LECTURE 4

LAW OF CONTRACT: ICLR, CONSIDERATION,

LEGAL CAPACITY
INTENTION TO CREATE LEGAL RELATIONS
“To create a contract there must be a common
intention between the parties to enter into legal
obligations, mutually communicated expressly or
impliedly”

Atkin LJ in Rose & Frank Co v JR Crompton & Bros Ltd

[1923] 2 KB 261 at 293
 HOW DO WE DETERMINE INTENTION OF THE
PARTIES?
• Whether parties intend to be legally bound would be determined objectively i.e.
whether reasonable parties to such an agreement would have intended to create
legal relations.

• There are 2 general rebuttable presumptions involving

• Business agreements
• Social agreements
 SOCIAL & DOMESTIC AGREEMENTS
In social and domestic agreements there is a presumption that there is NO
intention to create legal relations.

E.g., agreements between, parent and child, husband and wife, siblings, close
friends.

Balfour v Balfour [1919] 2 KB 571 –Husband worked overseas and agreed to pay
maintenance to wife monthly. Later failed. Wife sued. H&W – domestic agt – no
intention to create legal relation. W’s action failed.

Presumption can be compared and distinguished with the case of Merritt v Merritt
Merritt v Merritt
A husband left his wife. There was £180 left owing on the house which was
jointly owned by the couple. The husband signed an agreement whereby he
would pay the wife £40 per month to enable her to meet the mortgage
payments and if she paid all the charges in connection with the mortgage
until it was paid off he would transfer his share of the house to her. When
the mortgage was fully paid, he refused to transfer his share to her.

Held:
The agreement was binding. The Court of Appeal distinguished the case of
Balfour v Balfour on the grounds that the parties were separated. Where
spouses have separated it is generally considered that they do intend to be
bound by their agreements. The written agreement signed was further
evidence of an intention to be bound.
 Choo Tiong Hin & Ors v Choo Hock Swee [1959] MLJ 67

Plaintiff and his wife had a farm. Their children helped in the farm which grew
into a successful business enterprise. Differences arose after the wife died. The
father remarried and left the family home. He claimed possession of the farm
from his sons and a declaration that he was the owner of the property. The
sons claimed that they were entitled to an equal share as they had helped in
the creation of the family wealth.

Court Held: there was no intention to create legal relations. This was a private
family arrangement depending for its efficacy upon a sense of filial duty and
paternal responsibility on the part of the sons and their father.
 BUSINESS/ COMMERCIAL AGREEMENTS
In business or commercial agreements, there is a presumption that the parties
DID intend to create legal obligations

Presumption can be rebutted

Rose & Frank Co v Crompton & Bros Ltd [1925] AC 445
Business agreement contained a clause that it was NOT entered into as a formal or
legal agreement and would not be subject to legal jurisdiction in the courts but was
a record of the purpose and intention of the parties to which they honorably
pledged themselves, that it would be carried through with mutual loyalty and
friendly co-operation.

It was held that the agreement was not binding owing to the inclusion of the
"honorable pledge clause".
 Sri Kajang Rock Products Sdn Bhd v Mayban
Finance 10 Bhd & Ors [1992] 1 CLJ 204
Conduct of the parties and the surrounding circumstances may also be taken into
consideration to deduce any such intention

To constitute a valid contract there must be separate and definite parties

thereto; those parties must be in agreement, that is there must be a consensus
ad idem (meeting of the mind); those parties must intend to create legal
relations in the sense that the promises of each side are to be enforceable simply
because they are contractual promises and as clear and helpful an enunciation of
the principles as any which should guide the Court in determining the ever
recurring question of whether there has been a contract between the parties.
 CONSIDERATION
s.26 CA: An agreement without consideration is void**.

s.2(d) CA defines ‘consideration’ as follows; when at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains from doing, or promises to
do or to abstain from doing, something, such act or abstinence or promise is called a consideration
for the promise.

The value one party pays in exchange of the promise of another.

Both parties should give something in exchange.

Currie v Misa (1874) - A valuable consideration, in the sense of the law, may consist either in some
right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or
responsibility, given, suffered, or undertaken by the other.”

** Void contract: a contract which is invalid and unenforceable from the very beginning.
Exceptions to general rule that an agreement without
consideration is void are provided in Section 26:
Exceptions —
s.26 (a) It is in writing, registered & made for natural love & affection between
parties in relation to each other Re Tan Soh Sim & Ors v Tan Saw Keow [1951]
MLJ 2; or

s.26 (b) promise to compensate person for voluntarily doing something for
promisor; or

s.26 (c) promise in writing to pay statute barred debts that cannot be enforced
due to Limitation Act 1953
 UNLAWFUL CONSIDERTAION
S 24 Contracts Act 1950 The consideration or object of an agreement is lawful,
unless—
(a) it is forbidden by a law;
(c) it is fraudulent;
(d) it involves injury to the person or property of another; or
(e) the court regards it as immoral or opposed to public policy.

Every agreement of which the object or consideration is unlawful is void.

ILLUSTRATIONS
• A, B and C enter into agreement for division of gains acquired by fraud.
Agreement is void.
• A promises to obtain for B employment in public service, and B promises to
pay RM1,000 (bribe) to A. Agreement is void.
 ADEQUACY OF CONSIDERATION
Under Malaysian law, consideration need not be adequate. S.26 Explanation 2 provides
that an agreement is not void merely because the consideration is inadequate.

Example; ‘A agrees to sell a horse worth $1,000 for $10... the agreement is a contract
notwithstanding the inadequacy of the consideration.

Phang Swee Kim v Beh I Hock (1964) MLJ 383 –

The respondent agreed to sell to the appellant a land for RM500although the land was
worth much more. The respondent later refused to honour the promise deal with that
the promise was enforceable.

Held: The agreement was valid even though consideration was inadequate
MUST BE SUFFICIENT BUT NEED NOT BE ADEQUATE
Wisma Denmark Sdn Bhd v. Landcorp Finance Bhd [2008] 1 CLJ 704

Payment of RM1,100.00 by Defendant is not consideration for purchase of 2

properties worth more than RM150m. The effect of the above is that Defendant
would get 2 properties belonging to Plaintiff with no cost except for RM1,100.00
whereas Plaintiff would be deprived of both properties for a meagre RM1,100.00.

That in itself shows undue advantage and lack of consideration, agreements void
under s 26 Contracts Act 1950.
 PAST CONSIDERTAION

Past consideration is a valid form of consideration.

Where one party puts forward the act to a contract as consideration which was
performed before the other party make any promise of payment, this act can be
looked as past consideration.

Example: The reward for finding a lost pet. The act the performed first followed
by the reward.
 LEGAL CAPACITY – who can enter into a contract

S.11 CA 1950 – the parties to a contract must have the capacity i.e., must be
competent otherwise the contract would be invalid.

General rule all persons have the power to enter a contract EXCEPT: -

A. Minors
B. Intoxicated people
C. Mentally disordered people
MINORS- people below the age of 18 years (Age of
Majority Act 1971)
• s 11 Contracts Act 1950-Every person is competent to contract if he is of age
of majority & is of sound mind & is not disqualified from contracting by any
law.

• s. 2 Age of Majority Act 1971-every male and female in Malaysia attaining 18

shall be of the age of majority.

• General rule minors cannot enter a contract – the law wants to protect the
minors as they may not understand the seriousness and consequences of
their actions.
 EXCEPTIONS
(i) Contracts for necessaries with minors are valid -

s.69 Contracts Act 1950 -‘a person who supplies to a minor necessaries
suited to his condition in life is entitled to be reimbursed from the minor.

‘Necessaries’ -includes goods and services such as food, shelter, clothing,

medical services. Test is to look at nature of goods or services supplied,
the minor’s actual needs and his station in life.

Needs v Wants (Contract of luxury?)

 EXCEPTIONS
(ii) Scholarship agreements
s 4 Contracts (Amendment) Act 1976 -scholarship agreements entered
into with minors are valid.

(iii) Contracts of insurance –a minor may enter a contract of insurance, if he

is > 10 years but, if he is < 16 years, he must have consent of parent or
guardian - s.153(1) Insurance Act 1996

(iv) Employment Contracts -any child (below 14) and any young person
(between 14 & 16) is competent to enter into contracts of service - s 13
Children & Young Persons (Employment) Act 1966
 EXCEPTIONS

Effect of contracts entered into with minors –

S 66 Contracts Act 1950 -the agreement is void but any person who
received any advantage is bound to return it, or make compensation for
it, to person from whom he received it –
Govt of Malaysia v Gurcharan Singh (1971)

The contract involved the Government of Malaysia who granted Gurcharan

Sing a scholarship to study at the Malayan Teacher's
Training Institution, with an agreement that the defendant will serve the
Government in consideration for training as a teacher. The duration of the
contract is 5 years. However, G only served 10 months for 3 years. G claimed
that he was a minor when the contract was entered. The Govt claimed for
compensation amounting to $11,500.

Court held: In view of the exception to the necessaries claim, G was therefore
liable for reimbursement of the amount spent on his education and training as
being spent on the necessaries.
MENTALLY DISORDERED & INTOXICATED PEOPLE

s.11 CA 1950 – Everyone is competent, who is of sound mind is not disqualified

from entering into a contract.

s.12 (1) CA 1950 – A person is of sound mind when he is capable of

understanding and forming a rational judgment to its effects.

Therefore a mentally disordered and intoxicated person can enter into a

contract when they are of sound mind.

E.g. During intervals of sound mind.

 CERTAINTY
A contract will only be enforceable if the agreement has enough “certainty” and
terms have been agreed to enable the parties to carry out the contract.

s. 30 CA - Agreements, the meaning of which is not certain, are void.

ILLUSTRATIONS
(a) A agrees to sell to B “100 tons of oil”. What kind of oil intended is not specified.
Agreement void for uncertainty.

(c) A, dealer in coconut oil, agrees to sell to B

“100 tons of oil”. A’s trade indicates meaning of the words. No uncertainty.

(f) A agrees to sell to B “my white horse for

RM500 or RM1000”. Nothing to show which of the two prices was to be given.
Agreement void.