BBUN2103

Business Law

Copyright © Open University Malaysia (OUM)

 BBUN2103
BUSINESS LAW
Mazita Mohamed
Nurretina Ahmad
Shariff Rohizan Halim
Haslinda Mohd Anuar
Prof Dr Zuhairah Ariff Abd Ghadas
Liziana Kamarulzaman @ Mohd
Zahid

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Fifth edition 2021 (CS)
Fourth edition 2020
Third edition 2016
Second edition 2016
First edition 2009

Developed by Centre for Instructional Design and Technology, OUM.

Copyright © Open University Malaysia (OUM), BBUN2103
All rights reserved. No part of this work may be reproduced in any form or by any means without
the written permission of the President of Open University Malaysia (OUM).

www.oum.edu.my

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Table of Contents
Course Guide xiii–xix

Topic 1 Introduction to the Malaysian Legal System 1

1.1 Classifications of Law 2
1.2 Sources of Malaysian Law 4
1.3 The Constitution 7
1.4 Consitutional Supremacy 8
1.4.1 Electoral Democracy 8
1.4.2 Elected Legislative Body 8
1.4.3 Independent Judiciary 9
1.4.4 Impartial Public Service 9
1.4.5 Indigenous Features 9
1.5 Federal System 10
1.5.1 Fundamental Rights 10
1.5.2 Emergency Powers 10
1.5.3 Constitutional Monarchy 10
1.5.4 Conference of Rulers 10
1.5.5 Special Amendment Procedures 11
1.6 State Constitutions 11
1.7 Federation 11
1.8 Yang Di-Pertuan Agong (YDPA) 13
1.9 Conference of Rulers 14
1.10 Separation of Powers 16
1.11 Independence of Judiciary 18
1.11.1 Appointment of Judges 19
1.11.2 Hierarchy of Judiciary 20
1.11.3 Head of the Judiciary 22
1.11.4 Special Court 25
1.12 Jurisdiction of Courts 26
1.12.1 Jurisdiction of Federal Court 26
1.12.2 Exclusive and Advisory Jurisdiction 26
1.12.3 Special Advisory Jurisdiction on the Interpretation 27
of the Constitution
1.12.4 Reference of Constitutional Question by 27
High Court to Federal Court

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1.12.5 Jurisdiction of the Court of Appeal 28

1.12.6 Jurisdiction of the High Court 29
1.12.7 Jurisdiction of Sessions Court 31
1.12.8 Jurisdiction of Magistrate Courts 32
1.12.9 Special Court 34
1.12.10 Judicial Decisions 35
1.13 Position of Syariah Law in Malaysia 36
1.13.1 Syariah Law in the Federal Constitution 36
1.13.2 Administration of Islamic Law 38
1.13.3 Syariah Courts 39
Summary 40
Key Terms 42
References 42

Topic 2 Introduction to Contract Law 43

2.1 Introduction, Definition and Basic Elements of a Contract 44
2.1.1 Definition of a Contract 44
2.1.2 Basic Elements in the Formation of a Contract 46
2.2 Definition of an Offer 47
2.2.1 Whom Can an Offer Be Made to? 47
2.2.2 Invitation to Treat 48
2.2.3 Communication of Offer 52
2.2.4 Revocation of an Offer 53
2.3 Acceptance 58
2.3.1 Definition of Acceptance 58
2.3.2 Terms of an Acceptance 59
2.3.3 Form of Acceptance 59
2.3.4 Time Limit for an Acceptance 60
2.3.5 Communication of Acceptance 61
2.3.6 Revocation of Acceptance 62
2.3.7 Communication of Revocation of Acceptance 63
2.4 Consideration 65
2.4.1 Types of Consideration 66
2.4.2 Consideration According to the Contracts 67
Act 1950 and English Law
2.4.3 Performance of an Existing Duty – Is it 71
Consideration?
2.4.4 Adequacy of Consideration 72

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2.4.5 Agreement without Consideration 74

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2.5 Capacity to Contract 77

2.5.1 Age of Majority 78
2.5.2 Be of Sound Mind 85
2.5.3 Not Disqualified 87
2.6 Intention to Create Legal Relations 88
2.6.1 Presumption of Intention Based on the 88
Type of Contract
2.7 Certainty 92
Summary 93
Key Terms 94

Topic 3 Void and Voidable Contracts 95

3.1 Void Contracts 96
3.1.1 Agreements which Contravene the Law 96
(Illegal Contracts)
3.1.2 Contracts in Restraint of Trade 105
3.1.3 Contracts in Restraint of Legal Proceedings 106
3.2 Effects of Void Contracts 108
3.3 Definition of Voidable Contract 110
3.4 Elements Which Can Cause a Contract to be Voidable 111
3.4.1 Coercion 113
3.4.2 Undue Influence 114
3.4.3 Fraud 118
3.4.4 Innocent Misrepresentation 123
3.4.5 Mistake 125
Summary 132
Key Terms 133
Reference 133

Topic 4 Discharge and Remedies 134

4.1 Discharge of Contract 135
4.1.1 Discharge by Performance 136
4.1.2 Discharge by Frustration 136
4.1.3 Discharge by Agreement 139
4.1.4 Discharge by Breach 140
4.2 Remedies for Breach of Contract 143
4.2.1 Damages 144
4.2.2 Specific Performance 149
4.2.3 Injunction 150
4.2.4 Quantum Meruit 151
Summary 152
Key Terms 153

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Topic 5 Law of Agency 154

5.1 Creation of Agency 155
5.2 Types of agency 161
5.3 Authorities of an Agent 163
5.4 Duties and Obligations of an Agent 164
5.5 The Rights and Obligations of a Principal 170
5.6 Effects of a Contract Made by an Agent 170
5.7 Termination of an Agency 171
Summary 174
Key Terms 175

Topic 6 Sale of Goods 176

6.1 Definition of Goods 177
6.1.1 Types of Goods 177
6.2 Contract of Sales of Goods 179
6.3 Terms of Contract of Sale 179
6.3.1 Formation of Contract of Sale 179
6.3.2 Conditions and Warranties 181
6.3.3 Stipulation as to Time 182
6.3.4 Implied Terms 182
6.4 Transfer of Title 188
6.4.1 Estoppel 190
6.4.2 Sale by Mercantile Agent 191
6.4.3 Sale by Joint Owner 192
6.4.4 Sale Under Voidable Contracts 192
6.4.5 Sale by Seller in Possession of Goods 193
6.4.6 Sale by Buyer in Possession of the Goods 194
6.5 Performance of Contract 196
6.5.1 Delivery 196
6.5.2 Time and Place for Delivery 196
6.5.3 Goods in the Possession of Third Party 197
6.5.4 Instalment Deliveries 197
6.5.5 Wrong Delivery 197
6.5.6 Risks 198
6.5.7 Acceptance 198
6.6 Rights of Unpaid Seller 199
6.6.1 Lien 200
6.6.2 Stoppage in Transit 200
6.6.3 Resale 201

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6.7 Remedies for Breach 201

6.7.1 SellerÊs Right to Make a Claim 202
6.7.2 BuyerÊs Right to Sue 203
Summary 204
Key Terms 206

Topic 7 Hire Purchase 207

7.1 Definition of Hire-Purchase Agreement 208
7.2 Formation of Hire-Purchase Agreement 209
7.3 Implied Terms in Hire-Purchase Agreement 216
7.4 Liabilities of an Owner and Dealer for Misrepresentation 219
7.5 Rights and Liabilities of Hirer 220
7.6 Repossession By Owner 225
7.7 HirerÊs Right in Respect of Repossessed Goods 227
Summary 228
Key Terms 230

Topic 8 Insurance 231

8.1 Insurance Contract 232
8.2 Subrogation 233
8.3 Insurable Interests 233
8.4 Material Facts 234
8.4.1 Pre-contractual Duty 235
8.4.2 Remedies for Misrepresentation 236
8.5 Basic Clause, Conditions, Warranties and Exception Clause 238
Summary 241
Key Terms 241

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Topic 9 Banking and Negotiable Instruments 242

9.1 Bills of Exchange 243
9.2 Negotiation of Bills, Acceptance, Indorsement and Bill 246
Delivery
9.3 Liabilities of the Parties Involved in Negotiable 250
Instruments
9.4 Rights of a Holder 251
9.5 Payment 251
9.6 Procedure for Dishonour 253
9.7 Definition and Forms of Cheques 255
9.8 Crossing of Cheques 255
9.9 Alteration of Cheques 257
9.10 Protection of Paying Banker 258
9.11 Protection of Collecting Banker 258
9.12 Termination of the Authority of the Bank to Make 259
Payments
Summary 261
Key Terms 262

Topic 10 Introduction to Syariah Principles Governing Commercial 263

Transaction
10.1 Principle of Valid Contract under Syariah 264
10.1.1 Definition of Contract in Islam 264
10.1.2 The Pillars and Conditions of a Contract 265
10.1.3 Islamic Doctrine of Khiyar (Option) 271
10.2 Types of Syariah Contracts Commonly Used in 272
Commercial Transactions
10.2.1 Sale of Goods (BayÊ) 274
10.2.2 Contract of Agency (Wakalah) 276
10.2.3 Contract for Hire (Aqd al-ijarah) 279
10.2.4 Contract of Partnership (Musharakah) 281
10.2.5 Contract of Suretyship (Kafalah) 284
10.2.6 Contract of Safe Custody (WadiÊah) 286
Summary 288
Key Terms 289
References 290

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Topic 11 Partnership 291

11.1 Definition of Partnership 291
11.1.1 Relations between Several Individuals 292
11.1.2 Express or Implied Agreement to Carry on a 293
Common Business
11.1.3 Agreements between Parties with a View 294
of Profits
11.2 Factors Which Determine the Existence of a Partnership 295
11.3 Formation of a Partnership 296
11.4 Registration of a Partnership 297
11.5 Relation of Partners with a Third Party 297
11.5.1 Apparent Authority 297
11.5.2 Actual Authority 301
11.6 Liabilities of Partners 302
11.6.1 Liabilities of Incoming and Outgoing Partners 304
11.7 Relations of Partners to Each Other 305
11.7.1 Provisions on Relations of Partners to Each Other 305
Under the Partnership Act 1961
11.8 Dissolution of Partnership 310
11.8.1 Automatic Dissolution 311
11.8.2 Dissolution by Notice 312
11.8.3 Dissolution by the Court 312
Summary 315
Key Terms 315

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xxvi ▶ COURSE ASSIGNMENT

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 COURSE GUIDE ◀ xiii

COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course materials. It also suggests the amount of time you are likely to spend
in order to complete the course successfully. Please keep on referring to the
Course Guide as you go through the course materials as it will help you to
clarify important study components or points that you might miss or overlook.

INTRODUCTION
BBUN2103 Business Law is one of the courses offered at Open University Malaysia
(OUM). This course is worth 3 credit hours and should be covered over 8 to
15 weeks.

COURSE AUDIENCE
This is a core course for learners pursuing the degree in Bachelor of Management,
Bachelor of Marketing, Bachelor of Business Administration, Bachelor of
Accounting and Bachelor of Banking and Finance programmes.

As an open and distance learner, you should be able to learn independently

and optimise the learning modes and environment available to you. Before you
begin this course, please ensure that you have the correct course materials,
understand the course requirements, and know how the course is conducted.

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xiv ▶ COURSE GUIDE

STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for
every credit hour. As such, for a 3 credit hour course, you are expected to
spend 120 study hours. Figure 1 shows the student learning time (SLT).

Figure 1: Student Learning Time

COURSE LEARNING OUTCOMES

By the end of this course, you should be able to do the following:
1. Evaluate the framework of the Malaysian legal system and relevant laws
to different types of contract in conventional and Islamic business;
2. Analyse the principles of law relating to various aspects of different types
of contract; and
3. Apply the basic principles of different types of contract in daily transaction
ethically.

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 COURSE GUIDE ◀ xv

COURSE SYNOPSIS
This course is divided into 11 topics. The synopsis for each topic is listed
as follows:

Topic 1 will examine the basic framework of the Malaysian legal system which
includes the classification of law, sources of law and the doctrine of separation of
power in Malaysia. In addition to that, you will learn about the administration of
justice as well as the position of Islamic law in Malaysia.

Topic 2 will introduce you to all the relevant issues involving the essential
elements of a contract and problems arising from a contract which lacks any of
these elements.

Topic 3 will elucidate on the principles regarding void and voidable contracts.
You shall be shown the main differences between these two types of contracts
which have been affected by certain elements and which could, in turn, affect the
validity of a contract. Besides that, you will learn about agreements which are
declared unlawful by the Contracts Act 1950.

Topic 4 will discuss the four ways of how a contract can be discharged and
various types of remedies available to the innocent party when there is a breach of
contract.

Topic 5 involves a discussion on agency. You will look at how an agency is

created and the duties and obligations of an agent. Furthermore, you will study the
process involved in the termination of an agency.

Topic 6 emphasises the sale of goods. This topic will focus on the terms
applicable, the concept of transfer of ownership, performance of contract for sale
of goods, rights of the unpaid seller and remedies available in case of a breach.

Topic 7 is on hire purchase. This topic discusses procedures for the formation of
hire purchase agreements, implied terms in such agreements, liabilities of an
owner and seller for misrepresentation, rights and liabilities of the hirer as well
as the procedures involved for repossession by the owner.

Topic 8 moves on to explain the concepts involved in insurance law. Among the
principles of insurance contract which will be discussed are principles of
subrogation, the concept of insurable interests, material facts in the contract, basis
of contract clauses as well as conditions and exception clauses.

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Topic 9 covers banking and negotiable instruments. In this topic, the discussions
shall focus on cheques. You shall be familiarised with rules governing different
forms of cheques, crossing and alteration of cheques, provisions protecting the
paying and collecting banker and procedures for termination of bankÊs authority
to make payments.

Topic 10 provides a brief explanation about contracts from the Syariah point of
view, the pillars of a valid contract, the doctrine of khiyar (option) and various
types of Syariah contracts which are commonly used in commercial transactions.

Topic 11 provides a detailed discussion on partnership. It will focus on factors

which will determine the existence of a partnership, liabilities and duties of the
partners and the process of dissolution of a partnership.

TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:

Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.

Self-Check: This component of the module is included in strategic locations

throughout the module. It may be located after one subtopic or a few subtopics.
It usually comes in the form of a question. When you come across this
component, reflect on what you have already learnt thus far. By attempting to
answer the question, you should be able to gauge how well you have understood
the subtopic(s). Most of the time, the answers to the questions can be found
directly in the module itself.

Activity: Similar to Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you
to answer questions, explore short case studies or conduct an observation or
research. It may even require you to evaluate a given scenario. When you come
across an Activity, you should try to reflect on what you have gathered from the
module and apply it to real situations. You should, at the same time, engage in
Higher Order Thinking skills (HOTs) i.e. analysing, synthesising and evaluating
instead of only recalling and defining.

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 COURSE GUIDE ◀ xvii

Summary: You will find this component at the end of each topic. It summarises
various important parts of each topic and helps you to recap the whole topic.
By going through the summary, you should be able to gauge your knowledge
retention level. Should you find points in the summary that you do not fully
understand, it would be a good idea for you to revisit the details in the module.

Key Terms: This component can be found at the end of each topic. You should
go through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.

References: A list of relevant and useful textbooks, journals, articles, electronic

contents and sources can be found in this section. The list may appear in a few
locations such as in the Course Guide (in the References section), at the end of
every topic or at the back of the module. You are encouraged to read or refer to
the suggested references to obtain additional information and enhance your
overall understanding of the course.

PRIOR KNOWLEDGE
There is no prior knowledge needed.

ASSESSMENT METHOD
Please refer to myINSPIRE.

REFERENCES
Abdul Majid Nabi Baksh, Krishnan Arjunan (2014). Business Law in Malaysia
(2nd ed.). Lexis Nexis.

Abdullah Alwi Hassan. (1992). Sales and contracts in early Islamic commercial
law. Islamabad, Pakistan: Islamic Research Institute, International Islamic
University.

Ahmad Hidayat Buang. (2000). Studies in Islamic law of contracts: The prohibition
of gharar. Kuala Lumpur, Malaysia: International Law Book Services.

Ahmad Mohamed Ibrahim. (2000). The administration of Islamic law in Malaysia.

Kuala Lumpur: Institute of Islamic Understanding Malaysia.

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xviii ▶ COURSE GUIDE

Islamic banking practice from the practitionerÊs perspective. (1994). Kuala

Lumpur, Malaysia: Bank Islam Malaysia Berhad.

Lam, S. H. (1996). Commercial law. Kuala Lumpur, Malaysia: International Law

Book Services.

Lee, M. P., & Samen, D. (1997). Commercial law in Malaysia. Kuala Lumpur,
Malaysia: Malayan Law Journal.

Niazi, L. A. (1991). Islamic law of contract. Lahore, Pakistan: Research Cell, Dyal
Sing Trust Library.

S. Kanesh. (2000). General paper. Kuala Lumpur, Malaysia: Malayan Law Journal.

Shaik Mohd Noor Alam. (2000). Undang-undang komersil Malaysia. Kuala

Lumpur: Malaysia: Dewan Bahasa dan Pustaka.

Syed Ahmad Alsagoff. (1996). Principles of the law of contract in Malaysia.

Kuala Lumpur, Malaysia: Malayan Law Journal.

Vohrah, B., & Wu, M. A. (2002). The commercial law of Malaysia. Kuala Lumpur,
Malaysia: Longman.

Wan Arfah Hamzah, & Ramy Bulan. (2003). An introduction to the Malaysian
legal system. Kuala Lumpur, Malaysia: Penerbit Fajar Bakti.

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 COURSE GUIDE ◀ xix

TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources
for learners. This comprehensive digital library, which is accessible through the
OUM portal, provides access to more than 30 online databases and several of
them are shown in Figure 2. As an OUM learner, you are encouraged to make
full use of the resources available through this library.

Figure 2: Among the Online Databases Available at TSDAS Digital Library

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Copyright © Open University Malaysia (OUM)
 To pi ▶ Introduction to
the Malaysian
1 Legal System
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Describe the classification of law;
List the general sources of Malaysian law;
Elaborate on each of the sources of law;
Explain the doctrine of separation of power in Malaysia;
Discuss the hierarchy of Malaysian courts; and
Explain the position of Syariah law in Malaysia.

▶ INTRODUCTION
According to Wu (2003) Malaysia is a pluralistic country which comprises three
main ethnic groups, namely, the Malays and other communities such as the
Chinese and Indians. The country also has minority groups, which include the
Eurasians and Europeans. The term Bumiputera which means „sons of the soil‰
is also used for the Malays, aboriginal people in the Peninsular Malaysia and
natives of Sabah and Sarawak such as the Ibans, Kadazans and Muruts. The
political practice in Malaysia is mainly shaped by ethnology and race.

Wu (2003) also states that the Malaysian legal system was determined by events
which happened within a period of 600 years within three major periods; namely
the founding of the Malacca Sultanate in the 15th Century, the spread of Islam to
Southeast Asia and the era of British colonialism. In the 1890s, upon establishing
its power in the Malay States, the British discovered that the economic progress
of
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2 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

the Malay States was slow compared to the Straits Settlement (Sharifah Suhanah
Syed Ahmad, 2007). The Malays were found to be involved mostly in fishing and
as padi planters and were not interested to work for others for wages.

The Chinese employers preferred to employ their own people whilst the
European employers found that the Malays were not sufficient in number or
cheap enough for their needs (Parmer, 1960). Consequently, the British
government embarked on a policy which actively encouraged foreign
immigration to Malaya. The policy assisted immigration of foreign labour,
particularly from India whilst the Chinese labour largely entered Malaya
unassisted.

According to Sharifah Suhana (2007), such a policy dramatically altered the

population structure of Malaya and was responsible in turning Malaya into a
pluralistic country. It is claimed that problems associated with multiracialism
became part and parcel of the consolidation of political power and protection of
the economic interests of the British businessmen. The implementation of
uniform rules and regulations composed of various ethnicities raised many
important issues and latitude to be accorded to the native laws and customs.

1.1 CLASSIFICATIONS OF LAW

According to Pheng (2005), common law is classified into three broad divisions,
namely, public law, international law and private law as illustrated in Figure 1.1.

Figure 1.1: Classifications of law

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 3

The following are explanations on the different types of law:

(a) Public Law

Public law is the law which governs the relationship between individuals
and the State. It may be further subdivided into two categories,
constitutional law and criminal law.

Constitutional law lays down the rights of individuals in the State. It deals
with questions such as supremacy of Parliament and the rights of citizens.
It also covers areas dealing with state and federal powers.

Criminal law codifies various offences committed by individuals against

the State, for example, murder, robbery, cheating and rape. A crime is a
wrong against the State. Thus, the punishment is inflicted by the State and
the proceedings are brought by the public prosecutor. It aims at punishing
criminals and suppressing crime.

(b) International Law

This is a body of law which is composed, for its greater part, of principles
and rules of conduct in which the State itself feels bound to observe, and
consequently commonly does observe, in their relation with each other.

International law can be subdivided into public international law and private
international law. The former is the law that prevails between States
whereas private international law is part of municipal law, as a result of
which in every country there will be different versions. It consists of the
rules that guide a judge when the laws of more than one country affect a
case.

(c) Private Law

Private law governs the relationship between individuals. It is concerned
with their rights and duties. Basically, private law is intended to give
compensation to the person injured, to enable property to be recovered
from wrongdoers and to enforce obligations. Examples of private law are
law of contract, law of tort and trust, family law and property law.

ACTIVITY 1.1

Distinguish between public law and private law.

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4 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

1.2 SOURCES OF MALAYSIAN LAW

According to Sharifah Suhana (2007), the term „sources of law‰ has many
meanings, but the common descriptions refer to:

(a) Historical sources, indicating the factors that have been influential in the
development of the law but by them not recognised as law. Examples of these
factors that influence the development of the law are religious practices and
beliefs, local customs and opinions of jurists.

(b) It may also refer to places where the law can be found, for example, in
statutes, law reports, textbooks and decisions of courts.

(c) In most cases, however, it refers to legal sources, that is, the legal rules that
makes up the law.

Being a democratic, multi-ethnic, multi-cultural, multi-linguistic and pluralistic

country in every aspect, it is understandable why sources of Malaysian laws do
not and cannot come from a single source. Malaysian laws comprise both the
written and unwritten law. Unwritten law here does not mean that the law is
literally unwritten; it actually means the cases decided by the Courts and local
customs. Written law, on the other hand, refers to the laws embodied in the
Federal and State Constitutions and in a code or a statute, including subsidiary
or delegated legislation. In brief, sources of Malaysian law are illustrated in
Figure 1.2.

Figure 1.2: Sources of Malaysian laws

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 5

Here are the detailed explanations of each source of law:

(a) Written Law

Malaysian written law comprises both federal and state laws which consists
of the following:

(i) The Federal Constitution, which is the supreme law of the land,
together with the respective constitutions of the thirteen states
comprising the Federation;

(ii) Legislation enacted by Parliament and the State Assemblies under the
powers conferred to them by the respective constitutions; and

(iii) Subsidiary or delegated legislation made by persons or bodies under

powers conferred to them by Acts of Parliament or Enactments of
State Assemblies.

In addition to the above, extraordinary laws called Ordinances can be made

by His Majesty the King or Yang di-Pertuan Agong (YDPA) during a period
of emergency proclaimed in accordance with Article 150 of the Federal
Constitution. Under Article 150(2B) of the Federal Constitution, during an
emergency, if the YDPA is satisfied that certain circumstances exist which
render it necessary for him to take immediate action, he may announce that
such ordinances as circumstances appear to him to require such a law ranks
equally with an Act of Parliament but is not bound to follow normal
constitutional procedures binding on Parliament.

Example of emergencies in Malaysia is the application of the Emergency

(Essential Powers) Ordinance 1969 which was carried out by the Privy
Council in Teh Cheng Poh v. PP [1979] 1 MLJ 50. In that case, the
appellant was convicted and sentenced to death for an offence under the
Internal Security Act 1960 but his trial was conducted under special rules
made by the YDPA under powers conferred upon himself by the
Ordinance.

(b) Unwritten Law

The unwritten law of Malaysia comprises the following:

(i) Principles of English law applicable to local circumstances;

From the time of British colonisation, English law has been accepted
as the law of general application and customary laws were
accommodated in the legal system by way of exceptions (Ong Cheng
Neo v. Yeap Cheah Neoh, 1872). While English law is currently being
replaced by local laws, its importance in some areas will remain for a

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long time, particularly in the area of commercial law;

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6 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

(ii) Judicial decisions of the superior courts, that is, the High Court, the
Court of Appeal and the Federal Court;

(iii) Judicial decisions of superseded superior courts, namely, the Supreme

Court, the former Federal Court and Judicial Committee of the Privy
Council; and

(iv) Customs of the local inhabitants which have been accepted as law by
the courts.

These laws are regarded as personal laws, applying only to a specific race
or religion and except for Islamic law, they are generally in decline. They
are being increasingly replaced by statute law, for example, non-Muslim
customary law relating to marriage has been replaced by a uniform law,
that is, the Law Reform (Marriage and Divorce) Act 1976.

(c) Islamic Law

Under Article 3(1) of the Federal Constitution, Islam is the religion of the
country but other religions may be practised in peace and harmony in any
part of the Federation. The freedom of religion is clearly highlighted in
Article 11 of the Federal Constitution which provides that every person has
the right to profess and practise his religion. Article 160(2) expressly defines
Malays as a person who professes the religion of Islam but not all Muslims
are necessarily Malays.

Islamic law is recognised as one of the sources of Malaysian law but it is

applicable only to Muslims, regardless of race. It is also administered by a
separate system of Syariah courts (Islamic courts) at state levels and in the
Federal Territories of Kuala Lumpur and Labuan. For the Muslims in
Malaysia, many areas of the law have been altered to cater to the needs of
the Muslim community. The Federal Constitution Ninth Schedule, List II
only enumerates personal and family law of persons professing Islam as a
state matter, thus placing them within the jurisdiction of the Syariah courts.

The Malaysian government has attempted to give Islam a modern face,

establishing such institutions as the Islamic bank and the Institute of Islamic
Understanding. It has also encouraged other Islamic business practices such
as Islamic insurance and finance.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 7

(d) Historical Documents

Other than the above sources, the historical landmarks such as the
MacMichael Treaties (1945), Malay Union proposals (1946), Federation of
Malaya Agreement (1948), Reid Commission Report (1957), Federation of
Malaya Constitutional Proposals (1957), Cobbold Commission Report
(1962), Malaysia Agreement (1963), Twenty Points Declaration (1963) and
Rukun Negara (1970) are also important in the development of the
Malaysian Constitution (Rau & Kumar, 2005).

These documents do not have the status of law but assist the understanding
of the reality of Malaysian law today and to interpret the historical
perspective of the law.

SELF-CHECK 1.1

What do you think are the most important sources of written law in Malaysia?

Canyoudifferentiatebetweenlegislationandsubsidiary legislation?

1.3 THE CONSTITUTION

The Federal Constitution is the supreme and fundamental law of Malaysia.
Any law inconsistent with the Federal Constitution may be challenged in court.
Article 4(1) of the Federal Constitution provides that:

„This Constitution is the supreme law of the Federation and any law passed after Merdeka Da

Although Malaysia has a Parliament which passes all laws of the country, the
power of the Parliament is limited by the Constitution. The Parliament is not
supreme. There are procedural and substantive limits on ParliamentsÊ powers.
State Assemblies are also limited in their legislative competence. Courts have the
power to nullify federal and state legislation if there is inconsistency with the
supreme Constitution. According to Suffian L. P. in Ah Thian v. Government of
Malaysia (1976) 2 MLJ 112:

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8 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

„The doctrine of supremacy of Parliament does not apply in Malaysia. Here

1.4 CONSITUTIONAL SUPREMACY
we have a written constitution. The power of Parliament and of State
Legislatures in Malaysia is limited by the Constitution, and they cannot
The Federal Constitution is a written document. It is the supreme law of the
make any law as they please‰.
Federation. Laws made before Merdeka Day shall be applied by the court or
tribunal with such modifications, as may be necessary to make them accord with
the FC, as mentioned in Article 162(6) of FC.

The Supremacy of the Constitution is maintained by giving the courts the right to
review legislative and executive acts. When a legislative or executive act violates
the constitution, the court may declare it ultra vires and void. The Constitution is
amendable by a separate process different from that of ordinary legislation. Some
provisions affecting prerogatives of the State Rulers require special federal
parliamentary procedures and the consent of the Conference of Rulers.

1.4.1 Electoral Democracy

The Federal Constitution provides for periodic elections, universal adult suffrage
and an independent Election Commission. A unique feature of the electoral
landscape is that rural constituencies may have less than half of the population of
urban constituencies.

1.4.2 Elected Legislative Body

Elected legislative bodies exist at both the federal and state levels. At the federal
level, the Parliament is bicameral with predominance of power in the Dewan
Rakyat over the Dewan Negara. However, at the state level, the State Assemblies
are unicameral.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 9

1.4.3 Independent Judiciary

Judges enjoy many special safeguards in matters of appointment and dismissal.
Their terms and conditions of service cannot be altered to their detriment. They
are insulated from politics. They have power to punish for contempt of court. In
the performance of their functions, they enjoy absolute immunity.

1.4.4 Impartial Public Service

Civil servants are required to maintain an impartial reserve in matters relating to
politics. Their term in office is unaffected by the rise and fall of governments.
They enjoy many procedural safeguards against arbitrary dismissal or reduction
in rank.

1.4.5 Indigenous Features

For hundreds of years, Malaya has been the homeland of the Malays. It is
understandable, therefore, that when the Merdeka Constitution was drafted it
reflected a number of features indigenous to the Malay archipelago, among them
the Malay Sultanate, Islam as the religion of the nation, Malay privileges, Malay
reservation land, Bahasa Melayu or the Malay language as the official language
of the Federation and special protection for the customary laws of the Malays.

ACTIVITY 1.2
Examine the concept of constitutional supremacy in Malaysia.

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1.5 FEDERAL SYSTEM

Malaysia has a federal form of government. There is division of legislative,
executive, judicial and financial powers between the central government and the
States, though the weightage is heavily in favour of the central government. This
division is protected by the Federal Constitution.

1.5.1 Fundamental Rights

The Constitution protects a large number of political, civil, cultural and economic
rights, for example, Articles 5–13. However, these rights are not absolute and are
subject to extensive regulation by the Parliament.

1.5.2 Emergency Powers

The communist insurgency resulted in the Malayan Emergency from 1948 until
1960. Although the Malayan Emergency officially ended in 1960, the communist
guerrillas were still active in the late 1970s and even beyond in places such as the
Malayan-Thai border and some states like Pahang. The communist insurgency
cast a dark shadow on constitutional development and as such Articles 149 and
150 are specifically designed to empower the Parliament and the executive with
overriding powers to combat subversion and emergency.

1.5.3 Constitutional Monarchy

The YDPA and the State Rulers are required by Federal and State Constitutions
to act on the advice of the elected government in the whole range of their
constitutional functions except in a small area where personal direction has been
conferred. Even in this area, constitutional conventions limit royal discretion.
In the overall scheme of the Constitution, the monarchs are required to reign but
not to rule.

1.5.4 Conference of Rulers

The primary function of this unique institution is to elect and remove the YDPA,
elect the Deputy YDPA, consent or refuse to consent to some constitutional
amendments and to offer advice on some appointments.

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1.5.5 Special Amendment Procedures

Unlike ordinary laws which can be amended or repealed by simple majorities of
legislators present and voting, most constitutional provisions are entrenched
against easy repeal. Special two-third majorities are required.

1.6 STATE CONSTITUTIONS

In the Federation of Malaysia, each state possesses its own basic charter. But
because of Article 71(4) of the Federal Constitution, it is mandatory for each
State Constitution to contain certain essential provisions. These essential
provisions provide for certain common aspects among all the states such as
Rulers to act on advice, the existence of an Executive Council and a single-
chamber elected State legislature.

State Legislation
In the Federal System of Malaysia, State Legislatures have the power to frame
enactments on 13 topics in the State list and 12 topics in the concurrent list.
In addition, the State Legislatures have the power to amend the State
Constitution. All State enactments are subject to the Federal Constitution and the
StateÊs own constitution. There are several instances of State Legislation
being invalidated by the courts on constitutional grounds.

1.7 FEDERATION
Malaysia is a Federation, with a strong central government (Federal Government)
and thirteen State Governments. The power to make laws for the country is
divided between the Federal Government and the various State Governments in
accordance with Part VI of the FC. Article 74(1) provides that Parliament may
make laws with respect to any of the matter enumerated under the Federal List or
Concurrent List whilst Article 74(2) provides that the legislature of a State may
make laws with respect to any of the matters enumerated is the State Lists or
Concurrent List in the Ninth Schedule, without prejudice to any power to make
laws conferred on it by any other Article.

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The Federation has power and control over subject matters which can be
considered essential and vital to the nation as a whole. Table 1.1 shows matters in
the Federal List, State List and Concurrent List which are under the power and
control of the Federation.

Table 1.1: Matters in the Federal List and State List

Which are under Federation Power and Control

Federal List State List Concurrent List

 External affairs  Islamic law and  Social welfare such as

personal and family law protection of women,
 National defence of persons professing children and young
the religion of Islam, persons, wild animals
 Internal security, civil
Malay customs and birds
and criminal law,
procedure and the  The constitution,  Scholarships
administration of organisation and
justice procedure of Syariah  Town and country
courts planning
 Citizenship
 Land including land  Public health
 Finance, trade,
tenure, agriculture and
commerce and  Drainage and
forests
industry, shipping irrigation
 Local government,
 Communication and  Culture, sports and
libraries, museums,
transport national parks and
ancient and historical
many others
 Education, medicine monuments and records
and health and archaeological sites
and remains
 Labour and social
security

According to Article 44, the legislative authority of the Federation „shall be

vested in a Parliament‰ which is bicameral; the Dewan Rakyat (House of
Representatives) and Dewan Negara (Senate). Parliament may make laws for the
whole or any part of the Federation as provided in Article 73, which states that:

(a) Parliament may make laws for the whole or any part of the Federation and
laws having effect outside as well as within the Federation; and

(b) The Legislature of a State may make laws for the whole or any part of the
State.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 13

States may not make laws on federal matters unless specifically so authorised by
Parliament; the latter may legislate on subjects enumerated in the State List.
Article 76(1) provides three instances for the legitimate exercise of federal
authority in State matters namely:

(a) Where the government has committed itself to an international treaty or

any decision of an international organisation of which the country is a
member and it is necessary to make laws for the purpose of implementing
such a treaty or decision. This excludes matters of Islamic law, Malay
customs and native law and customs in Sabah and Sarawak until there is
prior consultation with the States.

(b) Laws may be made for the purpose of promoting uniformity of the laws of
two or more States.

(c) Where the State Legislative Assembly has requested Parliament to do so.

Federal laws made under (b) and (c) cannot come into operation until adopted by
the State Legislative Assembly. They will then be considered State laws which
may be later amended or repealed by the States.

1.8 YANG DI-PERTUAN AGONG (YDPA)

The Constitution provides for a Constitutional monarchy. The Malaysian
monarch is called YDPA who is the „Supreme Head of the Federation‰. The
YDPA holds office for a period of five years, and is elected at the Conference of
Rulers from amongst the nine Malay Rulers of the States of Perlis, Kedah, Perak,
Selangor, Negeri Sembilan, Johor, Pahang, Terengganu and Kelantan.

The YDPA is the Head of State much like the Queen of the United Kingdom and
the government is carried out in his name. The office of YDPA is both hereditary
and elective. It is hereditary in a broad sense in that only the nine Ruler of the
States are eligible for election.

The four other heads of the States of Penang, Malacca, Sabah and Sarawak are
not eligible for election as they are not hereditary rulers but appointed from
among prominent citizens. It is also elective in the sense that one of the nine
Rulers is elected from basics. A deputy king is known as Timbalan Yang di-
Pertuan Agong and is also elected in the same manner. The YDPA may be
removed from office by his fellow Rulers assembled in a Conference of Rulers.

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In the exercise of his functions under the Constitution or Federal Law, the YDPA
has to act in accordance with the advice of the Cabinet or of a minister acting
under the general authority of the Cabinet. Most of the functions and duties of
the YDPA are ceremonial in character. He is, for example, the designated
Supreme Commander of the armed forces of the Federation.

However, the YDPA has the power to grant pardons, reprieves and respites in
respect of all offences which have been tried by court-martial and all offences
committed in the Federal Territories of Kuala Lumpur, Labuan and Putrajaya.
In this regard, the YDPA is assisted by a Pardon Board, which consists of the
Attorney General, the Chief Territories of Kuala Lumpur, Labuan and Putrajaya,
and not more than three other members appointed by the Rulers (in the case of
a State) or the YDPA.

The YDPA is empowered to declare a „state of emergency‰ if he is satisfied that

the security or the economic life, or public order in the Federation or any part
thereof is threatened. This includes the power to proclaim an emergency in cases
where the YDPA is satisfied that there is „imminent danger‰ of the occurrence
of the above stated events, as provided for under Article 150 of the FC.

The rulers and the YDPAÊs immunity from prosecution has been removed, and
it is now provided under a new Article 33A where the YDPA has been charged
with an offence under any law in the Special Court established under Part XV of
the Federal Constitution, he shall cease to exercise the function of the YDPA.

1.9 CONFERENCE OF RULERS

The Conference of Rulers (Majlis Raja-Raja) is a unique feature of the Federal
Constitution by Article 38. It consists of nine Rulers and the four Yang di-Pertua
Negeri. The Conference is the most respected and impressive assembly in the
country (see Figure 1.3). While it has no power to make laws or levy taxes or
sanction public expenditure, it is highly influential. It provides an intimate link
between the Federal and the State Government at the highest level. With the
institution of constitutional monarchy under the Federal Constitution, the
functions of the Malay Rulers were „extended‰ to include certain matters of
national policy, and these have been identified under Article 38(2) of the
Constitution, as:

(a) Electing the YDPA and Deputy YDPA;

(b) Agreeing or disagreeing to the extension of any religious acts, observances

or ceremonies to the Federation;

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(c) Consenting or withholding consent to any law and making or giving advice
on any appointment which requires the consent of the Conference;

(d) Appointing members of the Special Court under Clause (1) of Article 182;
and

(e) Granting pardons, reprieves, and respites or of remitting, suspending or

commuting sentences, under Clause (2) of Article 42.

Figure 1.3: Conference of rulers

The Malay Rulers may deliberate on questions of national policy (for example
changes in immigration policy) and any other matters that they think fit. Among
the matters which require either the consent of the Conference of Rulers or its
prior consultation include the passing of any law affecting the privileges,
position, honours or dignities of the Rulers and any changes in policy affecting
administrative action under Article 153, that is, reservation of quotas in respect of
services and permits for Malaysia and natives of any of the States of Sabah and
Sarawak.

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The Conference of Rulers also deliberates on matters of national policy upon which
it must be attended by the YDPA and the Prime Minister as representatives of the
Federal Government, the Rulers and Yang di-Pertua each of whom is
accompanied by his Menteri Besar or Chief Minister. At the meeting, His Majesty
the King (YDPA) acts on the advice of the Prime Minister on behalf of the
Cabinet and the other Rulers and Yang di-Pertua Negeri in accordance with the
advice of their respective Executive Councils (State Cabinets).

1.10 SEPARATION OF POWERS

In Malaysia we practice a parliamentary democratic system which is based on the
British Westminster system. The concept of „people rule‰ applies whereby
the leaders are chosen by people through an election process who then form the
government. Since independence, the governing and administration of our
country has been strengthened further by means of separation of power based on
our constitution. The three bodies are the Executive, the Legislature and the
Judiciary.

(a) The Executive

The Cabinet of Ministers which is appointed by His Majesty the King
(YDPA) does advise him as the supreme policy-making body in the
country, exercising the executive authority of the Federation. The YDPA
first appoints the Prime Minister, a member of the House of
Representatives, who in his judgment is likely to command the confidence of
the majority of the members of that house to preside over the Cabinet. On
the advice of the Prime Minister, the YDPA then appoints other ministers
from among the members of either house of Parliament. The Cabinet is
collectively responsible to Parliament.

Ministers other than the Prime Minister hold office at the pleasure of the
YDPA. This does not mean that the YDPA may dismiss them at will. He
may do so only on the Prime MinisterÊs advice. Deputy Ministers are
appointed by the YDPA on the advice of the Prime Minister to assist
Ministers.

(b) The Legislature

The legislative authority of the Federation is vested in a Parliament by
Article 44 of the Constitution, which consists of two „houses‰, that is, the
Dewan Negara, or the Senate, the upper house and the Dewan Rakyat, or
House of Representatives, the lower house.

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The Senate is composed of members who are both elected as well as

appointed. 40 members are appointed by the YDPA while there shall be
two elected members from each State, two members from the Federal
Territory of Kuala Lumpur and one member each from the Federal
Territory of Labuan and Putrajaya, all appointed by the YDPA.

The House of Representatives is made up of elected members. They are

elected from single-member constituencies on a territorial basis using the
„first pass the post‰ system. In other words, the candidate with the largest
number of valid votes would secure the constituency even if the votes do
not constitute a majority of total votes.

The YDPA is an integral part of Parliament and his assent is required for all
laws except as otherwise provided in Article 66. As a constitutional
monarch, His Majesty the King (YDPA) attends ceremonial occasions such
as the opening of Parliamentary sessions and delivers the Royal Address to the
joint sitting of both the chambers outlining government policies.

The power to summon, prorogue or dissolve Parliament lies with the

YDPA, and he shall not allow six months to elapse between the last sitting
and the date appointed for its first meeting in the next session. When
Parliament is dissolved, a general election must be held within 60 days
from the date of the dissolution, and Parliament must be summoned to
meet on a date not later than 120 days from the date [Article 55(4)].

A person may be disqualified from being a member of either house of

Parliament upon several grounds, inter alibis, if he is of unsound mind; if
he is an undischarged bankrupt; if he holds an office or profit; or if he has
been convicted of an offence by a court of law in the Federation and
sentenced to imprisonment for a term of not less than one year or to a fine
of not less than RM2,000.

Where a member has been disqualified by reason of conviction of an

offence, the disqualification is to take effect upon the expiry of 14 days from
the date on which he was convicted and sentenced. However, if within the
period of 14 days, an appeal is brought in respect of the conviction and
sentence, the disqualification is to take effect upon the expiry of 14 days
from the date on which such appeal is disposed of by the court.

Parliament does not enjoy legislative supremacy like its British counterpart,
which has no written constitution. The British Parliament can make and
unmake any law it likes and validity of such acts cannot be successfully
challenged in the courts, which are bound to accept them as law. In
contrast, the Malaysian Parliament owes its very existence to a written

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Constitution

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18 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

and is governed by it. In the event of a conflict between the Constitution

and Act of Parliament, the Constitution shall prevail. Parliament is
empowered to amend the Constitution but any changes must be effected in
accordance with the provisions of the Constitution.

Although law-making is essentially the prerogative of Parliament, the

power to make laws can be delegated to other bodies by the powers
conferred upon them by Parliament in a parent statute, and legislation
made in this manner is known as delegated or subsidiary legislation.

(c) The Judiciary

The judicial power is exercised through a system of courts. Of the three
separate branches of Government, the courts are supreme. They are
supreme in the sense that they are independent of control by anybody. The
Courts can pronounce the legality or otherwise of executive acts of
Government, Federal and State. They can pronounce the validity or
otherwise of any law passed by Parliament and State Legislatures, and
finally they can interpret the meaning of any provision of the
Constitution, Federal and State.

1.11 INDEPENDENCE OF JUDICIARY

To ensure the independent functioning of the courts in discharging their
responsibility, without fear or favour, in pronouncing the judgments on the
validity of executive and legislative acts, the Federal Constitution excludes
judges of the High Court from the operation of the general rule set out in Article
132(2A) that a member of the public service holds office at the pleasure of the YDPA.
Judges do not hold office at pleasure.

They may be dismissed from the service by the YDPA only on valid grounds of
misbehaviour or of unsound body and mind or any other cause. They can be
removed from office only on the recommendation of a tribunal consisting of at
least five persons who hold or have held office as judge of the Federal Court or of
the Court of Appeal and the Chief Judges on the High Courts. The procedure for
removing a judge is given in Article 125 (3), (4) and (5) of the Constitution.

Salaries and other benefits of office of the Judges are provided by the
Constitution in Acts of Parliament and they are charged directly on the
consolidated fund and not through the annual parliamentary approvals. The Act
fixing the remuneration may of course be amended, but the amendment would
be constitutional if it altered a judgesÊ remuneration to his disadvantage after his
appointment. Judges retire at the age of 65 or a later time, not later than six
months after that age as the YDPA may approve.
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1.11.1 Appointment of Judges

A person is qualified for appointment as a judge of the Federal Court, Court of
Appeal or High Courts, if he is a citizen and for 10 years preceding his
appointment, he has been an advocate or a member of the Judicial and Legal
Services of the Federation or a State or States. Members of both the Bar and the
Judicial and Legal Service are appointed as judges.

Although the number of judges that may be appointed is fixed by the

Constitution, it may be varied by the YDPA and such variations have in fact been
made from time to time. His Majesty the King, acting on the advice of the Prime
Minister, after consulting the Conference of Rulers appoints the Chief Justice of
the Federal Court, the President of the Court of Appeal and Chief Judges of the
High Court, of the Court of Appeal and of the High Courts. In appointing the
High Court Judges the Prime Minister consults the respective Chief Judges as a
matter of procedure and as required by the Constitution.

Besides the judges, the Judicial Commissioners too are appointed by the YDPA
on the advice of the Prime Minister, after consulting the Chief Justice of the
Federal Court for such period or such purposes as may be specified in the order.
The main purpose of appointing Judicial Commissioners is to ease periodic heavy
workloads in the High Courts. Judicial Commissioners possess the same powers
and immunities a High Court Judge and are required to have the same minimum
qualifications.

Judges of the Subordinate Courts are appointed as provided by the provisions of

the Subordinate Courts Act 1948. The Subordinate Courts comprise two types of
courts, namely the Sessions Court and the MagistrateÊs Court. Each Sessions Court
is presided over by a Sessions Court Judge appointed by the YDPA on the
recommendation of the Chief Judge.

The Sessions Court Judge is a legally qualified person and is a member of the
Judicial and Legal Service of the Federation. A magistrateÊs court consists of a
magistrate sitting alone. There are two classes of magistrates namely First Class
Magistrate and Second Class Magistrate. The first is often a legally qualified
person appointed by the YDPA or the State Authority on the recommendation of
the Chief Judge. The second is usually an administrative officer who performs
magisterial functions and is appointed by the YDPA or the State Authority.

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1.11.2 Hierarchy of Judiciary

The present hierarchy of courts in Malaysia is composed of two segments, the
Constitutional or Superior Courts and the Statutory or Subordinate (inferior)
Courts. There are three levels in the organisation of the Superior Courts. At the
highest level, there is the Federal Court followed by the newly created Court of
Appeal and lastly the two High Courts. The Subordinate Courts, established by
the Subordinate Courts Act 1948, comprise the Sessions Court and MagistrateÊs
Court. In Peninsular Malaysia, the PenghuluÊs Court is also an inferior court,
with very limited jurisdiction and importance.

The Malaysian judiciary, apart from the Syariah Courts, is entirely a federal
organisation. It adopts a three-tier superior court system (refer to Figure 1.4). At
the apex of the organisation of the court structure is the Federal Court
(Mahkamah Persekutuan), which is the highest and the final appellate court in
Malaysia. The Federal Court, which has its principal registry in Kuala Lumpur,
shall have, by virtue of Article 121(2), the following jurisdiction:

(a) Jurisdiction to determine appeals from decisions of the Court of Appeal, of

the High Court or a judge thereof;

(b) Such original or consultative jurisdiction as is specified in Articles 128 and

130; and

(c) Such other jurisdiction as may be conferred by or under federal law.

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Figure 1.4: Hierarchy of judiciary in Malaysia

The Federal Court consists of a president of the court (to be styled the „Chief
Justice of the Federal Court‰), the President of the Court of Appeal, the Chief Judge
of the High Court in Malaya, the Chief Judge of the High Court in Sabah and
Sarawak and seven other Federal Court Judges. The proceedings before the
Federal Court will be heard and disposed of by a panel of three judges, or such
greater uneven number of judges as nominated by the Chief Justice.

The Court of Appeal (Mahkamah Rayuan) was established in 1994 and has its
principal registry in Kuala Lumpur. The Court of Appeal consists of a chairman
(to be styled the „President of the Court of Appeal‰) and ten other judges. The
jurisdiction of the Court of Appeal is limited only to appellate jurisdiction, both
in criminal and civil appeals. Sections 50(1) and 67(1) of the Courts of Judicature
Act 1964 (Act 91) provide for the jurisdiction to criminal and civil appeals.

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Below the Court of Appeal, there are two High Courts of equal and coordinate
jurisdiction and status, namely the High Court of Malaya, which has its principal
registry in Kuala Lumpur, and the High Court of Sabah and Sarawak, which has
its principal registry at such places in the States of Sabah and Sarawak as the YDPA
may determine. By virtue of Article 122AA of the Constitution, the Chief Judge of
Malaya (formerly known as Chief Justice of Malaya) and the Chief Judge of
Sabah and Sarawak (formerly known as the Chief Justice of Borneo) are
respective heads of the High Court in Malaya and the High Court in Sabah and
Sarawak.

By virtue of their office, the Chief Judges are members of the Federal Court and
the heads of the Subordinate courts in their respective territories.

1.11.3 Head of the Judiciary

The Chief Justice of the Federal Court is the head of the entire judiciary in
Malaysia and is appointed by His Majesty the King or YDPA, after consulting the
Conference of Rulers, on the advice of the Prime Minister. As head of the
judiciary, the Chief Justice performs functions which are not exercised by the
other judges.

One such function is that, he must be present to witness the oath-taking

ceremony by the YDPA and the Deputy YDPA, as provided by Article 37 of the
Constitution. He deals directly with the Prime Minister on matters related to the
judiciary and matters pertaining to the administration of justice in the country.
The Chief Justice also exercises other constitutional functions.

As early as 1906, when the Appeals Order in Council was passed, all appeals
from the Court of Appeal (then the highest appellate court) of the Federated
Malay States were referred to the Judicial Committee of the Privy Council. The
first reported Privy Council appeal from the Straits Settlements is the case of
Yeap Cheah Neo v. Ong Cheng Neo (1875) SLR PC 381. Since then, the court
structure in Malaysia varied from time to time. Figures 1.5, 1.6 and 1.7 indicate
the structure of the Malaysian Courts at different stages after Independence.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 23

Figure 1.5: Structure of the Malaysian courts at different stages (prior to 1985)

On Merdeka Day, 31 August 1957, the right to appeal from the Supreme Court of
Malaya to the Privy Council was maintained and embodied in Article 131 of the
Federal Constitution. With the formation of Malaysia, the practice was continued.
Thus appeals originating from Malaysia, an independent country with its own
sovereignty, were to be heard by Judges in England. This was subject to the
provision that these appeals were addressed not directly to the Privy Council but
to His Majesty the King (YDPA) who, in turn, would refer the matter for advice
to the Privy Council. Therefore, technically the judgment delivered by the Privy
Council was by way of advice to the YDPA.

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24 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

Figure 1.6: Structure of the Malaysian courts at different stages (between 1985 to 1995)

Figure 1.7: Structure of the Malaysian courts at different stages (current structure)

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 25

The gradual erosion of the right of appeal to the Privy Council began in 1975,
when a law was introduced to provide that any decision of the Federal Court in
criminal cases tried under the Essential (Security Cases) Regulations 1975 was
made non-appealable to the Privy Council. Subsequently in January 1978,
appeals to the Privy Council in criminal and constitutional matters were
abolished. Finally, with effect from 1 January 1985, all appeals to the Privy
Council were totally abolished.

The Malaysian Judiciary, except for the Syariah Courts, is entirely a federal
organisation. At the apex of the judiciary is the Federal Court, (previously called
the Supreme Court) which is now the highest court and the final appellate body
in Malaysia. Next in status and jurisdiction is the Court of Appeal, followed by
the High Courts. Below the High Courts are the subordinate courts, which
comprise the Sessions Court and MagistrateÊs Court, in descending order.

With the re-institution of the three-tiered structure of appeal, the current Court of
Appeal occupies the position previously held by the Federal Court, while the
Federal Court now occupies the position of the highest Court of Appeal in
Malaysia previously held by the Privy Council.

1.11.4 Special Court

In addition to the earlier mentioned superior courts, such as the Federal Court,
the Court of Appeal and the High Courts, in 1993 a new court known as the
Special Court was established. Its function was solely to hear and try cases
brought by or against the YDPA or a Ruler of a State. This is provided for under
Article 182 of the Federal Constitution, as follows:

(1) There shall be a court which shall be known as the Special Court and shall
consist of the Chief Justice of the Federal Court, who shall be the Chairman,
the Chief Judges of the High Courts and two other persons who hold or
have held office as judge of the Federal Court or a High Court, appointed
by the Conference of Rulers.

(2) Any proceedings by or against the Yang di-Pertuan Agong or the Ruler of a
State in his personal capacity shall be brought in a Special Court established
under Clause (1).

(3) The Special Court shall have exclusive jurisdiction to try all offences
committed in the Federation by the Yang di-Pertuan Agong or the Ruler of a
State and all civil cases by or against the Yang di-Pertuan Agong or the
Ruler of a State notwithstanding where the cause of action arose.

The Special Court does not form part of the judicial system as this court is just a

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constitutional Court.

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1.12 JURISDICTION OF COURTS

The jurisdiction and powers of court under the Malaysian hierarchy of courts are
contained principally in the Courts of Judicature Act 1964 (Act 91) for the
superior courts, that is, the Federal Court, the Court of Appeal and the High
Courts; and in the Subordinate Courts Act 1948 (Act 92) for the subordinate
courts that is the Sessions, MagistrateÊs and PenghuluÊs Courts.

1.12.1 Jurisdiction of Federal Court

The Federal Court is vested with original, appellate and advisory jurisdiction.
Article 121(2) of the Federal Constitution provides that the Federal Court shall
have:

(a) Jurisdiction to determine appeals from decisions of the Court of Appeal,

of the High Court or a judge thereof;

(b) Such original or consultative jurisdiction as it is specified in Article 128 and

130; and

(c) Such other jurisdiction as may be conferred by or under federal law.

1.12.2 Exclusive and Advisory Jurisdiction

The exclusive and advisory jurisdiction of the Federal Court is provided by
Article 128 and 130. Article 128(1) provides as follows:

The Federal Court shall, to the exclusion of any other Court, have jurisdiction to
determine in accordance with any rules of Court regulating the exercise of
such jurisdiction:

(a) Any question whether a law made by Parliament or by the Legislature of a

State is invalid on the ground that it makes provision with respect to a
matter which Parliament or, as the case may be, the Legislature of the State
has no power to make laws; and

(b) Disputes on any other question between States or between the Federation
and any State.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 27

In the event of any dispute on any other questions between the States or between
the Federation and any States, which is brought to the Federal Court for
declaration, in exercise of its jurisdiction under Article 128(1)(b) the Federal
Court should pronounce only a declaratory judgment. Such declaratory
judgment is well illustrated in Dewan Undangan Negeri Kelantan & Anor. v.
Nordin bin Salleh & Anor. [1992] 1 MLJ 697.

In that case the respondents, members of the Kelantan State Legislative

Assembly, sought a declaration that Article XXXIA of the Kelantan Constitution
was invalid as it contravened Article 10(1)(c) of the Federal Constitution
guaranteeing the fundamental right to freedom of association. On appeal the
Supreme Court held that the provision contained in the Kelantan State
Constitution imposing a restriction on the rights of the member of the Kelantan
state Legislative Assembly, was unconstitutional on the ground that it
contravened Article 10(1)(c) of the Federal Constitution.

1.12.3 Special Advisory Jurisdiction on

the Interpretation of the
Constitution
The special jurisdiction of the Federal Court pertaining to the interpretation of
any provision of the Federal Constitution is embodied in Article 130. The Article
provides that the YDPA may refer to the Federal Court for its opinion any
questions as to the effect of any provision of the Federal Constitution which has
arisen or appeared to him likely to arise, and the Federal Court shall pronounce
in open court its opinion on any question so referred to it.

1.12.4 Reference of Constitutional Question by High

Court to Federal Court
Under Article 128(2) of the Federal Constitution, the Federal Court also has
jurisdiction to determine constitutional questions referred to it by the High
Court. The Court of Judicature (Amendment) Act 1994 (Act A886) deals with
such references on constitutional issues by High Court. As regard to reference of
constitutional issues by the High Court to the Federal Court, section 84(1) of the
Courts of Judicature Act 1964 provides as follows:

Where in any proceedings in the High Court if a question arises to the effect of
any provision of the Constitution, the Judge hearing the proceedings may stay
the same on such terms as may be just to await the decision of the question by the
Federal Court.

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As regards to proceeding in the Federal Court, Section 85 of the above Act provides
as follows:

(1) Where a special case has been transmitted to the Federal Court under
section 84, the Federal Court shall, subject to any rules of court of the
Federal Court, deal with the case and hear and determine it in the same
way as any appeals to the Federal Court.

(2) When the Federal Court shall have determined any special case under this
section, the High Court in which the proceedings in the course of which the
case has been stated are pending shall continue and dispose of the
proceedings in accordance with the judgment of the Federal Court and
otherwise according to the law.

1.12.5 Jurisdiction of the Court of Appeal

The Court of Appeal has appellate jurisdiction in both civil and criminal matters.
In respect of criminal appeal, the Court of Appeal has jurisdiction to hear and
determine any appeal against any decision made by the High Court in the
exercise of its original jurisdiction, and in the exercise of its appellate or
revisionary jurisdiction. An appeal to the Court of Appeal is to be confined only
to questions of law which have arisen in the course of the appeal or revision and
the determination of which by the High Court has affected the event of the
appeal or revision.

In civil matters, the Court of Appeal has jurisdiction to hear and determine
appeals from any judgment or order of any High Court whether made in exercise
of its original or appellate jurisdiction. There are, however, several matters,
which are non-appealable to the Court of Appeal. Section 68(1) of the Courts of
Judicature Act 1964 provides as follows:

Section 68(1): No appeal shall be brought to the Court of Appeal in any of the
following cases:

(a) Where the amount or value of the subject matter of the claim (exclusive of
interest) is less than RM250,000 except with leave of the Court of Appeal;

(b) Where the judgment or order is made by consent of the relevant parties;

(c) Where the judgment or order relates to costs only which by law are left to
the discretion of the Court, except with leave of the Court of Appeal; and

(d) Whereby any written law for the time being in force, the judgment or order
of the High Court is expressly declared to be final.

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1.12.6 Jurisdiction of the High Court

The High Court has both original and appellate jurisdictions for both civil and
criminal matters. In its original criminal jurisdiction, the High Court is
empowered to try all offences committed within its local jurisdiction; all offences
committed on the high seas on board any ship or any aircraft registered in
Malaysia; all offences committed by any citizen or any permanent resident on the
high seas on board any ship or aircraft; all offences committed by any person on
the high seas, where the offence is piracy by the law of nations.

Section 22(1) of the Courts of Judicature Act 1964 provides additional criminal
jurisdiction to the High Court as follows:

(a) Offences under Chapter VI of the Penal Code and under any of the written
laws specified in the Schedule to the Extra Territorial Offences Act 1976 or
offences under any written law, the commission of which is certified by the
Attorney-General to affect the security of Malaysia committed, as the case
may be;

(b) On the high seas on board any ship on aircraft registered in Malaysia;
offences by any ship or aircraft registered in Malaysia;

(c) By any citizen or any permanent resident on the high seas on board any
ship or aircraft; or

(d) By any citizen or any permanent resident in any place without and beyond
the limits of Malaysia.

In general, civil jurisdiction of the High Court includes that of trying all civil
proceedings where the cause of action arose within the local jurisdiction of the
court, or the defendant or one of several defendants resides or has his place of
business within such local jurisdiction, or the facts on which the proceedings are
based exist or are alleged to have occurred, or any land, the ownership of which
is disputed is situated within the local jurisdiction of the court.

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The specific civil jurisdiction of the High Court is provided by Section 24 of the
Courts of Judicature Act 1964 as follows:

Without prejudice to the generality of Section 23, the civil jurisdiction of the High
Court shall include:

(a) Jurisdiction under any written law relating to divorce and matrimonial
causes;

(b) The same jurisdiction and authority in relation to matters of admiralty as it

had by the High Court of Justice in England under the Supreme Court Act
1981 of the United Kingdom;

(c) Jurisdiction under any written law relating to bankruptcy or to companies;

(d) Jurisdiction to appoint and control guardians of infants and generally over
the person and property of infants;

(e) Jurisdiction to appoint and control guardians and keepers of the person and
estate of idiots, mentally disordered person and persons of unsound mind;
and

(f) Jurisdiction to grant probates of wills and testaments and letters

administration of the estates of deceased persons leaving property within
the territorial jurisdiction of the Court and to alter or revoke such grants.

The High Court shall, in the exercise of its jurisdiction, have all the powers which
were vested in it immediately prior to Malaysia Day and such other powers as
may be vested in it by any written law in force within its local jurisdiction. The
High Court hears both criminal and civil law appeals.

However, no appeal shall lie to the High Court from a decision of a subordinate
court in any civil course or matter where the amount in dispute or the value of
the subject matter is RM10,000 or less except on a question of law. An appeal
shall lie from any decisions of a subordinate court in any proceedings relating to
maintenance of wives or children, irrespective of the amount involved.

The High Court is vested with special powers of revision of both criminal and
civil proceedings. The High Court may call for examination of the record for any
civil proceedings before any subordinate courts for the purpose of satisfying
itself as to the correctness, legality or propriety of any decision recorded or
passed and as to the regularity of any proceedings of any such subordinate court.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 31

In addition, the High Court is provided with general supervisory and revisionary
jurisdiction over all subordinate court, and may in particular if it appears
desirable in the interests of justice, either of its own motion or at the instance of
any party or person interested, at any stages in any matters or proceedings,
whether civil or criminal, in any subordinate courts, call for the record thereof. It
may remove the same into the High Court or may give to the subordinate court
such direction as to the further conduct of the same as justice may require.

1.12.7 Jurisdiction of Sessions Court

This Court is the highest of the inferior Courts. It is presided by a Sessions Court
Judge.

(a) Criminal Jurisdiction

A Sessions Court shall have jurisdiction to try all offences other than
offences punishable by death (Section 63 of the SCA). A Sessions Court
may pass any sentence allowed by law other than the death sentence
(Section 64 of the SCA).

(b) Civil Jurisdiction

According to Section 65 of the SCA, a Sessions Court shall have jurisdiction
for the following matters:

(i) Unlimited jurisdiction to try all actions and suits of a civil nature in
respect of motor vehicle accidents, landlords and tenants, and
distress;

(ii) Jurisdiction to try all actions and suits of a civil nature where the
amount in dispute or the value of the subject matter does not exceed
RM1,000,000; and

(iii) Jurisdiction to try all actions and suits of a civil nature for the specific
performance or rescission of contracts as well as the cancellation or
rectification of instruments.

However, there are also exceptions. The Sessions Court has no jurisdiction
in actions, suits or proceedings in the following matters (Section 69 of the
SCA):

(i) Relating to immovable property;

(ii) For accounting purposes;

(iii) For declaration of decrees;

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(iv) For the issuance and revocation of grants regarding the representation
of the estates of deceased persons or the administration, or
distribution thereof;

(v) Wherein the legitimacy of any person is in question;

(vi) Wherein the guardianship or custody of infants is in question; and

(vii) Wherein the validity or dissolution of any marriage is in question.

The civil jurisdiction limit of the Sessions Court has been increased significantly
under the Subordinate Courts (Amendment) Act 2010 [Act A1382) from the
previous jurisdiction of RM250,000. The Amendment Act came into force on 1
March 2013. The amendment also empowered the Sessions Court to grant
equitable relief and remedies such as injunctions, specific performance,
declaratory relief, rescission of contracts and cancellation or rectification of
instruments, provided that the claim is within its stipulated monetary
jurisdiction. Prior to 1 March 2013, only the High Court is vested with all these
powers.

1.12.8 Jurisdiction of Magistrate Courts

The MagistratesÊ Courts deal with civil and criminal cases. This court is presided
by a magistrate. There are two classes of magistrates that are First Class
Magistrate and Second Class Magistrate.

First Class Magistrate and Second Class Magistrate Courts only have original
jurisdiction. Before 1 March 2013, the First Class Magistrate Court has both the
original and appellate jurisdictions. It hears appeals from the PenghuluÊs Court.
Effective from 1 March 2013, the PenghuluÊs Court has been abolished by the
Amendment Act 2010 (Act A1382).

(a) Criminal Jurisdiction of a First Class Magistrate

In criminal matters, Section 85 of the Subordinate Courts Act 1948 [Act 92]
(Revised 1972) amended by the Subordinate Courts (Amendment) Act 1978
(SCA) empowers First Class Magistrates with substantial powers. A First
Class Magistrate has the jurisdiction to try all offences which:

(i) Carry the maximum term of imprisonment not exceeding 10 years;

(ii) Are punishable with fine only; or

(iii) Are under Sections 392 and 457 of the Penal Code.

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Section 392 of Penal Code deals with robbery, while Section 457 of the Penal
Code deals with trespassing and housebreaking as offences.

Under Section 87 of the SCA, a First Class Magistrate may pass any
sentence allowed by law but not exceeding:

(i) Five years of imprisonment;

(ii) A fine of RM10,000;

(iii) Whipping of up to 12 strokes; or

(iv) Any combination of the sentences aforesaid.

However, for any law which is currently in force, jurisdiction is given to the
MagistratesÊ Courts to award punishment for any offence in excess of the
power prescribed by this Section. A First Class Magistrate may,
notwithstanding anything herein contained in Section 87 (1) SCA, award
the full punishment authorised by that law and record the reason for doing
so.

(b) Civil Jurisdiction of a First Class Magistrate

In civil matters, a First Class Magistrate has the jurisdiction to hear all
actions and suits of a civil nature where the amount in dispute or value of
the subject matter does not exceed RM100,000 under Section 90 of the SCA
[Act 92].

The civil jurisdiction limit of a First Class Magistrate has been increased
from the previous RM25,000 under the Subordinate Courts (Amendment)
Act 2010 [Act A1382]. The Act came into force on 1 March 2013.

(c) Criminal Jurisdiction of a Second Class Magistrate

A Second Class Magistrate has the jurisdiction to try offences which have a
maximum term of imprisonment not exceeding 12 months or which are
punishable with only a fine. If a Second Class Magistrate is of the opinion
that a conviction should exceed more than his power and that his power to
sentence is inadequate, he shall adjourn the case for trial to a First Class
Magistrate (Section 88 of the SCA).

A Second Class Magistrate may pass any sentence allowed by law as follows:

(i) Not exceeding six months of imprisonment;

(ii) A fine of not more than RM1,000; or

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(iii) Any combination of the sentences aforesaid.

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34 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

(d) Civil Jurisdiction of a Second Class Magistrate

A Second Class Magistrate shall only have jurisdiction to try original
actions or suits of a civil nature where the plaintiff seeks to recover a debt
or liquidated demand in money payable by the defendant, with or without
interest, not exceeding ten thousand ringgit (Section 89 of the SCA). Prior to
the amendment on 1 March 2013 [Act A1382], the jurisdiction was limited
to only RM3,000 (Section 92 SCA).

Sections 26 28 Court of Judicature Act 1964 states that appeals in criminal

and civil cases against decisions of the Magistrates Courts lie with the High
Court. In a civil case, the disputed amount must be RM10,000 or less, with
the exception that it is a question of law. This monetary limit is not
applicable to proceedings regarding the maintenance of wife (wives) or
children.

Second Class Magistrates may try the entire small claims. The ceiling for
small claims is RM5,000 which also include any other claims other than
debts such as damages. This is a mandatory procedure if the recovery of the
claim is below RM5,000. The procedure for small claims is provided for
under Order 93 Rules of Court 2012. The claimant needs to comply with all
the requirements set therein.

1.12.9 Special Court

The Special Court established under part XV, Article 182 is to consist of the Chief
Justice of the Federal Court, who shall be the Chairman, the Chief Judges of the
High Courts and two other persons who hold or have held office as judge of the
Federal Court or High Court appointed by the Conference of Rulers.

This Special Court has the exclusive jurisdiction to try all offences committed in
the Federation by the YDPA notwithstanding where the cause of action arose.
However, no action, civil or criminal shall be instituted against the YDPA in
respect of anything done or omitted to be done by him in his personal capacity
except with the consent of the Attorney General. The YDPA has certain
discretionary powers. Clause (2) of Article 40 states:

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 35

The YDPA may act in his discretion in the performance of the following
functions, that is to say:

(a) The appointment of a Prime Minister;

(b) The withholding of consent to request for the dissolution of Parliament; and

(c) The requisition of a meeting of the Conference of Rulers concerned solely

with privileges, position, honours and dignities of Their Royal Highnesses,
and any action at such a meeting and in any other case mentioned in this
condition.

1.12.10 Judicial Decisions

Judicial decisions are decisions made in point of law by judges of the High
Court that have not been reversed or overruled by the superior courts and
decisions of the Court of Appeal and Federal Court. A legal ruling of a superior
court binds all inferior courts. These judicial decisions serve as precedents to
decide cases before the courts and to that extent these judicial decisions serve as
laws. Furthermore, courts have the power to interpret the statutes of federal and
state governments.

In interpreting the Federal Constitution, a judge cannot be too literal. He is justified

in giving effect to what is implicit in the basic law and to crystallise what is
inherent. His task is creative and not passive. This is necessary to enable the
Federal Constitution to be the guardian of peopleÊs rights and the source of their
freedom.

SELF-CHECK 1.2

What are subordinate courts? Discuss the constitution and

jurisdiction of these courts.

Which courts have appellate jurisdiction? When may an appeal be made to the Feder

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1.13 POSITION OF SYARIAH LAW IN

MALAYSIA
First and foremost, we need to understand what is Syariah law. According to
Wan Arfah Hamzah (2009) the definition of Syariah is as follows:

Literally Syariah means:

The way to a watering place.

Technically Syariah is:

The sacred law of Islam revealed through Prophet Muhammad SAW in the Quran and Sunnah. It is

The sources of Syariah law as applied in Malaysia come from two main categories:

(a) Primary Sources

(i) Quran: The word of Allah SWT.

(ii) Sunnah: Rules deduced from the saying or conduct of the Prophet
Muhammad SAW.

(b) Secondary Sources

(i) IjmaÊ: Consensus of jurists of any particular era on a judicial rule.

(ii) Qiyas: Deduction from reasoning by ijtihad or analogy.

1.13.1 Syariah Law in the Federal Constitution

As what has been discussed earlier, Islamic law or Syariah law is recognised as
one of the sources of law in Malaysia but it is applicable only to Muslims. In
order to understand the position of Syariah law in Malaysia, we need to examine
the relevant provisions stated in the Federal Constitution.

The most important provision is Article 3 of the Federal Constitution. This Article
stipulates that „Islam is the religion of the Federation‰. However, it further
provides that other religions may be practised in peace and harmony in any part
of the Federation.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 37

According to some legal experts, Articles 3(1) does not declare that the
Federation is an Islamic state. The clause has no any legal effect. This can be seen
in the case of Che Omar Che Soh v. Public Prosecutor (1988) , in which it was
argued that mandatory death penalty for drug trafficking offences was contrary
to Syariah law. The Supreme Court rejected the argument. Salleh Abas L.P held
that Article 3 was never intended to extend the application of Syariah to the
sphere of public law.

In other words, we can say that Syariah law is only confined to private or
personal law and not to public law. Nevertheless, Article 3 does give a special
status to the religion of Islam. This can be seen in the following Articles:

(a) Article 11(4) of Federal Constitution

State and federal (in the Federal Territories) law may control or restrict the
propagation of any religion other than Islam among Muslims.

(b) Article 12(2) of Federal Constitution

(i) The government may lawfully establish or maintain, or assist in

establishing or maintaining Islamic Institution, or provide or assist in
providing instructions in Islam and incur the necessary expenditure
for these purposes.

(ii) The government may spend money on the administration of Islamic

law.

Another interesting point to highlight here is that there is no head of Islamic

religion for the whole federation. Instead, the Ruler will become the head of
Islam for his own state. Meanwhile, for states without ruler and Federal
Territories, the head of Islam is the YDPA.

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1.13.2 Administration of Islamic Law

Starting from late 1970s, there are three independence authorities that are
responsible for the administration of Islamic law in Malaysia. The authorities
are:
(a) Majlis Agama Islam (or Its Variation)
This authority is responsible for all matters concerning the Islamic religion
except Islamic law and the administration of justice. Its primary function is
to advise the Ruler in each state or YDPA in those state without a Ruler in
all matters pertaining to Islam. Other than that, the Majlis also is
responsible to administer the following functions:

(i) To administer all funds of the treasury (baitul mal);

(ii) To collect zakat and fitrah;

(iii) To act as a trustee to all mosque, waqf (gift for religious purpose) and
all trusts;

(iv) To act as the executor of a will and administer the estate of a deceased
Muslim; and

(v) To promote the economic and social well-being of the Muslim

community.

(b) The Mufti (the Highest Religious Official)

The mufti and deputy mufti are appointed by the Ruler and, in states
without Ruler and the Federal Territories, by the YDPA on the advice of the
Minister in the Prime Minister Department responsible for Islamic Affairs.

The main function of the mufti is to make and publish in the Gazette a
fatwa (legal ruling) on any unsettled or controversial issues concerning Islamic
law. Upon publication in the Gazette, the fatwa is binding on all Muslims.
The fatwa also is recognised as authoritative by all courts in the state or
territory concerned.

(c) Syariah Court

Responsible for the administration of justice.

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1.13.3 Syariah Courts

Syariah Courts are established in all states through the Administration of Islamic
Law Enactments and in Federal Territories, through federal law. It should be
noted here that, under the Federal Constitution, Syariah Courts have jurisdiction
only over persons professing the religion of Islam and the jurisdiction is limited
only within the respective states or territories in the case of Federal Territories.

Since Syariah Courts and Islamic law are state matters, there is no uniformity in
the administration of Syariah courts or of Islamic law throughout Malaysia. This
can be seen from variations in the structure of Syariah Court itself. However,
for the purpose of our discussion, we will look at the three-tier structure of
Syariah Court because this structure has been used by most of states. The
following figure is the hierarchy of Syariah Court in Federal Territories which is
based on the three-tier structure.

Figure 1.8: Hierarchy of Syariah Court

Each court has different jurisdictions. However, we are not going to discuss the
jurisdictions in detail. What we can summarise is that Syariah courts have limited
civil jurisdiction as it relates to the MuslimÊs personal law and family only. As
for criminal matters, Syariah courts shall not have jurisdiction in respect of
offences except in so far as conferred by federal law. Parliament has enacted the
Syariah Courts (Criminal Jurisdiction) Act 1965 which confers a limited criminal
jurisdiction upon the Syariah courts. By virtue of this act, the punishments that
can be imposed by the Syariah Court for criminal offences are as below:

(a) Imprisonment not more than three years;

(b) Fine not more than RM5,000;

(c) Whipping not more than six strokes; or

(d) The combination of all those punishments.

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Another important provision relating to Syariah court is Article 121 (1A) of the
Federal Constitution. This article provides that the High Courts and courts
subordinate to it shall have no jurisdiction in any matter which is in the jurisdiction
of Syariah court. Thus, civil courts cannot interfere in matters related to Islamic
law.

EXERCISE 1.1

Advise which court has the jurisdiction

Jason was involved in an accident and would like to claim for special and general damages amounti

Daniel is charged under Section 302 of the Penal Code for murdering his girlfriend, an offence punis

Leman and Joyah were caught for

Briefly explain whether a state has an exclusive power to enact legislation concerning Islamic law

 According to common law, law can be classified into three broad divisions.
The divisions are public law, international law and private law.

 The most important source of law in Malaysia is the written law which
consists of the Federal Constitution, State Constitution, legislation and
subsidiary legislation.

 Federal Constitution is the supreme law of the land. Any law inconsistent
with the Federal Constitution may be challenged in court.

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 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM ◀ 41

 Legislation is the law enacted by Parliament and the State Legislative

Assemblies under the powers conferred on them by the constitution.
Parliament may make laws with respect to any of the matters enumerated
under the Federal List or Concurrent List in the Ninth Schedule. The laws are
called Acts. Whilst the legislature of a State may make laws with respect to
any of the matters enumerated in the State Lists or Concurrent List, the laws
are called Enactments except in Sarawak where the laws known as
ordinances.

 Subsidiary legislation refers to law made by persons or bodies under powers

conferred on them by Acts of Parliament or State Assemblies, for example, rule,
regulation, bye-law and order.

 Another source of law in Malaysia is unwritten law. It comprises English law,

judicial decisions and customs.

 Islamic law is recognised as one of the sources of the Malaysian law but it is
applicable only to Muslims. It is also administered by a separate system of
Syariah courts (Islamic courts) at state levels and in the Federal Territories of
Kuala Lumpur and Labuan. The Federal Constitution Ninth Schedule, List II
only enumerates personal and family law of persons professing Islam as a
state matter, thus placing them within the jurisdiction of the Syariah courts.

 Malaysia adopts the principle of separation of powers and has there three
organs of government namely, executive, legislature and judiciary.

 The hierarchy of courts in Malaysia is composed of two segments, one, the

Superior Courts and the other Subordinate (inferior) Courts. There are three
levels in the organisation of the Superior Courts – Federal Court, Court of
Appeal and the two High Courts. The Subordinate Courts, established by the
Subordinate Courts Act 1948, comprise the Session Court and MagistrateÊs
Court. In Peninsular Malaysia, the PenghuluÊs Court is an inferior court,
with very limited jurisdiction and importance.

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42 ▶ TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM

Conference of Rulers Judiciary

Court Legislation
Custom Legislature
Executive Subsidiary Legislation
Federal Constitution Syariah Law
Judicial precedent

Lee, M. P. (2005). General principle of Malaysian law (5th ed.). Shah Alam,
Malaysia: Penerbit Fajar Bakti.

Parmer, J. N. (1960). Colonial labour policy and administration: A history of

labor in the rubber plantation industry in Malaya, c 1910–1941. New
York, NY:
J. J. Augustin Incorporated Publisher.

Rau, & Kumar. (2005). General principles of the Malaysian legal system. Petaling
Jaya, Malaysia: International Law Book Services.

Sharifah Suhana Syed Ahmad. (2007). Malaysian legal system (2nd ed.). Kuala
Lumpur, Malaysia: Malayan Law Journal Sdn. Bhd.

Wan Arfah Hamzah. (2009). A first look at the Malaysian legal system. Shah Alam,
Malaysia: Oxford Fajar Sdn. Bhd.

Wu, M. A. (2003). HicklingÊs Malaysian public law. Petaling Jaya, Malaysia:

Pearson Malaysia.

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 To pi ▶ Introduction
to Contract
2 Law
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Identify laws and Acts which govern the formation of a contract in Malaysia;
Explain the definition of a contract;
Discuss the basic elements in the formation of a contract; and
Analyse the legal provisions regarding each element in the formation of a contract.

▶ INTRODUCTION
In this topic, you will be introduced to the laws which govern the formation of a
contract in Malaysia. You should understand the definition of a contract and each
basic element in the formation of a contract, which is made up of the offer,
acceptance, consideration, capacity, intention and certainty. You will not only
find Malaysian Acts and cases applied in the discussions, but also those from
England, India and Singapore. These facts are necessary to support your answers
during the examination. With a clear understanding of all the points above, you
should be able to complete all the exercises given in this topic.

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44 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

2.1 INTRODUCTION, DEFINITION AND BASIC

ELEMENTS OF A CONTRACT
In Malaysia, the Contracts Act 1950 (hereafter referred to as CA 1950) governs the
formation of a contract. The Sale of Goods Act 1957 governs contracts for the sale
of goods, whereas hire-purchase contracts are governed by the Hire-Purchase Act
1967. Apart from these Acts, students will also study English cases and statutes
which are accepted as authority based on the provisions of Sections 3 and 5 of the
Civil Laws Act 1956.

However, it must be noted that these English laws are only adopted as
persuasive authority and does not bind the decisions of the Malaysian courts.
Furthermore, the application of English laws shall only be made if there is a
lacuna in the local laws and insofar as it suits the circumstances and situation
prevailing in Malaysia (as far as it does not contradict the local circumstances).
For further understanding, you need to refer to Sections 3 and 5 of the Civil Laws
Act 1956.

Besides English Law, Indian cases will also be referred to in certain topics.
In certain cases, the Malaysian Courts referred to the Indian Contracts Act as
the Malaysian CA 1950 was taken from the Indian CA 1950. Thus, there are
many similarities in the provisions of both the Indian and our Contracts Act of
1950. In interpreting the provisions of the CA 1950, the Malaysian Courts referred
to Indian cases.

2.1.1 Definition of a Contract

You might think that it is hard to form a contract due to many elements that must
be complied with, or that it can only be made formally, and that a person must
sign it in front of a lawyer or a witness.

Actually, a person goes around with a binding contract almost daily without her
or him even realising it. For example, when you go to a shop to buy something,
you make a contract with the shopkeeper, or when you board a bus or park your
car at the parking lot, you make a contract with the bus company or the car park
operator.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 45

The definition of „contract‰ in the CA 1950 as seen below may help you
understand the term better.

Definition
Section 2(h): „an agreement enforceable by law is a contract‰.

You need to ensure that any agreement made is valid for it to be enforceable in
law as a binding contract. If any agreement made is not enforceable, the parties
involved will not obtain any redress from the court for any damages suffered.
This is based on Section 2(g) which states that „an agreement not enforceable by
law is said to be void.‰

Which agreement is a contract?

Definition
You have to refer to Section 10(1) which states that „all agreements are contracts if they were m

Section 10(1) clearly provides the elements where an agreement becomes an

enforceable contract in law.

SELF-CHECK 2.1

You must have heard of the word „contract‰ in your daily life. What is
„contract‰ under the law?

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46 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

2.1.2 Basic Elements in the Formation of a Contract

Table 2.1 shows the basic elements needed for the formation of a contract. The
elements shown in Table 2.1 are necessary for a valid and enforceable contract
under the law. We will study further each element in detail.

Table 2.1: Basic Elements in the Formation of a Contract

Element Explanation

Offer When a person signifies his willingness to enter into a contract with
another person.

Acceptance When a person to whom an offer has been made, accepts the offer
made.

Consideration A price that needs to be paid for the promise made.

Capacity Each contracting party must have the capacity to enter into a contract.
Such person must have reached the age of majority according to the
Age of Majority Act 1971 and be of sound mind at the time when the
contract is made.

Intention Each party which enters into a contract must have the intention to
create legal relations – that they are to be bound by the obligations
under the contract.

Free consent A person is deemed not to freely consent to enter into a contract if he
is influenced by coercion, undue influence, fraud, misrepresentation
and mistake when entering into the contract. These will be discussed
in detail in Topic 3, that is, voidable contracts.

Certainty A contract must contain conditions which are clear in meaning and not
vague.

Valid object A contract made must be for matters which are not against the law.
This will also be discussed in detail in Topic 3.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 47

2.2 DEFINITION OF AN OFFER

Before you continue reading, think of this question: You are talking with your
office colleagues and you say that you intend to sell your car, and a colleague states
his willingness to buy the said car. Is your statement a contractual offer or merely
a casual chat?

The term „offer‰ is also referred to as proposal. It is defined under Section 2(a) CA
1950 as:

„When one person signifies to another his willingness to do or to abstain from doing anything

There is no need to memorise the entire words in the definition; you only have to
know the meaning of the section. It defines that an offer can only exist when an
offeror or promiser, by his act or words, states his willingness to be bound by the
contract as soon as the other person to whom he made the proposal accepts it.

Example: Ahmad told Bakar that he is willing to sell his computer to Bakar for
RM2,000. In this situation, Ahmad has made an offer to Bakar.

2.2.1 Whom Can an Offer Be Made to?

An offer can be made to:

(a) An Individual
As in the example of Ahmad and Bakar where Ahmad made the proposal
only to Bakar.

(b) A Class of Persons

Example: A lecturer, Puan Aminah, made an offer to sell her lecture notes
to her students. The class of persons here is Puan AminahÊs students.

(c) The Public at Large

One has to differentiate between an offer made to the public at large and an
invitation to treat. An offer made to the public at large can be accepted by
anyone as long as he or she performs the conditions stated in the said offer.
As soon as someone fulfilled the said conditions, the offeror can no longer
withdraw from the contract.

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48 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

Example: Ben advertised in the newspaper offering a reward to anyone

who finds and returns his wallet. In this case, the offer was made to the
world at large, and anyone who finds his wallet and returns it to him is
considered as making an acceptance to the said offer. Ben is therefore
bound to his promise to give a reward.

Do try to distinguish the example shown in (c) from the following scenario. Bob
advertised in the newspaper to find a skilled worker to work as a sales manager
in his company. In this context, Bob does not intend to be bound with each
application received for the said job, even if each applicant has fulfilled the
criteria listed by him. Bob is only said to make an invitation to treat as the real
offer comes from the applicants.

Any statement made for the purpose of giving information cannot be deemed as
an offer. This is clarified in the case of Harvey v. Facey [1893].

In this case, A telegraphed B „Will you sell us a Bumper Hall Pen? Telegraph
lowest cash price‰. B replied by telegram „Lowest price for a Bumper Hall Pen
is
£900. A telegraphed B ‰We agree to buy a Bumper Hall Pen for the price of £900
as you wish‰. A claimed that a contract existed because there was an offer and
an acceptance. But the Court decided that in the telegram, B only supplied
information and did not make an offer. However, A, in his second telegraph
made the offer. Therefore, it did not constitute a contract.

ACTIVITY 2.1

You have learnt the difference between an offer and an invitation to treat. Just look at body slimmin

2.2.2 Invitation to Treat

As discussed earlier, it is sometimes difficult to determine whether an offer has
been made or it is an invitation to treat. In several circumstances, the Courts have
determined situations where it is said to be an invitation to treat and not an offer.
Please refer to Figure 2.1.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 49

Figure 2.1: Situations where there are intention for an invitation to treat

(a) Advertisements in Newspapers Directed to the Public

In general, an advertisement is an invitation to treat. An advertisement of a
job vacancy in a newspaper is an invitation to treat while the application sent,
or a response to the said advertisement, is actually an offer. It constitutes a
binding contract once the application is accepted.

In the case of Coelho v. Public Service Commission (1964), a post of an

assistant passport officer was advertised in the Malay Mail. Coelho applied
for the post and was accepted. Later, while still a probationary officer, he
was dismissed from the position. Coelho disputed the dismissal and
claimed that this was invalid.

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50 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

The Court decided that there was a binding contract when the offer made,
by his application to fill up the vacancy, was accepted by the Public Service
Commission since it was not stated that Coelho would be on probation
when he signed for the job. Therefore, the dismissal was not valid and in
breach of an existing contract.

There was also an invitation to treat in the case of Majumder v. Attorney

General of Sarawak (1967). The Court ruled that an advertisement in a
newspaper for the post of a medical officer was an invitation to treat.

In the case of Partridge v. Crittenden (1968), an advertisement which stated

„bramble finch cocks and hens for sale‰ was also an invitation to treat.

However, it must be noted that there is an exception to the general rule that
an advertisement is an invitation to treat. There are situations where an
advertisement made will still be categorised as an offer and not an
invitation to treat. The paragraph below presents a case related to this
situation.

Let us look at the decision made by the Court in the case of Carlill v. Carbolic
Smoke Ball Co. (1893). The defendant, Carbolic Smoke Ball Co. issued an
advertisement in which they offered to pay £100 to any person who
succumbed to influenza after having used one of their smoke balls in a
specified manner and for a specified period. The plaintiff, Mrs. Carlill,
bought and used the smoke balls as prescribed but still succumbed to
influenza. The plaintiff sued the company for the promised £100. The Court
of Appeal held that the plaintiff was entitled to the £100 because she had
made an acceptance to the defendantÊs offer to the entire world by
performing all the conditions stated in the advertisement.

It should be noted that, in this case, there was an intention by the defendant
to be bound by the contract upon acceptance by their act of depositing £100
with their bankers to be paid to any party making a claim. Indirectly, this
act indicates their intention to be bound by the contract.

As a general rule, an advertisement for appointments or tender invitations

made to the public is deemed to be an invitation to treat because it is still at
the negotiation and selection stage. On the other hand, it is deemed to be an
offer if the advertisement offers a reward to any person who finds and
returns an item, or an advertisement which shows an intention on the part
of the advertiser to be bound by the contract if what is specified in the
advertisement is fulfilled as in the case of Carlill.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 51

(b) Display of Goods in Self-service Shops

This refers to sales made in supermarkets where the shopowners only
display goods and invite customers to make an offer. A customer who
chooses the goods that he wants to buy and puts them into the basket is
said to make an offer. There is an acceptance when the cashier accepts the
money as payment for the said goods at the counter, and this therefore
constitutes a contract.

The case in point is Pharmaceutical Society of Great Britain v. Boots Cash

Chemists Ltd (1953). The defendant was charged under the Drugs and
Poison Act 1933 which states that it is an offence to sell a scheduled poison
except with the supervision of a registered chemist. The decision made was
based on whether there was a sale made in a self-service shop where a
buyer or customer selected items displayed on the shelves and put them in
the basket. Payment would be made to a cashier on duty who is stationed at
the exit aisle. For every sale of drug, a pharmacist would supervise
and if necessary, authorise to stop the sale. If there is a sale when goods are
put in the basket, the shopowner has breached the provisions of the Act.
Otherwise, if there is no sale, the shopowner will be free of such charges.

The Court held that the display of goods is deemed as only an invitation to
treat. An offer is said to be made when a customer puts the item into the
basket and the contract is made at the cash counter. Therefore, the
shopowner did not make any sale which is against the law.

(c) Auctions
In a public auction, the auctioneer invites the public to make an offer, that is
to offer the highest bid. When those who attend make an offer, it is up to
the auctioneer whether to accept it or not. An acceptance is considered
made at the fall of the hammer. Section 10 of the Auction Sales Enactment
[Chap. 81 of the Federated Malay State] states that:

An example is the decision in Spencer v. Harding (1870) where the court held
„A sale by public auction shall be complete when the auctioneer
the same statement as that in Section 10 of the Auction Sales Enactment .
announces its completion by the fall of the hammer⁄.‰

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52 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

2.2.3 Communication of Offer

Example: A proposed to reward B if B does something, but B did it without
knowing AÊs proposal, B cannot be said to have accepted AÊs offer as B had no
knowledge of the offer.

In the case of Fitch v. Snedaker (1868), the Court held that the reward cannot be
claimed by the person if he is not aware of the reward for such an act before he
did the said act because there is no consensus of mind between the proposer and
the promisee. Communication of a proposal is thus crucial. Section 4(1) of the CA
1950 provides:

This means that a communication of a proposal is only complete when a proposal

The communication of a proposal is complete when it comes to the
comes to the knowledge of the said promisee. If the communication of a proposal
knowledge of the person to whom it is made.
is made by telephone, telex, faxsimile or in person, the communication of the
proposal is said to be completed when the proposal is communicated to the
promisee. The communication of the proposal therefore is only completed when
the promisee receives the said offer letter.

Example: Ah Chong proposed to sell his car to Bala for RM15,000 by a letter
posted on 1 January 2012. Bala only received the offer letter on 10 January 2012.
In this case, the communication of the proposal is only completed on 10 January
2012, that is, when Bala received the letter.

A proposal will only be effective if it is communicated. This means that the

intended promisee should have knowledge of the existence of the said proposal.
This is because before an acceptance can occur, a proposal must be
communicated.

Illustration (a) of Section 4 of the CA 1950 can be referred to for a further

understanding of the position of a communication of proposal by post. A
proposed, by letter, to sell a house to B at a certain price. The communication of
the proposal is complete when B receives the letter.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 53

2.2.4 Revocation of an Offer

If a proposer wishes to revoke his proposal, he has to satisfy Section 5(1) of the
CA 1950, which provides:

When is a communication of acceptance complete against the proposer? If it is an

„A proposal may be revoked at any time before the communication of
acceptance under the instantaneous principle, that is by telephone, telex, orally or
its acceptance is complete as against the proposer, but not afterwards‰.
by facsimile, an acceptance is deemed communicated as soon as it reaches the
proposer. Therefore, a proposal can be revoked at any time before the promisee
accepts.

This differs for an acceptance by post. Section 4(2) states that communication of
an acceptance is complete against both parties (the proposer and the promisee) at
different times. Do refer to Section 4(2) of the CA 1950.

If you refer to Section 4(2)(a) of the CA 1950, you will find that a proposer binds
himself to the contract as soon as the promisee puts the letter of acceptance into
the post box even if the proposer does not know of the acceptance. The proposer
therefore cannot revoke his proposal because the letter of acceptance is already in
the post box.

Example: A proposed to B by a letter dated 7 January 2014 to sell his farm for
RM55,000. A later wished to revoke his proposal and sent a revocation letter
dated 10 January 2014. B received the offer letter on 12 January. On 13 January, B
posted an acceptance letter to A. B received the revocation letter on 15 January
2014. A later refused to carry on with the contract and informed B he had revoked
the offer.

The issue is whether a contract has already been formed between A and B. If a
contract has been formed, A has to carry on with the contract and if he refuses he
could be liable for breach of contract.

In the above example, a proposal was communicated on 12 January 2014. An

acceptance was made on 13 January 2014 and on the said date, according to
Section 4(2)(a), a communication of acceptance is complete against A. There is a
contract which binds A (the proposer) on 13 of January 2014. Based on Section
5(1), A can withdraw his proposal at any time before 13 of January 2014. Here, A
failed to act fast to withdraw his proposal because the revocation of the said offer
only took place on 15 January 2014; that is, the date when B received the
revocation letter.

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54 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

Thus, there is a contract and it binds A. A must continue with the contract.
Section 6 of the CA 1950 provides four ways in which a revocation of an offer is
made. We will discuss each of them now.

(a) By the communication of notice of revocation by the proposer to the other

party
What does this paragraph mean?

Definition
It means, if a proposer wishes to withdraw his proposal, he must communicate his revocation

When is the communication of revocation complete and effective? If the

proposer communicates by post, the communication of revocation of a
proposal is effective when it fulfils all the conditions stipulated in Section
4(3) of the CA 1950.

Section 4(3) refers to the two different parties involved. Paragraph (a) refers
Provision
to the proposer while paragraph (b) refers to the promisee. In order to
Section 4(3) provides that communication of a revocation is complete:
completely revoke a proposal, both paragraph (a) and (b) of Section 4(3) must
be satisfied. Refer to Illustration (c) of Section 4 of the CA 1950 for a clearer
(a) As against the person who makes it, when it is put into a course
picture of
of this section. to the person to whom it is made, so as to be out
transmission
of the power of the person who makes it; and

(b) As against the person to whom it is made, when it comes to his

knowledge.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 55

You should be able to distinguish between the communication of

revocation and communication of acceptance. Byrne v. Van Tienhoven
(1880) is an important case for reference on communication of revocation of
a proposal. The defendant made a proposal by letter to sell 1000 boxes of
tinplates to the plaintiff on 1 October. However, on 8 October, the
defendant posted a revocation letter. The plaintiff received the offer letter
on 11 October and telegraphed their acceptance.

The plaintiff only received defendantÊs letter of revocation of the proposal on

20 October.

The issues which the court must decide were:

(i) Was the revocation of the proposal effective even though it was not
communicated?

(ii) Was the posting of the said letter of revocation of the proposal a
communication of revocation against the promisee (the plaintiff in this
case)?

The Court held that the revocation of the proposal was inoperative as
against the plaintiff until it came to his knowledge. The posting of the letter
of revocation by the defendant was not communication. The acceptance
made by the plaintiff on 11 October could not be affected by the fact that the
defendantÊs letter of revocation was already on its way. There was a valid
contract on 11 October. Revocation of the proposal was only effective on 20
October, that is, the day when the plaintiff received the revocation letter.
The defendant therefore was bound by the contract.

The effect of Section 4(2)(a) and (b) of the CA 1950 on communication of

acceptance and communication of revocation respectively is clearly shown
in Byrne v. Van Tienhoven.

The case of Henthorn v. Fraser (1892) further shows the position of the
principle regarding revocation of a proposal. Lord Herschell held that
„communication of an acceptance takes place once such letter is posted is
not applicable to communication of revocation of a proposal.
Communication of revocation of a proposal is similar to communication of
a proposal where it is not effective unless brought to the mind of the
promisee.‰

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56 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

(b) By the lapse of the time prescribed in the proposal for its acceptance, or, if no
time is prescribed, by the lapse of a reasonable time, without communication
of the acceptance

Definition
This provision means that if a proposal has stated a time for an acceptance and no acceptance

Example: Pak Ali proposed to sell his farm to Pak Abu for RM10,000. Pak
Ali told Pak Abu that the offer is open only for two weeks. If Pak Abu failed
to accept within two weeks, the proposal lapses.

What if there is no fixed time for acceptance of the proposal? When will
such a proposal lapse? In such cases, a proposal lapses after a reasonable
time. What is reasonable time depends on the discretion of the court based
on the facts of the case and the nature of the subject-matter of the said
contract.

This can be seen from the case of Ramsgate Victoria Hotel Co v. Montefiore
(1866). The defendant applied for shares in the plaintiffÊs company by a letter
dated 8 June. He received no further news until 23 November by a letter
from the plaintiff which informed him that the shares had been alloted to
him. The defendant refused to accept them.

The court held that the defendantÊs proposal had lapsed because of the
plaintiffÊs failure to accept within a reasonable time. So, the defendant was
not bound to accept the shares.

(c) By the failure of the acceptor to fulfil a condition precedent to acceptance

If a proposer specified the conditions of acceptance, the promisee must
therefore fulfil it absolutely.

Definition
If a promisee accepts a proposal by introducing new terms or refuses to accept the terms speci

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 57

The case in point is Hyde v. Wrench (1840). A proposed to sell to B his

farm for £1,000. B agreed to buy it for £950. A refused to sell at the said
price. B then agreed to buy it at its original price, which is £1,000. A
refused to sell the said farm to B even though B had agreed to the original
proposal.

The Court held that B had refused AÊs proposal and had made a counter-
offer instead. There was no contract because the counter-offer caused the
original offer to lapse. A was entitled not to sell his farm to B.

SELF-CHECK 2.2

What do you think is the effect on the original contract, if an acceptor proposes new conditi

(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
A proposal will lapse if the proposer dies or is mentally disordered and the
death or the mental disorder is known by the promisee before he makes an
acceptance.

A contract is valid and enforceable if a promisee, until he makes an

acceptance, is ignorant of the proposerÊs death or mental disorder. This
was decided in Bradbury v. Morgan (1862).

A proposal will also lapse if a promisee has died and the executor or the
estate administrator cannot accept proposals on behalf of the deceasedÊs
estate or inheritance. This was decided in Re Chesire Banking Co. (1886).

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58 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

EXERCISE 2.1

1. By a letter dated 1 July 2014, Ali proposed to sell Adam his farm
for RM15,000. In it, Ali stated that the proposal was open until
1 August 2014. On 10 July 2014, Adam received the proposal
letter. He wrote back to state his acceptance on 20 July. On 15 July,
Ali posted a letter revoking the proposal to Adam. The letter of
revocation of the proposal only reached Adam on 25 July 2014.
Adam demanded Ali to perform his promise but Ali claimed that
he was not bound by the proposal as he had revoked it before
1 August 2014. Advise both parties.

2. This Act provides the provisions relating to the application of

English law in Malaysia.

Which Act does the above statement refer to?

A. The Contract Act 1950

B. The Civil Law Act 1956
C. The English Law Act 1956
D. The Companies Act 1965

2.3 ACCEPTANCE
An acceptance is a final and unqualified expression of assent to the terms of an
offer. Now let us look at acceptance in detail.

2.3.1 Definition of Acceptance

Acceptance is defined in Section 2(b) of the CA 1950 as:

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 59

2.3.2 Terms of an Acceptance

There are two conditions to an acceptance. These are stated in Section 7 of the
CA 1950. Do refer to Section 7 of the CA 1950 for further discussion of the
said provision.

(a) Absolute and Unqualified

If the proposer stipulated certain terms or rules in his proposal, which must
be complied with by the promisee, the acceptance by promisee must be
absolute.

It is not an acceptance if the promisee only agrees to a part of the terms

while rejecting the rest. An acceptance will only constitute a contract if all
the terms in the proposal are accepted in absolute. A proposal which is not
accepted in absolute will become a counter-offer as decided in Hyde v.
Wrench (1840). The counter-offer will eliminate the original proposal and
the promisee is not able to reenact it.

(b) Be Expressed in Some Usual and Reasonable Manner

If a proposal dictates a certain manner on how an acceptance should be
made, the acceptance must be done in that stated manner.

Example: Ali proposed to sell his wristwatch to Abu for RM50. In his
proposal Ali stipulated that Abu must pay in cash if he is to accept the
proposal. If Abu had paid by way of a postal order, Ali can assert within a
reasonable time after the communication of acceptance was made, that
payment can only be made in cash. If Ali does not assert as such within a
reasonable time and still accepts the postal order, Ali is then deemed to
have accepted the manner in which Abu had made his acceptance.

2.3.3 Form of Acceptance

Logically, one would think that an act of silence does not amount to acceptance
since an acceptance must be communicated. In Fraser v. Everett (1889), Wood,
Acting CJ, held that there is no rule of law like the saying „silence gives consent
‰.

In Felthouse v. Bindley (1862), Felthouse wrote to his nephew offering to buy a

horse for £30 15s. He added „If I hear no more from him, I consider the horse
mine at £30 15s‰. The nephew did not reply. The nephew however told Bindley
(an auctioneer) to keep the horse out of the sale of his farming stocks because he
wanted to set it aside for Felthouse. The auctioneer sold it by mistake. Felthouse
sued Bindley.

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60 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

The Court held that there was no acceptance by the nephew as he had kept silent.
Plaintiff therefore had no right to claim the horse as there was no contract.

Generally, silence does not amount to an acceptance even if the promisee intends
to accept the proposal. However, silence may amount to an acceptance if the
promisee gains some benefit out of the proposal when he has ample time to reject
it.

Example: A proposer sent food to the promisee, prescribing that payment for the
food needed to be paid if the promisee accepts the proposal by consuming the
said food. In this situation the act of consuming the food amounted to an
acceptance even if the promisee kept silent (not communicating his acceptance to
the proposer). This principle was held in Weatherby v. Banham (1832).

2.3.4 Time Limit for an Acceptance

Definition
If a proposal prescribes a time limit for an acceptance to be made, such a proposal must be accepted

Reasonable time was discussed under the topic of „offer‰ earlier. In Ramsgate
Victoria Hotel Co. v. Montefiore (1866), the defendant applied for shares in the
plaintiffÊs company on 8 June. He received no further news until 23 November.
When he was informed that the shares have been alloted to him the defendant
refused to accept them.

The Court held that the plaintiff had allowed too long a time to lapse before
accepting defendantÊs offer. Therefore, the defendant was not liable to accept the
shares.

It is clearly shown that the delay in making an acceptance in cases which involve
shares will deny the existence of a contract, being subject to price fluctuations.

The principle of „reasonable time‰ is also applicable to contracts involving

perishable goods.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 61

ACTIVITY 2.2

Haneef was given 30 days to accept KennyÊs proposal for a contract to

buy a house. Haneef made his acceptance on the 32nd day. What is the effect on the con

2.3.5 Communication of Acceptance

Whether a communication of acceptance is complete and constitutes a contract
depends on the principle of how the communication was made. According to the
general principle, if communication of acceptance is made by instantaneous
conversation such as face to face, telephone, telex or facsimile, a contract is
formed when communication of acceptance comes to the knowledge of the
proposer.

Example: A made a proposal to B orally. When B conveys his acceptance to A the

communication of acceptance is complete and therefore constitutes a contract.
The contract is binding on both parties at the same time.

The following case discusses the position of communication of acceptance by

telex. The issue that arose in court was when the communication of acceptance
was complete. The case of Entores Ltd v. Miles Far East Corporation (1955)
explained the general principle regarding communication of acceptance. The
defendant, in Amsterdam, sent an acceptance by telex. The plaintiff (proposer)
received the telex in London. When a dispute on the contract arose the plaintiff
brought it to the English Court to get a writ against the defendant. Therefore, the
English Court had to first decide whether there was a contract made in London.

The Court held that there was a contract made in London, and the English Court
therefore had the jurisdiction to hear the case. Communication of acceptance was
deemed to be instantaneous, and was formed the moment the plaintiff received
the defendantÊs telex of acceptance in London.

It must be noted that the above description is only applicable for instantaneous
means of communication. What is the principle for non-instantaneous means of
communication (where there is a gap of time between acceptance made by the
acceptor and communicated to the proposer)? Refer to Section 4(2) which is the
exception to the general rule and illustration (b) of Section 4 for a clearer picture.

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The contract binds both parties, that is the proposer and the promisee at two
different times. Illustration (b) states that the contract binds against A the
moment the promisee posted the letter of acceptance. Whether the letter arrives
to the proposer or not is not a relevant issue.

Ignatius v. Bell (1913) explains this situation. The defendant, Bell, gave an
option to the plaintiff to purchase a piece of land on the condition that the option
must be exercised on or before 20 August 1912. Both parties had contemplated
the use of the post as means of communication. The plaintiff sent a registered
letter on 16 August 1912. Because he was not at home, the defendant only
received it on the evening of 25 August.

The Court held that the contract bound the defendant on 16 August 1912, that is,
when the plaintiff posted the letter of acceptance. The said option was executed
within the specified time.

The contract binds the promisee the moment the posted letter of acceptance is
received by the proposer. It is clearly provided for in the second part of
Illustration
(b) of Section 4 of the CA 1950.

What is the position of the proposer and promisee if the said letter does not
arrive or is lost in transmission? The law is of the position that the proposer is
bound by the contract while the promisee is free from the contract until the said
letter is found and sent to the proposer. The court in Byrne v. Van Tienhoven
(1880) held that if a proposal and acceptance are made by means of transmission
by post, a contract is formed the moment the letter of acceptance was posted,
even if it does not arrive at its destination. As a precaution, a proposer can
include a term in the proposal whereby an acceptance is deemed complete at the
time the proposer receives the acceptance letter.

2.3.6 Revocation of Acceptance

A promisee can revoke an acceptance if the revocation is done within the permitted
time. Refer to Section 5(2) of the CA 1950.

Communication of acceptance is complete when the communication of

acceptance comes to the knowledge of the proposer or offeror (refer to Section
4(2)(b) of the CA 1950).

The promisee must communicate his revocation of acceptance to the proposer

before the letter of acceptance reaches the proposer. Revocation of acceptance can
happen in cases where transmission by the use of post is used for acceptance. To

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revoke his acceptance, a promisee usually uses a faster means of communication;

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 63

by telephoning, sending a facsimile or other means. A promisee cannot revoke

his acceptance where an instantaneous means of acceptance has been used as it
has already been communicated to the proposer. Revoking it has the effect of
defaulting the contract because in cases of instantaneous communication, a
contract exists at the same time for both parties.

Example: D made an offer to E through a letter dated 1 January. D gave E two

weeks to accept the offer. E posted a letter of acceptance on 10 January. D
received the letter on 20 January. E may revoke his acceptance at any time before
20 January. E may use a faster means of communication for the purpose of
revocation.

2.3.7 Communication of Revocation of Acceptance

Revocation of acceptance must be communicated to the proposer. The same rule
applies as in the communication of revocation of a proposal. Both parties to a
contract are bound to the revocation at two different times. Refer to Section 4(3)
to determine when communication of revocation is complete.

It must be noted that Section 4(2) and Section 4(3) of the CA 1950 may appear to
be similar. It differs however as to when different parties to the contract are
bound since it is subject to when the letter is posted and when the letter reaches
the destination.

When the letter is posted, communication of revocation is complete against the

party who made the revocation (promisee) whilst when the letter arrives,
communication is complete against the party who received the revocation
(proposer).

Example: Abu accepts BakarÊs offer by a letter dated 8 January. Abu revoked his
acceptance by telegram on 10 January. Communication of revocation is complete
against Abu on 10 January while against Bakar it is complete when the telegram
reaches him.

Although Byrne v. Van Tienhoven (1880) is more relevant to cases on

communication of revocation of a proposal, its principle is also applicable for
communication of revocation of an acceptance. The court in this case held that a
notice of revocation will only be effective when it comes to the proposerÊs
knowledge. If the revocation is not communicated to the proposer before there
was a contract, it is therefore not complete and will not revoke an existing
contract.

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In his attempts to revoke his acceptance, a promisee must therefore ensure that
Section 4(3)(a) and (b) of the CA 1950 must be complied with before a contract
can bind him (Section 4(2)(b) is complied with, that is, the letter of acceptance
reaches the proposer).

EXERCISE 2.2

1. Mee wrote to Zul offering to sell his computer for RM2,000.

Zul accepted the offer through a letter posted on 5 December 2014.
Zul, however changed his mind and wishes to revoke the
acceptance that he had made. Zul is worried that he will not be
able to revoke the acceptance by posting it. Zul therefore
telephoned Mee on 15 December 2014 at 10am to revoke his
acceptance. On 15 December at 11am, Mee received the revocation
letter which Zul posted. Mee is unhappy and wishes to sue Zul
for breach of contract. Advise both parties.

2. Nani told Nina that she would like to sell her new Proton Saga car
to Nina for RM25,000. Nina immediately takes RM20,000 and
gives the money to Nani.

What is the consequence of the above scenario?

A. A contract was formed when Nina gives RM20,000 to Nani.

B. Nani has the right to refuse before she takes the cash from
Nina.
C. There is no contract between Nani and Nina as the
consideration is too low.
D. There is no contract between Nani and Nina as Nina did not
comply with the term of offer made by Nani.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 65

2.4 CONSIDERATION
Consideration is an important element for the formation of a valid and binding
contract. It is defined in Section 2(d) of the CA 1950.

„When, at the desire of the promisor, the promisee or any other person has done or abstained

The definition clearly shows that consideration must exist in each and every
contract and is of value according to the offerorÊs wishes. It may consist of a
conduct, or a price to be paid in return for the promise made by, or the conduct
of, the promisor. The conduct need not necessarily to be of a positive nature. In
fact it can also be in the form of an abstinence from doing something.

The court in Curie v. Misa (1875) held that a valuable consideration in the sense
of the law may consist either in some right, interest, profit or benefit accruing to
one party, or some forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other.

Example: Jay sold his pen to Bob for RM10. The consideration in this case comes
in the form of the RM10 Bob paid to Jay. The consideration is in monetary value.

Example: Jay promises to present a gift to Bob if Bob wins a racing competition.
In this example, the consideration is BobÊs conduct, which is winning the race.

Both forms of consideration are valuable in law.

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2.4.1 Types of Consideration

There are three types of consideration, as shown in Figure2.2.

Figure 2.2: Types of consideration

(a) Executory Consideration

Definition
It is also known as a promise in return for a counter-promise or consideration in the future fro

Example: A promised B to renovate BÊs office and B promised to pay as

soon as A finished the renovation works. BÊs promise (to pay) is the
consideration to AÊs promise (to do the renovation).

(b) Executed Consideration

Definition
Such a consideration exists when one party had done his or her part according to the contract.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 67

Example: Ally promised to issue a reward of RM200 to anyone who finds

and returns his lost wallet. Muthu found and returned it to Ally. MuthuÊs
act is an executed consideration and thus constitutes a contract which binds
Ally. Ally must give the reward to Muthu.

(c) Past Consideration

This refers to a subsequent promise made in response to past acts or
previous considerations made.

Example: Uma found AminÊs identity card and returned it to him. Amin then
promised to reward her RM50. AminÊs promise is an act of responding to
UmaÊs previous act and is termed as past consideration.

2.4.2 Consideration According to the Contracts

Act 1950 and English Law
(a) Third Party
From the principles laid down in the Contracts Act 1950, it is clear that in
Malaysia, consideration may come from another person, a third party, and
not necessarily from the promisee.

Example: Chin promised to pay RM1,000 to Bala if Lai sends the promised
goods at the promised time. If Lai sends the goods at the fixed time but
Chin later refuses to pay Bala, Bala then has the right to sue Chin even if he
has not furnished any consideration to ChinÊs promise. The consideration
in this case comes from a third party which is Lai. This principle is
according to the CA 1950 and it differs from English law.

An Indian case, Venkata Chirinaya v. VerikataraÊmaÊya (1881) is based on a

section similar to Section 2(d) of CA 1950. A sister agreed to pay all her
brothers an annuity of 653 rupees. They did not furnish any consideration
for such promise. On the same day, however, their mother had given the
sister a few pieces of land with a condition that she must pay her brothers
the promised annuity. Her brothers sued her when she failed to do so. The
court held that she was under a duty to pay. A valid consideration came
from their mother and not from the promisee (her brothers).

Distinguish this case with the position under English law. It differs as English
law does not recognise the existence of a contract if consideration comes
from a third party and not the promisee, as decided in Tweddle v. Atkinson
(1861).

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Kenneth and Alice were husband and wife. KennethÊs father and father-in-
law (Peter and David respectively) both agreed to pay certain sums of
money to Kenneth and Kenneth has the right to take legal action if they
failed to do so. The agreement was confirmed in writing after KennethÊs
and AliceÊs marriage. After Peter and DavidÊs death, Kenneth sued DavidÊs
executors for the promised money.

The court held that the action failed because Kenneth is a stranger to the
contract. He did not give any consideration to the contract between Peter
and David.

Refer to Kepong Prospecting Ltd & Ors v. Schmidt (1968). Based on

Section 2(d), the court held that consideration to a contract need not come
from a promisee. Let us recall the example involving Chin, Bala and Lai.
According to English law, Bala has no right to sue Chin because Bala did
not furnish any consideration for ChinÊs promise. The consideration came
from Lai, who delivered the goods on time.

(b) Past Consideration

Based on the words used in Section 2(d) of the CA 1950 „⁄the promisee or
any other person has done or abstained from doing⁄‰, past consideration is
accepted as a form of consideration for a valid contract in Malaysia.

Let us look at Kepong Prospecting Ltd & Ors v. Schmidt (1968), being a case
decided based on Section 2(d). Schmidt, a mining engineer, actively assisted
a person to obtain a prospecting permit in Johor. He subsequently helped to
incorporate Kepong Prospecting Ltd and was appointed as managing
director. Upon incorporation, an agreement was made between them
whereby the company agreed to pay Schmidt 1 per cent of the selling price
of all iron produced and sold. This was in consideration for his services to
the company prior to its formation, after its incorporation and for future
services.

The court held that the consideration by Schmidt after the incorporation of
the company but before the agreement was made was a valuable
consideration and could be claimed under the law. However, Schmidt
could not claim on the consideration made before incorporation. Refer to
Illustration (c) Section 26 of the CA 1950.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 69

As a general rule, English law does not recognise past consideration. This is
clearly shown in Roscorla v. Thomas (1842). The plaintiff bought a horse
from the defendant. The sale was executed. After the sale, the defendant
guaranteed that the horse was sound and free from vice. The horse was in
fact vicious.

The court held that the guarantee was a promise made on past
consideration. Past consideration will not make a promise binding.

Even though the above explains the general rule, there are cases with
exceptions to the general rule. Past consideration is still accepted in English
law as good consideration if the act or omission was done at the request of
the promisor as in Lampleigh v. Braithwait (1615).

The defendant in this case sought the plaintiffÊs help to seek a royal pardon
from the King. The plaintiff used his own money for the effort and the
defendant later promised to pay him £100. The defendant failed to pay and
the plaintiff sued for the amount.

The court held that it was past consideration, which was clearly seen from
the facts of the case. The court however agreed to the plaintiffÊs claim because
the said consideration was done at the desire of the promisor (defendant).

(c) Dispense with or Remit the Performance of Promise

Section 64 of the CA 1950 allows the promisee to dispense with or remit,
wholly or in part, the performance of a promise made to him, or to extend
the time for such performance or to accept instead of it any satisfaction
which he thinks fit. Refer to Illustration (a) of Section 64.

In this situation, the promisee released the promisor from performing the
agreed promise.

Can a promisee accept part payment as payment for the whole debt?
According to Section 64, a promisee may do so. Look at the phrase
„⁄promisee may dispense with or remit, wholly or in part, the performance
of the promise⁄‰

Refer to Illustration (b) and (c) of Section 64 of the CA 1950.

The illustrations in Section 64 clearly show that in Malaysia, part payment

is sufficient settlement for the whole debt. The case of Kerpa Singh v.
Barian Singh (1966) further explains Illustration (c). Barian Singh owed
Kerpa Singh RM8,869.94 under a judgement debt. Barian SinghÊs son wrote
to Kerpa Singh offering RM4,000 as full settlement of the debt and enclosed

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a cheque

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70 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

for that amount. Also enclosed was a condition that should Kerpa Singh
refused to accept the offer, he had to return the cheque. Kerpa SinghÊs lawyer
cashed the cheque and kept the money.

The Federal Court held that by cashing the cheque, it showed that Kerpa
Singh had agreed to the RM4,000 as a discharge of the whole debt and
therefore cannot claim the balance of RM4,869.94 from Barian SinghÊs son.

English law differs on this point, where part payment is not considered as the
settlement of the whole debt. It is thus different from the Contracts Act, as shown
in PinnelÊs (1602).

In this case, Pinnel sued Cole for payment of debt amounting to £8 10s. Cole
claimed that he had made a part payment of £5 2s and Pinnel has accepted it as
payment of the whole sum.

The Court held that payment of a lesser sum in satisfaction of a greater sum
could not be any satisfaction for the whole.

The principle laid down in PinnelÊs was accepted by the House of Lords in Foakes
v. Beer (1884). Dr Foakes owed Mrs. Beer a sum of £2,090. Mrs. Beer agreed that
she would not take any proceeding whatsoever against him if he paid £500 in
cash and the balance of £1,590 in instalments. Dr. Foakes agreed and did so. Mrs.
Beer however sued him an additional payment of £360 for interest on the debt.
When he was sued, Foakes claimed that his obligation to pay the interest was
discharged on Mrs. BeerÊs promise that she would not take any legal proceeding.

The House of Lords held that Dr. Foakes was under an obligation to pay the
interest amounting to £360.

Hence, under English law in general, part payment is not a satisfaction of the
whole debt. There are however exceptions in certain cases where the court would
apply the principle of promissory estoppel.

Definition
Promissory estoppel applies when a creditor based on his representation or conduct is stopped f

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 71

The principle of promissory estoppel is applicable in the Central London Property

Trust Ltd v. High Trees House Ltd (1947). The plaintiff leased out a block of
flats to the defendants since 1937 for 99 years at a rental rate of £2,500 a year. In
1940, due to the outbreak of war, the defendants found difficulty in letting out
the units. The plaintiff agreed to reduce the rent to £1,250 per year. In 1945, war
ended and the flats were fully occupied again. The action was brought against
the defendant in 1947 by the plaintiff claiming the original rental rate of £2,500
for the future and the last two years from 1945 when the situation returned to
normal again.

It was held that the plaintiff was entitled to the claim. However, the court went
further to state the principle that had the plaintiffs sued for the full rent between
1940 and 1945, they would be unsuccessful because they themselves had agreed
to reduce the rent. The doctrine of promissory estoppel would be applicable and
the plaintiff by their promise would be estopped from suing.

2.4.3 Performance of an Existing Duty – Is

it Consideration?
The issue is whether the promisee did something more than what he or she was
legally bound to do. If the promisor does not get more than what he should get, it
does not constitute consideration in law. This usually happens when a promisee
is merely performing a duty already imposed upon him without any promise
from the promisor.

(a) Performance of Public Duty

If a promisee is merely performing an existing obligation or legal duty, the
duty is not considered as valid consideration. In Collins v. Godefroy
(1831), the plaintiff received a subpoena to attend court to give evidence for
the defendant. The defendant promised him a sum of money if he did so.

The Court held that a person who received a subpoena to attend court is
under the duty and bound to do so. There was no consideration for the
promise as he did not do anything over and above his existing public duty.

However, if a promisee had done something over and above his legal
duties, it would be a valid consideration. In Glassbrook Brothers Ltd v.
Glamorgan County Council (1925), the police sued for a sum of £2,200
promised to them by a mining company. The promise was for the provision
of a stationary guard during a strike. The Court held that the police was
entitled to the sum for the undertaking to provide more protection that
what the police thought necessary, which is something over and above their
duties under the law.
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72 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

(b) Performance of a Duty Owed to the Promisor

The principle applied by the courts can be seen in Stilk v. Myrick (1809).
In the course of a sea voyage to and from London and the Baltic, two
seamen deserted the ship. The captain who failed to find replacements
promised the rest of the crew extra wages if they would work the ship
home to London.

The Court held that such a promise did not bind the ship captain as the
crew were already bound in contract to ensure the ship would arrive safely
to its specified destination. It was further held that such a promise would
bind if there was a new contract with better pay signed between the captain
and the remaining crew.

ACTIVITY 2.3

An organiser of a big-scale heavy-metal group concert held in X country

promised to pay the police RM15,000 if there was a riot during or after the show. A riot took

2.4.4 Adequacy of Consideration

The issue here is whether the consideration provided by the promisee is
adequate or not. Example: Ahmad sold his motorcycle to Raju for RM10. Is the
consideration sufficient? What is its effect on the formation of a valid and binding
contract? Refer to the Explanation 2 of Section 26 of the CA 1950.

The main issue is whether the agreement made by the promisor was freely given
or not. If the promisor stated that his agreement was not freely given, then the
fact that consideration was insufficient will be taken into account as proof that
consent was not freely given. Therefore the contract will be set aside. Refer to
Illustration
(g) of Section 26 of the AC 1950.

The inadequency of consideration is a fact which must be taken into account

by the court as to whether AÊs consent was freely given or not. Refer to
Illustration
(f) of Section 26 of the CA 1950.

Reference can be made to the case of Phang Swee Kin v. Beh I Hock (1964),
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an appeal to the Federal Court.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 73

The respondent agreed to transfer part of his land to the appellantÊs husband for
20,000 in Japanese currency. The agreement was made orally and no document of
transfer was signed. The appellantÊs husband died and she continued to live on
the said land. In 1963, the land was sub-divided into two and the appellant paid
RM500 to the respondent for transfer of said land which they both agreed orally.

However, the land was still under the respondentÊs name. The respondent
instructed the appellant to vacate the land and asked for the account of all
income received from the land. The appellant counter-claimed that she was
entitled to the said land. The High Court held that the oral agreement to transfer
the land between the respondent and the appellantÊs husband was void due to
inadequacy of consideration.

On appeal, the Federal Court however decided otherwise. It was held that
consideration was adequate because there was no proof which showed the
respondentÊs consent was not given freely. The appellant was entitled to the said
land as the respondent had agreed to transfer the land on payment of RM500.

You should understand from the decided cases that for consideration to be
adequate, consent must be given freely. Consideration needs to be of value in the
legal sense.

What is the position under English law? Must consideration be adequate? This
can be seen from the decision in Chappel & Co Ltd v. Nestle Co Ltd (1960). The
appellant owned the copyright in a dance tune called RockinÊ Shoes, while the
respondent was a chocolate manufacturer. As a publicity stunt, the respondent
sold the records to the public at the ordinary retail selling price of 1s/6p each plus
three Nestle chocolate wrappers.

Under Section 8 of the Copyrights Act 1956, any person has an automatic right to
use the copyright of any musical works with the condition that a certain percentage
from the selling price need to be paid to the owner of the copyright. The question
that arose in the Court was whether there was a sale according to Section 8,
which would give the right to the respondent to offer the record to the public,
and whether the three chocolate wrappers were valuable consideration.

The appellant contended that the respondent could not rely on Section 8 as there
was no sale because the consideration for the record included the three wrappers.
The House of Lords in a majority decision held that the chocolate wrappers have
an economic value and was certainly part of the consideration and therefore
sufficient to create a sales contract.

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2.4.5 Agreement without Consideration

You have already noted that consideration need not be adequate to create a
contract. It is sufficient if it is of value and the promisor has freely given his
consent.

What will happen if a contract made does not have the element of consideration,
that is, the promisee need not do anything which would give any benefit to the
promisor? Refer to Illustration (a) of Section 26 of the CA 1950.

In Macon Works & Trading Sdn. Bhd v. Phang Hon Chin & Anor (1976), the Court
held that the option to purchase a piece of land was not valid due to lack of
consideration.

However, the CA 1950 provides exceptions to this general rule. Refer to Section
26 (a), (b) and (c) to ascertain those exceptions. Those exceptions will be
discussed in detail.

An agreement which lacks consideration but falls under one of the exceptions
in Section 26(a), (b) or (c) is deemed a valid and binding contract.

Section 26(a) provides:

This section requires a few conditions to be complied with, that is the

agreement:

(i) Is in writing;

(ii) Is registered under the law for the time being in force for the
registration of such documents (if any); and

(iii) Is made on account of natural love and affection between parties

standing in a near relation to each other.

All the three elements or conditions must be fulfilled to use Section 26(a) to
make the contract valid even without consideration. To have a clear picture
about this section, refer to illustration (b) of Section 26 of the CA 1980.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 75

Section 26(a) can only be applied to validate a contract which lacks consideration
if all the three elements are complied with. Refer to Illustration (b) Section 26 CA
1950 for a clearer picture of this section.

What are the circumstances deemed as natural love and affection between parties
standing in a near relation?

In the case of Re Tan Soh Sim (1951), an agreement to distribute the deceasedÊs
(adopted mother) property to her adopted son was void due to lack of
consideration. The court referred to Chinese customs and traditions as well as
circumstances in the said Chinese family and held that an adopted son only has a
near relation to his adopted father and not to his adopted mother and is thus not
within the scope of Section 26. Even if the element of natural love and affection
existed, it must only be between parties standing in „near relation‰ to each other.
The agreement therefore is void for failure to comply with element (iii), „natural
love and affection between parties standing in a near relation to each other.‰

Section 26(b) provides:

Only one part need to be complied with by the promisee for it to fall under
There are three elements or conditions in this exception too:
paragraph (ii). Refer to Illustration (c) of Section 26 for a clearer picture.
(i) It is a promise to compensate, wholly or in part;
The important thing to note is that the act was done by the promisee voluntarily
and
(ii)notOne
at the
whodesire of the promisor.
has already voluntarily done something for the promisor; or

The
(iii)issue of whether
Something whichthe
the plaintiff
promisorhad voluntarily
was legally done something
compellable to do. for the
defendantÊs firm arose in J. M. Wotherspoon & Co Ltd v. Henry Agency House
(1962).

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76 ▶ TOPIC 2 INTRODUCTION TO CONTRACT LAW

The court held that something which was done on another personÊs suggestion
cannot be considered as having been done voluntarily. The plaintiff in this case
had acted on the defendantÊs suggestion and therefore the act was not
voluntarily done.

Refer to Illustration (d) of Section 26 for a better understanding of paragraph (iii).

Illustration (d) in the CA 1950 Act clearly shows that B is under a legal duty to
take care of his infant son and he can be compelled under the law to execute the
duty. BÊs promise to pay AÊs expenses is a binding contract.

Example: A paid BÊs fine. B later promised to compensate A for paying the fine
for him. BÊs promise is binding and B must compensate A because paying the
fine is something which B was legally compelled to do.

Section 26 (c) provides:

Refer to Illustration (e) Section 26 CA 1950.

The conditions that need to be complied with under the exception in
Section 26(c) are:
This section provides for a new agreement to be made for payment of debt. It needs
to be signed separate from the original contract which is barred by the time-limit
(i) The agreement is made in writing;
for bringing suits.
(ii) The agreement is signed by the debtor or his authorised agent;
The Limitation Act 1953 is applicable in Malaysia. This Act provides a period of
six(iii)
years from
The the dateisontowhich
agreement the cause
pay wholly or inofpart
action accrued.
a debt; and If a creditor fails to
take any legal action within the period of six years from the date and the debtor
fails
(iv)to pay
The his debts, might
creditor the creditor
have may lose his
enforced right ofofaction
payment by lapse
the debt of time.
for the law
of the limitation of suits.

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 TOPIC 2 INTRODUCTION TO CONTRACT LAW ◀ 77

The Limitation Act 1953 provides that a time limit for an action in contract, that is
six years from the time the cause of action arises. If the creditor fails to bring a
court action within six years from the date the debtor failed to pay his debt, the
creditor no longer can bring an action as he or she is barred by the time limit.
Thus, Section 26(c) CA 1950 is an exception to the time limitation. Action can still
be brought if the conditions in (i) to (iii) are complied with. The written and
signed agreement by the debtor or his agent to pay a debt wholly or in part will
activate the debt which was barred by the time limit.

EXERCISE 2.3

Ahmad promised his wife that he will present their son, Man, a house which he bought la

Which of the following is NOT a type of consideration?

Executory consideration
Executive consideration
Executed consideration
Past consideration

2.5 CAPACITY TO CONTRACT

Another element that must be present for a valid contract is capacity. Every party
who wishes to enter into a contract must have capacity under the law of contract.

Section 10 of the CA 1950 provides:

All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful
object, and are not hereby expressly declared to be void.

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Section 11 provides an explanation on those who are competent to contract. The

provision is as follows:

Section 11 of the CA 1950 states three groups of persons capable of entering into a
Every person is competent to contract who is of the age of majority
contract as follows:
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.
(a) Be of the age of majority;

(b) Be of sound mind; and

(c) Not disqualified from contracting by any laws to which he is subjected to.

A detailed discussion will be provided on the three categories for a better

understanding on who may and may not be allowed to enter into a contract.

2.5.1 Age of Majority

In Malaysia, the capacity to contract based on age is determined by the Age of
Majority Act 1971. The Act states that all persons attain the age of majority at 18.
Only those 18 years and above have the capacity to enter into a contract in
Malaysia.

This is a general rule and can be seen from the decision in the case of Tan Hee Juan
v. Teh Boon Keat (1934) where a minor executed a transfer of land. The plaintiff
applied for a court order to revoke the said transfer. Hereford J. when deciding
said:

„The Privy Council have held that the effect of sections 10 and 11 of the CA of
India is that an infant cannot make a contract within the meaning of the Act, and
that a contract made by an infant is not only voidable but void (Mohori Bibee v.
Dharmodas Ghose, 30 Calcutta 539). That decision of the Privy Council is binding
on this court, and therefore there can be no doubt whatever that those transfers
are void⁄⁄and therefore the property is restored to the minor.‰

From the case above, it is clear that there are similarities between the Indian law
of contracts and the CA 1950, and Indian cases which discussed similar
provisions are applicable in the interpretation of the CA 1950.

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Therefore, it is clear that only a major (of 18 years of age) can enter into a
contract. However, there are exceptions to this rule where even a child who has
not attained the age of majority may be allowed to enter into a contract, and it is
valid. What are those exceptions?

There are five exceptions to the general rule. Refer to Figure 2.3.

Figure 2.3: Exceptions to the general rule

(a) Contract for Necessaries

A person who has supplied necessaries to a minor is entitled to be
reimbursed from the minorÊs property.

Provision
Section 69 of CA 1950 – if a person, incapable of entering into a
contract, or anyone whom he is legally bound to support, is supplied
by another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed
from the property of such incapable person.

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The contract for necessaries is valid if it is agreed by the minor and it is for
the purpose of supplying the said minor with necessaries and not mere
luxuries which he does not require. If a person entered into a contract with
a minor to supply him with necessaries, the person who supplied him
can claim for reimbursement from the minorÊs property.

Example: Aiman supplied Bakar who is an orphan and a minor, with food
Provision
and clothes suited to the condition of his life. Therefore, Aiman is entitled
Section 69 CA 1950 provides on what are necessaries for a person who
to be reimbursed from BakarÊs property.
is incapable of entering into a contract.
What are „necessaries suited to the condition in life of a person incapable of
entering into a contract?‰

Example: Sam, a minor student was supplied with a handphone by Raj, a

shop owner. Can Raj claim payment for the handphone?

Section 69 cannot be applied here and Raj is not entitled to be reimbursed

from SamÊs property because a handphone is not a necessity suited to the
condition in life of the minor student.

In Nash v. Inman (1908), a Savile Row tailor supplied a minor, a university

student, with fancy expensive clothes and later sued for the price of clothes.
Based on the evidence, the Court held that the student, a minor, was
already adequately supplied with clothes and the tailor had not adduced
any evidence that the clothes were suitable to the condition in life of the
minor. The action must fail and therefore no reimbursement could be made.

The court in Malaysia decided that education is a necessity in life for a

minor. It was held in Kerajaan Malaysia v. Gurcharan Singh & Ors
(1971). It must be noted that this case was decided before an amendment to
the CA 1950 was made, which now provides for capacity of a minor to enter
into scholarship agreements.

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Section 2 of the Contracts (Amendment) Act 1976 defines scholarship

agreement as:

Definition
„Scholarship agreement‰ means any contract or agreement between an appropriate aut

An amendment is needed because most scholarship agreements are made

between the government and students who are mostly not major yet. It was
made in order to avoid students from questioning the validity of
scholarship agreements in their attempt to avoid repayment or contractual
obligations. It is clear that now a scholarship agreement is valid even if
entered by minors.

In Gurcharan Singh, the Court had to categorise education as necessaries in

life to validate the contract and thus allowed the government to claim
damages due from the minorÊs breach of contract.

In this case, the plaintiff sued the first defendant as the promisor and the
second and third defendants as the guarantors for breach of contract. The
claim, amounted to RM11,500, the amount which was said to be the
expenses spent for the first defendantÊs education. The first defendant was
a minor at the time the contract was made. The Court held that the contract
was void. But as the training is to enable him to qualify for and accept the
appointment as a teacher, it is a provision of necessaries, and the first
defendant was liable to reimburse the amount spent for his education.

Logically, we can say that education, food and clothing can be categorised as
„neccessaries‰ with the condition that it is suited to the condition in life of
a minor, and not something which he already has and is adequately
supplied with.

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(b) Scholarship Agreement

Section 4(a) of the Contracts (Amendment) Act 1976 provides:

Due to this amendment, when a scholarship is granted and the agreement

Provision
signed, it is valid even if the other party is a minor. It has retrospective
Notwithstanding anything to the contrary contained in the principal
effects and acts to validate all scholarship agreements entered before this
Act 1950, no scholarship agreement shall be invalidated on the ground
amendment to the Act.
that the scholar entering into such agreement is not of the age of
majority.
ACTIVITY 2.4

It cannot be denied that there are cases where students attempt to avoid
paying their loan balances to the government and the government has resorted to advertisin

(c) Marriage Contracts

Minors are allowed to enter into a marriage contract. It is clearly shown in
Rajeswary & Anor v. Balakrishnan & Ors (1958), when Good J, held that
a contract to marry is valid and enforceable even if the parties involved
were minors. It is also stated as such in Section 4(a) of Age of Majority Act
1971. However, Section 12 of the Law Reform (Marriage and Divorce) Act
1976 provides that whosoever below the age of 21 cannot enter into a
marriage contract except with the written consent of his father or mother,
adopted father or adopted mother or guardian (according to sequence; if
father dies, then consent must be given by the mother and so on).

(d) Insurance Contracts

The Insurance Act 1996 provides in Section 153 that a child of 10 years and
above is allowed to sign a life insurance contract for himself or upon
another life in which he has an insurable interest. However, if a child is
below 16 years old, he needs to get a written consent from his parents or
guardian. If however, the person is above 16 years old, he can enter into
such contracts without having to get his parentsÊ or guardianÊs consent.

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(e) Apprenticeship Contracts

Section 13 of the Children and Young Persons (Employment) Act 1966
provides that a minor can enter into a contract of apprenticeship or services.
The Act defines a child as any person below the age of 14, while a young
person is one between the age of 14 and 16.

Generally, a contract signed by a minor is void, that is, invalid ab initio. It

cannot be enforced by the minor against the other party or vice versa. What
happens to the benefits passed under the contract? Can it be recovered?
Will the court assist the parties involved?

In the decided cases, the courts would not rule that such benefits be
restored if the plaintiff is a person who has the capacity to contract and is
not a minor. This is to prevent adults from binding a contract upon a minor.

In Mohori Bibee v. Dharmodas Ghose (1903), a child respondent

borrowed 20,000 rupees at 12 per cent interest from a moneylender and
secured the loan by way of mortgage executed by the child in favour of the
appellant on some houses belonging to the respondent. He refused to pay
the loan. The court held that the moneylender was not entitled to enforce
the mortgage in order to force him to pay the loan because he had known at
the time the contract was agreed upon that the borrower was a minor.

In Tan Hee Juan v. Teh Boon Keat (1934) a minor executed two transfers
of land and received the purchase money for the said land. The Court held
that the transfer was void and the minor allowed to get the return of his
land, and the court denied the buyers claim for refund of the purchase
money. Refer to Section 66.

Section 40 of the Specific Relief Act 1950 on the other hand provides:

Section 40 of the Specific Relief Act clearly shows that the court has the
„On adjudging the cancellation of an instrument, the court may require
discretion whether to require that the benefits be restored or to make
the party to whom the relief is granted to make any compensation
compensation. This was so decided in Tan Hee Juan (1934) when Hereford
to the other which justice may require‰.
J. refused to use its discretion to order a refund of the purchase price paid
by the defendant for the land.

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In another case, Leha binti Jusoh v. Awang Johari bin Hashim (1978) , the
Federal Court applied Section 66 of the CA 1950 by ordering the benefits be
returned. The respondent (a minor) bought a piece of land from the
appellant. He paid the purchase price and occupied the land. The Federal
Court held that the contract was void and ordered the respondent to vacate
the land and the appellant to refund the purchase price.

From the above evidence, it is clear that a person has to be careful and
refrain from entering into a contract with a minor because in all
probabilities the Court will not order that any benefits be returned and the
other party to the contract is bound to incur losses.

EXERCISE 2.4

1. Joyah signed a scholarship agreement with the Malaysian

government when she was 17 years old. She was required to serve
with the Malaysian government upon completion of her studies.
After finishing her studies, she refused to work in the public
sector, choosing instead to work in the private sector. The
Malaysian government sent her a notice of claim for the
scholarship amount or legal action will be taken against her. She is
not worried because she is of the opinion that the government
cannot sue her as the contract is void since it was made before she
was 18 years old. Advise Joyah.

2. Azreen is 16 years old and studies in Sekolah Menengah Taman

Melawati, Gombak.

Which of the following contract will be valid if entered into by

Azreen?

A. Purchase of computer from Maju Insan Sdn. Bhd.

B. Lease photocopy machine for her fatherÊs business.
C. Contract to be an agent for Easy Study Tuition Centre.
D. Insurance agreement with Etiqa Takaful Sdn. Bhd.

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2.5.2 Be of Sound Mind

Besides being of age, a person who wants to make a contract must also be of
sound mind. Who is regarded as being of sound mind under the CA 1950 and
therefore qualified to make a contract?

Section 12 of the CA 1950 provides:

A person who is usually of unsound mind, but occasionally of sound mind, may
A person is said to be of sound mind for the purpose of making a contract
make a contract when he is of sound mind. Refer to Illustration (a) Section 12.
if, at the time when he makes it, he is capable of understanding it and of
forming a rational judgement as to its effect upon his interests.
A person who is usually of sound mind, but occasionally of unsound mind,
may not make a contract when he is of unsound mind. Refer to Illustration (b)
Section 12.

(a) Effects of a Contract Signed by a Person of Unsound Mind

Any contract signed by a person of unsound mind is a voidable contract. It
means that the said contract can be made void at the option of the person of
unsound mind by proving certain conditions to the court.

In Imperial Loan Co. v. Stone (1892), Lord Esher put forth a principle as such:

„When a person enters into a contract, and afterwards alleges that he was
so insane at the time that he did not know what he was doing, and proves
the allegation, the contract is as binding upon him in every respect, whether
it is executory or executed, as if he had been sane when he made it, unless
he can prove further that the person with whom he contracted knew him to
be so insane as not to be capable of understanding what it was about.‰

The decision of Imperial Loan Co. v. Stone shows that if a person of unsound
mind wishes to make a contract void, he needs to prove both conditions in
Section 12(1) first. Failure to prove both conditions in the section will make
the contract binding as if he was of sound mind at the time it was made.
Meanwhile, a failure to prove that the said person is of unsound mind will
mean that the contract is valid. The contract therefore cannot be made void.

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This principle was applied in Che Som bt Yip & Ors v. Maha Pte Ltd. & Ors
(1989). The Court held that the contract made by a person of unsound mind
was voidable at oneÊs option by proving that she was of unsound mind at the
time the contract was signed and the other party knew of her unsoundness
of mind at the time she entered into a contract.

The first and second plaintiff in this case were administrators for the estate
of the third plaintiff who was of unsound mind. The third plaintiff had took
out a mortgage on his property with the defendant. The first and second
plaintiff applied for a declaration that it was a void contract and
successfully proved that the third plaintiff was of unsound mind at the time
they entered into a contract. Did they prove the second limb, that the
defendant knew that he had entered into a contract with a person of
unsound mind?

The Court also held that the defendant knew of that matter. The declaration
applied for was granted and the contract was made void.

(b) Contract of Necessaries

We have touched on this topic when discussing contract of necessaries by
minors. Section 69 of the CA 1950 provides:

Refer to Illustrations (a) and (b) of Section 69 of the CA 1950.

„If a person, incapable of entering into a contract, or anyone whom he
is legally bound to support, is supplied by another person with
The provision states that a person of unsound mind can still make a contract of
necessaries suited to his condition in life, the person who has furnished
necessaries.
such supplies is entitled to be reimbursed from the property of such
incapable person.

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EXERCISE 2.5

Ani who is of unsound mind applied for a personal loan from a

bank. The bank was not aware of her state of mind at the time she took the loan. The ban

What is the effect of a contract entered into by a person of unsound mind?

The contract is valid

The contract is voidable
The contract is void
The contract is unenforceable

2.5.3 Not Disqualified

To form a valid contract, a person must not lose the capacity to make a contract
according to whatever law he is subjected to.

It simply means that if there are laws which stipulate that a person is incapable of
entering into contracts, such person is deemed to have lost the capacity to enter
into a contract.

„Loss of capacity‰ means that the said party may have the capacity to contract but
lost it due to some circumstances under any laws or he is capable according to
the CA 1950 but lost it according to other laws to which he is subjected to.

Example: Ahmad is an adult and of sound mind. Therefore, he is capable of

making a contract according to the CA 1950. Two months ago, Ahmad was
declared bankrupt. Under the Bankruptcy Act, Ahmad cannot enter into a
contract. Ahmad therefore has lost his capacity to contract according to the
Bankruptcy Act.

NOTE: There should be a specific provision in the relevant law which

states that a person has lost his capacity to contract.

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2.6 INTENTION TO CREATE LEGAL

RELATIONS
The next element for the formation of a legally valid and enforceable contract is
intention.

Intention is an element of which the court must firstly exist before deciding on
the existence of a binding contract

The CA 1950 is silent on intention. How then would the court determine its
existence? It has been the practice of the Malaysian courts to refer to English
cases in determining the existence of intention.

Under English law, there is no binding contract unless the involved parties in the
agreement have the intention to enter into such relationship under the law. This
was decided in Weeks v. Tybald (1605).

The test used is an objective test, that is, the opinion of a reasonable man. Even if
the promisor did not intend to create legal relations, the court would still
presumed an intention exists if a reasonable man is of the opinion that intention
existed to bind the promisor. The promisorÊs real intention is immaterial. This
rule was decided in Carlill v. Carbolic Smoke Balls Co. (1893).

The court would usually look at the types of contracts made in determining
whether there was intention or not. This presumption could be set aside if it
could be proven otherwise by the contracting parties.

2.6.1 Presumption of Intention Based on the Type of

Contract
Generally, a contract can be divided into two types. Refer to Figure 2.4.

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Figure 2.4: Presumption of intention based on the type of contract

(a) Family or Other Domestic Agreements

Generally, the law presumes that there is no intention to create legal
relations in these agreements except where there is evidence to show
otherwise. For a better understanding on this, we shall need to look at a few
cases where intention is an issue.

In Balfour v. Balfour (1919), a husband was stationed in Ceylon. He and

his wife came to England for a holiday. Later he returned to Ceylon but his
wife stayed back in England on doctorÊs advice. The husband promised
orally to give an allowance of £30 a month until she was able to return to
Ceylon. He failed to pay and the wife sued him on the promise. The Court
held that both parties in this case did not intend that the agreement would
legally bind them.

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Distinguish the above case with Ferris v. Weaven (1952). The presumption of
no intention in domestic agreements was set aside by the courts. The Court
held that a husbandÊs promise to the wife that she could take their house
when they divorced was enforceable by the wife because there was
intention binding in law. This was due to the fact that when the promise
was made they had agreed to a separation.

In Choo Tiong Hin & Ors v. Choo Hock Swee (1951), the Singaporean Court
of Appeal applied the English Law in Balfour v. Balfour. According to the
court, the law did not presume agreement between family members
(adopted son and adopted father) as binding in law. Family agreements
cannot be enforced as a contract.

The respondent, in this case, sued his son and adopted grandson for family
land and home. The defendant alleged that there was a contract between
the respondent and the appellant that they were equally entitled to
possession of the farm and home if they work on the farm and helped
acquire wealth. The Court of Appeal however, held that the respondent
was not entitled to the property and home because the agreement between
them was not intended as to be binding in law.

In conclusion, if the agreement made is in the normal course of family life,

the law presumes that there is no intention to create legal relations.
However, the court will look at the circumstances of each case as intent is
something subjective and needs to be looked at from the conduct of the
parties and the circumstances under which it was made.

In Simpkins v. Pays (1955), an agreement was made between a

houseowner and a lodger who had lived almost as a member of the family,
to equally share the prize of a newspaper competition which was a binding
contract.

(b) Commercial Agreements

In commercial agreements, the court usually presumes that the parties do
intend to make a legally binding contract. The presumption may be
rebutted if the parties to the contract are able to otherwise prove that there
was no intention to create legal relations. Unlike domestic agreements, the
contracting parties cannot allege that there was no intention to bind them
because the court will decide based on the facts of the case.

Usually, a clause of „subject to the contract‰ will be inserted in

commercial agreements as a way to avoid the existence of a binding
contract.

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The clause indicates that the contractual party does not intend the said
agreement to bind until a full and complete contract is signed.

In Winn v. Bull (1877) there was a written agreement for the lease of a house
„subject to and is dependent upon a formal contract being prepared‰.

No formal contract was entered into by the parties and the court held that
there was no enforceable contract.

The Malaysian court in Low Kar Yit & Ors v. Mohd Isa & Anor (1963) agreed
with Winn v. Bull (1877). The defendant gave an option to the plaintiffÊs
agent to buy a piece of land subject to a formal contract to be drawn up and
agreed upon by the parties. The plaintiffÊs agent duly exercised the option
but the defendant refused to sign the agreement of sale. The court held that
there was no contract because there was no formal contract agreed by both
parties.

The clause „subject to contract‰ usually indicates no intention to create

legal relations. However, the courts in certain circumstances would decide
otherwise. This could be seen from decisions of some cases such as Lim
Keng Siong & Anor v. Yeo Ah Tee (1983). It was held that on the facts of
the case, the parties had agreed to the sales contract and the clause which
indicated „a written and signed contract be made‰ was not enough to
show there was no intention to create legal relations by the parties.

However, it must be noted that in most cases the clause „subject to contract‰
gives the effect of denying the existence of intention. This fact was clear
from the decision in Daiman Development Sdn Bhd v. Mathew Lui Chin
Teck & Anor (1981). The Privy Council held that:

The above decision lays down that the clause „subject to contract‰ in a contract
„It has been recognised throughout the cases on the topic that such
only shows the desire to create a binding contract in the future and not to make
words prima facie create an overriding condition, so that what has
the agreement into a binding contract.
been agreed upon must be regarded as the intended basis for the future
contract and not as constituting a contract‰.

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SELF-CHECK 2.3

Should there be a provision for domestic or family agreements in the law of contract? Justify.

EXERCISE 2.6

Abdul Aziz promised to give RM600 per month to his wife Anis for a
period of two years. Anis brought the matter to the court when Abdul Aziz failed to fulfil his p

Which of the following case provides the principle that was referred to by the court in decidin

Winn v. Bull
Ferris v. Weaven
Balfour v. Balfour
Low Kar Yit v. Mohd Isa

2.7 CERTAINTY
Even if other elements which are required in a contract are complied with, an
agreement can sometimes be defective due to the inability of the court to determine
what are the real terms agreed by the parties. Every term or condition in the
contract must therefore be clear and its meaning ascertainable.

Section 30 of the CA 1950 provides:

Agreements, the meaning of which is not certain, or capable of being

made certain, are void.

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Refer to Illustrations (a), (c), (d) and (f) of Section 30 of the CA 1950.

See also the court decision in Karuppan Chetty v. Suah Thian (1916). There was no
certainty when the contracting parties agreed to lease out of the land for RM35 a
month for „as long as you like.‰ It was held that the contract was void.

Therefore, parties to a contract have to use words which are clear and specific in
meaning for there to be a binding contract.

SELF-CHECK 2.4

How can an offer made be void?

 In Malaysia, the law of contract is governed by the Contracts Act 1950.

 A contract is an agreement which is enforceable by law.

 The basic elements of a valid contract are offer, acceptance, consideration,

capacity, intention to create legal relations, certainty and free consent.

 An offer exists when an offeror or promiser, by his act or words, states his
willingness to be bound by the contract as soon as the other person to whom
he made the proposal accepts it.

 An offer must be distinguished from an invitation to treat. An invitation to

treat is merely an invitation from one party to another party to make an offer.
Instances which are generally regarded as invitation to treat are
advertisements, display of goods, price lists and auctions.

 Acceptance must be absolute and unqualified. If the offeror modified the

term of acceptance or does not follow the conditions stated by the offeror, it
will amount to a counter offer.

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 Consideration must exist in each and every contract and is of value according
to the offerorÊs wishes. It may consist of a conduct, or a price to be paid in
return for the promise made by, or the conduct of, the promisor. The conduct
need not necessarily to be of a positive nature. In fact it can also be in the
form of an abstinence from doing something.

 The parties entering into a contract should be competent. The persons are
said to be not competent to enter into a valid contract if he is a minor or of an
unsound mind or bankrupt.

 In domestic agreements, there is a rebuttable presumption that the

contracting parties have no intention to create legal relations, while in
commercial agreements the rebuttable presumption is that legal relationships
are intended.

 An agreement without consideration is void.

 The parties entering into contract must have legal capacity to do so.

Acceptance Intention
Agreement Offer
Certainty Revocation
Contract

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 To pi ▶ Void and
Voidable
3 Contracts
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Describe void contracts and the three types of void contracts;
Assess matters which make a contract void;
Analyse the effects of void contracts;
Define the meaning of voidable contracts and free consent;
Discuss the five factors that cause a personÊs consent to enter into a contract deemed to be not
Differentiate between the five factors mentioned in (5).

▶ INTRODUCTION
In this topic, you will be introduced to void contracts. The topic will cover
matters that would cause a valid contract to be void. You will also notice the
differences between void and voidable contracts. It is important that the involved
parties be cautious when entering into such contracts as these contracts could
lead to a loss due to it being void. When a contract is void, the involved parties
cannot get the assistance of the court for recovery of benefits which is passed to
the other party.

We also will explore voidable contracts in this topic. Voidable contracts are
contracts made without free consent by one of the contracting parties. It is
important to understand each factor that affects the validity of a contract. Factors
that cause a personÊs consent not to be freely given will be discussed further in this
topic.
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3.1 VOID CONTRACTS

Section 2(g) of the Contracts Act (CA) 1950 defines void contract as:

„An agreement not enforceable by law is said to be void‰.

We will move on to study the different forms of void contracts in the Contracts
Act 1950.

When a contract becomes void, it therefore means that it is a contract without any
legal effect. The parties to the contract are, thus, under no obligation to perform
the contract. Such contracts are a complete nullity in law right from the very
beginning and therefore no right or duty flows from the contract. The courts also
will not enforce such contracts.

Therefore, any person who wishes to enter into a contract must first ensure that
the contract he is going to make is not one which could be considered void. This
is because the contracting parties will not get any benefits under a void contract.
The court will also not allow claims for compensation in such cases.

Among agreements considered to be void contracts are:

(a) Agreements which contravene the law;

(b) Agreements in restraint of trade; and

(c) Agreements in restraint of legal proceedings.

3.1.1 Agreements which Contravene the Law

(Illegal Contracts)
What are illegal contracts? You have to refer to Section 24 of the CA 1950. The
provision lists five categories of agreements which contravene the law resulting
in the contract being void. Refer to Section 24 of the CA 1950.

In such situations in the Section, the consideration or object of an agreement is

unlawful and every agreement of which the object or consideration is unlawful is
void.

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According to Section 10 of the CA 1950, a consideration or object of an agreement

should be lawful for the formation of a contract. Section 24 therefore explains
what are lawful considerations and lawful objects, that is, they must not be in
any of the instances mentioned in clause (a) to (e) of the Section. Discussions will
be provided on each situation.

(a) Consideration or Object of Agreement Forbidden by Law – Section 24 of the

CA 1950

Definition
This means that agreements agreed by the contracting parties clearly contravene with the

Several cases need to be discussed for a better understanding of instances

where an agreement is forbidden by the law.

In Govindji v. Soon Hin Huat (1982), an unlicensed purchaser signed a

contract to buy copra in contravention of rules made under the Federal
Agricultural Marketing Authority Act 1965. It was held that the contract
was void because it was done in contravention of the law.

In Wai Hin Tin Co. Ltd. V. Lee Chow Beng (1968), the defendant took out
a loan from company funds in contravention of its Articles of Association
and the Companies Ordinance 1940. The contract was therefore void and
the plaintiffÊs claim for the repayment of the loan was rejected.

In Hee Cheng v. Krishnan (1955), the plaintiff claimed for specific

performance or compensation from the defendant for a breach of contract.
By a sales and purchase agreement, the plaintiff sold his house built upon a
piece of land of which he was the holder of a Temporary Occupation
Licence. The contract to transfer the house was in contrary with Rule 41 of
the Land Rules 1930 which states that „No licence for the temporary
occupation of state land shall be transferable.‰ It was held that the agreement
was unlawful and therefore void being in contravention with the law.

Murugesan v. Krishnasamy & Anor (1958) differs on the facts of the case. The
defendants occupied land held under Temporary Occupation Licence, and
applied for permanent title to the land. Then, they entered into a written
agreement with the plaintiff and agreed to execute a valid transfer of the
land to the plaintiff as soon as the Collector of Land Revenue issued the
title.
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While waiting for the application to be approved, the defendants allowed

the plaintiff to enter the land. The defendantÊs application was rejected and
the plaintiff sued for damages. The defendant refused on the basis of a void
contract due to illegality.

The Court held that the contract was valid but became impossible to perform.
The plaintiff therefore was entitled to damages and recovery of monies
paid. In Rasiah Munusamy v. Lim Tan and Sons Sdn. Bhd (1985) , the
respondent orally agreed to sell his house to the appellant. Section 12(1) of
the Housing Developers (Control and Licensing) Rules 1960 states that
every contract of sale must be in writing. However, Rule 17 only imposes a
fine if Section 21 is contravened. The contravention does not make the oral
contract void. The court held that it was a valid and enforceable contract.

(b) Consideration or Object of an Agreement if permitted would defeat any Law

– Section 24(b) of the CA 1950

Definition
It refers to a contract which was signed but not expressly contrary to any provisions of the la

Example: Laws which allow a contract to be signed between parties but at

the same time forbids any contract be made by those without a license or a
permit.

In the Singaporean case of Raymond Banham & Anor v. Consolidated Hotels

Ltd., Raymond Banham (RB), an engineer who is registered in another
country but not in Singapore, entered into a contract with the defendant to
carry out work as a registered engineer in Singapore. The defendant refused
to pay RB after the work was carried out. RB brought the matter to court
claiming for payment from the defendant. The defendant raised the issue of
void contract because RB was not registered under the Professional
Engineers Act of Singapore. RB therefore had contravened the said Act which
requires any person who wishes to carry out the profession of a registered
engineer in Singapore to be so registered under the Act. The issue before
the court was whether the contract came under Section 24(a) or Section 24
(b) The court had to decide on several issues first:

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(i) Was the work carried out by RB valid?

The court held that the work carried out was valid.

(ii) Was the promise to pay valid?

The court decided that the promise was valid

Based on these issues, the court held that the consideration and object of the
contract was valid. However, if the consideration (payment to RB even
though he was unregistered) was allowed, it would defeat the provision of
the law. That law does not forbid such contracts to be made. On the other
hand, it only restraints those who are unregistered.

If the court allowed RB to get his payment, the court may create a precedent
where other non-Singaporean engineers may abuse the law in Singapore. In
this case, it was not relevant whether the defendant knew that the plaintiff
was unregistered because if it would still defeat the provision of the law to
allow it. Therefore, RB failed to get the payment.

It is hoped that you can understand the differences in Sections 24(a) and
Section 24(b). Section 24(a) clearly deals with situations where the
consideration or purpose of the agreement contravenes the law, while
Section 24(b) covers situations where the consideration or purpose of the
agreement do not contravene any law but if permitted, it would defeat the
law. Refer to Illustration (i) of Section 24.

(c) Consideration or Object of the Agreement is a Fraud – Section 24(c) of the

CA 1950
An agreement where its consideration or object is fraudulent in nature
contravenes the law. For example, an agreement to divide a share of money
obtained by deceit is void. Refer to Illustration (e) and (g) of Section 24 for a
clearer picture.

(d) Consideration or Object of the Agreement Implies or Involves Injury To the

Person or Property of another – Section 24(d) of the CA 1950

Definition
Paragraph (d) applies to the person or property of another person. Applying this princip

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In Syed Ahamed bin Mohamed Alhabshee v. Puteh binti Sabtu (1922),

the defendant agreed to sell a property to the plaintiff in which an infant
had an interest. This transaction was detrimental to the child and therefore
held void by the court.

(e) Consideration or Object of the Agreement Presumed by Court as Immoral or

Against Public Policy – Section 24(e) of the CA 1950
Section 24(e) gives the court a wider scope to use its discretion to make
such presumptions. To determine whether an agreement made can be
classified as one that the court would presume to come under this
paragraph would depend on the facts of each case. We can divide the
paragraph into two types of agreement. These are:

(i) Immoral agreements; and

(ii) Agreements which are opposed to public policy.

An agreement categorised into any of the above types is a void contract.

The explanation on immoral agreements is as follows:

(i) Immoral Agreement

Morality is very subjective and refers to the moral standards of each
society. An act which is considered as immoral in one society may not
have the same effect in another society. The Act provides several
examples as to what constitutes immoral acts. Refer to Illustrations (j)
and (k) of Section 24 of the CA 1950.

Most of the cases referred in this paragraph are those involving sexual
relationships. The English cases did not give a clear picture as to what
facts constitute immoral acts. However, Pollock in „The Principles of
Contracts„ suggested that „immoral acts„ be given a wide meaning
and not only be restricted to sexual acts. This may be so in the context
of the Contracts Act if we refer to the instance in Illustration (j) of
Section 24.

In Pearce v. Brooks (1866), the plaintiff agreed to hire a coach to the

defendant, a prostitute, knowing that she shall use it for her trade. The
defendant failed to pay the hire charges and the plaintiff claimed the
sum due. The court held that the plaintiff failed in the claim for the
hire charges because the agreement was illegal as it was immoral.

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In Aroomogum Chitty v. Lim Ah Hang (1894), the plaintiff lent

money to the defendant for the purpose of running a brothel. The
court held that the plaintiff could not recover his money from the
defendant because the agreement made was illegal as it was immoral.

Ahmad had some information about a murder. He did not want to

disclose the information. He, on the other hand, used it to obtain some
money from the criminal as a consideration for not revealing it to the
police. Is the agreement which Ahmad made valid?

(ii) Agreement Opposed to Public Policy

There is no specific category of situations stipulated by the Contracts
Act in respect of agreements which can be classified as being opposed
to public policy. There is no limit to its classification and is subject to
the discretion of the court based on the facts of the case. There are
however decided cases based on clause (e).

According to Wu and Vohrah (2004), an agreement opposed to public

policy is an agreement which is harmful to the public.

The Malaysian courts have taken an approach similar to the English

Courts despite having the power of discretion, that is, the doctrine of
public policy will not be extended to cover cases beyond those classes
of cases already covered by the doctrine.

The court in Theresa Chong v. Kin Khoon & Co (1976) took this
stand. However, in Sinyium Anak Mutut v. Datuk Ong Kee Hui
(1982) the court did not agree with TheresaÊs case restricting the
range of categories which can fall under public policy.

In general, we cannot clearly determine which agreements are

opposed to public policy. The types of agreements decided by the
courts in earlier cases as being of those opposed to public policy are
discussed as follows:

 Contracts Injurious to Public Service

Refer to Illustration (f) of Section 24 of the CA 1950.

Agreements for the sale of appointments, positions and public

awards are unlawful as it contributes towards corruption in public
life.

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In Parkinson v. Royal College of Ambulance Ltd. & Harrison (1925) ,

the secretary of the College of Ambulance, a charitable institution,
promised Colonel Parkinson that if he were to make a large
donation to the college, he would receive a knighthood. Based on
the promise, he donated more than £3,000 and promised
additional payment after he had received the promised award.
The plaintiff failed to get the promised award and sued for the
return of his donation. The court held that the action failed
because the agreement was based on an illegal contract.

 Contracts Which Interfere with the Proper Workings of Justice

Enforcement of criminal laws is considered to be of public interest.
Therefore, any legal action if brought against criminal acts cannot
be set aside through private contracts. Refer to Illustration (h) of
Section 24.

However, this paragraph does not prevent any contract to settle

cases out of court in respect of private crimes such as trespass on
land and others which do not affect the interest of the whole
community.

 Contracts against the Interest of the Country

Any agreement which might injure the interest of the country is
void because it is illegal. In a state of war, for example, any
agreement to trade with an enemy country is void because such an
act would increase resources of the enemy country. The same goes
to contracts which could jeopardise MalaysiaÊs diplomatic relations
with other countries. A contract to contravene the laws of any
other country which Malaysia has relations with also comes under
this paragraph.

In Foster v. Driscoll (1929), a partnership agreement formed

between five partners with the implicit intention of smuggling
whiskey into the US, in contravention of the Prohibition laws was
illegal and therefore void. This decision was agreed in Regazzono
v. K. C Sethia [1944] Ltd. (1958). The defendant in this case
signed an agreement to sell and deliver jute bags to the plaintiff in
South Africa. The law in India prohibits the direct or indirect
export of jutes from India to South Africa. Both parties conspired
to send the said jutes to Genoa first, so allowing the defendant to
henceforth import them to South Africa, without expressly
contravening the law in India. This contract was held as one
opposed to public policy.

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 Contracts Prejudicial to the Freedom and Stability of Marriage

It is also connected to Section 27 of the CA 1950 which provides:

However, agreements which come under Section 27 has the effect

Every agreement in restraint of the marriage of any person,
of being void and not illegal. Any agreement which might weaken
other than a minor during his or her minority, is void.
or affect the stability of an existing marriage is also void. An
agreement made between a husband and wife still in marriage to
specify conditions in the event of a future divorce is void.
However, such agreement is valid if the agreement was made at
the time when their marriage was in such an irrepairable state and
they are already separated.

In Fender v. St. John-Mildmay (1983), the court allowed an

agreement made to determine the rights of the parties upon their
divorce where separation has actually occurred or become
inevitable. However, the law will not allow agreements which
contemplate the possibility of future separation as it would
prejudice the stability of the parties at the time the contract was
made.

The validity of such agreements, therefore, depends on the nature

of the relationship between a husband and wife at the time the
agreement was made. However, in certain cases, the court may
allow such agreements, even if it was made while a marriage was
still stable and in a good state of affairs. The court will allow it if,
from the evidence, it was found that the conditions specified in the
contract do not prejudice the stability of the marriage at the time
the agreement was made, even if they ended up in a divorce.

This was so decided in Hamzah bin Musa v. Fatimah Zaharah binti

Mohamad Jalal (1982). The husband promised to pay his wife
RM 5,000 if he were to divorce her. He did and his wife sued him
for the said sum. It was held that the contract was valid and the
wife was entitled to the money. The contract was considered to be
not prejudicial to their life at the time it was made.

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Can a marriage brokerage contract be enforced under the law?

This is a contract matchmaking persons with a view to their
subsequent marriage and where some payment is charged for
those services. Even though it is a normal practice in the
Malaysian community, it is however declared as being opposed to
public policy. This was decided in Khem Singh v. Arokh Singh
(1930) and applied in Alang Kangkong bin Kulop Ibrahim v.
Pandak Ibrahim (1934).

In Karpen Tandil v. Karpen (1895), the court decided that it was

unfair to apply English cases to the facts of the case. The court
therefore held that marriage brokerage contracts based on Hindu
customs were valid. It must be noted that this case was decided
before the Contracts Act was in force in Penang and Melaka. This
decision may no longer be a principle of law which can be applied
today.

SELF-CHECK 3.1

Draw a situation which illustrates an agreement that is immoral.

EXERCISE 3.1

Mansor was promised by a secretary of a charitable club the post of a club advisor if Mansor is able
„An agreement not enforceable by law is said to be void.‰ What is the consequence of a void contr
All parties to the contract may rescind the contract.
The innocent party of the contract may rescind the contract.
The innocent party of the contract may proceed with the contract.
All parties to the contract are under no obligation to perform the contract.

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3.1.2 Contracts in Restraint of Trade

You are working as a cook at a restaurant and wish to open your own restaurant
in the same area. To what extent are you allowed to do so under the law?

The provision in the Contracts Act in respect to contracts in restraint of trade is

quite restrictive in its application compared to the English cases. Section 28 of the
CA 1950 provides:

„Every agreement
According bylaw,
to English which ananyone is restrained
agreement from exercising
which contains restrainta of
lawful
trade will
profession,
only trade
be declared asor business
void if the of any kind,
restraint is to that extent
is unreasonable. void‰.
This means that if there
is a restraint imposed on one of the parties of the contract, but it is reasonable,
Definition
Section 28 explains that every agreement which contains restrictive clauses is void immaterial

then the contract is still valid. This was so decided in Nordenfelt v. Maxim
Nordenfelt Guns and Ammunition Co. Ltd. (1894). The decision differs from
Section 28 of the Contracts Act which provides that such restriction is still void
even if it is reasonable.

This stand was taken by the court in Wrigglesworth v. Wilson Anthony (1964). An
agreement was made between the plaintiff, an advocate and solicitor, and the
defendant, restraining the defendant from practising his profession as an
advocate and solicitor within five miles from Kota Bharu for a period of two
years after the termination from the present firm. The defendant stopped
working in the plaintiffÊs firm and started his own firm in Kota Bharu. The
plaintiff prayed for an injunction to restrain the defendant from doing so. It was
held that the restraint of trade covenant was void in absolute in accordance with
Section 28.

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Due to the clear wording of Section 28, the cases clearly show that it is immaterial
whether the restraint is reasonable or otherwise. As a general rule, an agreement
in restraint of trade is void to the extent of the period and distance of restraint
stipulated in the contract. However, it is subjected to several exceptions provided
under the Act. Refer to Explanation 1, 2 and 3 in Section 28 of the CA 1950.

If the facts of a case indicate that any of the exceptions can be applied, the
contract then is valid and enforceable although it is in restraint of trade.

EXERCISE 3.2

Meng withdrew from a partnership and set up his own company.

Before the withdrawal he made an agreement with the other partners that he will not carry ou

3.1.3 Contracts in Restraint of Legal Proceedings

If a contract contains conditions restraining any of the parties from bringing
any legal proceedings to enforce the partyÊs right in the contract, or conditions
which limit the time-period within which he could enforce that right, the contract
is void to the extent of the restrictive clause.

Section 29 of the CA 1950 provides:

The time limit a person could enforce his rights under a contract is provided by
„Every agreement, by which any party thereto is restricted absolutely from
the Limitation Act 1953, that is six years from the date of the breach of the
enforcing his rights under or in respect of any contract, by the usual legal
contract. If there is a condition made to limit the time within the six year period,
proceedings in the ordinary tibunals, or which limits the time within
the contract is then void in accordance with Section 29.
which he may thus enforce his rights, is void to that extent‰.
Thus, a party to a contract who suffered losses due to breach of the contract has
six years to bring legal action from the date of the breach.

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In Corporation Royal Exchange v. Teck Guan (1912), a clause in a fire

insurance policy stipulated that if a claim is made but rejected by the insurance
company, any legal action must be brought within three months after that
rejection. Failure to do so would set aside all benefits under the policy.

The court held that the claim was less than the time provided for under the
Limitation Act. The clause therefore was in contradiction with Section 29 and
thus void.

However, there are three exceptions to the general rule, where a contract is still
valid despite the restraint. The exceptions are provided under Section 29. Refer to
Exceptions 1, 2, and 3 in Section 29 of the CA 1950.

Exceptions 1 and 2 provide that it is valid for the parties to agree to insert a
condition in the contract to refer to arbitration for any disputes which may arise
in respect of the contract. This was decided in Scott v. Avery (1836).

In Joshi v. United Indian Association (1936), it was held that there could be no
contract which would deny absolutely the right of a party to refer any decision
by arbitration to a court. If a contract states that any decision by arbitration is
absolute and cannot be appealed in any court, the contract is void as to the extent
of the restriction.

Exception 3 provides that any scholarship agreement between a person and

government, which state that the governmentÊs discretion is final and conclusive
and not to be questioned by any court, is valid. Government here also includes
state government.

Therefore, this means that the contracting parties can agree to submit for
arbitration first before making any appeals on the arbitration award.

In summary, Section 29 means that any clause which limits the time a person can
bring legal action in enforcing his rights, by shortening it from the the time
allowed under the Limitation Act (six years for contract), is void to the extent of
the restriction.

A clause which requires a party to first submit to arbitration is valid but it is not
so for any clause which restricts any decision made by arbitration to be appealed
to the courts. Such a clause is void to the extent of the restraint.

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3.2 EFFECTS OF VOID CONTRACTS

The following are the effects of void contracts.

(a) Illegal Contracts

This refers to void contracts which are unlawful as discussed earlier under
Section 24. The effect of these contracts are not the same as for void
contracts due to other factors. We have seen Section 66 of the CA 1950
which provides for restitution of benefits under void and voidable
contracts. Is Section 66 also applicable to unlawful contracts under Section
24?

Illustrations (a) to (d) in Section 66 do not provide any examples regarding

unlawful contracts. Since there is no clear provision in the Act, the court has
to refer to English law.

Generally, all parties to such contracts will not get any rights when
enforcing the contract. This principle is a based on the maxim ex dolo malo
no oritur actio which means that a court „would not give any help to a
person whose action arises from an unlawful act.‰

Money promised under an illegal contract therefore cannot be claimed even

if the promisee had done his part under the contract. Also, money paid
cannot be claimed for refund.

However, there are two exceptions to the general rule.

The exceptions are:

(i) If the Party Makes a Claim Independent of the Unlawful Transaction

Example: Aznan rented his house with the knowledge that his house
would be used for prostitution. If the house rent is not paid, Aznan
could not claim for arrears on the rent. However, he could get the
premises back if he can prove that the house was his without relying
the claim on the immoral contract.

In Sajan Singh v. Sardara Singh (1960), Ali, made an agreement with

Sajan to get a lorry registered under the latterÊs name and a haulage
permit. Ali bought the lorry for RM5,000 and a document of sales was
executed. Ali bought the lorry for his own use but used it under the
defendantÊs name. This transaction is against the law regarding the
transfer and use of motor vehicles. There was a disagreement and
Sajan transferred the lorry to another person without AliÊs permission. It

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was held that Ali was entitled to the lorry. The decision made was
based on

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SajanÊs infringement of AliÊs property without permission and not

on the unlawful contract. The Court was of the opinion that it had to
recognise AliÊs entitlement over the lorry even if the contract was in
effect void.

(ii) If the Plaintiff Does Not Know that the Agreed Contract was Unlawful
According to Section 66 of the CA 1950, if the other party knew that
the said contract is unlawful, he would not be allowed to claim for the
return of benefits or any compensation.

In Ahmad bin Udoh v. Ng Aik Chong (1970), the respondent made

an agreement for a lease of padi field with the appellant for a period
of six years. The respondent thereto paid RM1,500 at the signing of
the agreement. The agreement contravened Section 3(1) of the Padi
CultivatorsÊ Ordinance 1955. The appellant subsequently refused to
allow the respondent to till the land. The respondent claimed for the
return of his RM1,500. The appellant raised the issue that the said
agreement was unlawful. The Court held that the respondent is entitled
for the refund money according to Section 66 of CA 1950 because he
did not know the agreement was prohibited by law at the time he
made it.

Therefore, any person who wants to make a contract should be cautious

so that the contract is not unlawful under Section 24. This is because
the court will not assist the involved party to enforce such contracts,
what more to help them claim for recovery of benefits from the other
party, except if they are able to rely on the two exceptions above.

(b) Contracts in Restraint of Trade or Legal Proceedings

These contracts are not wholly void but only void to the extent of the
restriction. Once the restriction is severed from the other whole part of the
agreement without changing the nature of the contract, the valid part of the
contract is enforceable.

Example: Ali bought a provision shop situated in Klang from Faizal. Faizal
agreed not to carry out the same trade in Klang and Ipoh. The two
covenants can be severed and only FaizalÊs promise not to carry out the
same trade in Klang is binding but not the one in Ipoh.

Section 66 of the CA 1950 can be used to sue for return of benefits or

compensation for void contracts except contracts void due to illegality.

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SELF-CHECK 3.2

Write briefly as to how a person who had agreed to a void contract may make legal claims for t

EXERCISE 3.3

A chettiar who is not registered under the Moneylenders Act lent some money to Ahmad. A provisi

„Nizam is a legal assistant in XYZ & Partners, a legal firm in Klang. One of the terms of his offer lett

What is the consequence of the above agreement?

The whole agreement was void.

The part that restrained the trade was void.
The part that restrained the trade was voidable.
The whole agreement is valid and enforceable.

3.3 DEFINITION OF VOIDABLE CONTRACT

Section 2(i) of Contract Act 1950(CA) provides:

„An agreement which is enforceable by law at the option of one or more of the parties thereto, but n

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Section 2(i) means that if the said contract has the elements which can make it
voidable, the innocent party has the option to make the contract void and set
aside his duties under the contract. The guilty party of a voidable contract has no
such option.

It must be noted that if the innocent party does not use the option to rescind the
contract, there will still be a binding contract on both parties.

3.4 ELEMENTS WHICH CAN CAUSE A

CONTRACT TO BE VOIDABLE
Section 10 of CA 1950 provides that:

„Consent‰ in Section 13 of CA 1950 means:

„⁄..agreements are contracts if they are made by the free consent of parties
competent to contract⁄..‰
Definition
„Two or more persons are said to consent when they agree upon the same thing in the same

Under the law, consent exists when there is a meeting of the minds between the
contracting parties and they agree on the same thing. „Free consent‰ is defined
in Section 14 of CA 1950 .

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Figure 3.1 shows five elements which deem that consent is not freely given.

Figure 3.1: Elements which causes consent to be regarded as not consensual

Section 14 provides:

Section 14 stipulates that a personÊs consent to enter into a contract is not free, if
„Consent is said to be so caused when it would not have been given but
at the time he is making the contract, his consent to it was due to any one of the
for the existence of such coercion, undue influence, fraud, misrepresentation,
five elements, that is coercion, fraud, mistake, undue influence or
or mistake‰.
misrepresentation.

As seen from Figure 3.1, if any of the elements in paragraph (a) to (e) of Section
14 exists, then there is no free consent. Their existence in a contract will cause the
contract to be voidable at the option of the party whose consent was given due to
any one of those elements. It means that the innocent party would not have
consented to the contract if not due to the five elements which caused him to
consent unfreely.

We will be discussing each element in the following subtopics.

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3.4.1 Coercion
It is defined in Section 15 of the CA 1950 as:

„⁄..committing, or threatening to commit any act forbidden by the Penal Code, or the u

The first part of the sentence as highlighted in bold, „committing, or threatening

to commit any act forbidden by the Penal Code‰, is clarified by the explanation
and illustration part of Section 15 of the CA 1950.

Although the act forbidden by the Penal Code was committed where the Penal
Code is not applicable, it is still considered as coercion according to the first limb
of Section 15 of the CA 1950 if it involves Malaysians and is brought to the
Malaysian courts.

Refer to the following example:

Jack threatened to kill Ben (threat made in London) if Ben refused to sign an
agreement. Threatening to kill is a crime under the Penal Code. If Ben brings his
case to the Malaysian courts alleging that there was coercion which forced him to
give consent unfreely, the court would decide that there was coercion according
to Section 15, even if the act forbidden by the Penal Code was committed outside
Malaysia.

Reference can be made to several cases, such as Kesarmal s/o Letchman Das v.
Valiappa Chettiar (1954). It was held that the transfer of land executed under
the orders of the Sultan, issued in the ominous presence of two Japanese officers,
was voidable at the option of the party coerced into giving his consent.

In Chin Nam Bee Development Sdn. Bhd v. Tai Kim Choo & Ors (1988) , the
respondents purchased certain houses to be constructed by the appellants. They
signed a sales and purchase agreement for the house priced at RM29,500. The
appellants later instructed the respondents to pay an additional sum of RM4,000,
failing which the appellant threatened to cancel their booking for the house. It
was held that the additional payment was not voluntarily made but under threat.
The court ordered the appellants to refund the respondents for the additional
payments made.

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Effects of Contract Due to Coercion

A contract with an element of coercion is a voidable contract because consent was
not given freely.

Section 19 of the CA 1950 provides:

What happens if any sum of money or property had been transferred under a
„when consent to an agreement is caused by coercion, fraud or
voidable contract? Refer to Section 66 of the CA 1950 for the answer.
misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused‰.
Section 65 of the CA 1950 stipulates that when a person makes the option to
rescind a voidable contract he must restore the benefit to the person from whom
it was received from.

Section 73 of the CA 1950 provides that a person to whom money is paid under a
voidable contract must repay or return it to the person he had coerced.

3.4.2 Undue Influence

Section 16 of the CA 1950 stipulates:

Based on Section 16, there are two elements that must be present for the contract
„A contract is said to be induced by „undue influence‰ where the relations
to be categorised as one made under undue influence. They are:
subsisting between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that position to obtain an
(a) The existence of a close relationship between the parties and in that
unfair advantage over the other‰.
relationship, one of the parties was in a dominant position.

(b) The party who is in a dominant position made use of that position to obtain
an unfair advantage over the other.

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Both elements must be present to determine whether consent when given was
due to undue influence or not. How do you decide whether a person was in a
dominant position? Reference can be made to Section 16(2)(a) and (b) of the CA
1950.

Question: Who holds the real authority over another person? A relationship
between a father and a son is given as an example. A father has a real or apparent
authority over his son. Refer to Illustration (a) Section 16 of the CA 1950.

There is a relationship between a father and his son. Is the father in a position
where he can dominate his sonÊs will? The answer is yes. According to Section
16(2)(a), a father does hold a real or apparent authority over his son.

What about the relationship of trust according to Section 16(2)(a)? The Section
refers to parties who stand in a fiduciary relationship to the other party and are
under an obligation to execute that duty with care, such as, the relationship
between a doctor and his patient, a lawyer and his client, a trustee and
beneficiary and others. They cannot give any advice that promotes their
particular interests. Refer to Illustration (b) Section 16 of the CA 1950.

Illustration (b) is also in reference to Section 16(2) (b), a presumption that a

person is in a dominant position if he enters into a contract with a person whose
mental capacity is affected by any illness as such. Refer Section 16(2) (b) to
Illustration (b) of that Section.

It must be noted that although a person may have been proven to be in a

dominant position, the contract made is still valid if he did not use that position
to gain an unfair advantage over the other party.

What will happen if a party succeeds in proving the existence of undue influence
by complying with the requirements of Section 16 (1)?

According to Raghunath Prasad v. Sarju Prasad (1924), once an existence of undue

influence is successfully proven, the burden of proving that the contract was not
induced by undue influence is upon the person said to be in the position to
dominate the will of the other.

The burden of proof is stated in Section 16(3) of the CA 1950. The provision is
similar to the point made in Raghunath. Refer to Illustration (c) of Section 16 of
the CA 1950.

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An instance where one party was unable to rebut the presumption of undue
influence arose in Inche Noriah v. Shaikh Allie bin Omar (1929). The person
(the nephew) who was said to use undue influence upon the other party (an old,
feeble and illiterate aunt) who had sought her lawyerÊs advice before signing the
contract assigning her property to the nephew, failed to rebut the presumption of
undue influence. If it was so proven, it would mean there was free consent
because the person in the position to be dominated understood the effect of the
contract she had signed.

In Salwath Haneem v. Hadjee Abdullah (1894), a transaction involving a

transfer of land made by the plaintiffÂs husband in favour of his two
brothers was challenged by the plaintiff after her husbandÂs death. Based on the
facts of the case, the court held that there was a relation of trust between the
plaintiffÂs husband and his two brothers. It also held that it was upon the two
brothers to prove that the consent was voluntarily given without undue
influence. They failed to do so and it was decided that the transfer must be set
aside.

In Chait Singh v. Budin bin Abdullah (1918) , the court presumed that there
was undue influence based on the facts of the case when a moneylender lent
money to an illiterate at an excessively high interest rate of 36 per cent.

In Datuk Joginder Singh & Ors v. Tara Rajaratnam (1983), the court held that there
was undue influence by the appellants as the appellants were the respondentÊs
lawyers and had a fiduciary duty to the respondent. The appellantÊs conduct in
influencing the respondent to transfer the title of the respondentÊs land to the
second appellant caused it to be void. The appellant also failed to rebut the
presumption of undue influence in the transaction.

Effects of Contracts Induced By Undue Influence

Refer to Section 20 of the CA 1950, which provides:

The provision
„When consentdefines a contractis with
to an agreement causedanbyelement of unduethe
undue influence, influence
agreementas a
voidable Letchemy Arumugan v. Annamalay
is a contract voidable at the option of the party whose consent was so. A
contract, as seen in (1982)
contract
caused.made between
Any such a blind
contract mayilliterate woman
be set aside and a housing
absolutely or, if thedeveloper
party who was
tainted
was entitled to avoid it has received any benefit thereunder, upon such termsher
by undue influence. The court held that the contract was voidable at
option and it wasas
and conditions rescinded.
the court may seem just‰.

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 TOPIC 3 VOID AND VOIDABLE CONTRACTS ◀ 117

However, the innocent party has the right to make the contract voidable at his
option. In fact, he has two options based on whether any benefits had passed to
the other party or not. Let us look at the two options:

(a) If the party who has the right to rescind the contract has not received any
benefits under the contract, the contract may be set aside absolutely. Refer
to Illustration (a) of Section 20 of the CA 1950.

(b) If the party who wants to rescind the contract has received any benefits
under the contract, it can be set aside upon such terms and conditions as
the court may seem just. Refer to Illustration (b) of Section 20 of the CA
1950.

In Chait Singh v. Budin bin Abdullah (1918) , the court reduced the interest rate
from 36 per cent to 18 per cent.

In cases where the parties have received any benefit under a voidable contract,
the court may use Section 66 of the CA 1950 to make a restoration order on the
benefit or to give compensation.

EXERCISE 3.4

A threatened to set fire to CÊs rubber estate if C refused to sell it to

him. Due to this threat, C agreed to sign a contract of sale with A. After signing it, C refu

What is voidable contract?

An agreement which fulfils all the elements of contract.

An agreement which lacks one or more elements of contract.
An agreement which is enforceable by law at the options of all the parties to rescind the
An agreement which is enforceable by law at the option of one or more of the parties but

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3.4.3 Fraud
This definition must be read together with Section 17(a) to 17(e). Refer to Section
17(a) to 17(e).

Definition
„⁄⁄.includes any of the following acts committed by a party to a contract, or with his connivance, o

Section 17 of the CA 1950 defines fraud as:

„Certain acts or connivances, inclusive of other acts laid down in paragraph

(a) to (e) of Section 17, that are committed with intent to deceive another party.‰ According to Secti

Acts which are considered fraud according to Section 17:

(a) Suggestion, as to a Fact, of that Which is Not True by One Who Does Not
Believe it to be True
This provision is similar to the requirements for fraudulent
misrepresentation under the English law of tort. However it is termed as
fraud under the CA 1950. Therefore, the elements that need to be proven
are quite similar under English law and the CA of 1950. Under English law,
there is no need to prove intent to deceive to establish fraudulent
misrepresentation.

In Derry v. Peek, Lord Hershell stated that fraudulent misrepresentation

existed when a false statement had been made knowingly, or made without
belief in its truth, or it was made recklessly and careless, whether it be true
or false. Since there was honest belief in its truth, the misrepresentation was
not fraudulent.

Therefore, it would also not be fraud under Section 17 of the CA 1950.

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Example: Bala, a managing director of Syarikat Perdana, with intent to

deceive Chong into buying shares in his company, informed Chong that his
company have made millions in profits.

Bala has committed fraud according to Section 17(a) of the CA 1950.

For further explanation, reference should be made to Kheng Chwee Lian v.

Wong Tak Thong (1983). The court allowed the respondent to set aside the
contract because of undue influence within the meaning of Section 17 (a)
and (d). The respondent signed an agreement based on the appellantÊs
statement that the size of the land to be transferred under the second
contract was similar in size to the one bought in the first contract. It turned
out to be smaller than he was made to believe.

Kheng Chwee Lian gives an example of one party making a statement

which he believes to be untrue to deceive the other party to enter into a
contract.

(b) Active Concealment of a Fact by a Person Who Knew or Belief in the Fact
See Illustration (c) Section 19 of the CA 1950.

„B, having discovered a vein of ore on the estate of A, adopts the means to
conceal it. He conceals the existence of the ore from A. Due to AÊs
ignorance, B was able to buy the estate at an undervalued price. The
contract is voidable at AÊs option‰.

(c) Promise Made Without Any Intention of Performing it

When a promise was to be made a condition to the contract, failure to
perform the promise is a breach of contract. Where a promise is made
without any intention of performing it, it is categorised as fraud according
to Section 17 (c).

Example 1: A promised to repair BÊs house if B was to lend A some money.

A has no intention of doing it. The contract can be rescinded for fraud by B.

Compare that to Example 2 as follows:

Example 2: A promised to repair BÊs house if B was to lend A some money.

A intended to do so at the time he made the promise. After B lent him the
money, he later changed his mind and refused to perform the promise. In
this case, the intention not to perform the promise only takes place after the
promise was made. There is no fraud on AÊs part according to Section 17
(c) because at the time he made the promise, he had the intention to
perform it.
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120 ▶ TOPIC 3 VOID AND VOIDABLE CONTRACTS

(d) Any Other Act Fitted to Deceive

On this matter, the court has the discretion to decide whether an act or
connivance which does not come under any other clause in the Section
could be considered as fraud or not.

(e) Acts or Omission as the Law Specially Declares to be Fraudulent

It refers to acts or omissions considered to be fraud by any other
enforceable laws other than the CA 1950.

Silence is Not Fraud

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 it is the
duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.

The general rule is that silence does not constitute fraud. Refer to Illustration (a)
of Section 17 of the CA 1950.

Vyramuthu v. State of Pahang (1924) discussed whether a party to a contract

was bound to disclose information which is likely to affect the other partyÊs
willingness to enter into a contract.

The defendant at an auction sold a piece of land to the plaintiff. It was sold at an
undervalued price because the defendant mistakenly believed it to be
undeveloped land. The defendant refused to continue with the contract after
realising the mistake, and alleged that the plaintiff should not be allowed to gain
any benefits out of the information that he knew but concealed from the defendant.
It was held that the plaintiff was not bound to disclose the said information to the
defendant.

Exceptions: Instances when silence is fraud.

Provision
Silence is fraud according to the explanation in Section 17 if:
(a) It is the duty of the person keeping the silence to speak,
(b) His silence is, in itself, equivalent to speech.

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There are three situations where a person is under a duty to speak.

(a) Earlier Statements Which Later Became Untrue

Certain facts may be stated by a party to a contract to the other party during
negotiations. After it was stated but before they reached an agreement, the
statement may become untrue due to some changes. If the maker of the
statement is aware of the changes, he is under a duty to voluntarily inform
the other party of the changes.

Example: During a negotiation for a contract to purchase a computer,

Aman told Hashim the computer he was selling to Hashim has never
broken down. It however broke down a week before the contract was
signed and was sent for repair. Aman, in this contract, is under a duty to
inform that fact to Hashim.

(b) When There is a Relationship of Trust between the Parties

When there is a relationship of trust or confidentiality between the
contracting parties, there will be a presumption of undue influence by the
dominant party to control the will of the other party. The dominant party
therefore is under a duty to disclose all the material facts within his
knowledge to the other party. Persons considered to be in a relationship of
trust or confidentiality was discussed under undue influence. Refer to
Illustration (b) in Section 17.

(c) Uberrimae Fidei Contracts

This is also known as a contract of good faith such as in insurance contracts.
This is because certain facts are only within the knowledge of one party and
would remain unknown if not disclosed. The insurance buyer is under a
duty to disclose those facts because they are material facts which might
affect changes on the rate of premium to be paid.

Example: A wants to take out a life insurance policy with MNI Insurance
Company. A is under a duty to inform the insurance company regarding
matters relating to his health and familyÊs health history and of any
hereditary diseases present.

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When is Silence Equivalent to Speech?

This situation may occur where one party discloses only partially the state of
facts and is silent on some other facts which if made known might provide a
different impression of the disclosed facts.

In R v. Kyslant (1932), a company issued a prospectus to obtain funds. It contained

statements, which were true, that the company had paid dividends every year
between 1921 to 1927. However, the company failed to disclose that in fact,
during each of those years it had incurred trading losses. The dividends were
paid out of duty on surplus profits, tax adjustments, reserves and other non-
recurring incomes. The court held that the prospectus was misleading and
therefore there was fraud.

If you have any factual information in respect of the contract that you are going
to sign, to what extent do you feel obligated to disclose the information to the
other party?

Effects of Fraudulent Contracts

Refer to Section 19 of the CA 1950 discussed earlier. In general, a contract tainted
with fraud is voidable at the option of the person who gave consent, due to the
other partyÊs fraud. However there are exceptions to the rule, where such contracts
are still valid. According to Section 19, the exceptions are:

(a) A contract is valid if the person whose consent caused by fraud had the
means of discovering the truth with ordinary diligence; and

(b) A contract is valid if the committed fraud did not cause consent to be given
involuntarily.

Detailed discussion on this exceptions will be carried out under (d)

„Misrepresentation‰. Claims for return of benefits may be made under
Section 66 because it is a contract tainted with fraud.

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EXERCISE 3.5

A offered his car for sale to B. B asked A „If you do not deny it,
I shall assume that the car was never involved in any accident‰. A kept quiet and B bou

Aiman warned that he would kill ChongÊs daughter if Chong refused to sign an agr

In the above case, what element makes the contract invalid?

Illegal
Coercion
Undue influence
Immoral

3.4.4 Innocent Misrepresentation

You bought a video-recorder because you were attracted to its functions after
listening to the sellerÊs explanation. The seller himself believed that it had the
functions as he had explained. However, you found out that what he said was
untrue. Can you rescind the agreement? This type of case is called innocent
misrepresentation.

Definition
Innocent misrepresentation refers to any misrepresentation made by a person without inten

Example: A, who wished to sell his handphone to B, told him it had never dropped.
Without AÊs knowledge, his son had once dropped it. A, here had made an
innocent misrepresentation, that is, he himself believed it as true and had no
intention to deceive B. Refer to Section 18 of the CA 1950.

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Misrepresentation can only be made on statements of facts. If a statement is in the

form of an opinion, it is not a misrepresetation even if the opinion is untrue and
caused the other person to sign the contract.

In Bisset v. Wilkinson (1927), the respondent agreed to buy land for sheep farming.
He agreed because he relied on the appellantÊs statement that he estimated the
land would carry 2,000 sheeps. Nobody else, including the appellant, had carried
out sheep farming on the land in question. The respondent wished to rescind the
contract due to misrepresentation. It was held that the contract was valid and
could not be rescinded because there was no misrepresentation. The appellantÊs
statement was merely an honest opinion and not a statement of fact.

(a) Effects of Contracts Caused by Innocent Misrepresentation

The agreed contract can be made voidable according to Section 19. It can be
rescinded at the option of the innocent party. If the contract was rescinded
at the option of the innocent party, any benefits which he received can be
recovered under Section 66.

(b) Exceptions: When Misrepresentation Does Not Make the Contract Voidable
However, there are exceptions to the rule, that is, when contracts are
innocently misrepresentated and do not influence the other partyÊs consent
to sign the contract. What are those situations? Refer to the Exceptions in
Section 19.

Earlier on, we have earlier learned about them in the subtopic of „fraud‰.

If Provision
the concerned party has the means to discover the truth of the facts given
toIfhim,
such consent
then he must wasdo caused
just that.byThis
misrepresentation
exception is onlyoravailable
by silence,
to the
fraudulent
party within the meaning
who committed fraud byofsilence
Sectionand
17, the contract,
innocent nevertheless,
misrepresentation
is not voidable,
according to Sectionif18the party
of the CAwhose
1950. consent was so caused had the
means of discovering the truth with ordinary diligence.
In J.C Weber v. E.A Brown (1908), this exception could not be relied by the
defendant because he had committed fraudulent misrepresentation.
Therefore, it was not relevant whether the plaintiff could have investigated
it or not. The contract was voidable at the plaintiffÊs option. Refer to
Illustration (b) Section 19 of the CA 1950.

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(c) Effects of Innocent Misrepresentation

A contract is voidable at the option of the innocent party. This is clearly
stipulated by the provisions in Section 19 of the CA 1950. If the guilty party
can apply the exceptions in Section 19, the contract therefore cannot be
made voidable. Any benefits received due to innocent misrepresentation
must be returned or compensated according to Section 66 of the CA 1950.

EXERCISE 3.6

Mi told Dee that XY Co., in which Mi was a shareholder, made huge

profits each year. Mi believed the statement he made was true in his capacity as a shareh

3.4.5 Mistake
What is the effect of an agreement where both parties to a contract enter into it
due to some misunderstanding over some material facts in the contract?

Definition
In simple terms, mistake means „error‰.

Mistake and its effects are provided for in Sections 21, 22, and 23 of the CA 1950.
More attention should be given to the effects of mistake because different types of
mistakes have different effects. Even though, in general, a contract due to mistake
is a void contract, there are certain types of mistakes which give rise to a valid
contract.

We will now discuss each type of mistake. Mistakes can be divided into three
types, as shown in Figure 3.2.

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126 ▶ TOPIC 3 VOID AND VOIDABLE CONTRACTS

Figure 3.2: Types of mistake

(a) Mistake of Essential Facts by Both Parties

Refer to Section 21 of the CA 1950 which provides:

Refer to the Illustration in Section 21 of the CA 1950.

Provision
„Where both parties to an agreement are under a mistake as to a
This provision means that a contract is void if both parties to a contract
matter of fact essential to the agreement, the agreement is void‰.
made an error on a matter of fact essential to the agreement. Mistakes
which can make a contract void are those made based on the matter of fact
and not a personal opinion on the value of the suject matter in the
agreement. Refer to the Illustration in Section 21.

It is clearly seen from the Illustration in Section 21 of the Act, that the facts
on which both parties were mistaken of are essential facts and were the
subject matter of the agreement.

Look at Illustration (c) in Section 21 as an example. A was only entitled to

BÊs estate while B was still alive. He lost the right when B died. When the
contract was signed after BÊs death, both parties were ignorant of the fact that
A was no longer entitled to the estate due to BÊs death. A could not transfer
the title of the estate because the subject matter in the contract no longer
exists.

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Below are discussions of cases decided by the courts on mistakes of essential

facts by both parties. It can be divided into two types:

(i) Both Parties to the Contract were Mistaken on the Same Essential Fact
In Courturier v. Hastie (1856), there was a contract of sale of corns. Both
parties believed the corns were in transit from Salonica to England.
The corn were in fact spoiled due to hot weather and were already
sold in Tunis before the contract was signed. The buyer alleged that
since there were no corn when the contract was signed, he need not
pay the purchase price. The seller claimed otherwise. The court held
that there was no contract between the seller and the buyer because
they were mistaken over the existence of the subject matter of the
agreement. Therefore, the buyer was not liable to pay.

(ii) Both Parties to the Contract were Mistaken on Different Facts Which
Leads to Mutual Misunderstanding
Both parties under this situation negotiated at cross-purposes and
therefore there was no contract.

In Raffles v. Wichelhaus (1864), the buyer agreed to buy from the seller,
a cargo of cotton to arrive „ex Peerless from Bombay„ to London.
Unknown to them, there were two ships called Peerless sailing from
Bombay, one sailing in October and the other in December. The buyer
and the seller were referring to two different ships – the buyer meant
the earlier one and the seller the later. It was held that there was no
contract.

(b) Mistake as to Law

Provided under Section 22 of the CA 1950.

It means that if a party is mistaken in respect of the law in force in Malaysia,

„A contract is not voidable because it was caused by a mistake as to
that contract is valid. However, the contract is otherwise void if the mistake
any law in force in Malaysia; but a mistake as to a law not in force in
is regarding the laws of other countries.
Malaysia has the same effect as a mistake of fact‰.

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In Seck v. Wong & Lee (1940), the plaintiff, a building contractor asked for
a work plan from the defendant, an architect. The defendant asked for the
payment of RM500 for the plan. There is a law against such payment. The
plaintiff paid without being aware of that law. After realising the position
of the law, the plaintiff sued the defendant for a refund.

It was held that the plaintiffÊs mistake as to the law would not result in the
rescinding of the contract. Therefore, he could not get a refund. However,
in this case, the court allowed the plaintiffÊs claim on equitable grounds
and justice because the defendant was found to have taken an unfair
advantage over the plaintiff for personal gain.

(c) Mistake as to Matter of Fact by One Party

Section 23 of the CA 1950 provides:

This means that the contract is valid if only one of the parties was under a
A contract is not voidable merely because it was caused by one of the
mistake as to a fact in the contract. The court however may hold such a
parties to it being under a mistake as to a matter of fact.
contract voidable if the party who was not under the mistake knew that the
other party was under a mistake as to a matter of fact, but he did not take
any necessary steps to rectify or correct it. This was decided in Taylor v.
Johnson (1983).

A contract where one of the parties made a mistake as to a matter of fact,

may be a voidable contract in the following situations:

(i) Mistake as to the Identity of the Other Party

If a person is mistaken over the identity of the person he is contracting
with, the contract is voidable at the option of the person under
mistake, on condition that he is able to prove three elements:

 The identity of the other party is a matter of vital importance to

the formation of the contract.

 The other party to the agreement knew that he is not the person
with whom the contract should be made with.

 The party under mistake had taken reasonable steps to identify

the person with whom he would be dealing with.

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These three requirements must be proven before the party under

mistake is entitled to rescind the contract.

In Cundy v. Lindsay (1878), the plaintiff received an order for

handkerchieves from Blankern, a dishonest person. Blankern signed
his name to make it look like Blenkiron & Co., a respectable firm
known by reputation to the plaintiff. The respondent, so deceived,
sent the goods ordered to Blenkern who later sold them to the
appellant. The respondent claimed for the return of the goods or their
value.

The court held that the respondent could recover the goods because
the contract between Blenkarn and the respondent was void due to
mistake as to identity.

(ii) Mistake of Fact as to Type of Instrument

The general rule is a person is bound by a contract which he signed.
This principle was decided in LÊ Estrange v. Graucob (1934). The
Malaysian court accepted this principle and decided the same in
Subramaniam v. Retnam (1966) despite the fact that the defendant was
a person who could not understand English at the time he signed the
contract.

There are however exceptions allowing the courts the power to set
aside the general rule, that is, when the maxim non est factum (it is not
his deed) applies.

This maxim is applicable when a person signed an instrument in

ignorance of the type of document. It could be because he is illiterate,
blind, of unsound mind or deceived by the other party.

There is no specific provision in the CA 1950 relating to this exception.

However, the local court applied this maxim in Awang bin Omar v.
Haji Omar & Anor (1949). There was a contract between the plaintiff
and the first and second defendants. The second defendant influenced
the first defendant (his brother) to sign the contract. The first
defendant did not understand English and was told he needed to sign
as witness for his brother.

It was held that there was a mistake as to the type of instrument

signed and, therefore, the first defendant was not liable to the
contract.

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Effects of Contracts Caused by Mistake

You should have understood by now that a mistake will have different effects in
accordance with the type of mistake made. A contract which contains an element
of mistake by both parties as to a matter of essential fact is a void contract.

In Malaysia, mistake as to law will not result in the rescinding of the contract.
A contract is void and therefore may be rescinded if the mistake is as to a law not
in force in Malaysia.

Mistake by one party (unilateral mistake) as to a matter of fact will not affect the
validity of a contract unless it is a mistake as to identity or mistake as to the type
of document.

Contracts caused by mistake as to identity or mistake as to type of document are

voidable contracts on condition that all the requirements that must be fulfilled
before it may be rescinded can be complied with. Failure to comply with those
requirements will cause the contract to be valid.

Section 66 of the CA 1950 may be used for claiming the return of any benefits which
passed under void and voidable contracts (if the option to rescind it was
exercised) due to mistake. Refer to Illustration (a) Section 66 of the CA 1950. The
court may also order that compensation be paid when allowing any of the parties
to rescind the contract. This is within the courtÊs discretion as provided by
Section 37 of the Specific Relief Act, and is usually used by the courts exercising
equitable principles and justice. This Section provides:

The court may also order rectification be made if both parties wish to continue
„On adjudging the rescission of a contract, the court may require the party to
with the contract. This is provided for in Section 30 of the Specific Relief Act 1950,
whom the relief is granted to make any compensation to the other which
which stipulates:
justice may require‰.

„when through a mutual mistake of the parties, a contract or other

instrument in writing does not truly express their intention, either party, or
his representative in interest may institute a suit to have the instrument
rectified⁄⁄‰

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 TOPIC 3 VOID AND VOIDABLE CONTRACTS ◀ 131

In Oh Hiam v. Tham Kong (1980), the court ordered rectification be made in the
contract when both parties were under the mistake in respect of a piece of land
which should not be included in the contract.

EXERCISE 3.7

1. Bakar signed a document to transfer his land to Abu. He did it

without knowing that the paper he signed was actually a
document of transfer because he was illiterate. He put down his
signature after his brother told him that it was a document for
leasing his land to Abu for five years. B now wishes to rescind the
transfer. Advise Bakar.

2. Auntie Bee, ill from old age, transferred her property to a nurse
who took care of her while she was sick. After she died, her son
objected to the transfer and decided to bring the matter to court.
He wants to rescind the transfer on the ground of undue
influence. What is your advice to Auntie BeeÊs son?

3. Ain asked her father, Rahman to sign a document stating that

the document is to get an approval from the land office to build a
house in her fatherÊs land in Ulu Kelang. Rahman, who is
illiterate, believed her daughter and signed the document. Later, it
was found that the document was actually an agreement to sell the
land to a third party.

What is the consequence of the above agreement?

A. The contract is valid even though Rahman is under mistake

because it was done by his own daughter.

B. The contract is void because it involved the element of

mistake by Rahman and the third party.

C. The contract is void because Rahman mistakenly believes

that the document is to get the land officeÊs approval.

D. The contract is voidable because Rahman mistakenly

believes that the document is to get the land officeÊs
approval.

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132 ▶ TOPIC 3 VOID AND VOIDABLE CONTRACTS

 Section 28 of the Contracts Act 1950 provides that an agreement in restraint of

trade is void except for an agreement not to carry on business of which
goodwill is sold, or an agreement made before a dissolution of a partnerhip
or an agreement made during the continuance of a partnership.

 Section 29 of the Contracts Act 1950 provides that an agreement in restraint of

legal proceedings is void except for a contract agreeing to refer disputes to
arbitration or a contract relating to government scholarship.

 Generally, all parties involved in void contracts which are unlawful will not
get any rights when enforcing the contract. Therefore money promised under
illegal contract cannot be claimed even if the promisee had done his part
under the contract.

 Contract in restraint of trade or legal proceedings are not entirely void. Such
a contract is void to the extent of the restraint only.

 A void contract is a contract which is unenforcable by law. It means that the

parties has no rights and obligation under the contract. The contract has no
effect from the very beginning.

 Among the agreements which are considered to be void contracts are

agreements which contravenes the law, agreements in restraint of trade and
agreements in restraint of legal proceedings.

 A contract becomes a voidable contract if it is caused by coercion, fraud or

misrepresentation.

 A voidable contract means that the contract is valid and binding until the
party whose consent is so caused chooses to rescind it.

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 TOPIC 3 VOID AND VOIDABLE CONTRACTS ◀ 133

 According to Section 24 of the Contracts Act 1950, the consideration or object

of an agreement is lawful unless:

 It is forbidden by a law;

 It is of such a nature that, if permitted would defeat any law;

 It is fraudulent;

 It involves or implies injury to the person or property of another; or

 The court regards it as immoral, or opposed to public policy.

 Free consent is one of the important elements of a valid contract. Consent is

said to be free when it is not caused by coercion, undue influence, fraud,
misrepresantation and mistake.

Coercion Mistake
Fraud Restraint
Illegal contracts Undue influence
Immoral agreement Voidable
Misrepresentation

Wu, M. A., & Vohrah, B. (2004). The commercial law of Malaysia. Petaling Jaya,
Malaysia: Pearson Education Malaysia Sdn Bhd.

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 To pi ▶ Discharge and
Remedies
4
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Explain the four ways to discharge a contract;
Explain how a contract is discharged by performance;
Explain when the contract is discharged by frustration;
Describe how parties can discharge their contract by agreement; and
Analyse the types of remedies available for a breach of contract.

▶ INTRODUCTION
In the previous topics, you have learnt that there are several elements that should
be fulfilled before a valid contract can be formed. Now, in this topic we will discuss
the various ways of discharging a contract. Normally, a contract is discharged
when both parties perform what they have promised in their contract.
Sometimes, the parties may also discharge their contract either by agreement,
due to frustration or by breach. If a breach of contract occurs, the innocent party
can claim for remedies. These remedies will be discussed in the last part of this
topic.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 135

4.1 DISCHARGE OF CONTRACT

What is discharge of contract? In order to understand this, you should know
what is meant by discharge. To begin with, „discharge‰ can be defined as to let
or put off something, (Merriam Webster online dictionary) in this case, a contract.

In addition to the definition given by Merriam Webster online dictionary,

discharge of contract can also be defined as when the parties to the contract are
released from the obligations of the contract. For your information, there are four
ways in which a contract can be discharged. In order to provide you with a better
picture on the ways a contract can be discharged and some of their implications,
let us examine the following Figure 4.1.

Figure 4.1: Discharge of contract law

Referring to Figure 4.1, you can say that there are four ways to discharge a
contract, namely by performance, frustration, agreement and breach. In the
coming subtopic, we will discuss in detail the four ways and some of their
consequences.

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136 ▶ TOPIC 4 DISCHARGE AND REMEDIES

4.1.1 Discharge by Performance

Firstly, we will touch on what is discharge by performance. According to the
general rule, performance of a contract must be exact and precise and should be
in accordance with what the parties had promised. You can refer to Section 38(1)
to have a better understanding on what is meant by this:

Now let us look at the following illustration:

Section 38 (1):
The parties to a contract must either perform or offer to perform their
Ahmad agreed to sell his camera to Danish for RM500. Danish agreed to buy the
respective promises, unless such performance has been dispensed with by
camera for the said price. In this situation, Ahmad will be discharged by the
law.
contract after he has delivered the camera to Danish. Meanwhile for Danish, he
will be discharged from the contract after he has fully paid the price of RM500. If
Danish failed to do so, only Ahmad is discharged from the contract, while Danish
is still bound to perform the contract according to what has been agreed.

However, not all contracts can be successfully concluded. In such situations, the
contracts are discharged and categorised into various types of discharge as
explained in the following subtopics.

4.1.2 Discharge by Frustration

Do you know what discharge by frustration is? In what ways can a contract be
discharged by frustration? In order to find the answers to these questions, we
encourage you to pay close attention to this subtopic.

To begin with, a contract is frustrated when there is a change in the

circumstances which renders a contract legally or physically impossible of
performance (Section 57 (2)).

Another important point that you should take note of is that discharge by
frustration can only be applied when the impossibility of performing the contract
arises without the fault of either party.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 137

In addition, you can refer to the below case which is a real example of agreement
discharge by frustration. The case, known as Robinson v. Davidson (1871) 6
L.R. Exch. 269, goes as follows:

(a) Consequences of Frustration

In this case, the contract was that the defendant must play the piano at a
Apart
concert on from that, date.
a specified thereOnarethea specified
number date,
of consequences
the defendantofwas
discharging
unable
agreement by frustration. Now, let us study some of the consequences closely
to perform as she was ill. It was held that the contract was discharged by
in order to take note of the important points.
frustration.
The first consequence of discharging a contract by frustration is as follows:

Reflecting on the
Section 57(2) of above SectionAct:
the Contracts 57 (2), you can say that a contract which is
discharged by frustration can be ended automatically without being
The contract does not become voidable but is brought to an end
voidable.
forthwith and automatically.
The second consequence of frustration goes as follows:

InSection
this case,
57(3)the
of promisor whoAct:
the Contracts was supposed to perform the agreement
but discharged it, is accountable to pay the compensation to the promisee.
Compensation must be paid by the promisor to the promisee for
Next, we will look at the third and the last consequence of discharging an
loss through non-performance of act known to be impossible or
agreement by frustration. The third consequence goes as follows:
unlawful.

Section 66 of the Contracts Act:

Any person who has received any advantage under the agreement is
bound to restore it, or to make a compensation for it, to the person
from whom he received it.

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138 ▶ TOPIC 4 DISCHARGE AND REMEDIES

You should remember that under the above Section it is the duty of a
person who has gained the benefits from the agreement to pay them back,
which are quite similar to the case of voidable contracts and void
agreements.

You may also refer to Illustration (d) to Section 66 which provides that:

A contracts to sing for B at a concert for RM1,000, which would be paid

in advance. A is too ill to sing. A is not bound to make compensation to
B for the loss of the profits which B would have made if A had been
able to sing, but must refund to B the RM1,000 paid in advance.

Discharge by frustration may happen in several situations. The examples of

the situations are as follows:

(i) Destruction of Subject Matter of Contract

It should be noted that a contract is discharged by frustration when a
subject matter of the contract is destroyed due to unavoidable
circumstances. For example, take the case of Taylor v Caldwell [1863] 3
B & S 826 where the plaintiff rented a music hall from the defendant
for a series of concert. Unfortunately, the hall was accidentally burnt
down before the concert was scheduled. The Court held that the
contract was void due to the frustration.

However, Section 12 of the Specific Relief Act provides that there

must be a total destruction of the subject matter of the contract. The
contract will not be discharged by frustration if only part of the
subject matter of the contract has been destroyed.

(ii) There is a Supervening Event Which Defeats the Whole Purpose or

Object of the Contract
For example, take the case of Krell v Henry [1903] 2 KB 740, where
the defendant in this case contracted to hire a room from the
plaintiff. The defendantÊs purpose in hiring the room was to watch
the coronation procession of King Edward VII. However, due to the
KingÊs illness, the procession was cancelled. Thus, the plaintiff sued
the defendant for the payment of the outstanding balance owed for
the hire of the room. It was held that the contract for hire was
frustrated and defendant did not have to pay the balance owed to the
plaintiff.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 139

(iii) Death or Personal Incapacity

If the contract is for personal services, such as a contract of
employment, the contract may be discharged by frustration due to
death or incapacity of that party. You may refer to illustration (e) of
Section 57 for an example of this situation. A contracts to act at a
theatre for six months in consideration of a sum paid in advance
by B. On several occasions, A is too ill to act. The contract to act on
those occasions becomes void.

(iv) Supervening Illegality

There is a change in the law which makes the contract becomes
unlawful. This is supported by the case of Lee Kin v. Chan Suan Eng
[1933], where there was a lease which provided for the renewal every
five years. A new law was passed prescribing annual renewals. The
court held that the lease was frustrated because of the new law.

4.1.3 Discharge by Agreement

Do you think that a contract can be discharged through agreement? Well, the
answer to that question would be yes. In this subtopic, we will discuss how a
contract can be discharged by agreement.

For your information, when both parties to the contract agree that the contract
should no longer continue, both the parties are discharged from their obligations.
In other words, you can say that the contract comes to an end by the agreement
of both promisor and promisee.

A contract may be discharged by the agreement of all parties in the form of

substitution or rescission of the original contract. This is in accordance to Section
63 of the Contract Act which provides that:

Section 63 of the Contracts Act:

If the parties to a contract agree to substitute a new contract for it, or to
rescind it, the original contract need not be performed.

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140 ▶ TOPIC 4 DISCHARGE AND REMEDIES

Furthermore, the contract may also be discharged by the agreement of all the
parties in the form of a waiver, release or remission. This is based on Section 64 of
the Contracts Act.

If the promisee waives his rights under the contract, then the original contract is
Section 64 of the Contracts Act:
discharged and the promisee is already bound to his waiver of performance.
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
4.1.4 Discharge
such performance, by Breach
or may accept instead of it any satisfaction which he
thinks fit.
The word breach would surely make you think that a contract is terminated or
appear unlawful if such matter happens. In this subtopic, we will discuss how a
breach can discharge a contract in detail.

Firstly, you should be alerted that, if one of the parties to the contract indicates to
the other either by conduct or in clear terms an intention not to go on with the
contract, the party is said to have rejected the contract.

Moreover, a refusal to perform a contract may occur before the time that the
performance is due, or during the time of performance itself. In this case, you
should take note that a refusal to perform a contract when performance is due
would amount to a discharge.

Discharge by breach is stated in Section 40 of the Contracts Act. The provision

reads as follows:

Section 40 of the Contracts Act:

When a party to a contract has refused to perform, or disabled himself
from performing, his promise in its entirety, the promise may put an end to
the contract, unless he has signified, by words or conduct, his
acquiescence in its continuance.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 141

When there is a breach of contract, the party not in breach has the option either to
continue with the contract or to rescind it. If he chooses to rescind it, the contract
is discharged. You may refer to illustration (a) of Section 40 of the Contracts Act,
for a better understanding.

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre for two nights every week during the next two months, and B engages to
pay her RM100 for each nightÊs performance. On the sixth night, A wilfully did not
turn up at the theatre. B is at liberty to put an end to the contract.

Based on the above illustration, when A wilfully absents herself from the theatre
she actually has breached her contract with B. Since B is not the defaulting party,
she is entitled to discharge the contract.

You may also refer to the case of Ban Hong Joo Mine Ltd v. Chen & Yap Ltd (1969 ),
where in this case the appellant had refused to make fortnightly payments for the
work that had already been done by the respondent. The appellant also ordered
the respondent to stop his or her work. It was held that the respondent can treat
the contract as being repudiated and he or she is entitled to sue the appellant for
the work that has been done.

Consequences of Breach
Similar to the previous subtopic, discharging a contract by breach also has its
own consequences. The first consequence goes as follows:

We have discussed
Section this consequence
65 of the Contracts Act: in voidable contracts, void agreements and
contract discharged by frustration. In
The effect of an innocent party puttingthe case
anofend
breach of contract,
to the contract the samethe
is that rule
ofinnocent
thumb party
appliesmust
whereby
restorepeople who which
any benefits have gained
he maythe benefits
have received from
fromthe
agreement need to
the other party. pay back the compensation.

This was illustrated in the Indian case of Muralidhar Chatterjee v.

International Film Co. Ltd. (1942). In this case, the appellant, a distributor of
films in Calcutta entered into a contract with the respondents who imported
films into India. By the terms of the contract, the appellant was to pay in
advance for film prints that the respondents were to supply to him. The appellant
paid the respondents Rs2,000 in advance but unfortunately, later on he
wrongfully repudiated the contract.

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142 ▶ TOPIC 4 DISCHARGE AND REMEDIES

The respondents decided to put an end to the contract and purported to forfeit
the advance paid. The appellant sued to recover the sum paid under the contract
relying on a joint reading of Sections 39, 64 and 65 of the Indian Contract Act
which are similar to Sections 40, 65 and 66 of our Contracts Act. The Privy
Council held that Section 64 of the Indian Contract Act (Section 65 of Contracts
Act 1950) applies both to a contract which was put to an end under Section 39
(Section 40 of Contracts Act 1950) as well as to cases of recission ab initio. Thus,
appellant was entitled to recover from the respondents the sum paid under the
contract.

The above decision was followed in Yong Mok Hin v United Malay States
Sugar Industries Ltd. (1967). The Federal Court held that when a contract is
rescinded, besides Section 65, Section 66 of the Contracts Act applies as well.

The second consequence will provide you with a different picture on this matter.
The consequence goes as the following:

This is to show you that the person who has paid the compensation may recover
If the innocent party has paid money under the contract, he may be entitled
the sum paid in certain circumstances. Therefore, we hope that this subtopic will
to recover the sum paid.
enlighten you on this particular issue.

SELF-CHECK 4.1

Could you differentiate the four ways how contracts can be

discharged? Explain the effect of the discharge.

Give two situations where a contract could be discharged by frustration.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 143

EXERCISE 4.1

The purchase manager of Restaurant Sedap, Mr Foo, entered a contract to purchase a large qu

4.2 REMEDIES FOR BREACH OF CONTRACT

Before we begin to discuss this subtopic, let us first understand the term „remedy‰.
There are many ways for you to describe remedy. According to the Merriam
Webster online dictionary, remedy can be defined as „the legal means to recover
a right or to prevent or obtain redress for a wrong.‰ In simpler words, we can
say that a remedy for the breach of contract is the legal solution to such a
problem.

In addition to that, we invite you to take a close look at Figure 4.2 on some of the
remedies. The remedies for breach of contract are as follows:

Figure 4.2: Remedies for breach of contract

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144 ▶ TOPIC 4 DISCHARGE AND REMEDIES

4.2.1 Damages
To begin with, you should take note that, damages are granted to a party as
compensation for the damage, loss or injury he or she has suffered through a
breach of contract. In this case, an award of damages aims to put the plaintiff
in the position he would have been in if the contract had been performed.

(a) Classification of Damages

There are different classifications of damages. Basically, damages may be
classified as substantial, nominal and exemplary. Table 4.1 explains each
classification of damages in detail.

Table 4.1: Classification of Damages

Classification
Explanation
of Damages

Substantial damages Compensation which is intended to put the aggrieved

party in the position that he would have been in, if the
breach had not occurred.

Nominal damages A token award granted by the court where the

plaintiff has proved the defendantÊs breach but he has
suffered no actual loss.

Exemplary damages An award of damages which is intended to penalise

the defendant for his breach. The plaintiff will be
awarded more than his actual financial loss. It is only
awarded in special circumstances such as breach of
promise of marriage.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 145

(b) Measure of Damages

The next question to consider is how to determine the measure of damages
payable to the aggrieved party? Provisions relating to the measure of
damages are to be found in the judgement in the landmark case of Hadley
v. Baxendale (1854).

The rule based on the judgement in the case mentioned above has been
Hadley v. Baxendale (1854)
adopted in Section 74 (1) of the Contracts Act.
In this case, the plaintiff was a mill owner. He hired the defendant, a
carrier to take a broken crankshaft to Greenwich and asked for a new
Section
one. The74 defendant
(1) of the Contracts
(carrier) Act:
promised that it would be there the
When a contract has been
following day, but the defendant broken, thehad
party who suffers
delays by the breach
in transporting the
is entitled to receive, from the party who has broken
crankshaft. Consequently, the replacement was not delivered the contract,
on time.
compensation
The mill remained for anyidlelossfor
or adamage
longer caused to him
time. The thereby,
plaintiff which
sued for
naturally arose⁄ f rom
damages under two heads: the breach, or which the parties knew, ⁄
t o be
likely to result from the breach of it.
(i) For failure to deliver the crankshaft in the specified time,

(ii) For the loss of profit caused by the mill remaining idle.

The House of Lord allowed the damages under the first head but
disallowed damages under the second head as the defendant was not
informed of the special circumstances.

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146 ▶ TOPIC 4 DISCHARGE AND REMEDIES

By virtue of Section 74 of the Contracts Act, an aggrieved party is entitled to

two types of damages:

(i) Damages Arising Naturally

It is a situation where the damage or loss caused to the aggrieved
party arose naturally in the usual course of things from the breach. In
order to recover those damages, the aggrieved party has to establish
that the loss he sustained was caused by the breach.

You may refer to illustration (f) of Section 74:

A contracts to repair BÊs house in a certain manner, and receives

payment in advance. A repairs the house, but not according to the
contract. B is entitled to recover from A the cost of making the repairs
conforming to the contract.

(ii) Special Damages

The situation where the parties knew, when they made the contract,
that if he or she breached the contract, the other party would suffer
loss. Thus, in order to claim this type of damages the aggrieved party
must be able to prove that the defendant could foresee the loss.

You may refer to Illustration (j) of Section 74:

A, having contracted with B whereby to supply B with tonnes of iron

at RM100 a ton and to be delivered at a stated time. He (A) also
contracts with C for the purchase of 1,000 tonnes of iron at RM80 per
tonne, telling C that he does so for the purpose of performing his
contract with B (supply to B). C fails to perform his contract with A,
who cannot procure the iron, and B in consequence, rescinds the
contract. C must pay to A RM20,000 being the profit which A would
have been made by the performance of his contract with B.

The case in point is Victoria Laundry (Windsor) v. Newman Industries

Ltd [1949]. The plaintiff was a laundry company and had contracted
to buy from a defendant a boiler which is to be used in his laundry.
The defendant agreed to sell to the plaintiff a second-hand boiler and
to deliver it in June. But the boiler was not delivered until 8
November. The defendant knew that the boiler was required for the
business and for immediate use. Because of the breach, the plaintiff
claimed for:

 Loss of profits on laundry business which would have been

earned if the boiler is delivered on time; and
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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 147

 Loss of profits on certain dyeing contract from the Minister of

Supply.

The court held that the laundry company was entitled to recover for
the profits for ordinary laundry as the defendant must foresee their
loss if there was delay. However, the plaintiff was not entitled for
dyeing work because the defendant was not informed about that.

Another case is Tham Cheow Toh v. Associated Metal Smelters Ltd

[1972]. In this case the appellant had agreed to sell a metal melting
furnace to the respondent and giving an undertaking that the melting
furnace would have a temperature of not lower than 2,600 degrees F.
However, this specification was not fulfilled. Therefore, the
respondent brought an action alleging breach of the condition and
claimed damages including the loss of profit. In this case, the court
was satisfied that the appellant knew the requirement to deliver the
furnace capable of producing the specified temperature and the
urgency of delivery. Therefore, the respondent was awarded with
special damages.

However, it should be noted here that according to Section 74(2) of the

Contracts Act, such compensation is not to be given for any remote
and indirect loss or damage sustained by reason for the breach. In
order to get a clear picture about the remoteness of damages, let us
refer to the following illustration:

Illustration (n) of Section 74 of the Contracts Act:

A contracts to pay a sum of money to B on a day specified. However,

A does not pay the money on that day. B, in consequence of not
receiving the money on that day, is unable to pay his debts and is totally
ruined. A is not liable to make good to B anything except the principal
sum he contracted to pay, together with interest up to the day of
payment.

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148 ▶ TOPIC 4 DISCHARGE AND REMEDIES

Another section is Section 75 of the Contracts Act. This section deals with
the compensation for breach when the amount of damages is already
stipulated in the agreement.

In this situation, if there is a breach of contract, the party in default must

Section 75 of the Contracts Act:
pay damages up to the amount stipulated in the contract.
When a contract has been broken, if a sum is named in the contract as
(c) to the amount
Mitigation of Lossto be paid in case of breach, the party complaining
about
What is the breach of
mitigation whether there you
loss? Before is actual damage
can define this,proven or not,
you need to
to know
receive from the party who has broken the promise the penalty.
what is meant by mitigation. The root word of „mitigation‰ is „mitigate‰
which Merriam Webster online dictionary defines as an act to make
something less severe or painful. In this case, we can say that to mitigate
loss is to lessen the severe or profound loss.

In this section, we are going to discuss in detail on the mitigation of loss.

As a starting point, the party seeking damages is under a duty to mitigate
the loss. Let us study the following case in order to have a better
understanding on this matter:

Kabatasan Timber Extraction Co. v. Chong Fah Shing [1969] 2 M.L.J. 6

In this case, the appellants had contracted to supply timber to the

respondent to be delivered at the site of the sawmill to be erected by
the respondent. The timber was delivered in three lots. The second lot
of 198 logs and 4 of the 22 logs in the third lot were not delivered to the
sawmill but were dumped at a distance of more than 500 feet from the
sawmill.

It was held that it was the duty of the respondent in this case to take
reasonable steps to mitigate the damage.

There was no need for the respondent to have gone to the expense of
buying logs from elsewhere when the logs were lying a few hundred
feet away from the sawmill and all that was required was the
additional expense for hauling them up to the sawmill. The
appropriate damages to be awarded to the counter-claim was the
approximate cost of hauling the logs to the sawmill, which amounted

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 149

4.2.2 Specific Performance

What do you understand about specific performance? Specific performance is a
court order requiring the defendant to perform the act promised in the contract.
It is worth taking note that the Specific Relief Act, 1950 provides for the remedy
of specific performance.

You should also be alerted that specific performance is only an optional remedy.
Table 4.2 will discuss why specific performance is considered as an optional
remedy.

Table 4.2: Specific Performance

Section under the

Explanation
Contracts Act

Section 20(1)(a) The court will exercise its discretion not to decree specific
performance where damages will provide an adequate remedy.

Section 20(1)(c) Specific performance will be refused where the terms of the
contract are uncertain.

Section 21 The court has discretion to refuse specific performance where the
granting of it would cause undue hardship to the defendant.

Section 11(2) Specific performance may be granted in respect of agreements

relating to land transactions where there is a presumption that
the breach of a contract to transfer immovable property cannot
be adequately relieved by compensation in money.

Apart from the above details, you should know that specific performance may
also be granted in cases where actual damage cannot be ascertained.

In short, specific performance is applicable only to contracts which involve the

sale of unique, one-of-a-kind items such as a particular restaurant, a famous
painting or a piece of land for business purposes.

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4.2.3 Injunction
What is injunction? According to the Merriam Webster online dictionary,
injunction could be defined as a writ granted by a court of equity whereby one is
required to do or to refrain from doing a specified act.

You should take note that there are different types of injunctions in Malaysia.
In order to provide you with a better picture on these types of injunctions,
we encourage you to study the following Table 4.3:

Table 4.3: Types of Injunction

Types of Injunctions Explanation

Interlocutory injunction Used by a party to maintain the status quo of the subject
matter in a pending suit.

Mandatory injunction A court order requiring something to be done.

For example: An injunction requiring the landlord to

keep the water supply open for his tenants.

Case: Neoh Siew Eng v. Too Chee Kwang [1963] M.L.J.

272.

Prohibitory injunction Restraining order: Stopping something from being done.

Referring to Table 4.3, you should realise that there are three main injunctions:
interlocutory, mandatory and prohibitory injunctions. Each injunction has its
own role and function under the law. You would need to read further on the
differences between the three injunctions.

Apart from that, you should note that an injunction is an equitable remedy.
The term „equitable‰ suggests that the remedy is just and reasonable according to
the law. Thus, it can be varied or dissolved if the court discovers that the
application for injunction was made on suppressed facts or that the facts upon
which the order was granted no longer exist.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 151

4.2.4 Quantum Meruit

What is quantum meruit? Well, quantum meruit is an award made where one
party has completed all or part of his side of the bargain before the otherÊs
breach. It is a payment of the „amount deserved‰ for what has been done up
until the breach. It is a restitutory award. The aim of the award is to put the
plaintiff in the position he would have been in if the contract had been
performed. It is a compensatory award.

ACTIVITY 4.1

For a more detailed definition and explanation on quantum meruit,

please refer to this website:

Basically, this website provides you with vast explanations on legal terms which would b

EXERCISE 4.2

Sasha is a popular singer. She promised to perform at a concert

organised by Jay Lo. However, she could not perform due to a bad sore throat. Jay L

A contract is discharged by frustration when any of the following condition exist, EXCE

The subject matter of the contract is destroyed.

The law is amended causing the contract to be unlawful.
One of the contracting parties refused to proceed with the contract.
One of the contracting parties becomes insane.

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152 ▶ TOPIC 4 DISCHARGE AND REMEDIES

Jojo has entered into a contract to sing at Putra Musical Hall for RM15,000. The company already pa

To whom would damages be granted?

To the party who has broken the contract.

To the defaulted party.
To an innocent party as compensation for his or her loss due to a breach of contract.
To a third party.

 There are four ways of discharging a contract, namely, discharge by

performance, discharge by agreement, discharge by frustration and discharge
by breach.

 The contract is said to be discharged by performance if the contracting

parties have performed their promises under the contract.

 A contract may be discharged by the agreement of all the contracting

parties in the form of substitution or rescission of the original contract.

 A contract may be discharged by frustration because of supervening

impossibility, which causes the contract to become impossible to be
performed. Since the contract is discharged not due to any default of the
contracting parties, either party cannot sue the other party for breach of
contract.

 A repudiatory breach will enable the innocent party to choose to discharge

the contract. The partiesÊ contract obligation will cease and the defaulted
party will have to pay damages.

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 TOPIC 4 DISCHARGE AND REMEDIES ◀ 153

 Where there has been a breach of contract, the aggrieved party will be
entitled to claim for remedies. Remedy is the way by which an innocent party
enforces his or her rights or corrects a loss.

 There are several remedies available for a breach of contract, such as,
damages, specific performance, injunction and quantum meruit.

 Damages is granted to a party as monetary compensation for the damages,

loss or injury suffered due to a breach of contract by the other party.
However, if the loss or damage is too remote, the aggrieved party is not
entitled to the compensation.

 Specific performance and injunction are awarded at the discretion of courts

and will be awarded where damages are inappropriately remedied.

 Specific performance is a court order requiring a party to perform the act

promised in the contract, whereas injunction is a court order restraining a
party from doing specified act under a contract.

 Quantum meruit is a claim for reasonable remuneration for work done or

services supplied under the contract, in the event of a breach of contract.

Breach Frustration
Consequences Injunction
Damages Quantum meruit
Discharge Specific performance

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To pi ▶ Law of
Agency
5
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Explain five ways an agency can be created;
Categorise two types of authorities of an agent;
Discuss the functions and duties of an agent to his principal;
Explain the three rights and duties of a principal;
Assess the effects of a contract made by an agent; and
Examine the ways to terminate a contract of agency.

▶ INTRODUCTION
The laws in respect of agency are provided in the Contracts Act 1950 from
Section 135 to Section 191.

Section 135 defines an agent and a principal as:

„Agent is a person employed to do any act for another or to represent another in dealings with third

In other words, a principal may appoint an agent and give him authority to carry
out certain duties on his behalf as stipulated in a contract of agency.

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 TOPIC 5 LAW OF AGENCY ◀ 155

5.1 CREATION OF AGENCY

An agency can be created by five ways. Refer to Figure 5.1 to identify the creation
of an agency.

Figure 5.1: Creation of an agency

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156 ▶ TOPIC 5 LAW OF AGENCY

(a) Agency by Express Appointment

Section 140 of the CA 1950 provides that an agent may be appointed by
express or implied appointment. An agent is appointed by express
appointment if such appointment is made under a Power of Attorney or
letter of mandate.

(b) Agency by Implied Appointment

Also, according to Section 140 of the CA 1950, an agent may be appointed
by implied appointment whether by words or conduct of a principal.
Summers
v. Solomon (1857) laid down a principle that when a person, by his words
or conduct holds out another person as having authority to act for him, he
is liable for that personÂs act as if he had appointed him as his agent. Other
relevant cases are Ryan v. Pilkington (1959) and Chan Yin Tee v. William
Jacks & Co. (Malaya) Ltd. (1964).

The relationship between a husband and wife also gives a presumption of

implied agency. A husband (principal) is liable for any debts made by his
wife (agent) with a third party; except when:
(i) The husband expressly forbids his wife to pledge his credit;
(ii) The husband expressly warns the tradesman not to supply his wife
with goods or credit;
(iii) The husband had sufficiently provided for the wife;
(iv) The husband had given sufficient allowance to the wife; and
(v) The goods ordered by the wife was unreasonable, taking into
consideration her husbandÊs income.

In Miss Gray Ltd v. Cathcart (1922), where a woman purchased clothes worth
£215 on her husbandÊs credit. Her husband refused to pay for the clothes.
He was able to prove that his wife was given an allowance for £960 a year.
The court found her husband not liable for payment.

Implied agency is usually formed in partnership businesses. Section 7 of the

Partnership Act 1961 provides that partners are agents to each other and to
the partnership firm when contracting in the course of the partnership
business.

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 TOPIC 5 LAW OF AGENCY ◀ 157

In Mercantile Credit Co. Ltd. v. Garrod (1962), A, one of the partners sold
a car to a finance company and credited the sales money into the
partnership account without the consent of his partner, B. The finance
company took action when they found out that there was fraud in the sales.
The court held that B was entitled to recover the money from A.

(c) Agency by Ratification

Ratification according to Section 149 is:

Ratification
„When actscan onlyby
done bean
done in the
agent for following conditions:
his principal, where the principal has
no knowledge or does not give authority to do so to the agent, the
(i)principal
It must be elect
may an invalid or or
to ratify unauthorised act agentÂs
to disown the of an agent
act. Iforheanelects
act by
to a
person
ratify them,who holds
it has outeffect
the as an as
agent.
if they had been performed by his

(ii) Agent expressly acts as an agent for the principal and not on his own
name.
In Keighley Maxted & Co. v. Durant (1901), R, KeighleyÂs agent
was authorised to buy wheat for the company at a certain price but
bought them at a higher price from D. R bought in his own name but
intended to buy for Keighley. Keighley agreed with R to take the
wheat at that price but failed to take delivery. The court held that
Keighley was not liable because the agent bought it in his own name
and Keighley did not ratify it.

(iii) The principal must have contractual capacity at the date of the
contract and at the date of ratification.

In Kelner v. Baxter (1866), at the time the agent entered into a transaction
with a third party, the principalÊs company was about to be formed. The
court therefore held that the company had no contractual capacity to
make the contract since it did not exist at that time.

(iv) The principal must at the time of ratification have full kowledge of all
material facts unless it can be shown that he intends to ratify the
contract, whatever the facts may be.

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158 ▶ TOPIC 5 LAW OF AGENCY

(v) The principal must ratify the agentÂs act entirely.

(vi) The ratification must not injure a third party. Section 153 provides that
the ratification of an agentÂs act must not result in a third party to suffer
damages or terminate his right or interest.

(vii) The ratification must be made within a reasonable time.

When an agentÊs act which was originally not valid is ratified by his
principal, the ratification has these effects:

 The principal is liable for such act;

 The ratification will validify entirely or wholly the act of the agent;

 The ratification has a retrospective effect; and

 Ratification must be made within a reasonable time.

(d) Agency by Neccessity

Section 142 provides that:

The
„An of Great
caseagent has Northern
authority,Railway Co. v. Swaffield
in an emergency, to do (1874) should
all such be jointly
acts for the
referred
purpose to of
with the above
protecting his provision. A horse
principal from loss was sent by
as would betrain
doneandby athe
owner
personwasofnotordinary
there to receive it. Theinrailway
prudence, company
his own case,decided
under tosimilar
put it in
a stable for the night. The court held that the railway compay acted as an
agent by neccessity.

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 TOPIC 5 LAW OF AGENCY ◀ 159

However before an agency by neccessity can be created, three conditions

must be satisfied first:

(i) It must be impossible to contact the principal to get further instructions.

In Springer v. Great Western Railway & Co. (1921) , the railway

company which took care of the delivery of the tomatoes decided to
sell them locally when they were found to be bad due to the delay in
delivery. The company did not communicate with the plaintiff, the
principal.

The court held that the railway company were liable to the principal
on the sale because they should have communicated with him and
asked for his instructions as soon as the goods arrived and at the time
they wanted to take such action.

(ii) The act is done in actual and definite neccessity.

In Prager v. Blatspiel Stamp & Heacock Ltd. (1924) , owing to the

occupation of Romania by the German forces, it was impossible for
the agent of a fur merchant to send the skins to P or to communicate
with him, his principal. The agent acted in selling them, which had
increased in value between 1917 and 1918. The court held that the
skins were not likely to deteriorate in value if properly stored.
Therefore there was no neccessity for them to be sold. Thus, the agent
was liable for his act.

(iii) The agent acted in good faith.

(e) Agency by Estoppel

If a principal by his words or conduct causes a third party to believe that a
person is his agent, even though he is not, and the third party relies on it to
his detriment, that person will be estopped or precluded from denying the
existence of the personÊs authority as an agent. This can also be categorised
as one of the examples of implied appointment of an agent.

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160 ▶ TOPIC 5 LAW OF AGENCY

EXERCISE 5.1

1. Rahmat wishes to expressly elect Kamarul as his agent. Advise

Rahmat on the correct procedure.

2. Maimunah received orders for „Hari Raya biscuits‰. She instructed

Zainab to buy 50kg of flour at RM 1.00 per kg. Zainab bought
them at RM 1.10 per kg in her own name. Maimunah refused to
pay for the price when the seller delivered them to her house.
Advise Maimunah whether she should pay.

3. What are the three conditions which must be satisfied for the
creation of an agency by neccessity?

4. „A husband is liable for any debts made by his wife with a third
party‰.

How is agency created in the above situation?

A. By estoppel
B. By ratification
C. By express appointment
D. By implied appointment

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 TOPIC 5 LAW OF AGENCY ◀ 161

5.2 TYPES OF AGENCY

After identifying the creation of agency, we will discuss the different types of
agency. The following Figure 5.2 identifies the different types of agency.

Figure 5.2: Types of agency

Tables 5.1 and 5.2 will explain agencies in detail according to their jurisdiction
and functions.

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162 ▶ TOPIC 5 LAW OF AGENCY

Table 5.1: Agency According to Jurisdiction

Agency
According to Explanation
Jurisdiction

Universal Has extensive power as what a principal may personally have. The
powers given to this kind of agent is by a deed of a Power of
Attorney.
General Elected to perform general or ordinary transactions relating to a
particular trade or business.

Special Elected to do a specific act or for a specific purpose only.

Table 5.2: Agency According to Functions

Agency
According to Explanation
Functions

Del credere An agent who, in consideration of extra commission, undertakes

that a third party with whom he enters into a contract on his
principalÊs behalf, will perform his obligations. If the third party
fails to perform the obligation of the contract, the del credere agent
will be liable for it.

Factors An agent who is entrusted with the goods of the principal for sale
and sells it on his own name. The agent has a lien over the goods, if
the principal fails to make payments.

Brokers An agent who is employed to make contracts between a principal

and third parties. He is different from a factor, because he is not
entrusted to sell in his own name.

Auctioneers An agent who is employed to sell goods by auction. He starts off as

an agent of the seller during the auction and as an agent of the buyer
after he accepts a bid from the buyer.

Bankers Can be viewed from two perspectives, that is, as an agent for a
customer when dealing with the customer and as an agent for the
bank because they are bank employees.

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 TOPIC 5 LAW OF AGENCY ◀ 163

5.3 AUTHORITIES OF AN AGENT

Section 141(1) provides that:

However,
„An agentSection 139an
having states that the
authority to authority
do an actofhas
an authority
agent maytobedo
either express or
every
implied.
lawful thing which is necessary in order to do the act‰.

Definition
Actual or express authority is defined according to Section 140 as words spoken or written and

(a) Actual or Express Authority

Apart from any authority given by the principal expressly by his words or
by writing, express authority also exists in the following situations:
(i) All such powers or acts as are necessary or proper to execute the
express authority;
(ii) The circumstances of the case;
(iii) The custom or usage of trade; and
(iv) The situation and conduct of the parties.

(b) Implied Authority

In the case where a principal did not give an agent express authority, in
certain circumstances, implied authority may be presumed to exist and the
principal must be liable for the acts of the agent. These two situations are as
follows:
(i) Where a principal by his words or conduct, leads a third party to
believe that the agent has authority (Section 190 of the CA 1950).
(ii) Where the agent had authority to act, but that authority was
terminated by the principal without notice to the third party.

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164 ▶ TOPIC 5 LAW OF AGENCY

SELF-CHECK 5.1
You have learned about the authority of an agent while carrying out his duties. Give examples of sit

5.4 DUTIES AND OBLIGATIONS OF AN AGENT

„Every employee is responsible to perform his duties for his employer. The same
goes between an agent and his principal‰. Do you know what are the duties
and obligations of an agent to his principal?

Duties of an agent to his principal are provided under Section 164 to Section 178
of the Contracts Act 1950 (hereinafter referred to as CA 1950). Refer to Figure 5.3
for its illustration.

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 TOPIC 5 LAW OF AGENCY ◀ 165

Figure 5.3: Duties and obligations of an agent

(a) To Obey the PrincipalÊs Instructions

Section 164 of CA 1950 states that an agent is under the duty to conduct the
business of his principal according to the directions given by the principal
or according to the custom which prevails in doing business of the same
kind. The agent will be liable for any loss sustained due to his failure to
obey his principalÊs instructions.

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166 ▶ TOPIC 5 LAW OF AGENCY

In Turpin v. Bilton (1843), the principal instructed his agent to take out an
insurance on his ship but he failed to do so. The court held that the agent
was liable for damages when the ship was lost. The same principle was also
applied in Bostock v. Jardine (1865).

However, an agent is under no duty to obey an unlawful instruction. As an

example, in Cohen v. Kittel (1889), an agent was instructed to place bets by
his principal. Such instructions need not be obeyed.

(b) To Exercise Due Diligence in the Performance of His Duties and to Apply
Such Skills as He Possesses
An agent employed for his special skills must carry out his duties and display
such skills. The agent must always act diligently, skilfully and with due
care. An agent will be made liable due to negligence, lack of skill or
misconduct. Refer to Section 165 of CA 1950.

In Keppel v. Wheeler (1927), the agent, W did not communicate to his

principal, K, regarding the new offer for the sale of KÊs house, which is higher
than the previous offer. The court held that WÊs failure to communicate the
new offer to K was a breach of duty towards K, his principal and he was
liable to pay K the difference between the two offers.

(c) To Render Proper Accounts

Section 166 of the CA 1950 provides that „an agent is bound to render
proper accounts to his principal on demand‰.

(d) To Communicate with the Principal

According to Section 167 of the CA 1950, an agent must be diligent in
communicating with his principal to seek further instructions when facing
difficulties or in an emergency.

If it is impossible to communicate with the principal, the agent must act on

his own to avoid any loss caused to the principal. This is provided for in
Section 142 of CA 1950 as follows:

„An agent has authority, in an emergency, to do all such acts for the
purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar

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 TOPIC 5 LAW OF AGENCY ◀ 167

(e) Not to Let His Own Interest Conflict with His Duty – Illustration (A) of
Section 168 of the CA 1950
„A directs B to sell AÊs estate. B buys the estate for himself in the name of
C. A later on discovering that B has bought the estate for himself, may
repudiate the sale, if he can show that B has dishonestly concealed any
material fact, or that the sale has been disadvantageous to him‰.

In Wong Mun Hai v. Wong Tham Fatt (1987), an agent was found to have
sold his principalÊs land to his own wife well below market value. The
agent, therefore had acted in conflict with his duty.

(f) Not to Make Any Secret Profits Out of the Performance of His Duty
Section 168 also states that an agent is not allowed to make any secret
profits. It may happen that in carrying out his duty for a third party by
using his principalÂs property, the agent made some extra profits for himself,
but if the principal knew and consented to it, the agent is entitled to keep
the profit.

If the principal does not consent to the agentÊs act of keeping the secret profit,
the principal has the following remedies:

(i) May repudiate the contract agreed between the agent and the third
party.

(ii) To recover the amount of the secret profit from the agent.
In Tan Kiong Hwa v. Andrew S. H. Chong (1974), an agent received an
instruction to sell a flat for $45,000. Instead of selling it at that price,
the agent sold it for $54,000 and made a profit of $9,000. The court
held that the principal was entitled to recover the $9,000 from the
agent.

(iii) May refuse to pay the agent his commission or other renumeration.
Section 173 of the CA 1950 provides that:

(iv) May
„Andismiss
agent the
whoagent for breach
is guilty of duty; or in the business of the
of misconduct
agency is not entitled to any remuneration in respect of that part
of the business which he has misconduct‰.

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168 ▶ TOPIC 5 LAW OF AGENCY

(v) May sue the agent and third party giving the bribe.
In Mahesan v. The Government Officers Cooperative Housing Society
(1978), an agent received bribes amounting to $122,000 from a land
vendor. It was for keeping a secret from the principal as to the real
value of a land. The court held that the principal was entitled to sue
for the amount of bribe received by the agent.

(g) Not to Disclose Confidential Information or Documents Entrusted to Him by

His Principal
In L.S Harris Trustees Ltd. v. Power Packing Services (Hermit Road) Ltd.
(1970), the principal instructed his agent to prepare an insurance claim
when his warehouse was burnt down. He reminded his agent not to
disclose some information enclosed in the insurance document. The agent,
however, went against the reminder. The court held that the principal was
entitled to terminate his contract with the agent for a breach of confidence.

(h) Not to Delegate His Authority to Others

When a principal employs an agent to do any task for him, the agent may
not employ another person to do it for him. It is in accordance with the
maxim of „delegatus non potest delegare‰ which means „a
delegate cannot delegate‰. It is also in accordance with Section 143 of the
CA 1950.

Delegation may only be done in the following circumstances:

(i) The principal approves of the delegation of authority;
(ii) The customs of the trade or business permit delegation;
(iii) It is presumed from the conduct of the parties that the agent would
have power to delegate his authority;
(iv) Where the nature of the agency is such that delegation of the
authority to another is necessary to complete the business;
(v) In case of necessity or unforseen emergency; and
(vi) The act to be done is purely administrative or clerical in nature and
does not involve the exercise of discretion.

(i) To Pay to His Principal All Sums Received

Section 171 of the CA 1950 provides:

„Subject to the deductions specified in section 170, the agent is bound

to pay to his principal all sums received on his account‰.

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 TOPIC 5 LAW OF AGENCY ◀ 169

Section 170 states:

According
„An agent to the
maytwo above
retain, provisions,
out an agent
of any sums must on
received render all money
account of thehe
received during
principal in thethebusiness
execution
of of
thehis duties,all
agency, after deducting
money due tothe permitted
himself in
amount
respect such as any made
of advances advances which heproperly
or expenses made and any commissions
incurred by him in
promised by his
conducting principal.
such business, and also such renumeration as may be
payable to him for acting as agent‰.
If a principal fails to pay the promised commission to the agent, the agent is
entitled to retain the money on a lien until he is paid.

EXERCISE 5.2
1. Jack was instructed by his principal to send his car for rent to Chew.
However, Jack used the car to bring his family for sightseeing and
was involved in an accident. The car was badly damaged. Who
must be liable for the loss suffered due to the damaged car?

2. State the situations which enable an agent to keep a part of the

money received under the agency.

3. Raju, a driver, used a car which belonged to the company he

worked with as a Grab car after office hours. This matter was not
known by his principal. What should be done by the principal if
he does not consent to the secret profits made by his agent?

4. „Liyana is appointed by Fasha to be her agent. In the appointment

letter, Fasha stated that Liyana has to do all necessary tasks as a
branch manager relating to her cosmetic business.‰

What type of agent is Liyana categorised as?

A. Special agent
B. General agent
C. Universal agent
D. Del credere agent

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170 ▶ TOPIC 5 LAW OF AGENCY

5.5 THE RIGHTS AND OBLIGATIONS OF A

PRINCIPAL
An agent has duties to his principal and the principal has duties to his agent too.
Do you know the rights and liabilities of a principal to his agent?

After having discussed an agentÂs duties, the next discussion will focus on the
duties of a principal. The two duties are as follows:

(a) To Pay the Agent the Agreed Commision or Renumeration

According to Section 172 of the CA 1950, an agent should not be prevented
from receiving his commission.

When an agent is appointed by a principal, the principal is not permitted to

employ another person to carry out the same duty, for the sole purpose of
withdrawing the agreed commission. Refer to Section 172 of CA 1950.

(b) To Indemnify for Acts Lawfully Done in the Execution of His Authority
Section 175 of the CA 1950 provides that „the employer of an agent is
bound to indemnify him against the consequences of all lawful acts done
by the agent in exercise of the authority conferred upon him‰.

The rights to indemnify arise in the following situations:

(i) The agent incurred losses in the performance of his duties, provided
the performed act is lawful and authorised by the principal;
(ii) The agent causes injury to a third party in the execution of his authority;
and
(iii) The agent suffers injury during the course of his duty.

5.6 EFFECTS OF A CONTRACT MADE

BY AN AGENT
There are three effects which could result from a contract made by an agent, as it
varies according to the circumstances under which the agent contracted.

(a) When an Agent Contracts as an Agent For a Named Principal

In this case, the principal is liable for all the transactions made by an agent
because the third party is aware that the agent is acting for a principal.

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 TOPIC 5 LAW OF AGENCY ◀ 171

(b) Where an Agent Contracts for an Unnamed Principal but Discloses His
Existence
In this case, even if the third party does not know the name of the principal,
it is sufficient for him to be aware that the agent is acting for a principal.
The agent is therefore not liable. In Universal Steam Navigation Co. Ltd.
v. McElvie & Co. (1923), X, an agent to a shipowner, made a charterparty
with
J. M. & Co. and it was signed „for and on behalf of J. M. & Co. (as agents), J.
A. M. X knew when the charterparty was signed that J. M. Co. was acting as
agents for another but did not know who the principal was. There was a
breach of contract and the shipowner sued for damages from
J. M. & Co. The court held that J. M. &Co. was not liable to pay damages
because they were only agents.

(c) Where the Agent Contracts for an Undisclosed Principal

In this case, the agent discloses neither the existence nor the identity of the
principal, as if he is the principal at the time he contracted with a third
party. Therefore, the third party is entitled to take action against the agent
or the principal or both. The Illustration in Section 186 of the CA 1950
explains the situation:

„A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue either B or
C, or both, for the price of the cotton‰.

5.7 TERMINATION OF AN AGENCY

We also need to know how a contract of agency may be terminated.

Section 154 of the CA 1950 provides that:

„An agency is terminated by the principal revoking his authority; or by the agent
renouncing the business of the agency, or by the business of the agency being
completed, or by either the principal or agent dying or becoming of unsound
mind, or by the principal being adjudicated or declared a bankrupt or
an insolvent‰.

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172 ▶ TOPIC 5 LAW OF AGENCY

(a) Termination by the Parties Involved in the Contract

The following are the types of termination by parties involved in the contract:

(i) Termination by mutual agreement between the principal and the agent.

(ii) Termination by revocation of contract at any time by the principal.

However this may occur when:
 The agent himself has an interest in the property which forms the
subject matter of the agency.

• In this case, if the agent has carried out part of the principalÊs
instructions, termination is only effective:
– Against the agent after it becomes known to him.
– Against the third party after it becomes known to them.

 If the agent has carried out part of his duties, revocation is not
effective on the part of duty already carried out by the agent.

(iii) Unilateral revocation by an agent by giving reasonable notice. If no

such notice is given, the agent is liable for all damages resulting to the
principal (Section 159 of the CA 1950).

(b) Termination by Operation of Law

The following are the types of situations in which termination by operation
of law are applicable:
(i) Death of principal or agent;
(ii) Mental disability of principal or agent;
(iii) Becoming bankrupt;
(iv) Expiration of the period fixed for contract of agency;
(v) By the performance of the contract of agency, if it is for one
transaction only; and
(vi) By the happening of events stipulated in the contract of agency.

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 TOPIC 5 LAW OF AGENCY ◀ 173

SELF-CHECK 5.2
State the effects of contract if these situations take place:
Yusof, an agent to Cepat Kaya Company named Encik Ghazali as his principal.
Effect:

Mahat, an agent to Cempaka Holdings told Nora, a third party that he is acting for a principal
Effect:

Samerin, an agent to Bernas Insurance Co. did not name and disclose to Jefri, a third part
Effect:

EXERCISE 5.3
Discuss the three duties of an agent as stated in the Act and support your answer with relevan

Explain the creation of agency by neccessity and cite any relevant cases.

Ismail wishes to buy a house in Taman Bahagia. He instructed Joe to buy it on his behalf. Afte

Advise Joe as to his duty as an agent.

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174 ▶ TOPIC 5 LAW OF AGENCY

„A contract of agency may be terminated by parties involved in the contract and by operation of law

Which of the following is NOT a termination by operation of law?

Death of the principal or agent.
Principal or agent has become mentally disabled.
By the happening of events stipulated in the contract.
By mutual agreement between the principal and agent.

 Agency is a contractual relationship which exists between a principal and an

agent. Under this relationship, the agent is given authority by the principal to
act for him in dealing with the other party (third party).

 An agency may be formed by five different ways, that is, by express

appointment, by implied appointment, by ratification, by necessity and by
estoppel.

 The agentÊs authority may be actual or apparent.

• Both agent and principal have to observe several duties and obligations as
laid down under statutes and also as specified in their agreement.

 Agency may be terminated either by the act of the parties or by operation of

law.

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 TOPIC 5 LAW OF AGENCY ◀ 175

Agency Factors
Auctioneer General agent
Bankers Principal
Brokers Special agent
Del credere agent Universal agent
Drawer

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To pi ▶ Sale of Goods

6
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define goods;
2. Explain the terms which exist under the sale of goods contracts and
the implied terms under the Sale of Goods Act 1957;
3. Discuss the general principles in the transfer of goods and its
exceptions;
4. Assess the means of performance for sales of goods;
5. Examine unpaid sellerÊs rights; and
6. Discuss the remedies which can be claimed by a seller and buyer if
there is a breach of contract.

▶ INTRODUCTION
You have learned the law of contract in detail in the earlier topics. Now you will
be learning the law related to the sale of goods. Whether in theory or in practice,
this is important to us as we are involved in selling and purchasing goods on a
daily basis. The law which governs these activities is the Sale of Goods Act 1957
(hereinafter referred to as the SGA 1957).

We will be studying the definition of goods, terms under the sale of goods
contracts, principles for transfer of title, performance of contract, unpaid sellerÊs
right and remedies claimable for a breach of contract.

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 TOPIC 6 SALE OF GOODS ◀ 177

6.1 DEFINITION OF GOODS

According to Section 2 of SGA 1957:

Goods is defined as every kind of movable property other than actionable claims and money;

Based on this definition, nearly every movable thing are goods except money and
actionable claims for debts or others.

6.1.1 Types of Goods

Section 6(1) of SGA 1957 provides that:

The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or future goods.

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178 ▶ TOPIC 6 SALE OF GOODS

There are two types of goods. Explanation about these types are given in Table 6.1.

Table 6.1: Types of Goods within the Context of the Law

Types of
Explanation Example
Goods
Existing Goods possessed or owned by the A asked a car salesman to sell his
Goods seller at the time the contract of sale car. The car is his. The car needs to
was made. Why does Section 6(1) be in the salesmanÊs possession
differentiate between goods while waiting for a sale to be
possessed and goods owned by the made. This shows that a seller is
seller? This is because the goods in not necessarily the owner of the
his possession need not necessarily car.
be goods that he owned.
Future Goods to be manufactured, Purchasing of a car. When buyer
Goods produced or acquired by the and seller reach an agreement for
seller after a contract of sale has the sale of a car and detailed
been made. specifications are given, the seller
will prepare a contract of sale. The
car will then be manufactured and
produced according to the detailed
specifications.

Both types of goods can be further classified into two, which are:
(a) Specific goods or ascertained goods are goods seen and identified by the
buyer; and
(b) Unascertained goods are goods identified by description only.

SELF-CHECK 6.1
List down four examples of both types of goods that you have learnt.

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6.2 CONTRACT OF SALES OF GOODS

Definition
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the p

When a contract of sale involves existing goods, the contract is called a sale. A
transaction which involves future goods is called an agreement to sell. This is
because the property is to be transferred in future or is subject to several
conditions that need to be complied with.

Section 4(4) SGA 1957 states that an agreement to sell becomes a sale when the
time elapses or the conditions are fulfilled subject to which the property in the
goods is to be transferred.

6.3 TERMS OF CONTRACT OF SALE

Next, you will study the terms of a contract of sale. Terms of a contract are
conditions which exist in the contract of sale, whether express or implied.

6.3.1 Formation of Contract of Sale

Before you study the conditions of a contract, you need to look at how a contract
is formed. Section 5 of SGA 1957 provides as follows:
(a) A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such an offer. The contract may provide for the immediate
delivery of the goods or immediate payment of the price or both, or for the
delivery or payment by instalments, or that the delivery or payment or both
shall be postponed.
(b) Subject to any law for the time being in force, a contract of sale may be
made in writing or by word of mouth, or partly in writing and partly by
word of mouth or may be implied from the conduct of the parties.

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180 ▶ TOPIC 6 SALE OF GOODS

Price is usually meant in the form of money and Section 9 of SGA 1957 provides
that price can be fixed as follows:

(a) Price can be fixed specifically by the contract.

Example: Amin agreed to sell his bicycle to Rashid for RM200.

(b) Price can be fixed in a manner agreed by the contract, for example, by a
third party.

(c) Price can also be fixed by the course of dealing between the parties.
Example: Nasir made a contract to supply office stationery for a year to
Zahid. However, if Nasir continued to supply the stationery even after the
contract period had expired, the conditions in the original contract will be
binding on both parties.

(d) If price is not fixed, the buyer shall pay the seller a reasonable price.

Section 5(1) of SGA 1957 also permits a contract of sale be made by:

(a) Immediate delivery of the goods but payment is made later; or

(b) Immediate payment of the price but delivery is made later; or
(c) Both payment and delivery are made immediately; or
(d) Delivery is made but goods are paid by instalments.

A contract of sale requires the elements of offer, acceptance and price for its
formation. It may also be made in writing or by word-of-mouth, and under some
circumstances, be implied by the conduct of the parties to the contract.

However, the Hire-Purchase Act 1967 which specifically provides a hire-

purchase contract must be made in writing. This contract is one of the modes
mentioned in Section 5(2) of SGA 1957.

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6.3.2 Conditions and Warranties

In law, a contract of sale of goods is formed by its conditions and warranties. Both
terms will be explained.

Definition
A condition is a stipulation essential to the main purpose of the contract. A breach of the cond

InBased
conclusion, according
on Section to the
12(3) of theSGA,
Act, ifa warranty
any conditions are not complied
is a stipulation collateralwith,
to thethe
contract
main purpose of the contract the breach of which gives rise to claimis for
is void but if a warranty is not complied with, the other party only
entitled
damages to abutclaim
not for
to adamages. However,
right to reject a contract
the goods and does
treat not usually state
the contract as
clearly if a stipulation made in the contract is a condition or a warranty. Whether
a term is a condition or a warranty depends on the construction and intepretation
of the particular contract of sale. A stipulation which was meant to be only a
warranty may be deemed a condition or otherwise.

The general rule: A breach of condition gives rise to a right to the innocent party
to treat the contract as repudiated. However, if the following five situations
arise as exceptions to the general rule, it gives only a right to claim for damages
(Section 13 of the SGA 1957).
(a) The buyer waives the condition;
(b) The buyer elects to treat the breach of the condition as a breach of warranty
and claim for damages only;
(c) The contract of sale is not severable and buyer has accepted the goods or
parts of the goods;
(d) The breach of the condition can only be treated as a breach of warranty unless
stipulated otherwise in the contract; and
(e) The contract of sale is for specific goods, and the property of the goods has
passed to the buyer, a breach of the condition should be presumed as a
breach of warranty except if the contract stipulates otherwise.

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182 ▶ TOPIC 6 SALE OF GOODS

6.3.3 Stipulation as to Time

Example:
Provision If a buyer fails to pay within the stipulated time, a seller cannot
repudiate
Section 11the
of contract
the SGA made betweenunless
1957 provides them.a However, most contracts
different intention appearsoffrom
sales
stress on time
the terms andcontract,
of the stipulatestipulations
it expressively
as toin theofcontracts.
time paymentTime is, deemed
are not therefore,
presumed to be ofof
to be of essence essence to the
a contract of contract.
sale.

6.3.4 Implied Terms

Do you know that implied terms exist in a contract? What do you understand by
„implied terms‰ in a contract? Should there be implied terms in a contract?
Think about it.

There would be express stipulations made and agreed by the contracting parties
in a contract of sales. However, the SGA also provides several implied terms to
be impressed on the parties during their sale and purchase transactions, unless
they have included or modified the terms in the said contract of sales.

The implied terms are stated in Section 14 to Section 17 of the SGA 1957. Refer to
Figure 6.1.

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 TOPIC 6 SALE OF GOODS ◀ 183

Figure 6.1: Types of implied terms in a contract

(a) Implied Terms as to Title

Section 14 of the SGA 1957 provides, that there is:
(i) An implied condition that in the case of a sale, a seller has the right to
sell the goods and in the case of an agreement to sell, a seller will have
such right at the time when the property is to be transferred;
(ii) An implied warranty that the buyer shall have and enjoy quiet
possession of the goods; and
(iii) An implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to
the buyer before or at the time when the contract is made.

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184 ▶ TOPIC 6 SALE OF GOODS

Section 14(a) of the SGA 1957

General Rule:
The seller must have a valid right over the goods at the time he transferred
them to the buyer to enable the buyer to receive the title and enjoyment of
the goods.

In Rowland v. Divall (1923), Rowland bought a car from Divall and used
it for a few months. He later found out that Divall was not the valid owner
of the car as the real owner now claimed it from Rowland. Rowland sued to
recover the total purchase price he had paid to Divall. The court held that
Rowland was entitled to recover it in full, notwithstanding that he had used
the car for a few months.

Section 14(b) of the SGA

General Rule:
When a seller transfers possession of the goods to a buyer, there is an
implied warranty according to Section 14(b) of the SGA 1957 that the buyer
shall have and enjoy quiet possession of the goods.

In Healing (Sales) Pty Ltd v. Inglis Electric Pty Ltd (1968) , the court laid the
principle that a seller who has not been paid the full purchase price or
partly paid may not interfere with the goods sold.

Section 14(c) of the SGA 1957

General Rule:
Any goods to be transferred to a buyer shall be with an implied warranty
that it is free from any charge or other encumbrance and it was not known
by the buyer.

Example: Rahmat agreed to buy a house from Abdullah. Rahmat only

knew that the house was charged to the bank after the sales and purchase
transaction was made. Abdullah is liable for a breach of the implied
warranty for selling a house which is not free from encumbrance.

However, if Rahmat knew of that fact and still agreed to buy the house,
there is no breach of implied warranty.

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 TOPIC 6 SALE OF GOODS ◀ 185

(b) Implied Terms as to Sale of Goods by Description

A Section
sale of goods by description
15 of the normallythat
SGA 1957 provides takes placethere
where whenisa abuyer doesfor
contract not
have
the sight of goods
sale of the goods but agrees to
by description buyisafter
there relying on
an implied the description
condition that theof
the goods
goods for example,
shall correspondfrom catalogues.
with the description: and if the sale is by sample
as well as by description, it is not sufficient that the bulk of the goods
Nagurdas Purshotumdas
Incorresponds with the sample& if
Cothe
v. goods
Mitsuido Bussan Kaisha
not also Ltd (1911)
correspond with, a
contract of sale was made between two parties for the sale of a well-known
type of flour. After the buyer ran out of such flour, he made an order
describing it as „the same as our previous contract‰. The seller delivered
flour identical in quality as the previous one but of a different brand. It was
held that the seller did not comply with the buyerÊs stipulated description.

A sale by description is also applicable to cases where a buyer viewed the

goods but defects in its description could not be clearly detected.

An example could be seen in Beale v. Taylor (1967). A car salesman

advertised a car „Herald Convertible, white⁄‰ for sale. The buyer inspected
the car before buying it. After buying it, he discovered that the car consisted
of parts of two cars welded together, one being earlier than 1961. The court
held that the buyer was entitled to sue for damages because there was a
breach of contract.

(c) Implied Terms as to Fitness of Goods and of Merchantable Quality

Under the common law, there is a principle that a buyer must take care of
the fitness and quality of goods before making purchases as in the maxim
caveat emptor. In other words, there is no implied term that goods sold
should fit the purpose it was sold and is of quality to the buyer. A careless
buyer has to bear the consequences. However, Section 16 of the SGA gives
several exceptions where a buyer is presumed to have been cautious while
making his purchases.

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186 ▶ TOPIC 6 SALE OF GOODS

Exceptions in Section 16 of the SGA 1957 are:

(i) There is no implied term that the goods sold fit the particular purpose
it was bought except if:

 The buyer expressly or impliedly makes known to the seller the

particular purpose the goods is required.

 The buyer relies on the sellerÊs skill of judgment at the time of

purchase.

 The buyer purchases goods that is usually sold by the seller in the
course of his business.

However, there is an exception to the exception in Section 16 of the

SGA 1957, that is, for goods sold under specified patents or
trademarks.

In Deutz Far East (Pte) Ltd v. Pacific Navigation Co. Ltd (1990) , a
plaintiff is a manufacturer and supplier of ship engine and space
parts. They sued for payment for parts supplied to the defendantÊs
ship. The defendant claimed that the part supplied was defective and
caused great damage to the engine of his ship. The defendant also
claimed that the parts supplied did not fit the engine of their ship and
were of unmerchantable quality.

The court held that the defendant had relied on the plaintiff to supply
parts which could be used for the engine of their ship and the goods
supplied should be of merchantable quality.

However, if the goods sold was for one purpose only, for example,
when buying toothpaste for brushing teeth, the buyer therefore need
not inform the specific purpose of the purchase, unless the said goods
was purchased for other special purposes.

In Cammel Laird & Co v. Manganese Bronze Etc. Co. (1934) , X entered

into a contract with Y to build a propeller for YÊs ship according to
specifications given by Y. X delivered the propeller but it did not fit
the shipÊs engine. The court held that X broke the implied term
because Y specifically told X the purpose or use of the propeller and
had relied on XÊs skill to build it.

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 TOPIC 6 SALE OF GOODS ◀ 187

(ii) There is an implied condition that the goods are of merchantable

quality in respect of goods bought by description from a seller who
usually deals in goods of that description, provided that the buyer has
examined the goods and there are no defects found.

The quality of goods depends on the description and other conditions

of the goods. There is no definition given in the Act but it is explained
in Bristol Transway v. Fiat Motors Ltd (1910), as, „the goods are in
such good quality and such condition that a reasonable man acting in
a reasonable manner, after examining the goods adequately, would
accept them as complying with his offer to buy‰.

In Wilson v. Ricket, Cockerell & Co. Ltd (1954) , a woman ordered

Coalite, a kind of fuel, from a fuel merchant. During delivery, a
detonator was embedded in a piece of coal, causing an explosion. The
court held that the consignment of the goods as a whole were not of
merchantable quality.

(d) Implied Terms as to Sale By Sample

If a contract of sale was by sample, Section 17(2) of SGA 1957 provides there
is an implied condition that:
(i) The bulk shall correspond with the sample in quality;
(ii) The buyer shall have reasonable opportunity of comparing the bulk
with the sample; and
(iii) The goods shall be free from any defect rendering them
unmerchantable which would not be apparent on reasonable
examination of the sample.

In Godley v. Perry (1960), a boy bought a plastic catapult from Perry, a

shopkeeper. Godley used the catapult and it broke in his hands and part of
it ruptured his eye. Perry alleged that he bought a quantity of these
catapults from a wholesaler by sample and PerryÊs wife had tested the
sample before placing the order.

The court decided that the catapult was not of merchantable quality. The
shopkeeper could recover from the wholesaler. It was held that reasonable
examination was made by the seller but the defect of the goods could not be
discovered by reasonable examination. Therefore, the seller could recover
from the wholesaler.

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188 ▶ TOPIC 6 SALE OF GOODS

SELF-CHECK 6.2

Based on Section 5 of the SGA 1957, there is a similarity between a contract of sales and an ordinary

EXERCISE 6.1
How is a contract of sales formed?
When is time considered as the essence of a contract of sale of goods?
State four implied terms in a contract of sale of goods.
Explain the implied terms as to title based on the legal provisions and the cases to support them.

6.4 TRANSFER OF TITLE

According to the maxim of nemo dat quad non habet (no one gives who possesses
not), goods sold by a person who has no right on the goods or without the
ownerÊs or possessorÊs permission, cannot transfer the goods to the buyer. It is
also termed as sales by person not the owner.

Section 27 of the SGA 1957 (clearly similar to the maxim of nemo dat)
provides:

Subject to this Act, and of any other law for the time being in force, where
goods are sold by a person who is not the owner thereof, and who does not
sell them under the authority or with the consent of the owner, the buyer
acquires no better title to the goods that the seller had, unless the owner of

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 TOPIC 6 SALE OF GOODS ◀ 189

Example: A drug addict stole a pair of shoes and sold them to you. Even if you
do not know that the shoes were stolen goods, you do not have the right over
them. If the real owner claims them, you have to give him back the shoes. The
purpose of this principle is to protect the interest of the owner of goods sold
without his consent or stolen from him.

In Lim Chui Lai v. Zeno Ltd. (1964) , Ahmad, a contractor, obtained a contract to
build sewerage from the Petaling Jaya Local Authority and made an agreement
with Zeno Ltd, to supply the materials needed for sewerage works. Zeno Ltd
supplied the said materials to the building site. Several problems arose which
caused the contract between Petaling Jaya Local Authority and Ahmad to be
nullified. Ahmad was later found to have sold the materials supplied by Zeno
Ltd to Lim Chui Lai. Zeno Ltd alleged that the materials were theirs, and Ahmad
had no authority to sell them to other persons. The court held that Ahmad was
just a bailee and not the possessor who has the right to sell the said goods to a
third party.

However, there are exceptions to the nemo dat principle. The exceptions are as
stated in Figure 6.2.

Figure 6.2: Exceptions to the nemo dat principle

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190 ▶ TOPIC 6 SALE OF GOODS

6.4.1 Estoppel
The first exception to the nemo dat principle is stated in Section 27 of the SGA
1957, which is:

If Subject
the owner by Act,
to this his conduct, appeared
and any other as though
law for the timehe consented
being towhere
in force, the sale made
goods
byare
thesold
seller to a third party, the owner is precluded from denying
by a person who is not the owner thereof, and who does not sell that the seller
has no authority
them under the to do so.
authority or with the consent of the owner, the buyer
acquires no better title to the goods that the seller had, unless the owner of
Example:
the goodsAliiswished to sell JamalÊs
by his conduct cassette
precluded fromtodenying
Hamid. the
Jamal was aware
sellerÊs of AliÊs
authority to
conduct, but did not do anything to stop it. Therefore, it appears as though Jamal
had given Ali an authority to sell it. Jamal is precluded from making any claims
on Hamid.

In Syarikat Batu Sinar Sdn Bhd & YL v. UMBC Finance Bhd & YL (1990), the
second plaintiff (Supreme Leasing) purchased a tractor from a seller and leased it
to the first plaintiff (Syarikat Batu Sinar). The first defendant (UMBC) had
previously bought the same tractor from the seller and leased it to the second
defendant. However, at the time UMBC purchased it, the registration card to the
tractor was in the sellerÊs possession and no certification was made in the card to
show that the tractor then belonged to UMBC. The issue was on who was entitled
to the tractor.

The court held that the failure by UMBC to take steps to make the certification in
the registration card precluded it from denying Supreme Leasing of its title to the
tractor.

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6.4.2 Sale by Mercantile Agent

The second exception is stated in Section 27 of the SGA 1957, that is:

There are five

Provided that conditions to be complied
where a mercantile agent is, with under
with the Section
consent 27 owner,
of the under inthis
exception:
possession of the goods or of a document of title to the goods, any sale made
by him when acting in the ordinary course of business of a mercantile agent
(a) The seller is a mercantile agent according to the Act. Section 2 of the SGA
shall be as valid as if he were expressly authorised by the owner of the goods
1957 defines a mercantile agent as one having in the customary course of
to make the same; provided that the buyer acts in good faith and has not at
business, as such agent authority either to sell goods, or to consign goods
the time of the contract of sale, notice that the seller has no authority to sell.
for the purposes of sale, or to buy goods, or to raise money on the security
of the goods;
(b) Has posession of the good or document of title at the time of the sale;
(c) The keeping of the goods or document of title is with the ownerÊs consent;
(d) The sale was in the ordinary course of business of a mercantile agent; and
(e) The buyer bought them in good faith and has not notice that the mercantile
agent has no authority to sell.

In Folkes v. King (1923), Folkes owned a car and delivered it to a mercantile

agent for sale. The mercantile agent sold it to King and disappeared with the
money he received from King. The court held that King bought the car in good
faith and the mercantile agent sold it with FolkesÊs consent. King therefore had a
good title to the car.

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192 ▶ TOPIC 6 SALE OF GOODS

6.4.3 Sale by Joint Owner

A Section
buyer who buys
28 of thegoods
SGA which are jointly-owned
1957 provides byofseveral
that if one persons
several has the of
joint owners
right overhas
goods thethe
goods
solebought if theof
possession buyer
themcomplies with these
by permission conditions:
of the co-owners, the
property in the goods is transferred to any person who buys them of such
(a) The goods bought were in the sellerÊs posession.
joint owner in good faith and has not at the time of the contract of sale notice
(b)thatThe
the buyer
seller has no authority
bought them in to sell.faith and has no notice at the time of the
good
contract that the seller has no authority to sell.

If the buyer was able to comply with these conditions, any other joint-owner
could not sue for the recovery of those goods from the buyer.

6.4.4 Sale Under Voidable Contracts

Section
Section2929ofofSGA 1957 1957
the SGA clearly provides
provides that the
„where anyseller
goodsofobtained
goods has byobtained
the seller
from the original
possession owner
thereof by acoercion,
under contractfraud, misrepresentation
voidable under Section 19 oror
under influence,
section 20 of
and
thethe seller sold
Contracts Act them
1950, to
buta the
buyer who bought
contract has not in good
been faith without
rescinded notice
at the time ofof
the real
the situation,
sale, the buyertheacquires
originala owner of the
good title goods
to the goodscannot claimhefor
provided buyrecovery
them inof
the saidfaith
good goods.and without notice of the sellerÊs defect of title.

Example: Kamil bought a watch from Daud by fraud. Kamil later on sold it to
Salmah. The contract between Kamil and Daud was voidable at DaudÊs option.
If Daud did not rescind the contract before Kamil sold it to Salmah, Salmah then
has a valid right over the watch.

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 TOPIC 6 SALE OF GOODS ◀ 193

In Car and Universal Finance & Co Ltd v. Caldwell (1965), Caldwell, the owner of
a Jaguar car, was persuaded to sell and deliver a car to a rogue, who gave
Caldwell a car of a much lower value and a cheque which Caldwell later found to
be worthless. Caldwell reported to the police and asked the Automobile
Association to recover his car. They found that the car had passed through
several hands and eventually was acquired by the Car and Universal Finance Co.
Ltd.

The court held that even though the Car and Universal Finance purchased the car
in good faith without notice of the real situation, since Caldwell had acted
speedily in rescinding the contract with A, the rogue, Caldwell was still entitled
to the car.

6.4.5 Sale by Seller in Possession of Goods

The conditions to be complied with under the fifth exception are:

Provision
Section 30 (1) of the SGA 1957 provides when a seller having sold goods to a
(a) Seller sold the goods to a first buyer;
buyer continues to be in possession of the goods, the transfer by that seller of
(b)goods
Thetogoods
a newcontinues
buyer who or receives
is still inthe
thesame goods
sellerÊs in good faith and without
possession;
notice of the previous sale shall have the same effect as if the seller making
(c)the The same or
delivery goods sold by
transfer wastheexpressly
seller or agent to a second
authorised buyer;
by the ownerand(the first
(d)buyer)
Theto transfer
second them
buyer to the them
bought new buyer.
in good faith without notice of the first sale.

In Pacific Motor Auction Pty Ltd v. Motor Credits (Hire Finance) Ltd (1965) , the
plaintiff put several of his cars at a car dealerÊs shop and made an agreement for
the sale of the cars. Problems arose between them and the plaintiff rescinded his
agreement with the car dealer but he left them there. The car dealer then sold the
said cars to the defendant without his consent. The Privy Council held that the
defendant was entitled to the cars he bought.

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6.4.6 Sale by Buyer in Possession of the Goods

Section 30 (2) of the SGA 1957 provides:

There
Whereare afour conditions
person havingtobought
complyorwith in Section
agreed to buy30(2) of the
goods, SGA 1957
obtains, withbefore
the
the exceptions
consent areseller,
of the applicable:
possession of the goods or the document of title, the
delivery or transfer by that person or by a mercantile agent acting for him of
(a) Buyer bought or agrees to buy the goods;
the goods or documents of title under any sale, pledge, or other disposition
(b)thereof
The to any is
goods person
in the receiving the same in
buyerÊs possession good
with thefaith and consent;
sellerÊs without notice of
any lien or other right of the original seller in respect of the goods shall have
(c)effects
Theassame goods
if such liensold by the
or right buyer
did or his agent to a third party or a new buyer;
not exist.
and
(d) The third party or new buyer bought them in good faith.

In Newtons of Wembley Ltd v. Williams , A bought a car from the plaintiff and
paid by cheque. The cheque was found to be worthless. The plaintiff found out
that A sold the same car to B. B then sold it to the defendant. The court held that
since the car was in AÊs possession with the plaintiffÊs consent even though the
cheque was worthless and the car was already transferred to the defendant, the
defendant therefore had a valid right over the car.

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ACTIVITY 6.1

Read the situations below. Give your opinion and identify the
exceptions for each situation.

(a) First Situation

Zulkifli threatened Mas Ayu into selling her car to him. Anis, a
third party who did not know about the previous transaction,
bought it from Zulkifli. Mas Ayu did not take any steps to rescind
the contract. Is Anis entitled to the car? State the exception
applicable.

(b) Second Situation

Daniel lent his video recorder to Shah. Shah said he wished to sell
the video recorder to Linda but Daniel did not pay serious
attention. Shah sold it to Linda and Daniel sued Linda for recovery
of the video recorder. Is Daniel still entitled to the video recorder?

(c) Third Situation

Kamala made an agreement with David to sell 20 horses he reared.
A misunderstanding arose between them and the contract was
rescinded. Kamala, however did not take back the horses from
DavidÊs possession, though David kept urging her to do so
several times. David later sold the horses to a buyer and Kamala
sued for recovery of the horses. Is Kamala entitled to the horses?
State the exception applicable.

EXERCISE 6.2
Explain the maxim of nemo dat quad non habet.
State six exceptions to the rule of nemo dat quad non habet.
„Nina bought a bag from Ilyana fraudulently. Nina sold it to Najwa. Ilyana did not rescind t
What is the outcome of the above scenario?
Nina has a valid right over the bag.
Ilyana has a valid right over the bag.
Najwa has a valid right over the bag.
Nobody has a valid right over the bag.

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6.5 PERFORMANCE OF CONTRACT

In performing a contract of sale of goods, Section 31 of the SGA 1957 provides
that it is the duty of the seller to deliver the goods to the buyer. The buyer, on the
other hand, has the duty of accepting and paying for them in accordance with the
terms of the contract.

6.5.1 Delivery
Section 33 of the SGA provides that delivery may be made according to the
manner agreed by all the parties involved in the contract of sale. Delivery is then
presumed done or has the effect of putting the goods in the possession of the
buyer.

Section 32, on the other hand, specifically states that delivery of goods and
payment of the price are concurrent conditions which the seller and the buyer must
comply. A seller is presumed ready and willing to give possession of the goods to
the buyer in exchange for the price and the buyer should be ready and willing to
pay the price in exchange for possession of the goods.

6.5.2 Time and Place for Delivery

The rules as to delivery are also stated in the SGA 1957.

Section 36(1) also provides that:

Provision
Section 36(1) provides that „whether it is for the buyer to take possession of
the goods
„Apart fromor anyforsuch
the seller to send
contract, them
goods soldtoare
the
tobuyer is a question
be delivered depending
at a place at which
in each
they are atcase
theon
timetheofcontract,
the sale,express or implied,
and goods agreed between
to be soldthe parties⁄
are to be‰delivered at
a place at which they are at the time of the agreement to sell, or, if not then in
existence, at the place at which they are manufactured or produced‰.

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The above provision states three places where delivery can be made:
(a) If the goods were at the place where the sale was made, delivery must be
made at that place;
(b) If the goods are at a different place, the said goods must be delivered at the
place at which they are at the time of the agreement to sell; and
(c) If the goods does not exist yet, the goods must be delivered at the place
which they are manufactured or produced.

However, if time of delivery is not fixed in the contract of sale, the seller is bound
to deliver the goods within a reasonable time [Section 36(2)].

6.5.3 Goods in the Possession of Third Party

While goods are in the possession of a third person, the seller is presumed to
have made no delivery unless such third party acknowledges to the buyer that he
holds the goods on the buyerÊs behalf. This is provided for in Section 36(3).

6.5.4 Instalment Deliveries

According to Section 38 of the SGA 1957, delivery of goods by instalment can be
done if the buyer agrees to such a manner. If delivery by instalment is agreed
upon and payment by instalment is made, in the case where the seller fails to
deliver goods or a buyer fails to pay by instalments, the suing parties must refer
to the terms of their contract to see whether there was a breach of contract.

6.5.5 Wrong Delivery

If the quantity of goods delivered to the buyer is larger than or lesser than that
agreed in the contract, what is the effect on the goods? Has this ever happened to
you?

If the goods delivered is lesser than the agreed quantity in a contract, the buyer is
entitled to reject them. However, if the buyer accepts, he, must then pay
according to the agreed price in the contract.

If the quantity delivered is larger than agreed in a contract, the buyer can reject
the balance. However, if he agrees to accept them, the buyer must pay for them at
the agreed rate.

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If the seller delivers goods he is contracted to sell mixed with goods of a different
description not included in the contract, the buyer is entitled to accept only the
goods which are in accordance with the contract and reject the rest, or may reject
the whole delivery.

Section 37 provides that wrong delivery is subject to any usage of trade, special
agreement or course of dealing between the parties.

6.5.6 Risks
If a seller is required to deliver goods by a carrier to the buyer, the delivery of
goods by the seller to the carrier is prima facie deemed as the delivery of goods to
the buyer. If there is no agreement made between the seller and the carrier, and
the goods sent are lost or damaged in course of transit, the buyer is entitled to
decline the goods delivered by the carrier.

In certain circumstances where the goods are sent by the seller to the buyer by a
route involving sea transit, the seller must give such notice to the buyer to enable
him to insure the goods during the sea transit; if the seller fails to inform the
buyer, the goods are deemed to be at the sellerÊs risk if they are lost or damaged
during such sea transit. Delivery by carrier is stated in Section 39 of the SGA
1957.

Section 40 on the other hand states that when there is an agreement that goods
should be delivered at a place other than where they are, the buyer shall take any
risk of deterioration in the goods necessary in the course of transit.

6.5.7 Acceptance
Section 41 of the SGA 1957 gives a right to the buyer to examine the goods before
making an acceptance of goods delivered. The seller, on the other hand, must
give the buyer a reasonable opportunity to ascertain whether the goods are in
conformity with the contract or not.

A buyer is deemed to have made an acceptance when:

(a) The buyer intimates to the seller that he has accepted them;
(b) The goods are delivered to him and he did not act in a way inconsistent
with the sellerÊs ownership, for example, by selling the goods to others;
and
(c) After a lapse of a reasonable time, the buyer retains the goods without
intimating to the seller that he has rejected the goods.

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In M. G. Seth & Ors v. Lam Tye Co Ltd (1954), the appellant and respondent made
a contract of sales of tiles from India. It was a c.i.f contract (cost, insurance,
freight) and a sale by description. The tiles sent by the seller unfortunately did
not conform to the buyerÊs description. The respondent made a written
complaint. The tiles were however sent to Butterworth and Alor Setar to be
delivered to the respondent.

The court held that the respondentÊs act of permitting the goods to be unloaded
at Butterworth and Alor Setar showed that an acceptance was made and the
respondent therefore was prevented from rejecting the goods.

EXERCISE 6.3

What are the duties of a seller and a buyer in the performance of a contract of sale? State the re
What are the risks that a seller and a buyer have to face when performing a contract of sal
State five conditions that must be complied with before a mercantile agent may sell goods

6.6 RIGHTS OF UNPAID SELLER

According to Section 45(1) of the SGA 1957, a seller is defined as an „unpaid seller‰:
(a) When the whole of the price has not been paid or tendered; and
(b) When a bill of exchange or other negotiable instrument has been received as
conditional payment and the condition on which it was received has not been
fulfilled by reason of the dishonour of the instrument or otherwise.

The unpaid sellerÊs right is provided in Section 46(1) of the SGA 1957. It states
that even if the property in the goods may have passed to the buyer, an unpaid
seller is, by implication of law, entitled to:
(a) A lien on the goods for the price while he is in possession of them;
(b) In cases of insolvency of the buyer after the transfer of the goods, the seller
has the right to stop the goods in transit; and
(c) A right of resale.

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6.6.1 Lien
Lien is a right of the seller to retain possession of the goods until payment is
made. It can be exercised under these circumstances:
(a) Where the goods was sold without any stipulation as to credit;
(b) Where the goods was sold on credit, but the term of credit has expired; and
(c) Where the buyer becomes insolvent.

If part delivery of the goods has been made, Section 48 of the SGA 1957 provides
that an unpaid seller may exercise his right to a lien on the remainder. However,
he loses the right to a lien if:
(a) The seller delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods;
(b) When the buyer lawfully obtains possession of the goods; and
(c) The seller waives the right to a lien.

6.6.2 Stoppage in Transit

Section 50 of the SGA 1957 provides that if a buyer of goods becomes insolvent
and the unpaid seller is no longer in possession of the goods, the unpaid seller
has the right to stop the goods in transmission to the buyer and retain them until
payment is made.

Two crucial elements in this Section are that the buyer is insolvent and the goods
are in transmission.

Goods are deemed to be in transit if:

(a) The goods are delivered to a carrier or other bailee for the purpose of
transmission to the buyer;
(b) The goods delivered by the carrier has not reached the appointed destination;
(c) If, after the arrival of the goods at the appointed destination, the carrier
acknowledges the buyer that he holds the goods on the buyerÊs behalf and
continues in possession of them as bailee for the buyer, immaterial that a
further destination for the goods may be indicated by the buyer;
(d) If the goods are rejected by the buyer and the carrier continues in
possession of them even if the seller has refused to receive them back;
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(e) The carrier wrongfully refuses to deliver the goods to the buyer; and
(f) In cases where part delivery of goods has been made to the buyer, the right
to stop the goods in transit can be made on the remainder of the goods
except if there is an agreement made to give up possession of the whole of
the goods.

Stoppage of goods in transit can be done according to Section 52 of the SGA 1957.
It is provided that the seller has the right of either taking actual possession of the
goods or giving notice of his claim to the carrier. Such notice may be given either
to the person in actual possession of the goods or to his principal. If the notice
was given to the principal, the principal must be given reasonably enough time
and opportunity to communicate to his agent.

6.6.3 Resale
Section 54 of SGA 1957 provides that a resale may be made when:
(a) The goods are of a perishable nature;
(b) After the unpaid seller gives notice to the buyer, the buyer does not within
a reasonable time pay for the goods; and
(c) The seller expressly reserves a right of resale if the buyer defaulted.

SELF-CHECK 6.3
What rights may a seller sue for if the goods he sold were not paid for?

6.7 REMEDIES FOR BREACH

If one of the parties, whether a seller or a buyer breached a contract, how far does
the law protect the parties involved in the contract? Think of this matter.

If one of the parties to a contract of sale defaulted or breached the contract, the
other party is entitled to make a claim.

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6.7.1 Seller’s Right to Make a Claim

Every seller is protected under the law and entitled to claim if the buyer
defaulted on the contract. Let us identify the claims that a seller can make as
illustrated in Figure 6.3.

Figure 6.3: SellerÊs right to sue

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6.7.2 Buyer’s Right to Sue

Like a seller, a buyer is also protected under the law and is entitled to sue if a
seller breaches the contract. Let us identify the claims that a buyer can bring as
in Figure 6.4.

Figure 6.4: BuyerÊs right to sue

ACTIVITY 6.2
With all that you have understood now and referring to all the relevant sections, write a short

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EXERCISE 6.4

Which is NOT the right given to unpaid seller according to the Sale of Goods Act 1957?
Right of lien
Right of resale
Right to bring a tort action
Right for stoppage in transit

 There are three main elements in a contract of sale of goods, namely, there must
be goods available, the seller transfers or agrees to transfer the property in
goods and there is a price.

 Generally, every movable thing are goods except money and actionable
claims for debts or others.

 Price is usually meant in the form of money. The price can be fixed either
specifically by the contract or in a manner agreed by the contract or by the
course of dealing between the parties. If price is not fixed, the buyer shall pay
the seller a reasonable price.

 A sale must be distinguished from an agreement to sell. Contract of sale

involves existing goods, whilst agreement to sell involves future goods. This
is because the property is to be transferred in future or is subject to several
conditions that need to be complied with.

 The term of contract of sale of goods can be classified into condition and
warranty. Whether or not the term in the contract is actually a condition or a
warranty depends on the the construction and intepretation of the particular
contract of sale.

 A condition is a stipulation essential to the main purpose of the contract. A

breach of the condition gives rise to a right to treat the contract as repudiated.

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 A warranty is a stipulation collateral to the main purpose of the contract, the

breach of which gives rise to claim for damages but not to a right to reject the
goods and treat the contract as repudiated.

 By virtue of Section 14 to Section 17 of SGA, a number of terms are implied in

every contract of sale of goods. These terms should be observed by the parties
during their sales and purchase transactions, unless they have included or
modified the terms in the said contract of sales. The terms are:

 Implied terms as to title;

 Implied terms as to sale of goods by description;

 Implied terms as to fitness of goods and of merchantable quality; and

 Implied terms as to sale by sample.

 As a general rule, a person who has no right on the goods or without the
ownerÊs or possessorÊs permission, cannot transfer the goods to the buyer. This
is known as nemo dat quod non habet which is set out in Section 27 SGA.
However there are several exceptions to this rule. The exceptions are:

 Estoppel;

 Sale by mercantile agent;

 Sale by one of the joint owners;

 Sale under a voidable contract;

 Sale by a seller in possession after sale; and

 Sale by a buyer in possession after sale.

 In performing a contract of sale of goods, Section 31 of the SGA 1957 provides

that it is the duty of the seller to deliver the goods to the buyer. The buyer, on
the other hand, has a duty of accepting and paying for them in accordance
with the terms of the contract.

 There are three rights of an unpaid seller against the goods. The rights are
lien, stoppage in transit and right to resale.

 In the case of breach, either by seller or buyer, the party not in default may
claim for remedies.

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Breach Sale
Estoppel Title
Goods Transit
Lien

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To pi ▶ Hire Purchase

7
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define hire purchase;
2. Explain the procedures that must be complied with in the
formation of a hire-purchase agreement;
3. Discuss the five implied terms in a hire-purchase agreement;
4. Examine the ownerÊs and sellerÊs liabilities if there is
misrepresentation;
5. Assess the six rights and liabilities of the hirer;
6. Elaborate the procedures for repossession by the owner; and
7. Analyse the two rights of the hirer if goods are repossessed.

▶ INTRODUCTION
After having identified and studied the laws which govern the sale of goods, this
topic will discuss in depth the laws which govern hire-purchase activities. The
law applicable for hire-purchase activities is the Hire-Purchase Act 1967
(hereinafter stated as HPA). It is applicable to all types of hire purchase in respect
of goods listed in the First Schedule of HPA, that is:

(a) All consumer goods (S. 2(1) – Consumer goods means goods purchased for
personal, family or house hold purposes).

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(b) Motor vehicles, namely:

(i) Invalid carriages;
(ii) Motorcycles;
(iii) Motorcars including taxi cabs and hire cars;
(iv) Goods vehicles where the maximum permissible laden weight is not
more than 2,540kg; and
(v) Buses, including stage buses.

In this topic, you will also learn the definition of hire purchase, principles for the
formation of a hire-purchase agreement, implied terms in the agreement, the
ownerÊs and the dealerÊs liabilities for misrepresentation, the rights as well as
liabilities of the hirer, the procedures for taking possession by the owner and the
hirerÊs right if goods were repossessed.

7.1 DEFINITION OF HIRE-PURCHASE

AGREEMENT
Section 2(1) of the HPA 1967 defines a hire-purchase agreement as letting of
goods with an option to purchase. A hire-purchase agreement can also be defined
as an agreement for the purchase of goods by instalments (whether the
agreement stipulated the instalments as rent or hire or otherwise). However, hire-
purchase agreement does not include any agreement:

(a) In respect of goods where the property in the goods passed at the time of
the contract or upon delivery or at any time before goods delivered; and

(b) Where the buyer or hirer of the goods is a person who deals in the normal
course of a trade or business of selling similar goods having the same
description with the goods under the agreement.

Definition
Based on the definition, there are two important elements that you must understand. First, hire purc

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In Tractors Malaysia Bhd v. Kumpulan Pembinaan Malaysia Sdn Bhd (1979) , the
respondent sued for damages when the appellant repossessed his goods. The
respondent alleged that the business transaction was a mere sale and not a hire
purchase. The court held that, based on the agreement, both parties to the
contract had agreed to transfer the possession of the goods after the full price was
paid by the respondent. Therefore, the transaction was a hire-purchase
agreement.

7.2 FORMATION OF HIRE-PURCHASE

AGREEMENT
The HPA 1967 stipulated three stages which need to be complied by the parties
who wish to enter into a hire-purchase agreement. Figure 7.1 shows that the
formation of a hire-purchase agreement is divided into three stages: before,
during and after the agreement.

Figure 7.1: Formation of hire-purchase agreement

(a) Before (Negotiation)

As stated, before a hire-purchase agreement is formed, it must conform to
the procedure which has been stipulated in S.4(1). Figure 7.2 illustrates the
formalities before the formation.

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Figure 7.2: Stages before formation of hire-purchase agreement

S.4(4) stated that a hire-purchase agreement entered into in contravention of

subsection (1) shall be void.

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(b) During the Time of the Formation

The second stage that needs to be complied with is at the time of the
formation as illustrated in Figure 7.3.

Figure 7.3: Stage at the time of the formation of hire-purchase agreement

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It should be noted that under the Hire-Purchase (Amendment) Act 2010,

there are few additional formalities which should be observed if the hire-
purchase agreement comprised of a motor vehicle. The new added
formalities are as follows:
(i) Section 4E of the HPA provides that, the hirer may request in writing
to keep the registration certificate of the hired motor vehicle. Upon the
request, the owner shall hand over the registration certificate to the
hirer. Failure to do so would result in the owner being guilty of an
offence under the Act and the penalty is under Section 46(1) of the
HPA.
(ii) Section 4F of the HPA states that, the hire-purchase agreement shall
not be entered into if the motor vehicle has been altered or modified in
its construction and structure. If there was any modification to the
motor vehicle at the point of signing the hire-purchase agreement,
then the agreement shall be deemed void.
(iii) According to Section 4G of the HPA, the owner or dealer is required
to declare in writing if there are any defects on such motor vehicle in
accordance with the inspection report by the relevant authority.
Section 4G(2) defines the defect to include the mechanical or
operational system, construction, structure and build up and fitting of
the motor vehicle. Failure to declare the defects would render the
owner or dealer guilty of an offence and the penalty is under Section
46(1) of the HPA.

Besides the above three provisions, there are other two important
provisions relating to booking fees and downpayment which should be
highlighted here. Under Section 30A of the HPA, the owner, dealer or his
agent shall not collect or accept booking fees from the intending hirer. The
payment of booking fees can only be paid once the Second Schedule is
served. The amount of the booking fee shall not exceed 1 per cent of the
cash price of the good comprised in hire-purchase agreement. If the booking
is cancelled or withdrawn, 90 per cent of the booking fees shall be refunded.

Furthermore, Section 31 (1A) of the HPA provides that, the hirer needs to
pay the full downpayment only when the hire-purchase agreement is
signed and if the owner fails to deliver the goods to the hirer, then the
downpayment must be refunded in full to the hirer (S.31(1B)).

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(c) After the Formation

After a hire-purchase agreement is entered into, the stage after its formation
also needs to be considered. Let us study the formalities after its formation
as illustrated in Figure 7.4.

Figure 7.4: Procedures after formation of hire-purchase agreement

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Any person who contravenes these particular procedures and formalities shall be
guilty of an offence and will be subjected to the following penalty as stated under
Section 46(1) of the HPA:

(a) Penalty imposed to the body corporate for example bank, finance company
or dealers:
(i) For the first offence – Fine not exceeding RM100,000.
(ii) For second offence and so forth – Fine not exceeding RM250,000.

(b) Penalty imposed to a person who is not a body corporate, for example
director, manager, sale advisor, officer of banks and dealers:
(i) For first offence – Fine not exceeding RM25,000 or imprisonment for a
term not exceeding three years or both.
(ii) For second offence and so forth – Fine not exceeding RM50,000 or
imprisonment for a term not exceeding five years or both.

SELF-CHECK 7.1
Presume that one of your friends wishes to sign a hire purchase agreement. Explain to him the proc

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EXERCISE 7.1
1. Several stages need to be complied with before the formation of a
hire-purchase agreement. Explain those stages and the relevant
provisions.

2. „Muhamad went to KK Computer shop to buy a computer and

printer. While discussing the payment, Naili, the owner of the
shop mentioned that Muhamad may bring back the computer
and printer on that day and payment may be made by
instalments. Muhamad will be the owner of the computer and
printer when the full payment is made. Naili gave him two
separate documents, stating the agreement about the payment
for the computer and the printer respectively. Muhamad signed
the documents‰.

What is the nature and validity status of the above agreement?

A. The agreement is a valid hire-purchase agreement.
B. The agreement is not a valid hire-purchase agreement.
C. The agreement is a valid contract for sale of goods.
D. The agreement is not a valid contract for sale of goods.

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7.3 IMPLIED TERMS IN HIRE-PURCHASE

AGREEMENT
Section 7 of the HPA provides that there are five implied terms in a hire-purchase
agreement, as seen in Figure 7.5.

Figure 7.5: Implied terms in a hire-purchase agreement

(a) Quiet Possession: Section 7(1)(a) of the HPA

There is an implied warranty that the hirer shall have and enjoy quiet
possession of the goods. In this context, quiet possession means no
interference or claims from the seller or any third party.

In Jones v. Lavington (1903), quiet possession was decided to mean that there
should not be any interference from the seller or by any other individuals
through the seller on the goods under agreement.

In Niblett v. ConfectionersÊ Materials Co. (1921), however, interference could

include interference from a third party which arises out of a legal action
allowed by law.

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(b) Title: Section 7(1)(b) of the HPA

There is an implied condition that an owner has the right to sell the goods at
the time when the property is to pass. This provision explains that for a title
to pass from the owner to the hirer, the owner must first have the right to
sell the said goods.

In Ahmad Ismail v. Malayan Motor Co. & Ors (1973), a car on hire purchase
was detained by the police on suspicion that it was stolen. However, the car
was released because there was no evidence that it was a stolen good. The
court held that because the car was not a stolen good, the owner thereof had
the right to sell it.

(c) Goods Free from Any Charge or Encumbrances : Section 7(1)(c) of HPA
There is an implied warranty that goods shall be free from any charges or
encumbrances in favour of any third party at the time when the property is
to pass to the hirer.

Steinke v. Edwards (1935) showed that a hirer can sue if the owner fails to
ascertain whether goods for hire-purchase is free from any charges or
encumbrance. In this case, the plaintiff gave a sum of money to the
defendant for the settlement of a tax imposed on the car. The defendant
however failed to do so. Therefore, the plaintiff can make a claim on the
defendant.

(d) Merchantable Quality: Section 7(2) of the HPA

In every hire-purchase agreement, there shall be an implied condition that
the goods are of merchantable quality. Such conditions are not implied:

(i) When the hirer has examined the goods or a sample, in regards to any
defects which that examination ought to have revealed.

(ii) If such goods are second-hand goods and the agreement contains
statements which stated that:
 The said goods are second-hand goods.
 All conditions and warranties as to the quality and fitness are
expressed negatively, and the owner proves that the hirer has
acknowledged in writing that the statement was brought to his
notice.

(iii) Goods sold by hire-purchase is implied to be of quality, except if:

 The buyer of goods has examined the goods, and defects are
revealed after the inspection.

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In Lau Hee Teah v. Hargill Engineering Sdn Bhd & Ors (1980), a
hirer inspected a machine during negotiations but its defect was
not visible. The hirer then bought it by hire purchase. The court
held that the inspection made was not enough to reveal the defect
with the engine. The owner therefore could not deny that the
machine was of merchantable quality.
 The goods are second-hand goods and was so informed but there
was no mention of quality.
In Traders Finance Corp Ltd v. Rourke & Others (1967), the
court held that even though the parties knew that the goods were
second- hand, they still needed to clearly state it in the agreement
and show that the goods was not of quality.

(e) Fitness: Section 7(3) of the HPA

This section provides for fitness of goods for its purpose. If the hirer told the
owner the purpose for which the goods were needed, there is an implied
condition that the goods shall be fit for purpose as stated by the buyer,
except if:
(i) It is a second-hand good.
(ii) The fitness of the goods was negatively expressed and the owner
proves that the hirer was informed about the matter.

EXERCISE 7.2
What is meant by quiet possession? Give one case to support it.

State two situations where the goods sold by hire purchase are not of quality.

Give one relevant case with an implied condition that goods must be free from any charges or encum

What is the implied term under a hire-purchase agreement?

Goods are suitable for their price.
Goods are similiar to their sample.
Goods are of merchantable quality.
Goods correspond with their description.

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7.4 LIABILITIES OF AN OWNER AND DEALER

FOR MISREPRESENTATION
Section 8(1) of the HPA gives protection to a hirer if there is misrepresentation as
follows: Every representation, warranty or statement made to a hirer or
prospective hirer, whether orally or in writing by the owner or dealer or any person
acting on behalf of the owner or dealer in connection with or in the course of
negotiation leading to the entering into of a hire-purchase agreement, shall confer
on the hirer:

(a) Against the owner who made the representation, warranty or statement; and

(b) Against the person who made the representation, warranty or statement or
on whose behalf the person who made the representation, warranty or
statement was acting in making any payment in respect of the agreements
which is not sufficient to discharge the total amount then due under all the
agreements, to require the owner to appropriate the sum so paid by him in
or towards the satisfaction of the sum due under any one of the agreements,
or in or towards the satisfaction of the sum due under any two or more of
the agreements in such proportions as he thinks fit. If he fails to make any
such appropriation as aforesaid, the payment shall by virtue of this section
be appropriated towards the satisfaction of the sums due under the
respective hire-purchase agreements in the order in which the agreements
were entered into. This includes the right to sue for damages if the hirer
bought the goods from the person or his agent, whichever is relevant.

In Lau Hee Teah v. Hargill Engineering Sdn Bhd & Ors (1980), the Federal
Court was of the opinion that if the first defendant (agent) made a
misrepresentation which caused the plaintiff to sign the agreement, the
plaintiff is entitled to rescind the agreement with the second defendant
(owner) and sue for damages from the first defendant (agent). However, in
this case, the statement made by the agent was not a misrepresentation and
the hirer therefore could not terminate the agreement.

To further strengthen the protection given to the buyer, Section 8(2) of HPA
provides that the agreement made may not exclude, limit or modify the
hirerÊs right of action arising out of any such misrepresentation. An
agreement to the contrary shall be void.

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According to Section 8(3) of the HPA, an innocent owner may be entitled to

be indemnified from the agent who made the misrepresentation if the hirer
rescinded the agreement and suffered losses as a result of such
misrepresentation.

SELF-CHECK 7.2
Imagine a situation where you, as hirer, have been misrepresented by the owner during negotiation

7.5 RIGHTS AND LIABILITIES OF HIRER

The Hire-Purchase Act also provides seven rights which a hirer can claim for
under a hire-purchase agreement. The laws that govern these rights are in Section
9 to Section 15 of the HPA. To get a clearer picture of the hirerÊs rights and
liabilities, refer to Figure 7.6 below.

Figure 7.6: Rights and liabilities of hirer

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(a) Obtain Information – Section 9 of the HPA

A hirer is entitled to know about the status of those payments he or she
made by a written request to the owner. The owner shall within 14 days
after he received a request from the hirer supply to the hirer these
statements:
(i) The amount paid to the owner by the hirer;
(ii) The total amount which has become due under the agreement but
remains unpaid;
(iii) The amount which is to become payable under the agreement; and
(iv) The amount of interest out of the instalment payment.

However, if the owner had supplied these statements within the previous
three months, the owner no longer needs to supply the same statement
within the stipulated 14 days.

If the owner fails to comply with the provisions of Section 9, the owner cannot
enforce the agreement against the hirer, sue for recovery of the goods or
enforce the guarantee in respect of the said agreement. However, this does
not mean that the agreement is void. In such situation, only the ownerÊs
right to enforce the agreement is temporarily suspended until the owner
supplies such statements.

It becomes an offence if the owner however within a period of one year still
continuously fails to forward the statement to the hirer. If proven guilty, he
could be fined for not more than RM1,000.

(b) Appropriation of Payment – Section 10 of the HPA

A Ifhirer who
a hirer is liable two
purchased to make
or morepayment in hire
goods by respect of two
purchase or more
from hire-
the same
purchase
owner, agreements
he is entitled to the same owner
to request shall,forwithout
payment regard toto be
such goods any
agreement
distributedto according
the contrary be entitled,
to his ability. on making any payment in respect of
the agreement which is not sufficient to discharge the total amount then due
under all the agreements, require the owner to appropriate the sum so paid
by him in or towards the satisfaction of the sum due under any one of the
agreements, or in or towards the satisfaction of the sum due under any two
or more of the agreements in such proportions as he thinks fit. If he fails to
make any such appropriation as aforesaid, the payment shall by virtue of
this

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Section be appropriated towards the satisfaction of the sums due under the
respective hire-purchase agreements in the order in which the agreements
were entered into.

Example: Salmah bought a television by instalment of RM250 per month, a

washing machine by instalment of RM200 per month and a refrigerator by
instalment of RM150 per month. If Salmah cannot afford to settle the whole
amount according to each hire-purchase agreement, she is entitled to
request the owner to distribute payments to an amount she is able to pay.

(c) Change of Location – Section 11 of the HPA

By virtue of a hire-purchase agreement, a hirer is under the duty to keep the
goods comprised in the hire-purchase in his possession or control at a
particular place or not to remove the goods from a particular place stated in
the agreement. Section 11 of the HPA provides on the application of the
hirer, to make an order approving the removal of the goods to some other
place from a magistrate.

(d) Transfer of Title – Section 12(1) of the HPA

A hirer is also allowed to assign the title of the goods under hire-purchase
agreement to other persons. According to Section 12(1) of the HPA, „The
right, title and interest of a hirer under a hire-purchase agreement may be
assigned with the consent of the owner, or if his consent is reasonably
withheld, without his consent.‰

If we refer to the above provision, the hirer may assign his right, title and
interest without the consent of the owner, provided that the owner
unreasonably withholds the consent. However, in order to do so the hirer
must first apply to the High Court for an order declaring that the consent of
the owner has unreasonably been withheld.

The owner is said to unreasonably withhold his consent when:

(i) The owner fails or refuses to give his consent without sufficient reason.

(ii) The owner requires any payment or consideration for his consent to
such an assignment as provided under Section 12(2) of the HPA.

(iii) The High Court is satisfied to declare that the owner has unreasonably
withhold his consent, upon the application by the hirer under Section
12(3) of the HPA.

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(iv) The owner requires other or additional guarantors to guarantee the

assigneeÊs obligation, whereas:
 The same gurantors who have guaranteed the hirerÊs obligation
have agreed to guarantee the assigneeÊs obligation under the
assignment; or
 The assignee has furnished the same number of guarantors to
guarantee his obligation under the assignment as was furnished by
the hirer to guarantee his obligation under the hire-purchase
agreement.

(e) Transfer of Title by Operation of Law – Section 13 of the HPA

If the hirer is deceased, the hirerÊs right, title and interest under the hire-
purchase agreement will pass on to his personal representative. In the case
of a company, if it goes into liquidation or becomes bankrupt, its right, title
and interest under the hire-purchase agreement shall pass to the liquidator.
Upon the transfer, the personal representative or the liquidator shall
comply with all the terms in the hire-purchase agreement.

(f) Early Termination – Section 14 of the HPA

According to Section 14 of the HPA, a hirer is allowed to terminate a hire-
purchase agreement earlier than the period stipulated for in the agreement.
According to procedure, the hirer is required to give a notice in writing to
the owner stating his intention for doing so, and paying the owner the net
balance due under the agreement before or on the day specified.

(e) Termination of Agreement – Section 15 of the HPA

The hirer is also entitled to terminate the signed hire-purchase agreement at
any preferred time. According to this Section, „a hirer of any goods
comprised in a hire-purchase agreement may terminate the agreement by
returning the goods to the owner during ordinary business hour at the place
at which the owner ordinarily carries on his business or to the place
specified for that purpose in the agreement‰.

Section 15(2) of the HPA also provides that an agreement may be

terminated when the hirer requests the owner to sell the goods to a person
introduced by the hirer and the goods are bought in cash. If the value of the
goods is larger than the amount of unpaid payments, the hirer is entitled to
the balance but if the amount paid is lesser than the value of the goods, the
owner is only entitled to sue for debts from the hirer due to the difference.

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EXERCISE 7.3

1. What are the procedures that must be complied with if a hirer

wishes to terminate the agreement earlier than the specified
period?

2. What are the steps which must be taken if a hirer wishes to

transfer goods under the hire-purchase agreement to another
location?

3. „Rizal bought a television, washing machine and CD player by

instalment from HS Electrical for a price of RM250, RM200 and
RM150 per month respectively. The goods were purchase by
Rizal in January, March and December 2009 respectively. In
January 2010, Rizal was able to pay RM500 to HS Electrical. He
did not state anything about how the payment should be
divided.‰

What is the legal consequence of the above scenario according to

the Hire-Purchase Act 1967?
A. Rizal breached his duty as hirer. He must pay the total
amount of RM600 to HS Electrical every month.
B. Rizal breached his duty as hirer. HS Electrical may start the
process to repossess the goods from Rizal.
C. Rizal may pay the amount of RM500 and the payment
should be divided into equal amounts for the television,
washing machine and CD player.
D. Rizal may pay the amount of RM500 and the payment
should be made towards the satisfaction of amount of
instalment of the television, washing machine and CD
player in the order in which the agreement was made.

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7.6 REPOSSESSION BY OWNER

Have you ever been in a situation where after possession of the goods was
transferred to you and you are the new owner of the said goods, the original
owner sued you for recovery of the goods? Is he entitled to the goods?

Section 16 of the HPA stipulates several procedures for repossession by an

owner. Section 16(1) provides that an owner should only exercise his power of
taking possession if the following situations take place:
(a) The hirer defaulted two instalments or payments successively;
(b) The total payment of instalments paid by the hirer amounts to not more
than 75 per cent of the total cash price of the goods as in the hire-purchase
agreement;
(c) The owner served a notice in writing in the form set out in the Fourth
Schedule of HPA; and
(d) The period fixed by the notice has expired which shall not be less than
21 days after the service of the notice.

In Phang Brothers Motors Sdn Bhd v. Lee Aik Seng (1978), the court held that
because the Fourth Schedule notice was less than two days from the specified
period, the notice therefore was not valid and the repossession cannot be carried
out.

However in United Manufacturers Sdn Bhd v. Sulaiman bin Ahmad and

Others (1989), the court held that Section 16(1) only provided for the minimum
period, that is, 21 days. An action to repossess brought two years after the notice
was served, however, may still be presumed valid.

It should be noted that by virtue of section 16 (1A) of the HPA if the hirer
defaulted two successive instalments and the total payment of instalments is
more than 75 per cent of the total cash price of the goods, the owner may not
repossess unless he has obtained an order from the court.

There are also cases where a hirer died. Section 16(1C) of the HPA stipulates that
an action for repossession can only be carried out if there is a default of four
payments successively.

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As stated in Section 16(1) of the HPA, it is crucial to give notice before the act of
repossession can be carried out. However, Section 16(2) of HPA provides an
exception to the need for an owner to serve notice to the hirer, that is if there is a
reasonable ground for believing that the goods will be removed or concealed in
another location if a notice is served.

After the procedures according to Section 16(1) of the HPA are complied with, the
owner needs to comply with the following procedures also, which are:
(a) Section 16(3) of the HPA – within 21 days after repossession, the owner
must serve on the hirer and every guarantor of the hirer, a notice in writing
as in the form set out in the Fifth Schedule of HPA.
(b) Section 16(5) of the HPA – to prepare a document acknowledging receipt of
the goods, which sets out a short description of the goods and the date on
which, the time at which and the place where the owner repossessed the
goods.

For the Fourth and the Fifth Schedule mentioned in Section 16 of HPA, reference
can be made to the Fourth and Fifth Schedule in the Hire-Purchase Act 1967.

The document of acknowledgement of receipt must be served to the hirer at the

time repossession was made or if the hirer is not around, it must be given after
the repossession.

However, if a hirer feels that he cannot afford to settle the amount due but
remains unpaid after being served with the Fourth Schedule notice, the hirer is
entitled to return the goods within 21 days. Under this situation, the costs for
repossession and other costs will not be imposed on the hirer. This is explained in
Section 16A of the HPA.

After repossession, the owner cannot dispose of the goods without taking these
procedures in accordance with Section 17(1);
(a) To obtain written permission from the hirer, except;
(b) The period for the Fifth Schedule notice lapses; or
(c) The period for notice under Section 18(1)(a) lapses.

Failure to follow the procedures laid down in Section 16(1) will give the owner no
right to enforce repossession. If he still does it, his act is presumed to be unlawful.

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In DPP v. Mohamad Nor (1988), when a hirer failed to settle the instalment
payment, the owner sent a few agents to take further action. However, the owner
failed to give the Fourth Schedule notice as stipulated by the Act. The hirer was
said to be holding a few weapons when the ownerÊs agent was carrying out
repossession. The court held that the ownerÊs action was unlawful and the hirer
was entitled to use reasonable force.

Section 16(6) of the HPA provides that the right of the owner ceased and
determined under the hire-purchase agreement if he failed to serve the Fifth
Schedule notice. However, if the hirer sued for recovery of the goods from the
owner, the agreement has the same force and effects as if the notice had been
duly given and therefore enforceable.

ACTIVITY 7.1

Based on what you have learned, draw a mind map of the owner repossession procedures an

7.7 HIRER’S RIGHT IN RESPECT

OF REPOSSESSED GOODS
Section 18(1) of the HPA – where the owner repossesses any goods comprised in
a hire-purchase agreement, the hirer may have certain rights, as follows:
(a) The hirer, within 21 days after repossession of the goods, after the service of
a notice as in the Fifth Schedule and the document of acknowledgement of
receipt, may require the owner to redeliver the goods repossessed provided
all amount due but unpaid be settled first.
(b) Require the owner to sell the goods to any person introduced by the hirer
who is prepared to buy the goods for cash.

Section 18(1)(b) of the HPA – If there is a difference between the value of the
goods repossessed with the amount already paid, the hirer is entitled to the
difference.

For more information on the laws, Acts and cases in Malaysia, refer to
http://lawyerment.com.my.

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EXERCISE 7.4

1. State the procedure that must be complied with before signing a

hire-purchase agreement.
2. One of the implied terms in a hire-purchase agreement is that
the owner is entitled to sell at the time the goods are assigned to
the hirer. State the relevant sections and one case to support
your opinion.
3. What is the hirerÊs right when an owner and seller make a
misrepresentation during their negotiation which causes the
hirer to enter into the agreement?
4. How may a hirer claim his right of appropriation of payment?
5. Kamil purchased a Honda car by hire purchase. The purchase
was financed by Keong Finance Co. Ltd (KFCL). Kamil entered
into a hire- purchase agreement with KFCL for 60 months at an
instalment of RM800 per month. When he faced financial
problems, Kamil defaulted on two instalments successively and
subsequently, KFCL took possession of the car. Advise Kamil as
to his rights as a hirer.

 The law on hire-purchase in Malaysia is governed by the Hire-Purchase Act

1967 amended by Hire-Purchase (Amendment) Act 2010 which came into
force on 15 June 2011.

 Section 2(1) of the HPA 1967 defines a hire-purchase agreement as letting of

goods with an option to purchase. A hire-purchase agreement can also be
defined as an agreement for the purchase of goods by instalments.

 The Hire-Purchase Act only applies to all hire-purchase agreements relating

to goods specified in th First Schedule of the said Act.

 There are several procedures that have to be observed by the parties before,
during and after the formation of hire-purchase agreement. The procedures
are laid down under Sections 4 and 5 of the HPA.

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 There are three implied conditions and two implied warranties provided under
the HPA. These implied terms will protect the interest of hirers and their
guarantors.

 If the owner or dealer has made misrepresentation in the negotiations leading

to the hire-purchase agreement, the hirer has the right to rescind the
agreement and sue for damages.

 There are seven statutory rights of hirer. The relevant provisions are provided
under Section 9 to 15 of the HPA. The rights are as follows:

 Rights to obtain information;

 Right to require owner to appropriate payments;

 Right to change of location of the goods by applying to MagistratesÊ Court;

 Right to transfer his right, title and interest;

 Right to have his right, title and interest transferred by operation of law;

 Right for early termination; and

 Right to terminate the agreement.

 An owner has a right to take possession of the hired goods if the following
situations take place:

 The hirer defaulted two instalments or payments successively;

 The total payment of instalments paid by the hirer amounts to not more
than 75 per cent of the total cash price of the goods as in the hire-purchase
agreement.

 The owner served a notice in writing in the form set out in the Fourth
Schedule of the HPA; and

 The period fixed by the notice has expired which shall not be less than 21
days after the service of the notice.

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 HPA imposes certain restrictions on the owner in the exercise of his right of
repossession. The restrictions are as follows:

 Owner must give notice to the hirer at least 21 days before the
repossession took place.

 After repossession, the owner must not sell or dispose of the goods for 21
days.

 The owner must observe the rights and immunities given to the hirer
when the goods are repossessed. For example, the hirer may require the
owner to sell the goods to any person introduced by him who is prepared
to buy the goods for cash.

Hire-purchase agreement Liability

Hirer Repossession

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To pi ▶ Insurance

8
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Explain what is the position of an insurance contract and its definition;
Explain the doctrine of subrogation;
Discuss the concept of insurable interest;
Differentiate between material facts and non-material facts; and
Evaluate the basic clause, condition, warranties and exception clauses in the contract.

▶ INTRODUCTION
After discussing and identifying the laws which govern the contract of sales and
hire-purchase agreements, in this topic we will learn about insurance. Nearly
every day we are exposed to the importance of insurance, but how far do you
understand the laws which govern insurance?

The main legislation governing insurance law in Malaysia is the Financial

Services Act 2013 (hereinafter referred as FSA 2013), which repealed the
Insurance Act 1996. However, by virtue of Section 275 of FSA, Section 144,
Section 147(4), Section 147(5), Section 150, Section 151 and Section 224 of
Insurance Act 1996 continue to remain in full force and effect. Actually, Financial
Services Act 2013 consolidated the Banking and Financial Institutions Act 1989,
Insurance Act 1996, Payment Systems Act 2003 and Exchange Control Act 1953.
The rules relating to insurance can be found in Schedules 8, 9 and 10 of FSA. This
Act came into force on 30 June 2013 except for Section 129 and Schedule 9 with
effect from 1 January 2015.

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The Insurance Act divides the insurance business into two, that are:
(a) Life insurance business – All businesses in respect of life policies.
(b) General insurance business – All businesses other than life insurance policies.

Section 16(1) of the FSA 2013 prohibits licensed insurers from carrying on both
life business and general business. The licensed insurer is given five years to
comply with this provision, unless a longer period is specified by the Minister, on
the recommendation of Bank Negara Malaysia, by a written notice to the
insurers.

The usual types of insurance businesses carried out are life insurance, marine
shipping insurance, accident insurance, fire insurance, transportation insurance
and flight insurance.

You will learn about insurance contracts, subrogation, insurable interests,

material facts in an insurance contract as well as clauses in respect of basic
clauses, conditions, warranties and any exception clauses.

8.1 INSURANCE CONTRACT

You often hear about insurance. Do you know what is meant by insurance
contract under the law?

An insurance contract is a contract whereby an insurer agrees to assume losses suffered by a policy

An insurance contract is usually issued in the form of a „policy‰. However, no

policy does not mean that there is no insurance contract. In Borhanuddin bin Hj
Jantara & Others v. American International Assurance Co Ltd (1987), an insured
died in an accident two weeks after he submitted a completed proposal form to
the insurer. A certain sum of money was paid and a receipt issued but it was not
stated whether the payment was a premium or a deposit. A clause in the
proposal form stated that the insurance was enforceable after a payment of the
first premium and a policy would be issued. At the time of the accident, no policy
was issued even though a policy member was already named in the proposal
form. The next-of-kin sued for the amount insured but the insurer alleged that
there was no insurance contract.

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The court held that since the payment made by the deceased was the payment of
the first premium, therefore, there was an insurance contract.

8.2 SUBROGATION
The following is the definition of subrogation:

In subrogation, an insurer is entitled to enforce any remedy against any third party who caus

In Teo Kim Kien & Ors v. Lai Sen & Ors (1980) 2 MLJ 125, an insured sent his
car for a wash at a service centre (third party). The insured asked the car to be
sent to a certain address after the cleaning work was done and instructed that if
the insured was not there, to bring back the car to the service centre.

A service centre worker sent the car to the said address but because the insured
was not there, he brought it back to the service centre. On the way back, the car
rammed into a motorcyclist and the motorcyclist made a claim. After the
insurance company paid the claim to the motorcyclist, a claim for damages was
made against the service centre employer for his workerÊs negligence. It was
held that the insurance company was entitled to do so.

8.3 INSURABLE INTERESTS

A risk may only be insured if it is of insurable interest. A person is said to have
insurable interest in a subject matter if he suffers losses resulting from any
damages to his property.

Example: A house owner has an insurable interest on his house because if his
house is burnt down, he would face losses.

Therefore, if a person who has no insurable interest insures on the subject matter,
the insurance policy is void. However, according to Section 3 of the Financial
Services Act 2013, there is an execption to this general principle in cases of life
insurance. A life insurance policy owner is said to have no insurable interest on
his life. The insurable interest is with:
(a) A spouse (husband or wife);
(b) Child or ward below 18 years old;

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(c) Employee; and

(d) Any person who is wholly or partly depending on him or her.

In Nanyang Insurance Co Ltd v. Salbiah & Ors (1967), at the time the sales
took place, the seller was still in possession of the goods. The court held that the
seller was the person who had the insurable interest. The other relevant case is
Chong Soo Sin c/o Syarikat Perniagaan Moden v. Industrial and Commercial
Insurance (M) Bhd (1992).

SELF-CHECK 8.1
In a life policy, an insured has no insurable interest but the interest is with others. State the parties

8.4 MATERIAL FACTS

In contrast to other business contracts, an insurance contract expects a party to a
contract to disclose all information which is known to him or her. This is because
an insurance contract is based on mutual trust and confidence between the
insurer and the insured. In other words, an insurance contract is a contract of
uberrimae fidei (of total good faith).

In Goh Chooi Leng v. Public Life Assurance Co Ltd (1964), a beneficiary to the
insurance policy made a claim after the insuredÊs death. The insurer refused to
settle the payment on grounds that the insured in his admission had made a
fraudulent statement, a misrepresentation and concealed the truth. The insuredÊs
medical report showed that the insured used to receive treatment on
tuberculosis, but when answering a question regarding the said treatment, he
denied it. The court held that the answer in the policy form was false. The
contract was therefore void.

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The insured however need not disclose all facts. Only material facts must be
disclosed. The following is the definition of material facts:

Material facts in the context of an insurance contract are facts which if known by the insurer, c

In New India Assurance Co. Ltd v. Pang Piang Chong & Ors (1971), a man
died due to a road accident and his next-of-kin sued for damages against the
insured, who drove the car. The insurer refused to settle the compensation
money on the ground that the insured did not forward true facts when
completing the policy form. In the policy form was the question, „Have you or
any person you give permission to drive, ever committed any driving offences
within the last five years.‰ The answer given was „No.‰ The insurer found out
that the insured committed five offences under the Road Traffic Ordinance 1958
for driving without licence and for not displaying the „L‰ sign on his car.

The court held that the offence committed by the insured had no connection with
the original purpose the insurance was taken out by the insured. The answer was
not a non-disclosure of material facts or a deception of material facts.

Other relevant cases are Abu Bakar v. Oriental Fire & General Insurance Co
Ltd (1974), China Insurance Co Ltd v. Ngau Ah Kau (1972) and United
Malayan Insurance Co. Ltd. v. Lee Yoon Heng (1964).

8.4.1 Pre-contractual Duty

In addition to the principle of utmost good faith in common law, Section 129 and
Schedule 9 of FSA 2013 provides separate duty of disclosure to the licensed
insurer and insured (consumer). The duty is known as the pre-contractual duty
and the details of the duty are as follows:

(a) Pre-contractual Duty of Licensed Insurer

(i) According to Para 5 Schedule 9 of the FSA 2013, before a consumer

insurance is entered into or varied, a licensed insurer may request a
proposer who is a consumer to answer any specific questions that are
relevant to the decision of the licensed insurer whether to accept the
risk or not and the rates and terms to be applied.

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236 ▶ TOPIC 8 INSURANCE

According to the provision, the compliance with the consumerÊs duty

of disclosure shall deemed to have been waived by the insurer if the
insurer does not make a request to the insured or if the insured fails to
answer or gives incomplete answers and the answer was not pursued
further by the licensed insurer.

(ii) The licensed insurer also shall clearly inform the insured in writing of
the consumerÊs pre-contractual duty of disclosure and that the duty
of disclosure shall continue until the time the contract is entered.

(iii) Besides that, Para 11 Schedule 9 of FSA 2013, requires the licensed
insurer not to make misleading statements, not to conceal a material
fact and not to use unauthorised sales brochures. If this happens the
insured may rescind the contract.

(b) Pre-contractual Duty of Consumer (Insured)

It is the duty of the insured to take reasonable care not to make a
misrepresentation when answering the question posed by the licensed
insurer.

In determining whether the insured has taken reasonable care or not in

making any misrepresentations, the following circumstances may be taken
into account:
(i) The consumer insurance contract in question and the manner in which
the contract was sold to the customer;
(ii) Any relevant explanatory material or publicity produced or
authorised by the licensed insurer; and
(iii) How clear and specific, the licensed insurerÊs questions were.

As a result of the above provisions, it seems that the licensed insurers must make
sure that they pose the right and specific questions in order to assess the risk of
insuring. Meanwhile, the insured must take reasonable care in answering the
said questions and avoid making any misrepresentations.

8.4.2 Remedies for Misrepresentation

If there is a misrepresentation made by the insured in relation to the contract of
life insurance which has been effected for a period of two years or less and
contract of general insurance, the licensed insurer is entitled to certain remedies.
The remedies are provided in Division 2 Schedule 9.

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 TOPIC 8 INSURANCE ◀ 237

(a) Remedies for Deliberate or Reckless Misrepresentation (Para 15 Schedule 9)

In this situation, the licensed insurer may avoid the insurance contract and
refuse all claims.

A misrepresentation is said to be „deliberate or reckless‰ if the insured knew

or did not care whether:
(i) The information he provided was untrue or misleading; and
(ii) The information was relevant to the licensed insurer (Para 7(4)
Schedule 9).

So, it is up to the insurer to prove that the insured knew about the above
matters.

It shoud also be highlighted here that dishonest misrepresentation is also to

be regarded as deliberate and reckless misrepresentation.

(b) Remedies for Careless or Innocent Misrepresentation (Para 16 Schedule 9)

According to Para 7(6) Schedule 9, a misrepresentation is careless or
innocent if it is not deliberate or reckless.

The remedy depends on what the insurer would have done if the insured
had complied with the duty to take reasonable care.
(i) If the insurer would not have entered into the contract on any terms,
the insurer may avoid the policy and return the premium;
(ii) If the insurer would instead have suggested different terms relating to
the premium, the insurance contract will be treated as if it had been
entered into on those amended terms; or
(iii) If the insurer would have charged and increased premium, the
insurer may reduce proportionately the amount to be payable to the
insured.

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EXERCISE 8.1
Identify the differences between an insurance contract and other contracts.

State the position of an insurance policy if an insured did not disclose the truth or concealed materia

Give the definition of material facts in your own words and try to differentiate your definition with

„A risk may only be insured if it is of insurable interest.‰ Who has NO insurable interest in a case o
The policy owner.
The spouse of the policy owner.
The policy ownerÊs employee.
Parents of the policy owner.

8.5 BASIC CLAUSE, CONDITIONS,

WARRANTIES AND EXCEPTION CLAUSE
The question in the proposal form must be answered truthfully by the insured.
These answers become the basis of the insurance contract and the truthfulness of
the given answers is a condition for the insurance contract. Therefore, under the
common law, if a misrepresentation is given, the insurer is under no duty to
settle any claims made by the insured.

In Dawsons v. Bonnin (1922), it was stated in the proposal form that the lorry
would be kept at 46, Cadogan Road, Glasgow, whereas in fact it was kept outside
Glasgow. Later, it was burnt down. The court held that the insured was not liable
because there was a misstatement by the insured.

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In China Insurance Co Ltd v. Ngau Ah Kow (1972), an insured made a

misstatement when he stated that he never made any previous claims under a
motor policy. It was found out that he once did it six years ago. The court held
that the statement and answer given in the proposal form were conditions to the
insurance contract. The misstatement therefore gives the insurer the right to
repudiate the liabilities in the agreement.

Like other contracts, an insurance contract also contains conditions and

warranties that must be complied with. Breach of any conditions and warranties
may cause the insurance contract to be rescinded.

In Suhaimi bin Ibrahim v. United Malayan Insurance Co Ltd (1966), the

plaintiff took out a workersÊ compensation policy from the defendant. In the
proposal form, the plaintiff stated that six employees were covered by the said
policy. In fact, the plaintiff had 23 workers. One of the workers was killed while
cutting down a tree. The plaintiff gave a notice regarding the accident to the
defendant.

The court held that because the plaintiff had more than six workers, there was a
breach of warranty. Also, there was a breach of condition when the plaintiff
failed to refer the dispute within 12 months to an arbitrator after the defendant
refused to make payments to him. The defendant therefore was not liable to the
policy and the claim was unsuccessful.

In Public Insurance Co Ltd v. Muthu (1965), the plaintiff paid compensation to

a third party who was injured by an accident with an insured car. Later, the
plaintiff sued for damages and alleged that they were entitled to do so because
the insured failed to satisfy the stipulations in the policy which required him to
give notice if there was an accident, a loss or damage and to give notice if the
insured knew of any facts regarding any prosecution arising from the accident.

The court found that even though the insured gave notice with regard to the
accident, he however failed to give notice in respect of the prosecution.
Therefore, the plaintiff was not liable to the policy.

An insurance contract also includes exception clauses which exempts an insurer

from several liabilities. In Tan Keng Hong & Another v. Fatimah binti Abdullah &
Ors (1974), the insured took out a third party policy on his lorry (a policy which
exempts an insurer from liabilities if there is death). There was a death due to an
accident, and the court held that the insurer was not liable.

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EXERCISE 8.2
1. What is said to be the basis of an insurance contract?

2. State the insurerÊs liabilities if there are misstatements made by

the insured. Cite cases to support your answer.

3. Irham stated in a proposal form of an insurance contract that the

lorry insured would be kept at No. 40, Jalan Pandan Jaya 3, Kuala
Lumpur. However, it was actually kept outside Kuala Lumpur.
The lorry later was burnt down.

What is the legal consequence of the above scenario?

A. The insurance company is liable to pay the amount claimed
by Irham.
B. The insurance company is not liable to pay the amount
claimed by Irham.
C. The contract of insurance between Irham and the insurance
company is valid.
D. The contract of insurance between Irham and the insurance
company is enforcable.

4. State the position of an insurance contract if it is not issued in a

policy form. Give one relevant case.

5. State the position when a person is said to have insurable interest.

6. Give one case to support the differences between material facts

and non-material facts.

7. What is meant by exception clause? Give one case to support your

answer.

8. Cheong bought a medical insurance policy from Syarikat

Insurance Sihat (SIS). While completing the proposal form given
by SIS, Cheong answered „NO‰ to a question, „Have you or anyone
in your family ever suffered from diabetes?.‰ A month later,
Cheong who was suffering from diabetes, entered a hospital for an
eye operation. He claimed from SIS the settlement of the operation
costs. SIS refused and alleged that Cheong lied at the time he
completed the proposal form.

Advise SIS whether it should settle the payment or not.

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 The Act which governs the law relating to insurance in Malaysia is the
Financial Services Act 2013.

 An insurance contract is a contract whereby an insurer agrees to assume

losses suffered by a policy owner against any losses which might arise due to
the happening of certain perils, or to pay a certain sum of money on the
happening of such perils.

 Subrogation means an insurer is entitled to enforce any remedy against any

third party who caused the loss to occur.

 An insurable interest refers to an interest in the subject matter of a contract of

insurance. It provides the insured with the right to enforce the contract. Thus,
if a person has no insurable interest on the subject matter, the insurance
policy is void.

 An insurance contract is a contract of uberrimae fidei (of total good faith). It

means that the insured persons owes a duty to disclose, before the contract is
made, every material which he knows or reasonably ought to have known.

 It is a pre-contractual duty of the licensed insurer to request a proposer who

is a consumer to answer any specific questions that are relevant to the
decision of the license insurer whether to accept the risk or not and the rates
and terms to be applied.

 It is a pre-contractual duty of the insured to take reasonable care not to make

misrepresentation when providing information to the licensed insurer.

• Misrepresentation can be classified into deliberate and reckless

misrepresentation and careless or innocent misrepresentation.

Insurance Insurer
Insurance contact Subrogation
Insured

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To pi ▶ Banking and
Negotiable
9 Instruments
LEARNING OUTCOMES
By the end of this topic, you should be able to:
List six important characteristics which must exist in a bill of exchange;
Explain negotiation, acceptance, indorsement and bill delivery;
Discuss the eight principles of bill delivery for payment;
Examine the three forms of cheques and their definitions;
Appraise the procedures and effects of crossing of cheques as well as effects on cheques which hav
Assess the conditions which must be complied with to enable the paying bank and collecting bank
Evaluate the principle for the termination of authority of the bank to make payment.

▶ INTRODUCTION
In this topic, you will learn and be exposed to negotiable instruments.

Definition
Negotiable instruments refer to types of documents used in commercial or financial transactions.

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 TOPIC 9 BANKING AND NEGOTIABLE INSTRUMENTS ◀ 243

Negotiable means something that can be transferred from one person (owner) to
another party in the form of a document which would prove the existence of
contractual duties in exchange of a payment.

In short, negotiable instruments have these characteristics:

(a) Title to it passes to the acceptor by a delivery, order of payment or
indorsement and delivery;
(b) The holder of the instrument for the time being can sue in his own name;
(c) No notice of assignment needs to be given to the debtor, for example, the
bank; and
(d) A bona fide holder is value free from any defect (any claims or previous
liabilities) in the title of his predecessors.

Examples of negotiable instruments are bills of exchange, cheques, promissory

notes, bank drafts, bank notes, share warrants, dividend warrants, debentures
and travellers cheques. The law which is applicable for negotiable instruments is
the Bills of Exchange Act 1949 (hereinafter referred to as BEA).

Further on, you will learn about the concept behind the bills of exchange,
negotiation, acceptance, indorsement as well as bill delivery, liabilities of the
relevant parties in bills of exchange, the holderÊs rights, procedure for dishonoured
cheques, the definition and forms of cheques, crossing and alteration of cheques,
protection to paying and collecting banks and termination on the authority of the
bank to pay.

9.1 BILLS OF EXCHANGE

According to Section 3(1) of the BEA:

A bill of exchange is an unconditional order in writing, addressed to another, signed by the pe

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The person who gives the order to pay is called the drawer. The drawee, on the
other hand, is the person to whom the order to pay is given and the person to
whom payment is to be made is the payee.

Based on the definition given, there should be six important characteristics in a

bill of exchange.

(a) An Unconditional Order in Writing

The bill must be an order to pay made in writing. Example: „Pay A ⁄‰ or
„Do pay A ⁄‰. In Hamilton v. Spottiswood (1894), the bill was written with
„We hereby authorise you to pay on our account to the order of G ⁄‰ The
court held that this was not a bill of exchange because it was a request, not
an order.

The order given must also be unconditional. Situations where an order is

considered to be conditional are:
(i) Where the drawee was given the discretion to pay or not to pay.
Example: „Pay X if satisfied with the goods ⁄‰;

(ii) Where the drawee was asked to do an act in addition to the payment
of money. Example: „Pay X on condition that these conditions are
complied with ⁄‰;

(iii) The holder is required to sign a receipt to receive payment; and

(iv) An order of payment is out of a particular fund. Example: „Pay X ⁄
from contribution ⁄‰

In Palmer v. Pratt (1824) 2 Bing 185, the order to pay was made within
30 days after the ship reached Calcutta. The court held that it was
conditional because the ship might not arrive at Calcutta.

(b) Addressed by One Person to Another

Provision
If a bill is not payable to the bearer, the drawee must be named or
otherwise indicated with reasonable certainty. If there is no drawee, the
bill is considered paid to the bearer.

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 TOPIC 9 BANKING AND NEGOTIABLE INSTRUMENTS ◀ 245

If Provision
it is written „cash‰ on the bill, and not a name of a specified person, it is
not a bill of
Section exchange.
6(1) of the BEA: A drawee must be named or otherwise
indicated in a bill with reasonable certainty
In North and South Insurance Corp v. National Provincial Bank (1936), it was
decided that it was a bearer bill and did not need an indorsement

(c) Signed by the Person Giving It

The bill must be signed by the drawer or his authorised agent. Refer to
Section 96(1) of the BEA. In Lazarus Estates Ltd v. Beasley (1956), it was held
that the signature was made with a rubber stamp or a stamp with the
drawerÊs signature.

(d) To Pay on Demand

According to Section 10(1) of the BEA, a bill is payable on demand:
(i) When it is expressed to be payable on demand; or at sight, or on
presentation; or
(ii) In which no time for payment is expressed.

In other words, the provision showed that time for payment can be made
certain. If it is not specified, payment may be made on demand or when
presented.

(e) A Sum Certain in Money

Section 9 of the BEA – The sum of money payable must be in the form of
money and not services or goods. Section 9 defines a sum payable as a sum
certain within the meaning of this Act, although it is required to be paid:
(i) With interests;
(ii) By stated instalments;
(iii) By stated instalments with the provision that upon default in payment
of any instalment the whole shall become due; and
(iv) According to an indicated rate of exchange or according to the rate of
exchange to be ascertained as directed by the bill.

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The sum payable must be stated on the said bill and the sum must be
ascertained. In Barlow v. Broadhurst (1820), the written order was, „Pay 400
to JS agent, deduct any benefits or money owed by JS to the defendant‰.
Here, the sum to be paid was held by the court to be unascertained.

(f) At a Fixed Date or Determinable Future Time

The date is important because payment must be made within the specified
period based on the date the bill was issued. However, if the bill is not
dated, it does not make the bill invalid.

Section 3(4)(a) of the BEA provides:

„A bill is not invalid by reason that it is not dated⁄‰

According to Section 12 of the BEA, a holder is allowed to insert the date of

issue or the date of acceptance, with the condition:
(i) The holder in good faith and by mistake inserts a wrong date; and
(ii) Where a wrong date was inserted, the bill subsequently comes into
the hands of a holder in due course.

SELF-CHECK 9.1
By using your creativity, draw a mind map to show all the six important characteristics which must

9.2 NEGOTIATION OF BILLS, ACCEPTANCE,

INDORSEMENT AND BILL DELIVERY
The following are the explanations for the negotiation of bills, acceptance and
indorsements:

(a) Negotiation of Bills

Definition
Section 31(1) of the BEA defines a negotiation of bill as „⁄when it is transferred from one person

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 TOPIC 9 BANKING AND NEGOTIABLE INSTRUMENTS ◀ 247

This means that every bill of exchange may be transferred from one person
to another. The manner in which a title is transferred is called negotiation.
Examples can be seen in Section 31(2). If it is an order bill, it is negotiated
by indorsement by the holder and transferor [Section 31(3)].

(b) Acceptance

Definition
Acceptance is defined according to Section 17(1) of the Bills of Exchange Act as „the sign

To make an acceptance valid, two conditions must be complied with:

(i) The acceptance must be written on the bill and signed by the drawee.
The mere signature of the drawee without additional words is
sufficient; and
(ii) It must not express that the drawee will perform his promise by any
other means than the payment of money.

A bill is said to be presented if the following situations, according to

Section 41(1) of the BEA, are complied with:
(i) Presentment by the holder to the drawee to accept or reject the
acceptance must be made at a reasonable hour on a business day and
before the bill is overdue;
(ii) When the bill is addressed to two or more drawees who are not
partners, presentment must be made to all of them unless one has
authority to accept for all;
(iii) Where the drawee is deceased, presentment may be made to his
personal representative;
(iv) Where the drawee is bankrupt, presentment may be made to him or
her or to his trustee or assignee; and
(v) Where authorised by agreement or usage, presentment may be made
through the post.

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(b) Indorsements
An indorsement affects the transfer of title in the bill to the transferee and
also involves the liabilities of the indorser. Indorsement is important in the
negotiation of order bills. Before an indorsement can be enforceable as
negotiation, the conditions set out in Section 32 of BEA must be complied
with:
(i) It is written on the bill itself and signed by the indorser. A simple
signature without any additional words is sufficient. A written
indorsement on the allonge or a copy is presumed as written on the
bill itself;
(ii) It must be an indorsement of the entire bill; partial indorsement,
where there is a transfer of part of the sum payable only or there is a
transfer of a bill to two or more different persons, the indorsement is
not enforceable as negotiable bill;
(iii) If a bill is payable to two payees or indorsees, who are not partners,
every one of them must indorse except if one of them is authorised to
make the indorsement;
(iv) If a bill is payable to the order of a wrong payee, or his name is
wrongly spelt, he may indorse according to the spelling on the bill,
adding if he thinks fit, his proper signature;
(v) When there are two or more indorsements on a bill, each indorsement
would be presumed to have been made in accordance with the
intention of the bill, except if proven to the contrary; and
(vi) An indorsement may be made in a blank or special indorsement. It
may contains terms which make it restrictive.

Table 9.1 shows the different types of indorsements.

Table 9.1: Different Types of Indorsements

Type of
Section Explanation
Indorsement
Blank S. 34(1) A blank indorsement is effected when no indorsee is
indorsement specified and the bill indorsed becomes payable to bearer.
Special S. 34(2) When payee states to whom, or on his order, the bill is
indorsement payable.

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 TOPIC 9 BANKING AND NEGOTIABLE INSTRUMENTS ◀ 249

Restrictive S. 35(1) A restrictive indorsement is one which prohibits further

indorsement negotiation of the bill or expresses that it is a mere
authority to deal with the bill as thereby directed and not
to transfer of the ownership. Example: when a bill is
indorsed with „Pay D only‰ or „Pay D for the account of
X‰ or „Pay D, or order for collection‰.
Conditional S. 33 When the bill is so indorsed, the condition may be
indorsement disregarded by the payer and payment to the indorsee is
valid whether the condition has been fulfilled or not.
Facultative - When the indorser discharges part or all rights under the
indorsement law. Example: „Notice of Dishonour Discharged‰.

Section 21(1) of the BEA provides that a contract in a bill is incomplete and can be
rescinded if a drawer, drawee or acceptor or indorser did not sign and deliver the
bill. However, when acceptance is written on the bill, and the drawee has given
notice or when he agrees to obey the order of the person who is entitled to the bill
that he has accepted, acceptance is then completed and cannot be rescinded.

SELF-CHECK 9.2

Based on your understanding on what you have learnt, identify the differences between accep

EXERCISE 9.1
State two conditions which must be complied with for a valid acceptance.
„There are various types of indorsement of a bill of exchange‰. What is meant by the term „r
Where no indorsee is specified on the bill.
Where the bill prohibits futher negotiation of the bill.
When the indorser discharges part or all rights under the law.
When payee states to whom, or on his order, the bill is payable.

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9.3 LIABILITIES OF THE PARTIES

INVOLVED IN NEGOTIABLE
INSTRUMENTS
A drawer, drawee or acceptor and indorser is liable if he signs the bill (Section 23
of the BEA).

The drawer or acceptor is the person to whom the order to pay is given. He is
Provision
liable when
Section he of
55(1) signs the bill
the BEA as the that
provides acceptor
draweror of
drawee.
a bill isSection
liable to54accept
of theand
BEA
provides
will bethat
paidwhen he accepts
to its tenor onthedue
bill: presentment of the bill. If the bill be
dishonoured, he will compensate the holder and any indorser who is
(a) He must pay it according to its tenor; and
compelled to pay it, provided that the requisite proceedings on dishonour be
(b)taken.
He He is precluded
is precluded fromfrom denying
denying to a to a holder
holder in course.
in due due course the existence
of the payee or his capacity to indorse.
The following are additional inclusions that need to be considered:
(a) The existence of the drawer, the authenticity of his signature and his
capacity and authority to draw a bill.
(b) In the case of a bill payable to drawer's order, the drawer has the capacity
to indorse.
(c) In the case of a bill payable to the order of a third person, the existence of
the payee and his then capacity to indorse.

Bills are indorsed for it to be transferred. When an indorser indorses a bill, he is

said to promise that when the bill is presented, it would be according to its tenor
and if it is dishonoured, the holder or subsequent indorser who is compelled to
pay for it, would be compensated.

Indorsers also cannot deny the existence of the drawee to the holder, the
authenticity of drawee's signature and all previous indorsements. An indorser
cannot also deny an immediate or a subsequent indorsee that the bill was at the
time of his indorsement a valid bill and that he had a good title.

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 TOPIC 9 BANKING AND NEGOTIABLE INSTRUMENTS ◀ 251

SELF-CHECK 9.3
What are the liabilities of a drawee or acceptor when he signs a bill addressed to him?

9.4 RIGHTS OF A HOLDER

Definition
According to Section 2 of the BEA, a holder is defined as the payee, or indorsee having possess

The rights of a holder are provided in Section 38 of the BEA. They are as follows:
(a) He may sue on the bill in his own name;
(b) He holds the bill free from any defect of title of any of the prior parties; and
(c) Where his title is defective.

The following are some inclusions:

(a) If he can negotiate the bill with the holder in due course, that holder obtains
a good and complete title to the bill; and
(b) If he obtains payment of the bill, the person who pays him in due course
gets a valid discharge for the bill.

9.5 PAYMENT
Payment must be made when a bill is presented. If a bill is not presented for
payment, the drawer and indorsers shall be discharged from liability (Section
45(1) of the BEA). Presentment for payment must comply with the following
rules (Section 45(2) of the BEA):
(a) Where the bill is not payable on demand, presentment must be made on the
day it falls due.
(b) Where the bill is payable on demand, presentment must be made within a
reasonable time from date of issue to make the drawer liable, and within a
reasonable time from indorsement to make the indorser liable.

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(c) Presentment must be made by the holder or by some person authorised to

receive payment on his behalf at a reasonable hour on a business day, at the
proper place either to the person designated by the bill as payer or to some
person authorised to pay or refuse payment on his behalf.

(d) A bill is presumed to be presented at the proper place:

(i) When presentation of the bill is made to the place of payment
specified in the bill;
(ii) When no place of payment is specified, but the address of the drawee
or acceptor is given in the bill;
(iii) When neither place or address is stated, and the bill is presented at
the acceptor's place of business, if known, and if not, at his ordinary
residence; and
(iv) When presented to the drawee or acceptor wherever he can be found
or at his last known place of business or residence.

(e) Where a bill is presented at a proper place, and after the exercise of
reasonable dilligence, no person authorised to pay or refuse payment can
be found, no further presentment to the drawee or acceptor is required.

(f) Where a bill is drawn upon or accepted by two or more persons who are
not partners, and no place of payment is specified, presentment must be
made to all of them.

(g) Where the drawee or acceptor of a bill is dead, and no place of payment is
specified, presentment must be made to a personal representative; and

(h) Presentment may be made through the post office where agreement or
usage authorises that course.

SELF-CHECK 9.4
Give three of the eight principles on presentment of bills for payment.

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9.6 PROCEDURE FOR DISHONOUR

Definition
According to Section 2 of the BEA, a holder is defined as the payee, or indorsee having possess

Section 47(1) of the BEA provides that a bill dishonoured by non-payment is a

bill that:
(a) When it is duly presented for payment and payment is refused or cannot be
obtained; and
(b) When presentment is excused and the bill is overdue and unpaid.

When a bill is dishonoured by non-acceptance or by non-payment, the drawer

and every indorser must be given a dishonour notice. Any drawer or indorser
who is not given such notice cannot be sued, provided:
(a) If a bill is dishonoured by non-acceptance and notice of dishonour not
given, the right of a holder in due course is not affected; and
(b) If a bill is dishonoured by non-acceptance and notice of dishonour is given,
it is not necessary to give a fresh notice of dishonour on non-payment
unless in the meantime the bill has been accepted.

For a valid and effectual notice of dishonour, the principles in Section 49 of the
BEA must be complied with:
(a) When the notice is given by the indorser or holder who is himself liable on
the bill;
(b) Notice of dishonour may be given by an agent either in his name or in the
name of any party entitled to give notice;
(c) Where the notice is given by a holder, it is effective on subsequent holders
and all prior indorsers who have a right to receive the notice;
(d) Where the notice is given by or on behalf of an indorser entitled to give
notice, it is effective on the holder and subsequent indorsers;
(e) The notice may be given in writing or by personal communication, and in
any terms which sufficiently identifies the bill and intimate that the bill has
been dishonoured by non-acceptance or non-payment;

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(f) The return of a dishonoured bill to the drawer or an indorser is a sufficient

notice of dishonour;
(g) A written notice need not be signed. An insufficient written notice may be
supplemented and validated by verbal communication. A misdescription of
the bill does not invalidate the notice unless the party to whom the notice is
given has been misled;
(h) Where notice of dishonour is required to be given to any person, it may be
given to the party himself or to his agent on his behalf;
(i) Where the drawer or indorser is dead, and the party giving notice knows it,
the notice then must be given to a personal representative;
(j) Where the drawer or indorser is bankrupt, notice may be given either to the
party himself or to the trustee;
(k) Where there are two or more drawers or indorsers who are not partners,
notice must be given to all unless one of them has authority to receive such
notice for the others;
(l) The notice may be given as soon as the bill is dishonoured, and within a
reasonable time;
(m) Where a dishonoured bill is in the hands of an agent, the agent may either
himself give notice to the parties liable on the bill or he may give notice to
his principal;
(n) Where a party to a bill receives due notice of dishonour, the party has the
same period of time for giving notice to antecedent parties; and
(o) Where a notice of dishonour is addressed and posted, the sender is deemed
to have given due notice of dishonour even if there was a miscarriage by
the post office.

Prior parties are not liable if a notice of dishonour is not given within the
specified time. In Ismail v. Abdul Aziz (1955), the defendant accepted the
supply of padi from the plaintiff. The defendant indorsed two cheques in favour
of the plaintiff from his account. The plaintiff later indorsed the cheque in favour
of the government. The cheque was presented for payment on 14 September 1950
but was dishonoured. The plaintiff received a notice of dishonour on 20
September but only gave notice to the defendant on 18 October.

The court held that in order to make the notice valid and effective, it must be
given according to the rules stipulated in Section 49 of the Bills of Exchange Act
1949. The plaintiff was negligent because he delayed in sending the notice of
dishonour.

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9.7 DEFINITION AND FORMS OF CHEQUES

Definition
Under Section 73(1) of the BEA, a cheque is defined as „a bill of exchange, drawn on a banker

To identify the various forms of cheques, refer to the following Table 9.2:

Table 9.2: Forms of Cheques

Form Explanation
Undated A bank is not bound to honour an undated cheque. However, the holder
cheque of such cheque is authorised by Section 20 to fill in the date, but must do
so within a reasonable time.
Overdue Section 36(3) provides that overdue cheques are cheques which have been
or stale in circulation for an unreasonable length of time. „Reasonable length of
cheque time‰ is a subjective term and depends on certain cases. Generally, a
cheque becomes overdue or stale six months after it was issued.
Post-dated A post-dated cheque is a cheque with a future date inserted. It is in fact
cheque not a valid cheque because no payment can be made when presented. It is
however valid by virtue of Section 130 that „a bill is not invalid due to it
being pre-dated or post-dated, or with a date on a Sunday‰. The
bank therefore will honour the cheque as to the stated date.

9.8 CROSSING OF CHEQUES

Do you know the effect of a crossed cheque on payment? A crossing is an order
that payment can only be done by a specified bank or in a certain manner only.
The drawer will cross the cheque to ensure other persons who get hold of the
cheque will face difficulties in cashing it.

Cheques can be crossed generally or specially. If it is a general crossing, it may be

made:
(a) By writing words such as „and company‰ between two parallel lines
across it with the addition of „Not negotiable‰ or without anything written
between the parallel lines; and

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(b) By drawing two parallel lines across it only with, or without, „Not
negotiable‰ written between the parallel lines.

The effect of a general crossing is that the paying banker can only pay the
amount of the cheque to a collecting banker. The banker cannot pay cash across
the counter.

Special crossing is made by drawing two parallel lines across it with the addition
of the name of banker, with or without „not negotiable‰ written between the
parallel lines. The effect of special crossing is that the paying banker can only pay
the amount of the cheque only to a collecting banker named in the crossing.
Thus, the person who wants to obtain payment of the cheque must be a customer
of the said collecting banker.

When a cheque is crossed „not negotiable‰, the cheque therefore cannot be

negotiated but can still be transferred. When transferred, the person taking it
does not have, and is not capable of giving a better title to the cheque than the
person from whom he took it.

For better understanding you may refer to the case of Wilson & Meeson v.
Pickering (1946), where in this case Wilson drew a cheque in blank and crossed
„not negotiable‰. His clerk, who was supposed to fill in the amount and the
name of the payee, inserted a sum in excess of her authority and delivered it to
Pickering for the payment of her personal debt. The issue here is whether
Pickering had a good title to the cheque. The court held that, since the clerk had
no title to the cheque, she was not capable of giving a better title to Pickering.
Therefore, Wilson was not liable on the cheque.

The words „account payee‰ is usually written on a cheque. Even though this
kind of crossing is not stated in the Act, it is however permitted and has become
common practice.

The words „account payee‰ on a cheque are a direction that the banker can
credit the cheque to the account of the payee only.

SELF-CHECK 9.5
Illustrate a general crossing and special crossing on a cheque.

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9.9 ALTERATION OF CHEQUES

A drawer is not liable if a cheque is materially altered without the drawerÊs
consent. Therefore, if the bank honours the cheque, the bank cannot debit the
amount from the drawerÊs account. Section 64(2) of BEA, defined material
alteration as:

„any alteration of the date, sum payable, time of payment, place of payment, and where a bill

Section 64(1) of the BEA explains that „where a bill or acceptance is materially
altered without the assent of all parties liable on the bill, the bill is avoided except
as against a party who has himself made, authorised or assented to the alteration,
and subsequent indorsers provided that where the bill has been materially
altered, but the alteration is not apparent, and the bill is in the hands of a holder
in due course, such holder may avail himself of the bill as if it had not been
altered and may enforce payment of it according to its original tenor‰.

The above provision means if the alteration is apparent, all parties liable on the
cheque will be free from such liabilities. If otherwise, the holder of the cheque
may still enforce payment.

This is part of the contract between the bank and its customers, so that the
customers will take extra precaution when writing cheques to avoid forgery. Due
to a customer's negligence, a dishonest holder may make alterations on the
cheque. If the bank cannot detect any apparent alteration made, payment will be
made to the holder and it will be debited from the customer's account.

In London Joint Stock Bank v. Macmillan and Arthur (1918), one of the partners of
a firm signed a cheque payable to bearer, where the words „2 Os Od‰ were written
in the space for the figures. The clerk, entrusted by the firm on the duty of filling
up cheques for signature, then wrote in the space for writing „one hundred and
twenty‰ and altered the figures accordingly. The court held that the bank could
debit the amount from the account of the firm for the partner's negligence.

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9.10 PROTECTION OF PAYING BANKER

When a customer draws a cheque where he has a drawing account on his bank,
the bank is called the paying banker. Its duty is to make payments to the right
person according to the mandate given by his customers. Therefore, the paying
banker must ensure that it complies with that mandate to avoid from being
liable.

If the banker made a payment to the wrong person, the banker still has the right
to debit the amount from the customer's account. However, the banker must
fulfil the following provisions before it can be protected:
(a) Payment made in due course – Payment in due course is defined under
Section 59 of the BEA as „payment made at or after the maturity of the bill
to the holder in good faith and without notice that his title to the bill is
defective‰;
(b) The banker pays it in good faith and in the ordinary course of business
without knowledge such indorsement has been forged or made without
authority (Section 60 of the BEA);
(c) The banker pays it in good faith and in the ordinary course of business
without knowledge that the cheque was not indorsed where there is an
irregular indorsement (Section 82 of the BEA); and
(d) If when the cheque is crossed, the banker pays in good faith and without
negligence and in accordance with the crossing (Section 79(2) and Section
80).

9.11 PROTECTION OF COLLECTING BANKER

When a bearer of a cheque presents the cheque to his bank to be credited into his
account, the bank is under the duty to collect the amount from the paying
banker. The bearer's bank is called the collecting banker.

The collecting banker will be liable to its customers if there is a breach of contract,
that is, failure to make collection as ordered by its customer. The banker who
wrongly collects for a customer who is not entitled to the money, is also liable to
the true owner.

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Section 85 of the BEA gives protection to the banker which collects payment of
cheques for customers who has no title or has a defective title. The banker is not
liable to the true owner if:

(a) It Acts on Behalf of its Customer

In Oriental Bank of Malaya v. Rubber Industry (Replanting) Board (1957), it
was decided that a person was deemed as the customer of a bank when he
opened an account with the bank. The length of period he held the account
for was not crucial.

(b) It Acts in Good Faith

„Good faith‰ is defined under Section 95 of BEA as „done honestly whether
it is done negligently or not‰.

(c) It Acts without Any Negligence

If the banker acted in good faith but did it negligently, the banker must be
liable. The relevant cases are Rubber Industry (Replanting) Board v.
Hongkong and Shanghai Banking Corp (1957) and National City Bank of
New York v. Ho Hong Bank Ltd (1932).

SELF-CHECK 9.6
Compare the duties of the paying banker and the collecting banker. State your answer in a t

9.12 TERMINATION OF THE AUTHORITY OF

THE BANK TO MAKE PAYMENTS
A bank is under the duty to honour its customerÊs cheques until the end of his
credit balance and any agreed overdraft. If the bank refuses to honour the
cheques, its customer may sue for damages for the returned cheques. The bank
however cannot honour such cheques if his authority to make payments on such
cheques is terminated.

Termination can take place in the following situations:

(a) By a revocation order;
(b) Notice of death of customer;
(c) Notice of unsoundness of mind of customer;
(d) Due to garnishee order or other court orders;

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(e) Knowledge that customer is facing a bankruptcy petition or is bankrupt;

(f) The person who presented the cheque has a defective title;
(g) Knowledge that the customer has an intention to commit a breach on a trust
fund at the time he wrote the cheque;
(h) The customer transferred his money into a third party's account;
(i) The customer served notice to close his account; and
(j) If the customer does not have sufficient amount to honour the cheque.

EXERCISE 9.2
1. State four out of the ten conditions which enable the authority
of a bank to make payment be terminated.

2. Sazali made payment by a cheque to Hassan after Hassan had

supplied fertilisers to him. The cheque was indorsed by Sazali.
Hassan later indorsed the cheque and used it for payment of
debts he owed Rahmat. Rahmat found the cheques cannot be
honoured. A Notice of Dishonour was served on Hassan on 1
March 2014 but he only served the Notice to Sazali on 1 May
2014. Is Sazali liable for the cheque?

3. „One of the partners from Adam & Hawa Contractors signed a

cheque payable to one of their contractors, Emerald Plus
Enterprise with the amount of RM2,500.00. The clerk of the firm
later changed the amount to RM3,500.00 and the words to
Âthree thousand and five hundred Ringgit MalaysiaÊ. The bank
debited the amount from Adam & Hawa Contractors‰.

What is the legal consequence of the above scenario?

A. The clerk has to pay the amount debited to the firmÊs
account.
B. The contractor has to pay back the money to the firmÊs
account.
C. The bank has to reimburse the amount debited due to the
partnerÊs negligence.
D. The bank has to reimburse the amount due to the bankÊs
negligence.

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 The characteristics of a bill of exchange, negotiation, acceptance, indorsement

and presentment as well as liabilities of the involved parties are regarded as
important aspects to be discussed under the bills of exchange.

 A cheque is a bill of exchange drawn on a banker payable on demand.

 There are three forms of cheques: undated cheques, overdue cheques or stale
cheques and post-dated cheques.

 A crossing is an order that payment can only be done by a specified bank or

in a certain manner only. The crossing can be either general, special or by
adding the word „not negotiable‰ or „account payee only‰.

 If a cheque has been materially altered without the drawerÊs consent, the
drawer will be discharged from liability. If the bank honours the cheque, the
bank cannot debit the amount from the drawer's account.

 It is part of the contract between the bank and its customers that the
customers will take extra precaution when writing cheques to avoid forgery.

 The paying bankerÊs duty is to pay the right person according to his customerÊs
mandate. So, if the paying banker pays the amount of the cheque to the
wrong person, the bank has breached its duty and must bear the loss.
However, the Bill of Exchange Act 1949 provides some protection for the
paying bank. In order to be protected the paying banker must fulfil certain
conditions laid down in Section 59, Section 60, Section 82(1), Section 79(2)
and Section 80.

 The collecting banker will be liable to its customers if it failed to make

collections as ordered by its customer. However, Section 85 of Bill of
Exchange Act 1949 gives some protection to the collecting banker provided,
the collecting banker acted for a customer, it acted in good faith and without
negligence.

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Banker Cheque
Bill delivery Indorsement
Bills of exchange Negotiable instruments

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 To pi ▶ Introduction
1 0 to Syariah
Principles
Governing
Commercial
Transaction
LEARNING OUTCOMES
By the end of the topic, you should be able to:
Discuss the principles of valid contracts under Syariah law;
Identify the pillars of the contract in Syariah law;
Describe the types of option (khiyar) in Syariah law; and
Identify the types of Syariah contracts which are commonly used in commercial transactions

▶ INTRODUCTION
You have learned about the law relating to commercial transaction according to
common law and Malaysian law in Topics 2 through 9. Now, you will learn the
laws relating to commercial transactions according to Syariah law.

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In this topic, we will be studying the definition of contracts from the Syariah
point of view, the pillars of a valid contract, the doctrine of khiyar (option) and
various types of Syariah contracts which are commonly used in commercial
transactions.

10.1 PRINCIPLE OF VALID CONTRACT

UNDER SYARIAH
A contract is the basis of the Syariah law of transaction. Thus, it is very important
for us to understand the basic principles of a valid contract from the Syariah law
point of view. It should be noted here that Syariah law of contracts is based on al-
Quran, hadith of Prophet SAW, ijmaÊ of jurists, qiyas and other sources of
Syariah law. Among the evidence for the legalisation of contract are as follows:

Surah al-Maidah 5:1; which means:

„O ye who believe! Fulfil all your obligation‰.

Similarly in Surah An-Nisa 4:29:

„O you who believe! Squander not your wealth among yourselves in worthless
dealings, but let there be trade by mutual consent...‰

Prophet SAW expressly stated that „Muslims are bound by their

conditions...‰ (narrated by Al-Bukhari).

10.1.1 Definition of Contract in Islam

The Arabic word for contract is Âaqd which literally means „tie‰ or „bond‰.
According to AlaÊ Eddin Kharofa (2000),

The word Âaqd literally means tying tightly as in tying a rope.

Technically, Muslim jurists are of the opinion that Âaqd has two meanings:
general and specific. For the general meaning, Âaqd is whatever a person has
intent to do or perform, either based on his own decision, for example, as in
endowment (waqaf) and remission of debt (ibraÊ), or requiring the consent of at
least two parties as in sale, hire and agency.

As for the specific meaning of Âaqd, it is a connection of the words of one party
(Âijab) to the words of the other parties (qabul) which constitute a legally binding
contract, enforceable by law.

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AlaÊ Eddin Kharofa (2000) further explained that contracts according to Syariah
law is an expression of the matching between a positive proposal made by one of
the contractors and the acceptance of the other contractor in a way which has an
impact on the subject of the contract.

SELF-CHECK 10.1
Could you explain if there are any differences in the definition of contract or Âaqd according

10.1.2 The Pillars and Conditions of a Contract

In Topic 2 we have discussed that there are certain conditions that should be
fulfilled in order to form a valid contract. The conditions are offer, acceptance,
consideration, capacity, intention, certainty and free consent. Similarly, under
Syariah law, there are also certain conditions for the formation of a contract. The
said conditions are also known as pillars or rukn in Arabic. It refers to the must-
have components in a formation of a contract in Islam.

The majority of Mazhabs namely the Maliki, Syafie and Hanbali are of the opinion
that there are three pillars or rukn to a contract:
(a) Statement of contract (Sighah);
(b) The contracting parties; and
(c) The subject matters of the contract.

However, the Hanafi jurists hold that there is only one condition of a contract
which is a statement of contract or sighah. However, all aspects will automatically
follow the statement. Figure 10.1 show us conditions or pillars of a contract, from
the Islamic perspective.

Figure 10.1: Condition or pillars of Islamic contract

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(a) Statement of Contract (Sighah)

Basically, statement of contract or sighah is a method showing the intention
of the contracting parties to conclude a contract. According to AlaÊ Eddin
Kharofa (2000), the word sighah means the utterances expressing the wills
of the two parties, showing the purpose of contract and bringing it into
existence after it had been a hidden or unknown thing or intention.

Sighah comprises of both offer (Âijab) and acceptance (qabul). Thus, the
contract is said to be concluded once there is an Âijab and qabul. In other
words, we can say that s ighah is actually evidence showing that both of the
contracting parties have an intention to create legal relations between them.

According to Syariah law, Âijab and qabul can be conveyed in a number of

ways such as verbally, through writing and gestures. However, it is
unanimously agreed among the jurists that verbal communication is the
best way for the contracting parties to express their intention. Besides that,
the jurists prefer that the contracting parties use past tense to conclude their
contract, such as „I sold‰ and „I bought‰.

A contract may also be concluded in writing if the writing is clear, readable

and understandable by both of the contracting parties. Contracts can be
concluded in writing even if the two parties are capable of speaking.
However, for contract of marriage, it has to be concluded orally unless the
two parties are unable to speak. As for using gestures in concluding a
contract, the majority of jurists are of the opinion that it is admissible if the
parties are mute or unable to speak.

Now, let us look at the definition of Âijab and qabul in detail.

Definition of ÂIjab
ÂIjab is the offer made by the first party to the contract (that is, the offeror). ÂIjab here means

Definition of Qabul
Qabul is an acceptance. When an offer is accepted by the offeree it is said that an acceptance is

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We can conclude that, generally, the definition of Âijab and qabul under
Syariah law is similar to the definitions of offer and acceptance that we
have discussed earlier in Topic 2.

Muslim jurists have stipulated that there are three conditions for the
validity of offer and acceptance in a contract. The conditions are as
illustrated in Figure 10.2.

Figure 10.2: Conditions of offer and acceptance

(i) Offer and Acceptance Must Be Clear

Both offer and acceptance must be clear and unambiguous. The word
used by the contracting parties should indicate the kind of intended
contract. However, it is not necessary that such indication should be
in specific words or phrases.

(ii) Acceptance Must Conform to the Offer

In order to be a valid acceptance, it should be in line with the offer. It
also must be executed in accordance with the conditions specified in
the offer. For example: If Abu offers to sell his motorcycle to Ali for
RM2,000; thus, Ali must make an acceptance on the same subject
matter with the same price.

(iii) Communication of an Offer and Acceptance

According to Syariah law, the communication of offer and acceptance
should take place in one session (unity of session) when both of the
contracting parties are present. This is to ensure that the offer is
accepted before it lapses. The contracting party can make an
acceptance before the meeting ends.

Muslim jurists have different opinions regarding the meaning of the

unity of session. Some jurists are of the opinion that unity of session
means unity of time; while some others feel that it is the unity of

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place.

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However, the first opinion is preferable among the jurists because

nowadays we can see that people tend to use modern communication
systems such as fax, e-mail and telephone to conclude a contract. By
referring to the first opinion, as long as the offer and the receipt of
acceptance can be obtained at that instant, it is still considered as one
session.

Another point to be considered regarding the communication of offer

and acceptance is the time when the contract binds the contracting
parties. According to the Hanafi and Maliki schools, once the
acceptance is made the contract will immediately bind the contracting
parties. However, for other jurists, both of the parties are allowed to
rethink and delay until the end of session. This concept is known as
khiyar al-majlis.

(b) The Contracting Parties

The contracting parties are the parties who carry out the Âijab and qabul. In
order to form a valid contract, the contracting parties must have legal
capacity. Under Syariah law, this capacity is known as ahliyyah. Generally,
capacity is the ability to make a contract under a fully sane physical
condition with a healthy mental awareness.

Muslim jurists have divided ahliyyah into two types, namely ahliyyah al-
wujub and ahliyyah al-adaÊ. Ahliyyah al-wujub refers to the capacity to
acquire rights only. Meanwhile, ahliyyah al-adaÊ refers to the capacity for
the performance of rights and discharge of obligations. It only exists once a
person acquires proper mental awareness and attains the age of puberty
(bulugh). Muslim jurists are of the opinion that in order to form a valid
contract, both contracting parties must possess ahliyyah al adaÊ kamilah
which means that the parties must fulfil the following attributes:
(i) Attain puberty (bulugh);
(ii) Be of sound mind; and
(iii) Matured (rushd).

Now let us look at Figure 10.3 that shows us attributes of the contracting
parties.

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Figure 10.3: Attributes of the contracting parties

Thus, if a person possesses all these three qualities, then he or she is

considered to be fully capable of concluding a valid contract.

Besides that, it also should be highlighted here that the contracting parties
must enter into the contract with free consent (rida). A majority of jurists
are of the opinion that rida means intention of doing something without
being caused by coercion.

(c) Subject Matter of the Âaqad (Mahal al-Âaqd)

Another important pillar of contract under Syariah law is the subject matter
or mahal al-Âaqd. Subject matter of contract can either be tangible such as
money and goods or intangible such as a utility or work.

Muslim jurists have laid down four conditions in order for the subject
matter to become valid. The conditions are illustrated in Figure 10.4.

Figure 10.4: Conditions of subject matter

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Now let us look at each element of the conditions of subject matter.

(i) The Existence of Subject Matter

Syariah law stipulates that the subject matter must actually exist at the
time when an Êaqd is made. However, there are some exceptions to
this general rule. For instance, where Syariah law recognises the
legality of some contracts where the subject matter is not present
during the time of contract, such as baiÊ al-salam, istisnaÊ and ijarah.

(ii) The Subject Matter can be Delivered

Syariah law requires that the subject matter must be able to be delivered
to the contracting parties. Therefore, if the contracting parties are
unable to do so then the contract becomes void. For example, the sale
of birds flying in the air or fish in water is void because they cannot be
delivered at the time the contract is made.

(iii) The Subject Matter must be Ascertainable

Syariah law further requires that the subject matter of a contract must
be ascertained and known by the contracting parties. Sufficient
knowledge about the subject matter is important to avoid any
disputes in the future.

(iv) It must be Suitable for Transactions According to Syariah Law

Suitability of the subject matter refers to its legality. Subject matter is
considered legal if it has an explicit material value and is not declared
forbidden (haram). Thus, Muslims cannot enter into a contract if the
subject matter is wine, pork or meat taken from an animal carcass, just
to name a few examples.

SELF-CHECK 10.2
What are the pillars of a contract in Syariah law?
Is there any similarities between sighah and the intention to create legal relations?
What are the conditions of the contracting parties under Syariah contract? Is it similar with the requ

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10.1.3 Islamic Doctrine of Khiyar (Option)

Another important aspect of a contract under Syariah law is the doctrine of
khiyar (option). In simple terms, khiyar or option is a right given to the
contracting parties to confirm or cancel the contract. First and foremost, let us
look at the definition of khiyar.

Literally khiyar means:

A choice on the part of the holder of right of option who may either confirm the act or render

Legally khiyar means:

The right of the parties involved in a contract to terminate the legal act unilaterally.

There are various types of khiyar recognised by Syariah law. However, we will
only focus our discussion on the four famous khiyar in Syariah contract. Table
10.1 provides a simple explanation about the selected khiyar.

Table 10.1: Types of Khiyar

Types of Khiyar Explanation

Khiyar al-majlis (Option Each of the contracting parties has the right to confirm
during contract session) or cancel the contract that has been concluded, as long
as he or she is still in the session of contract, or by not
separating physically from each other.
Khiyar al-sharat (Option of Both or one of the parties has the choice of either
condition) confirming or cancelling the contract during the
specified time agreed by the parties. The option must be
stated clearly during the conclusion of the contract. For
example: Buyer says to seller: „I bought this computer
for RM2,000 with an option of condition of three days
‰.
Khiyar al-ruÊyah (Option It is a right of option to a person who enters into a
of viewing) contract to buy some goods which he has not seen to
cancel or confirm the contract upon seeing the goods.
Khiyar al-aib (Option of It is a right of option given to a person to repudiate a
defect) contract when he discovers some defects in the subject
matter of the contract provided that he becomes aware
of the defects only after taking possession of the goods.

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10.2 TYPES OF SYARIAH CONTRACTS

COMMONLY USED IN COMMERCIAL
TRANSACTIONS
There are many types of contracts in Syariah law. The types are classified
according to the different features and criteria of each contract. However, the
majority of Muslim jurists divide the contract based on its nature into two main
types of contract, namely, unilateral and bilateral contracts. Figure 10.5 shows the
said classification.

Figure 10.5: Types of contract

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Generally, a unilateral contract is a contract made by one party only. It is gratuitous

in nature and does not require the consent of the recipient. Examples of a unilateral
contract are gift (hibah), will (wassiyyat), endowment (waqf) and loan (qard).

On the other hand, the bilateral contract requires consent of both parties to the
contract, in which one of the parties makes a proposal and the other accepts it.
Because of this, the bilateral contract is bound to strict rulings and guidelines
compared to the unilateral contract. The jurists divide the bilateral contract into
six classifications as shown in Figure 10.5. In order to have a better
understanding about the classification, you may refer to Table 10.2.

Table 10.2: Classification of Bilateral Contract

Classification of
Explanation Example
Bilateral contract
Contract of exchange It is a type of contract whereby an Contract of sale (bayÊ)
(muÊawadat) exchange contract takes place
between two contracting parties.
Contracts pertaining It governs the legal right to utilise of Contract of hire
to the utilisation of usufruct or benefit from property that (Ijarah)
usufruct (manfaÊah) belongs to another person.

Contract pertaining It is a type of contract whereby one of Wakalah

to service the contracting parties is requested to JuÊalah
do a job with or without
consideration.
Contracts of It is a type of contract which is related Musharakah
partnership (shirkah) to participation between parties. Mudharabah
Contract of security It refers to a guarantee contract. Suretyship (kafalah)
(tawthiqat) Transfer of debt
(hawalah)
Mortgage (rahn)
Contracts of safe It refers to a deposit of goods or funds WadiÊah
custody (wadiÊah) with a person who is not the owner
for safekeeping purposes.

However, it should be highlighted here that this classification of contract is not

exhaustive. Perhaps in future there will be other types of contracts that will come
into existence.

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There will be a brief discussion on selected examples for each classification. The
explanation will only be limited to the definition, legality, types, elements and
conditions of each contract.

ACTIVITY 10.1

Compare and contrast between unilateral and bilateral contracts in Syariah law.

10.2.1 Sale of Goods (Bay’)

Sale of goods is the most important contractual relationship in our daily life.
Almost every day we enter into contracts of sale of goods, either as a buyer or a
seller. Generally, we can say that the contract of sale of goods occurs when there
is a transfer of ownership of a specific object in exchange for an equivalent.

(a) Definition
Now let us look at the definition of sale of goods according to Muslim jurists:

Literally bayÊ means:

Exchange

Technically bayÊ means:

Exchange of one property for another, which is often called „price‰.

(b) Legality
The evidence of permissibility of contract of sale is derived from the
Quranic injunction, hadith of prophet (SAW) and ijmaÊ of jurists. Among
others are:

Surah Al-Baqarah, 2:275

„...but Allah has permitted trade and forbidden usury‰

Surah An-Nisa, 4:29 also states to the effect:

„O ye who believe! Eat not up your property among yourselves in vanities
but let there be amongst you traffic and trade by mutual goodwill‰.

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Hadith of Prophet SAW:

„No one has ever eaten better food than what he eats as a result of the labour
of his hands‰ (hadith al-Bukhari).

(c) Types of Contract of Sale (BayÊ)

There are various kinds of contract of sale. For example:
(i) Murabahah: Refers to a sale of goods at a price higher than the cost
price provided that the seller must inform the buyer how much cost
he has incurred and how much profit he is going to charge.
(ii) BayÊ as-salam: Refers to a sale of goods whereby payment is made
in advance for delivery of specified goods in the future.
(iii) IstisnaÊ: A contract whereby a party undertakes to manufacture or
produce a specific thing according to certain agreed upon
specifications at a determined price and for fixed date of delivery.
(iv) BayÊ inah: Refers to a contract which involves the sale and buy back
transactions of an asset by the seller. In these transactions, the seller
sells an asset to the buyer on cash basis and then buys back the asset
at a deferred price which is higher than the cash sale price. It may also
be conducted where the seller sells the asset to the buyer at a deferred
price and subsequently buys back the asset on cash basis at a lower
price than the deferred sale price. Bai` `inah concept is used in the
Malaysian Islamic banking and Islamic capital market system to fulfil
the various needs of market players, mainly during the initial
development stage of the Islamic financial system.

(d) Elements and Conditions

In order to form a correct sale contract, Muslim jurists have listed down
several conditions that should be fulfilled. The conditions are as stipulated
in Table 10.3.

Table 10.3: Elements and Conditions of Contract of Sale

Essential Elements Conditions

Buyer and seller  Should have the capacity to conduct such sale. It
means that the buyer and seller must already attain
the age of majority (bulugh), rushd (be matured) and
have a sound mind.
 They willingly concluded the contract.

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The object of sale  Should be owned by the seller or he should have

permission by the owner to sell it.
 Should be capable of being delivered or handed over.
 Should be made known to the purchaser by sight or
by ample description.
 Should be halal and permissible by Syariah law.
 Should be valuable and useful.
The price  Should be made known to the two parties.
 Specified in terms of currency
Contract (Âijab and  All the conditions for sighah are applied.
qabul)

10.2.2 Contract of Agency (Wakalah)

Another type of contract in Syariah law is wakalah. Wakalah refers to law of
agency which you have learned in Topic 4. The contract of wakalah is an
important transaction in peopleÊs daily activities. Basically, wakalah is based
on three important elements: the principal (al-muwakkil), the agent (al-wakil)
and the subject matter (al-muwakkal fih).

(a) Definition
Now let us examine the definition of wakalah according to Muslim jurists:

Literally wakalah means:

Protection or delegation

Technically wakalah refers to:

A contract where a person authorises another to do a certain well- defined legal action on

(b) Legality of Wakalah

Legality of wakalah is confirmed in the al-Quran, Hadith of the Prophet
(SAW) and ijmaÊ of jurist. Among others are:

Surah Al-Kahfi, 18:19

„Let then, one of you with these silver coins to the town, and let him find
out what food is purest there, and bring you thereof (some) provision‰.

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Surah An-Nisa, 4:35

„If ye fear a breach between them twain, appoint (two) arbiters, one from his
family, and the other from hers...‰

(c) Conditions of Wakalah

There are some conditions that must be fulfilled in order to form a valid
wakalah contract. Now let us look at Table 10.4.

Table 10.4: Elements and Conditions of Wakalah

Essential Elements Conditions

Principal (muwakkil)  The principal should have the power and
competence to deal and own the property. It
means that the principal must attain ahliyyah al-
ada al- kamilah. If the principal is not competent to
perform a certain action, he cannot delegate the
doing of that action to another person. For
example, an insane or a minor cannot appoint
agents to act on their behalf.
Agent (wakil)  A majority of jurists are of the opinion that the
agent should be a competent person. Thus, an
insane person or a minor cannot become an agent.
 The agent should also be aware of his status as an
agent.
Subject matter  The subject matter of an agency contract refers to
(muwakkal fih) the act to be performed by the agent. The act
should be known to the agent. This is to avoid
uncertainty or gharar.
 The action must also be a lawful action. Wakalah is
not allowed for unlawful acts such as theft, bribery
and transaction which involves usury or riba.
However, it should be noted that there is some
subject matter which cannot be performed through
an agency such as performing solat, fasting, taking
ablution and swearing an oath.

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(d) Types of Wakalah

According to Muslim jurists, wakalah can be divided as shown in Figure 10.6:

Figure 10.6: Types of wakalah

(i) Particular Wakalah or Special Agency

Particular wakalah is made only for a certain known transaction, for
example, buying and selling a certain known house. The agent is
bound to sell or buy that particular house only.

(ii) General Wakalah

It is a general delegation of power by principal to the agent, for
example if the principal informs the agent: „I delegate to you all my
affairs‰.

Even though in this circumstance it seems that the principal has given
full authority to the agent to act on his behalf, it does not cover any
harmful things to the principal, such as a gift or divorce. Thereby, the
agent has no authority to divorce the principalÊs wife without express
authority from the principal.

(iii) Restricted Wakalah

This is where the agent has to act within certain conditions, for
example, if the principal informs the agent: „I delegate to you to buy a
house for RM300,000‰. In this situation, the agent has to strictly observe
this condition. If the agent fails to do so, the transaction is not binding
on the principal.

(iv) Absolute Wakalah

Absolute wakalah is contradictory to restricted wakalah where no
condition is put for the transaction; for example, if the principal
assigns an agent to buy a house and he does not specify the price, the
method of payment or other conditions. However an agent is still
bound to act within the prevailing practices and customs.

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10.2.3 Contract for Hire (Aqd al-ijarah)

Contract for hire (ijarah) is one of the contracts that falls under the transaction
pertaining to the utilisation of usufruct (manfaÊah). It is different from contract of
sale because it involves the transfer of usufruct (manfaÊah) for a consideration
rather than property or goods. The consideration here could be in terms of rent,
in cases of hire of things or wages, in case of hire of services.

(a) Definition
Now let us look at the definition of contract of hire according to Syariah law.

Literally ijarah means:

Lease, rent or wage

Technically ijarah is defined as:

A contract on using the benefit or services in return for compensation

(b) Legality
The evidence of permissibility of ijarah is derived from the Quranic
injunction, hadith of prophet (SAW) and ijmaÊ of jurists. Among others:

Surah Al-ÂAlaq, 65:6

„... and if they breastfeed for you, then give them their payment‰

Surah Al-Qasas, 23:27

„He (ShuÊaib) said: Intend to wed one of these my daughters to thee, on
condition that thou serve me for eight years...‰

Hadith of the Prophet SAW:

Reported by Ibn Abbas to the effect that Prophet SAW had himself
undergone cupping treatment and gave the person who cupped him his
remuneration. If it is prohibited, he would not have paid him in the first
place.

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(c) Types of Contract for Hire (Ijarah)

Contract for hire can be divided into two. You may refer to Figure 10.7 for
the explanation:

Figure 10.7: Types of contract of hire (Ijarah)

(d) Elements and Conditions

There are five important elements of contract of ijarah as tabulated in
Table 10.5.

Table 10.5: Elements and Conditions of Contract of Ijarah

Essential Elements Conditions

Lessor (owner) and lessee  As we have discussed before, in order to form
(hirer) a valid contract, the contracting parties must
have three important qualities, which are
sound mind, attained the age of puberty
(bulugh) and attained maturity (rushd).
 In addition to that, the parties also are not
declared bankrupt and enter into the contract
with free consent.
Property  The property must be owned by the lessor.
 The property must be ready for use.
 The property is known to both parties and
must be specific by address, description or
specification.
 The property must be delivered to the lessee.

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Benefit or usufruct  Can be valued with money.

(manfaÊat)  It must be permissible by Syariah law.
 It should be in good condition possible for
leasing.
 Lessee can fully utilise the benefit or usage
until the end of the tenancy.
 The benefit is known and has been identified.
 The lessor has the power and capability to
provide the benefit and allow the lessee to use
the property.
 The period of ijarah must be specified.
Rental  Specified in terms of currency.
 The amount must be certain.
Contract (Âijab and qabul)  All the conditions for sighah are applied.

10.2.4 Contract of Partnership (Musharakah)

In simple terms, contract of partnership is when two or more persons agree to carry
on business on condition that capital, profit and loss will be shared among them
in accordance with the terms and conditions agreed upon between them.

(a) Definition
Now let us look at the definition of contract of partnership according to
Muslim jurists:

Literally sharikah means:

Mixing

Technically sharikah is defined by Hanafi jurists as:

A contract between partners on both capital and profit.

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(b) Legality
The legality of contract of partnership can be found in the Quran, hadith
and ijmaÊ. Among others are:

Surah Saad 38:24

„... and truly, many partners (in a business) oppress one another, except
those who believe and work good deeds, and they are few...‰

Surah An-Nisa, 4:12

„... but if more than two, they share in a third...‰

Hadith Qudsi:
Allah SWT said: „I am a third of two partners as long as the partner does
not betray his companion. If one of the partners betrays the other, I cease to
be partner of them‰ (Narrated by Abu Daud and Al-Hakim).

(c) Types of Contract of Partnership

Basically, there are two types of partnership in Syariah law: partnership of
ownership and a partnership of contract.

You may refer to Figure 10.8 for the types of musharakah in detail:

Figure 10.8: Types of partnership

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Partnership of ownership is when two persons share the ownership of

property either by their own choice (by agreeing to buy property) or
without their choice (by inheriting the property). Thus, they become
partners as regard to the property. They cannot dispose of the property or
object unless with the consent from his or her partner.

Meanwhile, partnership of contract refers to a contract between two or

more people to have partnership in capital and profit. Table 10.6 provides a
brief explanation for the partnership of contract.

Table 10.6: Types of Partnership of Contract

Types of Partnership
Explanation
of Contract
Financial Partnership Two or more persons agree to participate in a
(sharekat amwal) capital to be used in trade and the profits would be
divided between them according to a specified ratio.
This type of partnership is subdivided into two
types:
 Unequal share partnership (Âinan)
 Equal share partnership (mufawadah)
Partnership with eminent Two or more persons who have no capital to use in
people (wojuh) trade. But they have a good reputation in the
society. Both of them agree to enter into a
partnership whereby they will buy goods on credit
and sell them in cash. The profits derived from the
trade will be divided among them according to
agreed conditions.
Partnership of Two professionals undertake to finish a job such as
professions (sharikah carpentry, sewing or dying. They agree to divide the
sanaÊi) hire between them according to certain conditions
which they agree upon.
Capital-labour It is partnership in profit where two or more
partnership persons join together to form a business whereby
(mudharabah) one side provides work in the business and the
other side provides capital. The two sides are
partners in profit and loss.

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(d) Elements and Conditions

Table 10.7 provides us elements and conditions of the musharakah contract.

Table 10.7: Elements and Conditions of Musharakah

Essential
Conditions
Elements
Partners  Each partner should meet all the requirements of principal
(muwakkil) and agent (wakil). Please refer to Table 10.4.
Capital  Any asset valued in money
 Not in debt
 Specific amount
 From all partners except for mudharabah
 Paid into capital fund
Business or trade  Must be permissible according to Syariah law.
Profit/loss  According to proportion of shares or according to agreed
sharing ratio.
Contract: ÂIjab  All the conditions for sighah are applied.
and qabul

10.2.5 Contract of Suretyship (Kafalah)

Contract of kafalah is a contract where a person guarantees any claims, debts or
obligations that should be fulfilled by others.

(a) Definition

Literally kafalah means:

Guarantee

Technically kafalah is defined as:

To add obligation to obligation in respect of a demand for something

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(b) Legality

Surah Yusuf 12:72

„They said: We have lost the (golden) bowl of the king and from him who
produces it is (the reward of) a camel load and I will be bound by it (zaÊim)
‰

Al-Bukhari narrated that Salamah bin al-AkwaÊ said:

„We were with the Prophet SAW when a deceased person was brought.
They said: „O, Rasulullah perform prayers on him?‰ He said: „Has the
deceased left anything?‰ They said: „No‰. He said: „He is in debt?‰ They
said: „Three dinars.‰ He said: „Perform prayer on him‰ (while Rasulullah
SAW did not perform the prayer). Abu Qutadah said: „Perform prayers on
him Rasulullah and I will guarantee for his debt.‰ Then Rasulullah SAW
performed prayers on him.‰

(c) Types of Kafalah Contracts

Please refer to Figure 10.9 for types of Kafalah Contracts.

Look at Figure 10.9.

Figure 10.9: Types of kafalah

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(d) Elements and Conditions

Table 10.9 provides us elements and conditions of kafalah contract.

Table 10.9: Elements and Conditions of Kafalah

Essential Elements Conditions

Guarantor (Kaafil)  Guarantor must have legal capacity.
 He must be capable of taking responsibility.
 Must not be prohibited from dealing with his
property.
Creditor (makful  The creditor should be known to the guarantor.
lahu)  The creditor should be present in the session or be
represented by someone.
 The creditor must have legal capacity.
Debtor (makful  The guarantor knows the debtor whose debt he
Âanhu) guarantees.
 The debtor must be able to deliver the debts that has
been guaranteed.
Debt (makful bihi)  The debt must have been established and certain.
 The debt must be obligatory.
 The debt must be known in amount.
Contract (Âijab and  All the conditions for sighah are applied.
qabul)

10.2.6 Contract of Safe Custody (Wadi’ah)

The contract of wadiÊah is a contract where a person entrusts his goods to
another person for safekeeping. It is also known as depository.

(a) Definition

Literally wadiÊah means:

To leave, lodge or deposit

Technically wadiÊah is defined as:

An asset given to someone for safekeeping without any return.

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(b) Legality
Surah An-Nisa: 58
„Verily, Allah commands that you should render back the trusts to those, to
whom they are due‰.

Surah al-MuÊminun: 8–10

Those who are faithfully true to their trusts (amanah) and their covenants.
And those who strictly guard their solat. These are indeed the inheritors.

Hadith of Prophet Muhammad SAW:

„Give a mandate to the people who trust you and you must not betray the
people who betrayed you‰. (Narrated by: Abe Daud, Tirmidzhi and Hakim)

(c) Types of Contract of WadiÊah

Now let us look at Figure 10.10:

Figure 10.10: Types of WadiÊah contract

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(d) Elements and Conditions

Table 10.10: Elements and Conditions of Kafalah

Essential Elements Conditions

Depositor or owner  Depositor must have legal capacity.
(al-muwaddiÊ)  According to the Hanafis, it is not necessary for the
depositor to attain the age of puberty.
Custodian or  The custodian must have legal capacity.
depositee
 Custodian is not allowed to promise any rewards or
(al-wadiÊ) return.
Goods under  It must be valuable property in Islamic law.
custody  Manageable by the custodian.
(al-wadiÊah)
 Storable.
Contract (sighah)  All the conditions for sighah are applied.

EXERCISE 10.1
What are the differences between contract of exchange (muawadat)
and contract of utilisation of usufruct (Âuqud al manfaÊah)?
Explain the types of wakalah.
Discuss the elements and conditions for a valid musharakah
contract.
Briefly discuss the different types of khiyar in the Syariah contracts.

 Contract or Âaqd is a connection of the words of one party (ijab) to the words
of the other parties (qabul) which constitute a legal binding contract and
enforceable by law.

 The contract in Syariah law consists of three pillars which are: the statement
of contract (sighah), the contracting parties and the subject matter of the
contract.

 Each pillar has some requirements to be fulfilled in order to validate the

contract.

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 Khiyar or option is one of salient features of contract under Syariah law. It

gives an option to the contracting parties to confirm or cancel the contract.
There are four examples of khiyar, namely, khiyar al-majlis, khiyar al-shart,
khiyar al-ruÊyah and khiyar al-Âayb.

 Muslim jurists have classified a contract based on its nature into two,
unilateral and bilateral. Bilateral contracts are further divided into six
classifications as follows:

 Contract of exchange (muÊawadat);

 Contracts pertaining to the utilisation of usufruct (manfaÊah);

 Contract pertaining to service;

 Contracts of partnership (shirkah);

 Contract of security (tawthiqat); and

 Contracts of safe custody (wadiÊah).

Contract of agency (Wakalah) Option (Khiyar)

Contract for hire (ÂAqad al-ijarah) Pillars of contract
Contract of partnership (Musharakah) Sale of Goods (BayÊ)
Contract of safe custody (WadiÊah) Statement of contract (Sighah)
Contract of suretyship (Kafalah) Syariah law
ÂIjab and qabul

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Abdullah Alwi Hassan. (1992). Sales and contracts in early Islamic commercial
law. Islamabad, Pakistan: Islamic Research Institute, International Islamic
University.

Ahmad Hidayat Buang. (2000). Studies in Islamic law of contracts: The prohibition
of gharar. Kuala Lumpur, Malaysia: International Law Book Services.

Ahmad Mohamed Ibrahim. (2000). The administration of Islamic law in Malaysia.

Kuala Lumpur: Institute of Islamic Understanding Malaysia.

Islamic banking practice from the practitionerÊs perspective (1994). Kuala Lumpur,
Malaysia: Bank Islam Malaysia Berhad.

Niazi, L. A. (1991). Islamic law of contract. Lahore, Pakistan: Research Cell, Dyal
Sing Trust Library.

Shariah Resolutions in Islamic Finance at http://www.sacbnm.org/wp-

content/uploads/2018/03/69.E.pdf access on 10 April 2020

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To pi ▶ Partnership
11
LEARNING OUTCOMES
By the end of this topic, you should be able to:
Explain the meaning of partnership;
Discuss characteristics of business entities which are formed through „partnership‰; and
Assess the rights and liabilities of partners and their relations to each other and to a third pa

▶ INTRODUCTION
Partnership is one of the various types of business organisations found in
Malaysia other than companies and sole proprietorships. Why does a person
prefer to form a partnership as a form of business? There should be advantages to
those who wish to carry on this form of business. Forming a partnership, for
example, would enable more capital to be injected as compared to carrying on a
sole proprietorship as a partnership would involve more than one person
compared to only one individual in sole proprietorship. The partners in a
partnership will be jointly liable while in a sole proprietorship the owner is
individually liable.

11.1 DEFINITION OF PARTNERSHIP

The applicable law in respect of partnership in Malaysia is the Partnership Act
1961 (hereinafter referred to as PA 1961). How is partnership defined under the
Act? It is important to know the definition when determining whether a business
is a partnership or is another form of business.

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Definition
Section 3(1) of the Partnership Act 1961 defines partnership as „the relation which subsists between

Section 3(2) of PA 1961 excludes cooperative societies and registered companies

from being inferred as a partnership as such entities cannot be registered as
partnership under the Business Registration Act, 1956.

Section 3(2) exclude cooperative society and companies which registered as

partnership. This is because these entities are not registered as partnership by the
Registration of Business Act 1956.

If Provision
we refer to the definition in Section 3(1) of the PA 1961, three elements must be
satisfied first before
No association or apartnership
business is or is not a partnership.
consisting of more thanWe20will discussshall
persons these
elements in Subtopics
be formed 11.1.1, 11.1.2
for the purpose and 11.1.3.
of carrying any business for profit, unless it is
incorporated as a company under this Act, or is formed under any other
written laws.
11.1.1 Relations between Several Individuals
There should be a relation between several people known as partners in a
partnership. A partnership cannot exist from less than two individuals. The
relations which exist between partners must be a relationship to carry on a
business of partnership. If it is clear that the existing relationship is without any
intention to form a partnership, or where in fact, they only intended to form a
company in the near future, such relations are not a partnership.

This is clearly seen from the decision made by the court in Keith Spicer Ltd. v.
Mansell (970). It was held that there was no evidence from the facts of the case
which showed Mansell and Bishop were carrying on a business with a view of
profit. The evidence only showed that they were getting ready to carry on a
business which would later be formed into a company.

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The Partnership Act 1961 does not stipulate the maximum number of members in
a partnership. However, there should be a minimum of two members. Reference
should be made to the Section 13 of the Companies Act 2016 to determine the
maximum number of members as shown in the following provisions:

The
„Inabove Sections
the case of any states that a professional
other association partnership
or partnership, mayofbe
it consists notmade
moreup of
more
than than
twenty20members‰.
members but a maximum of 20 members for an ordinary
partnership.

This issue was decided in several cases such as Tan Teck Hee v. Cheng Tian
Peng (1915). As a result, a partnership firm carrying on a business with more
than 25 partners was not valid and no legal actions may be made against them.
The same principle was also applied in Shim Fatt v. Leila Road Bus Co. (1957).

Before a partnership or a person wishes to enter into any transactions with any
firms, they should therefore ascertain that such limitation is complied with. This
is to enable any contracts entered to be enforceable in court.

11.1.2 Express or Implied Agreement to Carry on a

Common Business
„Common business‰ means „including every trade, occupation or profession‰. It
was defined in Section 2 of the PA 1961.

In summary, common business refers to trade. Sir Montague Smith in Mollowo,

March & Co. v. Court of Wards (1872) decided that to constitute a partnership, the
partners must have agreed to carry on a business or to share profits in some
common way.

Example: there is no partnership if A, who wishes to start a business selling

fabrics with B and C but it was disagreed to by B and C as to the kind of business.

In Smith v. Anderson (1880), business meant something which were carried on

persistently or repeatedly. It does not include an undertaking done only once
even if it brought some profits. In Customs & Excise Commissioner v. Lord
Fisher (1981), a plan to shoot pheasants was arranged and the participants had to
pay a certain sum for their participation. The court held that it was not a
business.

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In Malayandi Chetty v. Narayanan Chetty, it was held that a business of

moneylending by the chettiar was a business. However in Soh Hood Beng v. Khoo
Chye Neo (1897) where a moneylending association formed by several persons
for the purposes of giving out loans to its members from the money collected
from its members, it was held as not a business but a charitable activity to assist
its members.

It is clear therefore, a business must be one which is carried on persistently or

repeatedly before it could be categorised as a business under the Act. However,
something which is carried on persistently or repeatedly is not a business if it is
merely a charitable activity.

SELF-CHECK 11.1
Think of this scenario: There was a conflict of opinion between Michael, Aida and Siva when every o

11.1.3 Agreements Between Parties with a View of

Profits
The business they carried on should be with a view of making profits. If there is
no intention among them to gain profits, the definition of partnership is not
satisfied; thus, it does not constitute a partnership. It becomes irrelevant even if
the business in fact gains some profits if it is not accompanied with a view to
make profits.

It is clear therefore that a view to making profits is important in the formation of

a partnership. As decided in the following case, a charitable activity may not be
included in the definition of „a partnership‰.

In Soh Hood Beng v. Khoo Chye Neo, there was no partnership as there was no
intention to make any profits. Their only intention was to assist their needy
fellow members.

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11.2 FACTORS WHICH DETERMINE THE

EXISTENCE OF A PARTNERSHIP
It is difficult to determine the existence of a partnership without a partnership
agreement. Apart from the definition stipulated in the Partnership Act, there are
two other factors which may help determine the existence of a partnership.

(a) Joint Title to a Tenancy

Joint property by one or more will not automatically create a partnership.
This is clearly stipulated in Section 4(a) of the PA 1961. However, the court
might decide there is a partnership if it could be proven that the joint
property was used for the purpose of sharing net profits.

(b) Sharing of Net Profits

This is clearly explained in Section 4(b) of the PA 1961. Gross profits means
profits before deductions of costs. The sharing of gross profits will not
automatically create a partnership. In Lyons v. Knowles (1863), the court held
that the sharing of gross returns between an owner and a theatre manager
was not evidence which proved an existence of a partnership between
them.

Section 4(c) of the PA 1961 provides that the receipt by a person of a share
of business profits is a prima facie evidence that he is a partner. This
presumption however, may be rebutted if there are evidences which show
otherwise, as stated in Section 4(c)(i) to 4(c)(v) of the PA 1961. What are
those exceptions? They are as follows:

(i) Payment of Debt Instalment Out of the Accruing Profits of a Business

If a person lends money to a partnership firm and that debt payment
was from the profits made by the firm, the lender however may not be
inferred as a partner of firm.

(ii) Remuneration of a Servant or Mercantile Agent

A servant or an agent is not a partner even if he, under a contract, is
paid remuneration out of the profits of a partnership firm. In
Rowlinson v. Clarke (1860), the owner of a medical practice received
money out of the sale of goodwill of the business and a part of the
profits from the first year after the sale if he agreed to introduce his
patients to the buyer. The court held that he was not a partner by
reason he was remunerated by a share in the profits.

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(iii) Payment of Annuity from Profits to a Widow or Child of a Deceased

Partner
In I.R.C v. LebusÊs Trustees (1946), a widow of a deceased partner who
received an annuity from the profits of the firm was held to be not a
partner. Therefore, she could not bring any action to claim the assets
of the firm when the firm failed to pay the annuities to her because
she was not a partner.

(iv) Payment for an Advance of Money Out of Variable Profits

A written and signed contract by the involved parties or their agent
must be made. A lender who received a rate of interest that varies
with the profits or a share of the profits is not a partner of the firm.

In Re Young (1896), there was a written contract between A and B. A

lent B a sum of money and received payment of the loan out of the
profits of the firm. A was given the option to be a partner but he did
not exercise that option even though he was the person who managed
BÊs business. B went bankrupt and A sued for the assets of the firm
alleging they should be distributed equally. The court held that A was
not entitled to claim because he was not a partner.

(v) Payment to Seller of Goodwill of a Business a Portion of the Profits of

a Business
A person who sold the goodwill of a business and in consideration of
the sale receives a portion of the profits is not a partner of a
partnership.

11.3 FORMATION OF A PARTNERSHIP

A partnership can be formed through a mutual agreement made between the
parties. The courts will not face any difficulties to determine the existence of a
partnership if there is an agreement made either orally or in writing.

An agreement or a contract mutually made by the parties will also assist the
court to decide on any dispute which might arise between them because there are
clear stipulations which would show their intention at the time to form a
partnership.

The agreement between the partners may stipulate on several matters, such as
the duration of the partnership, the rights and liabilities of partners, capital
subscription, distribution of profits, name of the firm and other matters. In the
absence of a partnership agreement, Part IV and V of the Partnership Act 1961

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11.4 REGISTRATION OF A PARTNERSHIP

A partnership business must be registered according to the Companies
Commission of Malaysia (CCM) Act 2001. Matters such as the commencement,
execution and termination of business, name of the firm and its members must be
submitted to the CCM.

Even though registration is a definite proof of who the partners are in a

partnership, it will however not restrict other partners from proving that a
person should not be a partner even if his name is registered. This was decided in
Sivagami v. P.R.M Ramanathan Chettiar and Ors (1959).

11.5 RELATION OF PARTNERS WITH A

THIRD PARTY
Each and every partner is an agent of the firm and his other partners for the
purposes of carrying on the business of the partnership. If a partner acts outside
the authority given to him, his actions therefore does not bind the firm and his
other partners. A partnerÊs authority as an agent may be divided into two kinds.
They are:
(a) Apparent authority; and
(b) Actual authority.

We will look at each authority in turn.

11.5.1 Apparent Authority

Apparent authority includes all the authority which a partner does not actually
or expressly have but his actions will still bind the firm and his other partners if
the person who deals with him believed that he had such authority.

It is explained in Section 7 of the PA 1961 that other persons who deal with the
firm are entitled to presume that a partner has such authority, even though it is
not given expressly.

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A firm is not bound by apparent authority in the following situations:

(a) If the partner acted without any authority and the person who deals with
him knew that he had not such authority; or
(b) Did not know and at the same time did not believe that he is a partner.

Refer to this example:

A, a partner in borrowers firm was given an express authority by his other

partners to sign a moneylending contract which must not be larger than
RM30,000. A instead borrowed money amounting to RM45,000 from
moneylending firm. The moneylending firm did not know that A had no
authority to take loans larger than RM30,000.

The moneylending firm presumed that as a partner, A had the authority to

borrow more than that amount. Here, the Borrowers Firm and his other partners
cannot deny the loan made by A. His action binds the firm and may be inferred
as AÊs apparent authority.

Section 7 of the PA 196, however provides four elements to determine whether

there is an existence of apparent authority. A firm is not liable for a partnerÊs action
made under apparent authority if the transaction does not satisfy with the
elements set out in Section 7. Those elements are:

(a) The act must be of the nature usually carried on by the firm
The third party may presume that the partnerÊs action which has a relation
to the nature of business usually carried on by the firm is an action which
gives the partner the authority to do so. When a firm refused to be liable for
any liabilities due to an unauthorised partnerÊs action, the court, generally,
takes into consideration the opinion of the third party with regard to the
transaction whether it is in any way connected to the nature of business of
the firm.

(b) If the third party has a basis to believe, from the nature of business of the
firm, that the partner has the authority to act as such, then the firm is liable.
This principle was decided in Mercantile Credit v. Garrod (1962) . The
partnership firm carried on a business of leasing garages and car repairs.
The agreement between the parties prohibited the business of buying and
selling cars without the other partnersÊ knowledge. One of the partners
sold a car to the plaintiff. The partner in fact had no title on the car he sold.
The payment for the sale was put into the partnership account. The plaintiff
wished to rescind the contract when he came to know that the partner who
dealt with him had no right over the car. He sued for the return of his
money.
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The court held that the sale of the car in the opinion of the third party, was
a transaction of the same nature to the partnership business. The firm,
therefore, was liable for the partnerÊs action under apparent authority and
should return the sale money to the plaintiff.

The firm is also liable if a partner made a loan for the purposes of enlarging
or developing the business because a partner is presumed to have the
authority to do so. The firm is still liable even if the partner had
misappropriated the loan.

In Chettinad Bank v. Chop Haw Lee & Chop Lee Chan (1931), the defendant,
a pawnshop firm was sued by the Bank for a loan made by one of its
partners even though the partner had used the money for his personal use.
The court held that the firm was liable to pay the loan made by the partner.

The presumption of apparent authority is only in respect of transactions

which in the public opinion is in a way connected to the business of the
firm. If there is no such connection, the third party cannot claim that the
firm is liable except if the partner was specifically authorised to carry out
transactions which are beyond the nature of business usually carried on by
the firm.

The act was done in the usual way the act carried on by the partner or
within the ordinary course of business of the firm for similar transactions or
in accordance to practice of the business of that nature.

(c) The third party dealing with the partner knew or believed the person
who dealt with him is a partner.
Because he believed the person who is dealing with him is a partner, the
third party then presumed that the partner is acting under his apparent
authority as a partner.

In Sithambaram Chetty v. Hong Hing & Ors (1928), the third party,
several chettiars, gave a loan to one of the managers of a partnership firm in
Penang because they believed he was partner in the firm. The manager, in
fact was only managing the business for two actual partners who were
residing in Singapore. The manager who made the loan ran away and the
chettiar sued for the return of the money from the firm. The real partners
refused the claim on the ground that the firm was not liable because the
manager was not a partner.

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The court held that the partnership is liable for failure to indicate the
managerÊs position causing third parties to believe him a partner and thus
authorised to make the loan.

There are two ways to determine whether a person is or is not a partner.

These are:
(a) From specific sources or past dealings; and
(b) An action made by the firm by introducing a person as a partner.

An act of introducing a person as a partner can be seen in Chan Yin Tee v.

William Jacks & Co. (Malaya) Ltd. (1964). A partner introduced a minor
as his partner to a third party. As a result, the acts done by the minor bound
the partner.

(d) The third party who has a dealing with the partner does not know that
the partner has no authority.
Refer to this example.

Nicholas, a partner was given the authority to borrow only RM30,000 for
each loan made. Nicholas borrowed RM45,000 from Bank C who knew that
Nicholas does not have such authority. The firm is not bound by
NicholasÊs act and Bank C cannot allege that it is NicholasÊs apparent
authority because the Bank has the knowledge of the restriction on the
amount of loan that Nicholas could make.

If you refer to the above example you will find that „apparent authority‰ has
a wide meaning. It therefore gives a third party wider scope to use apparent
authority as a basis for any claims against a partnership firm for liabilities
caused by the act of a partner. How then can apparent authority be
restricted?

Section 10 of the PA 1961 provides:

Provision
„If it has been agreed between the partners that any restriction shall be
placed on the power of any one or more to bind the firm, no act done in
contravention of the agreement is binding on the firm with respect to
persons having notice of the agreement‰.

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Even if Section 10 of the PA 1961 could be used, the agreement on the

restriction must be known to the third party. The effects would be still the
same, that is, they could still impose the liabilities on the firm by reason of
apparent authority if the third party has no knowledge of the agreed
restriction.

11.5.2 Actual Authority

When the act is not of the same nature with the business of the firm, the firm is
still liable if actual authority was given to a partner either orally, in writing or by
the conduct of the parties to enter into such transactions. If a partner entered into
a transaction beyond the business of the firm and there is no actual authority
given for it by the firm, the partner will then be personally liable. This is clearly
provided for in Section 9 of the PA 1961.

As an example:

Bahar is a partner in a business which exports Malaysian batik fabrics. Due to the
demands of his foreign customers, Bahar exported Malaysian fruits under the
name of the firm. His other partners knew of his act and consented. The fruits he
exported were spoiled when they reached the destination and his customers sued
for damages from the partnership firm. The firm refused to be liable. Can the
third party (customers) allege that his act was made under his apparent authority
as a partner?

The third party cannot presume that his act was within his apparent authority
because the business of exporting fruits was not of the same nature as the
business of exporting batik fabrics. The customers would not be able to make the
firm liable under apparent authority.

Can they sue the firm by alleging that Bahar had actual authority? The firm may
be liable on actual authority that is by taking into account the conduct of the
other partners who consented Bahar to export the fruits under the name of the
firm.

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EXERCISE 11.1

1. Moon is a partner of X-Files Firm. It is a firm which carries on a

business in leasing photocopy machines. There is a restriction in
the partnership agreement stipulating that a partner is not
permitted to be involved in the sale of papers. Without the
knowledge of other partners Moon sold photocopy papers of
various brands to WY Publishing Co. The papers were found to be
not of quality and WY Publishing Co. wishes to sue the firm.
Advise WY Publishing Co. as to their rights.

2. „Imran, a partner in Imran & Associates was given an express

authority by his other partner to take a loan from another
organisation which must not be more than RM30,000. Imran
borrowed money amounting to RM100,000 from Public Bank.
Imran & Associates did not pay the loan‰.

Who will be liable for the loan?

A. Imran himself will be liable for the loan made from Public
Bank.
B. Imran & Associates will be liable to pay the loan because
there is no authority given to Imran.
C. Imran & Associates will be liable to pay the loan because
Public Bank gave the loan based on the belief that Imran has
an actual authority.
D. Imran & Associates will be liable to pay the loan because
Public Bank gave the loan based on the belief that Imran has
an apparent authority.

11.6 LIABILITIES OF PARTNERS

Section 16 of the PA 1961 provides for liabilities of persons who by words spoken
or written or by conduct consented or knew his name is stated as a partner, or he
himself holds himself out as a partner. In Tower Cabinet v. Ingram (1949), a
letterhead with the names of the retired partners were used by the firm for entering
into transactions with the third party.

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The court held that the failure by the retired partners to erase their names from
the letterhead was not a Âholding outÊ. The retired partners therefore were not
liable for the transactions made by using the old letterhead.

Section 16 of the PA 1961 further provides that any statements (spoken or

written) or conduct which may be presumed as Âholding outÊ need not be
communicated personally by the person who was said to be Âholding outÊ to the
other party who acted on such statement or conduct.

Example: A told B that he is a partner in TDK firm. B later told C that A is a

partner in the said firm and C, based on the information gave credit to A. A is
liable as a partner of TDK firm for his debts with C.

The conduct or act of holding out should be a conduct or an act which could
influence the third party to give credit to the firm. If the person who gave credit
to the firm did so but not due to being influenced by the holding out of the
person, the person who held out as a partner will not be liable.

SELF-CHECK 11.2
Qeemnoor held out as one of the partners and his name was stated in the agreement as one of

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11.6.1 Liabilities of Incoming and Outgoing Partners

Refer to Table 11.1 and you will find four provisions which provide on liabilities
of incoming and outgoing partners.

Table 11.1: Provisions on Liabilities of Incoming and Outgoing Partners

Provision Explanation
Section 19(1) of A partner will not be liable for anything done before he became a
PA 1961 partner.
Section 19(2) of A partner who retires is still liable for anything incurred before his
PA 1961 retirement.
Section 19(3) of A partner who retires may be discharged from any liabilities for
PA 1961 anything done before his retirement through an agreement with his
other partners and the creditors.
Section 38(1) of If there is a change in the constitution of a firm, a person who has
PA 1961 any dealings with the firm is entitled to presume all apparent
members of the old firm as still being members of the firm until he
has notice of the change.

IMPORTANT NOTES
It is important for a firm to inform a third party if a partner have withdrawn
from the partnership. This is to prevent the firm from being liable for any
transactions carried out by the former partner. A partner who wishes to retire
may nominate other person as a partner, but it must be agreed by the firm.
The partner too may also be discharged, if agreed by other partners and
creditors, from his liabilities for debts made before his retirement. This is
called the principle of novation.

EXERCISE 11.2

Rohan retired from being a partner to YY firm two years ago. Last year YY firm entered into a contra

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11.7 RELATIONS OF PARTNERS TO

EACH OTHER
Relations between partners can exist by two ways:

(a) By an agreement mutually agreed between the parties.

(b) InProvision
the absence of such agreement, the relations will be in accordance with
the
An provisions
agreement ofmutually
the Act. agreed between the partners which outlines all
the rights and liabilities in a partnership must be in accordance with
Any rules,
the whether
requirementspecified by anfairness
of utmost agreementandorgood
provisions of the Act
faith towards may be
all other
varied if all the partners
partners. consented
This requirement to ensure
will the variations. It is notbusiness
the partnership sufficient if it is
would
made byprogress
a majority
wellconsensus.
and executed in a proper manner.

Section 21 of the PA 1961 provides:

The mutual rights and duties of partner, whether ascertained by agreement

11.7.1
or defined Provisions onbeRelations
by this Act, may varied by theof Partners
consent topartners
of all the Each and
Other
such consent may beUnder the or
either express Partnership
inferred from a Act
course1961
of dealings.

Before you go to the next subtopic, think of the following scenario.

Azly, Letchumi, Michael Sagumugan, Ah Long and Leng Peen mutually agreed
to set up a partnership business. Being friends for a long time, they did not
bother to make any written agreement for the formation of the partnership. Can
they bring any disputes regarding the distribution of profits of the firm to court?
The answer would be NO!

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In the absence of any agreement between the partners which stipulates the rights
and liabilities, reference must be made to the Partnership Act 1961. The Act
provides several provisions which may be applied to settle any arising disputes
in respect of relations of partners to each other. Section 26 of the PA 1961
provides:

The interest of partners in the partnership property and their rights and duties in
relation to the partnership shall be determined subject to any agreement, express
or implied between the partners by the following rules:

(a) All the partners are entitled to share equally in the capital and profits of the
business, and must contribute equally towards the losses, whether of capital
or otherwise, sustained by the firm.
In short, this provision requires partners to equally contribute to the capital
and to equally suffer any losses suffered by the firm. Does this mean that a
rich partner cannot contribute a bigger portion than the other partners?

You must note that this provision does not restrict a partner from
contributing a bigger portion than the other partners. If a bigger portion is
contributed by one of them, and in the absence of an agreement which
states the distribution of profits would be in accordance with the portion of
capital contributed, the partner who contributed more would still receive
the same equal share of profits as his other partners.

The distribution of profits will be made equally among the partners without
regard to the amount of capital subscribed, if there is no agreement to the
contrary. In Stewart v. Forbes (1849), there was an agreement made which
stipulated that the partners mutually agreed to share the profits according
to the amount of capital contributed. The profits therefore would not be
shared equally and the provision of the Act did not apply.

If the firm suffers from any losses, how would the losses be shared? In Re
Albion Life Assurance Society (1880) , it was decided that if there was an
agreement which stipulates the distribution of profits in a certain
proportion, any losses suffered should be shared in the same proportion
too.

According to Section 46(a) of the Partnership Act 1961, losses would be

distributed in accordance with the distribution of profits. If there is no
express agreement to the contrary on the distribution of losses, it should
then be in the same proportion as to the distribution of profits. If profits are
shared equally, any losses then should accordingly be distributed in the
same proportion.

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(b) The firm must indemnify every partner in respect of payments made and
personal liabilities incurred by him:
(i) In the ordinary and proper conduct of the business of the firm.
(ii) In or about anything necessarily done for the preservation of the
business or property of the firm.

This provision means that a firm must indemnify a partner who had used
his own money when he carried out any transaction for the firm. The firm
should be liable too for any liabilities faced by any of the partners while
carrying out the business of the firm.

In Ong Keng Huat v. Hong Kong United Corporation (1961) , there was a
partnership agreement mutually agreed between the partners to give a task
to the appellant, one of the partners, to insure equipment in a theatre which
belonged to the partnership business. The equipment were damaged in a
fire. The appellant failed to insure them as instructed. His other partners
claimed that the appellant was personally liable due to his failure to insure
them as instructed.

The Court of Appeal decided that the other partners were jointly liable for
the losses because there was no fraud or negligence committed by the
appellant when he failed to insure the equipment. There was only a breach
of duty by the appellant.

It is clear therefore from the facts and decisions made, that a partnership
firm in cases where there are losses, must bear the liabilities of its partners if
it does not involve any fraud or negligence committed by the concerned
partner. This was decided in Kok Hong Leong & Ors. v. Seow Kah Cheng
& Ors (1950).

(c) Any actual payment or advance beyond the amount of capital which he has
agreed to subscribe, is entitled to interest at the rate of eight per cent per
annum from the date of the payment or advance.

If a partner made any payment larger than the amount stipulated for capital
subscription, this payment will be considered as an advance to the firm.
That partner therefore is entitled to an interest at the rate of eight per cent
on the excess from the date he made the payment or advance.

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(d) A partner is not entitled, before the ascertainment of profits, to an interest on

the capital subscribed by him.
The profits of a firm should be ascertained first before any interest on the
capital subscribed by the partners could be paid to them.

(e) Every partner may take part in the management of the partnership firm.
Every partner has the right to take part in the management of the
partnership firm and other partners could not deny this right. This is
however subject to any agreement mutually agreed between them. An
agreement which gives the authority to manage to a certain partner only
but excluded the others is therefore valid.

(f) No partner shall be entitled to remuneration for acting in the partnership

business.
Every partner is not entitled to receive any remuneration because they are
partners and already sharing the profits made by the firm. However, this
provision like in paragraph (e) above is subjected to any agreement to the
contrary between the partners.

(g) No person may be introduced as a partner without the consent of all existing
partners.
If any partners wishes to nominate any new partner into the partnership,
the consent of all partners must first be obtained. This is in accordance with
the duty of the partners to act fairly and in good faith to each other.

(h) Any differences occurs in the partnership business may be decided by a

majority of the partners but no change may be made in the nature of the
partnership business without the consent of all existing partners.
If there are differences which arises between the partners in respect of the
management of the firm, the decision should be made by the majority.
There are however several elements which must be satisfied with before
such majority decision may be accepted. This is stated in Const v. Harris
(1824). In this case, it was decided that the minority must be consulted first
and the decision made by the majority must, in exercising their power, be
done for the benefit of all parties and does not exclude the minority.

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If there are any disputes in respect of any changes with the nature of the
partnership business, consent of all partners must be obtained. The case of
Tham Kok Cheong & Ors v. Low Pui Heng (1966) can be used as an example.
Several partners decided to sell the partnership firm to a limited company
without the consent of one of the partners. The court held that the sale was
not valid because consent of all partners was not obtained.

Every partner has the right to examine all partnership books or documents.
To enable such right be available to the partners, all partnership books must
be kept at the place of business of partnership, or the principal place, if
there is more than one.

It must be noted that, the relationship of partners to each other is subjected

to any agreement mutually made between them. In the absence of such
agreement, the provisions of the Act will apply. Apart from that, there is a
requirement which must be observed in respect of the conduct of every
partners that is the need to be of utmost fairness and in good faith to each
other. These are provided in Sections 30, 31 and 32 of the Partnership Act
which lay down the duties of partners. Refer to Table 11.2 to identify the
duties of partners.

Table 11.2: Duties of Partners

Provision Explanation
Section 30 of This Section explains on the duty of a partner to render true
the PA 1961 accounts and full information on all things affecting the
partnership to the other partners or agent.
Section 31 of This Section provides for duties of a partner to account to the
the PA of 1961 firm any personal benefit he derived, without the consent of
the other partner, from transactions in connection with the
partnership, or from any use by him of the partnership
property, name or business connection, as a partner.
Section 32 of This Section provides where a partner must account for and
the PA 1961 pay over to the firm all profits made by him if such transactions
is of the same nature or competing business with that of the
firm.

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EXERCISE 11.3

1. Malik was one of the partners in TK firm. In the mutual

agreement between the partners at the commencement of the
firm, there was an agreed stipulation that Muthu, one of the
partners would be given the right to manage the partnership
firm. Malik wished to take part in the management too. He
alleged that his right should not be denied by the mutual
agreement which they made at the commencement of the
partnership. Malik was also unsatisfied over the remuneration
Muthu received for managing the firm. Malik wants your advice
as to his rights under the Partnership Act 1961. Advise him.

2. „Kamal and Adli are partners of K.A Bookstore which have a

business in supplying books and reading materials to bookstore
and supermarkets. After five years, the business prospered and
Kamal decided to change the partnership business into cosmetic
business without AdliÊs consent‰.

What is the legal consequence of Kamal action?

A. K & A Bookstore will be changed to cosmetic business.

B. The change is not valid as Kamal should get AdliÊs

consent first.

C. The act of Kamal shall have no effect to the partnership

relationship.

D. The partnership between Kamal and Adli is automatically

dissolved.

11.8 DISSOLUTION OF PARTNERSHIP

What is your advice to them if Daniel, Amir and Maniam come to seek your
advice on their wish to dissolve their partnership? Do you know that there are
several ways for dissolution of a partnership?

A partnership which was formed could be dissolved and its activities terminated
by three ways. Figure 11.1 illustrates how such dissolution is made.

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Figure 11.1: Dissolution of partnership

11.8.1 Automatic Dissolution

A partnership may terminate on its own or automatically dissolved with the
happening of certain events in Table 11.3. However, it must be noted that, there
is no dissolution even with the happening of such events if there is a stipulation
which states to the contrary and agreed upon by the partners in their mutual
agreement. This is due to the „Subject to any agreement between the partners⁄⁄
‰ clause found in every relevant Sections for the exceptions. Refer to Table
11.3.

Table 11.3: Matters which Caused Automatic Dissolution of Partnership

Automatic Section in the

Explanation
Dissolution PA 1961
1. Expiration of S. 34(1)(a) If partnership created for a certain term, it is
partnership dissolved by the expiration of that term.
term
S. 34(1)(b) If partnership entered for a single adventure or
undertaking, it is dissolved by the termination of
that adventure or undertaking.
2. Death or S. 35(1) Partnership is dissolved on its own against all
bankruptcy partners where there is a death or bankruptcy of
of partner any of the partners. To prevent this situation from
happening, the partners may provide for the
contrary in their mutual agreement.

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3. Illegality of S.36 A partnership is dissolved automatically when

partnership the purpose or the business of the firm suddenly
becomes unlawful due to the happening of
present events.
An example is where a partnership was formed
for the purpose of exporting elephant tusks to
foreign countries. To prevent extinction, the
government prohibits killings of elephants and
exports of elephant tusks. The partnership
business thus becomes illegal and automatically
dissolved.
4. Excess S.13 of the A partnership will not be valid and thus
membership Companies dissolved automatically if it is made up of more
Act 2016 than 20 persons, for an ordinary partnership.

11.8.2 Dissolution by Notice

Section 34(1)(c) of the PA 1961 enables a partner to dissolve a partnership by a
notification to all partners if the duration of partnership is not expressly
stipulated.

In such cases, Section 34(2) of the PA 1961 provides that the date of dissolution of
a partnership is from the date mentioned in the notice as the date of dissolution.
If the notice does not state the date of dissolution, a partnership is dissolved at
the date of the communication of notice.

A dissolution is not valid if there is a failure to notify all partners. This was
decided in Tham Kok Cheong & Ors v. Low Pui Heng (1966).

11.8.3 Dissolution by the Court

The court, as clearly stated in Section 37 of the PA 1961, has the power to order a
partnership be dissolved. Paragraphs (a) to (f) of the Section provide six reasons
where such a decree may be made. We will discuss each of the reasons
respectively. Refer to Table 11.4 for ascertaining the reasons. The dissolution may
be made after the court received an application from any of the partners.

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Table 11.4: Reasons for Dissolutions by the Court

Reason Section 37 Explanation

1. Unsound mind. When a partner is found to be insane or permanently of
unsound mind, the court may order the dissolution of the
partnership.
2. Permanently incapable. When a partner becomes permanently incapable, the court
may order the partnership be dissolved.
3. Partner found to be The guilty conduct by the partner must be of a nature
guilty of such conduct which could affect prejudicially the carrying on of the
which prejudice the business of the firm. If the guilty conduct has no relation to
business of the firm. the business of the firm, the court cannot decree an order
for the dissolution of the partnership. In Essell v.
Hayward (1860), there was a misappropriation on the
assets of the firm by one of the partners and the court
ordered the partnership be dissolved.
4. Breach of agreement. If one of the partners commits a breach on the partnership
agreement wilfully or persistently, until it is not
reasonably practicable for the other partner to carry on the
business with him, the court may dissolve the partnership.
5. The partnership suffers If a partnership business suffers loss persistently, the
persistent loss. partners may apply to the court for a dissolution.
6. Any circumstances Any events which the court thinks it is fair and just to order
which in the opinion of for a dissolution of the partnership.
the court, a partnership
should be dissolved.

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EXERCISE 11.4

1. Teguh firm was set up in February 2000 by three partners for

purposes of supplying raw materials under a contract for a
housing development project. There was no mutual agreement
made between them as to the duration of the partnership. In
February 2001, the housing development was fully ready and
Teguh firmÊs services was no longer needed. In August 2001, Ed,
one of the partners borrowed a sum of RM40,000 in the name of
the firm from the Cooperative Bank. Ed failed to pay back and the
Bank sued Teguh firm. Is Teguh firm still in existence or
operating? Advise the Cooperative Bank within the context of
dissolution of partnership.

2. Tunas Bakti (TB) was a firm which was jointly set up by Dol and
22 others. The firm was set up for the purposes of carrying on a
business of supplying computers to computer dealers in the
Northern region. In June 2001, TB entered into a transaction with
Computer Centre (CC), a company carrying on a business of
selling computers. The transaction was to supply 100 units of
Compaq computers to CC within a week. TB supplied the 100
units in accordance with the agreed period. CC later found that
the computer TB supplied were not Compaq but Lompaq. CC is
unhappy and wishes to sue TB.

Advise CC.

3. (a) Is an association set up to give financial aid to its needy

members a partnership?

(b) Is there a partnership if the partners in the firm share only

gross profits from the business?

(c) What is the effect if a partner used the information which he

obtained out of the partnership to set up other business
which competes and of the same nature of business as the
partnership?

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 Section 3(1) of the PA 1961 defines partnership as „the relation which subsists
between persons carrying on business in common with a view of profit‰.

 Each and every partner is an agent of the firm and his other partners for the
purposes of carrying on the business of the partnership.

 Authority as an agent may be divided into two that is apparent authority and
actual authority

 A partnership which was formed could be dissolved and its activities

terminated by three ways: automatic, by court and by notice.

Actual authority Liability

Apparent authority Partnership
Dissolution Third party

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