LAW OF CONTRACT

LESSON OUTLINEINTRODUCTIONELEMENTS OF A CONTRACT:1. Offer2. Acceptance3. Intention to create legal relations4. Consideration5. Certainty6. CapacityPRIVITY OF CONTRACTCONTENTS OF A CONTRACTFACTORS VITIATING A CONTRACTVOID AND ILLEGAL CONTRACTDISCHARGE OF CONTRACTREMEDIES

INTRODUCTION

Contract defined by Sec. 2(b) - an agreement enforceable by lawSpecific Legislation - Contract Act 1950 - but English law still applicable by virtue of Civil Law Act.

Function of contract:to secure the expectation created by a promise of future performance or expectation will be paid for its breach.facilitate forward planning of the transaction in terms of cost and value, responsibilities of parties and preparation for contingencies.

ELEMENTS OF CONTRACT

1. OFFER

Sec.2 (a) - offer or proposal - when a person signify his willingness to do or abstain from doing anything.Proposal or offer - something which is capable of being converted into an agreement by its acceptance. Must be a definite promise to be bound - provided that certain specific terms are accepted.Lack of offer and acceptance - contract void ab initio

Sec. 4 (1) -offer must be communicated - effective when it comes to the knowledge of the offeree.R v. Clarke - communication of proposal regarding capture of convict

Offer can be made to a particular person or to the general publicCarlill v. Carbolic Smoke Ball - offer made to the rest of the world but the contract is made with that limited portion of the public who come forward and perform the condition

To be an offer, the offeror must not merely feeling his way towards an agreement if that is the case, then it is not offer but is an invitation to treat Examples of ITT:Advertisements in the paper for the post of a doctor - ITTAuctioneer inviting a bid ITT (but a bidder making a bid is an offer)Catalogue advertising goods for saleGoods on display in a shopCases:Boots Cash Chemist Ltd sale of poison under pharmacist supervisionGibson v. Manchester City Council sale of council house to tenantsPartridge v. Crittenden

2. ACCEPTANCESec.2 (b) - when the person to whom the proposal is made signify his assent thereto.Acceptance can be expressed or implied (inferred from conduct)Acceptance must be accepted on exactly the same terms as the proposal without any variation or modification it must be absolute and unqualified Any modification / variation to the offer is a counter - proposal and is equivalent to rejectionHyde v Wrench - offer 1000, accept 950Stevenson v McLean - request for additional information is not counter proposal

Acceptance must be communicated with some positive action silence cannot be imposed as acceptance Felthouse v. BindleyException : - proposer dispense with it - acceptance in form of performance

Acceptance must be within reasonable time - Sec.6(b) Acceptance may also be revoked at any time before the communication of the acceptance is complete against the acceptor

Sec.4 - Acceptance through post - an exception to the general rule that acceptance must be communicated a.k.a. The Postal RuleSec.4 - communication of 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 acceptorb. As against the acceptor, when it comes to the knowledge of the proposerIllustration to the section:B accept As proposal by a letter sent by postThe communication of the communication is complete:as against A, when the letter is postedas against B, when the letter is received by ACASE :- Adams v. Lindsell

Acceptance through telex, phone and e-mailFor acceptance through telex, fax and telephone, the same principle as that of instantaneous communication applies i.e. it must be communicated to the offeror to be validSee Entores Ltd v. Miles Far East CorpAlso case of Brinkibon v. Stahlund Stahl For communication through e-mail the main issue that needs to be addressed is whether acceptance through e-mail constitutes instantaneous communication or delayed communication. If it is non-instantaneous, then the postal rule will apply that is acceptance is deemed complete once the acceptor click the SEND button with his mouse.This is looking at the nature of the e-mail itself where any message send will be channeled to a service provider before it reaches the intended recipient similar to that of using postal service

Termination of OfferRevocation must also be communicated Byrne v. Van Tienhoven Revocation of proposal possible if acceptance is not complete.Sec. 6 - A proposal may be withdrawn under four circumstancesBy communication of notice of revocation by the proposer to the other partyBy lapse of time (prescribed or reasonable) Ramsgate Victoria Hotel v. MontefioreBy failure of acceptor to fulfill a condition precedent to acceptanceBy death or mental disorder of the proposer if such fact comes to the knowledge of the acceptor before acceptance Bradbury v. Morgan

3. INTENTION TO CREATE LEGAL RELATION

Not provided by Contract Act but by case lawsMere agreement is not enough to contemplate the existence of a legal contract.Sometimes can be imputed from the nature of the agreement, for e.g : acceptance to a dinneracceptance to an offer to play a game of socceracceptance of an offer to pay for half of the petrol cost Thus parties to a transaction may state that they do not intend to enter into any binding obligation.Intention is particularly relevant when it comes to cases where legal contracts are not normally made like in domestic arrangements Balfour v. BalfourHowever in a commercial agreements, the presumption is that there is intention to create legal relations

4. CONSIDERATION

Sec.26 - as a general rule - agreement without consideration is voidSec. 2 (d) defined consideration as - when at the desire of the promisor, the promisee.do or abstain from doing something.or promises to do or abstain form doing something, such act or abstinence is called a consideration for the promise.

Consideration need not be adequate - Phang Swee Kim v. Beh HockConsideration need not move from the promisee - Venkata Chinnaya v. Verikataramaya - consideration provided by motherPast consideration is good consideration - Kepong Prospecting Ltd. V. SchmidtPart payment from the full amount is valid consideration

Exception to the rule that agreement without compensation is void - Section 26:a. agreement made on account of natural love and affectionb. agreement to compensate for past voluntary actc. agreement to compensate act the promisor legally compelled to dod. agreement to pay a statute barred debt.

5. CERTAINTYThe terms of an agreement cannot be vague but must be certain.If uncertain or incapable of being made certain - void.Intentions of the parties will be frustrated because of uncertainty and the court will usually not interfereAt common law - two aspects of uncertainty:due to language usedfailure to reach agreement on fundamental term of the agreementIn Contract Act - uncertainty provided by Sec. 30 - agreements, the meaning of which is not certain, or capable of being made certain, are void.Case:- Karuppan Chetty v. Suah Thian - lease at $35.00 per month as long as he likes

6. CAPACITYParties to a contract should be competent to contract, i.e. have the legal capacity to do so.Where one or more of the parties to a contract lack the capacity - contract invalid / void. - Tan Hee JuanSec. 11 - Every person is competent to contract who 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.Age of majority- 18 years - Age of Majority Act 1971Exception: contract for necessaries - Nash v. Inmanscholarship Govt. of Malaysia v. Gurcharan Singhinsurance Sound mind - Sec 12(1) - .. If at the time of making the contract.capable of understanding it and forming rational judgment as to its effect upon his interest.Includes incapacity due to sickness, alcohol or drugs

PRIVITY OF CONTRACTAfter a valid contract has been formed - to whom does the obligation extend? What are the limits of the contractual agreement.The general rule under common law - no one but the parties to a contract can be entitled to it, or bound by it.Contract cannot confer rights on third partyPrice v. Easton - payment of debt on behalf of anotherDunlop Pneumatic Tyre v. Selfridge.Contract cannot impose liability on third partye.g. relationship between building owner - contractor - sub contractorHowever, a claim can still lie in tort.

CONTENTS OF A CONTRACT1. EXPRESS AND IMPLIED TERMS

Contents made up of terms - expressed or implied1. Express terms - has been specifically agreed upon by the parties -orally, in writing or both.Express terms are straightforward and can be identified just by looking at the contract document.2. Implied terms - term that is read into the contract by the court.Form an integral part of the contract though not expressly provided - necessary to give business efficacy to the contract

Terms may be implied by :1. Custom and usage pertaining to a particular transaction.Preston Corporation - implied a term based on trade usage regarding ownership of film positives used to print booksMust satisfy - notoriety, certainty and reasonableness

2. Statutory ProvisionStatutes that imply terms into a contract:1. Sales of Goods Act 19572. Hire - Purchase Act 19673. National Land Code 1965

3. The courts , based by the intention of the partiesCases:Yong Ung Kai v. Enting - implied a term that must have been in the mind of the parties to get license to cut the timber the officious bystander test i.e. oh, of course!.

2. CONDITIONS AND WARRANTIES

Another classification of termsDefinition of both terms - given by Sales of Goods Act 1957Sec 12 (2) SOGA - condition - a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.Sec 12 (3) SOGA - warranty - a stipulation collateral to the main purpose of the contract, the breach of which gives rise to claim for damages but not a right to reject the goods or repudiate the contract.Whether a term is a condition or warranty - depends on the intention of the parties - the court will help to determine.

Example cases:Poussard v. Spiers and PondBettini v. Gye

3. EXEMPTION CLAUSE

Defined as a term of a contract that attempts either to modify the principal obligation(s) arising out of the contract or to limit / exclude the liability of a party which would otherwise arise as a result of a breach by that party.Common in standard contract - the operation of which depends on the construction of the contract.In case of disputes- court will interpret - contra proferentum.If the clause is ambiguous - will be interpreted to the disadvantage of the party who will benefit from clause.In case of negligence - need clear and unambiguous words to exclude liability.In case of serious / fundamental breach - exemption clause will not cover the parties who made the clause.There are also some statutes which modify the effect of the exemption clause to provide more protection to consumers.Also - exemption clause cannot give benefit to third party nor make another party liable

FACTORS VITIATING CONTRACTSSec 10 of Contract Act - agreements are contracts if they are made by the free consent of the parties.Sec 14 - consent is free when not caused by one or more of the following:1. Coercion - Sec 152. Undue influence - Sec 163. Fraud - Sec 174. Misrepresentation - Sec 185. Mistake - Sec 21, 22 and 23

Void - agreement that lacks any legal effect from the beginning - void ab initio.Voidable contract - Sec 2 (i) an agreement which is enforceable by law at the option of one or more parties, but not the others.

1. COERCIONCoercion defined as committing or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining of any person / property with the intention of causing any person to enter into an agreement.Kesarmal v. Valiappa Chettiar - transfer made under Sultans order in the presence of Japanese officers during the occupation considered voidable.Chin Nam Bee Development payment of extra $4000 under threats to cancel booking of houses

2. UNDUE INFLUENCE

Exist when the relations subsisting between the parties are such that one of the parties is in the position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.Therefore the elements of undue influence:Position to dominateUse that position to obtain unfair advantagePosition to dominate exist when:Has real or apparent authority over the other e.g.: parent-childMorley v. LoughnanStand in fiduciary relation to the other e.g.: religious leader follower, solicitor-client Allcard v. SkinnerTate v. WilliamsonPolygram Records Sdn Bhd v. The Search & AnorMade contract with a mentally incapacitated person by reason of age, illness or distress. Inche Noriah v. Shaikh Allie

Burden of proving no undue influence - on the person in position to dominate

3. FRAUDSec 17 Five acts that would constitute fraud:Suggestion of fact that is not trueActive concealment of fact - Horsfall v. Thomas - inserting metal plug in a cannon is active concealmentPromise made without intent to perform itOther act fitted to deceiveAny acts the law declares to be fraudulentThere must be an intention to deceive - that is made knowingly, without belief in its truth or reckless whether it true or falseGenerally silence does not constitute fraud - the misled party has the duty to exercise ordinary diligenceHowever, under certain circumstances silence or non -disclosure may constitute fraud Takes into account the relationship btw parties and where silence is equivalent to speechDuty to exercise ordinary diligence applies to fraud by silence only not other cases of fraudWeber v. Brown - number of rubber trees

4. MISREPRESENTATION

Misrepresentation refer to certain false statement of existing or past fact made by a person before or at the time of making the contract which induces a party to enter into a contract.Basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in its truth - but for misrepresentation - may himself believe it true.Like fraud - when there is a duty to disclose - silence may amount to misrepresentation.However under the Contract Act - Sec 19 - misled party has duty to exercise due diligenceTan Chye Chew v Eastern Mining Metals contract not voidable despite the misrepresentation as the party has means of discovering the truth with ordinary diligence.To be actionable:1. There must be false representation - Keates v Lord Cardogan2. The representation is one of fact , not opinion - Bisset v Wilkinson3. The statement was addressed to the party misled - Peek v Gurney4. The statement must induce the contract - Attwood v Small

5. MISTAKE

Sec. 21 of the Contract Act - where both the parties under the agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void - for lack of free consent.Sec 22 - mistake as to the law - contract not voidable due to mistake of law in force in Malaysia, but if the law not in force in Malaysia - like mistake of fact.Sec 23 - mistake as to one party (unilateral) - contract is validMistake of fact made by both parties can be as to :- Existence of the subject matter Strickland v. Turner. - annuity for a dead person

Identity of the subject matterFalck v. Williams - identity of charter parties

Quality of the subject matterKennedy v. Panama Royal Mail. - shares in a mail company

VOID AND ILLEGAL CONTRACTSec 2 (g) - Contract which is not enforceable by law.Sec 24 Contract with unlawful consideration / object is void i.e.:a- forbidden by law - Hee Cheng v Krishnan attempts to transfer TOL landb- of such nature as to defeat the law -Tan Bing Hock attempts to assign logging rightsc- fraudulent -Palaniappa Chettiard-involves / implies injury to person / property. - Syed Ahamed Alhabshee v Putehe- immoral / against public policy - Pearce v Brooks hire of vehicles for prostitution

There are also Sec 25 to Sec 31 which provides for other instances that renders a contract void in law.

Sec 25 - any part of a single consideration / any part of several consideration unlawful Chung Khiaw Bank Ltd.Sec 26 - agreement made without consideration.Sec 27 - agreement in restraint of marriage.Sec 28 - agreement in restraint of trade Wrigglesworth v. Anthony Wilson restrained from practicing as lawyer within five miles from KB for two yearsSec 29 - agreement to restraint legal proceeding Corporation Royal Exchange v. Teck GuanSec 30 - agreement void for uncertainty.Sec 31 - agreement by way of wager.

Consequence Of Void And Illegal Contract.General rule under CA - ex turpi causa non oritur actio - no action will arise from a wrong done.Contracts under sec 27, 28 and 29 - not void in toto - severable.Sec 66 - Right of restitution - doctrine of unjust enrichment Ahmad b. Udoh paid $1500 as deposit for lease of padi land which was illegalYeep Mooi v. Chu Chin Chua money deposited with a company carrying unlicensed business is recoverable

DISCHARGE OF CONTRACTContract is discharged when it is terminated in one of these ways:1. By performance.2. By consent or agreement between the parties3. By impossibility (frustration)4. By breach.

1.BY PERFORMANCE.Performance must be strictly in accordance with terms of the contract.Sec 38 (1) - parties to a contract must either perform or offer to perform their respective promises unless such performance has been dispensed with by any law.When time is of the essence - Sec 56Performance by third party - Sec 41 Letchumi Ammal terms of contract that requires personal performance must be done by promissorHaji Nik Ishak v. Nik Zainab if a promisee accepts performance from a third party, cannot afterwards enforce it against promisor

2. BY CONSENT OR AGREEMENTContract created by consent can be extinguished by consent either express or implied. Express consent may be given at time of contract or subsequent to that.E.g. discharged at the occurrence of an event. Waiver, release, novation or rescission.Sec 63 - if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.Sec 64 - every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.

3. BY IMPOSSIBILITY / FRUSTRATION

Two categories of impossibility of contractWhen impossibility is at the time of making the contract - an agreement to do an act impossible in itself is void. A contract is frustrated when there is a change in the circumstances which renders a contract legally or physically impossible of performance not merely difficult or more onerousSec 57(2) - a contract to do an act which after the contract is made becomes impossible, or by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.In applying the rule - court will examine the circumstances surrounding the frustration including whether it is self induced or not.

A contract may be discharged in any of the following circumstances:Destruction of the subject matter - Taylor v. Caldwell-there must be total destruction - not partial due to Sec 12 of SRASupervening event defeat the whole purpose / object of the contract - Henry v. Krell.Death or personal incapacity especially in regards of personal obligation.Supervening illegality - Lee Kin v. Chan Suan Eng.

Effect of frustration - automatically end the contractSec 66 CA provides for restitutionary remedy.

4. BY BREACH

Sec 40 - When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.Party not in breach has the option of continuing with the contract and claim damages or repudiate the contract.Sec 65 - when a person at whose option a contract is voidable rescinds it, the other thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore the benefit, so far as may be, to the person from whom it was received.

Cases :Choo Yin Loo v. VisuvalingamBan Hong Joo Mine Ltd. V. Chen & Yap

REMEDIESThere are several remedies provided by the law to give relief to the party not in default in a breach of contract.1. Rescission of Contract. - Sec 402. Damages. - Sec 74 to 763. Specific Performance. - The Specific Relief Act 19504. Injunction. - Specific Relief Act1.RESCISSION As dealt with in the previous part under sec. 40

2.DAMAGESDamages are granted to a party as compensation for the damage, loss or injury done / suffered through breach of contract - but damage cant be too remote or indirect.Damages can be classified as substantial, nominal or exemplary

Sec 74 - when a contract has been broken, the party who suffers is entitled to receive..compensation for any loss or damage.which naturally arose in the usual course of things..or which the parties knew, when they made the contract, to be likely to result from the breach.

Illustrations to sec74 also indicate that the aggrieved party may recover damages -for other expenses incurred as a result of the breach, for loss of profits arising out of the breach, for the difference btw the price of goods as contracted for and the actual price the goods were sold for as result of the breach.

Sec 75 - When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breachor any other stipulation by way of penaltythe party complaining of the breach is entitled to receivereasonable compensation not exceeding the sum named or the penalty stipulated for.The effect of fixing the sum - to determine the upper limit of compensation.Nevertheless, party seeking damages is also under the duty to mitigate the loss - Kabatasan Timber Extraction Co.

3. SPECIFIC RELIEFThe Specific Relief Act provides for the remedy of specific performance - which is discretionary by nature.It a decree of the courts directing the contract to be performed according to its terms.Sec 11 in trust cases and where no adequate relief.Sec 12 - presumption in cases of transfer of landSec 18 - court has power to award damages in lieu of SPSec 21 - court has discretion to refuse specific performance if cause undue hardship to the defendant.Sec 20 - circumstances where no SP can be enforced:where money is adequate relief.contract with minute details.contract dependant on personal qualification.contract that will need supervision of the court.contract with uncertain terms.contract revocable by nature.contract made by trustee in excess / breach of their powercontract made on behalf of public or private corporation in excess of its power.contract the involves performance of continuous duty extending over a period longer than three years from its date.contract which a material part of the subject matter has ceased to exist even before the contract is made

Thats All Folks!