Transcript Introduction to the Law of Contract

OUTCOME 1:
PRINCIPLES OF LAW
1
Test your understanding.
Analyse the following transactions in terms
of offer and acceptance

Filling a job vacancy

Parking a car in a multi-storey car park

Taking a bus ride

Buying a cup of coffee from an automatic vending
machine

Buying a packet of soap powder from a supermarket

Buying an antique dresser at an auction

Acquiring shares in a privatisation issue

Buying a book via internet
2
THE
LAW OF CONTRACT
3
WHAT IS CONTRACT?
4
Think about the agreements you have
made over the past week:





buying a newspaper;
taking the bus into work or college;
agreeing to complete an assignment
by a; particular date;
getting a cup of coffee at breaktime;
arranging to meet a friend for lunch
Can all these transactions be classed
as contracts?
5
Introduction



Definition of Contract: An agreement made
between two or more parties, which the
law will enforce.
S. 2(h) of CA 1950 - it is an agreement
enforceable by law.
A contract is different from all other forms
of agreement because the parties to a
contract acquire as a result of the
agreement certain rights and obligations
which are legally enforceable.
6



If a party breaks his promise and
persists with his refusal to act as
agreed, the other party may well wish to
enforce performance.
Generally, the law will only compel a
person to carry out his promise if that
promise is embodied in a valid contract.
If a valid contract exists then a party to
the contract can sue the other for failure
to carry it out.
7
Types of Contracts
Bilateral
vs. Unilateral
Executory
Valid

vs.
Unenforceable
Express
vs. Implied
vs. Executed
vs. Voidable
vs.
Void
Bilateral and Unilateral Contracts


Bilateral: both parties make a promise.
Unilateral: one party makes a promise
that the other party can accept only by
doing something.
8
Types of Contracts

Express and Implied Contracts



(cont’d)
Express: the two parties explicitly state
all important terms of their agreement.
Implied: the words and conduct indicate
that the parties intended an agreement.
Executory and Executed Contracts


Executory: when one or more parties
has not fulfilled its obligations.
Executed: when all parties have fulfilled
their obligations.
9
Types of Contracts

(cont’d)
Valid, Unenforceable, Voidable, and
Void Agreements




Valid: satisfies the law’s requirements.
Unenforceable: when the parties intend
to form a valid bargain but some rule of
law prevents enforcement.
Voidable: when the law permits one
party to terminate the agreement.
Void: one that neither party can enforce,
usually because the purpose is illegal or
one of the parties had no legal authority.
10
Essentials for a valid contract
 Proposal/Offer
 Acceptance
 Intention to create legal obligation
 Consideration
 Certainty
 Legal capacity
 Free consent
 Legality of the objects
 Required formalities
11
PROPOSAL



S.2(a) of the Contract Act 1950
provides that:
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.
Example:
Mr.
Squidward
wrote
offering to sell his car to Mr. Crab for
RM50,000.
12


The person making the proposal is
called the promisor/proposer/offeror.
The party accepting the proposal is
referred to as the promisee.
Based on the above example, Mr. Crab
acceptance of Mr. Squidward’s proposal
to
buy
the
car
establishes
an
agreement.
13

A proposal can be made to an
individual, a class of persons, a firm,
a company or to the public at large.
14
Carlill v Carbolic Smoke Ball
Co. (1893) IQB 256
15


Carlill v Carbolic Smoke Ball Co.
(1893) IQB 256, is a good illustration
of an offer made to the public.
The defendant 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 period. The plaintiff
Mrs. Carlill bought and used the
smokes ball as prescribed and caught
influenza.
16

She sued the company for the
promised reward. The defendants
contended that the contract was made
with the entire world, that is with
everybody, and that one can’t contract
with everybody. It was held that an
offer could be made to the entire world
because the contract will only be made
with that limited portion of that public
who came forward and performed the
condition
on
the
faith
of
the
advertisement.
17


A proposal can be made in any
form; it can be made in writing,
orally,
by
conduct
or
by
combination of these.
The
communication
of
the
proposal is complete when it
comes to the knowledge of the
person to whom it is made.
18
Invitation to Treat
Invitation to treat is not a proposal but a
sort of preliminary communication which
passes between the parties at the stage of
negotiation. Examples of invitation to
treat:
1) The display of goods with a price ticket
attached in a shop window or on a
supermarket.
This is not an offer to sell but an invitation
for customers to make an offer to buy.

19
FISHER v BELL [1960]


Shopkeeper- flick knife on display in
his shop window-charged with offering
weapon contrary to the provisions of
the Restriction of Offensive Weapon
Act 1959.
Held: the display of goods with a price
ticket attached in a shop window is an
ITT ( not an offer to sell)
20
PHARMACEUTICAL SOCIETY OF GREAT
BRITAIN v BOOTS CASH CHEMISTS Ltd
[1953]


Defendant – charged under Pharmacy and
Poisons Act 1933-unlawful to sell certain
poisons unless such sale was supervised by
a registered pharmacist.
Held: the display was only and ITT
(Payment was to be made at the exit where
a cashier was stationed and in every case
involving drugs, a pharmacist supervised
the transaction and authorized to prevent a
sale.)
21
2) Advertisements, catalogues and
brochures.
PARTRIDGE v CRITTENDEN [1968]
 Advertisement-”Bramblefinch cocks,
Bramblefinch hen, 25s each.”
 Held: the advertisement was an ITT (
the word ’offer’ did not appear in the
advertisement.)
 However, there are some situations
where an advertisement may be
regarded as a definite offer: Carlill’s
case
22
3) Auctions
PAYNE v CAVE [1789]
-Df made the highest bid (offer) at an
auction sale but withdrew his bid before
the fall of the auctioneer’s hammer
(acceptance).
-Df was not bound to purchase the
goods.
HARRIS v NICKERSON [1873]
-Advertisement a forthcoming auction
sale does not amount to an offer to hold
it.
4) Tender
5) Company prospectus
23
5) Statements of price in negotiations
for the sale of land.
HARVEY v FARCEY [1893]
H sent telegram to F: Will u sell us
Bumper Hall Pen? Telegraph lowest
cash price…
H telegraphed his response: We agree
to buy BHP for £900 asked by u.
Held: there was no contract
24
COMMUNICATION OF OFFER



Rule: Only an addressee may accept the
proposal
A party accepting a proposal must be
aware of its existence.
A party who casually returns a lost
property to its owner cannot legally claim
a reward if he is unaware of it at the time
but subsequently discovers the existence
of an offer of rewards for its return.
25
R v CLARKE [1927]


The Western Australian Gov. offered a
reward for information leading to the
arrest and conviction of persons
responsible for the murder of two police
officers.
Held: The claimed failed on the grounds
that the information was given to clear
himself and not in reliance on the offer of
rewards.
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2. ACCEPTANCE
S.2 (b) CA provides that
“when a person to whom the proposal is
made signifies his assert thereto, the
proposal is said to be accepted, a
proposal when accepted becomes a
promise.”
 S.9 CA provides that, ”where the
acceptance is made in words, the
acceptance is expressed, where the
acceptance is made other than in words,
it is implied.”

27

S.7(a) CA provides that, ” acceptance
must be absolute and unqualified.”
The acceptance must be made on exactly
the same terms as proposed without
modifications or variations.
Any modifications or variations of the
proposal does not constitute an acceptance
but amounts to a counter-offer. It is treated
as a rejection of the offer.
28

In the case of Hyde v Wrench (1840):
June 6-defendant offered to sell his estate
to the Plaintiff for 1,000.
June 8–plaintiff replied stating he was
willing to buy at 950, defendant refused to
sell.
June 27 –plaintiff wrote again offering to
pay 1,000 as there was no contract
formed.
By making the counter offer the plaintiff
had rejected the original offer on June 8,
and is no longer able to accept it later.
29
However, a distinction needs to be
drawn between a counter-offer and a
request for further information.
 STEVENSON JAQUES & CO v MCLEAN
[1880]
HELD: there is no counter-offer but a
mere inquiry which should have been
answered and not treated as a
rejection of the offer.

30

Acceptance-Subject to Contract
it often happen that acceptance may be
qualified by such common term as”
subject to contract” or “subject to a
formal contract being drawn up by our
solicitors.” Under such circumstances
the court is inclined to determine that
there is no binding agreement until the
contract as stipulated
LOW KAR YIT v MOHD ISA [1963]
31
COMMUNICATION OF ACCEPTANCE
S.7 (b) CA: The acceptance may
“ be expressed in some usual and reasonable
manner, unless the proposal prescribes a
manner in which it is to be accepted. If the
proposal prescribes a manner in which it is to be
accepted, and the acceptance is not made in such
manner, the proposer may within a reasonable
time after the acceptance is communicated to
him, insist that his proposal shall be accepted in
the prescribed manner, and not otherwise, but if
he fails to do so, he accepts the acceptance.”

32


Silence, absence of response or just
total disregard of the proposal is not
acceptance as there is no positive act
that can be related to the proposal.
The proposer may not throw the
burden on the addressee to a
positive act of rejection by saying for
instance: “ if I do not hear from U
within a week, I shall assume that U
have accepted my proposal.”
33
FRASER v EVERETT
[1889]

Held: there was no rule of law saying
that “silence gives consent”
applicable to mercantile contracts.”
FELTHOUSE v BINDLEY [1862]
“If I hear no more about him, I shall
consider the horse is mine at £30.”
34
ACCEPTANCE THROUGH POST


General Rule: acceptance is effective
or complete only when it is
communicated to the proposer.
( comes to the actual knowledge of
the proposer)
Exception: S.4(2) CA, where the
parties have contemplated the used
of the post as means of
communication :
35
The communication of an acceptance
is complete:
a) As against the proposer, when it is
put in a course of transmission him,
so as to be out of the power of the
acceptor; and
b) As against the acceptor, when it
comes to the knowledge of the
proposer.
36
Illustration (b) of s.4
B accepts A’s proposal by a letter sent
by post.
 The communication of the acceptance is
complete:
As against A, when the letter is posted;
As against B, when the letter is received
by A

37
CASE LAW
1.
2.
ADAMS v LINDSELL [1818]
HOUSEHOLD FIRE INSURANCE CO v GRANT
(1879)
3.
ENTORES LTD v MILES FAR EAST
CORPORATION [1955]
4.
IGNATIUS v BELL (1913)
5.
BRINKIBON v STAHAG STAHL UND
STAHLWARENHANDELSGESELLSCHAFT [1983]
38
ADAMS v LINDSELL




2 Sept- Df wrote to the claimants-offering to sell
them some wool and asking for an answer ‘in
course of post’. The letter was wrongly addressed
& reached the claimant on 5 Sept.
5 Sept-the claimants posted a letter of
acceptance-reached the Df on 9 Sept.
8 Sept-the Df sold the wool to someone else
Held: There was a contract between the Df and
the claimants.
39
HOUSEHOLD FIRE INSURANCE CO
v GRANT (1879)




Grant applied for shares in the claimant
company.
A letter of allotment was posted but Grant never
received it.
When the company went into liquidation, Grant
was asked as a shareholder, to contribute the
amount still outstanding on the shares he held.
Held: Grant was a shareholder of the company.
The contract to buy shares was formed when the
letter of allotment ( acceptance) was posted.
40
ENTORES LTD v MILES FAR EAST
CORPORATION [1955]
Denning LJ stated as follows:
“ when a contract is made by post it is
clear law throughout the common
law countries that acceptance is
complete as soon as the letter is put
into the post box, and that is the
place where the contract is made.”
41
IGNATIUS v BELL (1913)

In the case, the parties had contemplated
the use of the post as a means of
communication. The plaintiff sent a notice
of acceptance by registered post in Klang
on August 16, 1912 but it was not
delivered till the evening of August 25
because the Plaintiff was away. The letter
had remained in the post office at Kuala
Selangor until picked up by the Defendant.
Held: the option was duly exercised by the
Pf when the letter was posted on August
16
42
BRINKIBON v STAHAG STAHL UND
STAHLWARENHANDELSGESELLSCHAFT
[1983]
The House of Lords affirmed the rule with
Respect to communications by telex established
in the Entores case. According to the court no
universal rule can cover all such cases and they
must be resolved by reference to the intentions
of the parties, by sound business practice and in
some instances, by a judgement where the risks
should lie.
43
Notes:
1.
Where there is a delay in the post or the
letter of acceptance is misplaced by the
postal authority, the proposer is bound
irrespective of his knowledge of the
acceptance, while on the other hand, the
acceptor remains free till actual receipt
by the proposer. This implies that in the
meantime, the acceptor may also
withdraw his acceptance.
44
2.
3.
Therefore, a proposer should stipulate in
a proposal that acceptance is complete
only upon receipt. That would exclude
the postal rule by express terms of the
proposal.
The postal rule also applies to telegram
sent through the post office but not to
more instantaneous methods of
communication such as telex and
telephone.
45
TERMINATION OF
PROPOSAL
S.5(1) CA:
“A proposal may be revoked at any time
before the communication of its
acceptance is complete as against the
proposer, but not afterwards.”
46
S. 6 states that a proposal is
revoked:
a. By notice of revocation
b. By the lapse of time
c. By the failure of acceptor to
fulfil a condition precedent
d. By the death or mental
disorder of the party
47
REJECTION
An offer is rejected if:
1. The offeree notifies the offeror to
that he does not wish to accept the
offer;
2. The offer attempts to accept
subject to certain conditions;
3. The offeree makes a counter-offer.

48
HYDE v WRENCH




Wrench-offered to sell his farm to
Hyde for £1,000.
Hyde replied with a counter-offer of
£950 which was refused.
Then Hyde was prepared to meet the
original of offer of £1,000.
Held: No contract had been formed
49
Illustration- S. 5



A proposes by a letter sent by post
to sell his house to B
B accepts the proposal by a letter
sent by post
A may revoke his proposal at any
time before or at the moment when
B posts his letter of acceptance, but
not afterwards
50
BYRNE v TIENHOVEN [1880]
The Df offered to sell 1,000 boxes of tinplates to
the Pf.
The following communication took place:
 1 Oct: Df posted letter of offer in Cardiff to the
Pf in New York.
 8 Oct: Df posted a letter revoking the offer of
Oct 1.
 11 Oct: Pf received the letter of offer posted on
Oct 1 and sent acceptance by telegram the
same day. It also followed up with letter of
acceptance on 15 Oct.
 20 Oct: Df’s letter of revocation received by the
Pf.
51
The court ruled that :
There was a contract between the parties
because the revocation of the offer posted
on 8 October was not effective till 20
October when it was received by the Pf but
in the meantime, the latter had already
accepted the offer on 11 October when the
telegram was sent.
52
REVOCATION OF ACCEPTANCE
S.5(2) states:
“ An acceptance may be revoked at any time
before the communication of the acceptance is
complete as against the acceptor, but not
afterwards.”
 Illustration to S.5: on Revocation of acceptance
made by post:
 A proposes by a letter sent by post to sell his
house to B
 B accepts the proposal by a letter sent by post
 B may revoke his acceptance at any time before
or at the moment when the letter communicating
it reaches A, but not afterwards.

53
CONSIDERATION


Section 26 of CA provides that:
“An agreement made without consideration is
void”
Section 2(d) of CA defines consideration as
“when, at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, or does or abstain from
doing, or promises to do or to abstain from
doing something such an act or abstinence or
promise is called a consideration for the
promise.”
54

Consideration may be viewed as a sort
of bargain, a quid pro quo or the price
which one party pays to buy the
promise or act of the other. When a
promisor promises to do or abstain
from doing something, the promisee
must pay a price for it. This price to be
paid may be an act or an abstinence or
a promise to perform a future act or
abstinence.
55


Example: X has lost his camera while
travelling on a train and he offers a
reward of $50 to anyone who finds and
returns it to him. Y finds and returns it
to him.
In this simple illustration, X promises to
pay RM50 to anyone in return for an
act i.e. finding the camera and
returning it. Y pays the price for X’s
promise by performing the act which,
by section 2(d) is the consideration for
the promise.
56
TYPES OF CONSIDERATION
EXECUTORY CONSIDERATION

when one promise is made in return for another. ( a
promise in return for a promise)

eg: X agrees to sell Y a motorcycle and Y promises to
pay RM 2000 for it.

Illustration (a) of S.24:
A agrees to sell his house to B for RM10,000.
Here, B’s promise to pay the sum of RM10,000 is the
consideration for A’s promise to sell the house, and A’s
promise to sell the house is the consideration for B’s
promise to pay RM10,000. These are lawful
consideration.
57
EXECUTED CONSIDERATION


When a promise is made in return for the
performance of an act.
For example:
X offers RM100 to anyone who finds and returns
his camera which he has earlier lost. Y finds and
returns the camera in response to the offer. Y’s
consideration for X’s promise is executed, and
only X’s liability remains outstanding.
58
PAST CONSIDERATION



Where a promise is made subsequent to and in
return for an act that has already been
performed.
So, if Y finds and returns X’s camera and in
gratitute, X promises to reward him with RM100,
the promise is made in return for a prior act.
Illustration (c) of S.26:
A finds B’s purse and gives him. B promise
to give A RM 50. This is a contract.
59

Past Consideration:
Past
consideration
may
be
good
consideration.
Section 2(d) provides that if the act done
were at the desire of the promisor, then
such
an
act
would
constitute
consideration. The phrase ‘has done or
abstained from doing’ implies that even if
the act done was prior to the promise,
such an act would constitute consideration
as long as it was done at the desire of the
promisor.
60
Kepong Prospecting Ltd v A.E
Schmidt & Marjorie Schmidt [1968]
Schmidt, a consulting engineer had assisted
another in obtaining a prospecting permit for
mining iron ore in the State of Johore. He also helped in
the subsequent formation of the company, Kepong
Prospecting Ltd, and was appointed Managing Director.
After the company was formed, an agreement was
entered into between them under which the company
undertook to pay him one percent of the value of all ore
sold from the mining land. Held: It did constitute a valid
consideration so that Schmidt was entitled to his claim on
the amount.
61


Under English Law, the general rule is that
past consideration is insufficient to
support a contract.
Re McArdle [1951]
Held: a promise pay £488 to the wife was
made after the improvement had been
completed and was therefore, not binding.
However, if a person is asked to perform a
service, which he duly carries out, and
later a promise to pay is made, the
promise will be binding.
62

A person who promises to carry out a duty
which he is already obliged to perform is
in reality offering nothing of value.
However, if a person does more than he is
bound to do, there may be sufficient
consideration
63

Consideration needs not be adequate.
For example, illustration (f) to
section 26 states: “A agrees to sell a
horse worth RM1,000 for RM10. The
agreement
is
a
contract
notwithstanding the inadequacy of the
consideration.”
64




Under Common Law, consideration must
move from the promisee.
Under Local law, a party to an agreement can
enforce the promise, even if he himself has
given no consideration, so long as somebody
else has done so.
A,B and C are parties to an agreement in
which C promises to pay A RM1000 if B will
repair C’s house. B repairs C’s house and C
does not pay A anything. Although A has not
given any consideration for C’s promise, he
may sue C on the promise because
consideration has moved from B.
CASE: Venkata Chinnaya v Verikatara
’ma’ya (1881)
65
INTENTION TO CREATE
LEGAL RELATION

A valid contract requires an intention to
create legal relations. The court
determines where there is such an
intention from the language used and the
context in which it is used. There are 2
presumptions have developed in the
determination of intention with respect to
agreements:
66


In business agreement, there is an
agreement that the parties intend
legal consequences to follow unless
the parties specify otherwise.
In social domestic or family
agreement, it is implied as a matter
of course that no legal relations are
contemplated, but such presumption
may be rebuttable.
67