FORMATION OF CONTRACTS IN ELECTRONIC COMMERCE:
A STUDY ON THE EXTENT OF THE APPLICABILITY OF THE
MALAYSIAN CONTRACT LAW TO GOVERN ISSUES IN ONLINE
CONTRACTS
Prepared by:
Hartini Saripan
(17 4729)
Rafizah Abu Hassan (174486)
Jun 2006
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TABLE OF CONTENTS
Abstract
I
1.0
Introduction
2
2.0
Objectives
J
3.0
Differences between online contracts and traditional contracts
J
4.0
The Contracts Act 1950
6
5.0
Legal issues on formation of online contracts
8
5.1
The legal position of web site adveftisements
8
5.2
Concluding contracts in cyber space
16
5.3
Capacity to contracts
20
5.4
Jurisdictionalissues
AA
5.4.1
Choice of law
24
5.4.2
Forum non conveniens
27
5.5
-
Regulating online contracts
a
z+
Credibility of web site information
aa
JJ
5.5.I
.A
)+
Fraud and misrepresentation
6.0
LTNCITRAL Model Law on e-commerce
1n
7.0
Electronic Commerce Bill 2006
4I
8.0
Laws on fbrmation of online contracts in other selected jurisdictions
43
8.1
The European Union
Aa
+J
8.2
Singapore
47
8.3
China
48
)t
9.0
Conclusions
50
10.0
Bibliography
52
11.0
Appendix
55
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Formation of contracts in electronic commerce: A study on the extent of the
appticability of the Malaysian contract law to govern issues in online contracts
Abstract
The evolution of technology has a great impact on business operations throughout the
worlcl. From the traditional means
easier and faster with
of doing businesses, business transactions become
just a click of certain key functions. The rapid growth of electronic
commerce creates new issues to ponder. Since e-commerce transactions are virtual and
paperless, there is aneed to scrutinize some legal issues that arise out of these contractual
transactions. This paper aims to address the issue of formation of contracts in electronic
environment from the Malaysian perspective. In completing the paper, library based
method is adopted to collect and analyze data gained from various sources. The major
statute analyzed in this paper is the Contracts Act 1950. In addition to that, other sources
referred to are the Contracts (Amendment)
Act 1976,the Subordinate Courts Act
1948,
the Courts of Judicature Act 1964,the Rules of the High Courts 1980 andthe Civil Law
Act
1956. This paper
presented
will also analyze the Electronic Commerce Bill which was recently
in the House of
Representative. For purposes
of
comparison, the United
Nations International Commission on Trade Law (UNCITRAL) Model Law on
e-
the European Union Electronic Commerce Directive and electronic
transaction laws in other selected jurisdictions will also be highlighted. It is submitted
commerce,
that even though contracts can be formed online, still, there are some legal issues arising
out of the transactions that need deliberate discussion. This paper limits the discussion to
four legal issues, namely; the legal position of web site advertisements, capacity to
contracts, the jurisdictional issues in online trading in cases of breach of contract and, the
credibility of web site advertisements. It is the aim of this paper to provide solutions to
these issues. Therefore,
legal revolutions
in
it is hoped that this research
paper could be a catalyst to some
understanding the legal principles
of forming
Internet for the better future of business ooerations in the world.
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contracts via the
1.0
INTRODUCTION
Transactions via the Internet are not completely nelv phenomena and have been taken
place for some years. With the rapid growth of conducting businesses through electronic
means, contracts are formed in a virtual world, without the physical presence of the
In addition to that, when the parties are engaged in these virtual
they can form a contract not just within their national boundaries but
parties involved.
transactions,
internationally.
E-commerce may refer to all commercial activities conducted with the aid of electronic
devices.r It consists primarily of the distributing, buying, selling, marketing and servicing
of products or services over electronic
systems and other computer networks.2
there exists no widely accepted definition
for
"-co-mer"e.l
However,
it
In fact,
can
be
summarized as the conduct of trade and commerce within the electronic environment of
the global information economy.o
E-commerce can be formed either between consumers, traders, a trader and a consumer
and a trader and a government.s For purposes of the discussion, this paper
will only focus
on the contractual relationships between consumers and traders. Therefore, the aim of this
paper is
to highlight the issues of making contracts through the Internet from
the
Malaysian contract law point of view.
Jay Forder, Patrick Quirk, Electronic Commerce and the Law (John Wiley & Sons Australia, Ltd
2001) p 4
bqp-/,l"crr.r,yi!1p_r:dra.,qrdrryjlil[=::caj],tlrrgtsc (Accessed on 6 June 2006)
h!!p l/_\yw-!y.!_sant1t_9_!qc]_e_l9aq1ri!i9s.ne1li4dex.html. (Accessed on 5 June 2006)
Terry Cutler, paper presented to the ASEAN Round Tale on Electronic Commerce, Kuala Lumpur
October 1997. See also Julian Ding, E-Commerce Law and Practice (Sweet & Maxwell Asia
1999) p 2l
Consumer-to-consumer e-cornmerce (C2C) is an intemet-facilitated form of e-commerce that has
existed for the span of recorded history in the form of barter, flea markets, swap meets, yard sales
and the like. An example of a venue where C2C takes place is e-bay. Business-to-consumer
(B2C) is a form of e-commerce in which products or services are sold from a firm to a consumer.
See also htlp;1icq-wikipg(j4.qrgi -v,v-i$ (Accessed on 6 June 2006)
See also "Breaches of Contract in Online Trading: Enforcement of Rights By Consumers Against
Traders," Norliza Abd Hamid, Hartini Saripan, Paper presented at the 3'" ASLI Conference 2006,
25-26 May 2006
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in online trading are significant to both traders and consumers as they are
beneficial to both parties. On one hand, it benefits the traders when they are able to
Contracts
automate and cut costs in repetitive processes, to reach a wider market, to source products
from a wider supplier-base and to be able to respond to customer queries quickly
and
cheaply. On the other hand, consumers also benefit as normal business hours constraints
do not exist any more with online access and they can choose and purchase from a bigger
In addition, the online contracts allow people to form a contract from the
comfort of their own home, skipping traffic jams, parking problems and crowded
market.6
shopping centers.T
2.0
OBJECTIVES OF THE RESEARCH
The obiectives that need to be met in this research are:
2.1
To identify differences between traditionally formed contracts and
contracts
which are virtually formed in cyber space
2.2
To examine whether the law of contract in Malaysia is applicable to govern
contracts in online businesses
L..)
To identify the legal issues arising out of the formation of contracts in electronic
environment
2.4
To evaluate whether the Malaysian contract law is adequate to govern issues on
electronic based contracts
3.0
DIFFERENCES BETWEEN ONLINE CONTRACTS AND TRADITIONAL
CONTRACTS
Contracts are very much related to the daily events of the business world. From the
purchase
of newspapers with a cup of coffee every morning to the sale and purchase of
properties wofth millions
of
dollars, contracts are formed almost everyday
Note 3
Note
1 at 27
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and
everywhere. Developed from a barter system8 which was implemented more than 1000
years ago, contracts are a well established form of business transactions.e Whether or not
contracts are similar to agreements is indeed a matter of legal discussions.
All
contracts
are agreements, but not all agreements are contracts.l0 Only agreements which have
fulfilled the pre-requisites of valid contracts will be regarded
as contracts.lr
Today, the growth of technologies in many parts of the world has changed the concept of
traditional contracts, from paper-based to paperless. On this note, Malaysia is one of the
developing countries which have to move forward in dealing with electronic commerce.
It was only recently in June
2006, the Star, had these phrases: "Rural folk get digital
boost" when the Rural Development Minister Datuk Abdul Aziz Shamsuddin
emphasized on the boost
of cyber cafes for rural residents.tt According to him,
had
the
developmenl of Medan lnfoDesa was a major boost for those in the rural area as it would
give them access to the lnternet.ll Therefore, it is interesting to note that since Malaysia
is aggressively moving towards electronic society, this
will
have a great impact on the
formation of online contracts.
How is an online contract different from a conventional contract? Basically, contracts in
the electronic environment can be divided into two types, namely; web-based contracts
and e-mailed based contracts. The former refers
intended
to HTML-based contracts that are
to be concluded primarily on the basis of advertisements or web pages.lo The
latter, on the other hand are contracts formed via electronic mails (e-mail) sent by the
Black's Law Dictionary by Henry Campbell Black, West Publishing Co, 5'n ed 1979 defines
'barter' as to exchange goods or services without using money.
Barter system was originally established by Deutro-Malays who were migrated after 300 BC from
Yunan in Southwest China. It is well accepted that the Deutro-Malays were the ancestors of the
present Malays. They lived along river banks and sea coasts which later on, they developed trade
t0
ll
I2
l:]
l4
among them.
Visu Sinnadurai, Latv of Contract (Lexis Nexis Butterwofth 3'd Ed 20041 p 30
Section 2(h) ofthe Contracts Act provides that'an agreement enforceable by law is a contract
http:l/_!bcslar.qr;n,ruy4rc!!,lsKlt'lt.a.splfll!_l280q56rha1tensl l44l24l9&sec,=nation (Accessed on
7 June 2006)
rbid
Charles Chatterjee, E-commerce Law
Kingdom 2002) p 100
for
Business Managers (Financial World Publishing United
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acceptors.
l5
The HTML-based contracts are generally formed with just a click of certain
key functions in the advertisements. Therefore, the interested buyers will browse the web
sites, select the items and pay for them. This process seems
to be similar to traditional
shopping, where customers would enter into the shops, select the intended items and
make the payment.
Nevertheless, there are some differences between online contracts and traditional
contracts. As noted earlier, contracts in cyber space
will normally
be formed with a click
of a mouse in web advertisements. Therefore, customers do not have the opportunity of
examining the goods. The purchase will be solely based on the description of goods given
in the web sites.16 Hence, online purchases are claimed to be risky and
full of deceits.
In addition to that, since contracts are formed virtually without the presence of
parties, there
will be no question
the
and answer sessions to inquire about the goods or
services. Every transaction is done through the automation process which is devoid of
this opportunity for inquiries. Thus, customers will be hoping that the goods or services
bought by them are exactly what they had presumed earlier. It is not too much to contend
that this feature of contracting online
will eventually significantly affect the trust
confidence
of buyers when they are not satisfied with the goods purchased
Therefore,
to
convince people
and
online.
to shop online in a safe and efficient electronic
environment, some web sites provide their product descriptions policy in their Terms and
Conditions ol Use.r7
Another difference is that items bought online are very difficult to return.l8 Even though
some web sites have a return policy, but the cost of returning the goods
l5
t1
will
be borne by
rbid
Note 3 at 2
Amazon.com provides that Amazon.com and its affiliates attempt to be as accurate as possible
However, Amazon.com does not warrant that product descriptions or other content of this site is
accurate, complete, reliable, current or error-free. If a product offered by Amazon.com itself is not
as
described,
your sole remedy is to return it in unused condition.
httn:r'lwww.arnazon.com/execiobidos/tglbrowse/-/508088/
June 2006)
Note
See
102-4 I 39066-2835-l-56 (Accessed on 24
5
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the customers. Sometimes, the cost of returning the goods to the supplier is more
expensive than the price of the goods themselves. Some web sites clearly stipulate a
return or refund policy on a condition that the goods are returned in time depending on
the express terms of the agreed contracts. In the refund policy of an online sale of
flowers. vttt+v.hlooming.cont.my, it is stated that:
All our products (except for orders
overseas) are backed
up by
an
unconditional money-back guarantee or free replacement. We should be
notified of any problem immediately upon receipt of the flowers. We
reserve the right
to refuse a
request
for refund if such request is not
received by us on a timely basis. All prices shown and all transactions are
in Ringgit Malaysia (RM). As our products are mostly perishable, please
revert as soon as possible if there is a problem.
All refund requests will
be
dealt on a case by case basis.le
THE CONTRACTS ACT
1950 _
REGULATING ONLINE CONTRACTS
The crux of the issue is whether the Contracts Act 1950 is applicable to online contracts.
In Malaysia, the development of contract law has taken place for more than 130 years. In
1872, the British enacted the Indian Contract Act, codifying the English common law
principles relating to contracts. The Act also included a few provisions from The Draft
Civil Code for the State of New York (The Field Code). The British controlled
the
Federated Malay States comprising Pahang, Perak, Selangor and Negeri Sembilan in
1874 and the application of the Indian Contracts
Act 1872 was extended, with minor
modifications, to these four states in 1899 and known as the Contracts Enactment 1899.
The Enactment became the Contracts (Malay States) Ordinance
in
1950, when the
Federal Legislative Council of Malaya formally passed it and made it applicable also to
the Unfederated Malay States of Johore, Kedah, Kelantan, Perlis and Terengganu.
Finally, in 1974, the revised Contracts (Malay States) Ordinance 1950 became an Act and
re
http:i/www.bloonrirrg.conr.nry/bloonrinellielundPolicy.htm (Accessed on 24 June 2006)
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extended to
all states of Malaysia including Penang, Malacca, Sabah and
Sarawak.20
At
present, the main statute embodying the principles of the law of contracts in Malaysia is
the Contracts
It
Act
1950 (CA).2r
has been a well-established principle that
contract, certain prerequisites must
in order to be construed as a conventional
be fulfilled, namely; proposal, acceptance,
consideration and intention to create legal relation. Except for the intention to create legal
relations, all the other principles are specifically provided in the CA, thus proving that
they are not something ner,v in the Malaysian legal system.
note that
if
It is therefore
important to
any of these requirements are not present in an agreement, the arrangement
remains unenforceable.22 The fulfitlment of the prerequisites is in line with section 2 of
the CA. On this note, the Federal Court judge, Lee Hun Hoe CJ (Borneo) had observed as
follows:
It is useful to bear in mind
the distinction between un unr."ment and a
contract. The word 'contract' has at times been loosely ui"A in the past.
We do not see why we should perpetuate such loose use of the word. The
reason is simply that we are used to the English common law which does
not make the distinction between the two terms, as does our section 2 of
the Contracts Act. Our section 2 is word fro word the same as the
equivalent section of the lndian Contracts and Specific Relief Acts.23
What about electronic contracts? ls there anything provided
in the CA governing
electronic contracts? The preamble of the CA simply states that the CA is relating to
contracts. Nothing in the CA specifically mentions about online contracts. Neither does
it
exclude the application of the CA to govern them. General interpretation of contracts and
agreements is stipulated in section 2 of the CA. Section 2(e) states that every promise and
Ahrnad Alsagoff, Principles of the Lctw of Contract in Malnysia (Lexis Nexis Singapore
2003)pl0-ll
Act 136. Revised 1974
Note l0 at 30, See also section 2(e),2(g) and 2(h) ofthe CA
Beca (i,lalaysia) Sdn Rhd v Tan Choong Kuang & Anor [ 1986] I MLJ 390, SC
COPYRIGHT @ UiTM
2nd edn
every set of promises, forming the consideration for each other, is an agreement. Section
2(h) states that an agreement enforceable by law is a contract.
The above provisions reflectthe applicability of the CA to online contracts. The absence
of any express exclusion therein to negate the application of the CA to cases of online
contracts confirms it. To date, there is no single case in the court of law on formation of
online contracts in Malaysia.
5.0
LEGAL ISSUES ON FORMATION OF ONLINE CONTRACTS
Even though the purchase
of
products and services through the Internet has been
increasing tremendously, there are still many legal difficulties which are left uncertain. In
the eyes of the law
of contract, there are some contractual
issues that require a detailed
analysis of the law. Can a legally binding contract be formed with just a click of the
mouse?
In this respect, an attempt is made to
demonstrate whether the traditional
elements of contracts are applicable thereto. Whilst both contracts and agreements arise
from a relationship or an understanding between two parties, for such arrangement to be
enforceable
issues
it
must be a contract with the necessary prerequisites.2a There are several
with regards to formation of contracts which must be analyzed in
construing
whether or not a contract can be formed in an electronic environment. The issues are as
follows:
5.1
The legal position of web site advertisements
Companies such as Proctor and Gamble, the airlines, the cereal and food manufacturers,
automobile companies, etc. are considering a commitment of billions of those television,
radio and etc. dollars
to lnternet
advertising so as to have direct contact with their
customers. This would definitely enable them to gather significant data and information
directly so as to better serve those customers, and to eliminate part of the cost of
Note 10
In order for an agreement to become
a contract, the said prereguisites
intention to create legal relationship and consideration must be present.
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of offer,
acceptance,
advertising agencies, television network, etc.2s This evolution has indeed reflected new
revolutions in marketing their products and services. Web sites like AirAsia.com,
StarCruises.com and Cuti-cuti Malaysia.com have become favorites to the Internet users.
However, there are some legal problems with the Internet advertising, which have not
been resolved.
Does the user make the offer
to buy or does the trader make the offer to
sell?26 ln
Malaysia, the issue of whether a web site advertisement constitutes an offer capable of
immediate acceptance has always been debated, but
still unresolved. This
question
always comes across our minds when we are dissatisfied with the products or services
purchased online. Thus,
it is pertinent to determine the status of the Internet
advertisements, whether they are proposals or invitations to treat in order to identify the
liability of online traders in cases of any disputes in web-based contracts. This
determination is essential because traders will only be contractually liable if
advertisements are proposals, which are capable of being accepted once the customers
agree to such services as stated in the web advertisements.
It must be noted that proposals and invitations to treat are noticeably
proposal
"
eun be established when one person signifies
different. A
to another his willingness to do
or to abstain from doing anything, with a view to obtaining the assent of that other to the
act or abstinence." Thm, a proposal is an expression
specified terms, made with the intention that
accepted by the person
request
to whom it is
it is to
addressed.2e
of willingness to
contract on
become binding as soon as
it
is
ln contrast, when one party simply
for information or responds to such a request that party is said to make an
25
"Cyberspace: The Advertising Super Highway-Some Bumps Need Repair", E. Dubuc, Carroll,
Paper presented at the Second Annual Conference on lnternational Travel & Tourism: Law,
Management & Regulation 1999
26
Note l9 at 46
27
Proposal is also known as an offer. A proposal and an offer can used interchangeably and for ease
reference the common law term 'offer' shall be employed henceforth. See Abdul Majid,
Krishnan Arjunan, Business Law in ,l4alaysia, Lexis Nexis Malayan Law Journal, 2005, p 103
Section 2(a) of the CA
Guenter Treitel. The Law of Conract (Thompson Sweet Maxwell Ltd I l" Edition 2003) p 8
of
28
29
COPYRIGHT @ UiTM
invitation to treat.30 The person who supplies such information is not making an offer but,
invites the other person to do so. Therefore, to form a proposal, an offeror must not
merely have been feeling his way towards an agreement, or initiating negotiations from
which an agreement might or might not in time result.rl He must be prepared to be bound
by his promise if the other party accepts it.
Generally,
in
conventional contracts,
the question whether a statement in
an
advertisement is an offer or an invitation to treat depends primarily on the intention with
which it was made.32 Nonetheless, distinctions between these two terms are often hard to
draw. Even though in most of the cases it will primarily depend on the intention of the
person making the statement, sometimes, it is settled by authority or even by statute.33
For online contracts, traders mainly depend on advertisements to promote their products
or services. Nevertheless, some web advertisements have misled the public by visualizing
is not what they would provide for in their services. Misleading
information may occur in terms of misrepresentations about the existence of specific
something which
goods
or facilities, the quality or the price offered by them to the Internet users. In the
law of contract, the liability of traders in these cases will generally depend on the status
of the advertisements.
A traditional law of contract differentiates between advertisements of bilateral contracts
and unilateral contracts. In relation to advertisements by traders to promote their products
or services, these advertisements are bilateral contracts.34 Such advertisements are not
often held to be offers,ls Therefore, these advertisements are generally only an attempr ro
induce offers, and not offer in itself.36 There is, again, no absolute rule in determining the
character
30
3l
of advertisements of bilateral contracts. They are normally invitations to treat
Ibidpll
Andrew Phang Boon Leong, Cheshire, Fifoot and Furmston's Law of Contract (Butterworth Asia
1998) p 77
)2
l3
Aboven.7p11
Chitty on Contracts,25'" Edition, Edited by A.G Guest, Sweet Maxwell Ltd, 1983, p 44
lbid at 47
35
l6
Ibid
Note 4 at 37
10
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but they may be offers
if
the advertiser's intention to be bound immediately
on
acceptance is sufficiently clear. There are two situations when advertisements of bilateral
contracts
will
commonly be regarded as invitations
to treat. Firstly,
when the
advertisements lead to further bargaining and secondly, when the advertiser legitimately
wishes, before becoming bound, to assure himself that the other party is able (financially
or otherwise) to perform his obligations.lT
A distinction between a proposal and an invitation to treat has been highlighted in the
classic case of Partridge v Crittenden.3s In this case, Partridge was charged with
'offering for sale' a brambling (a wild bird), contrary to the provisions of the Protection
of Birds Act 1954. He had placed an advertisement in a periodical called Cage
and
Aviary Birds which read in part: 'Bramblefinch cocks, bramblefinch hens, 25s each.' It
was held that Partridge was not guilty. The advertisement was not an offer of sale but an
invitation to treat. Therefore, the offence charged, 'offering for sale' had not
been
committed.
In Malaysia, even though the CA is silent on the principle of invitations to treat,
the
judges are inclined to follow the approach taken by the English courts. In the case of
Eckhctrdt Marine GMBH v Sherffi High Court of Malaya, Seremban
&
Ors,3e the court
held that there was no doubt that the sheriff s advertisement amounted to an invitation to
treat.
It
was the appellant who had made a conditional offer by way
of its letter
in
question. The sheriff had clearly accepted the appellant's offer by words and by conduct.
Gopal Sri Ram JCA observed that:
...there are a number of guidelines...that have been formulated by courts
to ascertain whether there was an offer in a given case and by whom it was
made. Thus, as a general rule, an advefiisement is considered by courts to
be not an offer but a mere invitation to treat.
Note 33
[1968] 2 Ail ER 42r
[2001] 4 MLJ 49
ll
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The Court of Appeal had referred to the classic American case of LeJkowitz v Great
Minneapolis Surplus Store,l0 where Murphy J delivered the judgment of the court. He
said:
Whether in any individual instance a newspaper advertisement is an offer
rather than an invitation to make an offer depends on the legal intention
of
the parties and the surrounding circumstances. We are of the view on the
facts before us that the offer by the defendant of the sale of the Lapin fur
was clear, definite and explicit and left nothing open for negotiation.
The trend of following common law principles in determining whether advertisements
are proposals or invitations to treat has been widely accepted in several recent cases. In a
case of ly'ai Yau
Juuv Pqsdec Corp Sdn Bhd & Anor, Heliliah J came to
a conclusion that
a unilateral contract could be drawn from advertisements but even in advertisements
where
a
house
is
advertised there
is often further bargaining.ar The parties may
legitimately wish to ascertain that the other party is also financially able to undertake the
transaction.a2 When
a seller circulates a price list or other promotional materials
containing particulars of the products for sale, he is usually not deemed to be making an
offer, even if the word 'offer' were to be used.a3
Based on the above cases,
it
can be seen that in advertisements. there are no definite
offers which are capable to be accepted. Advertisements are usually silent on matters
which are significant to the validity of the contract, for example, the availability of the
product or services advertised. Such advertisements are subject to, for instance, the
limitation of availability and the maximum number of products or services available.aa
Therefore" thev cannot be construed as offers.
,+0
4l
(1957) 251 Minn 188
[2005] 3 MLJ 43r
rbid
43
rbid
44
Nuraisyah Chua Abdullah, Ilotel and Catering Lcrw in Malaysia (Pusat Penerbitan Universiti
Teknologi MARA 2002) p 24
t2
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Having discussed all of the above points, a major issue to solve is whether web site
adveftisements can be construed as proposals. To begin with,
the unique nature of web site
it is essential to examine
advertisements. Advertisements
can generally
categorized into three types, namely; passive, interactive and integral advertising.
passive web site
be
o' A
only advertises the products or services without the ability
to
communicate with the content provider. It is non-interactive in nature and provides for no
It is simply posted
to users even in foreign
more than the information about the products or services on sale.
information on an lnternet web site which
is
accessible
jurisdiction.a6
On the other hand, an interactive web site is where a user can exchange information with
the content provider.aT Thus, there will be a greater level of interaction between the
parlies which permits file transfers between the server and client.a8 In addition to that, a
web site is integral for the users to be able to purchase goods or services offered by the
web site. Therefore, it is indisputable that this site offers a maximum level of interactivity
and commercial nature of the exchanse
of information.
Since users cannot communicate with the content providers in passive web sites,
it
is
justified to argue that products or services advertised on such web sites have the same
status as goods displayed
treat.ae Thus,
in shop windows. In this respect, they are merely invitations to
the intention of the content providers is merely to invite people to make
offers rather than offering the products for sale. This can be justified by arguing that for
non-interactive websites, the customers cannot directly communicate with the traders as
Differences between interactive and passive are highlighted in the case of Zippo Mandacturing v
Zippo.com 952 F Supp lllp (1997). See also the case of Webber v Jolly Hotels (1997) 2 ECLR
1r23
rbid
47
48
49
See also Bensusan Restaurant Corp v King 937 F Supp 296 (SNDY I 996)
Marits, Inc v Cybergold, Inc, 1996 US Dist Lexis 14976
Julian Ding, E-Commerce, Law and Practice ( Sweet & Maxwell Asia 1999) p 88
Generally, goods on display, with or without price tags, are not offers but merely invitations to
treat. In the case of Pharmaceutical Society of Great Britain y Boots Cash Chemists (Southern)
Ltd 119521 3 All ER 45, the vital question was when the contract was made and this in tum
depended on whether the display ofthe goods on the shelves was an offer or an invitation to treat.
The English Coun of Appeal affirmed the decision of the trial court that it was only an invitation
to treat.
t3
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the websites can only be seen as windows for displaying the goods or services. There are
a number
of passive web sites that
of them are
can be used as examples
to illustrate this point. Some
wtu'ttt.harrods.com, www.metroiayaonline.com, chanel.com
www.carrefour.com.
All
and
these sites merely provide information about their products and
not more than inviting people to make an offer.
However, there is also an argument which considers a website advertisement to be an
offer.so
This is because upon the customer performing certain key functions it would
amount
to a valid
acceptance, which satisfies the human intention
to
create a valid
contract. Thus, when the content providers adveftise their products or services on the web
and customers respond by performing certain key functions as instructed in the site, a
valid contract is formed.
ln considering
a
web site advertisement as an offer, it is also arguable that the interaction
by an automated system would negate the legal requirement of intention in the formation
of contract if a website advertisement is regarded as an invitation to treat.sl This is caused
by the fact that machines cannot express intention as stated by Lord Denning in Thornton
v Shoe Lane Parking Ltd.s2 It is interesting to note that Lord Denning had given
a
tremendous observation in relation to forming a contract throush a machine. He said that:
The customer pays his money and gets a ticket. He cannot refuse it. He
cannot get his money back. He may protest to the machine, even swear at
it; but it will remain unmoved. He is committed beyond recall. He
was
committed at the very moment when he put his money into the machine.
The contract was concluded at that time. It can be translated into offer and
acceptance
in this way. The offer is made when the proprietor of
the
machine holds it out as being ready to receive the money. The acceptance
Note 48 at 48
It is an accepted common law rule in Malaysia that for a contract to be valid, it must be
accompanied by an intention to create legal relations of the parties involved. Though the CA is
silent on the question of intention to create legal relationships, there seems no doubt that a vital
requirement for a valid contract is that the parties must have the intention to enter into such a
relationship. See Note 10
u97tl1 All ER 686, CA
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takes place when the customer puts his money into the slot. The terms of
the offer are contained in the notice placed on or near the machine stating
what is offered for the money. The customer is bound by those terms as
long as they are sufficiently brought to his notice beforehand, but not
otherwise. He is not bound by the terms printed on the ticket if they differ
from the notice, because the ticket comes too late. The contract
has
already been made.
The above case entails the development of law in the area of formation of contracts. It
gives more room to the judiciary to consider advertisements in a website as offers to the
world at large. This approach is practically relevant to overcome the difficulty that no
human intervention exists when a buyer expresses his desire or intention to purchase
goods from the web store.
It is believed that this approach will facilitate the expansion of
e-commerce not onlv in Malavsia but also in other pans of the world.sl
Another argument in favour of the principle that web advertisements are practically offers
is based on the interactive nature of the sites. As discussed earlier, unlike a conventional
business, web-based store fronts operate 24 hours a day and 365 days
a year.to In this
instance, customers can communicate directly with the traders to purchase online or even
to make payment with their credit cards after office
hours.ss These interactive and
integral sites connote high level of interaction between users and the content providers.
Thus, to consider these sites as invitations to treat would definitely be unjust to the users
who practically rely on the information posted therein to form a contract.
What is our stand pertaining to this issue? Is there any room in the CA for Internet
advertising? In Malaysia, there is no provision in the CA governing the principle of an
invitation to treat. Hence, the Malaysian courts would be inclined to follow the English
Common Law principles. Moreover, the Civil Law
53
Act 1956 allows the application of
Note l9 at 49-50
54
Ibid at 48
55
Examples of interactive websites are www.airasia.com, www.ebay.com.my, www.lelong.com.my
and www.blooming.com
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English Law in Malaysia where there is a lacuna in our law.
s6
Nonetheless, whether the
display items on the web is an offer or an invitation to treat is still a legal quandary. To
date. the
CA has not even been amended to cater for this issue. There is a
suggestion to enact laws governing this transaction, but so far,
strong
it is left only for academic
discussions in many seminars and conferences.
5.2
Concluding contracts in cyber space
When and where is the contract formed? This is the most important aspect in the law of
contract that needs to be carefully scrutinized. Traditionally, contracts are formed through
postal communications or instantaneous means
telephone, telex or telegraph.sT
of
communications such as fax,
It is. however, our concern that with the development of
purchasing or making businesses via the Internet, communications through electronic
mails have become the main area that need to be analyzed. Besides,
transactions are also increasing rapidly
in a present business
web-based
operation. The issue
however is whether the Malaysian principles of contract law apply to these transactions.
It must be noted that the CA neither specifically provides for the principles of contracting
online nor excludes the application of the general principles to e-commerce transactions.
For all contracts to exist in law there must have been an offer which has been accepted.s8
The law stipulates that before the contracts are formed, it is vital to ensure that both offer
and acceptance have been communicated to the parties. The general rule is that an
56
Section 3 and 5 of the Civil Law Act 1956
5'7
Note I at
58
Note 48 at 43
An offer is an indication by one party to another party of his willingness to enter into a legally
binding contract, on certain specified term. The statement amounting to an offer must be such that,
on acceptance, without further negotiations as to the terms, a binding contract comes into effect. In
Malaysia, the Contracts Act 1950 employs the word 'proposal' instead of 'offer'. When one
person signifies to another his willingness to do or to abstain from doing anything, with a view to
obtaining the assent ofthat other to the act or abstinence, he is said to make a proposal. Therefore,
it can be construed that an offer is something capable of being converted into an agreement by its
acceptance. Whereas acceptance takes place when the person to whom the proposal is made
signifies his assent thereto.
58
See also Section 2 of the Contracts
See also Note 20 at 18
Act
1950
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it is communicated to the offeror.se Nonetheless, this
principle has received tremendous development in the common law. [n cases of
acceptance has
no effect until
acceptance by post, the common law rule states that a postal communication takes effect
when the letter of acceptance is posted.60 This principle has been illustrated in the classic
case
of Adam v Lindsell where the court held that the acceptance was complete upon
posting.6r
In
1955, the development of the telex machine rendered the utilization
of the postal rule
ineffective since the courts in England construed an acceptance by telex as instantaneous
rather than delayed.62 This evolution brought
acceptance
a new approach to the principle of
in England in relation to the communication by instantaneous mode. Lord
Denning gave
a remarkable observation in comparing
postal with instantaneous
communication in the decision of the leadins case of Entores Ltd v Miles Far East
Cornoratiorz.63 He said:
When a contract is made by post
it is clear law
throughout the common
law countries that the acceptance is complete as soon as the letter of
acceptance is put into the post box, and that is the place where the contract
is made. But there is no clear rule about contracts made by telephone or by
telex. Communications by these means are virtually instantaneous and
stand on a different footins.
My conclusion is that the rule about instantaneous
communications
between the parties is different from the rule about the post. The contract
59
60
6l
62
Note 29 at 22
rbid
(1818) lB & Ald,681; 106 ER 250
Note 48 at 53
The communication of acceptance can be done either by post or instantaneous means. The postal
rule in England states that the communication is complete as against both the offeror and the
acceptor once the letter of acceptance is posted. In Malaysia, this rule has been modified and laid
down in Section aQ)@) and (b). Whereas the rule for instantaneous mode of communication is
developed in the case of Entctres Ltd v Miles Far East corporation [19s5] 2 All ER 493.
ll955l 2 QB 327
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is only complete when the acceptance is received by the offeror: and the
contract is made at the place where the acceptance is received'
it
Based on the above decision,
communication
is important in
acceptance. The major concern
must be clear that
in
England, the mode of
determining the completion
of
communication of
now is to determine the nature of the
mode
of
communication for electronically formed contracts.
In Malaysia, the CA does not even distinguish modes of communication of acceptances
used by the acceptor. The
words'postal'and instantaneous'do not
appear
in any of the
provisions of the CA. The only relevant provisions governing the communication of
of the CA together with the illustrations
therein. Unlike the English law, the CA stipulates different times when the
acceptance are sections 4(2Xa) and 4(2)(b)
communication of an acceptance is deemed complete.uo This is indeed a modification of
the postal rule in England which manifests that the completion of the communication of
acceptance
is upon posting. The CA
states that
communication of acceptance is complete when
as against the proposer, the
it is put in a course of transmission to
him so as to be out of the power of the acceptor.6s Whilst as against the acceptor, the
communication of an acceptance is complete when
it
comes to the knowledge of the
p.opos"..6u
In
response
to the issue of
instantaneous mode
of communication of
acceptance, the
Malaysian courts tend to follow the principles in England.6T Hence, the acceptance is not
complete until it comes to the knowledge of an offeror. In the case
oflsla
Corp Ltdv ST
Ramakrishnan and Lim Kean Seng both trading under the sele of Malayan Corp,68 the
court held that the place where a contract is made is the place where the final acceptance
is received.
65
66
6l
68
Note 10 at 46
Section a(2Xa) of the CA
Section 4(2Xb) of the CA
Note 10 at 48
[194e] MLJ 206
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ln e-commerce, communications take place via e-mails in order to form e-mail
contracts. In contrast,
based
'click method contracts' or HTML-based contracts are intended to
be concluded primarily on the basis of advertisements.
lt must be highlighted
that the
legal consequences of entering into contracts on the basis of mere advertisements are
conditional upon the status on such advertisements as what was explained in the earlier
points.6e
How would the traditional rules of offer and acceptance apply to an electronic
mail communication? From the Malaysian contract law perspective, the CA states that
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; and
as
against the acceptor, when it comes to the knowledge of the proposer.T0 Thus, when rule
is applied to e-mail transactions the contract binds the proposer at the moment the e-mail
is sent by clicking the'send' button as it could be regarded so as to be out of the control
of the acceptor. Whereas, on the part of the acceptor, the contract binds him when such e-
mail comes to the knowledge of the offeror. Thus, the former cannot revoke his
acceptance after the receipt of the e-mail by the latter.
In this regard, there are certain complications that must be resolved. What if the Internet
Service Provider (lSP) returns the e-mail which could not be sent
unknown
or
if
the addressee is
incorrect? Another problem is the timing between the receipt
acceptance and revocation of acceptance by the acceptor. What
if
of
the
these two arrive at the
off-eror on the same day and almost at the same time? These are among the difficulties in
forming online contract lvhich must be dealt with for the expansion of electronic
transactions.
Another issue
to
deal with
is rvhether e-mail is an instantaneous means of
communication. As noted earlier, the exception to the general rule has been laid down by
the English Common Law.7r As opposed to the postal rule, the exception provides that
for the instantaneous communication of acceptance, it will be completed once it is
69
10
'tl
Note l4 at 100-101
Section a(2)(a)(b) ofthe CA
Note 3l
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actually brought to the knowledge of the offeror.T2 In this respect, is it possible to apply
this rule to e-mail communication? Is e-mail equated with instantaneous mode of
communication?
It is arguable that there is a major difference between an e-mail and a fax or telex.73 The
former refers a request to send all messages that the tSP has received for the receiver
whereas the latter relates to messages which are sent directly to the recipient without any
intermediary having to transfer the message from the sender or send the message to the
intended recipient.Ta Therefore, with the absence
of any intermediary to transfer the
message from one party to another when they communicate through a fax or telex renders
it
instantaneous.
What ever the difference might be between e-mail and other instantaneous devices, it is
submitted that the provision
in the CA does not limit its application only to
the
communication of acceptance by post. It is mentioned in a general terms so as to include
any mode of communication as long as it is put in a course of transmission so as to be out
of the power of the acceptor. In addition to that, the rule also stresses that
such
acceptance must come to the knowledge of the offeror. With the absence of any provision
excluding the application of the CA to electronic mails communications, the rules in
sections aQ)@) and (b) could therefore be applied to them.
5.J
Capacity to contracts
A common saying is that 'on the Internet, no-one knows you're
a dog'.7s Since people are
virtually connected in e-commerce, it is rather impossible for the contracting parties to
know the truth of the capacity of each of them. Therefore, what would be the legal
72
'13
75
See also Entores Ltd v Miles Far East Corporation |955\ 2 All ER 493 and Brinkibon Ltd v
Stahag Stahl Gmbh [983] 2 AC 34 . The general rule states that an acceptance has no effect unless
it is communicated to the proposer.
Note 48 at 57
Ibid
Note
I
at 62
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implication if it is discovered that the person at the other end of the electronic transaction
is a minor76?
The law of contract provides that in order for a contract to be valid, it must be entered
into by parties who are competent to contract.tt A person is competent when he is of the
age
of majority according to the law to which he is subject, and who is of sound mind,
and is not disqualified from contracting by any law to which he is subject.T8 Thus,
if
a
minor enters into a contract, the effect of such contract is void.Te
Nonetheless, the
CA
sets out an exception to this rule that the contracts by minors are
enforceable provided they fall within the ambit of section 69 of the CA. This section
reads as follows:
If a person,
incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished such supplies
is entitled to be reimbursed from the property of such incapable person.
The above provision renders the liability of a minor
another person.
ln such
a case, the latter is entitled
of the minor.81 What amounts to
necessaries
if he is supplied with
necessariesSo by
'to be reimbursed from the property'
is silent in the CA. The leading case in
Malaysia discussing on the scope of necessaries in section 69 of the CA is Government
Mctlaysiav Gurcharan Singh
't6
77
78
79
80
8l
82
&
Ors.82 The
of
High Court held that following the Privy
According to the Malaysia Age of Majority Act 1971, a person attains the age of majority at the
age of 18. Therefore, those who are below l8 years old are considered as minors in Malaysia.
Section l0(l) of the CA
Section I I of the CA
See also 10(l) of the CA. In the case of Mohori Bibee v Dhurmodas Ghose (1903) 30 Cal 539; 30
IA ll4, the Privy Council held that contracts entered into by minors were void.
Necessaries are not statutorily defined by the Act. However, according to Section 69 of the CA, il
must suit to the condition in life of a minor.
Section 69 of the CA
ll971l l MLJ 21 t, HC
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Council decision in Mohori Bibee v Dhurmodas Ghose,83 a contract entered into by a
minor was void. In considering the scope of necessaries, Chang Min Tat J observed that:
In my view, the word 'necessaries' must be construed broadly and in any
decision involving whether what are supplied or are not necessaries,
incumbent
to have
regard
to the facts of the case, the conditions
it
is
and
circumstances in which the supply was made and the purpose which is
served.
Even though there is no statutory interpretation of necessaries in the CA or in the Sale
Goods
Act
of
1950, common law principles could also be used as a reference in construing
the meaning of the term. In the case of Nash v Inman,8a the court decided thatthe action
to sue a minor must fail because the tailor had not adduced any evidencethat the clothes
were suitable to the condition in life of the minor and that the minor had not already
adequately supplied with clothes. Thus, to render a minor liable for necessaries it must be
proved, not only that the goods are suitable to his station in life, but also that they are
suitable to his actual requirements at the time of their delivery.
85
Moreover, if a minor
has already been sufficiently provided with goods of the kind in question, then, even
though this fact is not known to the plaintiff, the price is irrecoverable.s6
it is difficult or rather impossible to ascertain the age of every Internet user when
they communicate with the content provider, the use of the traditional contract law
Since
pertaining to this area would seem to be meaningless. The fact that minors may access
inlormation and products which may not be sold to them freely; they can definitely form
binding contracts when they purchase the goods even by using their parents' credit cards.
Even if the Malaysian courts were to stick to the rule that contracts by minors are void,
the biggest problem is to find out the identity of the real Internet user.
83
(1903) 30 Cal 539; 30 IA 1 l4
84
lre08l 2 KB r
Note 3l at 519
Barnes & Co v Toye (1884) 13 QBD 410. See also Note
85
86
3l
at 519
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