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GENERAL
PRINCIPLES OF LAW
TOPIC 3 (Part A):
CONTRACT LAW IN
MALAYSIA
FORMATION OF
CONTRACT
(ESSENTIAL ELEMENTS OF
A VALID CONTRACT)
Formation of Contract
BEKALAN SAINS P&C SDN BHD v BANK BUMIPUTRA
MALAYSIA BHD
[2011] 5 MLJ 1, CA
Abdul Malik Ishak JCA stated that the following key characteristics
are the essential elements in the formation of any contract:
a) Offer
b) Acceptance
c) Intention to create legal relations
d) Consideration
e) Capacity
f) Free Consent
g) Certainty/Mutuality
h) Legality
Sulisen Sdn Bhd v Kerajaan Malaysia
High Court stated that:
[2006] MLJU 341,
the
1.
The offer and acceptance when taken together would form
the ‘agreement’ and
2.
that agreement must be supported by consideration in order to
establish the obligation.
3.
It is the parties that must intend that the agreement to have legal
force and the courts will only enforce what the parties intend
should be enforced.
4.
The parties too must agree on the same thing and this would be
known as mutuality.
5.
The parties too must have the capacity of reaching a binding
agreement and
6.
the subject matter of the agreement must be legal.
Examples:
*
A agreed to sell to B ‘ a hundred tons of oil’. There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty. The courts will not
enforce such an agreement.
* A, B and C enters into an agreement for the division among them of gains acquired by
fraud. The agreement is void as its object is unlawful. The agreement is not
enforceable by law.
* A promise to sell his car ‘ a green Kancil MNN 2010’ to B for RM15000. B agrees to
buy the said car. There is a valid agreement.
* A finds B’s purse and gives to him. B promises to give A RM50. The promise by B to
give A RM50 is a good consideration. This is a contract.
Copyright Source ‘Principle of the Law of Contract in Malaysia’ 4th edition Dr SA Alsagoff
Proposal/Offer
Proposal/Offer & Acceptance
◦ Express – usually written form.
◦ Implied – anything other than written. Through conduct.
❖ Section 2(a), (b) & (c) of the Contracts Act 1950 (“CA”).
Proposal/Offer
Proposal/Offer
◦Contracts Act 1950 uses the term ‘proposal’.
◦Malaysian courts sometimes used the term of ‘offer’ instead of
proposal.
◦Proposal and Offer – interchangeable.
◦A proposal or an offer is necessary for the formation of an
agreement or contract.
Proposal/Offer
Definition of Proposal/Offer:
◦ S 2(a) of CA – “as willingness to do or abstain from doing anything
with a view of obtaining assent of the other, he is said to make a
proposal.”
Definition of Acceptance:
◦ S 2 (b) of CA – “when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted”.
Proposal/Offer
Definition of Proposal/Offer –
S 2 (c) of CA: The person making the proposal is called the
‘proposer’ and the person accepting the proposal is called the
‘acceptor’.
Rules of Proposal/Offer
◦A proposal can be in writing, oral or in combination.
There are 4 rules:
1.
It must be communicated to the acceptor.
2.
It can be made to a particular person or general public.
3.
It can be revoked or withdrawn.
4.
Not all communications are proposal.
Proposal/Offer
◦ S 3 of CA - A proposal must be communicated.
Communication can be through any act/ omission by which
communication is intended.
◦ S 4 of CA - Communication is complete when it comes to
the notice of the other person.
Proposal/Offer
S 9 of CA:
◦ Express – A proposal made in words (oral or written) is said to
be expressed.
◦ Implied – If a proposal made other than words (eg. conduct) it
is said to be implied.
Proposal/Offer
Proposal or acceptance may be implied from the
conduct of the parties or from the circumstances
concerned.
Example:
Peter enters a sundry shop, picks up a loaf of
bread priced at RM2.60, shows it to the
shopkeeper and silently puts RM2.60 on the
counter. That is an implied offer to buy the
loaf of bread.
If the shopkeeper , without uttering a word,
picks the cash and puts it in his drawer, that is
an implied acceptance of the offer by him.
Proposal/Offer
Communication of Proposal
◦The proposer must communicate his proposal to
the intended acceptor.
◦S 4 (1) of CA - the communication of a proposal is
complete when it comes to the knowledge of the
acceptor.
CONTRACT TO A PARTICULAR PERSON OR GENERAL
PUBLIC
• If a proposal is being made to a particular person, only that particular
person i.e. the person to whom the proposal is made can accept the
proposal.
e.g. A is offering C, a famous painter, RM 10,000 for a portrait, and D, who
was standing nearby, cannot accept the offer.
• If proposal is made to a general public, anyone who meets all the
terms of the proposal may accept it.
Carlill v Carbolic Smoke Ball Co. [1983] 1 QB 256
•The court held that an offer can be made to the world at large.
•Acceptance is made by performance of the condition of the offer.
•Thus, the Plaintiff is entitled to the reward.
https://www.youtube.com/watch?v=DxlVciF8WSQ
(Carlill v Carbolic Smoke Ball Company - video)
Invitation To Treat
◦There is a distinction between a proposal and an
‘invitation to treat’.
◦An invitation to treat is a proposal to negotiate, a
proposal to receive proposals or a proposal to chaffer.
Invitation To Treat vs Proposal
This distinction is neatly illustrated in the English case of Gibson v
Manchester City Council [1979] 1 All ER 972:
◦ the Manchester city council wrote to Gibson that the council ‘may be
prepared to sell’ the council house to him and invited him ‘to make
formal application to buy.’
◦ Gibson made a formal application as requested.
◦ Before the process of preparation and exchange of contracts, the control
of the council changed hands to new council and the new council refused
to complete the sale.
◦ The House of Lords held that the ex-council’s letter was at most an
invitation to treat.
◦ The words ‘may be prepared to sell’ and ‘to make formal application
to buy’ appearing in the ex-council’s letter was fatal to the contention
that the letter was a contractual proposal.
Invitation To Treat
The following are examples of invitation to treat:
1.
Display of goods in a shop window
2.
circulars and advertisement
3.
auctioneer’s invitation to bid
4.
tender
5.
options
6.
supply of information
7.
Statement of intent
Invitation To Treat - Display of goods in a shop window
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern)
Ltd [1953] 1 QB 401
◦ Defendant made one of their shops into a self-service shop.
◦ A customer on entering was given a basket and can select items displayed on
the shelves, put them in the basket and take them to the cash counter.
◦ At the counter, there was a registered pharmacist who was authorised if
necessary to stop a customer from removing any drug from the shop.
◦ The defendant was charged for selling a listed poison without the supervision
of a registered pharmacist.
◦ The vital question was when was the contract made? This in turn depended
on whether the display of the goods on the shelves was a proposal or an
invitation to threat?
Invitation To Treat - Display of goods in a shop window
Pharmaceutical Society of Great Britain v Boots Cash Chemists
(Southern) Ltd [1953] 1 QB 401
Held:
◦ The English Court of Appeal affirmed that the customer made a proposal
to buy when he picked up the medicine bottle from the shelf and
brought it to the counter.
◦ There was no sale until the registered pharmacist at counter accepted
the customer’s proposal to buy by the acceptance of the price.
Invitation To Treat - Display of goods in a shop window
Fisher v Bell [1961] QB 394
◦Defendant was charged with offering for sale a
flick-knife in his shop window that was against the
law.
◦The English Court of Appeal treated the point where
it is perfectly clear that according to the contract
law, whether the display of an article with a price
on it in a shop window is merely an invitation to
treat.
◦It is not an offer for sale, but merely an invitation to
treat, the acceptance of which constitutes a contract.
Fisher v Bell:
◦ Defendant had not technically ‘offered’ the knives for sale, his
display was an invitation to treat and it was the customers who
were making the offers.
Invitation To Treat - Circulars And Advertisement
• Seller by circulating a price list or other promotional materials
giving particulars of the products for sale is usually not making
a proposal, even if the word ‘offer’ were to be used.
• Nai Yau Juu v Pasdec Corp Sdn Bhd [2005] 5 CLJ 304
o Held: Circular stating that ‘we are instructed to offer to the
trade for sale certain described goods’ was merely an
invitation to treat and not an offer capable of acceptance.
Invitation To Treat - Circulars And Advertisement
• An advertisement inviting applications for a job is only an
invitation to treat. (It is the applications by job seekers that are
proposals)
Coelho v The Public Services Commission [1964] MLJ 12
Facts:
• Respondent advertised in the Malay Mail inviting applications
– assistant passport officer.
• Applicant made application and was accepted.
• Later, due to misconduct, applicant was terminated.
Held(Ong J):
• Advertisement was an invitation to treat and the applications
by applicants were proposals.
Invitation To Treat - Circulars And Advertisement
• Advertisement for sale of goods – generally invitation to treat unless they
come from the manufacturers.
• Partridge v Crittenden [1968] 2 All ER 421
Facts:
• An advertisement: ‘bramble finch cocks and hens 25s each’.
• The words ‘offer for sale’ was not used in the advertisement.
• The advertiser was charged with unlawfully offering for sale a wildlife bird
contrary to law.
Held (Court of Appeal of England):
• There had been no offer for sale and stated:
‘When one is dealing with advertisements and circulars, unless indeed they
come from manufacturers, there is business sense in their being construed
as invitations to treat and not offers for sale.”
3 STAGES TO A VALID CONTRACT
Display of goods on
shelves/windows
(ITT)
Customers bring
the goods to cashier
(offer/proposal)
Customer makes
payment &
payment received
by cashier
(Acceptance &
Consideration)
Termination of Proposal/Offer
A proposal can be terminated in a variety of ways;
a) Rejection – Hyde v Wrench (1840) 49 ER 132
b) Lapse of time – S6(b) of CA
c) Failure of the acceptor to fulfill condition precedent – S6(c) of
CA
d) Death or mental disorder – S6(d) of CA
e) Notice of revocation – S6(a) of CA
Proposal/Offer:
Revocation of Proposal
◦There are 4 methods of revoking a proposal as provided
under S 6 of CA:
I. Notice of Revocation;
II. Lapse of Time;
III. Failure to Fulfill Condition Precedent; and
IV. Death or Mental Disorder.
Proposal/Offer
(I) Notice of Revocation:
◦ S 6 (a) of CA – a proposer may revoke his proposal by communication of
a notice of revocation to the acceptor.
◦ S 5 (1) of CA - a proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but
not afterwards.
◦ S 4(2)(a) of CA - the communication of an acceptance is complete as
against the proposer, when it is put in a course of transmission to him, so
as to be out of the power of the acceptor.
◦ S 4 (3) of CA - the communication of a revocation is complete:
▪ as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the
power of the person who makes it;
▪ as against the person to whom it is made, when it comes to his
knowledge.
◦ Henthorn v Fraser [1892] 2 Ch 27 – The revocation or modification of a
proposal is not effective unless brought to the acceptor’s mind.
Notice of Revocation & Acceptance
◦ S 3 of CA – communication of acceptance of the proposals is
validate by any act or omission of the party accepting the proposal and
which he has effected the communication of his acceptance.
◦ Entores Ltd v Miles Far East Corp [1955] 2 QB 327, instantaneous means
of communication includes face to face, telephones and fax machines.
(instantaneous means of effecting a communication of acceptance)
Quick Quiz:
❖Instantaneous means of communication?
oWhatsapp or Facebook message?
oEmail?
• Revocation (of proposal) came before the acceptance – valid
revocation of proposal?
• Acceptance (of proposal) came before the revocation (of proposal) –
valid revocation? Valid Acceptance?
(II) Lapse of Time
◦ S 6 (b) of CA - a proposal will come to an end by lapse of time.
(III) Failure to Fulfill Condition Precedent
◦ S 6 (c) of CA - a proposal is automatically revoked by the
failure of the acceptor to fulfill a condition precedent to
acceptance.
(IV) Death or Mental Disorder
◦ S.6 (d) of CA - a proposal is terminated by the death or mental
disorder of the proposer.
Acceptance
There are 4 rules of acceptance:
i. An acceptance must be expressed in usual & reasonable
manner.
ii. An acceptance must be communicated to the proposer.
iii. An acceptance may be revoked.
iv. An acceptance must be absolute & unqualified.
Acceptance
i.
Usual and Reasonable Manner
S 7 (b) of CA:
• acceptance must be expressed in some usual and reasonable manner.
• the proposer is entitled to insist that the acceptance to be made in the manner
prescribed if the acceptor fails to do so.
ii.
Communication of Acceptance
S 2 (b) of CA - the person to whom the proposal is made (acceptor) to signify his
accent thereto to a proposal.
S 4 (2) of CA - the communication of an acceptance is complete a)
as against the proposer, when it is put in a course of transmission to him, so
as to be out of the power of the acceptor (e.g. acceptor’s sent a message to
proposer) ;
b)
as against the acceptor, when it comes to the knowledge of the proposer.
(e.g. proposer read the message)
Acceptance
iii.
Revocation of Acceptance
• S 5 (2) of CA - an acceptance may be revoked at any time before the
communication of the acceptance is complete, but not afterwards.
• S 4 (3) of CA - the communication of a revocation is complete:
a) as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of
the power of the person who makes it;
b) as against the person to whom it is made, when it comes to his
knowledge.
iv.
Absolute and Unqualified
S 7 (a) of CA : An acceptance must be ‘absolute and unqualified’
• It means neither further negotiations nor any new terms should take place.
• If negotiation is still ongoing, then an agreement cannot be considered has
been formed.
• The purported acceptance must be clear and unconditional.
S 7 (a) of CA: An acceptance must be Absolute and Unqualified
Silence does NOT amount to Acceptance
Felthouse v Bindley [1862] EWHC CP J35
Facts:
• Plaintiff (Felthouse) had discussed with his nephew – purchase nephew’s horse.
• Plaintiff – letter to his nephew offering to buy the horse – stated that if he didn’t hear anymore from
his nephew concerning the horse, he would consider acceptance of the order done and he would
own the horse.
• Nephew did not reply – busy at auctions.
• Later, while nephew was selling his farming stock, he told the auctioneer (Bindley) not to sell the
horse.
• Auctioneer sold the horse to someone by mistake and the plaintiff sued the auctioneer.
Issue: Whether silence amount to acceptance.
Held:
• No acceptance of the offer by plaintiff, silence did not amount to acceptance.
• Any acceptance of an offer must be communicated clearly.
S 7 (a) of CA: An acceptance must be Absolute and Unqualified
COUNTER OFFER
• A counter offer is not an acceptance.
• A counter offer is a rejection of the original offer.
• The maker (of counter offer) cannot later accept the rejected offer.
• Making a counter offer automatically rejects the original offer and requires
an acceptance under the terms of the counter offer or else there is no
contract.
• Hyde v Wrench (1840) 49 ER 132
Hyde v Wrench (1840) 49 ER 132
Facts:
• Defendant, Wrench, offered to sell his farm to the plaintiff, Hyde.
• Defendant offered to sell the property for £1,200, but this was declined by plaintiff.
• Defendant wrote to the plaintiff with another offer - this time to sell the farm to him for £1,000. He made it clear
that this would be his final offer regarding the property.
• In response, plaintiff offered £950 for the farm in his letter. This was refused by defendant.
• Plaintiff then agreed to buy the farm for £1,000, which was the sum that had previously been offered.
• However, this time, defendant refused to sell.
Issue:
Whether there was a valid contract between the parties and if a counter offer was made in discussions, whether the
original offer would still remain open.
Held
• The court held in defendant’s favour – there was no binding contract between the parties.
• When a counter offer is made, it supersedes and destroys the original offer.
• The original offer is no longer available. In this case, when plaintiff offered £950, he cancelled the £1,000 offer
and could not back track and accept the £1,000 offer.
S 7 (a) of CA: An acceptance must be Absolute and Unqualified
‘SUBJECT TO CONTRACT’ - NOT A VALID CONTRACT
Low Kar Yit & Ors v Mohd Isa & Anor [1963] MLJ 165
Facts:
• Defendants gave a written option to the plaintiffs to buy a land subject to – a formal
contract to be drawn up and agreed upon by the parties & approval by the High
Court.
• Plaintiffs’ agent duly exercised the option but the defendants refused to sign the
agreement of sale.
• Plaintiffs sued for breach of contract.
Issue – whether the signing of a further contract (“a formal contract to be drawn up
and agreed upon by the parties”) was:
i. A term of the bargain; if so, there is no enforceable contract yet when the option was
exercised by the plaintiffs; or
ii. Merely a formality, in which case there is already a binding contract between the parties,
even without signing the formal contract.
Low Kar Yit & Ors v Mohd Isa & Anor
Held:
• The parties clearly intended that they must execute a subsequent document in the
nature of a formal contract.
• This was evidenced by that the plaintiffs signed the formal contract but the defendants
did not.
• Since defendants did not subscribe their signatures to the formal contract, it could
not be said that they had agreed upon it.
• The option was conditional upon and subject to ‘a formal contract to be drawn up
and agreed upon’ between the parties.
• Without both parties signing the formal contract, the exercise of the option by the
plaintiffs amounted to nothing more than an agreement to enter into another
agreement, which of course has no legal effect.
• There was no legally binding contract between the parties.
S 7 (a) of CA: An acceptance must be Absolute and Unqualified
NEGOTIATION - NOT A VALID CONTRACT
Guha Majumder v RE Donough [1974] 2 MLJ 114
Facts:
• Property (orchid plantation) owned by defendant was advertise for sale.
• Plaintiff viewed the property twice, in between there were communication between the parties.
• it was alleged that the defendant had accepted the plaintiff’s offer to purchase property for RM70,000.
• The parties after that still negotiating about the property.
• Defendant denied that he had decided to go on with the sale.
Issue: Whether there is a valid contract.
Held:
• Law does not impute an intention to enter into such a legal relationship when parties conduct seems
negative in nature;
• Evidence shows parties did not intend to be immediately bound.
• This only regarded as a negotiation.
COMMUNICATION ROUTE
Section 4 of the Contracts Act 1950 (Malaysia), communication is said to be
complete
The communication of a proposal → when it comes to the knowledge of
the person to whom it is made.
The communication of an acceptance
• against the proposer → when it is put in a course of transmission to him;
(postal rule)
• against the acceptor → when it comes to the knowledge of the
proposer. (receipt rule)
The communication of a revocation
• as against the person who makes it → when it is put into a course of
transmission to the person to whom it is made
• as against the person to whom it is made → when it comes to his
knowledge.
Section 5 - Revocation of proposals and acceptances
(1) A proposal may be revoked at any time before the communication of
its acceptance is complete as against the proposer, but not
afterwards.
(2) An acceptance may be revoked at
any time before the
communication of the acceptance is complete as against the
acceptor, but not afterwards.
Under the postal rule an acceptance is complete and the offeror is bound by
the contract at the moment the acceptance letter is posted at the post office or
in a post box by the offeree no matter whether the offeror has received the
acceptance letter or not. This rule favours the offeree and causes hardship to the
offeror in certain situations.
The receipt rule which is applicable on the cyberspace contract provides that
the acceptance of the offer is effective when the data message is received by the
proposer.
Uniform Computer Information Transactions Act 1999 and Uniform Commercial
Code provide that an electronic message is effective at the time of its receipt
even if no individual is aware of its receipt.
THANK YOU