Essential elements of a valid contract
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First and foremost, I would like to thank to my lecturer, Sir Ahmad Shahriman bin Ahmad Tekmezi for the valuable guidance and advices. He guided me greatly on completing this assignment. His willingness to motivate and sharing the idea contributed tremendously to my assignment and also showing me the correct way to complete my assignment. Furthermore, I would like to take this opportunity to thank my classmates. They had helped me a lot on finishing my assignment. Finally, an honorable mention goes to my family and friends for their understandings and supports me in completing this assignment. Without the help of the particular that mentioned above, I might have faced many difficulties while doing this assignment.
“All of us are confronted with rules every day of our lives. Most of us make, interpret and apply them, as well as rely on, submit to, avoid and grouse about them…” (How to do things with rules, William twining and David Miers, 1991)
We involve in contract in our everyday life. Either we realize it or not, we have make contract from as simple as buying groceries in groceries store or during trading in between two big company. Pheng (2005) stated that contract may be defined as an agreement made by two or more parties which enforceable by law. To make it simple, contract is an agreement which legally bind between two or more parties based on the law enforce on the parties and agreements. In Malaysia, the contract act 1950 are govern by the legislation in Malaysia.
It is essential for each of us to understand the elements of a valid contract especially in term business context. These element will then be our guidance in making a contract that valid to use by the parties involve when making an agreement. In contract, there are a few basic elements constituting a contract such as offer, acceptance of the offer, intention to create legal relations, consideration, certainty, and capacity.
Based on the criteria of this assignment, the assessment will be covering three criteria in the element of contract which are the importance of essential elements required for the formation of a valid contract by explaining deeply the elements of consideration and capacity and as well as the needs to comply both elements in making a valid contract. Next is to discuss on the impact of different types of contract by explaining and compare the contract made by post and via e-mail based on section 4(2) of the Contract Act 1950 which stated on the completion of communication of an acceptance. This explanation are bound to the act force based on the section 4(2) of the Contract Act 1950. Next is assessment on the analysis of terms in contracts with reference to their meaning and effect by taking the Mr. Danial situation into account, where I as the event company making an agreement on the P.A system rental with Mr Danial. Form the agreement made by both parties, I have to explain to Mr Danial the terms on the agreement. Findings
Question 1: Elements of consideration and capacity and the needs to comply both elements in making a valid contract. Pheng (2005) stated to make a valid contract, there are a few basic elements that constituting which are:- 1. Offer
2. Acceptance of the offer
3. Intention to create legal relations
All above elements are implied to make a valid contract. Starting from Offering or proposing, acceptance of the offer by the promise (person who accept the proposal), intention to create legal relations, the consideration made before or during the agreement is made, the certainty and lastly the capacity of parties to enter into contract. I will briefly explain each of the elements in order to make a valid contract. Offer
Basically, Offer or proposal is happen when one parties tells to another parties to make an agreement. From the offer section in the elements of a contract (Pheng, 2005) stated that section 2(a) of the Contracts Act 1950 states that offer is the moment “when one person signifies the other persons his or her willingness to do or to abstain from doing anything, with a view to obstaining the assent of that other to the act abstinence”. At this moment, this parties is said that he is making a proposal to the other party. Based on the Contract Act 1950 section 4(1), the communication of a proposal is complete when the other parties acknowledge the act of proposing by the promisor (the person who made the proposal) or when the proposal come to the knowledge to whom to proposal is made. So, if the other parties did not acknowledge or do not knows the about the proposal or the communication of proposal is incomplete, there will be no offer made.
Meanwhile acceptance is about the person to who the proposal is made for. Pheng (2005) stated that in the Contract Act 1950 section 2(b) state acceptance is where the person to whom the agreement is made signifies his assent thereto, the proposal is said to have been accepted. Generally, an accepted proposal then become a promise. Proposal can be made by words or in writing. If the proposal made by writing, it falls on the section 9, Contract Act 1950 where acceptance that is made in words, the acceptance is said to be expressed while if made by other than words, it is said to be implied.
Offer can be withdrawn by revocation. It is possible if the acceptance is not complete. As Ivan Jeron Detta and Lee Mei Pheng (2011) demonstrate, the revocation of offer must be communicated in order to be effective. This is falls under section 6(a) of the Contract Act 1950. But the communication of a revocation is only be complete when to whom the revocation was made is acknowledge about the revocation based on the Contract Act 1950 section 4(3) (b). Intention to Create Legal Relations
This elements show the intention of the parties in creating a legal relations to another party. Somehow in some cases, the intention of making a contract sometime making the contract invalid. This is based on the presumptions on the intention of each parties in making a contract. In some circumstances, the contract also invalid due to each parties indicate lack of intention to enter into contract.
According to Pheng (2005) a presumption is made in a domestic agreement against the existence of an intention to create legal relations whilst in commercial arrangement, a rebuttable presumptions made which a legal relationship are intended if the parties are in a commercial agreement.
For example, domestic agreement is a father promise his son that he will buy him that he will bought him a car if he manage to get an A’s in his examination. If the father break the promise, the son cannot file a case in court because the case will be assume as the domestic agreement. But, if the agreement is relating to something serious, that can falls under commercial arrangement such as intention to sell and buy cars. This is falls under the commercial agreement.
This element I will explain in depth later.
These element holds the terms that an agreement must be certain. Uncertain agreement or unable to be made is void. For example, A promise to B to buy her 200 cars without specifying what type of cars he meant to B. This type of agreement is uncertainty and it is void. Capacity
Same goes to these element, I will explain in depth later.
Above explanation is the elements that constituting a contract. Without these type of element, an agreement may be invalid or void. The elements of consideration
Pheng (2005) stated Section of Contract Act 1950 tells that an agreement without consideration is void. Basically what is consideration?
Based on the section 2(d) Contract Act 1950, it stated that consideration is the moment “when, the promisor, the promise or any other person has done, or abstained from doing, something, such act or abstinence or promise is called a consideration for the promise”. (Pheng, 2005) Based on the above act, basically consideration is what a person demands or want to receive in order to make her or his promise legally binding. Adamson (2006) state that there are three requirements of consideration which are:-
1. Each party must give an act, forbearance, or promise to the other party. 2. Each party must trade what they contribute to the transaction (act, forbearance, or promise) for the other party’s contribution. 3. What each party trades must have legal value, that is, it must be worth something in terms of law. These requirements distinguished or differentiate the different between contractual promise or promise from the promise to give a gift to other parties. Andy Gibson and Douglas Fraser (2005) stated that there are three types of consideration which are Past consideration, Executed (Present) consideration and Executory (Future) consideration. These three types of consideration can simplified into below illustration (Figure1.0).
Figure 1.0: types of considerations
All types of consideration can be explain as below.
(Andy Gibson, Douglas Fraser, 2005) stated that past consideration is promise after the act has been performed. These type of consideration are generally enforceable and not liable to the contract. Executed (present) Consideration
In this type of consideration, the action is considered as act for a promise. The act is done in return for a promises. Executory (Future) Consideration
Andy Gibson and Douglas Fraser (2005) explain that this consideration is the exchange of promise between parties. By each promise being consideration for the other. This type of consideration is intended to be performed in the future. For example, an agreement was made earlier for the performance of payment on delivery. The delivery and payment was not yet made but the agreement and consideration is done at the time. In term of adequacy of consideration, Adamson (2006) stated that consideration need not be of equal to economic value when comparing to what the parties give and get. The value is depend on the evaluation of the people itself.
He or she values the item of what they give or get. Because of that, the economic value is unimportant as long as there is a valid or genuine contract between two parties. For example, the person who sells a cold soft drink to a crowd during a hot sunny day at the football fields during a football match. He can mark-up the price more than the grocery store price. As long as people willing to buy or we can say make contract with him, he can sell at that particular price. The reason is consideration of what parties give or take need not be of equal to economic value. Guthrie Waugh Bhd. v. Malaippan Muthucumaru
Based on the Cased Study, the high court decide that there was no cause of action in the statement of claim as claim was based on a deed of arrangement for which there was no consideration. The court held that deed made by the defendant was neither past consideration, nor in respect of any forbearance to sue him for the supplies made to the estates, nor the consideration of any promise to supply him goods on credit in future. So, the deed was made without consideration but only a moral obligation. This cased study refers to the Contract Act 1950 sections 2(d), consideration should follows these section. As there is no cause of action in the statement of claim as the claim was based on a deed of arrangement, so there was no consideration. These Guthrie Waugh Bhd. v. Malaippan Muthucumaru case study shows the important of consideration during making a valid contract. This is the reason why consideration is constituting a contract because without these element, any parties can take advantage on the contract. The Element of Capacity
Pheng (2005) state that capacity is the ability or competency of parties to enter to contract. If the parties is incompetent to enter the contract, the party cannot make the contract. Capacity falls under the section 11 of Contract Act 1950 which explain that the person who is competent to contract is who at age of majority according to the law to which he is subjected, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. In other words, people that are not competent to enter to contract are:- 1. Minor person
2. Unsound mind person
3. Person that is not qualified from contracting by any law. For minors, the necessaries things such as food and clothes are essential to the existence
and reasonable comfort to them. As in Malaysia, education is included in the necessaries things for the infant. But even though minor cannot enter a contract, but at some cases they are liable to make a contract and the contract is valid. Based on the Contract (amendment) Act 1976, Minor can enter into scholarship agreement. This is valid when the scholarship, award, bursary, loan or sponsorship is granted by Federal or State Government, a statutory authority, or an educational institutions. Besides that, Pheng (2005) state that infant over 10 years old are liable to enter into contract of insurance. By the way, if she or he is below sixteen years old, he or she can only do so with written consent of his parents or guardian. So, the minor category cannot enter into contract except the contract such as:- 1. Contract of necessaries
2. Contract of scholarship
3. Contract of insurance.
Mohori Bibee v Dharmodas Ghose (1903)
Based on this case study, the infant are not competent to enter to contract. This case falls under the Age of Majority Act 1971. The contract made by the infant is void as the parties is under age of 18. The contract made is not under the exception of contract that can be enter by infant such as contract of necessaries, contract of scholarship, and contract of insurance. This is a perfect case study to show that capacity is needed to comply in making a valid contract.
Question 2: the impact of contracts.
As explain in question 1, the element to make a valid contract, both offer and acceptance. Offer and acceptance have the impact on contracts. This element is required for the formation of a legally binding contract. Offer or proposal is necessary for the formation of an agreement. As it signifies the parties willingness to contract on certain terms. This is made with the intention that it shall become binding as soon as possible to the person whom is addressed. The acceptance is only affective when it comes to the parties’ knowledge on the offer. The acceptance can be made either in terms of words or other than words as discuss as above (question 1: acceptance element in a contract). As for the communication of acceptance, Section 4(2) of the Contract Act 1950 states that, the acceptance is complete when: a) As against the proposer, when it is put in the 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. POSTAGE MEDIUM
By using post as a medium of exchange of acceptance, the parties are bound to the rules by referring to the time of acceptance change. Therefore, these situation can be explain in two. First, the offer letter sent by offeror is not functional or effective until is received by the offeree and the acceptance is effective once the letter is posted. Based on the above situation, the contract is valid based on the section 4(2)(a) of Contract Act 1950, once the stamped and properly addressed letter of acceptance is posted into mail box, the contract is valid even the letter is lost during the process of sending the letter by authority Adams v. Lindsell (1818) 106 ER 250
In this case study, the defendant wrote to the claimant offering to sell them some wool and asking for a reply ‘in the course of post’. The letter of offer to sell wool was posted on 2 September. Unfortunately, the letter was delayed in the post. After receiving the letter, the offeree sent the letter of acceptance on the same day. However, due to the delay. The offeror assumes that the offeree was not interested in the wool offer and sold it on to third party. The offeree claim a breach of contract. Based on the above case study, the contract is valid as it came in to existence the moment the letter of acceptance was place in the post box not upon receiving of letter of acceptance. It does not matter the letter is lost or damage or delayed, as long as both parties are agree to use the postal method as their mode of communication. Due to this event. The courts decided that offeror is willing to accept the risk at the moment they use this post as their medium of communication.
Email is one of the fastest medium of communication nowadays. This type of medium really helpful in big companies that involves big trading every day. To them postage medium method are inconvenience as the transaction needed to be fast. For example, the clothing companies such as Padini and Zara, they need to send make business with other organization throughout the world. Postage medium communication is irrelevant to them. The postal acceptance rule can be applied to email contract. The email contract were formed during the acceptor reply the acceptance email to the offeror. Once they push the send button on their computer, the acceptor accept. But in some cases, the moment they push the send button to send the email, it does not considered as acceptance, so under the normal rule of acceptance, the acceptance is considered as done when the offeror receive the acceptance email. Thomas & Anor v. BPE Solicitors (2010)
In this case study on 19 February 2010, the question faced Blair J, a question he admitted was not a straightforward one, and did not appear to be settled by authority. The issue arose in the context of a professional negligence dispute over whether a share purchase transaction had been completed or not on a particular day. An email had been sent between solicitors acting for the respective parties at 6.00 pm on a Friday evening before a bank holiday weekend. The defendant solicitors submitted that the email was not effective from the moment it was received because it was sent after working hours, and it could not have been effective until it came to the recipient’s eye on the Tuesday morning. The claimant, however, submitted that the email was effective from 6.00 pm Friday evening by analogy with the postal rule (ie effective at the moment of dispatch). Blair J decided that the issue must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgment as to where the risks should lie.
In the context in which the email had been sent (that is, a transaction which all had agreed could have been completed that evening), then the email was not outside working hours. Therefore, the email was available to be read within working hours, despite the fact that its intended recipient had gone home. If that email had been an acceptance (which Blair J held it was not in this case for other reasons), then it would have taken effect at 6.00 pm. The solution is Blair J’s finding that 6.00 pm was not outside working hours for this particular transaction needs to be viewed against the backdrop of a transaction which all parties had agreed and expected would be completed that day by the provision of solicitors’ undertakings to transfer the finance funds (as the time for instructing the bank to do so had already passed earlier on the Friday afternoon). Nevertheless, this judgment is the only authority on the issue of when an email communication can be said to be effective in relation to contractual offer and acceptance.
Blair J’s judgment makes it clear there is no clear cut rule. The outcome in each case will depend on the context, including the intentions of the parties and “sound business practice”. Perhaps sounds business practice is making sure that, on a day when a deal is expected to close, those involved do not simply slip away without notifying counterparties that they are now not in communication any more. If the solicitor in this case had turned on his “Out of Office notification” the result might have been different. Note that, in many concluded commercial contracts, notice provisions will specify the hours within which communications can be sent.
Finally, a reminder on the rules concerning service of court documents by email. If a party is seeking to serve a court document by fax, email or other electronic method, it must ensure that it has first obtained the recipient’s written agreement to accept service by this method. In the case of a solicitor acting as a legal representative for a party to the proceedings, such agreement will be inferred if his headed paper shows a fax number or email address. The same does not apply, however, when serving on a solicitor in his capacity as a party to proceedings. The document (other than a claim form) served by personal service, fax, email or being left at a specified place is deemed served: if before 4.30 pm on a business day, the same business day; or in any other case, the next business day.
Comparison between the contracts made by postage medium and e-mail medium There are a few comparison between postage medium and email medium contract which are postage medium is quite slow and time consuming. This is due to the process of sending the post letter to the recipient. While e-mail is time saving and fast. The process of e-mail is a lot faster than postage as the process sending of e-mail is only takes less than a minute depends on the internet coverage. Next, postage medium is unreasonable to be used for a big company. This is because they need to make offer with a lot of people throughout the world. While by using e-mail medium, the company can communicate through a lot of people at the same time and can make contract easily.
Furthermore, the postage medium is hard to organize. The letter of acceptance can be receive in bulk at the same time. Sometimes the company may misplaced the letter during organizing the letter. While through e-mail, the company can easily separate the file or document according to the system in computer or server. Besides that, the using postage medium is hard in term of accessing the information in the letter of acceptance from offeree. While by using e-mail, the offeror can easily access the information on each e-mail through company server. Question 3: Audio System Rental Agreement
Mr. Danial requested to rent a P.A system with Seven Audio System Sdn. Bhd. on this upcoming 20th October. Seven Audio System Sdn. Bhd. are required to prepare a set of P.A system agreement consist of few terms in business contract. The terms the following agreement are carefully organized to be fitted on the Audio system equipment rental contract between Mr Danial and Seven Audio System Sdn Bhd.
AUDIO SYSTEM EQUIPMENT RENTAL CONTRACT
This Audio System Equipment Rental is made effective as 20 October 2014, between Seven Audio System Sdn. Bhd. and Mr. Muhammad Danial Bin Yusuf Omar, and states the agreement of the parties as follows: RENTAL EQUIPMENT SUBJECT TO THIS CONTRACT.
The company (“Seven Audio System Sdn. Bhd.”) shall rent the equipment listed on the attached EXHIBIT A. PAYMENT TERMS. The rental payments shall be due whether or not the Customer has received notice of a payment. The notice of payment will be release 4 day(s) before the effective date above. Customer should sent to us the confirmation of payment within the 2 day(s) after the notice of payment is released. The failure of doing so may lead to termination of agreement. The payment terms of the rental are defined in EXHIBIT B.
SECURITY DEPOSIT. The Customer shall pay a security deposit of 10% of the estimated value of the rental at the time that this Rental is signed. This deposit will be returned to the Customer at the termination of this Rental, subject to the option of the Company to apply it against Rental charges and damages. Any amounts refundable to the Customer shall be paid at the time this Rental is terminated. The security deposit shall not bear interest. RISK OF LOSS OR DAMAGE. The Customer assumes all risks of loss or damage to the equipment from any cause, and agrees to return it to the Company in the condition received from the Company, with the exception of normal wear and tear. The Company or their appointed agent will determine normal wear and tear. All determinations made by the Company are final. RENTAL TERM. This Rental shall begin on the above effective date and shall terminate on return in fully working condition to the Company’s facility.
The Customer may terminate the Rental after the initial period of the Rental has been completed as defined in EXHIBIT C. CARE AND OPERATION OF EQUIPMENT. The equipment may only be used and operated in a careful and proper manner. Its use must comply with all laws, ordinances, and regulations relating to the possession, use, or maintenance of the equipment, including registration and/or licensing requirements, if any. MAINTENANCE AND REPAIR. The Customer shall maintain the equipment in good repair and operating condition, allowing for reasonable wear and tear. COMPANY’S RIGHT OF INSPECTION. The Company shall have the right to inspect the equipment during Customer’s equipment usage hours or during the events. RETURN OF EQUIPMENT. At the end of the Rental period, the Company will take the equipment from the customer. An inspection will be made by the company’s representative to evaluate any damages on the equipment. Any damages related to the rented equipment incurred during or at the end of the rental will be evaluated later by the company and will be billed to the Customer’s account. OPTION TO RENEW.
If the Customer is not in default upon the expiration of this rental, the Customer shall have first option to rent the equipment on such terms as the parties may agree at that time. ACCEPTANCE OF EQUIPMENT. The Customer shall inspect each item of equipment delivered pursuant to this Rental. The Customer shall immediately notify the Company of any discrepancies between such item of equipment and the description of the equipment in the Equipment Schedule. If the Customer fails to provide such notice in writing within 2 hour(s) after the delivery of the equipment, the Customer will be conclusively presumed to have accepted the equipment as specified in the Equipment Schedule. Any subsequent claim that the equipment was not provided in fully functional order will not be considered. FAILURE TO PERFORM
If the equipment fails to perform after the initial acceptance it will be the responsibility of the customer to repair and correct the problem. The Company will not be held responsible for any failure of equipment for any reason and the equipment will remain on rental unless a dispensation is granted in writing by the Company to waive the rental fees for the period of non-performance. The company will not be held responsible for any errors or omissions due to the Customer’s lack of operational or technical capability. WARRANTY. The Company makes no warranties; express or implied, as to the equipment rented. The Customer assumes the responsibility for the condition of the equipment. INDEMNITY OF COMPANY FOR LOSS OR DAMAGES.
If the equipment is damaged or lost, the Company shall have the option of requiring the Customer to repair the equipment to a state of good working order, or replace the equipment with like equipment in good repair, which equipment shall become the property of the Company and subject to this contract. ASSIGNMENT. The Customer shall not assign or sublet any interest in this Rental or the equipment or permit the equipment to be used by anyone. GOVERNING LAW. This contract shall be construed in accordance with the laws of Malaysia. CERTIFICATION. Customer certifies that the application, statements, trade references, and financial reports submitted to Company are true and correct and any material misrepresentation will constitute default under this contract.
Equipment Description and Replacement Value:
1. Basic Altec Lansing Audio System- RM 300.00
2. Bass Boost by BOSS audio performance– RM 140.00
3. Speaker stand – RM 100.00
4. P.A full system with audio alternative – RM 1,200.00
Total rental payment – RM 1,740.00
The total amount of payment should be full paid to Seven Audio System Sdn. Bhd. 2 day(s) before the equipment sent to customer. EXHIBIT C
Initial period of the hire
The estimated initial period of the hire is for 2 days starting on or before 20 October 2014 to be agreed between the parties. The actual period will be from the time of leaving the Company’ facility until its return to that facility in full working order. The rental period is only for two days based agreed by both parties.
Terms of contract is generally understand or classified into condition and warranties. Basically, the term of contract is a condition or warranty made depends on the intention of the parties during the agreement making. The intention may be vary depends on the business agreement involves. By taking above agreement made by Seven Audio System Sdn. Bhd. as the example, the intention of both parties can be evaluated based on the business they involve which is the rental of P.A system by Mr Danial from company Seven Audio System Sdn. Bhd. Based on above agreement, Mr Danial are obligate to certain condition and warranty terms. This condition and warranty terms which is agreed by both parties protect are act as the guidance so that both parties should not cross over. The act of crossing over the line or action of denying any of the agreed terms can lead to breaching of contracts.
The parties that breach the contract will receive the consequences based on the terms that are broken. So, it is crucial for both parties to understand the agreement made by both of them. As the operational manager of Seven Audio System Sdn. Bhd., I am responsible to explain to Mr Muhammad Danial Bin Yusuf Omar about the terms in the agreement made for both parties, my company and his as an individual. This explanation will make him understand the terms that he need to follow and also the impact if those terms are broken by his party. The condition and warranty terms that are obligate by Mr. Muhammad Danial as the lessee are as follows:- 1. Mr Muhammad Danial party (lessee/Customer).
a. Based on the payment terms. Customer should pay the payment either the notice of payment released is received or not. The payment as in the exhibit A are obligate by the customer to be settle 2 days after the day the notice of payment is released. Furthermore, the customer should also do the confirmation of payment to the company within 2 days after the notice of payment is released. This is the terms the customer needs to be obey. The failure of doing so will lead to termination of agreement. This consequences is what we called the impacts if the terms are broken. b. In the security deposit section, the customer are required to pay 10% from the total value of rental right at the time the agreement is signed. This is the terms that is need to be follow by the customer. The security deposit act as the security to the company if the customer breach any of the terms such as damages of the equipment.
The consequences if these terms is broken is the customer might not get the refund on the deposit money. c. In the company’s right to inspection. Customer cannot obstruct the company’s if they want to do the inspection during the customer’s event. Seven Audio system Sdn Bhd have the right to inspect their equipment. d. In the return of equipment section, even though the return of equipment will be fully handle by Seven Audio system Sdn Bhd but if during the inspection of equipment, the company’s representative found any damages, it will be charge on the customer account. This is the consequences if the terms is broken. So, it is the customer responsibilities to take a good care on the equipment once the customer receive it from the company.
In conclusion, it is essential for each of us to understand the elements of a valid contract especially in term business context. These element will then be our guidance in making a contract that valid to use by the parties involve when making an agreement.
Adamson, J. E. (2006). Law for Business and Personal Use. Ohio: Thomson South-Western. Andy Gibson, Douglas Fraser. (2005). Business Law. Australia: Pearson Education Australia. Ivan Jeron Detta, Lee Mei Pheng. (2011). Business Law. Kuala Lumpur: Oxford University Press. Pheng, L. M. (2005). General Principles of Malaysian Law. Shah Alam : Oxford Fajar Sdn. Bhd.