Faculty of Syariah and Law Bachelor Honour of Syariah and Law
Law of Contract (LBA 2043) Question 2 - Elements of Contracts
Name Adilah binti Hamzah (1080147) TLB 1
Lecturer’s name Encik Mustafa ‘Afifi bin Ab. Halim
INTRODUCTION
We enter into contracts every day. These contracts are made orally e.g. boarding a bus, buying coffee at a shop, buying a reload phone card. However sometimes written contracts are required, such as when buying a house or a car. A contract means that there is an agreement between two parties which is enforceable by law. Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. The others are consideration and intention to create legal relationship between the parties in forming a contract. The Law of Contract in Malaysia is governed by the Contracts Act 1950. Section 2(h)1 states that an agreement enforceable by law is a contract.
ELEMENTS OF A VALID CONTRACT
1. OFFER
The first element to constitute a valid contract is offer or proposal. An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed by virtue of Section 2 (a)2 and section 2 (b)3 of Contracts Act 1950. An agreement must happen between two or more parties when there is expression of willingness to enter into a contract and when it made with a legal intention that it shall be binding. From that, the contract will legally enforceable by law. Section 2(c)4 of states that a person making the offer / proposal is the "offeror" while the person accepting the offer/proposal is the “offeree”. As an example, A offers his Ferrari to B for the price of RM250000. B accepts the offer by buying the car. A is the offeror and B is the offeree. In section 9 of Contracts Act 1950, there are two ways that offer can be made either orally, in writing, by conduct or by a combination of these methods.5 There are two types of offer should be highlighted that is, first, unilateral. In a unilateral 1
Contracts Act 1950, s 2 (h) Contracts Act 1950, s 2 (a) 3 Contracts Act 1950, s 2 (b) 4 Contracts Act 1950, s 2 (c) 5 Syed Ahmad Alsagoff, Principles of the Law of Contract in Malaysia, 2003, Lexis Nexis, Singapore. p 20. 2
contract, only one party to the contract makes a promise and the offeree accepts the offer by performing a certain act. The offer can be made to one party or to the world at large through an advertisement. The offer is accepted once the act is performed. Only one person makes the promise. There is no obligation for the other party to make any promise. For instance, A promises to pay a reward to B if B finds A's dog. In this situation there can be only B can perform the act and once that act is performed A is obliged to pay the reward. The finding of the dog is a condition precedent to the reward which means you get the money after the dog is found. Unilateral offer is shown in the case of Carlill v Carbolic Smoke Ball Company1. The Carbolic Smoke Ball Company made a product called a smoke ball that it claimed could protect the user from getting influenza (flu). The Company published advertisements claiming that it would pay £100 to anyone who still got sick with influenza after using its product.The company even deposited £1000 with the Bank, to show their genuine intention in the matter. Mrs. Carlill bought one of the balls and used it in the manner specified, yet still managed to get influenza. When she asked for the reward the Carbolic Company claimed that there was no enforceable contract between it and the user of the smoke ball on the grounds that there was no acceptance of the offer, because Mrs Carlill had never notified the Company that she accepted its offer, nor furnished any consideration. The issue arose, is there a valid and binding contract between Mrs Carlil and the company? The court held that in unilateral offers, the advertisement is an offer which was accepted by Mrs Carlill.The courts also looked at the party‟s intention, i.e. the fact that 1000 pounds were deposited in the Bank showed a genuine intention to create a legal relationship. There was consideration furnished by Mrs carlill when she purchased the smoke balls. Hence there was a binding contract. The second type of offer is bilateral. A bilateral contract is an agreement in which both parties make a promise or promises to the other party. For example A offers to sell his house to B for RM250000. B accepts the offer by promising to pay A. Many people could not differentiate between offer and an invitation to treat. What is an invitation to treat? Invitation to treat is not an offer. It is willingness to negotiate a contract. If the negotiations are successful then it becomes an offer hence an agreement enforceable by law. There are many ways come into the situation of invitation to treat, first, club membership. In the case of Abdul Rashid Abdul Majid v Island Golf Properties Sdn. Bhd 2, the court held that a person making an application to become a member of a social club was not making an offer. The club made the offer 1 2
[1893] 1 QB 256 [1989] 3 MLJ 376
for membership only after the club had considered the application. Second is supply of information. In the case of Harvey v Facey1, the situation was as follow: Plaintiffs: Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer paid". Defendant: "Lowest price for Bumper Hall Pen £900" (Invitation to treat). Plaintiff: “We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by you. Please send us your title deed to get early possession” (offer). Defendant: Refused to sell at that price. The issue arose, is there a valid and binding contract between plaintiff and defendant. The court held that there is no binding contract between plaintiff and defendant because the defendant only answered the price for the property but did not reply as to his willingness to sell. Thus he had made no offer. It is an invitation to treat. The last telegram of the plaintiff was an offer to buy but the defendant never accepted. Third is display of goods. In Fisher v Bell2, where goods are displayed in a shop together with a price label, such display is treated as an invitation to treat by the seller, and not an offer. The offer is made when the customer presents the item to the cashier together with payment. Acceptance occurs at the point the cashier takes payment. Other than that is auction situation. In Harris v Nickerson3, an auctioneer who puts his property up for sale is not making an offer but merely an invitation to request for bids. However this case must be contrasted with the other case law where the court held that although auctions are invitation to treat but the auctioneer may be liable in certain situations. Lastly is an advertisement. The case of Maju Mujumder v Donough4 was an issue related to an advertisement. A piece of property was advertised for sale and written offers to purchase were invited. The Plaintiff who was interested in purchasing the house inspected it on two different occasions that are on 24 May 1969 and 2 June 1969. Numerous telephone conversations took place between the Plaintiff and the Defendant between these two visits. The Plaintiff alleged that the Defendant had thereby accepted their offer to purchase the house, the furniture and orchids therein for RM70 000 and that a contract to that effect was already in existence before 2 June 1969. The court held that there was no contract between the Plaintiff and the Defendants. It was still in the stage of negotiations. Section 5(1)5 and section 6(a) 6 provide that an offeror may revoke an offer before it has been
1
[1893] AC 552 [1961] 1 QB 394 3 [1873] LR 8 QB 286 4 [1974] 2 MLJ 114 5 Contracts Act 1950, s 5 (1) 6 Contracts Act 1950, s 6 (a) 2
accepted, but the revocation must be communicated to the offeree. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer. Section 6 of Contracts Act 1950 states that an offer can be revoked by, first, revocation or rejection. An offer may be revoked but should comply for some conditions that are, the offeror must give a notification of revocation and must be communicated to the offeree before acceptance. There are provisions clearly state pertaining to this matter as in section 6 (b)1 – lapse of time, if the offeror gives a time limit then that is effective to terminate the offer when it lapses. Where there is no express time limit, an offer is usually deemed to remain open for a reasonable time. What constitutes „reasonable‟ will depend on the circumstances 2.This can be seen in Ramsgate Victoria Hotel Co Ltd v montefiore3. Section 6(c)4 states that, the offer is subject to express or implied condition. An offer may be made subject to a condition. If the condition is not satisfied, the offer cannot be accepted. Section 6 (d) 5 states pertaining to death of one of the parties. The effect of the death of the offeror depends upon the nature of the offer. If it personal to the offeror, than the offer cannot be accepted once news of the death has been communicated. If the offer does not depend on personal performance and may be satisfied out of his estate, death may not prevent acceptance of the offer. The death of the offeror normally has a similar effect. Second, an offer may be revoked by counter-offer. An offeree‟s response to an offer which significantly differs from the offeror‟s term is a counter-offer, which does not amount to acceptance. It is a rejection of the original offer and brings it to an end. This shows in the case of Hyde and Wrench. 6 2. ACCEPTANCE The second element to constitute a contract is acceptance. By virtue of section 2 (b) of Contracts Act 1950 Act, acceptance is the final expression of assent to the terms of proposal. When the offeree accepted it becomes a promise. Acceptance is a final and unqualified expression of assent to the terms of an offer as states in section 7 of Contracts Act 1950. Section 7(a)7 states that an acceptance
1
Contracts Act 1950, s 6 (b) George Applebey, Contract Law, 2001, Sweet and Maxwell, London. p 40. 3 [1866] L.R 1 Ex 109 4 Contracts Act 1950, s 6 (c) 5 Contracts Act 1950, s 6 (d) 6 [1840] 3 Bea 334 7 Contracts Act 1950, s 7 (b) 2
must be absolute and unqualified. Section 7(b)1 states that an acceptance be expressed in some usual and reasonable manner unless the offeror expressly provides for the manner of acceptance. You must accept the offer exactly within the terms, you cannot modify the terms of offer, unless it is a counteroffer. If the offeree rejects the offer or changes the terms of the offer, the offer has been destroyed and cannot be accepted at a future time. In Hyde and Wrench2,W offers to sell an estate at a certain price. H made an offer to buy at a lower price. This offer was refused and subsequently, H sought to accept the initial offer. It was held that no contract was made as the initial offer did not exist at the time H tried to accept it, the offer having been terminated by the counter offer. However a mere inquiry about terms of an offer is not a counter offer and leaves the offer intact.
There are some principles of acceptance should be noted where the first principle is accceptance must be communicated. Section 4(1)3 provides that the communication of proposal is complete when it comes to the knowledge of the offeree. Communication of acceptance is complete when it is communicated to the offeror. There are several rules dealing with the communication of acceptance which is first, the acceptance must be communicated. Depending on the construction of the contract, the acceptance may not have to come until the notification of the performance of the conditions in the offer as in Carlill‟s case, but nonetheless the acceptance must be communicated. Second, an offer can only be accepted by the proposee/offeree, that is, the person to whom the offer is made. Third, an offeree/ proposee is not bound if another person accepts the offer on his behalf without his authorization. Fourth, if the offer specifies a method of acceptance e.g. post/ fax, you must accept it using a method that is no less effective than the method specifiedexception to the postal rule. Lastly, silence cannot be construed as acceptance. As in Felthouse v Bindley4, the offeror cannot write the words ” If i hear no more from you, it means that you have accepted the offer”. The second principle is acceptance by post. Section 4(2)5 provides an exception when the parties use post as a means of communication. The offeror is bound when the offeree posts the letter even though tthe offeror has no knowledge of the acceptance. When the letter is posted the offeree has put 1
Contracts Act 1950, s 7 (b) [1840] 3 Beav 334 3 Contracts Act 1950, s 4 (1) 4 [1862] 142 ER 1037 5 Contracts Act 1950, s 4 (2) 2
it in a course of transmission in such a way that he no longer has control over it. The transaction becomes binding irrespective of any delay or lost in mail. This rule is known as the postal rule enunciated in the English case of Entores Ltd v Miles Far East Corporation1. In Malaysia, the authority for postal rule in is the case of Ignatious v Bell2. As an example, A makes an offer to B on January 1. A then decides to revoke the offer on January 2 and puts a letter in the mail to B revoking the offer; however, B puts a letter accepting the offer in the mail on January 3, and does not receive A's revocation letter until January 4. The letter of revocation can be effective only when received, that is January 4. However, a contract was formed on January 3 when the letter of acceptance was posted. It is too late to revoke the offer. The third principle is instantaneous communications. Contracts concluded by instantaneous means of communication like email, telex, telephone, fax, etc. – acceptance must be received by the offeror. As in Entores Ltd v Miles Far East Corporation3, P in London sent a telex to D in Amsterdam offering to buy goods from D. D sent a telex in return to P accepting the offer. The court held that acceptance must be received. Section 5(2) of Contracts Act 1950 provides that an acceptance may be revoked any time before the communication of acceptance is complete. It is possible for an offer made by the post to be revoked by the offeror. However, revocation will be ineffective unless it is communicated to the offeree before the letter of acceptance is posted. Any acceptance of an offer outside the time stipulated in the offer will be ineffective. If an offer, for example, specifies that acceptance is required within three days, then any attempt at offering an acceptance after five days will be invalid. If no time is prescribed, then the offer may be accepted within a reasonable time.
3. INTENTION TO CREATE A LEGAL RELATIONSHIP
The other element of a valid contract requires the parties to intend to create a legal relationship. To determine whether there is an intention to create legal relations, the law looks at the nature of the agreement. If the agreement is of a social or domestic nature, the law has created a presumption that such agreements do not have an intention to create legal relations. In this element, there are about two types of agreements that often be used by people which is, first, social agreements. Social 1
[1955] 2 QB 327 [1913] 2 FMSLR 115 3 [1955] 2 QB 327 2
agreements are made between friends and are made without the intention of being enforceable. Domestic agreements made between members of a family, for example, parents and children, also do not create a legal relationship. Generally, the law presumes that agreement made between husband and wife is not intended to create legal relationship1.For example, where a husband and wife were living together at the time of the agreement, although extremely unhappily, on the basis that legal proceeding should not be used to resolve marital disputes 2. As in Balfour v Balfour 3 case, the defendant who was a civil servant stationed in Ceylon, came to England with his wife. Later he returned back to Ceylon and left his wife in England on doctor‟s recommendation. The husband before sailing promised her £30 per month. The court decided that they did not intend that the agreement should be attended by legal consequences 4. However, where the husband and wife are not living together at the time of the agreements the court may enforce it, particularly where the agreement was designed to deal with marriage break-up as in Merrit v Merrit 5,the husband left his wife and lived with another woman. The wife forced the husband to make arrangements for their future. They met and made some oral promises which one from the promises, the wife will pay for the house and as the consideration, the husband give the house, but he refused. The wife sued for declaration that she was now the sole beneficial owner of the matrimonial house. The wife succeeded. The other type of agreements that always be entered are business agreements. Agreements of a business or commercial nature are treated differently from social or domestic agreements by the law. Courts assume that business agreements are intended to create a legal relationship. This presumption can be rebutted if evidence is produced to show that there was clearly no intention to create a legally binding agreement. If an agreement is made in the course of business dealings, then in the absence of express words to the contrary, the courts will say that legal relations were intended. In Carlill v Carbolic Smoke Ball Co6, the defendant had made extravagant claims in an advertisement about the efficacy of their smoke ball in preventing influenza. The supported these claims with a promise to pay £100 to anybody who used it and yet caught influenza within a given period. They stated that in order „to show their sincerity‟ they had deposited £1000 with their bankers. The plaintiff bought the smoke ball, used it and caught influenza. Amongst other defences, 1
Syed Ahmad Alsagoff, Principles of the Law of Contract in Malaysia, 2003, Lexis Nexis, Singapore. p 79. Neil Lucas & Richard Stone, Law of contract, 2001, Blackstones Press, New York. p 27. 3 [1919] 2 KB 571 4 Neil Lucas & Richard Stone, Law of contract, 2001, Blackstones Press, New York. p 28. 5 [1970] 2 All ER 760 6 [1893] 1 QB 256 2
the defendant contended that the advertisement was „a mere puff‟ and was not intended to create legal relations. The court rejected this as the bank deposit was strong evidence that the defendant had contemplated legal liability when the issued their advertisement.
4. CONSIDERATION
The last element of a valid contract is consideration. This refers to the price paid in exchange for the promises both parties made. For an agreement to be regarded as a contract, it must either be supported by consideration or be a formal contract. Section 2(d) of the Contracts Act states, when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or obtains 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 terms promisor and promisee are used to describe the parties to a contract in which consideration is present. The promisor is the person undertaking to perform the consideration; the promisee is the recipient of the consideration. In contracts where both parties provide consideration each party will be both a promisor and a promisee. Consideration that is still to be performed is termed executory. Consideraton that has already been performed is said to be executed. The element of consideration is essential in any valid contract. It is this element that turns a mere promise into a contract that the law will enforce. Every contract contains at least one promise, and consideration is something given or done in return for the promise. In most cases, consideration is in the form of giving money in return for goods or services. The following are examples of consideration, 1) Martin agrees to mow Joe‟s lawn and Joe agrees to pay Martin $10.00, 2) Bob agrees to fix Jack‟s car if Jack services his lawnmower. Contract law makes a distinction between a valid contract and promises that are made where no consideration is given. If your husband promises you a diamond for your birthday this amounts to a gratuitous promise – a gift that is freely given. If your parents break their promise you cannot enforce it.
There are executory, executed and past consideration. An executory consideration consists of a promise to do, forbear or suffer, given in return for a similar promise e.g. „I promise to pay you RM 1000 provided you promise to decorate my kitchen‟ 1. Executed consideration means that a party‟s
1
Neil Lucas & Richard Stone, Law of contract, 2001, Blackstones Press, New York.p.33.
obligation has been performed 1. Past consideration exists where the act that is the consideration was performed before the contract was made. For instant, Lee agrees to sell his bicycle to Mario, who agrees to pay $150.00. If Mario pays the money in return for the bicycle at the time the contract is made, then this is present consideration. If the payment and the transfer of possession of the bicycle are to take place at a time after the contract is made, then the consideration is future consideration. If Mario is to purchase Lee‟s bike for $150 and Lee is to rely on work that Mario performed for Lee last week, then consideration is past consideration. The act that is the consideration is already past.
There are rules pertaining to sufficiency and adequacy of consideration. Sufficiency of consideration means satisfying the legal rules necessary to provide good consideration at law. This is usually something of economic value 2. Whereas, adequacy of consideration is when the law does not enquire into the true worth of the contract or strike out the price as being unfair. That has not traditionally been the roles of the courts 3. If the consideration is too vague there will be no contract. In Shields v Drysdale 4, daughter promised to look after her elderly mother and father for as long as they lived. In consideration for the daughter‟s promise, the father promised to transfer to her his interest in „some‟ of his property. The court held that this agreement was void because the consideration was not definite. No particular property was indicated in the agreement and therefore it was too vague and not legally enforceable. Other than that, consideration must be capable of being performed. It is not possible to enforce a promise that cannot be performed. As an example, Angela agrees to sell a car to Peter but she is not the owner of the car. Besides, consideration must not be illegal or unlawful. Consideration is not valid if the act that is the consideration is in any way illegal or unlawful. Consideration also must not involve a breach of the civil law or public duty. As an example, an agreement to pay a person to commit a robbery would not be valid consideration. Consideration also must be more than a person is already obliged to do. A person who is already obliged to perform an act or duty will not be able to rely on that act or duty as appropriate consideration to support a contract. A person may already be under an obligation to perform an act by virtue of an existing contractual term. Such an act cannot support a new contract, as there is no
1
George Applebey, Contract Law, 2001, Sweet and Maxwell, London. p 101. George Applebey, Contract Law, 2001, Sweet and Maxwell, London. p 102. 3 George Applebey, Contract Law, 2001, Sweet and Maxwell, London. p 101. 4 [1880] 6 VLR Eq 126 2
new consideration. In Stilk v Myrick1, the plaintiff (sailors) contracted to crew a ship on a voyage for a fixed amount of money. During the voyage, two crew members deserted. The captain of the ship promised to divide the deserters‟ wages among the remaining crew if they completed the voyage. On the completion of the voyage, the captain refused to pay the additional money to the remaining crew. The court agreed with the captain‟s decision. The reason the remaining crew were not entitled to extra money was because when the crew initially contracted for their wages, they agreed to complete the journey, even if others deserted. The promise by the captain to pay additional money was not supported by consideration. The sailors were doing nothing more than they were already obliged to do pursuant to their contract. A person cannot seek to rely on an act as consideration for a contract if they are already under a legal duty to perform that act. The other rule is consideration must move from the promisee. The promisor is the person making the promise. The „promisee‟ is the person to whom the promise is made. The promise of the promisor will not be supported by consideration and be legally enforceable unless supported by consideration from the promisee. For a promise to be enforceable, it must be paid for. A promise can be made to two or more persons jointly, with only one of them providing consideration. The party not providing the consideration can still enforce the agreement.
CONCLUSION
Most contractual transactions in Malaysia are governed by the Contracts Law Act 1950. All situations that have been discussed above are the most important elements in the formation of a contract. As all of the elements are exists, it is sufficient to constitute a contract which known as an agreement between two or more parties in which legal rights and obligations are created, and are enforced by a court. For a contract to be legally enforceable the contract must contain the following elements; an offer on behalf of the promisor, an acceptance from the promisee, a consideration between the parties and the intention to create legal relationship. In all business activities, the law of contract plays a fundamental role. Everyday many contracts are made and many are breached. The aim of this task is to present the elements to form a contract in its simplest terms so that anyone can grasp the fundamentals in this area of the law.
1
[1809] 2 Camp 317; 170 ER 1168
BIBLIOGRAPHY
1. Contracts Act 1950 2. Syed Ahmad Alsagoff, Principles of the Law of Contract in Malaysia, 2003, Lexis Nexis, Singapore. 3. George Applebey, Contract Law, 2001, Sweet and Maxwell, London. 4. Neil Lucas & Richard Stone, Law of contract, 2001, Blackstones Press, New York. 5. GH Treitel, An Outline of the Law of Contract, 1995, London. 6. http://llbnotes.blogspot.com 7. http://vijay-highcourtspotblogcom.blogspot.com
