The Law of Contract

Business Law

THE LAW OF CONTRACT

1. Introduction
We enter into many contracts in our day-to-day lives. We purchase goods for our
daily use, we buy houses from the developers, we ask contractors to renovate our
houses, we take loans from the banks, and in all these and many other transactions we
enter into contracts. The essential of the contract is that promises are protected and
enforced. Section 2 (h) of the Contracts Act 1950 (CA 1950) provides that an
agreement enforceable by law is a contract. The law of contract does not lay down
rights and duties, which the law will enforce. The parties to a contract make the law
for themselves subject to some legal limitations and prohibitions.
Indian Contracts Act 1872
The provisions of the CA 1950 are based on the provisions of the Indian Contracts
Act 1872. Therefore, the Indian cases may be of great assistance and provide a useful
guide to the interpretation of the CA 1950. The decisions of the Privy Council on the
provisions of the Indian Contracts Act which are in pari materia (word for word the
same as the corresponding section of a local statute) prior to 1885 are binding on the
courts in Malaysia, but the decisions made by privy Council after 1985 are not
binding (i.e. the courts in Malaysia are not bound to follow it), those cases are
obviously of high persuasive value for the Malaysian courts.
Application of English law of contract
It is now generally accepted that where our CA 1950 is silent on a particular matter
(for e.g., intention to create legal relations, terms of a contract, exemption clauses),
English law relating to the law of contract is applicable by virtue of s. 3 and S. 5 of
the Civil Law Act 1956 subject to the qualifications stated therein [see p.2 & p.3 of
Ch2].
2. Elements of a Contract
The basic elements for an agreement to be enforceable by law in order to constitute a
contract are as follows:
(a) Offer
(b) Acceptance
(c) Intention to create legal relations
(d) For lawful consideration and for a lawful object
(e) Certainty
(f) The parties must be competent to contract
(g) By the free consent of the parties

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3. Proposal / Offer
Most of the contracts arrive by an acceptance of a proposal. The term proposal is
synonymous with offer in English law.
Section 2 (a) of the CA 1950 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 the act or abstinence, he is said to make a proposal.
Thus, according to s. 2 (a) an offer/proposal can be one of two things:
- the doing of something
- abstaining from doing something
The proposal is an expression of will or intention made by one person to another. The
person who is making the proposal is called promisor or proposer or offeror. The
person to whom the proposal is made is called proposee or offeree and when he
accepts, he is called promisee.
3.1 Proposal must be definite and certain
A proposal must be definite and certain. It should be made with clear intent to
contract with the other party. The parties must agree to its terms with sufficient
certainty. If the terms are unsettled or indefinite, there will be no contract: M. N.
Guha Majumder v R. E. Donough (1974) (p.78 of Textbook)
3.2 Proposal may be express or implied
A proposal may be made by words, written or spoken, or by conduct.
3.3 Communication of proposal
A proposal is effective when it is communicated to the offeree. S. 4 of the CA 1950
provided that The communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made.
A person who does an act for which a reward had been offered, in ignorance of such
offer cannot say either that there was a consensus of wills between him and the
offeror, or that his act was done in return for the promise offered.
3.4 Offer to be distinguished from Invitation To Treat
S. 2 (a) CA 1950 provides that 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 that other to the act or abstinence, he is said to make a proposal.
Thus, a proposal/offer is the final expression of the offeror awaiting the assent of the
other party. However, when a party is not expressing his final willingness, but

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proposes to negotiate, he is not making the offer rather he is inviting the other party to
make an offer. A preliminary statement of facts made merely to supply information
and not intended to be binding cannot be treated as an offer but just an invitation to
treat (ITT).
Examples of ITT:
(a) Lowest price
Harvey v. Facey (1893)
A telegraphed to B: will you sell us Bumper Hall Pen?
B replied: Lowest price for Bumper Hall Pen $900
A sent the last telegram: we agree to buy Bumper Hall Pen for $900 asked by you.
B subsequently refused to sell that land known as Bumper Hall Pen.
Privy Council held that no contract had been made because B by stating the lowest
price for the land was not making as offer but merely supplying the invitation to
invite offer. In this case, As offer to buy the land at $900 had never been accepted by
B.
(b) Tender notice
A tender notice is not an offer but an invitation to contractors to make offer. The rate
quoted by a contractor is an offer and it becomes a promise when it is accepted by the
person calling for tenders.
(c) Catalogue or price list
A shopkeepers catalogue, with prices stated against the goods is not an offer but just
an ITT.
(d) Sale in self-service shops
Where the goods with price tags are displayed in shop having self-service system,
the shopkeeper is not making an offer but inviting offer from the customers to bye the
goods. In other words, the shopkeeper may accept or refuse the offer as he wishes:
Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd (1952) (p.80 of
Textbook).
(e) Auction sale
In a sale by auction, the auctioneer is not making an offer, but in fact, he is inviting
offer. A bid is only an offer which the auctioneer is free to accept or reject. Until the
auctioneer announces his acceptance by the fall of the hammer or in other customary
manner, no contract of sale is concluded with the bidder. Thus, a bid can be retracted
at any time before the fall of the hammer.

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(f) Advertisement
Whether an advertisement is an offer or a mere ITT is a question to be determined on
the basis of facts and the intention of the parties in each case. In Majumder v
Attorney-General of Sarawak (1967), the Federal Court held that an advertisement
in the newspaper for the position of a doctor was an ITT and not an offer.
3.5 Specific offer and general offer
Where an offer is made to a definite or ascertained person, it is called specific offer
and it is only the offeree concerned may accept it.
Where an offer is made to the public at large, it is called general offer. In a case of
general offer, the contract is not made with the whole world but within those persons
who come forward and perform the conditions of the offer or who accept it. An offer
addressed to the general public at large by an advertisement published in the
newspaper is a general offer. Such an offer may be accepted by those persons to
whom it is made or becomes known.
In some cases, a general offer is exhausted once it is accepted. For e.g., where an
offer is made for reward for the return of some lost goods, anyone who knows about
such offer and returns the said goods is entitled to get the reward.
Sometimes, a general offer may be of continuing nature capable of acceptance by a
number of persons and such acceptance is made by performing the conditions of the
offer. The leading English case on the point is :
Carlill v Carbolic Smoke Ball Co Ltd (1893)
The plaintiff saw an advertisement for a smoke ball which stated that if anyone
purchased and used the smoke ball according to instructions and still contracted flu,
the company would pay a sum of D1,000 pounds. The company stated that to show
their sincerity they had deposited D10,000 pounds in the bank. Mrs. Carlill bought
and used the smoke balls according to the instructions but she still developed flu and
therefore she sued the company for the promised reward.
Held: a unilateral offer can be made to the whole world, the advertisement was
sufficiently definite and intended to be understood by the public as an offer which
was to be acted upon. Mrs. Carlill had accepted the offer by purchasing the smoke
balls and using them according to the instructions. The company proved its intention
that this should be understood as an offer by stating that they had deposited money in
the bank. Thus, there was a binding contract and the Smoke Ball Co had to pay Mrs.
Carlill.

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4. Acceptance
An agreement consists of a proposal made by one person and its acceptance by
another person to whom it is made. S. 2 b) CA 1950 provides that 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 is no rule of law like the saying silence gives consent. However, silence may
amount to acceptance if there are other facts like the conduct of the offeree to indicate
acceptance. Any formal or informal expression or conduct to signify the assent will be
sufficient acceptance.
4.1 Acceptance may be express or implied
S. 9 CA 1950 provides that both proposal and acceptance may be express or implied.
Express means by words, written or spoken; and implied means by conduct.
4.2 Communication of acceptance
It is necessary that the acceptance must be communicated to the proposer. However,
the offeror may expressly or impliedly dispense with this requirement and provide
that uncommunicated acceptance will suffice (see for e.g. in a case of unilateral offer:
Carlill case on p.4 herein.)
4.3 Acceptance must be absolute and unqualified
S.7 a) CA 1950 provides that the acceptance must be absolute and unqualified. It
cannot be conditional. In other words, the acceptance must correspond with the terms
of the proposal actually made. If the offeree changes the terms contained in the offer
or introduces new terms, he is merely making a counter-offer and it amounts to
rejection of the original offer. A counter-offer cannot constitute an acceptance of the
original offer.
4.4 Acceptance as prescribed in the proposal
Where a proposal prescribes the manner in which it is to be accepted, the acceptor
must communicate his acceptance in that manner. However, if the acceptance is not
made in the prescribed manner, the proposer may, within a reasonable time, insist that
his proposal shall be accepted in the prescribed manner, and not otherwise. But if he
fails to do so, he becomes bound by the acceptance.
For example, if A offers to sell his watch to B for certain amount, asking that the
acceptance be communicated by telegram. B must communicate his acceptance by
telegram. If B communicates his acceptance by letter, A may, within a reasonable time

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reject the acceptance and may insist that the proposal be accepted in the prescribed
manner. But, if A does not object, the acceptance would be binding upon him.
4.5 Acceptance in usual and reasonable manner
Where a proposal does not prescribe the manner of its acceptance, the acceptance
must be expressed in some usual and reasonable manner. What will be a usual and
reasonable manner will depend upon the facts and circumstances of each case.
Generally speaking, the mode adopted for the communication of a proposal may also
be adopted for the communication of acceptance as a usual and reasonable manner.
For example, a proposal made by letter may be accepted by letter.
4.6 Communication of acceptance by post
In Malaysia, section 4 (2) of the CA 1950 provides two principles:
(a) 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
(b) the communication of an acceptance is complete against the acceptor, when it
comes to the knowledge of the proposer.
The above provisions reveal the following points:
(i)When a letter of acceptance is posted it is only the proposer who becomes bound
by such acceptance and not the acceptor. The acceptor will become bound only when
the letter of acceptance is received by the proposer. See: Ignatius v. Bell (1913) (p.89
of Textbook)
(ii) Thus, the acceptor may make use of the time gap between the time of positing the
letter of acceptance and its delivery to the proposer, for the purpose of revocation.
(iii) It must be noted that there is a marked distinction between English and
Malaysian law on this point. In England, when the letter of acceptance is posted,
both the offeror and offeree are bound by it. But, in Malaysia, when the letter of
acceptance is posted, it is only the proposer who is bound by it and the acceptor
becomes bound only when the letter of acceptance is received by the proposer.
For example, if B accepts As proposal by letter sent by post, the communication
of the acceptance is complete (i) as against A, when the letter is posted; and (ii)
as against B, when the letter is received by A.
4.7 Acceptance by telephone or telex; Instantaneous communication

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Now the question for our consideration is whether the law relating to postal
communication as laid down in section 4, discussed above, can be extended to the
telex or telephonic communication? In case of instantaneous communication between
the parties, the rule is different from the rule of postal communication.
In telephonic and such other communications, the parties talk instantaneously though
separated in space and, therefore, the contract is concluded when the acceptance is
heard by the offeror and at the place where the acceptance is heard. In England, the
Court of Appeal in Entores Ltd. V. Miles Far East Corporation (1955) has also
taken the view that in instantaneous means of communication the contract is complete
only when the acceptance is received by the offeror; and the contract is made at the
place where the acceptance is received.
5. Revocation of proposal / offer
Offer may be revoked at any time before it is accepted
S. 5 (1) of the CA 1950 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.
Thus, a proposal / offer can be revoked at any time before it is accepted. Where a
proposal is to be accepted within a fixed time, it can be revoked even before the
expiry of that time. The proposer / offeror is at liberty to revoke the offer at any time
even before the expiry of the time fixed for acceptance.
HOWEVER, when the agreement is to keep the offer open for a fixed period for some
consideration, the offeror cannot revoke it before the expiry of that period.
Instances of revocation of a proposal / offer
S. 6 of the CA 1950 provides that A proposal is revoked
(a)

by the communication of notice of revocation by the proposer to the other

party;

(b)

by the lapse of the time prescribed in the proposal for its acceptance, or , if
no time is so prescribed, by the lapse of a reasonable time, without
communication of the acceptance;

(c)

by the failure of the acceptor to fulfil a condition precedent to acceptance;

or

(d)

by the death or mental disorder of the proposer, if the fact of his death or
mental disorder comes to the knowledge of the acceptor before
acceptance.

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6. Revocation of acceptance
S.5 (2) of the CA 1950 provides that An acceptance may be revoked at any time
before the communication of the acceptance is complete as against the acceptor, but
not afterwards.
As already stated earlier that under S. 4 (2) (b) of the CA 1950, the communication of
an acceptance is complete against the acceptor, when it comes to the knowledge of
the proposer. In other words, the revocation of acceptances must reach the proposer /
offeror before the acceptance itself.
7. Intention to create legal relations
Though the CA 1950 is silent on the question of intention to create legal relations,
there seems to b no doubt that a vital requirement for a vital requirement for a valid
contract is that the parties must have the intention to enter into such a relations. In
domestic / family arrangements, there is an rebuttable presumption that the parties do
not have such intention to create legal relations: Choo Tiong Hin v. Choo Hock
Swee (1959) ; on the other hand, in commercial arrangements or where the
arrangements were arranged through solicitors, there is a rebuttable presumption that
the parties intended to create legal relations : Esso Petroleum Co. ltd v. Customs &
Excise Commissioner (1976).
8. Consideration
Consideration is an essential requirement for the formation of a valid contract. In
Malaysia, section 26 of the CA 1950 begins with the words: An agreement made
without considerations is void . Thus, in Malaysia, consideration is a necessary
element a valid contract. However, this principle is subject to certain exceptions laid
down under section 26 of the Act. It is, therefore, obvious that in Malaysia a unilateral
declaration is not enough to make a contact and that no question of a contra ct under
seal arises, unless the matter is covered by one of the exceptions provided under S. 26
CA 1950.
S 2 (d) CA 1950 defines the term consideration thus When, at the desire of
promisor, the promise or any other person has done or abstained from doing,
something, such act or abstinence or promise is called a consideration for the
promise.
The definition reveals that where at the desire of the promisor, the promise or any
other person has done or abstained from doing something, such act or abstinence is
called consideration. It stipulates that when,(h) that the act or abstinence should be done at the desire of the promisor;

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(ii) that it should be done by the promise or any other person,

(iii) has done of abstained from doing, or does or abstains from doing or promise
to do or to abstain from doing something,
(iv) such act or abstinence or promise is called a consideration for the promise.
It thus follows that to constitute food consideration there must be an act, abstinence or
promise on the part of the promise or some other person at desire of the promisor. The
claim can be good only if the promise acts, abstains or promises to do something in
pursuance of the promise.
8.1 At the desire of the promisor / offeror
The act constituting consideration must be done at the desire or request of the
promisor.
In Wong Hon Leong David v Noorazman bin Adnan [1995] 3 MLJ 283, the D was
one of the directors of Wealth Sdn Bhd (the company) which owned three lots of
agricultural land in Kajang (the land). As the company wanted to develop the land
into a housing estate, it made an application to the land administrator for the district
of Ulu Langat (the land administrator) for conversion and sub-division of the land
(the application). To expedite the matter, the D sought the assistance of the P who
said that he know the Menteri Besar of Selangor. The D agreed to pay a fee of
RM268,888 (the fee) for the Ps services. On 28 January 1991, the P wrote a letter
using the companys letterhead to the Menteri Besar, asking for assistance for an early
approval of the application. The D later paid RM100,000 to the P when he produced
the letter with the handwritten word Disokong addressed to the land administrator
and signed by the Menteri Besar. On 16 September 1992, the land administrator
informed the company that its application had been approved. The D, however,
refused to pay the remaining fee of RM168,888.
The Court of Appeal held that the submission that the P did nothing to earn his fee
was unmeritorious. The P had expended his exertions in securing the Menteri Besars
support for the companys application, and the application had in fact been approved.
The Ps actions came within the terms of s 2(d) of the CA 1950 which provides that
when the promisee has done something at the desire of the promisor, such act is a
consideration for the promise. From the facts of the case, it was the D who asked the
P for help. The P had obtained the approval of the application as promised and should
receive the payment which had been agreed upon from the D.
Where the act had been done voluntarily and there is no request by the promisor,
it will be a bare promise without consideration. An act done at the desire of the third
party is not a consideration.
8.2 Consideration need not be adequate

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There must be some consideration which is of some value in the eye of law but it is
not necessary that the consideration should be adequate. Adequacy being a matter
purely for the contracting parties to agree upon. The courts will not inquire into the
adequacy of the consideration.
Explanation 2 of S. 26 CA 1950 An agreement to which the consent of the promisor
is freely given is not void merely because the consideration is inadequate; but the in
adequacy of the consideration may be taken into account by the court in determining
the question whether the consent of the promisor was freely given.
ILLUSTRATIONS
(f)A agrees to sell a horse worth $1,000 for $10. As consent to the agreement was
feely given. The agreement is a contract not withstanding the inadequacy of the
consideration.
(g)A agrees to sell a horse worth $1,000 for 410. A denies that consent to the
agreement was freely given.
The inadequacy of the consideration is a fact which the court should take into
account in considering whether or not As consent was freely given.
In Phang Swee Kim v. Beh I Hock (1964), the D agreed to transfer the land to the P
on payment of RM500 when the land was subdivided. The Federal Court held that if
there was consideration then inadequacy of consideration is immaterial (there being
no evidence of fraud or duress) and therefore the P was entitled to the declaration
sought by him.
8.3 Past consideration is good consideration
Under English law, the consideration must always be present at the time of making
the promise. Any promise made subsequent to the act which has already been done is
a past consideration and is in effect no consideration at all. However, English law
recognized and important exception tot eh above rule, the exception is a past act done
at the request of the promisor will constitute a good consideration; Lampleigh v.
Brathwait (1615)
In Malaysia, past consideration is a good consideration:
(a) Past voluntary service:
Past voluntary services are covered by S.26 (b) CA 1950. Where a person has already
done something voluntarily for the promisor and there is a subsequent promise to pay
for it, it is enforceable.

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(b) Past service at the request of the promisor

s.2 (d) CA 1950 provides that when, at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing, something, such act or abstinence or promise
is called a consideration for the promise. This provision seems to include an act
which has been done at the request of the promisor and there is a subsequent promise
to pay for that act: Kepong Prospecting Ltd & Ors v. Schmidt (1968) 1 MLJ 170
(PC).
8.4 Agreement on account of natural love and affection
S. 26 (a) CA 1950 provides that An agreement made without consideration is void,
unless it is in writing and registered;
It is expressed in writing and registered under the law (if any) for the time being in
force for the registration of such documents, and is made on account of natural love
and affection between parties standing in a near relation to each other;
Illustration: A for natural love and affection, promises to give his son, B, $1,000. A
puts his promise to B into writing and registers it under a law for the time being in
force for the registration of such documents. This is a contract.
8.5 Consideration may proceed from the promisee or any other person
In Malaysia, the act constituting consideration may proceed from the promisee or
any other person. Under S. 2 (d) CA 1950, consideration for an agreement may
proceed from a 3rd party, but it does not follow that the third party can sue on the
agreement : Kepong Prospecting Ltd. v. Schmidt (1968) PC. Under the doctrine of
privity of contract, a contract cannot be enforced by a person who is not a party to
the contract even through it is made for his benefit (exceptions; where a trust has been
created; in a case of insurance against third party risks)
8.6 Promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him
Associated Pan Malaysia Cement Sdn Bhd v Syarikat Teknikal & Kejuruteraan
Sdn Bhd [1990] 3 MLJ 287
Supreme Court held that s 64 of our Contracts Act 1950 represents a departure from
the common law in England. Our law on waiver in s 64 of the Contracts Act 1950, is
similar to the Indian law on the general principles of waiver under which it is open to
a promise to dispense with or remit wholly or in part the performance of the promise
made to him or hi can accept any promise which he thinks fit. Under our law neither
consideration nor an agreement will be necessary.

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Illustration ; A owes B RM5,000. A pays to B RM2,000 and B accepts in satisfaction

of the whole debt. The whole debt is discharged.
Illustration : A owes B RM5,000. C pays to B RM1,000 and B accepts them in
satisfaction of his claim on A. This payment is a discharge of the whole claim.
9. CERTAINTY
S. 30 CA 1950 provides that agreements, the meaning of which is not certain, or the
meaning of which is not capable of being made certain, are void. Where the terms of
an agreement are so vague or indefinable that it cannot be ascertained with reasonable
certainly as to what is the intention of the parties, there is no contract enforceable at
law. It is for the parties concerned and not for the court to define the terms of the
contract. The purpose of S. 30 is to ensure that the parties should be aware of the
precise nature and scope of their mutual rights and obligation under the contract.
Illustration : If A agrees to sell B a hundred tons of oil without specifying what kind
of oil, the agreement is void for uncertainty. But if A deals only in only coconut oil
and no other oil, then the agreement can be understood to mean only coconut oil and
thus the agreement is valid.
10. WHO ARE COMPETENT TO CONTRACT
S. 11 CA 1950 provides that a person who is of the age of majority and is of sound
mind, and not disqualified from contracting by any law, is competent to contract.
10.1 Age of majority
S. 2 of the Age of Majority Act 1971 provide 18 years as the age of majority. It is now
settled law that the effect of S. 10 is that the minors agreement is void ab initio :
Mohori Bibi & Anor v Dhurmodas Ghose (1902-3).
Supply of necessaries to minor: S. 69 CA 1950 provides that if a minor is supplied with
necessaries by another person, such a person is entitled to be reimbursed from the
property of the minor. It is clear that the minor is NOT liable even for necessaries and
that no demand in respect thereof is enforceable against his estate.
In Government of Malaysia v Gurcharan Singh & Ors the court came to the conclusion
that the word necessaries must be construed broadly and in so interpreting, a court
would have regard to the facts of the case, the conditions and the circumstances in
which the goods were supplied. The legal definition is thus wider that bare essentials of
life and includes goods and services reasonably necessary to the minors actual
requirements such as food, shelter, clothing, medical services. However, these must be
tested against the minors station in life. Thus what may constitute necessaries may

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vary according to the position of the minor. The test is to look at the nature of the goods
or services supplied, the minors actual needs and his station in life.
In the circumstances of this case, the provision of professional or vocational training for
the first defendant in a Teachers Training Institution to enable him to qualify for and
accept appointment as a teacher was provision for necessaries

Scholarship agreements: The CA 1950 has been amended by the Contracts (Amendment)
Act 1976 in which it is provided that no scholarship agreement shall be invalidated on the
ground that the scholar is not of the age of majority. In the event of the breach of a
scholarship agreement, the scholar and the surety shall be liable jointly and severally.
10.2 Person of unsound mind
At the time of entering into a contract, the contracting party must be capable of
understanding it and of forming a rational judgment as to its effects upon his interests: S.
12 CA 1950.
10.3 Person disqualified from contracting by any law
S. 11 CA 1950 reveals that a person may be disqualified from contracting by any law to
which he is subject beside by reason of minority or insanity.
11. TERMS TO BE IMPLIED IN THE CONTRACT
Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998] 3 MLJ 151
The Federal Court held that there are 3 types of implied terms:
(1) The first and most important type is an implied term which the court infers from
evidence that the parties to a contract must have intended to include it in the contract
through it has not been expressly set out in the contract. The implied term contended
for in this appeal belongs to this type and much more about this later.
The 1st test is that such a term to be implied by a court is something so obvious that
it goes without saying, so that if, while the parties were making their bargain, an
officious bystander were to suggest some express provision for it in the agreement,
they would testily suppress his with a common Oh, of course.
The 2nd test is that the implied term should be of a kind that will give business
efficacy to the transaction of the contract of both parties.
(2) The second type of implied term is one by operation of law, and not based on the
interference just explained. By operation of law, it means that a large number of
specific implied terms have been held in to arise from previous decided cases on
certain specific facts.

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(3) The third kind of an implied term is one that is implied by custom or usage of
any market or trade which is reasonable, and again it is not dependent on a courts
inference explained above but by virtue of such a custom or usage from the market or
trade.
12. EXEMPTION CLAUSES
An exclusion clause is one that seeks to exclude from a contract some
term (such as one imposing a duty of care) that would otherwise be
implied; a limitation clause similarly seeks to limit liability for any breach
of such a term.
The general rule is that the parties are free to determine the terms of
their own contract, but the courts and Parliament do not look favourably
on exclusion clauses and have found various ways of limiting their effect.
Incorporation and notice
Clearly no exclusion clause is valid if it is not part of the contract, and it is not part of the
contract unless both parties agreed to it at the time.
Parker v South Eastern Railway (1877) LR 2 CPD 416, CA
P left his bag in a railway cloakroom, paid 2d (twopence), and was given
a ticket on which were the words "See back"; on the back of the ticket
was a notice excluding liability for any package worth over 10. There
was also a notice to the same effect visible in the cloakroom. The bag
was lost, P sued, and DD relied on the exclusion clause. The court said it
was a matter of fact whether or not DD had done all that was reasonably
necessary to give notice of the clause, and in this case they had.
Contra proferentem
Any ambiguity or uncertainty in the interpretation of an exclusion clause, however
contrived the ambiguity might be, is normally construed contra proferentem against the party seeking to rely on it.
White v Warwick [1953] 2 All ER 1021, CA
P hired a bicycle from DD under a written agreement which included a
provision that "nothing in this agreement shall render the owners liable
for any personal injuries". P was injured when the saddle tilted forward,
and the Court of Appeal found DD liable in negligence. The exclusion
clause was construed so as to exclude only the concurrent liability that
would otherwise have arisen under the contract.

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Fundamental breach
No exclusion clause can protect a party who is "in fundamental breach" of the contract.
In consumer contracts this common-law rule has been strengthened by s.3(2) of
the Unfair Contract Terms Act 1977 (below), but in purely commercial contracts
the courts are inclined to take a broader view if they are satisfied that the clause
represents the parties' true intentions.
Karsales v Wallis [1956] 2 All ER 866, CA
D examined a second-hand car at a showroom and decided to buy it on
hire purchase. The car was then in excellent condition, but when it was
delivered two weeks later it was in very poor condition and incapable of
being driven under its own power. The finance company PP sued for
payment and relied on a term in the contract that no warranty was given
as to the condition or fitness of the vehicle, The Court of Appeal found in
D's favour; the vehicle supplied was not a useable car at all, and the
exclusion clause could not cover a fundamental breach of this nature.
Chin Hooi Nan v Comprehensive Auto Restoration Service Sdn Bhd & Anor [1995]
The appellant had, on payment of RM296 to the respondents, agreed to have his car
waxed and polished by them. He left his car at the respondents premises in the
basement of the Sungai Wang Plaza Complex and was given a receipt (the receipt)
with which to claim for the car. When the appellant returned to collect his car from the
respondents, he found that it had been damaged while being driven by an employee of
the second respondent to a lower floor of the basement. The appellant sued the
respondents for the costs of repairing the car at RM3,630.85; costs of hiring another car
for one month at RM1,790; 25% depreciation in the value of the car at RM9,128.81; and
costs of engaging an independent adjuster at RM169. The suit was dismissed with costs
after a full trial in the magistrates court on the ground that an exemption clause at the
back of the receipt which stated that the respondents were not liable for any loss or
damage whatsoever of or to the vehicle, its accessories or contents. Vehicle and goods
are at owners risk exonerated the respondents. The appellant appealed.
HELD: it is settled law that an exemption clause however wide and general does not
exonerate the respondents from the burden of proving that the damage caused to the
car was not due to their negligence and misconduct. They must show that they had
exercised due diligence and care in the handling of the car. Sze Hai Tong Bank Ltd v
Rambler Cycle Co Ltd [1959], and Port Swettenham Authority v TW Wu & Co (M) Sdn
Bhd [1978] are authorities for this proposition of the law.
13. VOIDABLE CONTRACTS
S. 10 CA 1950 provides that free consent of the parties is an essential requirement of a
valid contract. When consent is caused by coercion, undue influence, fraud or
misrepresentation, the agreement is a contract voidable at the option of the party whose
consent was so caused: S. 19 & S. 20 CA 1950; when the consent is caused by mistake,
the agreement is void: S. 21 CA 1950. The term free consent has been defined in S. 14
CA 1950 and consent is said to be free when it is not cased by the following factors:
13.1 Coercion

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Consent is said to be caused by coercion under S. 15 CA 1950 if it is obtained with the

intention of causing any person to enter into an agreement by:
(a) committing, or threatening to commit any act forbidden by the Penal Code; or
(b) the unlawful detaining or threatening to detain, any property, to the prejudice of
any person whatsoever.
Allied Granite Marble Industries Sdn. Bhd v. Chin Foong Holdings Sdn. Bhd (2000),
it was held that legal duress means actual violence or threats of violence to the person.
The threat must be illegal and it must be a threat to commit a crime or a tort.
In Pao On v. Lau Yiu Long (1937), the terms commercial pressure, economic duress
and unfair use of a dominant bargaining position have been commented as follows:
Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. In a
contractual situation, commercial pressure is not enough.
13.2 Undue influence
S. 16 (1) CA 1950 provides that A contract is said to be induced by undue influence
where the relations subsisting between the parties are such that one of the parties is in a
position to dominate the will or the other and uses that position to obtain an unfair
advantage over the other.
Saw Gaik Beow v Cheong Yew Weng & Ors [1989], it was held that only in
exceptional circumstances will the equitable remedy of setting aside a transaction on
grounds of undue influence be granted. Courts are not inclined to intervene even if the
bargain may appear harsh, unless it can also be demonstrated that the transaction was
to the manifest disadvantage of the person subjected to the dominating influence. To rely
on undue influence, the party must show that:
(a)
(b)
(c)
(d)

the other party had the capacity to influence him;

the influence was exercised;
its exercise was undue; and
that its exercise brought about the transaction. None of these conditions were
satisfied by the defence.

Fiduciary relation: The principle of undue influence includes a situation where one party
dominating the other is in a fiduciary relationship (where one party places a complete
trust and confidence in the other). Sometimes the relationship is such as to raise a
presumption of undue influence, such as, parent over child, solicitor over client, doctor
over patient, spiritual adviser over follower.
13.3 Fraud
S. 17 CA 1950 provides that Fraud includes any of the following acts committed by a
party to a contract, or with his connivance, or by his agent, with intent to deceive another
party thereto or his agent, or to induce him to enter into the contract
(a) the suggestion, as to a fact, of that which is not true by one who does not
believe it to be true;
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(b) the active concealment of a fact by one having knowledge of belief of the fact;
(c) a promise made without any intention of performing it;
(d) any other act fitted to deceive; and
(e) any such act or omission as the law specially declares to be fraudulent.
Explanation mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud, unless the circumstances of the case are such that, regard
being had to them, it is duty of the person keeping silence to speak, or unless his silence
is, in itself, equivalent to speech.
ILLUSTRATIONS
(a) A sells. By auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horses unsoundness. This is not fraud in A.
(b) B is As daughter and has just come of age. Here, the relation between the
parties would make it As duty to tell B if the horse is unsound.
(c) B says to A, If you do not deny it, I shall assume that the horse is sound. A
says nothing. Here, As silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a
change in prices which would affect Bs willingness to proceed with the
contract. A is not bound to inform B.
13.4 Misrepresentation
Misrepresentation as defined in S. 18 CA 1950 may arise under 3 circumstances as
follows:
(a) S. 18 (a) reveals that a misrepresentation is a positive assertion of that which
is not true, though the person making it believes it to be true. The statement
happens to be unwarranted by the information of the person making it.
(b) Under S. 18 (b), a person committing any breach of duty obtaining an
advantage by misleading the other to his prejudice without any intention to
deceive, amounts to misrepresentation. The cases of concealment or
suppression of facts may also fall within the ambit of this clause when there is
a duty to disclose such facts.
(c) When there is a concealment or suppression of facts which may lead the
other party to make a mistake as to the subject-matter of the agreement, it
may amount to misrepresentation within S. 18 (c):
13.5 Mistake

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S. 21 provides that when both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, the agreement is void.
Explanation An erroneous opinion as to the value of the thing which forms the subjectmatter of the agreement is not to be deemed a mistake as to a matter of fact.
In a case of mutual mistake both the contracting parties misunderstand each other and
are at cross-purposes. There is no corresponding proposal and acceptance. Thus their
consent is mollified and the agreement is void: Ng Chun Lin & Anor v. Foo Lian Sin &
Anor (2000) (p. 131 of Textbook)
In unilateral mistake, only one party to the contract is mistaken and the other party
knows of his mistake. According to S. 23 CA 1950, a contract is not voidable merely
because it was caused by one of the parties to it being under a mistake as to a matter of
fact. In a case of unilateral mistake, a contract may be avoided if it is caused by fraud or
misrepresentation on the part of the other party.
Effect of mistake as to law: S. 22 CA 1950 provides that a contract is not voidable
because it was caused by a mistake as to any law in force in Malaysia and such mistake
has the same effect as a mistake of fact.
14. VOID AND ILLEGAL CONTRACTS
A valid contract must be made for a lawful consideration and with valid object: Chung
Khiaw Bank Ltd v Hotel Rasa Sayang And Bhd 7 Anor (1990) Supreme Court (p. 135
of Textbook).
S. 24 CA 1950 provides that the consideration or object of an agreement is lawful,
unless
(a) it is forbidden by a law;
(b) it is of such a nature that, if permitted, it would defeat any law;
(c) it is fraudulent;
(d) it involves or implies injury to the person or property of another, or
(e) the court regards it as immoral, or opposed to public policy.
In each of the above cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is void.
Illustrations (where object / consideration is unlawful)
(e) A, B and C enter into an agreement for the division among them of gains
acquired, or to be acquired, by them by fraud. The agreement is void, as its
object is unlawful.

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(f) A promises to obtain for B an employment in the public service, and B

promises to pay $1,000 to A. The agreement is void, as the consideration for it is
unlawful.
(h) A promises B to drop a prosecution which he has instituted against B for
robbery, and B promises to restore the value of the things taken. The agreement
is void, as its objects is unlawful.
(j) A, who is Bs advocate, promises to exercise his influence, as such, with B in
favour of C, and C promises to pay $1,000 to A. The agreement is void, because
it is immoral.
14.1 Agreement in restraint of marriage void
S. 27 CA 1950 provides that every agreement in restraint of the marriage of any person,
other than a minor during his or her minority, is void. Marriage ought to be free, and,
therefore, an agreement which restrains a person from marrying anybody, or from
marrying anybody except a particular person, is void.
14.2 Agreement in restraint of trade void
S. 28 CA 1950 provides that every agreement by which anyone is restrained from
exercising a lawful profession, trade, or business of any kind, is to that extent void.
Saving of agreement not to carry on business of which goodwill is sold;
Exception 1 One who sells the goodwill of a business may agree with the buyer to
refrain carrying on a similar business, within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business therein:
Provided that such limits appear to the court reasonable, regard being had to the nature
of the business.
of agreement between partners prior to dissolution;
Exception 2 Partners may, upon or in anticipation of a dissolution of the partnership,
agree that some or all of them will not carry on a business similar to that of the
partnership within such local limits as are referred to in exception1.
of during continuance of partnership.
Exception 3 Partners may agree that some one or all of them will not carry on any
business, other than that of the partnership, during the continuance of the partnership.
The doctrine of restraint of trade is based upon public policy. Every person shall be free
to use his abilities and earn his living in whatever legitimate ways he may from time to
time think fit.
In Wrigglesworth v. Wilson Anthony (1964), the Malaysian court has given a strict
interpretation to S. 28 and it was held that whilst the validity of the covenants in restraint
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of trade are tested by the reasonableness test by the English Courts, the position in
Malaysia is different. Once the Malaysian Court has taken the view that a particular
covenant is a covenant in restraint of trade, the court has no discretion but to declare it
to be void under S. 28 subject to the 3 exceptions provided for by S. 28. Accordingly an
agreement whereby an advocate and solicitor is restrained from practicing his profession
within 5 miles from Kota Bharu town for a period of 2 years after the termination of his
service agreement with his employer is void. The distance and place in respect of the
restraint are irrelevant.
Polygram Records Sdn Bhd v The Search & Anor (1994)
The covenant, whereby the group undertook to provide exclusive recording rights to the
plaintiffs during the currency of their recording contract, was not a covenant in restraint
of trade and was therefore not rendered void under S 28 of the Act. Section 28 is only
applicable in cases where a person is restrained from carrying on his trade or profession
in the post-contract period and not during the currency of the contract.
14.3 Agreement in restraint of legal proceedings void
Every agreement, by which any party thereto is restricted absolutely from enforcing his
rights under or in respect if any contract, by the usual legal proceeding in the ordinary
tribunals, or which limits the time within which he may thus enforce his rights, is void to
that extent subject to 3 exceptions provided therein (see p. 143 of Textbook).

15. DISCHARGE BY PERFORMANCE

S. 38 (1) provides that the parties to a contract must either perform, or offer to perform,
their respective promises, unless the performance is dispensed with or executed under
CA 1950 or any other law.
56. Effect of failure to perform at fixed time, in contract in which time is essential.
(1) When a party to a contract promises to do a certain thing at or before a specified
time, or certain things at or before specified times, and fails to do any such thing at or
before the specified time, the contract or so much or it as has not been performed,
becomes voidable at the option of the promise, if the intention of the parties was that
time should be of the essence of the contract.
(2) Effect of failure when time is not essential.
If it was not the intention of the parties that time should be of the essence of the contract,
the contract does not become voidable by the failure to do the thing at or before the
specified time; but the promise is entitled to compensation from the promisor for any
loss occasioned to him by the failure.
(3) Effect of acceptance of performance at time other than that agreed upon.
If, in case of a contract voidable on account of the promisors failure to perform his
promise at the time agreed, the promise accepts performance of the promise at any time
other than that agreed, the promise cannot claim compensation form any loss

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occasioned by the non-performance of the promise at the time agreed, unless, at the
time of the acceptance, he gives notice to the promisor of his intention to do so.
16. DISCHARGE BY FRUSTRATION
In Yee Seng Plantations Sdn Bhd v Kerajaan Negeri Terengganu & Ors (2000), the
Court of Appeal held that the law of frustration is contained in s 57 (2) of the Contracts
Act 1950 which reads: 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,
unlawful, becomes void when the act becomes impossible or unlawful.
The section postulates two supervening events that frustrate a contract. The first is an
event that makes the contract impossible of performance: the second is the event of
supervening illegality.
On the other hand, it is to be noted that after a contract has been entered and there is a
change of circumstances which do not render a fundamental or radical change in the
originally undertaken to make the performance of the contract something radically
different from that originally undertaken, the contract does not become impossible and it
is not discharged by frustration: Lai Kok Kit @ Sulaiman Lai bin Abdullah v MBf
Finance Bhd (2000) Court of Appeal. Similarly, in an instance of a commercial hardship
(where the performance is more difficult or costly) to perform the contract will not
discharge the contract.
Instances of impossibility / frustration:
(a)

Where the subject matter of a contract is destroyed subsequent to the contract

without any fault of the parties
(b)
A contract for personal service is put to an end on the death or incapacity of the
promisor.
(c)
Where the performance of a contract becomes impossible or unlawful as a result
of the legislative or administrative action of the State. Any subsequent change in the law
which makes the performance of a contract illegal would frustrate the contract
automatically.
Effect of frustration: S. 57 (2) makes it clear that a contract to do an act which after the
contract is made becomes impossible or unlawful, the contract becomes void and in
which S. 57 (3) and S. 66 provide for the restitutionary remedies.
17. DISCHARGE BY BREACH
Ching Yik Development Sdn Bhd v Setapak Heights Development Sdn Bhd (1996)
Court of Appeal:
(1)

In every contract, be it for the sale of land or any other commodity, there are
some terms that are of fundamental importance and others of less or minor importance.
Where the term that has been flouted is fundamental to the contract, the innocent
party is entitled to treat himself as being discharged from further obligations under it.
But where the obligation that has been breached is only subsidiary or minor in nature,
the innocent party may not treat himself as being free of his obligations under the
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contract, although he may sue and recover damages for the non-performance of the
subsidiary term.
(2)

A party who terminates a contract or treats it as having come to an end in

reliance upon the breach of a non-fundamental term is himself guilty of a breach of a
contract.

(3)

Whether a particular term is fundamental to the contract or merely a term of

subsidiary importance depends on the way in which the particular contract is
constructed. Nevertheless, in the absence of any special considerations in a contract for
the sale of land, the obligation to pay the purchase price is a fundamental term. So too is
a term that the vendor has good title to the property that is the subject matter of the sale.
If the parties desire to make some other obligation fundamental in nature, they must
make it dependent upon one or other of there terms.
18. CONSEQUENCES OF BREACH OF CONTRACT
(A) DAMAGES
DAMAGES, ACTUAL - Actual Damages are real damages to compensate for loss or
injuries that have actually occurred. This is in contrast to "nominal" damages (a small
amount paid where there is no real loss) or "punitive" damages (intended to punish the
party
who
must
pay
damages).
When damages, which have been suffered by someone as a result of another's
wrongdoing, can be precisely measured, they are called actual damages. Examples of
actual
damages
are:
loss of income because of an injury * medical expenses * costs of repairing damaged
property, and * specific business losses occurring because of a breach of a contract.
LIQUIDATED DAMAGES - When the parties to a contract agree to the payment of a
certain sum as a fixed and agreed upon satisfaction for not doing certain things
particularly mentioned in the agreement, the sum is called liquidated damages.
The

damages

will

be

considered

as

liquidated

in

the

following

cases:

When the damages are uncertain and not capable of being ascertained by any
satisfactory or known rule - whether the uncertainty lies in the nature of the subject itself
or
in
the
particular
circumstances
of
the
case;
When, from the nature of the case and the tenor of the agreement, it is clear that the
damages have been the subject of actual and fair calculation and adjustment between
the parties.
UNLIQUIDATED DAMAGES - Such damages, as are unascertained. In general such
damages cannot be set-off. No interest will be allowed on unliquidated damages.
SET-OFF - Defalcation; a demand which a defendant makes against the plaintiff in the
suit for the purpose of liquidating the whole or a part of his claim.

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18.1 Compensation for loss or damage caused by breach of contract: S.74

S. 74 (1) CA 1950 provides that when a contract has been broken, the party who suffers
by the breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from the breach, or which the parties knew,
when they made the contract, to be likely to result from the breach of it.
Malaysian Rubber Development Corp Bhd v Glove Seal Sdn Bhd (1994) Supreme
Court
Generally, the value of the goods should be determined at the time of breach but if there
is no available market, the value is likely to be based upon the price at which the goods
are eventually sold.
The plaintiff was under a duty to take reasonable steps to mitigate its loss immediately
upon the breach, i.e. buy or sell in the market, if there was an available market or, if
there was none, act reasonably to mitigate its loss. The question of what is reasonable in
every case is a question of fact and not law.
18.2 Compensation for breach of contract where penalty stipulated for: S.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 breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual damage or
loss is proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding the amount so named or, as the
case may be, the penalty stipulated for.
Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy (1995) Federal Court:
(1)
In Malaysia, there is no distinction between liquidated damages and penalties as
understood under English law, in view of s 75 of the Contracts Act 1950 which provides
that in every case the court must determine what is the reasonable compensation,
whether or not actual damage or loss is proved to have been caused thereby.
(2)
However, the words in question must be given a restricted construction. Hence,
despite the words in question, a plaintiff who is claiming for actual damages in an action
for breach of contract must still prove the actual damages or the reasonable
compensation in accordance with the settled principles in Hadley v Baxendale (1854).
Any failure to prove such damages will result in the refusal of the court to award such
damages.
(3)
However, for cases where the court finds it difficult to assess damages for the
actual damage as there is no known measure of damages employable, and yet the
evidence clearly shows some real loss inherently which is not too remote, the words in
question will apply. The court ought to award substantial damages as opposed to
nominal damages which are reasonable and fair according to the courts good sense
and fair play. In any event, the damages awarded must not exceed the sum so named in
the contractual provision.

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(B) SPECIFIC PERFORMANCE

Specific Relief Act 1950:
S. 21 (1) provides that the jurisdiction to decree specific performance is discretionary,
and the court is not bound to grant any such relief merely because it is lawful to do so;
but the discretion of the court is not arbitrary but sound and reasonable, guided by
judicial principles and capable of correction by a court of appeal. Under S. 18 (1), any
person suing for the specific performance of a contract may also ask for compensation
for its breach, either in addition to, or in substitution for, its performance.
S. 11 (2) provides that unless and until the contrary is proved, the court shall presume
that the breach of a contract to transfer immovable property cannot be adequately
relieved by compensation in money, and that the breach of a contract to transfer
movable property can be thus relieved.
20. Contracts not specifically enforceable.
(1) The following contracts cannot be specifically enforced
(a)
(b)
(c)
(d)

where damages will provide an adequate remedy

where the terms of the contract are uncertain
where there is evidence of fraud
where to grant specific performance would require the constant supervision of
the court
(e) where it is a contract for personal service

(C) INJUNCTION
An interlocutory injunction, prohibitory (forbids the doing of an act) or mandatory (directs
a party to do something), may be granted by the court for a specific period of time
pending the outcome of the suit. Its purpose is to maintain the status quo of the parties
until the issues in dispute between the parties have been adjudicated or decided by the
court.
1.Anton Piller injunction
This is a mandatory order permitting the applicant to enter into specified premises to
inspect and take into custody documents or articles relevant to the action which might be
destroyed or otherwise concealed by the defendant. Its purpose is to preserve material
documentary evidence essential to the plaintiffs case.
2. Mareva Injunction
A Mareva injunction is an equitable relief to restrain the defendant who has assets in
Malaysia from dissipating those assets out of Malaysia before any judgment is obtained
by the plaintiff.

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(D) Rectification
Where it can be shown clearly that a document such as a will or a contract does not
reflect the true intentions of the parties (or where one party to a contract took unfair
advantage of a mistake made by the other) the court has power to rectify the document
to make it show the true position.
Re Posner [1953] 1 All ER 1123, Karminski J
A testator T left most of his property to "my wife Rose Posner", though in fact the woman
concerned, with whom T lived, was married to someone else and was not T's legal wife.
In interlocutory proceedings the judge said that unless fraud could be proved the words
"my wife" could be deleted so that T's intentions could be carried out.
(E)Rescission
If a contract is rescinded, then it is as if it had never existed, and the parties are restored
to their original positions. A party discovering a relevant mistake, or the victim of a
misrepresentation, may affirm or rescind the contract, explicitly or by his conduct, but this
decision once made is irrevocable.
Redgrave v Hurd (1881) LR 20 ChD 1, CA
A solicitor P advertised for a partner, giving an exaggerated account of the firm's
profitability. D answered the advertisement and (after negotiations) agreed to join the
firm, but retracted when he discovered the true position. P sued for specific performance;
D defended and counterclaimed for rescission and damages. The court refused
damages but said D was entitled to rescission of the contract, which had been entered
into because of P's misrepresentations.

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