Business Law Assignment

Contract
By definition under Sec 2(h) Contract Act 1950, “an agreement enforceable by law is a contract”. A contract is a promise or agreement between two or more parties that is enforced by law to be legally binding. It may involve a duty to do or refrain from doing something, and the failure to perform such duty is a breach of contract. The role of law in a contract is not to punish the breaching party but to provide remedies to restore the person wronged to the position they ought to occupy if the contract had not been breached. To distinguish contracts from other types of promises and agreements, 6 vital elements have been established that are necessary for a contract to exist and they are Offer, Acceptance, Consideration, Intention to create a legal relationship, Capacity and Certainty. A contract is only legally binding once the elements are in existence. Absence of any of the elements in a contract will be void or voidable.

Offer
According to Section 2(a) Contracts Act 1950, an offer or proposal is made “When one person signifies to another his willingness to do or abstain from doing, with the view to obtaining the assent of that to the act or abstinence, he is said to make a proposal”. Example, Jeff proposes to sell his van to Kim for RM20, 000. This makes Jeff the offeror and Kim the offeree. An offer need not be made to a specific person. It may be addressed either to an individual, or to a group of persons, or to the world at large, and may be made expressly or by conduct. a) A particular person: Jeff went to Kim’s shop and is offered to buy a pair of shoes. Kim’s offer cannot be accepted by Rony who owns a shoe shop nearby because Rony was not the addressed person in the offer. Furthermore, Section 2(b) Contracts Act provides that “…when a person to whom the proposal is made” which appears to say that only the addressee may accept the proposal.

Boulton v Jones (1857) 2H & N 564
Defendant had business dealing with a shopkeeper named Brocklehurst. The defendant had ordered some stocks from Brocklehurst but on the day of the order Brocklehurst had sold his business to the Plaintiff. The Plaintiff delivered the goods without informing the Defendant of the change of ownership. The Defendant then refused to make any payments. It was held that the plaintiff had no rights to accept an offer not made to him. b) To the General Public: Here anyone who meets all the terms of the proposal may accept the proposal. For example, Jeff offered RM100 for the safe return of his cat at an address advertised. Jeff’s offer is to the general public and those who read or knew of the offer may accept the offer and claim for the reward

Carlil v Carbolic Smoke Ball Co
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims. An offer must be clear, complete, final and specific to avoid any vagueness.

Guthing v Lynn (1831) 2B & AD 232
Lynn offered to buy a horse from Guthing. He was to pay 5 pounds extra if the horse brought him good luck. The condition laid was held by the court to be too vague to constitute a binding contract. Tan Geok Khoon & Gerald Francis Robless v Pava Terubong Estate Sdn Bhd [1988] 2 MLJ 672 Plaintiff were executors and trustees of deceased’s estate. They claimed various correspondences between the deceased and the defendant constituted a contract. The court agreed because the deceased had agreed to and accepted a counter offer from the defendant and paid the balance of the price. Defendant had accepted payment by issuing a receipt signed by a director. According to Section 4(1) Contracts Act 1950, the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. Unless there is a communication of the proposal there can be no acceptance to form an agreement. The fact that the other party has done something which coincides with proposal without being aware of the proposal does not bring an agreement into being. A party accepting the proposal must be aware of its existence. In one sense a proposal cannot take effect until it is received, for until the offeree knows about it, he can take no action in reliance on it. R v Clarke (1927) 40 C.L.R 227

The Australian Government offered a reward for information leading to an arrest and conviction of persons responsible for the murder of Two Police officers. X and Clarke were arrested and charged with murder but later Clarke gave information leading to arrest of Y. X & Y were later convicted and Clarke claimed for the reward. Clarke failed to claim the reward as the information he gave was to clear himself and not in reliance of the offer to reward.

Taylor v Laird (1856) 25 LJ Ex 329
Taylor resigned as a skipper of Laird’s ship in the middle of a voyage. Taylor however assisted to sail the ship home. The court held Taylor cannot claim for fees due as he had failed to make known his offer to sail the ship home and Laird had no opportunity either to accept or refuse the offer. No contract existed. Invitation to treat is not a proposal and there can be no acceptance as to constitute a binding contract. When parties negotiate with the view of making a contract, many preliminary communications may pass between them before the definite proposal is made. One party may simply respond to a request for information (For example, by stating the price at which he might be prepared to sell his house), that party is then said to make an “invitation to treat”. In this situation he is not making an actual offer but merely inviting to make an offer. Patridge v Crittenden

Partridge was charged by Anthony Ian Crittenden with illegally offering for sale a wild life bird which was not a close-ringed specimen, bred in captivity. The magistrates decided that the advertisement was an offer for sale and that the bird was not a close-ringed specimen bred in captivity, because it was possible to remove the ring from the bird’s leg.

Display of goods for sale: The general rule is that a display of price marked goods in a shop window is not an offer to sell goods but is an invitation to treat to customers to make offer to buy.

Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1953) 1 QB 401 Article was wrapped and had a price tags displayed to the customers. Sale for such articles is governed by the Pharmacy and Poisons Act 1933 (UK). The Act specifies that it is unlawful to sell certain poisons unless such sale was supervised by a registered Pharmacist.

The court ruled that the display was only an invitation to treat. A proposal to buy occurred only when the customer placed the articles in the basket and brought them to the cashiers. The proposal may be accepted or denied. The contract of sale would only be made at the cashier’s desk.

Advertisement: The general rule is that an advertisement is only an invitation to treat.

Eckhardt Marine GMBH v Sheriff Mahkamah Tinggi Malaya [2001] 3 CLJ 864 Gopal Sri Ram JCA held: “Advertisement amounted to an invitation to treat and the appellant made a conditional offer by way of its letter and the offer was in fact accepted. There was therefore a binding contract between the parties. Furthermore the appellant through his authorized agent has acknowledged that its offer had been accepted by the sheriff and was therefore stopped from denying that there was a valid and binding contract between the parties.”

It is essential to note that not all advertisements is an invitation to treat. It can be an offer to which another party can accept. In order to decide whether it is an invitation to treat or a proposal, we have to look at the intention of the parties involved. Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256

The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.

Tender is also an invitation to treat and the person who announced the tender may accept or refuse the offer made by the readers of the said tender.

Spencer v Harding (1870) LR 5 CP 561
The defendant had sent out letters of tender for a said article. The Plaintiff’s tender was the highest but the defendant did not accept it. The Court held that the defendant has right to refuse the offer because no contract had existed between them. A letter of tender is only an invitation to treat.

Counter Offer and Acceptance
Section 2 (b) Contracts Act 1950: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.”

A proposal when accepted becomes a promise. The acceptance must be made on exactly the same terms proposed without modifications or variations – must be as provided in Section 7(a) Contract Act – absolute and unqualified.

Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal). Hyde v Wrench (1840)

Wrench offered to sell his estate to the Hyde for £ 1000 on 6th June. On 8th June in reply the Hyde made a counter – proposal to purchase at £950. When Wrench refused to accept proposal on 27th June, the Hyde wrote to accept the original proposal. The court held that there was no acceptance because Hyde’s letter dated 8th June had rejected the original proposal which could not be revived. However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information.

Acceptance
Acceptance occurs when the offeree agrees to the offer by way of statement or act. Acceptance is final and unqualified expression of assent to the terms of an offer. Acceptance must be absolute and unambiguous and communicated to the offeror. A mere acknowledgement of an offer would not be an acceptance, nor is there an acceptance where a person who has received an offer to sell goods merely relies that it is his intention to place an order.

The main reason for the rule is that it could cause hardship to an offeror if he is bound without knowing that his offer had been accepted. However take note that there can be a contract if the offeror knows about the acceptance although it was not brought to his notice by the offeree. Against that, there will be no contract if the communication is made by the third party without the authority of the offeree Powell v Lee (1908) 99 LT 284

Powell applied for a job as headmaster and the school managers decided to appoint him. One of them, acting without authority, told the Powell he had been accepted. Later the managers decided to appoint someone else. Then Powell brought an action alleging that by breach of a contract to employ him he had suffered damages in loss of salary. The county court judge held that there was no contract as there had been no authorised communication of intention to contract on the part of the body, that is, the managers, alleged to be a party to the contract. Acceptance of a proposal must be communicated to the proposer for there to be a binding contract between the parties. For an acceptance to be communicated it must normally be brought to the notice of the offeror.

Section 4(2) Contracts Act 1950, The Communication of an acceptance is complete: a) 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, and b) as against the acceptor, when it comes to the knowledge of the proposer.

Section 7 (b) Contracts Act 1950 includes that it be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner which it is to be accepted, and the acceptance is not made in that manner, the proposal 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.

Acceptance must ordinarily be communicated and made in some usual and reasonable manner if no method of acceptance is prescribed. However, if the proposal specifies a particular mode of acceptance and it is not followed, the proposer is entitled to insist on it. It is essential that the proposer act within a reasonable time after the communication of acceptance. If he does nothing, he would have been deemed to have accepted. The duty to object lies with the proposer. Note that the English law differs from our position, as it does not require such positive objection.

Eliason v Henshaw (1819) 4 Wheaton 225
Eliason offered to purchase flour from Henshaw. Eliason specified that acceptance of offer be made by mail coach to Harper’s Ferry. Henshaw sent the acceptance by post to Georgetown on the assumption that it would reach Eliason faster. Unfortunately the mail was late and the Court held Eliason was justified to refuse Henshaw’s acceptance.

Section 4(2) Contracts Act provides for the exceptions that acceptance is only by communication. The Communication of an acceptance is complete: c) 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, and d) as against the acceptor, when it comes to the knowledge of the proposer.

The proposer is bound when the offeree posts the letter even though the proposer has no knowledge of the acceptance. When the letter is posted the acceptor has put in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding irrespective of any delay or disappearance in the course of transit. This was clearly stated in Entores Ltd v Miles Far East Corp [1955] 2 QB per Lord Denning

“……..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 ….”

Gnatius v Bell (1913) 2 FMSLR 115
Plaintiff sued for specific performance over his rights to purchase Defendant’s land. The option was to be exercised on or before 20th August 1912. The parties had contemplated the use of post as means of communication. Plaintiff sent a notice of acceptance by registered post in Klang on 16th August 1912 but was not delivered until 25th August 1912 because Plaintiff was away. The letter was at the Post Office until picked up by Defendant. The court applied Section 4 Contracts Act and held that the option was duly exercised by the Plaintiff when the letter was posted on 16th August 1912.

Intention to create legal relations
The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts. For example you may have an agreement to meet a friend at a pub. You may have a moral duty to honor that agreement but not a legal duty to do so. This is because in general the parties to such agreements do not intend to be legally bound and the law seeks to mirror the party’s wishes. In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social and domestic agreements and agreements made in a commercial context.

Balfour v Balfour [1919] 2 KB 571
A husband worked overseas and agreed to send maintenance payments to his wife. At the time of the agreement the couple was happily married. The relationship later soured and the husband stopped making the payments. The wife sought to enforce the agreement. Held: The agreement was a purely social and domestic agreement and therefore it was presumed that the parties did not intend to be legally bound.

Merritt v Merritt [1970] 1 WLR 1211 Court of Appeal
A husband left his wife and went to live with another woman. 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 she brought an action for a declaration that the house belonged 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.

Errington v Errington Woods [1952] 1 KB 290 Court of Appeal A father-in-law purchased a house for his son and daughter-in-law to live in. The house was put in the father’s name alone. He paid the deposit as a wedding gift and promised the couple that if they paid the mortgage installments, the father would transfer the house to them. The father then became ill and died. The mother inherited the house. After the father’s death the son went to live with his mother but the wife refused to live with the mother and continued to pay the mortgage installments. The mother brought an action to remove the wife from the house.

Held: The wife was entitled to remain in the house. The father had made the couple a unilateral offer. The wife was in course of performing the acceptance of the offer by continuing to meet the mortgage payments. Under normal contract principles an offer may be revoked at any time before acceptance takes place, however, with unilateral contracts acceptance takes place only on full performance. Lord Denning held that once performance had commenced the Mother was stopped from revoking the offer since it would be unconscionable for her to do so. Furthermore there was an intention to create legal relations despite it being a family agreement.

Consideration
An agreement without a valid consideration is void unless they belong to one of those categories of agreement listed in the same section as being exempted from the rule.

According to Section 2(d) Contact Act 1950, “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 so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise”

Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. When the promisor promises to do or to abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or abstinence or a price to perform a future act or abstinence. For example: Jeff lost his cat and offered a reward of RM 1000 to anyone who finds it and returns it to Jeff. Kim finds the cat and returns it to Jeff. Here Kim pays the price for Jeff promise by performing the act which by Section 2(d) is the consideration of the promise. Types of Consideration

Executory Consideration: when one promise is made in return for another promise. Murugesu v Nadarajah [1980] 2 MLJ 82
Murugesu agreed to sell his house to Nadarajah within three months from the date which he written on a scrap paper. Murugesu later refused to sell the house and a specific performance was ordered at the trial and the appellant took the matter to Federal Court. The appeal was dismissed and the judge held: “The agreement must be seen to be a case of Executory consideration. A promisee is made by one party in return for a promise made by the other; in such a case each promise is the consideration for the other. Executed Consideration is a promise is made, in return for the performance of an act. Example, Jeff lost his pen and offered RM 200 to anyone who finds and returns the documents to him. Kim found Jeff’s pen in response to the offer and returns them to Jeff. By returning the pen, Kim has given consideration to Jeff’s promise to pay.

Should Jeff refuse to pay, Kim may take an legal action against him. Past Consideration is where a promise is made subsequent to and in return for an act that has already been performed, the promise is made on account of a past consideration. Kepong Prospecting Ltd & S.K Jagatheesan & Ors v A.E Schmidt & Marjorie Schmidt [1968] 1 MLJ 170. Schmidt a consultant engineer has assisted another in obtaining a prospecting permit for mining iron ore; he helped in the subsequent formation of Kepong Prospecting Ltd and was appointed as its Managing Director. After the company was formed they entered into an agreement whereby the company undertook to pay 1% of the value of all ore sold from the mining land. This was clearly past consideration. The Privy Council ruled that it did constitute a valid consideration so that Schmidt was entitled to his claim on the amount. Consideration need not be adequate. An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the adequacy of the consideration may be taken into account by the court in determining the question whether the Phang Swee Kim v Beh I Hock [1964] MLJ 383

Sale of a land for $500 when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration. The trail court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision of the Trail judge was reversed and applied explanation 2 and illustration (f) of Section 26. Consent of the promisor was freely given.

Legal Capacity
Not every person is competent to enter a contract. A person has to be in the age of majority and has to be mentally sane in order to take part in a contract according to Section 11 Contract Act 1950 stated “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.” In Malaysia, the age of majority is recognized as above eighteen years of age as stated in the Age of Majority Act 1971: “The minority of all males and females at the age of eighteen years and every such male and female attaining that age shall be of the age of majority.” Section 12 Contract Act 1950 further explains the soundness of mind has been made which is as follows. 1. A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. 2. A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. 3. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind. Illustrations:

(a) A patient in a mental hospital, who is at intervals of sound mind, may contract during those intervals. (b) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts. Exceptions of General Rule

Contracts for necessaries: Section 69 Contract Act 1950 whereby suppliers of necessaries are to be reimbursed. Meaning to say if a minor contracted for necessaries (food, lodging, clothes), such contracts are not void.

Govt. of Malaysia v Gurcharan Singh (1971)
The government sued the D (minor) for breach of agreement in writing entered into by both P and D for providing a course of training at a Malayan Teacher’s Training Institution. The claim was for $11, 500 allege to be actually spent by the Government for educating the first defendant. Held: The contract entered into by P & D was void as D was an infant at the relevant time. The word “necessaries” must be construed broadly and in the circumstances of this case, the provision of professional or vocational training for d in a teacher’s training institution to enable him to qualify for and accept appointment as a teacher was a provision for necessaries. D was therefore liable for the repayment of the sum expended for his education and training as being expended on necessaries. Today, law related to scholarships have been amended – Section 4(a) & Section 5 Contracts (Amendment) Act 1976.

Certainty
If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues such as price or safety may cause entire contract to fail. Section 30 Contract Act 1950 states “Agreements, the meaning of which is not certain, or capable of being made certain, are void”. Illustrations:

1. Jeff agrees to sell to Kim “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. 2. Jeff agrees to sell to Kim on hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. 3. Jeff, who is a coconut oil dealer, agrees to sell to Kim “one hundred tons of oil”. The nature of Jeff’s business indicates the meaning of the words, and Jeff has entered into a contract for the sale of one hundred tons of coconut oil. 4. Jeff agrees to sell to Kim “all the grain in my granary at Klang”. There is no uncertainty here to make the agreement void.

Legal Implication and Conclusion
A final note concerning contractual relationships is the legality of the relationships themselves. If a contract has all of the elements mentioned above, chances are that such contracts are legally enforceable and can result in legal troubles if breached. Because contracts are binding agreements, breaking a part of all of a contract’s conditions could result in monetary damages. Therefore, a good rule of thumb is to consult with a lawyer before signing contracts, especially if the language or conditions are unclear. In short, a legally binding contract includes mutual consent, an offer, acceptance, and consideration. Parties of contracts must also have the legal capacity to enter such arrangements; otherwise, the contract’s conditions are void or voidable. In addition, contracts that fail to include the essential elements as outlined in assessment, whether written or oral, are unlikely to be enforceable, making it necessary for all parties to educate themselves before signing on the dotted line.

References

E-Law Sources (2008) Contract Law. Accessed October 14, 2012 from http://www.e-lawresources.co.uk/Contract.php Wikipedia (Online Free Encyclopedia). Accessed October 14, 2012 from http://en.wikipedia.org/wiki/Contract Smith, C. (2010). Acceptance defined. Accessed October 10, 2012 from http://www.west.net/~smith/acceptance.htm Ollek, S. (2010) Essentials of a contract. Accessed October 10, 2012 from http://www.e-law.bc.ca/art_essential.html