LAW OF CONTRACT

LECTURER: LIM ENG HOE

email. ehlimwee@hotmail.com

FORMATION OF CONTRACT

oral

Contract-

writing
conduct
offeror-s2(c)

offer

agreement- not
enforceable
by law
social/domestic
contract-enforceable by
law
business/commercial
Offerees2(c)
Offer 2(a)
acceptan
ce
consideration-s2(d)
intention to treat
Capacitys11

 Contract
Contracts Act 1950
Consents10
Legality-s10

Certainty-s30

DEFINITION
A contract is an agreement

between two or more persons to do

or abstain from doing an act and it
is intended to create a legally
binding relation.
S 2(b) Contracts Act 1950
when the person to whom the
proposal (offer) is made signifies
his assent thereto, the proposal is
said to be accepted: a proposal,
when accepted, becomes a

Distinction: contract and agreement

S 2(g) Contracts Act 1950
an agreement not enforceable by law is

said to be void.
S 2(h) CA 1950
an agreement enforceable by law is a
contract.

A contract may be made:

in writing
orally
by conduct

What constitute a valid contract?

A valid contract must have following elements
1. offer
2. acceptance
3. consideration
4. intention to create legal relation
5. capacity of persons
6. legal
7. certain
8. consent

What if does not have any above

elements?
Contract is either:
Void
Voidable
unenforceable

What is an offer, offeror or offeree?

S 2(a) CA 1950
when one person signifies to another his

willingness to do or 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 (offer).
S 2 (c) CA 1950
the person making the proposal is called the

promisor (offeror) and the person accepting the

proposal is called the promisee (offeree)

Offer
Must be absolute
Must be unqualified
Must be communicated to offeree

Offer
Must be absolute, cannot be vague
Definite promise to be bound by specific terms
Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui [1984]

1MJL 169
Held: terms of offer must be disclosed before acceptance can
be given to conclude a contract, failing which such agreement
is void.

Offer must be clear, definite and certain

White v Bluett (1853) LJ Ex 36
Son claimed father agreed to discharge him from liability in

consideration of his promise to cease complaining.

Held: Sons promise was no more than a promise not to bore
his father and was to vague to form a consideration
But in Ward v Byham [956] 1 WLR 496
Held: promise to make child happy was part of consideration

S 30 terms of agreement must be certain otherwise void

Karuppan Chetty v Suah Thian [1916]
Held: Agreement to grant a lease at RM35 per

month for as long as he liked was void for

uncertainty.

Must be communicated to offeree

Taylor v Laird (1856) 156 ER 1203

T was engaged to work on Ls ship. He threw up his job

but continued to help on ship without Ls knowledge.
Ship reached port and he claimed remuneration.
Held: T could not claim because he did not communicate
his offer and L had no opportunity to accept his offer.
S 4 (1) communication of proposal is complete when it
comes to knowledge of person to whom it is
made.

Offer: distinguish
Invitation to treat attempt to induce offers
Display of goods
- Fisher v Bell [1960]
- Pharmaceutical Society of Great Britain v Boots Cash

Chemists [1952]
Advertisement
Attempt to induce offers
Partridge v Crittenden [1968]
Advertisement can sometimes be offer
- Carlill v Carbolic Smoke Ball Co [1893]

Display of goods
Fisher v Bell [1961]

D exhibited flick knife in his shop window. Prosecuted

under Restriction of Offensive Weapons Act 1959
Held: Display of goods in shop window even with price
tag not an offer for sale but an invitation to treat.
Pharmaceutical Society of GB v Boots [1953]
Lady picked up controlled medicine from Boots, a sell
service store. Boots was prosecuted under Pharmacy and
Poisons Act 1933.
Held: Medicines on display merely invitation to treat; only
when lady took goods to check out cashier she made
an offer, which pharmacist at check out could refuse.

Advertisement invitation to treat

Partridge v Crittenden [1968]

P advertised bramblefiinch cocks and hens for sale and was

charged for offering for sale under Protection of Birds Act 1954.
Held: when P advertised he was making invitation to treat and
when C responded he was making an offer. If Ps advertisement
was treated as offer then he would himself contractually bound
to supply to all who responded.
Advertisement offer
- Carlill v Carbolic Smoke Ball Co [1893]

Sometimes invitation to treat can be offer

Harvela Investment Ltd v Royal Trust Co of

Canada 1986] AC 207

Owner invited two bidders for their shares
and stated they would accept highest offer.
First bidder submitted fixed bid and second
bidder submitted referential bid.
Held: invitation to tender was an offer of a
unilateral contract to sell to highest bidder.
Second bid was invalid because it was a
referential bid intended to frustrate the other
bid.

Offer distinguished from supply of information

Harvey v Facey [1893] Ac 552
H telegraphed F, Will you sell us Bumper Hall?

Telegraph lowest cash price. F telegraphed H,

Lowest price for BHP, 900. H telegraphed F, We
agree to buy BHP for 900 asked by you.
Held: No contract F merely supplying information
on lowest price acceptable. It was H who made the
offer which was never accepted by F.
Stevenson v McLean (1880) 5 QBD 346
Held: offeree could still accept offer even though he

had telegraphed to offeror requesting information

on credit terms because it did not destroy offer.

Tender
Invitation to tender is generally an invitation to treat

and bidders tender is an offer

Invitation to treat attempt to induce offers
- Harris v Nickerson (1873)
Auction
Invitation to treat attempt to induce offers
- Payne v Cave (1789)
- British Car Auctions v Wright [1972]

Harris v Nickerson (1873)

Auctioneer advertised to hold auction. Harris travelled to

auction site to find item had been withdrawn. He sued for

loss of expenses because Nickerson was in breach of
contract for not holding sale.
Held: advertisement of auction an invitation to treat to
invite offers.
British Car Auctions v Wright [1972]
Held: bid is an offer and becomes a contract when
auctioneer accepts it.
Now in s 42 Sale of Goods Act 1957

Termination of offer
S 5 (1) offer may be revoked at any time before

S 6(a)
S 6(b)
S 6(c)
S 6(d)

communication of its acceptance is

complete
- by communication of notice of revocation
- by lapse of time
- by failure of offeree to fulfill condition
precedent
- by death or mental disorder of offeror if
fact of death or mental disorder comes to
offerees knowledge before acceptance

Cross-offer
- two identical offers which crossed each

other will not

conclude a contract because each offer is
made in
ignorant of the other.
Tinn v Hoffman & Co (1873) 29 LT 271
On 28 Nov 1871, H wrote to T to sell him
800 tons of
iron at 69s per ton. On same day T wrote to
H to buy
800 tons of iron at same price. Letters
crossed in

Counter-offer

- is a purported acceptance which does not accept all

the terms and conditions of the offer; it introduces
new terms and is treated as a new offer
Hyde Wrench (1840) 3 Beav 334.
D offered to sell his land to P for 1000, but P replied
to buy for 950. D refused to accept. P, later, offered
to buy for 1000. D refused.
Court held: no contract made because Ps counteroffer is a rejection of D offer which could not later be
accepted.

Acceptance
S 7 In order to convert an offer into a contract the

acceptance:
S 7 (a) must be absolute and unqualified
S 7 (b) be expressed in some usual and reasonable
manner., unless the proposal prescribed the
manner in which it is to be accepted. If the
proposal prescribes a manner in which it is to be
accepted, and the acceptance is not made in such
manner, the proposer may, within a reasonable
time after the acceptance is communicated to him,
insist that his proposal shall be accepted in the
prescribed manner, and not otherwise, but if he
fails to do so, he accepts the acceptance.

However, offeror cannot prescribe silence as

a manner in which it is to be accepted.

Felthouse v Bindley [1862] 142 ER 1037
F wrote to his nephew offering to buy his
horse, adding if I hear no more about him I
shall assume horse mine at 40. Bindley,
auctioneer, sold horse by mistake though
nephew told auctioneer to exclude it from
auction.
Held: Nephews acceptance had not been
communicated to uncle, hence horse did not
belong to him.

Consideration
S 26 agreement made without consideration is void
S 2(d) when, at desire of offeror, offeree or any

other person has done or does something

A sort of bargain , quid pro quo, something done in

return or in exchange for something

S 2(d) - Past consideration is valid consideration
Adequacy of consideration
Explanation 2 of S 26
- Consent of offeror is freely given is not void merely
because consideration is inadequate

Executory consideration
Where a contract is made in return for an offer, i.e.

mutual exchange of a mutual promises

Illustration (a) s 24 As promise to sell the house is the
consideration for Bs promise to pay $10,000 for the
house.
Executed consideration
Where a promise is made in return for the performance of
an act
e.g. A has lost her purse. She offers to pay $100 to anyone
who can finds and returns her purse. B finds her purse and
returns it to her. A has to pay B for her executed act

Consideration must be lawful

S 24 an agreement of which the object or

consideration is unlawful is void

S 24(a) it is forbidden by law
S 24(b) it would defeat any law
S 24(c) it is fraudulent
S 24(d) it involves or implied injury to the person
or property of another
S 24(e) court regards it as immoral or opposed to
public policy

Bilateral contract
Mutual exchange of promises between parties
Unilateral contract
There is only a promise by the offeror. The offeree

makes no promise. He performs the act to conclude

the contract. Usually an offer for performance of act
e.g. Carlill v Carbolic Smoke Ball Co [1893]

Past consideration
A promise is made subsequent to and in return for an

act that has already been performed

S 26 Illustration (c) A finds Bs purse and gives it to
her. B promises to pay A $100. It is a contract
e.g.
Kepong Prospecting Ltd & S K Jagathesan & Ors v A
E Schmidt & Majorie Schmidt [1965]
Agreement by company to pay Schmidt after its
incorporation is legally binding

Adequacy of consideration
S 26 Explanation 2
Agreement to which consent of offeror is freely given

is not void merely because consideration is inadequate

Though inadequacy of consideration may be taken
into by court in determining whether consent is freely
given
e.g. Phang Swee Kim v Beh I Hock [1964] MLJ 383

Exception to general rule of consideration

S 26 agreement without consideration is void
Exception
S 26(a) - agreement made for natural love and

affection with conditions must be made in writing,

registered, if registerable and parties in near relation
S 26(b) agreement to compensate a person for past
voluntary act or for which offeror is legally compel to
do
S 26(c) promise to pay debt barred by limitation law

Consideration need not move from offeree

S 2(d) when at desire of offeror, offeree or any

other person has done ..something, such act is a

consideration
e.g. Venkata Chinnaya v Verikatara Maya (1881)
Mother gave land to sister in consideration sister
would give brothers an annuity sum held to be valid
consideration though brothers did not give any
consideration

Waiver of performance
S 64 offeree may dispense with the performance of

a promise made to him, or extend the time for such

performance, or may accept instead of it any
satisfaction which he thinks fit
S 64 Illustration (b)
A owes B $5000. A pays to B, and B accepts, in
satisfaction of whole debt, $2000. Whole debt is
discharged

Waiver of performance third party

S 64 Illustration (c) A owes B $5000. C pays to B

$1000, and B accepts them in satisfaction of his claim

on A. This payment discharges whole claim.
e.g. Kerpa Singh v Barjam Singh [1966] 1 MLJ 38
B owed K $8,869.64 in judgment debt. Bs son,
Gurbakhash wrote to K offering to pay $4000 in full
satisfaction of his fathers debt. Ks lawyers cashed
cheque and retained money. They then proceeded to
sue for balance. Court held acceptance of payment
preclude them from claiming balance

INTENION TO CREATION LEGAL RELATIONS

Recognise under common law as an element for

existence of contract
Malaysian contract law though silence recognises under
common law such element as essential for contract to be
enforceable
Social and domestic agreement
Presumption that there is no intention to create legal
relations, though rebuttable
e.g. Balfour v Balfour [1919]

Jones v Padavatton [1961]

Merritt v Merritt [ 1970]

Business and commercial agreement

Presumption there is an intention to create legal

relation, though rebuttable

e.g. Esso Petroleum Ltd v Commissioners of
Customs and Excise [1976]
May be rebutted by an express term in contract,
e.g. agreement made subject to contract
Agreement not legally binding contract
e.g. Rose and Frank Co v J R Crompton and Bros
Ltd [1925] agreement not entered into as formal
or legal agreement

CAPACITY
Parties must have legal capacity to enter into

contract
S 10 all agreements are contracts if made by:

1. free consent of parties

2. parties are competent

3. consideration and object are lawful

4, agreement not declared void

S 11 those competent to enter into contract are:

1. persons of sound mind
2. reached age of majority (18 years old)
Age of Majority Act 1971
3. persons not disqualify by law

Though minor, can, provided

for scholarship or skill training (Contracts

(Amendment) Act 1976 following Govt of

Malaysia v Gurcharan Singh & Ors [1971]
for necessaries Nash v Inman [1908] waist
coat
Insurance Insurance Act 1963 (Rev. 1972) - can
enter into contract for insurance below 16 yrs but
with consent of parents/guardian

CERTAINTY
Terms of contract must be certain
S 30 agreement, meaning of which is not

certain, or capable of being certain is void

e.g. Karuppan Chetty v Suah Thian [1916]

PRIVITY OF CONTRACT
Only parties to contract can sue or be sued
Only parties to contract have rights and

obligations under contract.

Dunlop Pneumatic Tyre v Selfridge [1915]AC
847
D sold tyres to S with price restriction, if sold
below price would pay D 5 each tyre. S sold to
customer below restricted price. D sued S.
Held: D did not provide consideration to S and D
not party to contract between S and customer.

Jackson v Horizon Holidays Ltd ]1975] 3 All ER 92

J bought holiday for family. Holiday fell short of what had

been promised. J claimed damages for all.

Held: J entitled to claim for himself and family. Family as
beneficiaries were entitled to the claim.
Woodar Investment v Wimpey Construction [1980] 1 All ER
571
Woodar contracted to sell land to Wimpey for 150,000 on
behalf of third party. Wimpey breached contract. Woodar sued
for both sums.
Held: Even if Wimpey was in breach Woodar could only
succeed in claim for themselves but not for third party as they
were not privy to the contract. Woodar had not suffered in
respect of that loss of third party

TERMS OF CONTRACT
Contract contains terms and conditions agreed by

parties to contract
Can be express or implied
Express Terms
These are terms and conditions agreed to in
writing or orally by parties
Implied Terms
Parties may not have expressly agreed to the
terms and conditions but statute provides for each
terms and conditions to be implied into contract

e.g. Sale of Goods Act 1957

seller has right to sell (condition)

Hire Purchase Act 1967

goods shall be of merchantable quality

Custom, Usage and Court
Terms, though not express sometimes implied

into contract
Past Dealing
Popular Industries v Eastern Garment
Manufacturing Sdn Bhd [1989]

Court
Court implies terms into parties contract to give

full effect to parties intention and business

efficacy
Yong Ung Kai v Enting [1965]
Court implies into contract that sale of timber
require licence. E entitled to refund

Condition
major term or essence of contract
if breached, innocent party can repudiate and

terminate contract and claim damages

Warranty
minor term which is collateral to main purpose of
contract.
if breached, innocent party cannot repudiate or
terminate contract but only seek damages
e.g. Associated Metal Smelters Ltd v Tham Cheow
Toh [1971]

EXEMPTION/EXCLUSION CLAUSES
Contract may contain exclusion clause exempting

or limiting one party from liability for fault done

to another party
SIGNED AGREEMENT
If parties signed contract containing exclusion
clauses then they are bound
e.g. LEstrangee v FGraucob Ltd [1934]
UNSIGNED
Depend whether contractual or non-contractual

Contractual
Must give reasonable notice, e.g. signboard which

is clear and unambiguous

e.g. Thompson v London, Midland and Scottish
Railway Co
If unambiguous contra proferendum rule applies
Timing of notice
Must be given before contract made
e.g. Thornton v Shoe Lane Parking Ltd [1971]

Olley v Marlborough Court Ltd [1949]

Prior dealing
e.g.Balmain New Ferry Co v Robertson [1906]
Must not beyond 4 corners
e.g.Council of City of Sydney v West [1965]
Non-contractual
Must bring actual notice to other party
e.g. Causer v Browne 1952]

Legal, void and voidable contract

Legal: s 2(h) CA
Void: s 2(g) CA

s 10 unlawful object or consideration

s 11 agreement by minor, person of unsound mind

s 21 agreement entered into under mistake

s26 without consideration

s 30 agreement meaning of which is uncertain

Voidable: s 2(i)

s 15 coercion

s 16 undue influence

s 17 fraud

s 18 - misrepresentation

VOIDABLE CONTRACT
S 2(i) an agreement which is enforceable by law

at option of one but not at option of the other is a

voidable contract
S 10 all agreements are contracts if they are made
by free consent of parties competent to contract for a
lawful consideration and with a lawful purpose are
not void
S 19(1) when consent to agreement is caused by
coercion, fraud, or misrepresentation, agreement is a
contract voidable at option of party whose consent
was so caused

S 19(2) a party to a contract whose consent was

caused by fraud or misrepresentation may, if he

thinks fit, insist that contract shall be performed
and he shall be put in position in which he would
have been as if representation was true
e.g. A intending to deceive B, falsely represents
his company was making RM5 M a year and
hereby induces B to buy company. Contract is
voidable at option of B

Exception
If consent is caused by misrepresentation or by

silence or by fraudulent act within s 17 contract is

not voidable if party whose consent is so caused
has meaning of discovering truth with ordinary
diligence
e.g. A, by misrepresentation of B, leads B
erroneously to believe his company is making
RM5 M a year. B examines account and discovers
company is only making RM4 M a year. B bought
company. Contract is not voidable

Where contract is voidable aggrieved party has

right to either continue with contract or repudiate it

S 14 consent is said to be free when not caused
by:
S 15 coercion commit or threaten to commit
any act forbidden by law or unlawful detaining or
threaten to detain any property to prejudice of any
person
S 16 undue influence person in position to
dominate will of the other use that position to
obtain unfair advantage

S 17 fraud intend to deceive another person or

to induce another to enter into contract

S 18 misrepresentation

(a) positive assertion which is not true by

person though he believes to be true

(b) any breach of duty, without intention to

deceive gives an advantage to person committing
it

(c) causing however innocently party to

agreement to make mistake as to substance of
thing

DISCHARGE OF CONTRACT
1. by performance
Parties have performed their obligations under the

contract
S 40 if a party refuses to perform or disabled
himself from performing the other party can put end
to contract
2. by agreement
Parties may consent to mutually agree to end
contract
S 63 & s 64 provide for to end contract by consent

3. by frustration
S 57 (2) contract becomes impossible or illegal to

perform subsequent to the making becomes void,

e.g. Taylor v Caldwell [1863] destruction of subject
matter; Krell v Henry [1903] supervening event
caused contract impossible to perform
Self induced frustration does not discharge contract,
e.g. Ramli bin Zakaria & Ors v Govt of Malaysia
[1982]
Frustration does not apply merely performance
becomes more difficult, e.g. Khau Daw Yau v Kim
Nam Realty Development Sdn Bhd [1984]

Frustration
S 66 any advantage received must be restored
4. by breach
Either party to contract fail to perform his

obligations under contract

S 40 where one party fails to perform the other
party can rescind or end contract and claim
damages

REMEDIES
Robinson v Harman [1848] 1 Ex 855
Held: Object of damages is to put injured party in

position they would have been in had contract been

performed in as far as money is able to do this.
Anglia Television v Reed [1972] 1 QB 60
R entered into contract with A to produce film but
abandoned it.
Held: A can claim for reliance loss or loss of expenses
but not expectation loss as that would be speculative.

Rescission and damages

S 76 party that rightfully rescind can claim damages
S 74 party not in breach can from party in breach

loss or damages which naturally arose in the usual

course of thing from breach
or which parties knew when they made contract to
loss or damages likely to result from breach, i.e.,
but not for any remote or indirect loss sustained , e.g.
Tham Cheow Toh v Associated Metal Smelters
[1972]; Hadley v Baxendale [ 1854]

 Hadley v Baxendale (1854) 9 Exch 341

Hs mill stop working because of broken crankshaft. No spare

so sent as pattern to manufacturer to make new shaft. H

engaged B to transport shaft to manufacturer but B was
negligent for late delivery to manufacturer. As result Hs mill
had to shut down longer than necessary.
Held: B could not claim for loss of profit as it was not within
the contemplation of the parties as H could have a spare shaft.
Victoria Laundry v Newman Industries [1949] 2 KB528
V wanted to expand business and bought secondhand boiler.
While dismantling N negligently damaged it resulted in delay
of 22 weeks to fix boiler.
Held: V could claim for loss of profit boiler could produced
but not the extra profit B had made from another contract.

Equitable remedy
Injunction is an order by court to defaulting party

to stop doing an act

Specific performance is an order by court to
defaulting party to perform contract as agreed
S 1(1) Specific Relief Act 1950 states when
court may grant specific performance
Mitigation
Party not in breach must mitigate his loss