CONTRACT LAW: ESSENTIAL ELEMENTS

Thanks to Dr. Abbas for the slides. They have been slightly modified.

INTRODUCTION
A contract may be defined simply as a legally binding agreement between two or more parties. Generally in Malaysia, the law of contracts is regulated by the Contracts Act 1950. If a particular subject concerning the law of contract is not dealt with sufficiently or not at all by the Contracts Act or Malaysian decided cases, then the English law may be applied.

ESSENTIAL ELEMENTS
The essential elements or pre-requisites of a valid contract are:
i. ii. iii. iv. v.

offer acceptance genuine intention to create legal relations consideration capacity

OFFER & ACCEPTANCE

An agreement is the presence of offer and acceptance. OFFER: Section 2(a) of the Contracts Act states: 'when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Proposal has the same meaning as offer. Note that only the person to whom the proposal is made can accept the proposal. Other persons cannot accept the proposal.

A promisor is also known as a proposer or an offeror. A promisee is also referred to as an acceptor or offeree. An offer or acceptance can be express or implied. Express: Generally, an offer (or acceptance) will be in words, either oral or written. Implied: However, in a number of cases, an offer (or acceptance) may be implied from the conduct (behaviour) of the parties or from the circumstances concerned.

CERTAIN FEATURES OF AN OFFER

An offer may be made to an individual or to a large number of people : Carlill v Carbolic Smoke Ball Co. (1892) Carbolic smoke Ball Co. Ltd., in its newspaper advertisement, promised to give 100 to anyone who purchased their smoke ball remedy for influenza, and caught illness within 14 days. To show good faith, the company deposited 1000 with a bank to meet any claims. Mr. Carlill bought the remedy, caught influenza and claimed 100. The court held that the advertisement was an offer to the world at large, and Mrs. Carlill had accepted the offer by purchasing and taking the remedy. An offer must be a definite promise by which the offeror intends to be legally bound by the terms stated. The fact that 1000 had been deposited with a bank showed that it was a firm offer and the company intended to be legally bound.

Carlill v Carbolic Smoke Ball Co. is an example of advertisement of a unilateral contract (one party makes the offer; the other accepts it through performance). Another example: reward for lost dog.

DIFFERENCES

BETWEEN AN OFFER AND AN

INVITATION TO TREAT

It is important to know which party makes the offer and which accepts. In the case of goods on display in a shop or supermarket, the law has decided that it is the customer who makes the offer by taking the goods and placing them on the shopkeepers or cashiers counter, and the shopkeeper or cashier accepts the offer by accepting the customers money. The price displayed on the goods is not the offer, it is only an invitation for the customer to make an offer; it is only an invitation to treat. The law gives the shopkeeper or cashier the right to accept or reject a customers offer.

DIFFERENCES

BETWEEN AN OFFER AND AN

INVITATION TO TREAT

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd. [1953] The law required that the sale of certain pharmaceuticals must be carried out under the supervision of a qualified pharmacist. Boots operated a store where the drugs were displayed on a self-service basis and the customers paid at a cash desk for the goods they has selected. A pharmacist was present at the cash desk but not at the shelves where the goods were displayed with a price tag. The Pharmaceutical Society claimed that the law was violated by the shop.

Was the acceptance at the time the customer put the medicine in the shopping cart, or when the cashier entered the amount into the register? The court held that the display of goods in the store was not an offer but an invitation to treat. It was the customer who made the offer and Boots could either accept or reject this offer at the cash desk (in the presence of the qualified pharmacist). The acceptance was the ringing up of the price by the cashier and at that moment a binding contract of sale is made.

Invitations to treat generally include: Auctions Advertisement of tenders (invitation to bid for services) Catalogues Price lists Goods displayed in shop windows and shelves

RELATED CASES
Partridge v Crittenden Harvela Investments v Royal Trust Co of Canada (1985) Blackpool Aero Club v Blackpool Borough Council (1990) Harvey v Facey (1893) Fisher v Bell (1959)

ACCEPTANCE
Section 2(b) of the Contracts Act states: when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted; a proposal, when accepted, becomes a promise. There must be an unconditional consent to the terms of the offer. In other words, a final and unqualified acceptance of the terms of an offer. It is important to note that if an acceptance contains any reservations or any variations to the terms of the offer, then the acceptance will be conditional and thus not form a valid contract.

CONT.
A conditional acceptance is a new offer known as a COUNTER-OFFER. An acceptance must be communicated to the offeror. Entores v Miles Far East Corp [1955] 2 All ER 493where Lord Denning stated that acceptance must be communicated by the offeree or someone authorised by the offeree. If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance.

CONT.

Merely remaining silent cannot amount to acceptance, unless it is absolutely clear acceptance was intended. See Powell v Lee, where the court stated that the offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should amount to an acceptance.

But silence is binding if offeree stipulates that it is, or in counter-offer situation.

THE POSTAL RULE

The postal rules ONLY apply when the acceptance is sent by post. Simplified rule: Acceptance here takes effect when the letter is posted. In other words, where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties, then acceptance is complete as soon as the letter is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror.

Adams v Lindsell: Lindsell sent an offer to sell wool to Adams on 2 Sept 1817. It was received by Adams on 5 Sept. That evening, Adams posted a letter accepting Lindsells offer. The letter of acceptance was not received by Lindsell until 9 Sept. On 8 Sept, Lindsell not having received the answer on 7 Sept, as he expected, sold the wool to another person. The issue before the court was when acceptance took effect. The court held that acceptance took effect when the letter was posted; i.e., 5 Sept.

REVOCATION OF OFFER/ACCEPTANCE
Section 5 provides that: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. [see chart] In general, an offer terminates: i. When rejected by the offeree. ii. When the offeree makes a counter-offer. iii. On the death of either the offeror or the offeree before acceptance. iv. By non-acceptance within the time stipulated for acceptance, or within a reasonable time. v. When revoked before acceptance.

GENUINE INTENTION TO CREATE LEGAL RELATIONS Although every contract is an agreement, there are many agreements that are not contracts. For example, if A and B agree to meet at 8 oclock to have dinner together, the agreement is made without intending that there will be legal consequences if either A or B in the end, does not turn up. It is merely a social agreement, and not a contract. For an agreement to become a contract there must be a genuine intention to create legal relations which has legal implications. For the parties to be bound, they must have finished reaching an agreement, so that it is possible to infer an intention on the part of both of them to be bound immediately. Kwong Kum Sun(s) Pte Ltd v Lian Soon Siew & Ors. [1984].

RELATED CASES
In Rose and Frank Co. v Crompton (1925), a written agreement between the parties stipulated that it was not a formal or legal document and should not be subject to the legal jurisdiction of the court. The House of Lords held that the agreement had no legal effect. Parties usually engage in a process of negotiation before they settle into an agreement. During this process of negotiation, they do not intend to be legally bound yet. Likewise, when the parties include the words subject to contract, it usually means that whatever agreement that seems to have been reached still needs further deliberation, which shows that the parties are not ready to be legally bound. In all these circumstances, there is no contract yet. In Balfour v Balfour (1919), the husband went to work in Ceylon and agreed to pay his wife 30 per month. He did not pay the money and the wife sued. It was held that there was no contract because the parties did not intend to create a legal relationship.

CONSIDERATION Section 26 provides that an agreement without consideration is void. The word consideration is defined in section 2(d). It means merely the price in a bargain. The price need not be money, but must have a monetary value. Examples: If A enters a shop and buys a packet of groundnuts, the consideration which A provides is the money, whereas the consideration moving from the shopkeeper is the packet of groundnuts. They have each provided consideration for the business transaction. Section 25 states that if the consideration or any part of it is unlawful, the agreement is void.

CONSIDERATION

NEED NOT BE ADEQUATE

In order for consideration to be valid, it must be measurable in terms of some economic gain or loss. In legal language, the consideration must be sufficient, but need not be adequate. In Phang Swee Kim v Beh I Hock [1964], the Federal court held that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.

So, if A told B that he would sell his new Mercedes to her for RM5, and B agreed, there is a binding contract between A and B for the sale of As new Mercedes. The RM5 is sufficient consideration, although not adequate. However, if A said to B that she could have his new Mercedes in return for her praying for him and wishing him good health, there would not be sufficient consideration even if B actually carried out the praying and wishing.

CAPACITY
Generally, any person may make a contract, but the law sometimes protects certain classes of persons such as minors and mental patients who, because of an inherent weakness or disability, cannot be expected to manage their own affairs adequately. Section 11 states that:
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.

Minors and people of unsound mind are disqualified by law from entering into contracts.
Exceptions for necessaries, scholarships and insurance.

RELATED CASES
Nash v Inman (1908): A tailor supplied high-class clothing to an undergraduate at Cambridge University. The clothes include 11 fancy waistcoats. The undergraduates father was a wealthy architect. The clothes could be said to be suitable to the undergraduates station in life. However, his father proved that the infant was already amply supplied with such clothes when the tailor supplied the clothes concerned. The court held that the goods supplied were not necessaries. In Government of Malaysia v Gurcharan Singh & Ors [1971], it was held that education was included under necessaries. Under the Contracts [Amendment] Act 1976, for scholarships or loans given by the government or a statutory body or an educational institution, the scholarship agreement entered into by an infant is valid.