BG201- BUSINESS LAW –MALAYSIA PERSPECTIVE REPRESENT :

LAW OF CONTRACT ROLE PLAY ACTIVITY

 CHAPTER 6 :

LAW OF CONTRACT

BY

NOOR ZIRA AZLIN BTE MD ZAKI

 OBJECTIVES

This chapter:
• describes the basic principles of the law
governing contracts
 PREVIEW

• Introduction
• Elements of a Contract
• Privity of Contract
• Terms of a Contract
• Voidable Contracts
• Void and Illegal Contracts
• Restraint of Trade and Legal Proceedings
• Discharge by Frustration, Performance and Breach
• Remedies
 INTRODUCTION

• compare ‘contract’ with ‘agreement’:

– contract involves an element of agreement but
not every agreement will result in a contract
recognizable by law
– contract is an agreement enforceable by law
– contract is an agreement which is legally binding
between them parties (at least two parties will
involved)
• Malaysian legislation – Contracts Act 1950.
 INTRODUCTION (cont.)

• where there are no provisions in Contracts Act 1950 –

English law applies by virtue of the Civil Law Act 1956
• where the Contracts Act makes certain provisions
which differ from English law, the provisions of the
Contracts Act 1950 must prevail – see Song Bok Yoong
v Ho Kim Poui
 Definition of Contract

Contract is a voluntary, deliberate and legally binding

agreement between two or more competent parties.

Sec 2 (h) Contract Act 1950

breach the contract the other party can bring the case
to the court.

Can be in written or unwritten.

Each parties acquires rights and duties to each other

after they enter into a contract.
 CONTRACT vs AGREEMENT

CONTRACT AGREEMENT
Section 2 (h) of
Contract Act 1950 Section 2(e) of Contracts
“An agreement Act 1950
enforceable by law is a
contract” “every promise and every
  set of promises, forming the
@Section 2 (g) of consideration for each
Contract Act 1950 other, is an agreement”.
“An agreement not
enforceable by law is
said to void”.
 LAW OF CONTRACT

Elements of Breach of Contract

Definition of Contract
contract

OFFER INTENTION CREATE

CAPACITY
LEGAL RELATION

ACCEPTANCE
CERTAINTY OF
CONSIDERATION CONTRACT
 Offer

Capacity Acceptance

CONTRACT

Intention to
Certainty
Create Legal

Consideratio
n
 When all the elements are present, the courts
will give due effect to the agreements as
CONTRACT !

Case : Gemencheh Enterprises Sdn Bhd v Aikpoint Development Sdn Bhd

“ …All agreements are contracts if they are

made free consent of parties competent to
contract, for a lawful consideration and
with lawful object and are not expressly
declared to be void : Section 10 (1)
Contract Act 1950….”
 ELEMENTS OF A CONTRACT

1. Offer (Proposal)
• section 2(a), Contracts Act 1950 – ‘when one person
signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent
of that other to the act or abstinence, he is said to make
a proposal’
• The person who make an offer called as offeror.
• the ‘promisor’ (‘offeror’) must have declared his
readiness to undertake an obligation upon certain terms,
leaving the option of its acceptance or refusal to ‘the
offeree’. See Affin Credit (Malaysia) Sdn Bhd v Yap Yuen
Fui
 ELEMENTS OF A CONTRACT
(cont.)

•thecommunication of a proposal is complete when it

comes to the knowledge of the person to whom it is made
– section 4(1)of the Contracts Act 1950

•compare ‘offer’ with ‘option’ and ‘advertisement’

 ELEMENTS OF A CONTRACT
(cont.)

•option– undertaking to keep the offer open for a certain

period of time
•optionarises when the offeror promises to keep the offer
open for a specified period. See Goldsborough Mort & Co Ltd
v Quinn, Coelho v The Public Services Commission, M N
Guha Majumder v Re Donough
•whetheran advertisement is an offer or an invitation to treat
depends on the intention of the parties in each case
 ELEMENTS OF A CONTRACT
(cont.)
• advertisements of bilateral contracts are not offers
whereas advertisements of unilateral contracts are
construed to be offers. See Majumder v Attorney-General
of Sarawak, Pharmaceutical Society Of Great Britain v
Boots Cash Chemist Ltd, Partridge v Crittenden, Rooke v
Dawson, Grainger & Sons v Gough, Eckhardt Marine Gmbh
v Sheriff, High Court of Malaya, Seremban & Ors, Malayan
Flour Mills Bhd v Saw Eng Chee
• if a party intends their words or conduct to constitute and
offer, the court will construe as such. See Carlill v
Carbolic Smoke Ball Co. Ltd
 ELEMENTS OF A CONTRACT
(cont.)
• offer must be distinguished from invitations to treat, e.g.:
– auctions
– advertisement of tenders
– catalogues
– price lists
– goods displayed in shop windows and shelves
• the advertisement of an auction is not an offer to hold it but
an invitation to treat. See Harrison v Nickerson and EON
Bank Bhd v BH Steel Sdn Bhd & Anor
 ELEMENTS OF A CONTRACT
(cont.)

2. Acceptance
• when the person to whom the proposal is made signifies
his assent thereto, the proposal is said to have been
accepted – section 2(b)of the Contracts Act 1950

• when a proposal is accepted, it becomes a promise

• the person accepting the proposal – the ‘promisee’

• if the acceptance is made in words – expressed

acceptance
 ELEMENTS OF A CONTRACT
(cont.)

• if the acceptance is made other than in words – implied

acceptance
• for a proposal to be converted into a promise, the
acceptance of that proposal must be absolute and
unqualified – section 7 of said Act
• acceptance must be absolute and unqualified so that
there is complete consensus. If the parties are still
negotiating, an agreement is not yet formed.
• a conditional assent is not an acceptance
 ELEMENTS OF A CONTRACT
(cont.)
• if acceptance is qualified by words such as ‘subject to
contract’ or ‘subject to a formal contract being drawn up by
our solicitors’, the courts would be inclined to regard it as a
mere conditional contract
• the mere use of the words ‘subject to contract’ does not
necessarily mean that the contract is not yet binding. Whether
the parties contemplated a binding contract to take immediate
effect or whether they were postponing their rights and
obligations under the proposed contract until formalization is a
question of fact and depends on the circumstances of each
case
 ELEMENTS OF A CONTRACT
(cont.)
• in Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprises
Sdn Bhd:
1. The existence of an agreement depends upon the intention of the
parties who must be ad idem. It may be inferred from the language
used, the parties’ conduct having regard to the surrounding
circumstances and the object of the contract. The court will generally
apply an objective or reasonable man test.
2. Merely because the parties contemplate the preparation of a formal
contract, that would not prevent a binding contract from coming into
existence before the formal contract is signed.
 ELEMENTS OF A CONTRACT
(cont.)
• although the formula ‘subject to contract’ gives rise to a
strong presumption of the necessity of a further formal
contract, it does not detract from the well-established
principles that:
1. An informal contract without any express details may be
binding
2. A bargain with essential terms, though a formal document is
to be drawn up with further terms, is still a bargain
3. Where there is a definite and complete agreement, the
reservation in respect of a formal document only means that
it should be put into proper shape and in legal phraseology
with any subsidiary terms necessary for insertion in a formal
document
 ELEMENTS OF A CONTRACT
(cont.)
• acceptance which is qualified by the introduction of a new
term may be considered as a counter-offer destroying the
original offer. See Hyde v Wrench
• acceptance must be made within a reasonable time. See
Fraser v Everett
• ‘reasonable time’ depends on the circumstances of each
case, e.g. the nature of the subject-matter or the method
by which the offer is communicated
 ELEMENTS OF A CONTRACT
(cont.)

 an offer is normally short-lived in the case of perishable

goods, whereas in the case of land, provided that there
is nothing in the offer to indicate a degree of urgency,
the offer remains open for a longer time. See Ramsgate
Victoria Hotel Co Ltd v Montefiore
 the rationale for this rule is given by Hashim Yeop A
Sani J in the case of Macon Works & Trading Sdn Bhd v
Phang Hon Chin & Anor
 ELEMENTS OF A CONTRACT
(cont.)
• acceptance must be expressed in some usual and
reasonable manner, unless the proposer prescribes the
manner in which it is to be accepted. The proposer cannot
prescribe silence as a manner of acceptance – section 7(b)
of the Contracts Act 1950
• however, silence may also amount to acceptance if there
are other facts like the conduct of the offeror to indicate
acceptance. See Weatherby v Banham
 ELEMENTS OF A CONTRACT
(cont.)
• the communication of an acceptance is complete as against the
proposer when it is put in a course of transmission to him so as to
be out of the power of the acceptor
• with respect to the acceptor, the communication of an acceptance
is complete as against the acceptor when it comes to the
knowledge of the proposer
• when the acceptance does not reach the proposer, there can still
be an agreement because the offeror, though having no knowledge
of the acceptance, is bound whilst the acceptor, because his
acceptance had not come to the knowledge of the proposer, is not
bound. See Ignatius v Bell
 ELEMENTS OF A CONTRACT
(cont.)

POSTAL RULE APPLICATION

• in cases of acceptance through post, acceptance is complete upon posting
• however, this rule that acceptance is complete upon posting may be
excluded by the express terms of the offer – Holiwell Securities Ltd v
Hughes
• the mere posting of the letter of acceptance was not sufficient
• exception to the aforesaid rule as regards acceptance through the post
lies in cases of instantaneous circumstances, e.g. telephone, telex and
telefax – see Entores Ltd v Miles Far East Corporation, Tenax Steamship
Ltd v The Brimmes
• where a person who signs a contractual document is bound by its terms
even though he has not read it – Wee Lian Construction Sdn Bhd v
Ingersoll-Jati Malaysia Sdn Bhd
 ELEMENTS OF A CONTRACT
(cont.)
Revocation of Offer and Acceptance
• a proposal may be withdrawn in any of the following
ways:
1.Communicating the notice of revocation by the proposer
to the party to whom the proposal was made
2.The time prescribed in the proposal for its acceptance
elapses, or if no time is prescribed for acceptance by the
lapse of a reasonable time
3.The failure of the acceptor to fulfil a condition precedent
to a acceptance
 ELEMENTS OF A CONTRACT
(cont.)
4. The death or mental disorder of the proposer if the fact of
the proposer’s death or mental disorder comes to the
knowledge of the acceptor before acceptance
• when acceptance is complete, an agreement is formed so
that there is no question of revocation
• revocation is possible if the acceptance is not complete
• revocation of an offer must be communicated to be
effective – section 6(a)
 ELEMENTS OF A CONTRACT
(cont.)
• the communication of revocation – section 4(3)
• section 4(2) – the communication of an acceptance is
complete:
1.As against the proposer, when it is put in a course of
transmission to him, so as to be out of the power of the
acceptor
2.As against the acceptor, when it comes to the knowledge of
the proposer
 ELEMENTS OF A CONTRACT
(cont.)
• the communication of a revocation is also complete
at 2 different times:
1. As against the person who makes the revocation, when it
is put in the course of transmission to the person to whom
it is made, so as to be out of the power of the person who
makes it – section 4(3)(a)
2. As against the person to whom it is made, only when it
comes to his knowledge – section 4(3)(b)
 ELEMENTS OF A CONTRACT
(cont.)

• a proposal may be revoked at any time before the

communication of its acceptance is complete as against the
proposer, but not afterwards – section 5(1)
• an acceptance may be revoked at any time before the
communication of the acceptance is complete as against
the acceptor, but not afterwards – section 5(2)
 ELEMENTS OF A CONTRACT
(cont.)
3. Intention to Create Legal Relations
• there are cases where there were no intention to enter
into legal relations
– where the agreements merely represent family
arrangements
– where concessions were made in the course of business
negotiations
• circumstances and conduct of parties may also indicate
lack of intention
• in domestic arrangements – presumption against the
existence of an intention to create legal relations
 ELEMENTS OF A CONTRACT
(cont.)
• in commercial arrangements – presumption is that legal
relationships are intended
• it is up to the courts to ascertain the intentions of the parties
from the language used and the context in which they are
used
4. Consideration
• as a general rule, an agreement without consideration is
void – section 26, Contracts Act 1950
• definition of ‘consideration’ – see section 2(d), Contracts
Act 1950.
 ELEMENTS OF A CONTRACT
(cont.)

Consideration Need Not be Adequate

• an agreement is not void merely because the consideration
is inadequate – Explanation 2, section 26

• for the application of the rule – see Illustration (f) section

26

• adequacy of consideration – see Chappell & Co Ltd v Nestlé

Co. Ltd, Phang Swee Kim v Beh I Hock
 ELEMENTS OF A CONTRACT
(cont.)

Provision of Consideration
• consideration may move from a person who is not
the promisee. It may move from ‘the promisee or
any other person’ – section 2(d), Contract Act 1950.

Past Consideration is Good Consideration

• English law does not recognize past consideration
 ELEMENTS OF A CONTRACT
(cont.)
• exceptions to this rule – an act originally done at the
request of the promisor, a promise made subsequent to the
doing of that act, was deemed binding since the act
constituted consideration. See Lampleigh v Brathwait
• definition of the word ‘consideration’ in section 2(d)
appears extensive enough to cover the aforementioned rule
• an agreement made without consideration is void unless it
is a promise to compensate a person who has already
voluntarily done something for the promisor – section 26(b)
 ELEMENTS OF A CONTRACT
(cont.)

Natural Love and Affection is Valid

Consideration
• English law does not recognize natural love
and affection as valid consideration
• natural love and affection are valid
consideration if certain prerequisites are
complied with – Contracts Act 1950 in Malaysia
 ELEMENTS OF A CONTRACT
(cont.)

• an agreement made on account of natural love and

affection would be held to be binding in Malaysia if the
requirements of section 26(a) are present:
1. It is expressed in writing
2. It is registered (if applicable)
3. The parties stand in a near relation to each other
 ELEMENTS OF A CONTRACT
(cont.)

Accord and Satisfaction – Part Payment may Discharge an

Obligation
• English law (Pinnel’s Case) – general rule that payment of a
smaller sum is not a satisfaction of an obligation to pay a
large sum – this does not apply in Malaysia
• exceptions to the rule – “[T]he gift of a horse, hawk, or
robe ... in satisfaction is good. For it shall be intended that
a horse, hawk, or robe ... might be more beneficial ... than
the money ... .”
 ELEMENTS OF A CONTRACT
(cont.)

• section 64 is wide enough to cover all the

exceptions to the general rule under English law.
Indeed, it goes further to provide that the
promisee may do away with the promise
completely – see Illustration (b) of section 64
Consideration Need Not Move from the Promisee
• a party to an agreement can enforce the promise
even if he himself has no given no consideration as
long as somebody else has done so – section 2(d)
• see Venkata Chinnaya v Verikatara Ma’ya
 ELEMENTS OF A CONTRACT
(cont.)
5. Certainty
• an agreement which is uncertain or is not capable of being made
certain is void. See Karuppan Chetty v Suah Thian
• A legal requirement of a valid offer to contract; that it must be
precise and definite in order to be subject to acceptance.
6. Capacity
• refers to the ability of the parties to a contract to fully
understand its terms and obligations
• every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is
of sound mind, and is not disqualified from contracting by any law
to which he is subject – section 11
 ELEMENTS OF A CONTRACT
(cont.)
• the age of majority is eighteen years (18)
– Age of Majority Act 1971
• exceptions to the rule that contracts by minors
are void:
1. Contracts for necessaries
2. Contracts of scholarship
3. Contracts of insurance
• ‘necessaries’ are things which are essential to the
existence and reasonable comfort of the infant,
e.g. food and clothing, shelter, and education
 ELEMENTS OF A CONTRACT
(cont.)
• a scholarship agreement is valid if granted
by the Federal or State Government
• anyone between the age of ten and sixteen
may enter into a contract of insurance with
written consent of his parents/guardian
 PRIVITY OF CONTRACT

• only the persons who are parties to the contract can

acquire rights and incur liabilities under it. See
Andrew Christopher Chuah Choong Eng Chuan case
• obligations under a contract generally cannot be
transferred unless all the parties consent
• equity, and in limited cases, the law permits an
assignment of rights
• contract requiring performance of personal service
is not assignable
 TERMS OF A CONTRACT

• terms may be expressed or implied

• terms may be classified as:
1. Condition – vital to the contract. The parties consider it so
important that its non-performance may be considered by
the injured party as amounting to substantial failure to
honour the contract at all and thus may be regarded as
grounds for setting the contract aside, and or suing for
damages
2. Warranty – considered to be of lesser importance to the
main purpose of the contract. If it is breached, the injured
party must still perform their part of the contract but they
have the right to sue for damages for any loss that they
may suffer as a result of the breach
 TERMS OF A CONTRACT
(cont.)
• the 5 conditions for a term to be implied into a
contract – it must be:
1. Reasonable and equitable
2. Necessary to give business efficacy to the
contract, so that no term will be implied if the
contract is effective without it
3. So obvious that ‘it does without saying’
4. Capable of clear expression
5. Not in contradiction of any express term of the
contract
 DISCHARGE BY FRUSTRATION,
PERFORMANCE AND BREACH
1. Discharge by Frustration
•if a party promises to carry out a particular act, the law will hold them
to their promise – doctrine of absolute liability
•for exceptions to this rule of frustration – see Cutter v Powell
•doctrine of frustration applies where the following situations occur:

1. Physical impossibility because of destruction of subject matter

2. Physical impossibility under contract of personal service
3. Change in the law rendering performance impossible
4. Impossibility due to non-occurrence of event basic to contract
5. Where the particular state of affairs ceases to exist
 Effects of Frustration
•to discharge a contract immediately, but only as to the future.
The contract is not void ab initio, but only void from the time of
the frustrating event.
•a total failure of consideration would need to be established in
order that the money be recovered –
see Fibrosa Spolka Akcyjna v Fairburn Lawson Combe Barbour
Ltd
2. Discharge by Performance
• performance of a contract must be exact and precise and
should be in accordance with what the parties had
promised – section 38(1)
•performance may be from a third party and not necessarily
from the promisor – section 42
•section56 regulates the position when time is of the
essence of a contract
•theperformance of any promise may be made in any
manner, or at any time, which the promisee prescribes or
sanctions – section 51
•theeffect of both sections 51 and 56 a promise must be
performed at the time agreed by the parties
• when a promise is to be performed on a certain day, and
the promisor has undertaken to perform it without
application by the promisee, the promisor may perform it
at any time during the usual hours of business on the day
and at the place at which the promise ought to be
performed – section 48
• 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 – section 40
3. Discharge by Breach
• when a party fails to perform their
obligations as agreed
• can occur due to:
– Failure to comply with a term of the
contract
– Anticipatory breach
– Delay in the performance where time
is of the essence
Effects of Breach
• the innocent party is entitled to treat the contract as
ended and may be able to recover damages
• partial breach – the innocent party still has to carry
out his obligations but may sue for damages
• if the innocent party ends the contract, he must
restore any benefits received from the other party –
section 65
 REMEDIES

1. Rescission
• an equitable remedy, which allows an innocent
party to cancel the contract by rescinding or, if
there has been misrepresentation by the other
party, raising that misrepresentation as a
defence if sued for damages or specific
performance by the other party
 REMEDIES (cont.)

2.Restitution
• is sometimes referred to as quasi-contract. It is not
contractual and does not rely on the plaintiff
suffering loss or damage. Its basis is unjust
enrichment; that is, those situations where it would
be very unfair if the defendant was to be allowed to
retain the money, or the goods or services, without
payment
 REMEDIES (cont.)

3. Damages
• main purpose is to enable the innocent party
to receive monetary compensation from the
party responsible for the breach of contract.
Damages are granted to a party as
compensation for the damage, loss or injury
he has suffered through a breach of contract
• the general principle for the assessment of
damages is compensatory – section 74
 REMEDIES (cont.)

• the requirement of the plaintiff seeking

substantial damages to prove both the fact
and amount of damages before he can
recover the damages is seen in Popular
Industries Limited v Eastern Garment
Manufacturing Sdn Bhd
• the court must determine what is the
reasonable compensation and whether or not
actual damage or loss is proved to have been
caused thereby – section 75
 REMEDIES (cont.)

Mitigation of Loss
• duty upon the person claiming damages to take
all reasonable steps to reduce, minimize or
mitigate their loss
• if he fails in doing so, the amount of damages
to recover will be reduced
• if the plaintiff is able to avoid loss, damages will
not be recoverable for the potential loss
 REMEDIES (cont.)

4. Specific Performance
• is a discretionary order granted by the courts
directing a person to carry out their obligations
under the contract. It is not generally used in
breach of contract actions unless damages
prove to be inadequate.
• the court has a discretion to refuse specific
performance where the granting of it would
cause undue hardship to the defendant –
section 21,Specific Relief Act 1950
 REMEDIES (cont.)

• specific performance may be granted in respect of

agreement 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 –
section 11(2) of the Specific Relief Act 1950
• specific performance may also be granted in
respect of executory contracts and in cases where
actual damage cannot be ascertained
 REMEDIES (cont.)

• the court will exercise its discretion not to

decree specific performance:
1. Where damages will provide an adequate remedy –
section 20(1)(a),Specific Relief Act 1950. See Yeo
Long Seng v Lucky Park (Pte) Ltd
2. Where the terms of the contract are uncertain –
section 20(1)(c), Specific Relief Act 1950. See Lim
Nyuk Chan v Wong Sz Tsin
3. Where there has been delay in bringing the action
 REMEDIES (cont.)

4. Where there is evidence of fraud

5. Where to do so would require the constant
supervision of the court – see Lee Sau Kong v Leow
Chang Chiang
6. Contracts for personal services – see Dato’ Abdullah
bin Ahmad v Syarikat Permodalan Kebangsaan Bhd &
Ors
• the court has the power to award damages in
addition to or in lieu of specific performance –
section 18, Specific Relief Act 1950
 REMEDIES (cont.)

5. Injunction
• is a discretionary court order
• may be:
a) prohibitory – preventing the breach of a contract
b) mandatory – requiring a person to perform some
contractual obligation
c) interlocutory – where it freezes the status quo
between the parties until the dispute can be heard by
the court
• is an equitable remedy – can be varied or dissolved
if the court discovers later that the application was
made on suppressed facts or facts upon which the
order was granted no longer exist
 REMEDIES (cont.)

6. Mareva Injunction
• prevents the defendant removing or disposing of
any assets in the jurisdiction until the court
makes a decision
• a plaintiff must be able to establish all the
following:
a) the defendant has assets that are in the court’s
jurisdiction
b) there is a real risk that the defendant will remove
or get rid of any assets before judgement
c) the plaintiff can establish a substantive cause of
action such as a claim for damages
 REMEDIES (cont.)

7. Quantum Meruit
• means as much as he has earned and only
arises in cases of part performance
• can arise where:
a) a defendant has prevented a plaintiff from
carrying out the remainder of their contractual
duties
b) the parties cannot agree on payment
c) the parties agree on payment for the part-
performance but not the actual amount
 REVIEW

• Introduction
• Elements of a Contract
• Privity of Contract
• Terms of a Contract
• Voidable Contracts
• Void and Illegal Contracts
• Restraint of Trade and Legal Proceedings
• Discharge by Frustration, Performance and Breach
• Remedies