LAW OF

CONTRACT
 LESSON OUTLINE
INTRODUCTION
ELEMENTS OF A CONTRACT:
1. Offer
2. Acceptance
3. Consideration
4. Capacity
5. Intention
6. Free Consent
7. Certainty
8. Valid Object

VOID AND ILLEGAL CONTRACT

DISCHARGE OF CONTRACT
REMEDIES
 INTRODUCTION
Contract defined by Sec. 2(h) - an agreement
enforceable by law is a contract
Specific Legislation - Contract Act 1950 - but English
law still applicable by virtue of Civil Law Act.
Function of contract:
to secure the expectation created by a promise of future
performance or expectation will be paid for its breach.
facilitate forward planning of the transaction in terms of cost
and value, responsibilities of parties and preparation for
contingencies.
Contract therefore - the instrument by which separate
and conflicting interests of the parties can be
reconciled and brought to common goal.
 ELEMENTS OF CONTRACT
1. Offer

Sec.2 (a) - offer or proposal - when a person signify his

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

Sec. 4 (1) -offer must be communicated - effective when it comes

to the knowledge of the offeree.
R v. Clarke - communication of proposal regarding capture of
convict

Offer can be made to a particular person or to the general public

Carlill v. Carbolic Smoke Ball - offer made to the rest of the
world but the contract is made with that limited portion of the
public who come forward and perform the condition
 To be an offer, the offeror must not merely feeling
his way towards an agreement if that is the case,
then it is not offer but is an invitation to treat
Examples of ITT:
Advertisements in the paper for the post of a doctor - ITT
Auctioneer inviting a bid ITT (but a bidder making a bid is
an offer)
Catalogue advertising goods for sale
Goods on display in a shop
Cases:
Boots Cash Chemist Ltd sale of poison under pharmacist
supervision
Majumder V. Attorney General of Sarawak advertisement
for the post of a medical officer
2. Acceptance
Sec.2 (b) - when the person to whom the proposal is made
signify his assent thereto.
Acceptance can be expressed or implied (inferred from conduct)
Acceptance must be accepted on exactly the same terms as the
proposal without any variation or modification it must be
absolute and unqualified
Any modification / variation to the offer is a counter - proposal
and is equivalent to rejection
Hyde v.Wrench - offer 1000, accept 950
Stevenson v. McLean - request for additional information is
not counter proposal
Acceptance must be communicated with some positive action
silence cannot be imposed as acceptance Felthouse v. Bindley
Exception : - proposer dispense with it
- acceptance in form of performance
Acceptance must be within reasonable time - Sec.6(b)
Acceptance may also be revoked at any time before the
communication of the acceptance is complete against the
acceptor
 Sec.4 - Acceptance through post - an exception to the
general rule that acceptance must be communicated
a.k.a. The Postal Rule
Sec.4 - communication of acceptance is complete-
a. As against the proposer, when it is put in a course
of transmission to him, so as to be out of the power of
the acceptor
b. As against the acceptor, when it comes to the
knowledge of the proposer
Illustration to the section:
B accept As proposal by a letter sent by post
The communication of the communication is
complete:
as against A, when the letter is posted
as against B, when the letter is received by A
Termination of offer
Revocation must also be communicated Fitch
v.Snedaker
Revocation of proposal possible if acceptance is not
complete.
Sec. 6 - A proposal may be withdrawn under four
circumstances
By communication of notice of revocation by the proposer
to the other party Bryne V. Tienhoven
By lapse of time (prescribed or reasonable) Ramsgate
Victoria Hotel v. Montefiore
By failure of acceptor to fulfill a condition precedent to
acceptance Hyde V. Wrench
By death or mental disorder of the proposer if such fact
comes to the knowledge of the acceptor before acceptance
Bradbury V. Morgan
3. Intention To Create Legal Relation

Not provided by Contract Act but by case laws

Mere agreement is not enough to contemplate the existence of
a legal contract.
Sometimes can be imputed from the nature of the agreement,
for e.g :
acceptance to a dinner
acceptance to an offer to play a game of soccer
acceptance of an offer to pay for half of the petrol cost
Thus parties to a transaction may state that they do not intend
to enter into any binding obligation.
Intention is particularly relevant when it comes to cases where
legal contracts are not normally made like in domestic
arrangements Balfour v. Balfour
However in a commercial agreements, the presumption is that
there is intention to create legal relations- Winn V.Bull
4. Consideration

Sec.26 - as a general rule - agreement without consideration is void

Sec. 2 (d) defined what is consideration.
Types of consideration
i) Executory consideration
ii) Executed consideration
iii) Past consideration
Consideration need not be adequate - Phang Swee Kim v. Beh Hock
Consideration need not move from the promisee - Venkata Chinnaya v.
Verikataramaya - consideration provided by mother
Past consideration is good consideration - Kepong Prospecting Ltd..
Part payment from the full amount is valid consideration

Exception to the rule that agreement without compensation is void -

Section 26:
a. agreement made on account of natural love and affection
b.agreement to compensate for past voluntary act
c. agreement to compensate act the promisor legally compelled to do
d.agreement to pay a statute barred debt.
5. Certainty
The terms of an agreement cannot be vague but must
be certain.
If uncertain or incapable of being made certain - void.
Intentions of the parties will be frustrated because of
uncertainty and the court will usually not interfere
At common law - two aspects of uncertainty:
due to language used
failure to reach agreement on fundamental term of the
agreement
In Contract Act - uncertainty provided by Sec. 30 -
agreements,the meaning of which is not certain, or
capable of being made certain, are void.
Case:
- Karuppan Chetty v. Suah Thian - lease at $35.00 per
month as long as he likes
6. Capacity
Parties to a contract should be competent to contract, i.e have
the legal capacity to do so.
Where one or more of the parties to a contract lack the
capacity - contract invalid / void. - Tan Hee Juan
Sec. 11 - Every person is competent to contract who is of the
age of majority according to the law to which he is subject,
and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.
Age of majority- 18 years - Age of Majority Act 1971
Exception:
contract for necessaries Nash V.Inman
scholarship Govt. of Malaysia v. Gurcharan Singh
Marriage contracts
insurance
Apprenticeship
Sound mind - Sec 12(1) - ..capable of understanding it and
forming rational judgement as to its effect upon his interest.
Includes incapacity due to sickness, alcohol or drugs
 PRIVITY OF CONTRACT
After a valid contract has been formed - to whom does
the obligation extend? What are the limits of the
contractual agreement.
The general rule under common law - no one but the
parties to a contract can be entitled to it, or bound by
it.
Contract cannot confer rights on third party
Price v. Easton - payment of debt on behalf of another
Dunlop Pneumatic Tyre v. Selfridge.
Contract cannot impose liability on third party
e.g. relationship between building owner - contractor - sub
contractor
However, a claim can still lie in tort.
 CONTENTS OF A CONTRACT
1. Express and Implied Terms

Contents made up of terms - expressed or implied

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

Terms may be implied by :

1. Custom and usage pertaining to a particular transaction.
Preston Corporation - implied a term based on trade usage
regarding ownership of film positives used to print books
Must satisfy - notoriety, certainty and reasonableness

2. Statutory Provision
Statutes that imply terms into a contract:
1. Sales of Goods Act 1957
2. Hire - Purchase Act 1967
3. National Land Code 1965
3. The courts , based by the intention of the parties
Cases:
Yong Ung Kai v. Enting - implied a term that must have been
in the mind of the parties to get license to cut the timber
the officious bystander test i.e. oh, of course!.

2. Conditions and Warranties

Another classification of terms
Definition of both terms - given by Sales of Goods Act 1957
Sec 12 (2) SOGA - condition - a stipulation essential to the main
purpose of the contract, the breach of which gives rise to a right
to treat the contract as repudiated.
Sec 12 (3) SOGA - warranty - a stipulation collateral to the main
purpose of the contract, the breach of which gives rise to claim
for damages but not a right to reject the goods or repudiate the
contract.
Whether a term is a condition or warranty - depends on the
intention of the parties - the court will help to determine.
3. Exemption Clause
Defined as a term of a contract that attempts either to modify
the principal obligation(s) arising out of the contract or to limit
/ exclude the liability of a party which would otherwise arise as
a result of a breach by that party.
Common in standard contract - the operation of which depends
on the construction of the contract.
In case of disputes- court will interpret - contra proferentum.
If the clause is ambiguous - will be interpreted to the
disadvantage of the party who will benefit from clause.
In case of negligence - need clear and unambiguous words to
exclude liability.
In case of serious / fundamental breach - exemption clause will
not cover the parties who made the clause.
- Port Swettenham v. T.W.Wu and Company

There are also some statutes which modify the effect of the
exemption clause to provide more protection to consumers.
Also - exemption clause cannot give benefit to third party nor
make another party liable
 Free Consent
Sec 10 of Contract Act - agreements are contracts if
they are made by the free consent of the parties.
Sec 14 - consent is free when not caused by one or
more of the following:
1. Coercion - Sec 15
2. Undue influence - Sec 16
3. Fraud - Sec 17
4. Misrepresentation - Sec 18
5. Mistake - Sec 21, 22 and 23

Void - agreement that lacks any legal effect from the

beginning - void ab initio.
Voidable contract - Sec 2 (i) an agreement which is
enforceable by law at the option of one or more parties, but not
the others.
1. Coercion.
Coercion defined as committing or threatening to commit
any act forbidden by the Penal Code, or the unlawful detaining
of any person / property with the intention of causing any
person to enter into an agreement.
Kesarmal v. Valiappa Chettiar - transfer made under
Sultans order in the presence of Japanese officers
during the occupation considered voidable.
Chin Nam Bee Development payment of extra
$4000 under threats to cancel booking of houses
2. Undue Influence
Exist when the relations subsisting between the parties are such
that one of the parties is in the position to dominate the will of the
other and uses that position to obtain an unfair advantage over the
other.
Therefore the elements of undue influence:
Position to dominate
Use that position to obtain unfair advantage
Position to dominate exist when:
Has real or apparent authority over the other e.g.:
parent-child
Morley v. Loughnan
Stand in fiduciary relation to the other e.g.: religious
leader follower, solicitor-client
Allcard v. Skinner
Tate v. Williamson
Made contract with a mentally incapacitated person by
reason of age, illness or distress.
Inche Noriah v. Shaikh Allie

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

dominate
3. Fraud
Sec 17 Five acts that would constitute fraud:
Suggestion of fact that is not true
Active concealment of fact - Horsfall v. Thomas - inserting
metal plug in a cannon is active concealment
Promise made without intent to perform it
Other act fitted to deceive
Any acts the law declares to be fraudulent
There must be an intention to deceive - that is made knowingly,
without belief in its truth or reckless whether it true or false
Generally silence does not constitute fraud - the misled party
has the duty to exercise ordinary diligence
However, under certain circumstances silence or non -
disclosure may constitute fraud
Takes into account the relationship btw parties and where
silence is equivalent to speech
Duty to exercise ordinary diligence applies to fraud by silence
only not other cases of fraud
Weber v. Brown - number of rubber trees
4. Misrepresentation.

Misrepresentation refer to certain false statement of existing or

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

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

Identity of the subject matter

Falck v. Williams - identity of charter parties

Quality of the subject matter

Kennedy v. Panama Royal Mail. - shares in a mail company

Possibility of performing the contract.

Sheikh Brothers v. Ochsner. - manufacture sisal
 VOID AND ILLEGAL CONTRACT
Sec 2 (g) - Contract which is not
enforceable by law.
Sec 24 Contract with unlawful
consideration / object is void i.e.:
a- forbidden by law - Hee Cheng V. Krishnan
attempts to transfer TOL land
b- of such nature as to defeat the law -Tan Bing
Hock attempts to assign logging rights
c- fraudulent -Palaniappa Chettiar
d-involves / implies injury to person / property. -
Syed Ahamed Alhabshee V. Puteh
e- immoral / against public policy - Pearce V.
Brooks hire of vehicles for prostitution
 There are also Sec 25 to Sec 31 which provides for
other instances that renders a contract void in law.

Sec 25 - any part of a single consideration / any

part of several consideration unlawful
Chung Khiaw Bank Ltd.
Sec 26 - agreement made without consideration.
Sec 27 - agreement in restraint of marriage.
Sec 28 - agreement in restraint of trade
Wrigglesworth v. Anthony Wilson restrained
from practicing as lawyer within five miles
from KB for two years
Sec 29 - agreement to restraint legal proceeding
Corporation Royal Exchange v. Teck Guan
Sec 30 - agreement void for uncertainty.
Sec 31 - agreement by way of wager.
Consequence Of Void And Illegal Contract.
General rule under CA - ex turpi causa non oritur actio
- no action will arise from a wrong done.
Contracts under sec 27, 28 and 29 - not void in toto -
severable.
Sec 66 - Right of restitution - doctrine of unjust
enrichment
Ahmad b. Udoh paid $1500 as deposit for lease of padi land
which was illegal
Yeep Mooi v. Chu Chin Chua money deposited with a
company carrying unlicensed business is recoverable
 DISCHARGE OF CONTRACT
Contract is discharged when it is terminated in one of these
ways:
1. By performance.
2. By consent or agreement between the parties
3. By impossibility (frustration)
4. By breach.

1.By Performance.
Performance must be strictly in accordance with terms of the
contract.
Sec 38 (1) - parties to a contract must either perform or offer to
perform their respective promises unless such performance has
been dispensed with by any law.
When time is of the essence - Sec 56
Performance by third party - Sec 41
Letchumi Ammal terms of contract that requires personal
performance must be done by promissor
Haji Nik Ishak v. Nik Zainab if a promisee accepts performance
from a third party, cannot afterwards enforce it against promisor
2. By Consent or Agreement.
Contract created by consent can be extinguished by
consent either express or implied.
Express consent may be given at time of contract or
subsequent to that.
E.g. discharged at the occurrence of an event.
Waiver, release, novation or rescission.
Sec 63 - if the parties to a contract agree to
substitute a new contract for it, or to rescind or alter
it, the original contract need not be performed.
Sec 64 - every promisee may dispense with or remit,
wholly or in part, the performance of the promise
made to him, or may extend the time for such
performance, or may accept instead of it any
satisfaction which he thinks fit.
3. By Impossibility / Frustration.
Two categories of impossibility of contract
When impossibility is at the time of making the contract - an
agreement to do an act impossible in itself is void.
A contract is frustrated when there is a change in the circumstances
which renders a contract legally or physically impossible of
performance not merely difficult or more onerous
Sec 57(2) - a contract to do an act which after the contract is made
becomes impossible, or by reason of some event which the promisor
could not prevent, becomes void when the act becomes impossible or
unlawful.
In applying the rule - court will examine the circumstances
surrounding the frustration , including whether it is self induced or
not.
A contract may be discharged in any of the following circumstances:
1. Destruction of the subject matter - Taylor v. Caldwell
there must be total destruction - not partial due to Sec 12 of SRA
2. Supervening event defeat the whole purpose / object of the contract.
Henry v. Krell.
3. Death or personal incapacity especially in regards of personal obligation.
4. Supervening illegality - Lee Kin v. Chan Suan Eng.

Effect of frustration - automatically end the contract

Sec 66 CA provides for restitutionary remedy.
4. By Breach
Sec 40 - When a party to a contract has refused to perform,
or disabled himself from performing, his promise in its entirety,
the promisee to the contract, unless he has signified, by words
or conduct, his acquiescence in its continuance.
Party not in breach has the option of continuing with
the contract and claim damages or repudiate the
contract.
Sec 65 - when a person at whose option a contract is
voidable rescinds it, the other thereto need not perform any
promise therein contained in which he is promisor. The party
rescinding a voidable contract shall, if he has received any
benefit thereunder from another party to such contract, restore
the benefit, so far as may be, to the person from whom it was
received.

Cases :
Choo Yin Loo v. Visuvalingam
Ban Hong Joo Mine Ltd. V. Chen & Yap
 REMEDIES
There are several remedies provided by the law to give relief to
the party not in default in a breach of contract.
1. Rescission of Contract. - Sec 40
2. Damages. - Sec 74 to 76
3. Specific Performance. - The Specific Relief Act 1950
4. Injunction. - Specific Relief Act.

1.Rescission
as dealt with in the previous part under sec. 40

2.Damages
Damages are granted to a party as compensation for the damage,
loss or injury done / suffered through breach of contract - but
damage cant be too remote or indirect.
Damages can be classified as substantial, nominal or exemplary.
Sec 74 - when a contract has been broken, the party who suffers
is entitled to receive..compensation for any loss or
damage.which naturally arose in the usual course of things..or
which the parties knew, when they made the contract, to be
likely to result from the breach.
 Illustrations to sec74 also indicate that the aggrieved party
may recover damages -
for other expenses incurred as a result of the breach,
for loss of profits arising out of the breach,
for the difference btw the price of goods as contracted for
and the actual price the goods were sold for as result of the
breach.

Sec 75 - When a contract has been broken, if a sum is named

in the contract as the amount to be paid in case of such
breachor any other stipulation by way of penaltythe party
complaining of the breach is entitled to receivereasonable
compensation not exceeding the sum named or the penalty
stipulated for.
The effect of fixing the sum - to determine the upper limit of
compensation.
Nevertheless, party seeking damages is also under the duty to
mitigate the loss - Kabatasan Timber Extraction Co.
3. Specific Relief.
The Specific Relief Act provides for the remedy of specific
performance - which is discretionary by nature.
It a decree of the courts directing the contract to be performed
according to its terms.
Sec 11 in trust cases and where no adequate relief.
Sec 12 - presumption in cases of transfer of land
Sec 18 - court has power to award damages in lieu of SP
Sec 21 - court has discretion to refuse specific performance if cause
undue hardship to the defendant.
Sec 20 - circumstances where no SP can be enforced:
where money is adequate relief.
contract with minute details.
contract dependant on personal qualification.
contract that will need supervision of the court.
contract with uncertain terms.
contract revocable by nature.
contract made by trustee in excess / breach of their power
contract made on behalf of public or private corporation in excess
of its power.
contract the involves performance of continuous duty extending
over a period longer than three years from its date.
contract which a material part of the subject matter has ceased to
exist even before the contract is made
4. Injunction.
An equitable remedy that can be varied or dissolved
Sec 50 of SRA provides for two types of injunctions:
1. Interim Injunction.
Used by a party to maintain the status quo of a subject
matter pending full trail of the case.
To continue until a specified time / full order of the court.
May be granted at any period during a suit.
Must consider that there are serious question to be tried,
that compensation would be adequate and it is proper on
the balance of convenience.
Can be mandatory injunction or a restraining order.

2. Perpetual Injunction.
Granted by decree made after a full trial based on the
merits of the case - defendant will be permanently
prohibited.
No injunction where the contract cannot specifically
enforced.
Thats All
Folks!