Professional Documents
Culture Documents
BBUN2103
Business Law
BBUN2103
BUSINESS LAW
Mazita Mohamed
Nurretina Ahmad Shariff
Rohizan Halim
Haslinda Mohd Anuar
Prof Dr Zuhairah Ariff Abd Ghadas
Liziana Kamarulzaman @ Mohd Zahid
Project Directors:
Module Writers:
Mazita Mohamed
Nurretina Ahmad Shariff
Rohizan Halim
Haslinda Mohd Anuar
Prof Dr Zuhairah Ariff Abd Ghadas
Universiti Sultan Zainal Abidin
Liziana Kamarulzaman @ Mohd Zahid
University Technology Mara
Moderators:
Cyrill H Ponnu
Tuan Fatma Tuan Sulaiman
Open University Malaysia
Developed by:
Table of Contents
Course Guide
Topic 1
xixvi
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TABLE OF CONTENTS
Topic 2
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TABLE OF CONTENTS
2.6
Topic 4
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TABLE OF CONTENTS
Topic 5
Law of Agency
5.1 Creation of Agency
5.2 Types of Agency
5.3 Authorities of an Agent
5.4 Duties and Obligations of an Agent
5.5 The Rights and Obligations of a Principal
5.6 Effects of a Contract Made by an Agent
5.7 Termination of an Agency
Summary
Key Terms
147
148
153
155
156
161
162
163
165
166
Topic 6
Sale of Goods
6.1 Definition of Goods
6.1.1
Types of Goods
6.2 Contract of Sales of Goods
6.3 Terms of Contract of Sale
6.3.1
Formation of Contract of Sale
6.3.2
Conditions and Warranties
6.3.3
Stipulation as to Time
6.3.4
Implied Terms
6.4 Transfer of Title
6.4.1
Estoppel
6.4.2
Sale by Mercantile Agent
6.4.3
Sale by Joint Owner
6.4.5
Sale by Seller in Possession of Goods
6.4.6
Sale by Buyer in Possession of the Goods
6.5 Performance of Contract
6.5.1
Delivery
6.5.2
Time and Place for Delivery
6.5.3
Goods in the Possession of Third Party
6.5.4
Instalment Deliveries
6.5.5
Wrong Delivery
6.5.6
Risks
6.5.7
Acceptance
6.6 Rights of Unpaid Seller
6.6.1
Lien
6.6.2
Stoppage in Transit
6.6.3
Resale
6.7 Remedies for Breach
6.7.1
Sellers Right to Make a Claim
6.7.2
Buyers Right to Sue
Summary
Key Terms
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Topic 7
Hire Purchase
7.1 Definition of Hire Purchase Agreement
7.2 Formation of Hire Purchase Agreement
7.3 Implied Terms in Hire Purchase Agreement
7.4 Liabilities of an Owner and Seller for Misrepresentation
7.5 Rights and Liabilities of Hirer
7.6 Repossession by Owner
7.7 Hirers Right in Respect of Repossessed Goods
Summary
Key Terms
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204
207
208
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Topic 8
Insurance
8.1 Insurance Contract
8.2 Subrogation
8.3 Insurable Interests
8.4 Material Facts
8.4.1
Pre-Contractual Duty
8.4.2
Remedies for Misrepresentation
8.5 Basic Clause, Conditions, Warranties and Exception Clause
Summary
Key Terms
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Topic 9
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TABLE OF CONTENTS
Topic 10
Answers
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COURSE GUIDE
INTRODUCTION
BBUN2103 Business Law is one of the courses offered by OUM Business School
at Open University Malaysia (OUM). This course is worth 3 credit hours and
should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This is a core course for students pursuing the degree in Bachelor of
Management, Bachelor of Business Administration and Bachelor of Accounting
programmes.
As an open and distance learner, you should be acquainted with learning
independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please confirm that you have the
right course material, and understand the course requirements as well as how the
course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.
xii
COURSE GUIDE
Study
Hours
60
10
Online participation
12
Revision
15
20
120
COURSE OUTCOMES
By the end of this course, you should be able to:
1.
2.
3.
4.
Identify the types of negotiable instruments and the liabilities of the parties
thereto; and
5.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic can be listed as
follows:
Topic 1 will examine the basic framework of the Malaysian legal system which
includes the classification of law, sources of law and the doctrine of separation of
power in Malaysia. In addition to that, you will learn about the administration of
justice as well as the position of Islamic law in Malaysia.
Topic 2 will introduce you to all the relevant issues involving the essential
elements of a contract and problems arising from a contract which lacks any of
these elements.
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COURSE GUIDE
xiii
Topic 3 will elucidate on the principles regarding void and voidable contracts.
You shall be shown the main differences between these two types of contracts
which have been affected by certain elements and which could, in turn, affect the
validity of a contract. Besides that, you will learn about agreements which are
declared unlawful by the Contracts Act 1950.
Topic 4 will discuss the four ways of how a contract can be discharged and also
various types of remedies available to the innocent party when there is a breach
of contract.
Topic 5 involves a discussion on agency. You will look at how an agency is
created and the duties and obligations of an agent. Furthermore, you will study
the process involved in the termination of an agency.
Topic 6 gives attention to the sale of goods. This topic will focus on the terms
applicable, the concept of transfer of ownership, performance of contract for sale
of goods, rights of the unpaid seller and remedies available in case of a breach.
Topic 7 is on hire purchase. This topic discusses procedures for the formation of
hire purchase agreements, implied terms in such agreements, liabilities of an
owner and seller for misrepresentation, rights and liabilities of the hirer as well
as the procedures involved for repossession by the owner.
Topic 8 moves on to explain concepts involved in insurance law. Among the
principles of insurance contract which will be discussed are principles of
subrogation, the concept of insurable interests, material facts in the contract, basis
of contract clauses as well as conditions and exception clauses.
Topic 9 covers banking and negotiable instruments. In this topic, the discussions
shall focus on cheques. You shall be familiarised with rules governing forms of
cheques, crossing and alteration of cheques, provisions protecting the paying and
collecting banker and procedures for termination of banks authority to make
payments.
Topic 10 provides a brief explanation about contracts from the Syariah point of
view, the pillars of a valid contract, the doctrine of khiyar (option) and various
types of Syariah contracts which are commonly used in commercial transactions.
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COURSE GUIDE
COURSE GUIDE
xv
PRIOR KNOWLEDGE
No prior knowledge required.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Abdullah Alwi Hassan. (1992). Sales and contracts in early Islamic commercial
law. Islamabad, Pakistan: Islamic Research Institute, International Islamic
University.
Ahmad Hidayat Buang. (2000). Studies in Islamic law of contracts: The
prohibition of gharar. Kuala Lumpur, Malaysia: International Law Book
Services.
Ahmad Mohamed Ibrahim. (2000). The administration of Islamic law in
Malaysia. Kuala Lumpur: Institute of Islamic Understanding Malaysia.
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COURSE GUIDE
Topic Introduction to
the Malaysian
Legal System
LEARNING OUTCOMES
By the end of the topic, you should be able to:
1.
2.
3.
4.
5.
6.
INTRODUCTION
TOPIC 1
of the Malay States was slow compared to the Straits Settlement (Sharifah
Suhanah Syed Ahmad, 2007). The Malays were found to be involved mostly in
fishing and as paddy planters and were not interested to work for others for
wages.
The Chinese employers preferred to employ their own people whilst the
European employers found that the Malays were not sufficient in number or
cheap enough for their needs (Parmer, 1960). Consequently, the British
government embarked on a policy which actively encouraged foreign
immigration to Malaya. The policy assisted immigration of foreign labour,
particularly from India whilst the Chinese labour largely entered Malaya
unassisted.
According to Sharifah Suhana (2007), such a policy dramatically altered the
population structure of Malaya and was responsible in turning Malaya into a
pluralistic country. It is claimed that problems associated with multiracialism
became part and parcel of the consolidation of political power and protection of
the economic interests of the British businessmen. The implementation of
uniform rules and regulations composed of various ethnicities raised many
important issues and latitude to be accorded to the native laws and customs.
1.1
CLASSIFICATION OF LAW
According to Pheng (2005), common law is classified into three broad divisions,
namely, public law, international law and private law.
TOPIC 1
Public Law
Public law is the law which governs the relationship between individuals
and the State. It may be further subdivided into two categories,
constitutional law and criminal law.
Constitutional law lays down the rights of individuals in the State. It deals
with questions such as supremacy of parliament and the rights of citizens.
It also covers areas dealing with state and federal powers.
Criminal law codifies various offences committed by individuals against
the State, for example, murder, robbery, cheating and rape. A crime is a
wrong against the State. Thus, the punishment is inflicted by the State and
the proceedings are brought by the public prosecutor. It aims at punishing
criminals and suppressing crime.
(b)
International Law
This is a body of law which is composed, for its greater part, of principles
and rules of conduct in which the State itself feels bound to observe, and
consequently commonly does observe, in their relation with each other.
International law can be subdivided into public international law and
private international law. The former is the law that prevails between States
whereas private international law is part of municipal law, as a result of
which in every country there will be different versions. It consists of the
rules that guide a judge when the laws of more than one country affect a
case.
(c)
Private Law
Private law governs the relationship between individuals. It is concerned
with their rights and duties. Basically, private law is intended to give
compensation to the person injured, to enable property to be recovered
from wrongdoers and to enforce obligations. Examples of private law are
laws of contract, laws of tort and trust, family law and property law.
ACTIVITY 1.1
Distiguish between public law and private law.
TOPIC 1
1.2
According to Sharifah Suhana (2007), the term sources of law has many
meanings, but the common descriptions refer to:
(a)
Historical sources, indicating the factors that have been influential in the
development of the law but by them not recognised as law. Examples of
these factors that influence the development of the law are religious
practices and beliefs, local customs and opinions of jurists.
(b)
It may also refer to places where the law can be found, for example, in
statutes, law reports, textbooks and decisions of courts.
(c)
In most cases, however, it refers to legal sources, that is, the legal rules that
makes up the law.
TOPIC 1
Written Law
Malaysian written law comprises both federal and state laws which consists
of the following:
(i)
The Federal Constitution (FC), which is the supreme law of the land,
together with the respective constitutions of the thirteen states
comprising the Federation;
(ii)
Unwritten Law
The unwritten law of Malaysia comprises the following:
(i)
TOPIC 1
(ii)
Judicial decisions of the superior courts, that is, the High Court, the
Court of Appeal and the Federal Court;
Islamic Law
Under Article 3(1) of the Federal Constitution, Islam is the religion of the
country but other religions may be practised in peace and harmony in any
part of the Federation. The freedom of religion is clearly highlighted in
Article 11 of the Federal Constitution which provides that every person has
the right to profess and practise his religion. Article 160(2) expressly defines
Malays as a person who professes the religion of Islam but not all Muslims
are necessarily Malays.
Islamic law is recognised as one of the sources of Malaysian law but it is
applicable only to Muslims, regardless of race. It is also administered by a
separate system of Syariah courts (Islamic courts) at state levels and in the
Federal Territories of Kuala Lumpur and Labuan. For the Muslims in
Malaysia, many areas of the law have been altered to cater to the needs of
the Muslim community. The Federal Constitution Ninth Schedule, List II
only enumerates personal and family law of persons professing Islam as a
state matter, thus placing them within the jurisdiction of the Syariah courts.
The Malaysian government has attempted to give Islam a modern face,
establishing such institutions as the Islamic bank and the Institute of
Islamic Understanding. It has also encouraged other Islamic business
practices such as Islamic insurance and finance.
(d)
Historical Documents
Other than the above sources, the historical landmarks such as the
MacMicheal Treaties(1945), Malay Union proposals(1946), Federation of
Malaya Agreement (1948), Reid Commission Report (1957), Federation of
Copyright Open University Malaysia (OUM)
TOPIC 1
SELF-CHECK 1.1
1.
What do you think are the most important sources of written law
in Malaysia?
2.
1.3
between
legislation
and
subsidiary
THE CONSTITUTION
The Constitution (FC) is the supreme and fundamental law of Malaysia. Any law
inconsistent with the FC may be challenged in court. Article 4(1) of FC provides
that:
This Constitution is the supreme law of the Federation and any law passed
after Merdeka Day which is inconsistent with this Constitution shall to the
extent of the inconsistency be void.
Although Malaysia has the Parliament which passes all laws of the country, the
power of the Parliament is limited by the Constitution. The Parliament is not
supreme. There are procedural and substantive limits on Parliaments powers.
State Assemblies are also limited in their legislative competence. Courts have the
power to nullify federal and state legislation if there is inconsistency with the
supreme Constitution. According to Suffian L. P. in Ah Thian v. Government of
Malaysia(1976) 2 MLJ 112:
The doctrine of supremacy of Parliament does not apply in Malaysia.
Here we have a written constitution. The power of Parliament and of
State Legislatures in Malaysia is limited by the Constitutions, and they
cannot make any law they please.
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TOPIC 1
1.4
CONSITUTIONAL SUPREMACY
1.4.1
Electoral Democracy
The Constitution provides for periodic elections, universal adult suffrage and an
independent Election Commission. A unique feature of the electoral landscape is
that rural constituencies may have less than half of the population of urban
constituencies.
1.4.2
Elected legislative bodies exist at both the federal and state levels. At the federal
level, the Parliament is bicameral with predominance of power in the Dewan
Rakyat over the Dewan Negara. However at the state level, the State Assemblies
are unicameral.
1.4.3
Independent Judiciary
1.4.4
TOPIC 1
1.4.5
Indigenous Features
For hundreds of years, Malaya has been the homeland of the Malays. It is
understandable, therefore, that when the Merdeka Constitution was drafted it
reflected a number of features indigenous to the Malay archipelago, among them
the Malay Sultanate, Islam as the religion of the nation, Malay privileges, Malay
reservation land, Bahasa Melayu as the official language of the Federation and
special protection for the customary laws of the Malays.
ACTIVITY 1.2
Examine the concept of constitutional supremacy in Malaysia.
1.5
FEDERAL SYSTEM
1.5.1
Fundamental Rights
The Constitution protects a large number of political, civil, cultural and economic
rights, for example, Articles 5-13. However, these rights are not absolute and are
subject to extensive regulation by Parliament.
1.5.2
Emergency Powers
The communist insurgency resulted in the Malayan Emergency from 1948 until
1960. Although the Malayan Emergency officially ended in 1960, the communist
guerrillas were still active in the late 1970s and even beyond in places such as the
Malayan-Thai border and some states like Pahang. The communist insurgency
cast a dark shadow on constitutional development and as such Articles 149 and
150 are specifically designed to empower the Parliament and the executive with
overriding powers to combat subversion and emergency.
10
TOPIC 1
1.5.3
Constitutional Monarchy
The YDPA and the State Rulers are required by Federal and State Constitutions
to act on the advice of the elected government in the whole range of their
constitutional functions except in a small area where personal direction has been
conferred. Even in this area, constitutional conventions limit royal discretion. In
the overall scheme of the Constitution, the monarchs are required to reign but
not to rule.
1.5.4
Conference of Rulers
The primary function of this unique institution is to elect and remove the YDPA,
elect the Timbalan Yang di-Pertuan Agong (Deputy of the Ruler of a State),
consent or refuse to consent to some constitutional amendments and to offer
advice on some appointments.
1.5.5
1.6
STATE CONSTITUTIONS
In the Federation of Malaysia, each state possesses its own basic charter. But
because of Article 71(4) of the FC, it is mandatory for each State Constitution to
contain certain essential provisions. These essential provisions provide for
certain common aspects among all the states such as Rulers to act on advice, the
existence of an Executive Council and a single-chamber elected State legislature.
State Legislation
In the Federal System of Malaysia, State Legislatures have the power to frame
enactments on 13 topics in the State list and 12 topics in the concurrent list. In
addition, State Legislatures have the power to amend the State Constitution. All
State enactments are subject to the Federal Constitution and the States own
constitution. There are several instances of State Legislation being invalidated by
the courts on constitutional grounds.
TOPIC 1
1.7
11
FEDERATION
External affairs
National defence
State List
Concurrent List
The constitution,
organisation and
procedure of Syariah
courts
Scholarships
Public health
Drainage and
irrigation
Citizenship
Finance, trade,
commerce and
industry, shipping
Communication and
transport
Education, medicine
and health
Local government,
libraries, museums,
ancient and historical
monuments and records
and archaeological sites
and remains.
12
TOPIC 1
Parliament may make laws for the whole or any part of the Federation and
laws having effect outside as well as within the Federation; and
(b)
The Legislature of a State may make laws for the whole or any part of the
State.
States may not make laws on federal matters unless specifically so authorised by
Parliament; the latter may legislate on subjects enumerated in the State List.
Article 76(1) provides three instances for the legitimate exercise of federal
authority in State matters namely:
(a)
(b)
Laws may be made for the purpose of promoting uniformity of the laws of
two or more States.
(c)
Federal laws made under (b) and (c) cannot come into operation until adopted by
the State Legislative Assembly. They will then be considered State laws which
may be later amended or repealed by the States.
1.8
TOPIC 1
13
The four other heads of the States of Penang, Malacca, Sabah and Sarawak are
not eligible for election as they are not hereditary rulers but appointed from
among prominent citizens. It is also elective in the sense that one of the nine
Rulers is elected from basics. A deputy king is known as Timbalan Yang diPertuan Agong and is also elected in the same manner. The YDPA may be
removed from office by his fellow Rulers assembled in a Conference of Rulers.
In the exercise of his functions under the Constitution or Federal Law, the YDPA
has to act in accordance with the advice of the Cabinet or of a minister acting
under the general authority of the Cabinet. Most of the functions and duties of
the YDPA are ceremonial in character. He is, for example, the designated
Supreme Commander of the armed forces of the Federation.
However, the YDPA has power to grant pardons, reprieves and respites in
respect of all offences which have been tried by court-martial and all offences
committed in the Federal Territories of Kuala Lumpur, Labuan and Putrajaya. In
this regard the YDPA is assisted by a Pardon Board, which consists of the
Attorney General, the Chief Territories of Kuala Lumpur, Labuan and Putrajaya,
and not more than three other members appointed by the Rules (in the case of a
State) or the YDPA.
The YDPA is empowered to declare a state of emergency if he is satisfied that
the security or the economic life, or public order in the Federation or any part
thereof is threatened. This includes the power to proclaim an emergency in cases
where the YDPA is satisfied that there is imminent danger of the occurrence of
the above stated events, as provided for under Article 150 of the FC.
The rulers and the YDPAs immunity from prosecution has been removed, and it
is now provided under a new Article 33A where the YDPA has been charged
with an offence under any law in the Special Court established under Part XV of
the Federal Constitution, he shall cease to exercise the function of the YDPA.
1.9
CONFERENCE OF RULERS
14
TOPIC 1
national policy, and these have been identified under Article 38(2) of the
Constitution, as:
(a)
(b)
(c)
(d)
Appointing members of the Special Court under Clause (1) of Article 182;
and
(e)
The Malay Rulers may deliberate on questions of national policy (for example
changes in immigration policy) and any other matters that they think fit. Among
the matters which require either the consent of the Conference of Rulers or its
prior consultation include the passing of any law affecting the privileges,
position, honours or dignities of the Rulers and any changes in policy affecting
administrative action under Article 153, that is, reservation of quotas in respect of
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TOPIC 1
15
services and permits for Malaysia and natives of any of the States of Sabah and
Sarawak.
The Conference of Rulers also deliberates on matters of national policy upon
which it must be attended by the YDPA and the Prime Minister as
representatives of the Federal Government, the Rulers and Yang di-Pertua each
of whom is accompanied by his Menteri Besar or Chief Minister. At the meeting,
the Yang di-Pertuan Agong acts on the advice of the Prime Minister on behalf of
the Cabinet and the other Rulers and Yang di-Pertua Negeri in accordance with
the advice of their respective Executive Councils (State Cabinets).
1.10
SEPARATION OF POWERS
The Executive
The Cabinet of Ministers which is appointed by the YDPA does advise him
as the supreme policy-making body in the country, exercising the executive
authority of the Federation. The YDPA first appoints the Prime Minister, a
member of the House of Representatives, who in his judgment is likely to
command the confidence of the majority of the members of that house to
preside over the Cabinet. On the advice of the Prime Minister, the YDPA
then appoints other ministers from among the members of either house of
Parliament. The Cabinet is collectively responsible to Parliament.
Ministers other than the Prime Minister hold office at the pleasure of the
YDPA. This does not mean that the YDPA may dismiss them at will. He
may do so only on the Prime Ministers advice. Deputy Ministers are
appointed by the YDPA on the advice of the Prime Minister to assist
Ministers.
(b)
The Legislature
The legislative authority of the Federation is vested in a Parliament by
Article 44 of the Constitution, which consists of two houses, that is, the
Dewan Negara, or the Senate, the upper house and the Dewan Rakyat, or
House of Representatives, the lower house.
Copyright Open University Malaysia (OUM)
16
TOPIC 1
well as
shall be
Federal
Federal
TOPIC 1
17
The Judiciary
The judicial power is exercised through a system of courts. Of the three
separate branches of Government, the courts are supreme. They are
supreme in the sense that they are independent of control by anybody. The
Courts can pronounce the legality or otherwise of executive acts of
Government, Federal and State. They can pronounce the validity or
otherwise of any law passed by Parliament and State Legislatures, and
finally they can interpret the meaning of any provision of the Constitution,
Federal and State.
1.11
INDEPENDENCE OF JUDICIARY
18
TOPIC 1
1.11.1
Appointment of Judges
TOPIC 1
1.11.2
19
Hierarchy of Judiciary
(b)
(c)
20
TOPIC 1
The Federal Court consists of a president of the court (to be styled the Chief
Justice of the Federal Court), the President of the Court of Appeal, the Chief
Judge of the High Court in Malaya, the Chief Judge of the High Court in Sabah
and Sarawak and seven other Federal Court Judges. The proceedings before the
Federal Court will be heard and disposed of by a panel of three judges, or such
greater uneven number of judges as nominated by the Chief Justice.
The Court of Appeal (Mahkamah Rayuan) was established in 1994 and has its
principal registry in Kuala Lumpur. The Court of Appeal consists of a chairman
(to be styled the President of the Court of Appeal) and ten other judges. The
jurisdiction of the Court of Appeal is limited only to appellate jurisdiction, both
in criminal and civil appeals. Sections 50(1) and 67(1) of the Courts of Judicature
Act 1964 (Act 91) provides for the jurisdiction to criminal and civil appeals.
Below the Court of Appeal, there are two High Courts of equal and coordinate
jurisdiction and status, namely the High Court in Malaya, which has its principal
registry in Kuala Lumpur, and the High Court in Sabah and Sarawak, which has
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TOPIC 1
21
its principal registry at such places in the States of Sabah and Sarawak as the
YDPA may determine. By virtue of Article 122AA of the Constitution, the Chief
Judge of Malaya (formerly known as Chief Justice of Malaya) and the Chief
Judge of Sabah and Sarawak (formerly known as the Chief Justice of Borneo) are
respective heads of the High Court in Malaya and the High Court in Sabah and
Sarawak.
By virtue of their office, the Chief Judges are members of the Federal Court and
the heads of the Subordinate courts in their respective territories.
1.11.3
The Chief Justice of the Federal Court is the head of the entire judiciary in
Malaysia and is appointed by the YDPA, after consulting the Conference of
Rulers, on the advice of the Prime Minister. As head of the judiciary, the Chief
Justice performs functions which are not exercised by the other judges.
One such function is that, he must be present to witness the oath-taking
ceremony by the YDPA and the Timbalan Yang di-Pertuan Agong, as provided
by Article 37 of the Constitution. He deals directly with the Prime Minister on
matters related to the judiciary and matters pertaining to the administration of
justice in the country. The Chief Justice also exercises other constitutional
functions.
As early as 1906, when the Appeals Order in Council was passed, all appeals
from the Court of Appeal (then the highest appellate court) of the Federated
Malay States were referred to the Judicial Committee of the Privy Council. The
first reported Privy Council appeal from the Straits Settlements is the case of
Yeap Cheah Neo v. Ong Cheng Neo (1875) SLR PC 381. Since then, the court
structure in Malaysia varied from time to time. Figure 1.5, 1.6 and 1.7 indicate the
structure of the Malaysian Courts at different stages.
22
TOPIC 1
Figure 1.5: Structure of the Malaysian courts at different stages (prior to 1985)
On Independence Day, 31 August 1957, the right to appeal from the Supreme
Court of Malaya to the Privy Council was maintained and embodied in Article
131 of the Federal Constitution. With the formation of Malaysia, the practice was
continued. Thus appeals originating from Malaysia, an independent country
with its own sovereignity, were to be heard by Judges in England. This was
subject to the provision that these appeals were addressed not directly to the
Privy Council but to His Majesty the YDPA who, in turn, would refer the matter
for advice to the Privy Council. Therefore, technically the judgment delivered by
the Privy Council was by way of advice to His Majesty the YDPA.
TOPIC 1
23
Figure 1.6: Structure of the Malaysian courts at different stages (between 1985-1995)
Figure 1.7: Structure of the Malaysian courts at different stages (current structure)
Copyright Open University Malaysia (OUM)
24
TOPIC 1
The gradual erosion of the right of appeal to the Privacy Council began in 1975,
when a law was introduced to provide that any decision of the Federal Court in
criminal cases tried under the Essential (Security Cases) Regulations 1975 was
made non-appealable to the Privy Council. Subsequently in January 1978,
appeals to the Privy Council in criminal and constitutional matters were
abolished. Finally with effect from 1 January 1985, all appeals to the Privy
Council were totally abolished.
The Malaysian Judiciary, except for the Syariah Courts, is entirely a federal
organisation. At the apex of the judiciary is the Federal Court, (previously called
the Supreme Court) which is now the highest court and the final appellate body
in Malaysia. Next in status and jurisdiction is the Court of Appeal, followed by
the High Courts. Below the High Courts are the subordinate courts, which
comprise the Sessions Court and Magistrates Court, in descending order.
With the re-institution of the three-tiered structure of appeal, the current Court of
Appeal occupies the position previously held by the Federal Court, while the
Federal Court now occupies the position of the highest court of appeal in
Malaysia previously held by the Privy Council.
1.11.4
Special Court
In addition to the earlier mentioned superior courts, such as the Federal Court,
the Court of Appeal and the High Courts, in 1993 a new court known as the
Special Court was established. Its function was solely to hear and try cases
brought by or against the YDPA or a Ruler of a State. This is provided for under
Article 182 of the Federal Constitution, as follows:
(1) There shall be a court which shall be known as the Special Court and
shall consist of the Chief Justice of the Federal Court, who shall be the
Chairman, the Chief Judges of the High Courts and two other persons who
hold or have held office as judge of the Federal Court or a High Court,
appointed by the Conference of Rulers.
(2) Any proceedings by or against the Yang di-Pertuan Agong or the Ruler
of a State in his personal capacity shall be brought in a Special Court
established under Clause (1).
(3) The Special Court shall have exclusive jurisdiction to try all offences
committed in the Federation by the Yang di-Pertuan Agong or the Ruler of
a State and all civil cases by or against the Yang di-Pertuan Agong or the
Ruler of a State notwithstanding where the cause of action arose.
TOPIC 1
25
The Special Court does not form part of the judicial system as this court is just a
constitutional Court.
1.12
JURISDICTION OF COURTS
The jurisdiction and powers of court under the Malaysian hierarchy of courts are
contained principally in the Courts of Judicature Act 1964 (Act 91) for the
superior courts, that is, the Federal Court, the Court of Appeal and the High
Courts, and in the Subordinate Courts Act 1948 (Act 92) for the subordinate
courts that is the Sessions, Magistrates and Penghulus Courts.
1.12.1
The Federal Court is vested with original, appellate and advisory jurisdiction.
Article 121(2) of the Federal Constitution provides that the Federal Court shall
have:
(a)
(b)
(c)
1.12.2
(b)
26
TOPIC 1
In the event of any dispute on any other questions between the States or between
the Federation and any States, which is brought to the Federal Court for
declaration, in exercise of its jurisdiction under Article 128(1)(b) the Federal
Court should pronounce only a declatory judgment. Such declatory judgment is
well illustrated in Dewan Undangan Negeri Kelantan & Anor. v. Nordin bin
1.12.3
1.12.4
Under Article 128(2) of the Federal Constitution, the Federal Court also has
jurisdiction to determine constitutional questions referred to it by the High
Court. The Court of Judicature (Amendment) Act 1994 (Act A886) deals with
such references on constitutional issues by High Court. As regard to reference of
constitutional issues by the High Court to the Federal Court, section 84(1) of the
Courts of Judicature Act 1964 provides as follows:
Where in any proceedings in the High Court if a question arises to the effect of
any provision of the Constitution, the Judge hearing the proceedings may stay
the same on such terms as may be just to await the decision of the question by the
Federal Court.
TOPIC 1
27
1.12.5
The Court of Appeal has appellate jurisdiction in both civil and criminal matters.
In respect of criminal appeal, the Court of Appeal has jurisdiction to hear and
determine any appeal against any decision made by the High Court in the
exercise of its original jurisdiction, and in the exercise of its appellate or
revisionary jurisdiction. An appeal to the Court of Appeal is to be confined only
to questions of law which have arisen in the course of the appeal or revision and
the determination of which by the High Court has affected the event of the
appeal or revision.
In civil matters, the Court of Appeal has jurisdiction to hear and determine
appeals from any judgment or order of any High Court whether made in exercise
of its original or appellate jurisdiction. There are, however, several matters,
which are non-appealable to the Court of Appeal. Section 68(1) of the Courts of
Judicature Act 1964 provides as follows:
Section 68(1): No appeal shall be brought to the Court of Appeal in any of the
following cases:
(a)
Where the amount or value of the subject matter of the claim (exclusive of
interest) is less than RM250,000 except with leave of the Court of Appeal;
(b)
(c)
Where the judgment or order relates to costs only which by law are left to
the discretion of the court, except with leave of the Court of Appeal; and
(d)
Whereby any written law for the time being in force, the judgment or order
of the High Court is expressly declared to be final.
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TOPIC 1
1.12.6
The High Court has both original and appellate jurisdictions for both civil and
criminal matters. In its original criminal jurisdiction, the High Court is
empowered to try all offences committed within its local jurisdiction; all offences
committed on the high seas on board any ship or any aircraft registered in
Malaysia; all offences committed by any citizen or any permanent resident on the
high seas on board any ship or aircraft; all offences committed by any person on
the high seas, where the offence is piracy by the law of nations.
Section 22(1) of the Courts of Judicature Act 1964 provides additional criminal
jurisdiction to the High Court as follows:
(a)
Offences under Chapter VI of the Penal Code and under any of the written
laws specified in the Schedule to the Extra Territorial Offences Act 1976 or
offences under any written law, the commission of which is certified by the
Attorney-General to affect the security of Malaysia committed, as the case
may be;
(b)
(c)
By any citizen or any permanent resident on the high seas on board any
ship or aircraft; or
(d)
By any citizen or any permanent resident in any place without and beyond
the limits of Malaysia.
In general, civil jurisdiction of the High Court includes that of trying all civil
proceedings where the cause of action arose within the local jurisdiction of the
court, or the defendant or one of several defendants resides or has his place of
business within such local jurisdiction, or the facts on which the proceedings are
based exist or are alleged to have occurred, or any land, the ownership of which
is disputed is situated within the local jurisdiction of the court.
The specific civil jurisdiction of the High Court is provided by section 24 of the
Courts of Judicature Act 1964 as follows:
Without prejudice to the generality of section 23, the civil jurisdiction of the High
Court shall include:
(a)
TOPIC 1
29
(b)
(c)
(d)
(e)
(f)
The High Court shall, in the exercise of its jurisdiction, have all the powers which
were vested in it immediately prior to Malaysia Day and such other powers as
may be vested in it by any written law in force within its local jurisdiction. The
High Court hears both criminal and civil law appeals.
However, no appeal shall lie to the High Court from a decision of a subordinate
court in any civil course or matter where the amount in dispute or the value of
the subject matter is RM10,000 or less except on a question of law. An appeal
shall lie from any decisions of a subordinate court in any proceedings relating to
maintenance of wives or children, irrespective of the amount involved.
The High Court is vested with special powers of revision of both criminal and
civil proceedings. The High Court may call for examination of the record for any
civil proceedings before any subordinate courts for the purpose of satisfying
itself as to the correctness, legality or propriety of any decision recorded or
passed and as to the regularity of any proceedings of any such subordinate court.
In addition, the High Court is provided with general supervisory and revisionary
jurisdiction over all subordinate court, and may in particular if it appears
desirable in the interests of justice, either of its own motion or at the instance of
any party or person interested, at any stages in any matters or proceedings,
whether civil or criminal, in any subordinate courts, call for the record thereof. It
may remove the same into the High Court or may give to the subordinate court
such direction as to the further conduct of the same as justice may require.
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TOPIC 1
1.12.7
A Session Court shall have jurisdiction to try all criminal offences other than
offences punishable with death; and may pass any sentence allowed by law,
other than the sentence of death.
In civil jurisdiction, the Sessions Court shall have unlimited jurisdiction to try all
actions and suits of a civil matter in respect of motor vehicle accidents, landlord
and tenant and distress, and jurisdiction to try all other actions and suits of a civil
nature where the amount in dispute or the value of the subject matter does not
exceed RM25,000.
Exceptions to civil jurisdiction of Sessions Courts are provided in section 69 of
the Subordinate Courts Act 1948, as follows:
(a)
(b)
(c)
For an injunction;
(d)
(e)
To enforce trusts;
(f)
For accounts;
(g)
(h)
(i)
(j)
Except as specifically provided in any written law for the time being in
force, wherein the validity or dissolution of any marriage is in question.
1.12.8
There are two classes of magistrate: First Class Magistrate and Second Class
Magistrate. No person shall be appointed to be a First Class Magistrate unless he
is a member of the Judicial and Legal Service of the Federation. The YDPA may
appoint any fit and proper person to be a First Class Magistrate in and for the
Federal Territory, and the State Authority may on the recommendation of the
Chief Judge, make the appointment in and for the State.
TOPIC 1
31
A First Class Magistrate in his criminal jurisdiction may try all offences for which
the maximum term of imprisonment provided by law does not exceed 10 years
imprisonment or which are punishable with fine only and offences under
sections 392 and 457 of the Penal Code.
In West Malaysia, a First Class Magistrate shall have jurisdiction to hear and
determine criminal appeals by persons convicted by a Penghulus Court situated
within the local limits of his jurisdiction. A First Class Magistrate may pass any
sentence allowed by law not exceeding:
(a)
(b)
A fine of RM10,000;
(c)
Whipping up to 12 strokes; or
(d)
In its civil jurisdiction, a First Class Magistrate shall have jurisdiction to trial all
actions and suits where the amount in dispute or value of the subject matter does
not exceed RM25,000 and hear civil appeals from Penghulus courts. A Second
Class Magistrate shall only have jurisdiction to try original actions or suits of a
civil nature where the plaintiff seeks to recover a debt or liquidated demand in
money payable by the defendant, with or without interest, not exceeding
RM3,000.
1.12.9
Special Court
The Special Court established under part XV, Article 182 is to consist of the Chief
Justice of the Federal Court, who shall be the Chairman, the Chief Judges of the
High Courts and two other persons who hold or have held office as judge of the
Federal Court or High Court appointed by the Conference of Rulers.
This Special Court has the exclusive jurisdiction to try all offences committed in
the Federation by the YDPA notwithstanding where the cause of action arose.
However, no action, civil or criminal shall be instituted against the YDPA in
respect of anything done or omitted to be done by him in his personal capacity
except with the consent of the Attorney General. The YDPA has certain
discretionary powers. Clause (2) of Article 40 states:
32
TOPIC 1
The YDPA may act in his discretion in the performance of the following
functions, that is to say:
(a)
(b)
(c)
1.12.10
Judicial Decisions
Judicial decisions are decisions made in point of law by judges of the High Court
that have not been reversed or overruled by the superior courts and decisions of
the Court of Appeal and Federal Court. A legal ruling of a superior court binds
all inferior courts. These judicial decisions serve as precedents to decide cases
before the courts and to that extent these judicial decisions serve as laws.
Furthermore, courts have the power to interpret the statutes of federal and state
governments.
In interpreting the Constitution, a judge cannot be too literal. He is justified in
giving effect to what is implicit in the basic law and to crystallise what is
inherent. His task is creative and not passive. This is necessary to enable the
Constitution to be the guardian of peoples rights and the source of their
freedom.
SELF-CHECK 1.2
1.
2.
1.13
TOPIC 1
33
The sources of Syariah law as applied in Malaysia come from two main
categories:
(a)
(b)
Primary Sources
(i)
(ii)
Secondary Sources
(i)
(ii)
1.13.1
As what has been discussed earlier, Islamic law or Syariah law is recognised as
one of the sources of law in Malaysia but it is applicable only to Muslims. In
order to understand the position of Syariah law in Malaysia, we need to examine
the relevant provisions stated in the Federal Constitution.
The most important provision is Article 3 of Federal Constitution. This Article
stipulates that Islam is the religion of the Federation. However, it further
provides that other religions may be practised in peace and harmony in any part
of the Federation.
According to some legal experts, Articles 3(1) does not declare that the
Federation is an Islamic state. The clause has no any legal effect. This can be seen
in the case of Che Omar Che Soh v. Public Prosecutor (1988), in which it was
argued that mandatory death penalty for drug trafficking offences was contrary
to Islamic Law. The Supreme Court rejected the argument. Salleh Abas L.P held
that Article 3 was never intended to extend the application of Syariah to the
sphere of public law.
Copyright Open University Malaysia (OUM)
34
TOPIC 1
In other words, we can say that Syariah law is only confined to private or
personal law and not to public law. Nevertheless, Article 3 does give a special
status to the religion of Islam. This can be seen in the following Articles:
(a)
(b)
(ii)
1.13.2
Starting from late 1970s, there are three independence authorities that are
responsible for the administration of Islamic law in Malaysia. The authorities are:
(a)
(ii)
(iii) To act as a trustee to all mosque, waqf (gift for religious purpose) and
all trusts;
(iv) To act as the executor of a will and administer the estate of a deceased
Muslim; and
(v)
TOPIC 1
(b)
35
(c)
Syariah Court
Responsible for the administration of justice.
1.13.3
Syariah Courts
Syariah Courts are established in all states through the Administration of Islamic
Law Enactments and in Federal Territories, through federal law. It should be
noted here that, under the Federal Constitution, Syariah Courts have jurisdiction
only over persons professing the religion of Islam and the jurisdiction is limited
only within the respective states or territories in the case of Federal Territories.
Since Syariah Courts and Islamic law are state matters, there is no uniformity in
the administration of Syariah courts or of Islamic law throughout Malaysia. This
can be seen from variations in the structure of Syariah Court itself. However, for
the purpose of our discussion, we will look at the three-tier stucture of Syariah
Court because this structure has been used by most of states. The following
figure is the hierarchy of Syariah Court in Federal Territories which is based on
the three-tier structure.
36
TOPIC 1
Each court has different jurisdictions. However, we are not going to discuss the
jurisdictions in detail. What we can summarise is that Syariah courts have limited
civil jurisdiction as it relates to the Muslims personal law and family only. As for
criminal matters, Syariah courts shall not have jurisdiction in respect of offences
except in so far as conferred by federal law. Parliament has enacted the Syariah
Courts (Criminal Jurisdiction) Act 1965 which confers a limited criminal
jurisdiction upon the Syariah courts. By virtue of this act, the punishments that
can be imposed by the Syariah Court for criminal offences are as below:
(a)
(b)
(c)
(d)
Another important provision relating to Syariah court is Article 121 (1A) of the
Federal Constitution. This article provides that the High Courts and courts
surbodinate to it shall have no jurisdiction in any matter which is in the
jurisdiction of Syariah court. Thus, civil courts cannot interfere in matters related
to Islamic law.
EXERCISE 1.1
1.
Advise which court has the jurisdiction to hear the following cases:
(i)
(ii)
(iii) Leman and Joyah were caught for close proximity (khalwat).
2.
TOPIC 1
37
According to common law, law can be classified into three broad divisions.
The divisions are public law, international law and private law.
The most important source of law in Malaysia is the written law which
consists of the Federal Constitution, State Constitution, legislation and
subsidiary legislation.
Federal Constitution is the supreme law of the land. Any law inconsistent
with the Federal Constitution may be challenged in court.
Islamic law is recognised as one of the sources of the Malaysian law but it is
applicable only to Muslims. It is also administered by a separate system of
Syariah courts (Islamic courts) at state levels and in the Federal Territories of
Kuala Lumpur and Labuan. The Federal Constitution Ninth Schedule, List II
only enumerates personal and family law of persons professing Islam as a
state matter, thus placing them within the jurisdiction of the Syariah courts.
Malaysia adopts the principle of separation of powers and has there three
organs of government namely, executive, legislature and judiciary.
38
TOPIC 1
Conference of Rulers
Judiciary
Court
Legislation
Custom
Legislature
Executive
Subsidiary Legislation
Federal Constitution
Syariah Law
Judicial precedent
Lee, M. P. (2005). General principle of Malaysian law (5th ed.). Shah Alam,
Malaysia: Penerbit Fajar Bakti.
Parmer, J. N. (1960). Colonial labour policy and administration: A history of labor
in the rubber plantation industry in Malaya, c 1910 - 1941. New York, NY:
J. J. Augustin Incorporated Publisher.
Rau & Kumar (2005). General principles of the Malaysian legal system. Petaling
Jaya, Malaysia: International Law Book Services.
Sharifah Suhana Syed Ahmad (2007). Malaysian legal system (2nd ed.). Kuala
Lumpur, Malaysia: Malayan Law Journal Sdn. Bhd.
Wan Arfah Hamzah. (2009). A first look at the Malaysian legal system. Shah
Alam, Malaysia: Oxford Fajar Sdn. Bhd.
Wu, M. A. (2003). Hicklings Malaysian public law. Petaling Jaya, Malaysia:
Pearson Malaysia.
Topic Introduction
to Contract
Law
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
INTRODUCTION
In this topic, you will be introduced to the laws which govern the formation of a
contract in Malaysia. You should understand the definition of a contract and each
basic element in the formation of a contract, which is made up of the offer,
acceptance, consideration, capacity, intention and certainty. Learners will not
only find Malaysian Acts and cases applied in the discussions, but also those
from England, India and Singapore. These facts are necessary to support your
answers during the examination. With a clear understanding of all the points
above, you should be able to complete all the exercises given in this topic.
40
TOPIC 2
2.1
In Malaysia, the Contracts Act 1950 (hereafter referred to as CA 1950) governs the
formation of a contract. The Sale of Goods Act 1957 governs contracts for the sale
of goods, whereas hire-purchase contracts are governed by the Hire-Purchase Act
1967. Apart from these Acts, students will also study English cases and statutes
which are accepted as authority based on the provisions of Sections 3 and 5 of the
Civil Laws Act 1956.
However, it must be noted that these English laws are only adopted as persuasive
authority and does not bind the decisions of the Malaysian courts. Furthermore,
the application of English laws shall only be made if there is a lacuna in the local
laws and insofar as it suits the circumstances and situation prevailing in Malaysia
(as far as it does not contradict the local circumstances). For further understanding,
you need to refer to Sections 3 and 5 of the Civil Laws Act 1956.
Besides English Law, Indian cases will also be referred to in certain topics.
In certain cases, the Malaysian Courts referred to the Indian Contracts Act as
the Malaysian CA 1950 was taken from the Indian CA 1950. Thus, there are
many similarities in the provisions of both the Indian and our Contracts Act
of 1950. In interpreting the provisions of the CA 1950, the Malaysian Courts
referred to Indian cases.
2.1.1
Definition of a Contract
You might think that it is hard to form a contract due to many elements that must
be complied with, or that it can only be made formally, and that a person must
sign it in front of a lawyer or a witness.
Actually, a person goes around with a binding contract almost daily without her or
him realising it. For example, when you go to a shop to buy something, you make a
contract with the shopkeeper, or when you board a bus or park your car at the parking
lot, you make a contract with the bus company or the car park operator.
The definition of contract in the CA 1950 as seen below may help you
understand the term better.
Definition
Section 2(h): an agreement enforceable by law is a contract
TOPIC 2
41
You need to ensure that any agreement made is valid for it to be enforceable in
law as a binding contract. If any agreement made is not enforceable, the parties
involved will not obtain any redress from the court for any damages suffered.
This is based on Section 2(g) which states that an agreement not enforceable by
law is said to be void.
Which agreement is a contract?
Definition
You have to refer to Section 10(1) which states that all agreements are
contracts if they were made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not
hereby expressly declared to be void.
SELF-CHECK 2.1
You must have heard of the word contract in your daily life. What is
contract under the law?
2.1.2
Table 2.1 shows the basic elements needed for the formation of a contract. The
elements shown in Table 2.1 are necessary for a valid and enforceable contract
under the law. We will study further each element in detail.
Table 2.1: Basic Elements in the Formation of a Contract
Element
Explanation
Offer
Acceptance
When a person to whom an offer has been made, accepts the offer
made.
Consideration
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TOPIC 2
Capacity
Each contracting party must have the capacity to enter into a contract.
Such person must have reached the age of majority according to the
Age of Majority Act 1971 and be of sound mind at the time when the
contract is made.
Intention
Each party which enters into a contract must have the intention to
create legal relations that they are to be bound by the obligations
under the contract.
Free Consent
Certainty
Valid Object
A contract made must be for matters which are not against the law.
These will be discussed in detail in Topic 3.
2.2
DEFINITION OF AN OFFER
Before you continue reading, think of this question: You are talking with your
office colleagues and you say that you intend to sell your car, and a colleague
states his willingness to buy the said car. Is your offer a contract or just a casual
chat?
The term offer is also referred to as proposal. It is defined under Section 2(a)
CA 1950 as:
Definition
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 person to the
act or abstinence, he is said to make a proposal.
There is no need to memorise the entire words in the definition. You only have to
know the meaning of the section. It defines that an offer can only exist when an
offeror or promiser, by his act or words, states his willingness to be bound by the
contract as soon as the other person to whom he made the proposal accepts it.
Example: Ahmad told Bakar that he is willing to sell his computer to Bakar for
RM2,000. In this situation, Ahmad has made an offer to Bakar.
TOPIC 2
2.2.1
43
(b)
(c)
The public at large One has to differentiate between an offer made to the
public at large and an invitation to treat. An offer made to the public at
large can be accepted by anyone as long as he performs the conditions
stated in the said offer. As soon as someone fulfilled the said conditions, the
offeror can no longer withdraw from the contract.
Example: Ben advertised in the newspaper offering a reward to anyone who
finds and returns his wallet. In this case, the offer was made to the world at
large, and anyone who finds his wallet and returns it to him is considered as
making an acceptance to the said offer. Ben is therefore bound to his promise
to give a reward.
Do try to distinguish the example shown in (c) from the following scenario. Bob
advertised in the newspaper to find a skilled worker to work as a sales manager
in his company. In this context, Bob does not intend to be bound with each
application received for the said job, even if each applicant has fulfilled the
criteria listed by him. Bob is only said to make an invitation to treat as the real
offer comes from the applicants.
Any statement made for the purpose of giving information cannot be deemed as
an offer. This is clarified in the case of Harvey V. Facey [1893].
In this case, A telegraphed B Will you sell us a Bumper Hall Pen? Telegraph lowest
cash price. B replied by telegram Lowest price for a Bumper Hall Pen is 900. A
telegraphed B We agree to buy a Bumper Hall Pen for the price of 900 as you wish.
A claimed that a contract existed because there was an offer and an acceptance.
But the Court decided that in the telegram, B only supplied information and did
not make an offer. However, A, in his second telegraph made the offer.
Therefore, it did not constitute a contract.
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TOPIC 2
ACTIVITY 2.1
You have learnt the difference between an offer and an invitation to
treat. Just look at body slimming products advertised in the television.
Differentiate between the body slimming products sold in shops with
advertisement of body slimming products which guarantees a refund
within 30 days. Is it an offer or only an invitation to treat? Discuss this
point with your course mates.
2.2.2
Invitation to Treat
TOPIC 2
(a)
45
46
TOPIC 2
It should be noted that, in this case, there was an intention by the defendant
to be bound by the contract upon acceptance by their act of depositing 100
with their bankers to be paid to any party making a claim. Indirectly, this
act indicates their intention to be bound by the contract.
As a general rule, an advertisement for appointments or tender invitations
made to the public is deemed to be an invitation to treat because it is still at
the negotiation and selection stage. On the other hand, it is deemed to be an
offer if the advertisement offers a reward to any person who finds and
returns an item, or an advertisement which shows an intention on the part
of the advertiser to be bound by the contract if what is specified in the
advertisement is fulfilled as in the case of Carlill.
(b)
(c)
Auctions
In a public auction, the auctioneer invites the public to make an offer, that is
to offer the highest bid. When those who attend make an offer, it is up to
the auctioneer whether to accept it or not. An acceptance is considered
TOPIC 2
47
made at the fall of the hammer. Section 10 of the Auction Sales Enactment
[Chap. 81 of the Federated Malay State] states that;
A sale by public auction shall be complete when the auctioneer
announces its completion by the fall of the hammer.
2.2.3
Communication of Offer
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TOPIC 2
2.2.4
Revocation of an Offer
If a proposer wishes to revoke his proposal, he has to satisfy Section 5(1) of the
CA 1950, which provides:
Provision
A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards.
TOPIC 2
49
The issue is whether a contract has already been formed between A and B. If a
contract has been formed, A has to carry on with the contract and if he refuses he
could be liable for breach of contract.
In the above example, a proposal was communicated on 12 January 2014. An
acceptance was made on 13 January 2014 and on the said date, according to Section
4(2)(a), a communication of acceptance is complete against A. There is a contract
which binds A (the proposer) on 13 of January 2014. Based on Section 5(1), A can
withdraw his proposal at any time before 13 of January 2014. Here, A failed to act
fast to withdraw his proposal because the revocation of the said offer only took
place on 15 January 2014; that is, the date when B received the revocation letter.
Thus, there is a contract and it binds A. A must continue with the contract. Section
6 of the CA 1950 provides four ways in which a revocation of an offer is made. We
will discuss each of them now.
(a)
As against the person who makes it, when it is put into a course
of transmission to the person to whom it is made, so as to be out
of the power of the person who makes it; and
(b)
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TOPIC 2
Section 4(3) refers to the two different parties involved. Paragraph (a) refers
to the proposer while paragraph (b) refers to the promisee. In order to
completely revoke a proposal, both paragraph (a) and (b) of Section 4(3)
must be satisfied. Refer to Illustration (c) of Section 4 of the CA 1950 for a
clearer picture of this section.
You should be able to distinguish between the communication of
revocation and communication of acceptance. Bryne v. Van Tienhoven
(1880) is an important case for reference on communication of revocation of
a proposal. The defendant made a proposal by letter to sell 1000 boxes of
tinplates to the plaintiff on 1 October. However, on 8 October, the
defendant posted a revocation letter. The plaintiff received the offer letter
on 11 October and telegraphed their acceptance.
The plaintiff only received defendants letter of revocation of the proposal
on 20 October.
The issues which the court must decide were:
(i)
Was the revocation of the proposal effective even though it was not
communicated?
(ii)
The court held that the revocation of the proposal was inoperative as
against the plaintiff until it came to his knowledge. The posting of the letter
of revocation by the defendant was not communication. The acceptance
made by the plaintiff on 11 October could not be affected by the fact that
the defendants letter of revocation was already on its way. There was a
valid contract on 11 October. Revocation of the proposal was only effective
on 20 October, that is, the day when the plaintiff received the revocation
letter. The defendant therefore was bound by the contract.
The effect of Section 4(2)(a) and (b) of the CA 1950 on communication of
acceptance and communication of revocation respectively is clearly shown
in Bryne v. Van Tienhoven.
The case of Henthorn v. Fraser (1892) further shows the position of the
principle regarding revocation of a proposal. Lord Herschell held that
communication of an acceptance takes place once such letter is posted is
not applicable to communication of revocation of a proposal.
Communication of revocation of a proposal is similar to communication of
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By the lapse of the time prescribed in the proposal for its acceptance, or, if
no time is prescribed, by the lapse of a reasonable time, without
communication of the acceptance.
Definition
This provision means that if a proposal has stated a time for an
acceptance and no acceptance has been made within the specified time,
the proposal will lapse or is revoked.
Example: Pak Ali proposed to sell his farm to Pak Abu for RM10,000. Pak
Ali told Pak Abu that the offer is open only for two weeks. If Pak Abu
failed to accept within two weeks, the proposal lapses.
What if there is no fixed time for acceptance of the proposal? When will
such a proposal lapse? In such cases, a proposal lapses after a reasonable
time. What is reasonable time depends on the discretion of the court based
on the facts of the case and the nature of the subject-matter of the said
contract.
This can be seen from the case of Ramsgate Victoria Hotel Co v. Montefiore
(1866). The defendant applied for shares in the plaintiffs company by a
letter dated 8 June. He received no further news until 23 November by a
letter from the plaintiff which informed him that the shares had been
alloted to him. The defendant refused to accept them.
The court held that the defendants proposal had lapsed because of the
plaintiffs failure to accept within a reasonable time. So, the defendant was
not bound to accept the shares.
(c)
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Definition
If a promisee accepts a proposal by introducing new terms or refuses to
accept the terms specified by the proposer, the original proposal
therefore lapses. In this situation, an acceptance accompanied by new
terms is not an acceptance. It is otherwise deemed as a refusal of the
original offer, and is a counter-offer.
The case in point is Hyde v. Wrench (1840). A proposed to sell to B his farm
for 1,000. B agreed to buy it for 950. A refused to sell at the said price. B
then agreed to buy it at its original price, which is 1,000. A refused to sell
the said farm to B even though B had agreed to the original proposal.
The Court held that B had refused As proposal and had made a counteroffer instead. There was no contract because the counter-offer caused the
original offer to lapse. A was entitled not to sell his farm to B.
SELF-CHECK 2.2
What do you think is the effect on the original contract, if an acceptor
proposes new conditions into it?
(d)
By the death or mental disorder of the proposer, if the fact of his death or
mental disorder comes to the knowledge of the acceptor before acceptance.
A proposal will lapse if the proposer dies or is mentally disordered and the
death or the mental disorder is known by the promisee before he makes an
acceptance.
A contract is valid and enforceable if a promisee, until he makes an
acceptance, is ignorant of the proposers death or mental disorder. This was
decided in Bradbury v. Morgan (1862).
A proposal will also lapse if a promisee has died and the executor or the
estate administrator cannot accept proposals on behalf of the deceaseds
estate or inheritance. This was decided in Re Chesire Banking Co. (1886).
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EXERCISE 2.1
1.
By a letter dated 1 July 2014, Ali proposed to sell Adam his farm
for RM15,000. In it, Ali stated that the proposal was open until the
1 August 2014. On 10 July 2014, Adam received the proposal
letter. He wrote back to state his acceptance on 20 July. On 15 July,
Ali posted a letter revoking the proposal to Adam. The letter of
revocation of the proposal only reached Adam on 25 July 2014.
Adam demanded Ali to perform his promise but Ali claimed that
he was not bound by the proposal as he had revoked it before 1
August 2014. Advise both parties.
2.
2.3
A.
B.
C.
D.
ACCEPTANCE
2.3.1
Definition of Acceptance
Definition
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.
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2.3.2
Terms of an Acceptance
There are two conditions to an acceptance. These are stated in Section 7 of the CA
1950. Do refer to Section 7 of the CA 1950 for further discussion of the said
provision.
(a)
(b)
2.3.3
Form of Acceptance
Logically, one would think that an act of silence does not amount to acceptance
since an acceptance must be communicated. In Fraser v. Everett (1889), Wood,
Acting CJ, held that there is no rule of law like the saying silence gives consent.
In Felthouse v. Bindley (1862), Felthouse wrote to his nephew offering to buy a horse
for 30 15s. He added If I hear no more from him, I consider the horse mine at 30
15s. The nephew did not reply. The nephew however told Bindley (an auctioneer) to
keep the horse out of the sale of his farming stocks because he wanted to set it aside for
Felthouse. The auctioneer sold it by mistake. Felthouse sued Bindley.
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The Court held that there was no acceptance by the nephew as he had kept silent.
Plaintiff therefore had no right to claim the horse as there was no contract.
Generally, silence does not amount to an acceptance even if the promisee intends to
accept the proposal. However, silence may amount to an acceptance if the promisee
gains some benefit out of the proposal when he has ample time to reject it.
Example: A proposer sent food to the promisee, prescribing that payment for the
food needed to be paid if the promisee accepts the proposal by consuming the
said food. In this situation the act of consuming the food amounted to an
acceptance even if the promisee kept silent (not communicating his acceptance to
the proposer). This principle was held in Weatherby v. Banham (1832).
2.3.4
Definition
If a proposal prescribes a time limit for an acceptance to be made, such a
proposal must be accepted within the prescribed time. Any failure will
nullify the proposal. If no time is prescribed, acceptance then must be made
within a reasonable time. Do refer to Section 6(b) of the CA 1950.
Reasonable time was discussed under the topic of offer earlier. In Ramsgate
Victoria Hotel Co. v. Montefiore (1866), the defendant applied for shares in the
plaintiffs company on 8 June. He received no further news until 23 November.
When he was informed that the shares have been alloted to him the defendant
refused to accept them.
The Court held that the plaintiff had allowed too long a time to lapse before
accepting defendants offer. Therefore, the defendant was not liable to accept the
shares.
It is clearly shown that the delay in making an acceptance in cases which involve
shares will deny the existence of a contract, being subject to price fluctuations.
The principle of reasonable time is also applicable to contracts involving
perishable goods.
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ACTIVITY 2.2
Haneef was given 30 days to accept Kennys proposal for a contract to
buy a house. Haneef made his acceptance on the 32nd day. What is
the effect on the contract? Can Kenny revoke his proposal? Discuss in
class.
2.3.5
Communication of Acceptance
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The contract binds both parties, that is the proposer and the promisee at two
different times. Illustration (b) states that the contract binds against A the
moment the promisee posted the letter of acceptance. Whether the letter arrives
to the proposer or not is not a relevant issue.
Ignatius v. Bell (1913) explains this situation. The defendant, Bell, gave an option
to the plaintiff to purchase a piece of land on the condition that the option must
be exercised on or before 20 August 1912. Both parties had contemplated the use
of the post as means of communication. The plaintiff sent a registered letter on 16
August 1912. Because he was not at home, the defendant only received it on the
evening of 25 August.
The Court held that the contract bound the defendant on 16 August 1912, that is,
when the plaintiff posted the letter of acceptance. The said option was executed
within the specified time.
The contract binds the promisee the moment the posted letter of acceptance is
received by the proposer. It is clearly provided for in the second part of
Illustration (b) of Section 4 of the CA 1950.
What is the position of the proposer and promisee if the said letter does not
arrive or is lost in transmission? The law is of the position that the proposer is
bound by the contract while the promisee is free from the contract until the said
letter is found and sent to the proposer. The court in Byrne v. Van Tienhoven
(1880) held that if a proposal and acceptance are made by means of transmission
by post, a contract is formed the moment the letter of acceptance was posted,
even if it does not arrive at its destination. As a precaution, a proposer can
include a term in the proposal whereby an acceptance is deemed complete at the
time the proposer receives the acceptance letter.
2.3.6
Revocation of Acceptance
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2.3.7
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In his attempts to revoke his acceptance, a promisee must therefore ensure that
Section 4(3)(a) and (b) of the CA 1950 must be complied with before a contract
can bind him (Section 4(2)(b) is complied with, that is, the letter of acceptance
reaches the proposer).
EXERCISE 2.2
1.
Mee wrote to Zul offering to sell his computer for RM2,000. Zul
accepted the offer through a letter posted on 5 December 2014.
Zul, however changed his mind and wishes to revoke the
acceptance that he had made. Zul is worried that he will not be
able to revoke the acceptance by posting it. Zul therefore
telephoned Mee on 15 December 2014 at 10am to revoke his
acceptance. On 15 December at 11am, Mee received the revocation
letter which Zul posted. Mee is unhappy and wishes to sue Zul
for breach of contract. Advise both parties.
2.
Nani would like to sell her new Proton Saga Car to Nina for
RM25,000. Nina immediately takes RM20,000 and gives to Nani.
What is the consequence of the above scenario?
2.4
A.
B.
Nani has the right to refuse before she takes the cash from
Nina
C.
D.
CONSIDERATION
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The definition clearly shows that consideration must exist in each and every
contract and is of value according to the offerors wishes. It may consist of a
conduct, or a price to be paid in return for the promise made by, or the conduct
of, the promisor. The conduct need not necessarily to be of a positive nature. In
fact it can also be in the form of an abstinence from doing something.
The court in Curie v. Misa (1875) held that a valuable consideration in the sense
of the law may consist either in some right, interest, profit or benefit accruing to
one party, or some forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other.
Example: Jay sold his pen to Bob for RM10. The consideration in this case comes
in the form of the RM10 Bob paid to Jay. The consideration is in monetary value.
Example: Jay promises to present a gift to Bob if Bob wins the athletic event. In
this example, the consideration is Bobs conduct, which is winning the race.
Both forms of consideration are valuable in law.
2.4.1
Types of Consideration
(a)
Executory Consideration
Definition
It is also known as a promise in return for a counter-promise or
consideration in the future from the other party. The consideration is
not fulfilled yet but will be fulfilled as soon as the other party fulfills
his promise.
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Executed Consideration
Definition
Such a consideration exists when one party had done his or her part
according to the contract. The other party therefore is under a duty to
fulfill his promise. An executory promise is also known as an executory
consideration, that is a promise made in exchange for the other partys
conduct.
Past Consideration
This refers to a subsequent promise made in response to past acts or
previous considerations made.
Example: Uma found Amins identity card and returned it to him. Amin
then promised to reward her RM50. Amins promise is an act of responding
to Umas previous act and is termed as past consideration.
2.4.2
(a)
Third Party
From the principles laid down in the Contracts Act 1950, it is clear that in
Malaysia, consideration may come from another person, a third party, and
not necessarily from the promisee.
Example: Chin promised to pay RM1,000 to Bala if Lai sends the promised
goods at the promised time. If Lai sends the goods at the fixed time but
Chin later refuses to pay Bala, Bala then has the right to sue Chin even if he
has not furnished any consideration to Chins promise. The consideration in
this case comes from a third party which is Lai. This principle is according
to the CA 1950 and it differs from English law.
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Atkinson (1861).
Kenneth and Alice were husband and wife. Kenneths father and father-inlaw (Peter and David respectively) both agreed to pay certain sums of
money to Kenneth and Kenneth has the right to take legal action if they
failed to do so. The agreement was confirmed in writing after Kenneths
and Alices marriage. After Peter and Davids death, Kenneth sued Davids
executors for the promised money.
The court held that the action failed because Kenneth is a stranger to the
contract. He did not give any consideration to the contract between Peter and
David.
Refer to Kepong Prospecting Ltd & Ors v. Schmidt (1968). Based on Section
2(d), the court held that consideration to a contract need not come from a
promisee. Let us refer back to the example involving Chin, Bala, and Lai.
According to English law, Bala has no right to sue Chin because Bala did
not furnish any consideration for Chins promise. The consideration came
from Lai (who delivered the goods on time).
(b)
Past Consideration
Based on the words used in Section 2(d) of the CA 1950 the promisee or
any other person has done or abstained from doing, past consideration
is accepted as a form of consideration for a valid contract in Malaysia.
Let us look at Kepong Prospecting Ltd & Ors v. Schmidt (1968), being a case
decided based on Section 2(d). Schmidt, a mining engineer, actively assisted
a person to obtain a prospecting permit in Johor. He subsequently helped to
incorporate Kepong Prospecting Ltd and was appointed as managing
director. Upon incorporation, an agreement was made between them
whereby the company agreed to pay Schmidt 1 per cent of the selling price of
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all iron produced and sold. This was in consideration for his services to the
company prior to its formation, after its incorporation and for future services.
The court held that the consideration by Schmidt after the incorporation of
the company but before the agreement was made was a valuable
consideration and could be claimed under the law. However, Schmidt
could not claim on the consideration made before incorporation. Refer to
Illustration (c) Section 26 of the CA 1950.
As a general rule, English law does not recognise past considerations. This is
clearly shown in Roscorla v. Thomas (1842). The plaintiff bought a horse from
the defendant. The sale was executed. After the sale, the defendant guaranteed
that the horse was sound and free from vice. The horse was in fact vicious.
The court held that the guarantee was a promise made on past
consideration. Past consideration will not make a promise binding.
Even though the above explains the general rule, there are cases with
exceptions to the general rule. Past consideration is still accepted in English
law as good consideration if the act or omission was done at the request of
the promisor as in Lampleigh v. Braithwait (1615).
The defendant in this case sought the plaintiffs help to seek a Royal pardon
from the King. The plaintiff used his own money for the effort and the
defendant later promised to pay him 100. The defendant failed to pay and
the plaintiff sued for the amount.
The court held that it was past consideration, which was clearly seen from the
facts of the case. The court however agreed to the plaintiffs claim because the
said consideration was done at the desire of the promisor (defendant).
(c)
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Definition
Promissory estoppel applies when a creditor based on his representation or
conduct is stopped from denying part payment as a settlement of the whole
debt.
2.4.3
The issue is whether the promisee did something more than what he or she was
legally bound to do. If the promisor does not get more than what he should get, it
does not constitute consideration in law. This usually happens when a promisee
is merely performing a duty already imposed upon him without any promise
from the promisor.
(a)
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However, if a promisee had done something over and above his legal duties, it
would be a valid consideration. In Glassbrook Brothers Ltd v. Glamorgan
County Council (1925), the police sued for a sum of 2,200 promised to them by
a mining company. The promise was for the provision of a stationary guard
during a strike. The Court held that the police was entitled to the sum for the
undertaking to provide more protection that what the police thought necessary,
which is something over and above their duties under the law.
(b)
ACTIVITY 2.3
An organiser of a big-scale heavy-metal group concert held in X
country promised to pay the police RM15,000 if there was a riot during
or after the show. A riot took place during the show and the police
successfully quelled the disturbance. Is the police in law entitled to the
sum promised by the organiser? Give your opinions.
2.4.4
Adequacy of Consideration
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The appellant contended that the respondent could not rely on Section 8 as there
was no sale because the consideration for the record included the three wrappers.
The House of Lords in a majority decision held that the chocolate wrappers have
an economic value and was certainly part of the consideration and therefore
sufficient to create a record sales contract.
2.4.5
You have already noted that consideration need not be adequate to create a contract.
It is sufficient if it is of value and the promisor has freely given his consent.
What will happen if a contract made does not have the element of consideration,
that is, the promisee need not do anything which would give any benefit to the
promisor? Refer to Illustration (a) of Section 26 of the CA 1950.
In Macon Works & Trading Sdn. Bhd v. Phang Hon Chin & Anor (1976), the
Court held that the option to purchase a piece of land was not valid due to lack
of consideration.
However, the CA 1950 provides exceptions to this general rule. Refer to Section 26
(a), (b) and (c) to ascertain those exceptions. Those exceptions will be discussed in
detail.
An agreement which lacks consideration but falls under one of the exceptions in
Section 26(a), (b) or (c) is deemed a valid and binding contract.
Section 26(a)
Provision
This section requires a few conditions to be complied with, that is the
agreement:
(i)
Is In Writing;
(ii)
Is Registered Under The Law For The Time Being In Force For The
Registration Of Such Documents (If Any); and
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Section 26(a) can only be applied to validate a contract which lacks consideration
if all the three elements are complied with. Refer to Illustration (b) Section 26 CA
1950 for a clearer picture of this section.
What are the circumstances deemed as natural love and affection between parties
standing in a near relation?
In the case of Re Tan Soh Sim (1951), an agreement to distribute the deceaseds
(adopted mother) property to her adopted son was void due to lack of consideration.
The court referred to Chinese customs and traditions as well as circumstances in the
said Chinese family and held that an adopted son only has a near relation to his
adopted father and not to his adopted mother and is thus not within the scope of
Section 26. Even if the element of natural love and affection existed, it must only be
between parties standing in near relation to each other. The agreement therefore is
void for failure to comply with element (iii), natural love and affection between
parties standing in a near relation to each other.
Section 26(b)
Provision
There are three elements or conditions in this exception too:
(i)
(ii)
One who has already voluntarily done something for the promisor; or
Only one part need to be complied with by the promisee for it to fall under
paragraph (ii). Refer to Illustration (c) of Section 26 for a clearer picture.
The important thing to note is that the act was done by the promisee voluntarily
and not at the desire of the promisor.
The issue of whether the plaintiff had voluntarily done something for the defendants
firm arose in J. M. Wotherspoon & CO Ltd v. Henry Agency House (1962).
The court held that something which was done on another persons suggestion
cannot be considered as having been done voluntarily. The plaintiff in this case had
acted on the defendants suggestion and therefore the act was not voluntarily done.
Refer to Illustration (d) of Section 26 for a better understanding of paragraph (iii).
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Illustration (d) in the CA 1950 Act clearly shows that B is under a legal duty to
take care of his infant son and he can be compelled under the law to execute the
duty. Bs promise to pay As expenses is a binding contract.
Example: A paid Bs fine. B later promised to compensate A for paying the fine
for him. Bs promise is binding and B must compensate A because paying the
fine is something which B was legally compelled to do.
Section 26 (c)
Provision
The conditions that need to be complied with under the exception in Section
26(c) are:
(i)
(ii)
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EXERCISE 2.3
1.
Ahmad promised his wife that he will present their son, Man a
house which he bought last year when Man gets married. Ahmad
changed his mind and refused to do so when Man got married.
Can Man sue his father for the house? Advise Man.
2.
2.5
A.
Executory consideration
B.
Executive consideration
C.
Executed consideration
D.
Past consideration
CAPACITY TO CONTRACT
Another element that must be present for a valid contract is capacity. Every party
who wishes to enter into a contract must have capacity under the law of contract.
Section 10 of the CA 1950 provides:
Provision
All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object,
and are not hereby expressly declared to be void.
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Section 11 of the CA 1950 states three groups of persons capable of entering into
a contract as follows:
(a)
(b)
(c)
2.5.1
Age of Majority
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(a)
The contract for necessaries is valid if it is agreed by the minor and it is for
the purpose of supplying the said minor with necessaries and not mere
luxuries which he does not require. If a person entered into a contract with
a minor to supply him with necessaries, the person who supplied him can
claim for reimbursement from the minors property.
Provision
Section 69 CA 1950 provides on what are necessaries for a person who
is incapable of entering into a contract.
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Example: Aiman supplied Bakar who is an orphan and a minor, with food
and clothes suited to the condition of his life. Therefore, Aiman is entitled
to be reimbursed from Bakars property.
What are necessaries suited to the condition in life of a person incapable of
entering into a contract?
Example: Sam, a minor student was supplied with a handphone by Raj, a
shop owner. Can Raj claim payment for the handphone?
Section 69 cannot be applied here and Raj is not entitled to be reimbursed
from Sams property because a handphone is not a necessity suited to the
condition in life of the minor student.
In Nash v. Inman (1908), a Savile Row tailor supplied a minor, a university
student, with fancy expensive clothes and later sued for the price of clothes.
Based on the evidence, the Court held that the student, a minor, was
already adequately supplied with clothes and the tailor had not adduced
any evidence that the clothes were suitable to the condition in life of the
minor. The action must fail and therefore no reimbursement could be made.
The court in Malaysia decided that education is a necessity in life for a
minor. It was held in Kerajaan Malaysia v. Gurcharan Singh & Ors (1971). It
must be noted that this case was decided before an amendment to the CA
1950 was made, which now provides for capacity of a minor to enter into
scholarship agreements.
Section 2 of the Contracts (Amendment) Act 1976 defines scholarship
agreement as:
Definition
Scholarship agreement means any contract or agreement between an
appropriate authority and any person (hereinafter in this Act referred to as a
scholar) with respect to, any scholarship, award, bursary, loan,
sponsorship, or appointment to a course of study, the provision of leave
with or without pay, or any other facility, whether granted directly by the
appropriate authority, or by any other person or body, or by any
government outside Malaysia, for the purpose of education or learning of
any description.
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Scholarship Agreement
Section 4(a) of the Contracts (Amendment) Act 1976 provides:
Provision
Notwithstanding anything to the contrary contained in the principal
Act 1950, no scholarship agreement shall be invalidated on the ground
that the scholar entering into such agreement is not of the age of
majority.
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ACTIVITY 2.4
It cannot be denied that there are cases where students attempt to
avoid paying their loan balances to the government and the
government has resorted to advertising their names in newspapers.
How far do you agree with the provision you have just learnt?
(c)
Marriage Contracts
Minors are allowed to enter into a marriage contract. It is clearly shown in
Rajeswary & Anor v. Balakrishnan & Ors (1958), when Good J, held that a
contract to marry is valid and enforceable even if the parties involved were
minors. It is also stated as such in Section 4(a) of Age of Majority Act 1971.
However, Section 12 of the Law Reform (Marriage and Divorce) Act 1976
provides that whosoever below the age of 21 cannot enter into a marriage
contract except with the written consent of his father or mother, adopted
father or adopted mother or guardian (according to sequence; if father dies,
then consent must be given by the mother and so on).
(d)
Insurance Contracts
The Insurance Act 1996 provides in Section 153 that a child of 10 years and
above is allowed to sign a life insurance contract for himself or upon
another life in which he has an insurable interest. However, if a child is
below 16 years old, he needs to get a written consent from his parents or
guardian. A child above 16 years old can enter into such contracts without
having to get his parents or guardians consent.
(e)
Apprenticeship Contracts
Section 13 of the Children and Young Persons (Employment) Act 1966
provides that a minor can enter into a contract of apprenticeship or
services. The Act defines a child as any person below the age of 14 while a
young person is one between the age of 14 and 16.
Generally, a contract signed by a minor is void, that is, invalid ab initio. It
cannot be enforced by the minor against the other party or vice versa. What
happens to the benefits passed under the contract? Can it be recovered?
Will the court assist the parties involved?
In the decided cases, the courts would not rule that such benefits be
restored if the plaintiff is a person who has the capacity to contract and is
not a minor. This is to prevent adults from binding a contract upon a minor.
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Section 40 of the Specific Relief Act clearly shows that the court has the
discretion whether to require that the benefits be restored or to make
compensation. This was so decided in Tan Hee Juan (1934) when Hereford
J. refused to use its discretion to order a refund of the purchase price paid
by the defendant for the land.
In another case, Leha binti Jusoh v. Awang Johari bin Hashim (1978), the
Federal Court applied Section 66 of the CA 1950 by ordering the benefits be
returned. The respondent (a minor) bought a piece of land from the
appellant. He paid the purchase price and occupied the land. The Federal
Court held that the contract was void and ordered the respondent to vacate
the land and the appellant to refund the purchase price.
From the above evidence, it is clear that a person has to be careful and
refrain from entering into a contract with a minor because in all probability
the court will not order that any benefits be returned and the other party to
the contract is bound to incur losses.
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EXERCISE 2.4
1.
2.
2.5.2
A.
B.
C.
D.
Be of Sound Mind
Besides being of age, a person who wants to make a contract must also be of
sound mind. Who is regarded as being of sound mind under the CA 1950 and
therefore qualified to make a contract?
Section 12 of the CA 1950 provides:
Provision
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.
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A person who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind. Refer to Illustration (a) Section 12.
A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind. Refer to Illustration (b) Section 12.
(a)
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Contract of Necessaries
We have touched on this topic when discussing contract of necessaries by
minors. Section 69 of the CA 1950 provides:
Provision
If a person, incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person.
EXERCISE 2.5
1.
2.
B.
C.
D.
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2.5.3
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Not Disqualified
To form a valid contract, a person must not lose the capacity to make a contract
according to whatever law he is subjected to.
It simply means that if there are laws which stipulate that a person is incapable of
entering into contracts, such person is deemed to have lost the capacity to enter
into a contract.
Loss of capacity means that the said party may have the capacity to contract
but lost it due to some circumstances under any laws or he is capable according
to the CA 1950 but lost it according to other laws to which he is subjected to.
Example: Ahmad is an adult and of sound mind. Therefore, he is capable of
making a contract according to the CA 1950. Two months ago Ahmad was
declared bankrupt. Under the Bankruptcy Act, Ahmad cannot enter into a
contract. Ahmad therefore has lost his capacity to contract according to the
Bankruptcy Act.
NOTE: There should be a specific provision in the relevant law which states that
a person has lost his capacity to contract.
2.6
The next element for the formation of a legally valid and enforceable contract is
intention.
Intention is an element of which the court must firstly exist before deciding on
the existence of a binding contract
The CA 1950 is silent on intention. How then would the court determine its
existence? It has been the practice of the Malaysian courts to refer to English
cases in determining the existence of intention.
Under English law, there is no binding contract unless the involved parties in the
agreement have the intention to enter into such relationship under the law. This
was decided in Weeks v. Tybald (1605).
The test used is an objective test, that is, the opinion of a reasonable man. Even if
the promisor did not intend to create legal relations, the court would still
presumed an intention exists if a reasonable man is of the opinion that intention
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existed to bind the promisor. The promisors real intention is immaterial. This
rule was decided in Carlill v. Carbolic Smoke Balls Co. (1893).
The court would usually look at the types of contracts made in determining
whether there was intention or not. This presumption could be set aside if it
could be proven otherwise by the contracting parties.
2.6.1
Generally, a contract can be divided into two types. Refer to Figure 2.4.
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(a)
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(b)
Commercial Agreements
In commercial agreements, the court usually presumes that the parties do
intend to make a legally binding contract. The presumption may be
rebutted if the parties to the contract are able to otherwise prove that there
was no intention to create legal relations. Unlike domestic agreements, the
contracting parties cannot allege that there was no intention to bind them
because the court will decide based on the facts of the case.
Usually, a clause of subject to the contract will be inserted in commercial
agreements as a way to avoid the existence of a binding contract.
The clause indicates that the contractual party does not intend the said
agreement to bind until a full and complete contract is signed.
In Winn v. Bull (1877) there was a written agreement for the lease of a
house subject to and is dependent upon a formal contract being
prepared.
No formal contract was entered into by the parties and the court held that
there was no enforceable contract.
The Malaysian court in Low Kar Yit & Ors v. Mohd Isa & Anor (1963)
agreed with Winn v. Bull (1877). The defendant gave an option to the
plaintiffs agent to buy a piece of land subject to a formal contract to be
drawn up and agreed upon by the parties. The plaintiffs agent duly
exercised the option but the defendant refused to sign the agreement of
sale. The court held that there was no contract because there was no formal
contract agreed by both parties.
The clause subject to contract usually indicates no intention to create
legal relations. However, the courts in certain circumstances would decide
otherwise. This could be seen from decisions of some cases such as Lim
Keng Siong & Anor v. Yeo Ah Tee (1983). It was held that on the facts of the
case, the parties had agreed to the sales contract and the clause which
indicated a written and signed contract be made was not enough to show
there was no intention to create legal relations by the parties.
However, it must be noted that in most cases the clause subject to
contract gives the effect of denying the existence of intention. This fact was
clear from the decision in Daiman Development Sdn Bhd v. Mathew Lui
Chin Teck & Anor (1981). The Privy Council held that:
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It has been recognised throughout the cases on the topic that such
words prima facie create an overriding condition, so that what has
been agreed upon must be regarded as the intended basis for the
future contract and not as constituting a contract.
The above decision lays down that the clause subject to contract in a contract
only shows the desire to create a binding contract in the future and not to make
the agreement into a binding contract.
SELF-CHECK 2.3
Should there be provision for domestic or family agreements in the law
of contract? Justify.
EXERCISE 2.6
Abdul Aziz promised to give RM600 per month to his wife Anis for a
period of two years. Anis brought the matter to the court when Abdul
Aziz failed to fullfil his promise. The court decided that Anis was not
entitled to the amount promised.
Which of the following case provides the principle that was referred to
by the court in deciding the case between Anis and Abdul Aziz?
A.
Winn v. Bull
B.
Ferris v. Weaven
C.
Balfour v. Balfour
D.
2.7
CERTAINTY
Even if other elements which are required in a contract are complied with, an
agreement can sometimes be defective due to the inability of the court to
determine what are the real terms agreed by the parties. Every term or condition
in the contract must therefore be clear and its meaning ascertainable.
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Refer to Illustration (a), (c), (d) and (f) of Section 30 of the CA 1950.
See also the court decision in Karuppan Chetty v. Suah Thian (1916). There was
no certainty when the contracting parties agreed to lease out of the land for
RM35 a month for as long as you like. It was held that the contract was void.
Therefore, parties to a contract have to use words which are clear and specific in
meaning for there to be a binding contract.
SELF-CHECK 2.4
How can an offer made be void?
An offer exists when an offeror or promiser, by his act or words, states his
willingness to be bound by the contract as soon as the other person to whom
he made the proposal accepts it.
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Consideration must exist in each and every contract and is of value according
to the offerors wishes. It may consist of a conduct, or a price to be paid in
return for the promise made by, or the conduct of, the promisor. The conduct
need not necessarily to be of a positive nature. In fact it can also be in the
form of an abstinence from doing something.
The parties entering into a contract should be competent. The persons are
said to be not competent to enter into a valid contract if he is a minor or of an
unsound mind or bankrupt.
The parties entering into contract must have legal capacity to do so.
Acceptance
Intention
Agreement
Offer
Certainty
Revocation
Contract
Topic
Void and
Voidable
Contracts
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
6.
Discuss the five elements that cause a persons consent to enter into
a contract deemed to be not free; and
7.
INTRODUCTION
In this topic, you will be introduced to void contracts. The topic will cover
matters that would cause a valid contract to be void. You will also notice the
differences between void and voidable contracts. It is important that the involved
parties be cautious when entering into such contracts as these contracts could
lead to a loss due to it being void. When a contract is void, the involved parties
cannot get the assistance of the court for recovery of benefits which is passed to
the other party.
We also will explore voidable contracts in this topic. Voidable contracts are
contracts made without free consent by one of the contracting parties. It is
important to understand each factor that affects the validity of a contract. Factors
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that cause a persons consent not to be freely given will be discussed further in
this topic.
3.1
VOID CONTRACTS
Section 2(g) of the Contracts Act 1950 defines void contract as:
an agreement not enforceable by law is said to be void
We will move on to study the different forms of void contracts in the Contracts
Act 1950.
When a contract becomes void, it therefore means that it is a contract without any
legal effect. The parties to the contract are, thus, under no obligation to perform
the contract. Such contracts are a complete nullity in law right from the very
beginning and therefore no right or duty flows from the contract. The courts also
will not enforce such contracts.
Therefore, any person who wishes to enter into a contract must first ensure that
the contract he is going to make is not one which could be considered void. This
is because the contracting parties will not get any benefits under a void contract.
The court will also not allow claims for compensation in such cases.
Among agreements considered to be void contracts are:
(a)
(b)
(c)
3.1.1
What are illegal contracts? You have to refer to Section 24 of the CA 1950. The
provision lists five categories of agreements which contravene the law resulting
in the contract being void. Refer to Section 24 of the CA 1950.
In such situations in the Section, the consideration or object of an agreement is
unlawful and every agreement of which the object or consideration is unlawful is
void.
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Murugesan v. Krishnasamy & Anor (1958) differs on the facts of the case.
The defendants occupied land held under Temporary Occupation Licence,
and applied for permanent title to the land. Then, they entered into a
written agreement with the plaintiff and agreed to execute a valid transfer
of the land to the plaintiff as soon as the Collector of Land Revenue issued
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the title. While waiting for the application to be approved, the defendants
allowed the plaintiff to enter the land. The defendants application was
rejected and the plaintiff sued for damages. The defendant refused on the
basis of a void contract due to illegality.
The Court held that the contract was valid but became impossible to
perform. The plaintiff therefore was entitled to damages and recovery of
monies paid. In Rasiah Munusamy v. Lim Tan and Sons Sdn. Bhd (1985),
the respondent orally agreed to sell his house to the appellant. Section 12(1)
of the Housing Developers (Control and Licensing) Rules 1960 states that
every contract of sale must be in writing. However, Rule 17 only imposes a
fine if Section 21 is contravened. The contravention does not make the oral
contract void. The court held that it was a valid and enforceable contract.
(b)
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(i)
(ii)
Based on these issues, the court held that the consideration and object of the
contract was valid. However, if the consideration (payment to RB even
though he was unregistered) was allowed, it would defeat the provision of
the law. That law does not forbid such contracts to be made. On the other
hand, it only restraints those who are unregistered.
If the court allowed RB to get his payment, the court may create a precedent
where other non-Singaporean engineers may abuse the law in Singapore. In
this case, it was not relevant whether the defendant knew that the plaintiff
was unregistered because if it would still defeat the provision of the law to
allow it. Therefore, RB failed to get the payment.
It is hoped that you can understand the differences in Sections 24(a) and
Section 24(b). Section 24(a) clearly deals with situations where the
consideration or purpose of the agreement contravenes the law, while
Section 24(b) covers situations where the consideration or purpose of the
agreement do not contravene any law but if permitted, it would defeat the
law. Refer to Illustration (i) of Section 24.
(c)
(d)
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In Syed Ahamed bin Mohamed Alhabshee v. Puteh binti Sabtu (1922), the
defendant agreed to sell a property to the plaintiff in which an infant had
an interest. This transaction was detrimental to the child and therefore held
void by the court.
(e)
Immoral Agreement
Morality is very subjective and refers to the moral standards of each
society. An act which is considered as immoral in one society may not
have the same effect in another society. The Act provides several
examples as to what constitutes immoral acts. Refer to Illustration (j)
and (k) of Section 24 of the CA 1950.
Most of the cases referred in this paragraph are those involving sexual
relationships. The English cases did not give a clear picture as to what
facts constitute immoral acts. However, Pollock in The Principles of
Contracts suggested that immoral acts be given a wide meaning
and not only be restricted to sexual acts. This may be so in the context
of the Contracts Act if we refer to the instance in Illustration (j) of
Section 24.
In Pearce v. Brooks (1866), the plaintiff agreed to hire a coach to the
defendant, a prostitute, knowing that she shall use it for her trade.
The defendant failed to pay the hire charges and the plaintiff claimed
the sum due. The court held that the plaintiff failed in the claim for
the hire charges because the agreement was illegal as it was immoral.
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SELF-CHECK 3.1
Draw a situation which illustrates an aggreement that is immoral.
EXERCISE 3.1
1.
2.
B.
C.
D.
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You are working as a cook at a restaurant and wish to open your own restaurant in
the same area. To what extent are you allowed to do so under the law?
The provision in the Contracts Act in respect to contracts in restraint of trade is
quite restrictive in its application compared to the English cases. Section 28 of the
CA 1950 provides:
Provision
Every agreement by which anyone is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Definition
Section 28 explains that every agreement which contains restrictive clauses is
void immaterial of the extent of the said restriction, even if it is reasonable.
However, the restriction will not rescind the whole contract. It means
therefore that only the part of contract which does not restrict will be valid
and enforceable.
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Due to the clear wording of Section 28, the cases clearly show that it is immaterial
whether the restraint is reasonable or otherwise. As a general rule, an agreement in
restraint of trade is void to the extent of the period and distance of restraint
stipulated in the contract. However, it is subjected to several exceptions provided
under the Act. Refer to Explanation 1, 2 and 3 in Section 28 of the CA 1950.
If the facts of a case indicate that any of the exceptions can be applied, the
contract then is valid and enforceable although it is in restraint of trade.
EXERCISE 3.2
Meng withdrew from a partnership and set up his own company. Before
the withdrawal he made an agreement with the other partners that he
will not carry out the same trade as the partnership within the same area.
Meng did so. Can his former partners sue him for breach of contract?
3.1.3
If a contract contains conditions restraining any of the parties from bringing any
legal proceedings to enforce the partys right in the contract, or conditions which
limit the time-period within which he could enforce that right, the contract is
void to the extent of the restrictive clause.
Section 29 of the CA 1950 provides:
Provision
Every agreement, by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tibunals, or which limits the time within which he
may thus enforce his rights, is void to that extent.
The time limit a person could enforce his rights under a contract is provided by
the Limitation Act 1953, that is six years from the date of the breach of the
contract. If there is a condition made to limit the time within the six year period,
the contract is then void in accordance with Section 29.
Thus, a party to a contract who suffered losses due to breach of the contract has
six years to bring legal action from the date of the breach.
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3.2
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Illegal Contracts
This refers to void contracts which are unlawful as discussed earlier under
Section 24. The effect of these contracts are not the same as for void contracts
due to other factors. We have seen Section 66 of the CA 1950 which provides
for restitution of benefits under void and voidable contracts. Is Section 66
also applicable to unlawful contracts under Section 24?
Illustrations (a) to (d) in Section 66 do not provide any examples regarding
unlawful contracts. Since there is no clear provision in the Act, the court has
to refer to English law.
Generally, all parties to such contracts will not get any rights when
enforcing the contract. This principle is a based on the maxim ex dolo malo
no oritur actio which means that a court would not give any help to a
person whose action arises from an unlawful act.
Money promised under an illegal contract therefore cannot be claimed even
if the promisee had done his part under the contract. Also, money paid
cannot be claimed for refund.
However, there are two exceptions to the general rule.
The exceptions are:
(i)
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If the Plaintiff Does Not Know that the Agreed Contract was
Unlawful
According to Section 66 of the CA 1950, if the other party knew that
the said contract is unlawful, he would not be allowed to claim for the
return of benefits or any compensation.
In Ahmad bin Udoh v. Ng Aik Chong (1970), the respondent made an
agreement for a lease of padi land with the appellant for a period of
six years. The respondent thereto paid RM1,500 at the signing of the
agreement. The agreement contravened Section 3(1) of the Padi
Cultivators Ordinance 1955. The appellant subsequently refused to
allow the respondent to till the land. The respondent claimed for the
return of his RM1,500. The appellant raised the issue that the said
agreement was unlawful. The court held that the respondent is
entitled for the refund money according to Section 66 of CA 1950
because he did not know the agreement was prohibited by law at the
time he made it.
Therefore, any person who wants to make a contract should be cautious so
that the contract is not unlawful under Section 24. This is because the court
will not assist the involved party to enforce such contracts, what more to
help them claim for recovery of benefits from the other party, except if
they are able to rely on the two exceptions above.
(b)
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SELF-CHECK 3.2
Write briefly as to how a person who had agreed to a void contract may
make legal claims for the return of the benefits which had passed to the
other party.
EXERCISE 3.3
1.
2.
3.3
A.
B.
C.
D.
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Section 2(i) means that if the said contract has the elements which can make it
voidable, the innocent party has the option to make the contract void and set
aside his duties under the contract. The guilty party of a voidable contract has no
such option.
It must be noted that if the innocent party does not use the option to rescind the
contract, there will still be a binding contract on both parties.
3.4
Under the law, consent exists when there is a meeting of the minds between the
contracting parties and they agree on the same thing. Free consent is defined in
Section 14 of CA 1950 .
Figure 3.1 shows five elements which deem that consent is not freely given.
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Section 14 provides:
Provision
Consent is said to be so caused when it would not have been given but for
the existence of such coercion, undue influence, fraud, misrepresentation, or
mistake.
Section 14 stipulates that a persons consent to enter into a contract is not free, if
at the time he is making the contract, his consent to it was due to any one of the
five elements, that is coercion, fraud, mistake, undue influence or
misrepresentation.
As seen from Figure 3.1, if any of the elements in paragraph (a) to (e) of Section
14 exists, then there is no free consent. Their existence in a contract will cause the
contract to be voidable at the option of the party whose consent was given due to
any one of those elements. It means that the innocent party would not have
consented to the contract if not due to the five elements which caused him to
consent unfreely.
We will be discussing each element in the following sections.
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Coercion
Definition
..committing, or threatening to commit any act forbidden by the Penal
Code, or the unlawful detaining or threatening to detain, any property, to
the prejudice of any person whatever, with the intention of causing any
person to enter into an agreement.
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The court ordered the appellants to refund the respondents for the additional
payments made.
Effects of Contract Due to Coercion
A contract with an element of coercion is a voidable contract because consent
was not given freely.
Section 19 of the CA 1950 provides:
Provision
when consent to an agreement is caused by coercion, fraud, or
misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused.
What happens if any sum of money or property had transferred under a voidable
contract? Refer to Section 66 of the CA 1950 for the answer.
Section 65 of the CA 1950 stipulates that when a person makes the option to
rescind a voidable contract he must restore the benefit to the person from whom
it was received from.
Section 73 of the CA 1950 provides that a person to whom money is paid under a
voidable contract must repay or return it to the person he had coerced.
3.4.2
Undue Influence
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Based on Section 16, there are two elements that must be present for the contract
to be categorised as one made under undue influence. They are:
(a)
(b)
The party who is in a dominant position made use of that position to obtain
an unfair advantage over the other.
Both elements must be present to determine whether consent when given was due
to undue influence or not. How do you decide whether a person was in a dominant
position? Reference can be made to Section 16(2)(a) and (b) of the CA 1950.
Question: Who holds real authority over another person? A relationship between
a father and a son is given as an example. A father has real or apparent authority
over his son. Refer to Illustration (a) Section 16 of the CA 1950.
There is a relationship between a father and his son. Is the father in a position
where he can dominate his sons will? The answer is Yes. According to Section
16(2)(a), a father does hold real or apparent authority over his son.
What about relationship of trust according to Section 16(2)(a)? The section refers
to parties who stand in a fiduciary relationship to the other party and are under
an obligation to execute that duty with care, such as, the relationship between a
doctor and his patient, a lawyer and his client, a trustee and beneficiary and
others. They cannot give any advice that promotes their particular interests.
Refer to Illustration (b) Section 16 of the CA 1950.
Illustration (b) is also in reference to Section 16(2) (b), a presumption that a
person is in a dominant position if he enters into a contract with a person whose
mental capacity is affected by any illness as such. Refer Section 16(2) (b) to
Illustration (b) of that Section.
It must be noted that although a person may have been proven to be in a
dominant position, the contract made is still valid if he did not use that position
to gain unfair advantage over the other party.
What will happen if a party succeeds in proving the existence of undue influence
by complying with the requirements of Section 16 (1)?
According to Raghunath Prasad v. Sarju Prasad AIR (1924), once an existence of
undue influence is successfully proven, the burden of proving that the contract
was not induced by undue influence is upon the person said to be in the position
to dominate the will of the other.
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The burden of proving is stated in Section 16(3) of the CA 1950. The provision is
similar to the point made in Raghunath. Refer to Illustration (c) of Section 16 of
the CA 1950.
An instance where one party was unable to rebut the presumption of undue
influence arose in Inche Noriah v. Shaikh Allie bin Omar (1929). The person (the
nephew) who was said to use undue influence upon the other party (an old,
feeble and illiterate aunt) who had sought her lawyers advice before signing the
contract assigning property to the nephew, failed to rebut the presumption of
undue influence. If it was so proven, it would mean there was free consent
because the person in the position to be dominated understood the effect of the
contract she had signed.
In Salwath Haneem v. Hadjee Abdullah (1894), a transaction involving a transfer
of land made by the plaintiffs husband in favour of his two brothers was
challenged by the plaintiff after her husbands death. Based on the facts of the
case, the court held that there was a relation of trust between the plaintiffs
husband and his two brothers. It also held that it was upon the two brothers to
prove that the consent was voluntarily given without undue influence. They
failed to do so and it was decided that the transfer must be set aside.
In Chait Singh v. Budin bin Abdullah (1918) , the court presumed that there was
undue influence based on the facts of the case when a moneylender lent money
to an illiterate at an excessively high interest rate of 36 per cent.
In Datuk Joginder Singh & Ors v. Tara Rajaratnam (1983), the court held that
there was undue influence by the appellants as the appellants were the
respondents lawyers and had a fiduciary duty to the respondent. The appellants
conduct in influencing the respondent to transfer the title of the respondents
land to the second appellant caused it to be void The appellant also failed to
rebut the presumption of undue influence in the transaction.
Effects of Contracts Induced By Undue Influence
Refer to Section 20 of the CA 1950, which provides:
Provision
when consent to an agreement is caused by undue influence, the agreement
is a contract voidable at the option of the party whose consent was so
caused. Any such contract may be set aside absolutely or, if the party who
was entitled to avoid it has received any benefit thereunder, upon such
terms and conditions as the court may seem just.
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If the party who has the right to rescind the contract has not received any
benefits under the contract, the contract may be set aside absolutely. Refer
to Illustration (a) of Section 20 of the CA 1950.
(b)
If the party who wants to rescind the contract has received any benefits under
the contract, it can be set aside upon such terms and conditions as the court may
seem just. Refer to Illustration (b) of Section 20 of the CA 1950.
In Chait Singh v. Budin bin Abdullah (1918), the court reduced the interest rate
from 36 per cent to 18 per cent.
In cases where the parties have received any benefits under a voidable contract,
the court may use Section 66 of the CA 1950 to make a restoration order on the
benefits or to give compensation.
EXERCISE 3.4
1.
2.
B.
C.
D.
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3.4.3
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Fraud
This definition must be read together with Section 17(a) to 17(e). Refer to Section
17(a) to 17(e).
Definition
.includes any of the following acts committed by a party to a contract,
or with his connivance, or by his agent, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract.
Suggestion, as to a fact, of that which is not true by one who does not
believe it to be true.
This provision is similar to the requirements for fraudulent
misrepresentation under English law of tort. However it is termed as fraud
under the CA 1950. Therefore, the elements that need to be proven are quite
similar under English law and the CA of 1950. Under English law, there is no
need to prove intent to deceive to establish fraudulent misrepresentation.
In Derry v. Peek, Lord Hershell stated that fraudulent misrepresentation
existed when a false statement had been made knowingly, or made without
belief in its truth, or it was made recklessly and careless, whether it be true
or false. Since there was honest belief in its truth, the misrepresentation was
not fraudulent.
Therefore, it would also not be fraud under Section 17 of the CA 1950.
Example: Bala, a managing director of Syarikat Perdana, with intent to
deceive Chong into buying shares in his company, informed Chong that his
company have made millions in profits.
Bala has committed fraud according to Section 17(a) of the CA 1950.
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(c)
(d)
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(b)
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If you have any factual information in respect of the contract that you are going
to sign, to what extent do you feel obligated to disclose the information to the
other party?
Effects of Fraudulent Contracts
Refer to Section 19 of the CA 1950 discussed earlier. In general, a contract tainted
with fraud is voidable at the option of the person who gave consent due to the
other partys fraud. However there are exceptions to the rule, where such
contracts are still valid. According to Section 19, the exceptions are:
(a)
A contract is valid if the person whose consent caused by fraud had the
means of discovering the truth with ordinary diligence; and
(b)
A contract is valid if the committed fraud did not cause consent to be given
involuntarily.
Detailed discussion on this exceptions will be carried out under (d)
Misrepresentation. Claims for return of benefits may be made under
Section 66 because it is a contract tainted with fraud.
EXERCISE 3.5
1.
A offered his car for sale to B. B asked A If you do not deny it, I
shall assume that the car was never involved in any accident. A
kept quiet and B bought the car. B later found out that it was once
involved in an accident. B therefore wishes to rescind the contract.
Can B do so?
2.
Illegal
B.
Coercion
C.
Undue influence
D.
Immoral
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Innocent Misrepresentation
You bought a video-recorder because you were attracted to its functions after
listening to the sellers explanation. The seller himself believed that it had the
functions as he had explained. However, you found out that what he said was
untrue. Can you rescind the agreement? This type of case is called innocent
misrepresentation.
Definition
Innocent misrepresentation refers to any misrepresentation made by a person
without intent to deceive and of which he himself believed to be true.
Example: A, who wished to sell his handphone to B, told him it had never
dropped. Without As knowledge, his son had once dropped it. A, here had
made an innocent misrepresentation, that is, he himself believed it as true and
had no intention to deceive B. Refer to Section 18 of the CA 1950.
Misrepresentation can only be made on statements of facts. If a statement is in
the form of an opinion, it is not a misrepresetation even if the opinion is untrue
and caused the other person to sign the contract.
In Bisset v. Wilkinson (1927), the respondent agreed to buy land for sheep
farming. He agreed because he relied on the appellants statement that he
estimated the land would carry 2,000 sheeps. Nobody else, including the
appellant, had carried out sheep farming on the land in question. The respondent
wished to rescind the contract due to misrepresentation. It was held that the
contract was valid and could not be rescinded because there was no
misrepresentation. The appellants statement was merely an honest opinion and
not a statement of fact.
(a)
(b)
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117
to sign the contract. What are those situations? Refer to the Exceptions in
Section 19.
Earlier on, we have earlier learned about them in the subtopic of fraud.
Provision
If such consent was caused by misrepresentation or by silence,
fraudulent within the meaning of Section 17, the contract, nevertheless,
is not voidable, if the party whose consent was so caused had the means
of discovering the truth with ordinary diligence.
If the concerned party has the means to discover the truth of the facts given
to him, then he must do just that. This exception is only available to the
party who committed fraud (by silence) and innocent misrepresentation
according to Section 18 of the CA 1950.
In J.C Weber v. E.A Brown (1908), this exception could not be relied by the
defendant because he had committed fraudulent misrepresentation.
Therefore, it was not relevant whether the plaintiff could have investigated
it or not. The contract was voidable at the plaintiffs option. Refer to
Illustration (b) Section 19 of the CA 1950.
(c)
EXERCISE 3.6
Mi told Dee that XY Co., in which Mi was a shareholder, made huge
profits each year. Mi believed the statement he made was true in his
capacity as a shareholder. This was because he received high dividends
every year. Dee asked a brother of his who happens to be working in the
company as to the truth of Mis statement. Dees brother told him that the
company was actually facing losses and would be wound up. Dee did not
believe his brothers information. Later, Dee bought the shares from Mi.
As a result, Dee faced great losses. Dee wanted to rescind the contract on
the grounds of misrepresentation. Can Dee do it?
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3.4.5
Mistake
What is the effect of an agreement where both parties to a contract enter into it
due to some misunderstanding over some material facts in the contract?
Definition
In simple terms, mistake means error.
Mistake and its effects are provided for in Sections 21, 22, and 23 of the CA 1950.
More attention should be given to the effects of mistake because different types
of mistakes have different effects. Even though, in general, a contract due to
mistake is a void contract, there are certain types of mistakes which give rise to a
valid contract.
We will now discuss each type of mistake. Mistakes can be divided into three
types, as shown in Figure 3.2.
(a)
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119
Both parties to the contract were mistaken on the same essential fact.
In Courturier v. Hastie (1856), there was a contract of sale of corns.
Both parties believed the corns were in transit from Salonica to
England. The corn were in fact spoiled due to hot weather and were
already sold in Tunis before the contract was signed. The buyer
alleged that since there were no corn when the contract was signed, he
need not pay the purchase price. The seller claimed otherwise. The
court held that there was no contract between the seller and the buyer
because they were mistaken over the existence of the subject matter of
the agreement. Therefore, the buyer was not liable to pay.
(ii)
120
(b)
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Mistake as to Law
Provided under Section 22 of the CA 1950.
Provision
A contract is not voidable because it was caused by a mistake as to
any law in force in Malaysia; but a mistake as to a law not in force in
Malaysia has the same effect as a mistake of fact.
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121
122
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123
Provision
On adjudging the rescission of a contract, the court may require the party to
whom the relief is granted to make any compensation to the other which
justice may require.
The court may also order rectification be made if both parties wish to continue
with the contract. This is provided for in Section 30 of the Specific Relief Act
1950, which stipulates:
Provision
when through a mutual mistake of the parties, a contract or other instrument
in writing does not truly express their intention, either party, or his
representative in interest may institute a suit to have the instrument
rectified
In Oh Hiam v. Tham Kong (1980), the court ordered rectification be made in the
contract when both parties were under the mistake in respect of a piece of land
which should not be included in the contract.
EXERCISE 3.7
1.
2.
Auntie Bee, ill from old age, transferred her property to a nurse
who took care of her while she was sick. After she died, her son
objected to the transfer and decided to bring the matter to court.
He wants to rescind the transfer on the ground of undue
influence. What is your advice to Auntie Bees son?
124
3.
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Ain asked her father, Rahman to sign a document stating that the
document is to get an approval from the Land office to build a
house in her fathers land in Ulu Kelang. Rahman, who is
illiterate, believed her daughter and signed the document. Later,
it was found that the document was actually an agreement to sell
the land to a third party.
What is the consequence of the above agreement?
A.
B.
C.
D.
Generally, all parties involved in void contracts which are unlawful will not
get any rights when enforcing the contract. Therefore money promised under
illegal contract cannot be claimed even if the promisee had done his part
under the contract.
Contract in restraint of trade or legal proceedings are not entirely void. Such
a contract is void to the extent of the restraint only.
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125
A voidable contract means that the contract is valid and binding until the
party whose consent is so caused chooses to recind it.
it is forbidden by a law;
it is fraudulent;
Coercion
Mistake
Fraud
Restraint
Illegal contracts
Undue influence
Immoral agreement
Voidable
Misrepresentation
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Wu, M. A., & Vohrah, B. (2004). The commercial law of Malaysia. Petaling Jaya,
Malaysia: Pearson Education Malaysia Sdn Bhd.
Remedies
LEARNING OUTCOMES
By the end of the topic, you should be able to:
1.
2.
3.
4.
5.
INTRODUCTION
In the previous topics, you have learnt that there are several elements that should
be fulfilled before a valid contract can be formed. Now, in this topic we will
discuss the various ways of how you may discharge a contract. Normally, a
contract is discharged when both parties perform what they have promised in
their contract. Sometimes, the parties may also discharge their contract either by
agreement, due to frustration or by breach. If a breach of contract occurs, the
innocent party can claim for remedies. These remedies will be discussed in the
last part of this topic.
4.1
DISCHARGE OF CONTRACT
Referring to Figure 4.1, you can say that there are four ways to discharge a
contract namely by performance, frustration, agreement and breach. In the
coming section, we will discuss in detail the four ways and some of their
consequences.
4.1.1
Discharge by Performance
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Section 38(1):
The parties to a contract must either perform or offer to perform their
respective promises, unless such performance has been dispensed with by
law.
4.1.2
Discharge by Frustration
Do you know what discharge by frustration is? In what ways can a contract be
discharged by frustration? In order to find the answers to those questions, we
encourage you to pay close attention to this section.
To begin with, a contract is frustrated when there is a change in the
circumstances which renders a contract legally or physically impossible of
performance (Section 57(2).
Another important point that you should take note of is that discharge by
frustration can only be applied when the impossibility of performing the contract
arises without the fault of either party.
In addition, you can refer to the below case which is a real example of agreement
discharge by frustration. The case, known as Robinson v. Davidson (1871)6 L.R.
Exch. 269, goes as follows:
In this case the contract was that the defendant must play the piano at a
concert on a specified date. On the specified date, the defendant was unable to
perform as she was ill. It was held that the contract was discharged by
frustration.
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(a)
Consequences of Frustration
Apart from that, there are a number of consequences of discharging
agreement by frustration. Now, let us study some of the consequences
closely in order to take note of the important points.
The first consequence of discharging a contract by frustration is as follows:
Section 57(2) of the Contracts Act:
The contract does not become voidable but is brought to an end
forthwith and automatically.
Reflecting on the above Section 57(2), you can say that a contract which is
discharged by frustration can be ended automatically without being
voidable.
The second consequence of frustration goes as follows:
Section 57(3) of the Contracts Act:
Compensation must be paid by the promisor to the promisee for loss
through non-performance of act known to be impossible or unlawful.
In this case, the promisor who was supposed to perform the agreement but
discharged it, is accountable to pay the compensation to the promisee.
Next, we will look at the third and the last consequence of discharging an
agreement by frustration. The third consequence goes as follows:
Section 66 of the Contracts Act:
Any person who has received any advantage under the agreement is
bound to restore it, or to make a compensation for it, to the person from
whom he received it.
You should remember that under the above section it is the duty of a
person who has gained the benefits from the agreement to pay them back,
which are quite similar to the case of voidable contracts and void
agreements.
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You may also refer to Illustration (d) to Section 66 which provides that:
A contracts to sing for B at a concert for RM1,000, which would be paid in
advance. A is too ill to sing. A is not bound to make compensation to B for
the loss of the profits which B would have made if A had been able to sing,
but must refund to B the RM1,000 paid in advance.
Discharge by frustration may happen in several situations. The examples of
the situations are as follows:
(i)
(ii)
4.1.3
Discharge by Agreement
Do you think that a contract can be discharged through agreement? Well, the
answer to that question would be yes. In this section, we will discuss how a
contract can be discharged by agreement.
For your information, when both parties to the contract agree that the contract
should no longer continue, both the parties are discharged from their obligations.
In other words, you can say that the contract comes to an end by the agreement
of both promisor and promisee.
A contract may be discharged by the agreement of all parties in the form of
substitution or rescission of the original contract. This is in accordance to Section
63 of the Contract Act which provides that:
Section 63 of the Contracts Act:
If the parties to a contract agree to substitute a new contract for it, or to
rescind it, the original contract need not be performed.
Furthermore, the contract may also be discharged by the agreement of all the
parties in the form of a waiver, release or remission. This is based on Section 64
of the Contract Act.
Section 64 of the Contracts Act:
Every promisee may dispense with or remit, wholly or in part, the
performance of the promise made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he thinks fit.
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If the promisee waives his rights under the contract, then the original contract is
discharged and the promisee is already bound to his waiver of performance.
4.1.4
Discharge by Breach
The word breach would surely make you think that a contract is terminated or
appear unlawful if such matter happens. In this section, we will discuss how a
breach can discharge a contract in detail.
Firstly, you should be alerted that, if one of the parties to the contract indicates to
the other either by conduct or in clear terms an intention not to go on with the
contract, the party is said to have rejected the contract.
Moreover, a refusal to perform a contract may occur before the time that the
performance is due, or during the time of performance itself. In this case, you
should take note that a refusal to perform a contract when performance is due
would amount to a discharge.
Discharge by breach is stated in Section 40 of the Contracts Act. The provision
reads as follows:
Section 40 of the Contracts Act: When a party to a contract has refused to
perform, or disabled himself from performing, his promise in its entirety, the
promise may put an end to the contract, unless he has signified, by words or
conduct, his acquiescincein its continuance.
When there is a breach of contract, the party not in breach has the option either to
continue with the contract or to rescind it. If he chooses to rescind it, the contract
is discharged. You may refer to illustration (a) of Section 40 of the Contracts Act,
for a better understanding.
A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every week during the next two months, and B engages to
pay her RM100 for each nights performance. On the sixth night A wilfully
absents herself from the theatre. B is at liberty to put an end to the contract.
Based on the above illustration, when A wilfully absents herself from the theatre
she actually has breached her contract with B. Therefore, B as the party not in
default is entitled to discharge the contract.
You may also refer to the case of Ban Hong Joo Mine Ltd v. Chen & Yap Ltd
(1969), where in this case the appellant had refused to make fortnightly payments
for the work that had already been done by the respondent. The appellant also
ordered the respondent to stop his or her work. It was held that the respondent
can treat the contract as being repudiated and he or she is entitled to sue the
appellant for the work that has been done.
Consequences of Breach
Similar to the previous section, discharging a contract by breach also has its own
consequences. The first consequence goes as follows:
Section 65 of the Contracts Act:
The effect of an innocent party putting an end to the contract is that the
innocent party must restore any benefits which he may have received from
the other party.
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The second consequence will provide you with a different picture on this matter.
The consequence goes as the following:
If the innocent party has paid money under the contract, he may be entitled to
recover the sum paid.
This is to show you that the person who has paid the compensation may recover
the sum paid in certain circumstances. Therefore, we hope that this section will
enlighten you on this particular issue.
SELF-CHECK 4.1
1.
2.
EXERCISE 4.1
The purchase manager of Restaurant Sedap, Mr Foo, entered a contract
to purchase a large quantity of MEO Meat from MEO Meat Sdn. Bhd.
However, after three weeks, the Ministry of Health declared that the
products of MEO Sdn. Bhd. were not safe for consumption and
prohibited any purchase of MEO Meat from MEO Meat Sdn. Bhd. Mr
Foo is not certain about his position and came to you for advice.
Advise him.
4.2
Before we begin to discuss this section, we invite you to study the term
remedy. There are a lot of ways for you to describe remedy. In this case, we
would like you to focus on a particular definition of remedy given by the
Merriam Webster online dictionary. According to this online dictionary, remedy
can be defined as the legal means to recover a right or to prevent or obtain
redress for a wrong. In simpler words, we can say that a remedy for the breach of
contract is the legal solution to such a problem.
In addition to that, we invite you to take a close look at Figure 4.2 on some of the
remedies. The remedies for breach of contract are as follows:
4.2.1
Damages
To begin with, you should take note that, damages are granted to a party as
compensation for the damage, loss or injury he or she has suffered through a
breach of contract. In this case, an award of damages aims to put the plaintiff in
the position he would have been in if the contract had been performed.
(a)
Classification of Damages
There are different classifications of damages. Basically damages may be
classified as substantial, nominal and exemplary. Table 4.1 explains each
classification of damages in detail.
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Explanation
Substantial
damages
Nominal damages
Exemplary
damages
(b)
Measure of Damages
The next question to consider is how to determine the measure of damages
payable to the aggrieved party? Provisions relating to the measure of
damages are to be found in the judgement in the land mark case of Hadley
v. Baxendale (1854).
Hadley v. Baxendale (1854)
In this case, the plaintiff was a mill owner. He hired the defendant, a
carrier to take a broken crankshaft to Greenwich and asked for a new
one. The defendant (carrier) promised that it would be there the
following day, but the defendant had delays in transporting the
crankshaft. Consequently, the replacement was not delivered when it
should have been. The mill remained idle for a longer time. The plaintiff
sued for damages under two heads:
(i)
(ii)
The House of Lord allowed the damages under the first head but
disallowed damages under the second head as the defendant was not
informed of the special circumstances.
The rule based on the judgement in the case mentioned above has been
adopted in Section 74 (1) of the Contracts Act.
(ii)
Special Damages
The situation where the parties knew, when they made the contract,
that if he or she breached the contract, the other party would suffer
loss. Thus, in order to claim this type of damages the aggrieved party
must be able to prove that the defendant could foresee the loss.
You may refer to Illustration (j) of Section 74:
A, having contracted with B whereby to supply B with tons of iron at
RM100 a ton and to be delivered at a stated time. He (A) also contracts
with C for the purchase of 1000 tons of iron at RM80 a ton, telling C
that he does so for the purpose of performing his contract with B
(supply to B). C fails to perform his contract with A, who cannot
procure the iron, and B in consequence, rescinds the contract. C must
pay to A RM20,000 being the profit which A would have been made
by the performance of his contract with B.
The case in point is Victoria Laundry (Windsor) v. Newman
Industries Ltd [1949]. The plaintiff was a laundry company and had
contracted to buy from a defendant a boiler which is to be used in his
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The court held that the laundry company was entitled to recover for
the profits for ordinary laundry as the defendant must foresee their
loss if there was delay. However, the plaintiff was not entitled for
dyeing work because the defendant was not informed about that.
Another case is Tham Cheow Toh v. Associated Metal Smelters Ltd
[1972]. In this case the appellant had agreed to sell a metal melting
furnace to the respondent and giving an undertaking that the melting
furnace would have a temperature of not lower than 2,600 degrees F.
However, this specification was not fulfilled. Therefore the
respondent brought an action alleging breach of the condition and
claimed damages including the loss of profit. In this case, the court
was satisfied that the appellant knew the requirement to deliver the
furnace capable of producing the specified temperature and the
urgency of delivery. Therefore respondent was awarded with special
damages.
However, it should be noted here that according to Section 74(2) of
the Contracts Act, such compensation is not to be given for any
remote and indirect loss or damage sustained by reason for the
breach. In order to get a clear picture about the remoteness of
damages let us refer to the following illustration:
Illustration (n) of Section 74 of the Contracts Act
A contracts to pay a sum of money to B on a day specified. However,
A does not pay the money on that day. B, in consequence of not
receiving the money on that day, is unable to pay his debts and is
totally ruined. A is not liable to make good to B anything except the
principal sum he contracted to pay, together with interest up to the
day of payment.
Another section is Section 75 of the Contracts Act. This section deals with
the compensation for breach when the amount of damages is already
stipulated in the agreement.
Section 75 of the Contracts Act
When a contract has been broken, if a sum is named in the contract as to
the amount to be paid in case of breach, the party complaining about the
breach whether there is actual damage prove or not, to receive from the
party who has broken the promise the penalty.
Mitigation of Loss
What is mitigation of loss? Before you can define this, you need to know what
is meant by mitigation. The root word of mitigation is mitigate which
Merriam Webster online dictionary defines as an act to make something less
severe or painful. In this case, we can say that to mitigate loss is to lessen the
severe or pro-founding loss.
In this section, we are going to discuss in details on mitigation of loss. As a
starting point, the party seeking damages is under the duty to mitigate the
loss. Let us study the following case in order to have a better understanding
on this matter:
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4.2.2
Specific Performance
What do you understand about specific performance? Well, in this case, specific
performance is a court order requiring the defendant to perform the act promised
in the contract. It is worth taking note that the Specific Relief Act, 1950 provides
for the remedy of specific performance.
You should also be alerted that specific performance is only an optional remedy.
Table 4.2 will discuss why specific performance is consider as an optional
remedy.
Explanation
Section 20(1)(a)
Section 20(1)(c)
Section 21
Section 11(2)
Apart from the above details, it is wise for you to know that specific performance
may also be granted in cases where actual damage cannot be ascertained.
In short, specific performance is applicable only to contracts which involve the
sale of unique, one-of-a-kind items such as a particular restaurant or a famous
painting or a piece of land for business purposes.
4.2.3
Injunction
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Explanation
Interlocutory injunction
Mandatory injunction
Prohibitory injunction
Referring to Table 4.3, you should realise that there are three main injunctions
namely interlocutory, mandatory and prohibitory injunctions. Each injunction
has its own role and function under the law. Thus, we hope you can differentiate
between the three.
Apart from that, you should note that an injunction is an equitable remedy. The
term equitable suggests that the remedy is just and reasonable according to the
law. Thus, it can be varied or dissolved if the court discovers that the application
for injunction was made on suppressed facts or that the facts upon which the
order was granted no longer exist.
4.2.4
Quantum Meruit
What is quantum meruit? Well, quantum meruit is an award made where one
party has completed all or part of his side of the bargain before the others
breach. It is a payment of the amount deserved for what has been done up
until the breach. It is a restitutory award. The aim of the award is to put the
plaintiff in the position he would have been in if the contract had been
performed. It is a compensatory award.
ACTIVITY 4.1
For a more detailed definition and explanation on Quantum Meruit,
please refer to this website: http://dictionary.law.com
Basically, this website provides you with vast explanations on legal
terms which would be a useful reference for this module.
EXERCISE 4.2
1.
2.
B.
C.
D.
3.
Jojo has entered into a contract to sing at Putra Musical Hall for
RM15,000. The company already paid her RM5,000 in advance.
Two days before the performance is to take place, Jojo received a
better offer from another company. She accepted the offer and did
not turn up for performance at Putra Musical Hall. Advise the
parties.
4.
B.
C.
D.
To a third party.
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Where there has been a breach of contract, the aggrieved party will be
entitled to claim for remedies. Remedy is the way by which an innocent party
enforces his or her rights or corrects a loss.
There are several remedies available for breach of contract, among others are,
damages, specific performance, injunction and quantum meruit.
Breach
Frustration
Consequences
Injunction
Damages
Quantum meruit
Discharge
Specific performance
Topic
Law of
Agency
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
6.
INTRODUCTION
The laws in respect of agency are provided in the Contracts Act 1950 from
Section 135 to Section 191.
Section 135 defines an agent and a principal as:
Definition
Agent is a person employed to do any act for another or to represent another
in dealings with third persons, while a principal is the person for whom such
act is done or is so represented.
In other words, a principal may appoint an agent and give him authority to carry
out certain duties on his behalf as stipulated in a contract of agency.
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5.1
CREATION OF AGENCY
An agency can be created by five ways. Refer to Figure 5.1 to identify the creation
of an agency.
(a)
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(b)
(ii)
The husband expressly warns the tradesman not to supply his wife
with goods or credit;
In Miss Gray v. Catcard (1922), where a wife was supplied with clothes to
the value of 215, a husband was able to prove that his wife was given an
allowance for 960 a year. Therefore, the husband is not responsible for the
wife's loan.
Implied agency is usually formed in partnership businesses. Section 7 of the
Partnership Act 1961 provides that partners are agents to each other and to
the partnership firm when contracting in the course of the partnership
business.
In Mercantile Credit Co. Ltd. v. Garrod (1962), A, one of the partners sold a
car to a finance company and credited the sales money into the partnership
account without the consent of his partner, B. The finance company took
action when they found out that there was fraud in the sales. The court held
that B was entitled to recover the money from A.
(c)
Agency by Ratification
Ratification according to Section 149 is:
Definition
When acts done by an agent for his principal, where the principal has no
knowledge or does not give authority to do so to the agent, the principal
may elect to ratify or to disown the agent's act. If he elects to ratify them,
it has the effect as if they had been performed by his authority.
Ratification can only be done in the following conditions:
(i)
(ii)
Agent expressly acts as an agent for the principal and not on his own
name.
In Keighley Maxted & Co. v. Durant (1901), R, Keighley's agent was
authorised to buy wheat for the company at a certain price but bought
them at a higher price from D. R bought in his own name but
intended to buy for Keighley. Keighley agreed with R to take the
wheat at that price but failed to take delivery. The court held that
Keighley was not liable because the agent bought it in his own name
and Keighley did not ratify it.
(iii) The principal must have contractual capacity at the date of the
contract and at the date of ratification.
In Kelner v. Baxter (1866), at the time the agent entered into a
transaction with a third party, the principals company was about to be
formed.The court therefore held that the company had no contractual
capacity to make the contract since it did not exist at that time.
(iv) The principal must at the time of ratification have full kowledge of all
material facts unless it can be shown that he intends to ratify the
contracts, whatever the facts may be.
(v)
(vi) The ratification must not injure a third party. Section 153 provides
that the ratification of an agent's act must not result in a third party to
suffer damages or terminate his right or interest.
(vii) The ratification must be made within a reasonable time.
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When an agent's act which was originally not valid is ratified by his
principal, the ratification has these effects:
(d)
The ratification will validify entirely or wholly the act of the agent;
Agency by Neccessity
Section 142 provides that:
Provision
An agent has authority, in an emergency, to do all such acts for the
purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar
circumstances.
(ii)
Agency by Estoppel
If a principal by his words or conduct causes a third party to believe that a
person is his agent, even though he is not, and the third party relies on it to
his detriment, that person will be estopped or precluded from denying the
existence of the persons authority as an agent. This can also be categorised
as one of the examples of implied appointment of an agent.
EXERCISE 5.1
1.
2.
3.
What are the three conditions which must be satisfied for the
creation of an agency by neccessity?
4.
A husband is liable for any debts made by his wife with a third
party.
How is agency created in the above situation?
A.
By estoppel
B.
By ratification
C.
By express appoiment.
D.
By implied appoiment.
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TOPIC 5
5.2
TYPES OF AGENCY
After identifying the creation of agency, we will discuss types of agency. Please
refer to Figure 5.2 to identify types of agency.
Table 5.1 and Table 5.2 will clarify on agencies according to their jurisdiction and
functions.
Explanation
Universal
General
Special
Agency
According to
Functions
Explanation
Del credere
Factors
An agent who is entrusted with the goods of the principal for sale
and sells it on his own name. The agent has a lien over the goods, if
the principal fails to make payments.
Brokers
Auctioneers
Bankers
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5.3
AUTHORITIES OF AN AGENT
However, Section 139 states that the authority of an agent may be expressed or
implied.
Definition
Actual or Express authority is defined according to Section 140 as words
spoken or written and implied authority as "inferred from the circumstances
of the case, and things spoken or written, or in the ordinary course of
dealing"
(a)
(ii)
Implied Authority
In the case where in fact a principal does not give an agent express
authority, in certain circumstances, implied authority may be presumed to
exist and the principal must be liable for the acts of the agent. These two
situations may arise:
(i)
(ii)
Where the agent had authority to act, but that authority was
terminated by the principal without notice to the third party.
SELF-CHECK 5.1
You have learned about the authority of an agent while carrying out his
duties. Give examples of situations where both authorities of an agent
are present.
5.4
Every employee is responsible to perform his duties for his employer. The same
goes between an agent and his principal. Do you know what are the duties and
obligations of an agent to his principal?
Duties of an agent to his principal are provided in Section 164 to Section 178 of
the Contracts Act 1950 (hereinafter referred to as CA 1950). Refer to Figure 5.3 for
its illustration.
(a)
TOPIC 5
(b)
(d)
According to the two above provisions, an agent must render all moneys he
received during the execution of his duties, after deducting the permitted
amount such as any advances which he made and any commissions
promised by his principal.
If a principal fails to pay the promised commission to the agent, the agent is
entitled to retain the money on a lien until he is paid.
(e)
TOPIC 5
Provision
An agent has authority, in an emergency, to do all such acts for the
purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar
circumstances.
(f)
Not to Let His Own Interest Conflict with His Duty Illustration (A) of
Section 168 of the CA 1950
A directs B to sell As estate. B buys the estate for himself in the name of C.
A later on discovering that B has bought the estate for himself, may
repudiate the sale, if he can show that B has dishonestly concealed any
material fact, or that the sale has been disadvantageous to him.
In Wong Mun Hai v. Wong Tham Fatt (1987), an agent was found to have
sold his principal's land to his own wife well below market value. The
agent, therefore had acted in conflict with his duty.
(g)
Not to Make Any Secret Profits Out of the Performance of His Duty
Section 168 also states that an agent is not allowed to make any secret
profits. It may happen that in carrying out his duty for a third party by
using his principal's property, the agent made some extra profits for
himself, but if the principal knew and consented to it, the agent is entitled
to keep the profit.
If the principal does not consent to the agent's act of keeping the secret
profit, the principal has the following remedies:
(i)
May repudiate the contract agreed between the agent and the third
party.
(ii)
(iii) May refuse to pay the agent his commission or other renumeration.
May sue the agent and third party giving the bribe.
In Mahesan v. The Government Officers Cooperative Housing Society
(1978), an agent received bribes amounting to $122,000 from a land
vendor. It was for keeping a secret from the principal as to the real
value of a land. The court held that the principal was entitled to sue
for the amount of bribe received by the agent.
(h)
(i)
(ii)
(iii) It is presumed from the conduct of the parties that the agent would
have power to delegate his authority;
(iv) Where the nature of the agency is such that delegation of the
authority to another is necessary to complete the business;
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TOPIC 5
(v)
(vi) The act to be done is purely administrative or clerical and does not
involve the exercise of discretion.
EXERCISE 5.2
1.
Jack was instructed by his principal to send his car for rent to
Chew. However, Jack used the car to bring his family for
sightseeing and was involved in an accident. The car was badly
damaged. Who must be liable for the loss suffered due to the
damage on the car?
2.
3.
4.
5.5
A.
Special agent
B.
General agent
C.
Universal agent
D.
An agent has duties to his principal and the principal has duties to his agent too.
Do you know the rights and liabilities of a principal to his agent ?
After having discussed an agent's duties, the next discussion will focus on the
duties of a principal.
(a)
(b)
(ii)
(iii) The agent suffers injury during the course of his duty.
5.6
There are three effects which could result from a contract made by an agent, as it
varies according to the circumstances under which the agent contracted.
(a)
(b)
TOPIC 5
J. M. & Co. The court held that J. M. &Co. was not liable to pay demurrage
because they were only agents.
(c)
5.7
TERMINATION OF AN AGENCY
(a)
(ii)
The agent himself has an interest in the property which forms the
subject matter of the agency.
In this case, if the agent has carried out part of the principals
instructions, termination is only effective:
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If the agent has carried out part of his duties, revocation is not
effective on the part of duty already carried out by the agent.
(ii)
SELF-CHECK 5.2
State the effects of contract if these situations take place:
(a)
(b)
(c)
TOPIC 5
EXERCISE 5.3
1.
2.
3.
4.
B.
C.
D.
Both agent and principal have to observe several duties and obligations as
laid down under statutes and also as specified in their agreement.
Agency
Factors
Auctioneer
General agent
Bankers
Principal
Brokers
Special agent
Del credere
Universal agent
Drawer
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
Define goods;
2.
Explain the terms which exist under the sale of goods contracts;
3.
4.
5.
6.
INTRODUCTION
You have learned the law of contract in detail in the earlier topics. Now you will
be learning the law related to sale of goods. Whether in theory or in practice, this
is important to us as we are involved in selling and purchasing goods on a daily
basis. The law which governs these activities is the Sale of Goods Act 1957
(hereinafter referred to as the SGA 1957).
We will be studying the definition of goods, terms under the sale of goods
contracts, principles for transfer of title, performance of contract, unpaid sellers
right and remedies claimable for a breach of contract.
6.1
DEFINITION OF GOODS
Based on the definition, nearly every movable thing are goods except money and
actionable claims for debts or others.
6.1.1
Types of Goods
There are two types of goods. Explanation about these types are given in Table 6.1.
Table 6.1: Types of Goods within the Context of the Law
Types of
Goods
Existing
Goods
Explanation
Example
Future
Goods
Both types of goods can be further classified into two, which are:
(a)
Specific goods or ascertained goods are goods seen and identified by the
buyer; and
(b)
SELF-CHECK 6.1
List down four examples of both types of goods that you have learnt.
6.2
Definition
A contract of sale of goods is a contract whereby the seller transfers or agrees
to transfer the property in goods to the buyer for a price.
When a contract of sale involves existing goods, the contract is called a sale. A
transaction which involves future goods is called an agreement to sell. This is
because the property is to be transferred in future or is subject to several
conditions that need to be complied with.
Section 4(4) SGA 1957 states that an agreement to sell becomes a sale when the
time elapses or the conditions are fulfilled subject to which the property in the
goods is to be transferred.
6.3
Next, you will study the terms of a contract of sale. Terms of a contract are
conditions which exist in the contract of sale, whether expressed or implied.
6.3.1
Before you study the conditions of a contract, you need to look at how a contract
is formed. Section 5 of SGA 1957 provides as follows:
(a)
A contract of sale is made by an offer to buy or sell goods for a price and
the acceptance of such an offer. The contract may provide for the immediate
delivery of the goods or immediate payment of the price or both, or for the
delivery or payment by instalments, or that the delivery or payment or both
shall be postponed.
(b)
Subject to any law for the time being in force, a contract of sale may be
made in writing or by word of mouth, or partly in writing and partly by
word of mouth or may be implied from the conduct of the parties.
Price is usually meant in the form of money and Section 9 of SGA 1957 provides
that price can be fixed as follows:
(a)
(b)
(c)
Price can also be fixed by the course of dealing between the parties.
Example: Nasir made a contract to supply office stationery for a year to
Zahid. However, if Nasir continued to supply the stationery even after the
contract period had expired, the conditions in the original contract will be
binding on both parties.
(d)
If price is not fixed, the buyer shall pay the seller a reasonable price.
Section 5(1) of SGA 1957 also permits a contract of sale be made by:
(a)
(b)
(c)
(d)
A contract of sale requires the elements of offer, acceptance and price for its
formation. It may also be made in writing or by word of mouth, and under some
circumstances, be implied by the conduct of the parties to the contract.
However, the Hire-Purchase Act which specifically provides a hire-purchase
contract must be made in writing. This contract is one of the modes mentioned in
Section 5(2) of SGA 1957.
6.3.2
In conclusion, according to the Act, if any conditions are not complied with, the
contract is void but if a warranty is not complied with, the other party is only
entitled to claim for damages. However, a contract does not usually state clearly
if a stipulation made in the contract is a condition or a warranty. Whether a term
is a condition or a warranty depends on the construction and intepretation of the
particular contract of sale. A stipulation which was meant to be only a warranty
may be deemed a condition or otherwise.
The general rule: A breach of condition gives rise to a right to the innocent party
to treat the contract as repudiated. However, if the following five situations arise
as exceptions to the general rule, it gives only a right to claim for damages
(Section 13 of the SGA 1957).
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(a)
(b)
The buyer elects to treat the breach of the condition as a breach of warranty
and claim for damages only;
(c)
The contract of sale is not severable and buyer has accepted the goods or
parts of the goods;
(d)
(e)
The contract of sale is for specific goods, and the property of the goods has
passed to the buyer, a breach of the condition should be presumed as a
breach of warranty except if the contract stipulates otherwise.
6.3.3
Stipulation as to Time
Provision
Section 11 of the SGA 1957 provides unless a different intention appears from
the terms of the contract, stipulations as to time of payment are not deemed to
be of essence of a contract of sale.
Example: If a buyer fails to pay within the stipulated time, a seller cannot
repudiate the contract made between them. However, most contracts of sales
stress on time and stipulate it expressively in the contracts. Time is, therefore,
presumed to be of essence to the contract.
6.3.4
Implied Terms
Do you know that implied terms exist in a contract? What do you understand by
implied terms in a contract? Should there be implied terms in a contract? Think
about it.
There would be express stipulations made and agreed by the contracting parties
in a contract of sales. However, the SGA also provides several implied terms to
be impressed on the parties during their sales and purchase transactions, unless
they have included or modified the terms in the said contract of sales.
The implied terms are stated in Section 14 to Section 17 of the SGA 1957. Refer to
Figure 6.1.
(a)
An implied condition that in the case of a sale, a seller has the right to
sell the goods and in the case of an agreement to sell, a seller will have
such right at the time when the property is to be transferred;
(ii)
An implied warranty that the buyer shall have and enjoy quiet
possession of the goods; and
(iii) An implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to
the buyer before or at the time when the contract is made.
Section 14(a) of the SGA 1957
General Rule:
The seller must have a valid right over the goods at the time he transferred
them to the buyer to enable the buyer to receive the title and enjoyment of
the goods.
In Rowland v. Divall (1923), Rowland bought a car from Divall and used it
for a few months. R later found out that D was not the valid owner of the
car as the real owner now claimed it from Rowland. Rowland sued to
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recover the total purchase price he had paid to Divall. The court held that
Rowland was entitled to recover it in full, notwithstanding that he had used
the car for a few months.
Section 14(b) of the SGA
General Rule:
When a seller transfers possession of the goods to a buyer, there is an
implied warranty according to Section 14(b) of the SGA 1957 that the buyer
shall have and enjoy quiet possession of the goods.
In Healing (Sales) Pty Ltd v. Inglis Electric Pty Ltd (1968), the court laid the
principle that a seller who has not been paid the full purchase price or
partly paid may not interfere with the goods sold.
Section 14(c) of the SGA 1957
General Rule:
Any goods to be transferred to a buyer shall be with an implied warranty
that it is free from any charge or other encumbrance and it was not known
by the buyer.
Example: Rahmat agreed to buy a house from Abdullah. Rahmat only
knew that the house was charged to the bank after the sales and purchase
transaction was made. Abdullah is liable for breach of the implied warranty
for selling a house which is not free from an encumbrance.
However, if Rahmat knew of that fact and still agreed to buy the house,
there is no breach of implied warranty.
(b)
A sale of goods by description normally takes place when a buyer does not
have sight of the goods but agrees to buy after relying on the description of
the goods for example, from catalogues.
In Nagurdas Purshotumdas & Co v. Mitsui Bussan Kaisha Ltd (1911), a
contract of sale was made between two parties in a sale of a well-known
type of flour. After the buyer ran out of such flour, he made an order
describing it as the same as our previous contract. The seller delivered
flour identical in quality as the previous one but of a different brand. It was
held that the seller did not comply with the buyers stipulated description.
A sale by description is also applicable to cases where a buyer viewed the
goods but defects in its description could not be clearly detected.
An example could be seen in Beale v. Taylor (1967). A car salesman
advertised a car Herald Convertible, white for sale. The buyer
inspected the car before buying it. After buying it, he discovered that the
car consisted of parts of two cars welded together, one being earlier than
1961. The court held that the buyer was entitled to sue for damages because
there was a breach of contract.
(c)
There is no implied term that the goods sold fits the particular
purpose it was bought except if:
The buyer purchases goods that are usually sold by the seller in
the course of his business.
(ii)
(iii) The goods shall be free from any defect rendering them
umerchantable which would not be apparent on reasonable
examination of the sample.
In Godley v. Perry (1960), a boy bought a plastic catapult from P, a
shopkeeper. G used the catapult and it broke in his hands and part of it
ruptured Gs eye. P alleged that he bought a quantity of these catapults
from a wholesaler by sample and Ps wife had tested the sample before
placing the order.
The court decided that the catapult was not of merchantable quality. The
shopkeeper could recover from the wholesaler. It was held that reasonable
examination was made by the seller but the defect of the goods could not be
discovered by reasonable examination. Therefore, the seller could recover
from the wholesaler.
SELF-CHECK 6.2
Based on Section 5 of the SGA 1957, there is a close similarity
between a contract of sales and an ordinary contract. What are the
differences between the two contracts? Post your answers in the
forum.
EXERCISE 6.1
6.4
1.
2.
3.
4.
TRANSFER OF TITLE
According to the maxim of nemo dat quad non habet (no one gives who
possesses not), goods sold by a person who has no right on the goods or without
the owners or possessors permission, cannot transfer the goods to the buyer. It
is also termed as sales by person not the owner.
Provision
Section 27 of the SGA 1957 (clearly similar to the maxim of nemo dat)
provides:
Subject to this act, and of any other law for the time being in force, where
goods are sold by a person who is not the owner thereof, and who does not
sell them under the authority or with the consent of the owner, the buyer
acquires no better title to the goods that the seller had, unless the owner of the
goods is by his conduct precluded from denying the sellers authority to sell
Example: A drug addict stole a pair of shoes and sold them to you. Even if you
do not know that the shoes were stolen goods, you do not have the right over
them. If the real owner claims them, you have to give him back the shoes.
The purpose of this principle is to protect the interest of the owner of goods sold
without his consent or stolen from him.
In Lim Chui Lai v. Zeno Ltd. (1964), Ahmad, a contractor, obtained a contract to
build sewerage from the Petaling Jaya Local Authority and made an agreement
with Zeno Ltd, to supply the materials needed for sewerage works. Zeno Ltd
supplied the said materials to the building site. Several problems arose which
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caused the contract between Petaling Jaya Local Authority and Ahmad to be
nullified. Ahmad was later found to have sold the materials supplied by Zeno
Ltd to Lim Chui Lai. Zeno Ltd alleged that the materials were theirs, and Ahmad
had no authority to sell them to other persons. The court held that Ahmad was
just a bailee and not the possessor who has the right to sell the said goods to a
third party.
However, there are exceptions to the nemo dat principle. The exceptions are in
the situations as stated in Figure 6.2.
6.4.1
Estoppel
The first exception to the nemo dat principle is stated in Section 27 of the SGA
1957, which is:
Provision:
Section 27 of the SGA 1957 states that:
Subject to this act, and any other law for the time being in force, where goods
are sold by a person who is not the owner thereof, and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no
better title to the goods that the seller had, unless the owner of the goods is by
his conduct precluded from denying the sellers authority to sell.
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If the owner by his conduct, appeared as though he consented to the sale made
by the seller to a third party, the owner is precluded from denying that the seller
has no authority to do so.
Example: Ali wished to sell Jamals cassette to Hamid. Jamal was aware of Alis
conduct, but did not do anything to stop it. Therefore, it appears as though Jamal
had given Ali an authority to sell it. Jamal is precluded from making any claims
on Hamid.
In Syarikat Batu Sinar Sdn Bhd & YL v. UMBC Finance Bhd & YL (1990), the
second plaintiff (Supreme Leasing) purchased a tractor from a seller and leased it
to the first plaintiff (Sykt Batu Sinar). The first defendant (UMBC) had previously
bought the same tractor from the seller and leased it to the second defendant.
However, at the time UMBC purchased it, the registration card to the tractor was
in the sellers possession and no certification was made in the card to show that the
tractor then belonged to UMBC. The issue was on who was entitled to the tractor.
The court held that the failure by UMBC to take steps to make the certification in
the registration card precluded it from denying Supreme Leasing of its title to the
tractor.
6.4.2
The second exception is stated in Section 27 of the SGA 1957, that is:
Provision
Provided that where a mercantile agent is, with the consent of the owner, in
possession of the goods or of a document of title to the goods, any sale made
by him when acting in the ordinary course of business of a mercantile agent
shall be as valid as if he were expressly authorised by the owner of the goods
to make the same; provided that the buyer acts in good faith and has not at the
time of the contract of sale notice that the seller has no authority to sell.
There are five conditions to be complied with under Section 27 under this
exception:
(a)
The seller is a mercantile agent according to the Act. Section 2 of the SGA
1957 defines them as a mercantile agent as one having in the customary
course of business, as such agent authority either to sell goods, or to
consign goods for the purposes of sale, or to buy goods, or to raise money
on the security of the goods;
(b)
Has posession of the good or document of title at the time of the sale;
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(c)
The keeping of the goods or document of title with the owners consent;
(d)
The sale was in the ordinary course of business of a mercantile agent; and
(e)
The buyer bought them in good faith and has no notice that the mercantile
agent has no authority to sell.
In Folkes v. King (1923), F owned a car and delivered it to a mercantile agent for
sale. The mercantile agent sold it to K and disappeared with the money he
received from K. The court held that K bought the car in good faith and the
mercantile agent sold it with Fs consent. K therefore had a good title to the car.
6.4.3
Provision
Section 28 of the SGA 1957 provides that if one of several joint owners of
goods has the sole possession of them by permission of the co-owners, the
property in the goods is transferred to any person who buys them of such
joint owner in good faith and has not at the time of the contract of sale notice
that the seller has no authority to sell.
A buyer who buys goods which are jointly-owned by several persons has the
right over the goods bought if the buyer complies with these conditions:
(a)
(b)
The buyer bought them in good faith and has no notice at the time of the
contract that the seller has no authority to sell.
If the buyer was able to comply with these conditions, any other joint-owner
could not sue for the recovery of those goods from the buyer.
6.4.4
Provision
Section 29 of the SGA 1957 provides where the seller of goods has obtained
possession thereof under a contract voidable under Section 19 or section 20 of
the Contracts Act 1950, but the contract has not been rescinded at the time of
the sale, the buyer acquires a good title to the goods provided he buy them in
good faith and without notice of the sellers defect of title.
Section 29 of SGA 1957 clearly provides that any goods obtained by the seller
from the original owner by coercion, fraud, misrepresentation or under influence,
and the seller sold them to a buyer who bought in good faith without notice of
the real situation, the original owner of the goods cannot claim for recovery of
the said goods.
Example: Kamil bought a watch from Daud by fraud. Kamil sold it to Salmah.
The contract between Kamil and Daud was voidable at Dauds option. If Daud
did not rescind the contract before Kamil sold it to Salmah, Salmah then has a
valid right over the watch.
In Car and Universal Finance & Co Ltd v. Caldwell (1965), Caldwell, the owner of
a Jaguar car, was persuaded to sell and deliver a car to a rogue, who gave Caldwell
a car of a much lower value and a cheque which Caldwell later found to be
worthless. Caldwell reported to the police and asked the Automobile Association
to recover his car. They found that the car had passed through several hands and
eventually was acquired by the Car and Universal Finance Co. Ltd.
The court held that even though the Car and Universal Finance purchased the car
in good faith without notice of the real situation, since Cadwell had acted
speedily in rescinding the contract with A, the rogue, Cadwell was still entitled
to the car.
6.4.5
Provision
Section 30 (1) of the SGA 1957 provides when a seller having sold goods to a
buyer continues to be in possession of the goods, the transfer by that seller of
goods to a new buyer who receives the same goods in good faith and without
notice of the previous sale shall have the same effect as if the seller making the
delivery or transfer was expressly authorised by the owner (the first buyer) to
transfer them to the new buyer.
(b)
(c)
The same goods sold by the seller or agent to a second buyer; and
(d)
The second buyer bought them in good faith without notice of the first sale.
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In Pacific Motor Auction Pty Ltd v. Motor Credits (Hire Finance) Ltd (1965), the
plaintiff put several of his cars at a car dealers shop and made an agreement for
the sale of the cars. Problems arose between them and the plaintiff rescinded his
agreement with the car dealer but he left them there. The car dealer then sold the
said cars to the defendant without his consent. The Privy Council held that the
defendant was entitled to the car he bought.
6.4.6
There are four conditions to comply with in Section 30(2) of the SGA 1957 before
the exceptions are applicable:
(a)
(b)
(c)
The same goods sold by the buyer or his agent to a third party or a new
buyer; and
(d)
In Newtons of Wembley Ltd v. Williams, A bought a car from the plaintiff and
paid by cheque. The cheque was found to be worthless. The plaintiff found out
that A sold the same car to B. B then sold it to the defendant. The Court held that
since the car was in As possession with the plaintiffs consent even though the
cheque was worthless and the car was already transferred to the defendant, the
defendant therefore had a valid right over the car.
ACTIVITY 6.1
Read the situations below. Give your opinion and identify the exceptions
for each situation.
1.
First Situation
Zulkifli threatened Mas Ayu into selling her car to him. Anis, a third
party who did not know about the previous transaction, bought it
from Zulkifli. Mas Ayu did not take any steps to rescind the contract.
Is Anis entitled to the car? State the exception applicable.
2.
Second Situation
Daniel lent his video recorder to Shah. Shah said he wished to sell
the video recorder to Linda but Daniel did not pay serious
attention. Shah sold it to Linda and Daniel sued Linda for recovery
of the video recorder. Is Daniel still entitled to the video recorder?
3.
Third Situation
Kamala made an agreement with David to sell 20 horses he reared.
A misunderstanding arose between them and the contract was
rescinded. Kamala, however did not take back the horses from
Davids possession, though David kept urging her to do so several
times. David later sold the horses to a buyer and Kamala sued for
recovery of the horses. Is Kamala entitled to the horses? State the
exception applicable.
EXERCISE 6.2
1.
2.
State six exceptions to the rule of nemo dat quad non habet.
3.
B.
C.
D.
6.5
PERFORMANCE OF CONTRACT
6.5.1
Delivery
Section 33 of the SGA provides that delivery may be made according to the
manner agreed by all the parties involved in the contract of sale. Delivery is then
presumed done or has the effect of putting the goods in the possession of the
buyer.
Section 32, on the other hand, specifically states that delivery of goods and
payment of the price are concurrent conditions which the seller and the buyer
must comply. A seller is presumed ready and willing to give possession of the
goods to the buyer in exchange for the price and the buyer should be ready and
willing to pay the price in exchange for possession of the goods.
6.5.2
The above provision states three places where delivery can be made:
(a)
If the goods were at the place where the sale was made, delivery must be
made at that place;
(b)
If the goods are at a different place, the said goods must be delivered at the
place at which they are at the time of the agreement to sell; and
(c)
If the goods does not exist yet, the goods must be delivered at the place
which they are manufactured or produced.
However, if time of delivery is not fixed in the contract of sale, the seller is bound
to deliver the goods within a reasonable time (Section 36(2)).
6.5.3
While goods are in the possession of a third person, the seller is presumed to
have made no delivery unless such third party acknowledges to the buyer that he
holds the goods on his behalf. This is provided for in Section 36(3).
6.5.4
Instalment Deliveries
6.5.5
Wrong Delivery
If the quantity of goods delivered to the buyer is larger than or lesser than that agreed
in the contract, what is the effect on the goods? Has this ever happened to you?
If the goods delivered is lesser than the agreed quantity in a contract, the
buyer is entitled to reject them. However, if the buyer accepts, he, must then
pay according to the agreed price in the contract.
If the quantity delivered is larger than agreed in a contract, the buyer can reject
the balance. However, if he agrees to accept them, the buyer must pay for them at
the agreed rate. If the seller delivers goods he is contracted to sell mixed with
goods of a different description not included in the contract, the buyer is entitled
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to accept only the goods which are in accordance with the contract and reject the
rest, or may reject the whole delivery.
Section 37 provides that wrong delivery is subject to any usage of trade, special
agreement or course of dealing between the parties.
6.5.6
Risks
6.5.7
Acceptance
Section 41 of the SGA 1957 gives a right to the buyer to examine the goods before
making an acceptance of goods delivered. The seller, on the other hand, must
give the buyer a reasonable opportunity to ascertain whether the goods are in
conformity with the contract or not.
A buyer is deemed to have made an acceptance when:
(a)
(b)
The goods are delivered to him and he did not act in a way inconsistent
with the sellers ownership, for example, by selling the goods to others; and
(c)
After a lapse of a reasonable time, the buyer retains the goods without
intimating to the seller that he has rejected the goods.
In M. G. Seth & Ors v. Lam Tye Co Ltd (1954), the appellant and respondent
made a contract of sales of tiles from India. It was a c.i.f contract (cost, insurance,
freight) and a sale by description. The tiles sent by the seller unfortunately did
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EXERCISE 6.3
6.6
1.
2.
What are the risks that a seller and a buyer have to face when
performing a contract of sale?
3.
When the whole of the price has not been paid or tendered; and
(b)
The unpaid sellers right is provided in Section 46(1) of the SGA 1957. It states
that even if the property in the goods may have passed to the buyer, an unpaid
seller is, by implication of law, entitled to:
(a)
(b)
In cases of insolvency of the buyer after the transfer of the goods, seller has
the right to stop the goods in transit; and
(c)
A right of resale.
6.6.1
Lien
Lien is a right of the seller to retain possession of the goods until payment is
made. It can be exercised under these circumstances:
(a)
(b)
Where the goods was sold on credit, but the term of credit has expired; and
(c)
If part delivery of the goods has been made, Section 48 of the SGA 1957 provides
that an unpaid seller may exercise his right to a lien on the remainder. However,
he loses the right to a lien if:
(a)
The seller delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods;
(b)
(c)
6.6.2
Stoppage in Transit
Section 50 of the SGA 1957 provides that if a buyer of goods becomes insolvent
and the unpaid seller is no longer in possession of the goods, the unpaid seller
has the right to stop the goods in transmission to the buyer and retain them until
payment is made.
Two crucial elements in this Section are that the buyer is insolvent and the goods
are in transmission.
Goods are deemed to be in transit if:
(a)
The goods are delivered to a carrier or other bailee for the purpose of
transmission to the buyer;
(b)
The goods delivered by the carrier has not reached the appointed
destination;
(c)
If, after the arrival of the goods at the appointed destination, the carrier
acknowledges the buyer that he holds the goods on the buyers behalf and
continues in possession of them as bailee for the buyer, immaterial that a
further destination for the goods may be indicated by the buyer;
(d)
If the goods are rejected by the buyer and the carrier continues in
possession of them even if the seller has refused to receive them back;
Copyright Open University Malaysia (OUM)
(e)
The carrier wrongfully refuses to deliver the goods to the buyer; and
(f)
In cases where part delivery of goods has been made to the buyer, the right
to stop the goods in transit can be made on the remainder of the goods
except if there is an agreement made to give up possession of the whole of
the goods.
Stoppage of goods in transit can be done according to Section 52 of the SGA 1957.
It is provided that the seller has the right of either taking actual possession of the
goods or giving notice of his claim to the carrier. Such notice may be given either
to the person in actual possession of the goods or to his principal. If the notice
was given to the principal, the principal must be given reasonably enough time
and opportunity to communicate to his agent.
6.6.3
Resale
(b)
After the unpaid seller gives notice to the buyer, the buyer does not within
a reasonable time pay for the goods; and
(c)
SELF-CHECK 6.3
What rights may a seller sue for if the goods he sold were not paid for?
6.7
If one of the parties, whether a seller or a buyer breached a contract, how far does
the law protect the parties involved in the contract? Think of this matter.
If one of the parties to a contract of sale defaulted or breached the contract, the
other party is entitled to make a claim.
6.7.1
Every seller is protected under the law and entitled to claim if the buyer
defaulted on the contract. Let us identify the claims that a seller can make as
illustrated in Figure 6.3.
6.7.2
Like a seller, a buyer is also protected under the law and is entitled to sue if a
seller breaches the contract. Let us identify the claims that a buyer can bring as in
Figure 6.4.
ACTIVITY 6.2
With all that you have understood now and referring to all the
relevant sections, write a short essay on the remedies a seller may
claim for breach of contract.
EXERCISE 6.4
Which is NOT the right given to unpaid seller according to the Sale of
Goods Act 1957?
A.
Right of lien
B.
Right of resale
C.
D.
There are three main elements in a contract of sale of goods, namely, there
must be goods available, the seller transfers or agrees to transfer the property
in goods and there is a price.
Generally, every movable thing are goods except money and actionable
claims for debts or others.
Price is usually meant in the form of money. The price can be fixed either
specifically by the contract or in a manner agreed by the contract or by the
course of dealing between the parties. If price is not fixed, the buyer shall pay
the seller a reasonable price.
The terms of contract of sale of goods can be classified into conditions and
warranties. Whether or not the term in the contract is actually a condition or a
warranty depends on the the construction and intepretation of the particular
contract of sale.
As a general rule, a person who has no right on the goods or without the
owners or possessors permission, cannot transfer the goods to the buyer.
This is known as nemo dat quod non habet which is set out in Section 27
SGA. However there are several exceptions to this rule. The exceptions are:
Estoppel;
There are three rights of an unpaid seller against the goods. The rights are
lien, stoppage in transit and right to resale.
In the case of breach, either by seller or buyer, the party not in default may
claim for remedies.
Breach
Sale
Estoppel
Title
Goods
Transit
Lien
Topic
Hire Purchase
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
6.
7.
and
sellers
liabilities
if
there
is
INTRODUCTION
After having identified and studied the laws which govern the sale of goods, this
topic will discuss in depth the laws which govern hire purchase activities. The
law applicable for hire purchase activities is the Hire Purchase Act 1967
(hereinafter stated as HPA). It is applicable to all types of hire purchase in respect
of goods listed in the First Schedule of HPA, that is:
(a)
All consumer goods (S 2(1) consumer goods means goods purchased for
personal, family or house hold purposes).
TOPIC 7
(b)
Invalid carriages;
(ii)
Motorcycles;
In this topic, you will also learn the definition of hire purchase, principles for the
formation of a hire purchase agreement, implied terms in the agreement, the
owners and the sellers liabilities for misrepresentation, the rights as well as
liabilities of the hirer, the procedures for taking possession by the owner and the
hirers right if goods were repossessed.
7.1
Section 2(1) of the HPA 1967 defines a hire purchase agreement as letting of
goods with an option to purchase. A hire purchase agreement can also be defined
as an agreement for the purchase of goods by instalments (whether the
agreement stipulated the instalments as rent or hire or otherwise). However, hire
purchase agreement does not include any agreement:
(a)
In respect of goods where the property in the goods passed at the time of
the contract or upon delivery or at any time before goods delivered; and
(b)
Where the buyer or hirer of the goods is a person who deals in the normal
course of a trade or business of selling similar goods having the same
description with the goods under the agreement.
Definition
Based on the definition, there are two important elements that you must
understand. First, hire-purchase is a choice to buy goods after hiring it for a
certain period of time. Second, there is an agreement made between the owner
and the hirer that the goods is bought by instalments and the title to the goods
will not pass to the hirer until he has finished paying the full price of the goods.
In Tractors Malaysia Bhd v. Kumpulan Pembinaan Malaysia Sdn Bhd (1979), the
respondent sued for damages when the appellant repossessed his goods. The
respondent alleged that the business transaction was a mere sale and not a hire
purchase. The court held that, based on the agreement, both parties to the
contract had agreed to transfer the possession of the goods after the full price was
paid by the respondent. Therefore, the transaction was a hire purchase
agreement.
7.2
The HPA 1967 stipulated three stages which need to be complied by the parties
who wish to enter into a hire purchase agreement. Figure 7.1 shows that the
formation of a hire purchase agreement is divided into three stages, that is,
before, during and after the agreement.
(a)
Before (Negotiation)
As stated, before a hire purchase agreement is formed, it must conform to
the procedure which has been stipulated. Figure 7.2 illustrates the
formalities before the formation.
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(b)
Figure 7.3: Stage at the time of the formation of hire purchase agreement
It should be noted that under the 2011 amendment of Hire Purchase Act,
there are few additional formalities which should be observed if the hire
purchase agreement comprised of a motor vehicle. The new added
formalities are as follows:
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(i)
Section 4E of the HPA provides that, the hirer may request in writing
to keep the registration certificate of the hired motor vehicle. Upon the
request, the owner shall hand over the registration certificate to the
hirer. Failure to do so would result in the owner being guilty of an
offence under the Act and the penalty is under Section 46(1) of the
HPA.
(ii)
Section 4F of the HPA states that, the hire purchase agreement shall
not be entered into if the motor vehicle has been altered or modified in
its construction and structure. If there was any modification to the
motor vehicle at the point of signing the hire purchase agreement,
then the agreement shall be deemed void.
Any person who contravenes these particular procedures and formalities shall be
guilty of an offence and will be subjected to the following penalty as stated under
Section 46(1) of the HPA:
(a)
Penalty imposed to the body corporate for example bank, finance company
or dealers:
(i)
(ii)
For second offence and so forth Fine not exceeding RM250, 000.
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(b)
(ii)
SELF-CHECK 7.1
Presume that one of your friends wishes to sign a hire purchase
agreement. Explain to him the procedures that must be complied
with. Do this activity in class.
EXERCISE 7.1
1.
2.
B.
C.
D.
7.3
Section 7 of the HPA provides that there are five implied terms in a hire purchase
agreement, as seen in Figure 7.5.
(a)
(b)
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In Ahmad Ismail v. Malayan Motor Co. & Ors (1973), a car on hire purchase
was detained by the police on suspicion that it was stolen. However, the car
was released because there was no evidence that it was a stolen good. The
court held that because the car was not a stolen good, the owner thereof had
the right to sell it.
(c)
Steinke v. Edwards (1935) showed that a hirer can sue if the owner fails to
ascertain whether goods for hire purchase is free from any charges or
encumbrance. In this case, the plaintiff gave a sum of money to the
defendant for the settlement of a tax imposed on the car. The defendant
however failed to do so. Therefore, the plaintiff can make a claim on the
defendant.
(d)
When the hirer has examined the goods or a sample, in regards to any
defects which that examination ought to have revealed.
(ii)
The buyer of goods has examined the goods, and defects are
revealed after the inspection.
In Lau Hee Teah v. Hargill Engineering Sdn Bhd & Ors (1980), a
hirer inspected a machine during negotiations but its defect was
not visible. The hirer then bought it by hire purchase. The court
held that the inspection made was not enough to reveal the defect
with the engine. The owner therefore could not deny that the
machine was of merchantable quality.
(e)
It is a second-hand good.
(ii)
The fitness of the goods was negatively expressed and the owner
proves that the hirer was informed about the matter.
EXERCISE 7.2
1.
2.
3.
4.
B.
C.
D.
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7.4
(b)
SELF-CHECK 7.2
Imagine a situation where you, as hirer, have been misrepresented by
the owner during negotiations. What would be your course of action?
Can you rescind the contract? Discuss in class.
7.5
The Hire Purchase Act also provides seven rights which a hirer can claim for
under a hire purchase agreement. The laws that govern these rights are in Section
9 to Section 15 of the HPA. To get a clearer picture of hirers rights and liabilities,
refer to Figure 7.6 below.
(a)
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(i)
(ii)
The total amount which has become due under the agreement but
remains unpaid;
(iii) The amount which is to become payable under the agreement; and
(iv) The amount of interest out of the instalment payment.
However, if the owner had supplied these statements within the previous
three months, the owner no longer needs to supply the same statement
within the stipulated 14 days.
If the owner failed to comply with the provisions of Section 9, the owner
cannot enforce the agreement against the hirer, sue for recovery of the
goods or enforce the guarantee in respect of the said agreement. However,
this does not mean that the agreement is void. In such situation, only the
owners right to enforce the agreement is temporarily suspended until the
owner supplies such statements.
It becomes an offence if the owner however within a period of one year still
continuously fails to forward the statement to the hirer. If proven guilty, he
could be fined for not more than RM1,000.
(b)
(d)
(ii)
(iii) The High Court is satisfied to declare that the owner has unreasonably
withold his consent, upon the application by the hirer under Section
12(3) of the HPA.
(iv) The owner requires other or additional guarantors to guarantee the
assignees obligation, whereas:
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(e)
(f)
(e)
EXERCISE 7.3
1.
2.
3.
7.6
A.
B.
C.
D.
REPOSSESSION BY OWNER
Have you ever been in a situation where after possession of the goods was
transferred to you and you are the new owner of the said goods, the original
owner sued you for recovery of the goods? Is he entitled to the goods?
TOPIC 7
(b)
The total payment of instalments paid by the hirer amounts to not more
than 75% of the total cash price of the goods as in the hire purchase
agreement.
(c)
The owner served a notice in writing in the form set out in the Fourth
Schedule of HPA; and
(d)
The period fixed by the notice has expired which shall not be less than 21
days after the service of the notice.
In Phang Brothers Motors Sdn Bhd v. Lee Aik Seng (1978), the court held that
because the Fourth Schedule notice was less than two days from the specified
period, the notice therefore was not valid and the repossession cannot be carried
out.
However in United Manufacturers Sdn Bhd v. Sulaiman bin Ahmad and Others
(1989), the court held that Section 16(1) only provided for the minimum period,
that is, 21 days. An action to repossess brought two years after the notice was
served however may still be presumed valid.
It should be noted that by virtue of section 16 (1A) of the HPA if the hirer
defaulted two successive instalments and the total payment of instalments is
more than 75% of the total cash price of the goods, the owner may not repossess
unless he has obtained an order from the court.
There are also cases where a hirer died. Section 16(1C) of the HPA stipulates that
an action for repossession can only be carried out if there is a default of four
payments successively.
As stated in Section 16(1) of the HPA, it is crucial to give notice before the act of
repossession can be carried out. However, Section 16(2) of HPA provides an
exception to the need for an owner to serve notice to the hirer, that is if there is a
reasonable ground for believing that the goods will be removed or concealed in
another location if a notice is served.
After the procedures according to Section 16(1) of the HPA are complied with,
the owner needs to comply with the following procedures also, which are:
(a)
Section 16(3) of the HPA within 21 days after repossession, the owner
must serve on the hirer and every guarantor of the hirer, a notice in writing
as in the form set out in the Fifth Schedule of HPA.
(b)
For the Fourth and the Fifth Schedule mentioned in Section 16 of HPA, reference
can be made to the Fourth and Fifth Schedule in the Hire Purchase Act 1967.
The document of acknowledgement of receipt must be served to the hirer at the
time repossession was made or if the hirer is not around, it must be given after
the repossession.
However, if a hirer feels that he cannot afford to settle the amount due but
remains unpaid after being served with the Fourth Schedule notice, the hirer is
entitled to return the goods within 21 days. Under this situation, the costs for
repossession and other costs will not be imposed on the hirer. This is explained in
Section 16A of the HPA.
After repossession, the owner cannot dispose of the goods without taking these
procedures in accordance with Section 17(1);
(a)
(b)
(c)
Failure to follow the procedures laid down in Section 16(1) will give the owner no
right to enforce repossession. If he still does it, his act is presumed to be unlawful.
In D. P. P. v. Mohamad Nor (1988), when a hirer failed to settle the instalment
payment, the owner sent a few agents to take further action. However, the owner
failed to give the Fourth Schedule notice as stipulated by the Act. The hirer was
said to be holding a chopper and a spear when the owners agent was carrying
out repossession. The court held that the owners action was unlawful and the
hirer was entitled to use reasonable force.
TOPIC 7
Section 16(6) of the HPA provides that the right of the owner ceased and
determined under the Hire purchase agreement if he failed to serve the Fifth
Schedule notice. However, if the hirer sued for recovery of the goods from the
owner, the agreement has the same force and effects as if the notice had been
duly given and therefore enforceable.
Based on all that you have learned previously, that is repossession by the owner,
try to draw a mind map of the procedures to make it clearer.
7.7
Section 18(1) of the HPA where the owner repossesses any goods comprised in
a Hire purchase agreement, the hirer may have certain rights, as follows:
(a)
The hirer, within 21 days after repossession of the goods, after the service of
a notice as in the Fifth Schedule and the document of acknowledgement of
receipt, may require the owner to redeliver the goods repossessed provided
all amount due but unpaid be settled first.
(b)
Require the owner to sell the goods to any person introduced by the hirer
who is prepared to buy the goods for cash.
Section 18(1)(b) of the HPA If there is a difference between the value of the
goods repossessed with the amount already paid, the hirer is entitled to the
difference.
For more information on the laws, Acts and cases in Malaysia, refer to
http://lawyerment.com.my.
EXERCISE 7.4
1.
2.
3.
4.
5.
The law on hire purchase in Malaysia is governed by the Hire Purchase Act
1967 amended by Hire Purchase (Amendment) Act 2010 which came into
force on 15 June 2011.
Section 2(1) of the HPA 1967 defines a hire purchase agreement as letting of
goods with an option to purchase. A hire purchase agreement can also be
defined as an agreement for the purchase of goods by instalments
The Hire Purchase Act only applies to all hire purchase agreements relating to
goods specified in th First Schedule of the said Act.
TOPIC 7
There are several procedures that have to be observed by the parties before,
during and after the formation of Hire purchase agreement. The procedures
are laid down under Section 4 and 5 of the HPA.
There are three implied conditions and two implied warranties provided
under the HPA. These implied terms will protect the interest of hirers and
their guarantors.
There are seven statutory rights of hirer. The relevant provisions are provided
under Section 9 to 15 of the HPA. The rights are as follows:
Right to have his right, title and interest transferred by operation of law;
An owner has a right to take possession of the hired goods if the following
situations take place:
The total payment of instalments paid by the hirer amounts to not more
than 75 per cent of the total cash price of the goods as in the hire purchase
agreement.
The owner served a notice in writing in the form set out in the Fourth
Schedule of HPA; and
The period fixed by the notice has expired which shall not be less than 21
days after the service of the notice.
HPA imposes certain restrictions on the owner in the exercise of his right of
repossession. The restrictions are as follows:
Owner must give notice to the hirer at least 21 days before the
repossession took place.
Copyright Open University Malaysia (OUM)
After repossession the owner must not sell or dispose of the goods for 21
days.
Owner must observe the rights and immunities given to the hirer when
the goods are repossessed. For example the hirer may require the owner
to sell the goods to any person introduced by him who is prepared to buy
the goods for cash.
Liability
Hirer
Repossession
Topic
Insurance
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
INTRODUCTION
After discussing and identifying the laws which govern the contract of sales and
hire-purchase agreements, in this topic we will learn about insurance. Nearly
every day we are exposed to the importance of insurance, but how far do you
understand the laws which govern insurance?
The main legislation governing insurance law in Malaysia is the Financial
Services Act 2013 (hereinafter referred as FSA 2013), which repealed the
Insurance Act 1996. However, by virtue of Section 275 of FSA, Section 144,
Section 147(4), Section 147(5), Section 150, Section 151 and Section 224 of
Insurance Act 1996 continue to remain in full force and effect. Actually Financial
Services Act 2013 consolidated the Banking and Financial Institutions Act 1989,
Insurance Act 1996, Payment Systems Act 2003 and Exchange Control Act 1953.
The rules relating to insurance can be found in Schedule 8, 9 and 10 of FSA. This
act came into force on 30 June 2013 except for Section 129 and Schedule 9 with
effect from 1 January 2015.
Copyright Open University Malaysia (OUM)
The Insurance Act divides the insurance business into two, that are:
(a)
(b)
Section 16(1) of the FSA 2013 prohibits licensed insurers from carrying on both
life business and general business. The licensed insurer is given five years to
comply with this provision, unless a longer period is specified by the Minister, on
the recommendation of Bank Negara Malaysia, by a written notice to the
insurers.
The usual types of insurance businesses carried out are life insurance, marine
shipping insurance, accident insurance, fire insurance, transportation insurance
and flight insurance.
You will learn about insurance contracts, subrogation, insurable interests,
material facts in an insurance contract as well as clauses in respect of basic
clauses, conditions, warranties and any exception clauses.
8.1
INSURANCE CONTRACT
You often hear about insurance. Do you know what is meant by insurance
contract under the law?
Definition
An insurance contract is a contract whereby an insurer agrees to assume
losses suffered by a policy owner against any losses which might arise due to
the happening of certain perils, or to pay a certain sum of money on the
happening of such perils.
TOPIC 8
INSURANCE 221
proposal form. The next-of-kin sued for the amount insured but the insurer
alleged that there was no insurance contract.
The court held that since the payment made by the deceased was the payment of
the first premium, therefore, there was an insurance contract.
8.2
SUBROGATION
Definition
In subrogation, an insurer is entitled to enforce any remedy against any third
party who caused the loss to occur.
In Teo Kim Kien & Ors v. Lai Sen & Ors (1980) 2 MLJ 125, an insured sent his car
for a wash at a service centre (third party). The insured asked the car to be sent to
a certain address after the cleaning work was done and instructed that if the
insured was not there, to bring back the car to the service centre.
A service centre worker sent the car to the said address but because the insured
was not there, he brought it back to the service centre. On the way back, the car
rammed into a motorcyclist and the motorcyclist made a claim. After the
insurance company paid the claim to the motorcyclist, a claim for damages was
made against the service centre employer for his workers negligence. It was held
that the insurance company was entitled to do so.
8.3
INSURABLE INTERESTS
(b)
(c)
Employee; and
(d)
In Nanyang Insurance Co Ltd v. Salbiah & Ors (1967), at the time the sales took
place, the seller was still in possession of the goods. The court held that the seller
was the person who had the insurable interest. The other relevant case is Chong
Soo Sin c/o Syarikat Perniagaan Moden v. Industrial and Commercial Insurance
(M) Bhd (1992).
SELF-CHECK 8.1
In a life policy, an insured has no insurable interest but the interest is
with others. State the parties who have the insurable interests.
8.4
MATERIAL FACTS
TOPIC 8
INSURANCE 223
The insured however need not disclose all facts. Only material facts must be
disclosed. The following is the definition of material facts:
Definition
Material facts in the context of an insurance contract are facts which if known
by the insurer, could influence the judgment of the insurer in accepting or
rejecting the taking of the risks and in deciding what premium should be
fixed. If the insured disclosed non-material facts, the policy is still valid.
In New India Assurance Co Ltd v. Pang Piang Chong & Ors (1971), a man died
due to a road accident and his next-of-kin sued for damages against the insured,
who drove the car. The insurer refused to settle the compensation money on the
ground that the insured did not forward true facts when completing the policy
form. In the policy form was the question, Have you or any person you give
permission to drive, ever committed any driving offences within the last five
years. The answer given was No. The insurer found out that the insured
committed five offences under the Road Traffic Ordinance 1958 for driving
without licence and for not displaying the L sign on his car.
The court held that the offence committed by the insured had no connection with
the original purpose the insurance was taken out by the insured. The answer was
not a non-disclosure of material facts or a deception of material facts.
Other relevant cases are Abu Bakar v. Oriental Fire & General Insurance Co Ltd
(1974), China Insurance Co Ltd v. Ngau Ah Kau (1972) and United Malayan
Insurance Co Ltd v. Lee Yoon Heng (1964).
8.4.1
Pre-Contractual Duty
In addition to the principle of utmost good faith in common law, Section 129 and
Schedule 9 of FSA 2013 provides separate duty of disclosure to the licensed
insurer and insured (consumer). The duty is known as the pre-contractual duty
and the details of the duty are as follows:
(a)
The licensed insurer also shall clearly inform the insured in writing of
the consumers pre-contractual duty of disclosure and that the duty of
disclosure shall continue until the time the contract is entered.
(iii) Besides that, Para 11 Schedule 9 of FSA 2013, requires the licensed
insurer not to make misleading statements, not to conceal a material
fact and not to use unauthorised sales brochures. If this happens the
insured may rescind the contract.
(b)
(ii)
(iii) How clear and specific, the licensed insurers questions were.
As the result of the above provisions, it seems that the licensed insurers must
make sure that they pose the right and specific questions in order to assess the
risk of insuring. Meanwhile, the insured must take reasonable care in answering
the said questions and avoid making any misrepresentations.
8.4.2
TOPIC 8
(a)
INSURANCE 225
(ii)
So, it is up to the insurer to prove that the insured knew about the above
matters.
It shoud also be highlighted here that dishonest misrepresentation is also to
be regarded as as deliberate and reckless misrepresentation.
(b)
If the insurer would not have entered into the contract on any terms,
the insurer may avoid the policy and return the premium;
(ii)
(iii) If the insurer would have charged and increased premium, the
insurer may reduce proportionately the amount to be payable to the
insured.
EXERCISE 8.1
1.
2.
3.
Give the definition of material facts in your own words and try to
differentiate your definition with answers given for the exercise.
4.
8.5
A.
B.
C.
D.
The question in the proposal form must be answered truthfully by the insured.
These answers become the basis of the insurance contract and the truthfulness of
the given answers is a condition for the insurance contract. Therefore, under the
common law, if a misrepresentation is given, the insured is under no duty to
settle any claims made by the insured.
In Dawsons v. Bonnin (1922), it was stated in the proposal form that the lorry
would be kept at 46, Cadogan Road, Glasgow, whereas in fact it was kept outside
Glasgow. Later, it was burnt down. The court held that the insured was not liable
because there was a misstatement by the insured.
In China Insurance Co Ltd v. Ngau Ah Kow (1972), an insured made a
misstatement when he stated that he never made any previous claims under a
motor policy. It was found out that he once did it six years ago. The court held
that the statement and answer given in the proposal form were conditions to the
Copyright Open University Malaysia (OUM)
TOPIC 8
INSURANCE 227
insurance contract. The misstatement therefore gives the insurer the right to
repudiate the liabilities in the agreement.
Like other contracts, an insurance contract also contains conditions and
warranties that must be complied with. Breach of any conditions and warranties
may cause the insurance contract to be rescinded.
In Suhaimi bin Ibrahim v. United Malayan Insurance Co Ltd (1966), the plaintiff
took out a Workers Compensation policy from the defendant. In the proposal
form, the plaintiff stated that six employees were covered by the said policy. In
fact, the plaintiff had 23 workers. One of the workers was killed while cutting
down a tree. The plaintiff gave a notice regarding the accident to the defendant.
The court held that because the plaintiff had more than six workers, there was a
breach of warranty. Also, there was a breach of condition when the plaintiff
failed to refer the dispute within 12 months to an arbitrator after the defendant
refused to make payments to him. The defendant therefore was not liable on the
policy and the claim unsuccessful.
In Public Insurance Co Ltd v. Muthu (1965), the plaintiff paid compensation to a
third party who was injured by an accident with an insured car. Later, the plaintiff
sued for damages and alleged that they were entitled to do so because the insured
failed to satisfy the stipulations in the policy which required him to give notice if
there was an accident, a loss or damage and to give notice if the insured knew of
any facts regarding any prosecution arising from the accident.
The court found that even though the insured gave notice with regard to the
accident, he however failed to give notice in respect of the prosecution.
Therefore, the plaintiff was not liable to the policy.
An insurance contract also includes excepted clauses which exempts an insurer
from several liabilities. In Tan Keng Hong & another v. Fatimah binti Abdullah &
Ors (1974), the insured took out a third party policy on his lorry (a policy which
exempts an insurer from liabilities if there is death). There was a death due to an
accident, and the court held that the insurer was not liable.
EXERCISE 8.2
1.
2.
3.
B.
C.
D.
4.
5.
6.
7.
8.
TOPIC 8
INSURANCE 229
The act which governs the law relating to insurance in Malaysia is the
Financial Services Act 2013.
Insurance
Insurer
Insurance contact
Subrogation
Insured
reckless
Topic
Banking and
Negotiable
Instruments
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
6.
7.
INTRODUCTION
TOPIC 9
Negotiable means something that can be transferred from one person (owner) to
another party in the form of a document which would prove the existence of
contractual duties in exchange of a payment.
In short, negotiable instruments have these characteristics:
(a)
(b)
The holder of the instrument for the time being can sue in his own name;
(c)
(d)
A bona fide holder is value free from any defect (any claims or previous
liabilities) in the title of his predecessors.
9.1
BILLS OF EXCHANGE
The person who gives the order to pay is called the drawer. The drawee, on the
other hand, is the person to whom the order to pay is given and the person to
whom payment is to be made is the payee.
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TOPIC 9
Where the drawee was given the discretion to pay or not to pay.
Example: Pay X if satisfied with the goods ;
(ii)
Provision
Section 6(1) of the BEA: A drawee must be named or otherwise
indicated in a bill with reasonable certainty
TOPIC 9
(d)
To Pay on Demand
Section 10(1) of the BEA: A bill is payable on demand:
(i)
(ii)
In other words, the provision showed that time for payment can be made
certain. If it is not specified, payment may be made on demand or when
presented.
(e)
With interests;
(ii)
By stated instalments;
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TOPIC 9
The holder in good faith and by mistake inserts a wrong date; and
(ii)
Where a wrong date was inserted, the bill subsequently comes into
the hands of a holder in due course.
SELF-CHECK 9.1
By using your creativity, draw a mind map to show all the six important
characteristics which must exist on a bill of exchange as well as the
relevant cases and sections.
9.2
The following are the explanations for the negotiation of bills, acceptance and
indorsements:
(a)
Negotiation of Bills
Definition
Section 31(1) of the BEA defines a negotiation of bill as "when it is
transferred from one person to another in such a manner as to
constitute the transferee the holder of the bill."
This means that every bill of exchange may be transferred from one person
to another. The manner in which a title is transferred is called negotiation.
Examples can be seen in Section 31(2). If it is an order bill, it is negotiated
by indorsement by the holder and transferor [Section 31(3)].
TOPIC 9
(b)
Acceptance
Definition
Acceptance is defined according to Section 17(1) of the Bills of
Exchange Act as "the signification by the drawee of his assent to the
order of the drawer."
The acceptance must be written on the bill and signed by the drawee.
The mere signature of the drawee without additional words is
sufficient; and
(ii)
It must not express that the drawee will perform his promise by any
other means than the payment of money.
(ii)
When the bill is addressed to two or more drawees who are not
partners, presentment must be made to all of them unless one has
authority to accept for all;
(iii) Where the drawee is dead, presentment may be made to his personal
representative;
(c)
(iv)
(v)
Indorsements
An indorsement affects the transfer of title in the bill to the transferee and
also involves the liabilities of the indorser. Indorsement is important in the
negotiation of order bills. Before an indorsement can be enforceable as
negotiation, the conditions set out in Section 32 of BEA must be complied
with:
(i)
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TOPIC 9
(iii) If a bill is payable to two payees or indorsees, who are not partners,
every one of them must indorse except if one of them is authorised to
make the indorsement;
(iv) If a bill is payable to the order of a wrong payee, or his name is wrongly
spelt, he may indorse according to the spelling on the bill, adding if he
thinks fit, his proper signature;
(v)
Section
Explanation
Blank
Indorsement
S 34(1)
Special
Indorsement
S 34(2)
Restrictive
Indorsement
S 35(1)
Conditional
Indorsement
S 33
Facultative
Indorsement
TOPIC 9
Section 21(1) of the BEA provides that a contract in a bill is incomplete and can be
rescinded if a drawer, drawee or acceptor or indorser did not sign and deliver the
bill. However, when acceptance is written on the bill, and the drawee has given
notice or when he agrees to obey the order of the person who is entitled to the
bill that he has accepted, acceptance is then complete and cannot be rescinded.
SELF-CHECK 9.2
Based on your understanding on what you have learnt, identify the
differences between acceptance and indorsement. State your answer in
a table form.
EXERCISE 9.1
1.
2.
9.3
A.
B.
C.
D.
A drawer, drawee or acceptor and indorser is liable if he signs the bill (Section 23
of the BEA).
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TOPIC 9
Provision
Section 55(1) of the BEA provides that drawer of a bill is liable to accept and
will be paid to its tenor on due presentment of the bill. If the bill be
dishonoured he will compensate the holder and any indorser who is
compelled to pay it, provided that the requisite proceedings on dishonour be
taken. He is precluded from denying to a holder in due course the existence of
the payee or his capacity to indorse.
The drawer or acceptor is the person to whom the order to pay is given. He is
liable when he signs the bill as the acceptor or drawee. Section 54 of the BEA
provides that when he accepts the bill:
(a)
(b)
The existence of the drawer, the authenticity of his signature and his
capacity and authority to draw a bill.
(b)
In the case of a bill payable to drawer's order, the drawer has the capacity
to indorse.
(c)
In the case of a bill payable to the order of a third person, the existence of
the payee and his then capacity to indorse.
SELF-CHECK 9.3
What are the liabilities of a drawee or acceptor when he signs a bill
addressed to him?
TOPIC 9
9.4
RIGHTS OF A HOLDER
Definition
According to Section 2 of the BEA, a holder is defined as the payee, or
indorsee having possession of a bill or the bearer of a bill.
The rights of a holder are provided in Section 38 of the BEA. They are as follows:
(a)
(b)
He holds the bill free from any defect of title of any of the prior parties; and
(c)
If he can negotiate the bill with the holder in due course, that holder obtains
a good and complete title to the bill; and
(b)
If he obtains payment of the bill, the person who pays him in due course
gets a valid discharge for the bill.
9.5
PAYMENT
Payment must be made when a bill is presented. If a bill is not presented for
payment, the drawer and indorsers shall be discharged from liability (Section
45(1) of the BEA). Presentment for payment must comply with the following
rules (Section 45(2) of the BEA):
(a)
Where the bill is not payable on demand, presentment must be made on the
day it falls due.
(b)
(c)
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(d)
TOPIC 9
(ii)
(iii) When neither place or address is stated, and the bill is presented at
the acceptor's place of business, if known, and if not, at his ordinary
residence; and
(iv) When presented to the drawee or acceptor wherever he can be found
or at his last known place of business or residence.
(e)
(f)
Where a bill is drawn upon or accepted by two or more persons who are
not partners, and no place of payment is specified, presentment must be
made to all of them.
(g)
(h)
SELF-CHECK 9.4
Give three of the eight principles on presentment of bills for payment.
9.6
Definition
According to Section 2 of the BEA, a holder is defined as the payee, or
indorsee having possession of a bill or the bearer of a bill.
TOPIC 9
(b)
(b)
For a valid and effectual notice of dishonour, the principles in Section 49 of the
BEA must be complied with:
(a)
When the notice is given by the indorser or holder who is himself liable on
the bill;
(b)
(c)
(d)
(e)
(f)
(g)
(h)
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TOPIC 9
(i)
Where the drawer or indorser is dead, and the party giving notice knows it,
the notice then must be given to a personal representative;
(j)
Where the drawer or indorser is bankrupt, notice may be given either to the
party himself or to the trustee;
(k)
Where there are two or more drawers or indorsers who are not partners,
notice must be given to all unless one of them has authority to receive such
notice for the others;
(l)
The notice may be given as soon as the bill is dishonoured, and within a
reasonable time;
(m) Where a dishonoured bill is in the hands of an agent, the agent may either
himself give notice to the parties liable on the bill or he may give notice to
his principal;
(n)
Where a party to a bill receives due notice of dishonour, the party has the
same period of time for giving notice to antecedent parties; and
(o)
Prior parties are not liable if a notice of dishonour is not given within the
specified time. In Ismail v. Abdul Aziz (1955), the defendant accepted the supply
of padi from the plaintiff. The defendant indorsed two cheques in favour of the
plaintiff from his account. The plaintiff later indorsed the cheque in favour of the
government. The cheque was presented for payment on 14 September 1950 but
was dishonoured. The plaintiff received a notice of dishonour on 20 September
but only gave notice to the defendant on 18 October.
The court held that in order to make the notice valid and effective, it must be
given according to the rules stipulated in Section 49 of the Bills of Exchange Act
1949. The plaintiff was negligent because he delayed in sending the notice of
dishonour.
9.7
Definition
Under section 73(1) of the BEA, a cheque is defined as "a bill of exchange,
drawn on a banker payable on demand." It means that the laws in respect of
bills of exchange payable on demand are also applicable on cheques.
TOPIC 9
Explanation
Undated
Cheques
Overdue
or Stale
Cheques
Section 36(3) provides that overdue cheques are cheques which have been
in circulation for an unreasonable length of time. Reasonable length of
time is a subjective term and depends on certain cases. Generally, a
cheque becomes overdue or stale six months after it was issued.
Post-dated
Cheques
9.8
CROSSING OF CHEQUES
By writing words such as and company between two parallel lines across
it with the addition of Not negotiable or without anything written
between the parallel lines; and
(b)
The effect of a general crossing is that the paying banker can only pay the
amount of the cheque to a collecting banker. The banker cannot pay cash across
the counter.
Special crossing is made by drawing two parallel lines across it with the addition
of the name of banker, with or without not negotiable written between the
parallel lines. The effect of special crossing is that the paying banker can only pay
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TOPIC 9
the amount of the cheque only to a collecting banker named in the crossing.
Thus, the persons who want to obtain payment of the cheque must be a customer
of the said collecting banker.
When a cheque is crossed not negotiable, the cheque therefore cannot be
negotiated but can still be transferred. When transferred, the person taking it
does not have, and is not capable of giving a better title to the cheque than the
person from whom he took it.
For better understanding you may refer to the case of Wilson & Meeson v.
Pickering (1946), where in this case Wilson drew a cheque in blank and crossed
not negotiable. His clerk, who was supposed to fill in the amount and the
name of the payee, inserted a sum in excess of her authority and delivered it to
Pickering for the payment of her personal debt. The issue here is whether
Pickering had a good title to the cheque. The court held that, since the clerk had
no title to the cheque, she was not capable of giving a better title to Pickering.
Therefore, Wilson was not liable upon the cheque.
The words account payee is usually written on a cheque. Even though this
kind of crossing is not stated in the Act, it is however permitted and has become
common practice.
The words account payee on a cheque are a direction that the banker can credit
the cheque to the account of the payee only.
SELF-CHECK 9.5
Illustrate a general crossing and special crossing on a cheque.
9.9
ALTERATION OF CHEQUES
TOPIC 9
Definition
According to Section 64(2), material alteration is defined as any alteration of
the date, the sum payable, the time of payment, the place of payment, and
where a bill has been accepted generally, the addition of a place of payment
without the acceptor's assent.
Section 64(1) of the BEA explains that where a bill or acceptance is materially
altered without the assent of all parties liable on the bill, the bill is avoided except
as against a party who has himself made, authorised or assented to the alteration,
and subsequent indorsers provided that where the bill has been materially
altered, but the alteration is not apparent, and the bill is in the hands of a holder
in due course, such holder may avail himself of the bill as if it had not been
altered and may enforce payment of it according to its original tenor.
The above provision means if the alteration is apparent, all parties liable on the
cheque will be free from such liabilities. If otherwise, the holder of the cheque
may still enforce payment.
This is part of the contract between the bank and its customers, so that the
customers will take extra precaution when writing cheques to avoid forgery. Due
to a customer's negligence, a dishonest holder may make alterations on the
cheque. If the bank cannot detect any apparent alteration made, payment will be
made to the holder and it will be debited from the customer's account.
In London Joint Stock Bank v. Macmillan and Arthur (1918), one of the partners
of a firm signed a cheque payable to bearer, where the words 2 Os Od were
written in the space for the figures. The clerk, entrusted by the firm on the duty
of filling up cheques for signature, then wrote in the space for writing one
hundred and twenty and altered the figures accordingly. The court held that the
bank could debit the amount from the account of the firm for the partner's
negligence.
9.10
When a customer draws a cheque where he has a drawing account on his bank,
the bank is called the paying banker. Its duty is to make payments to the right
person according to the mandate given by his customers. Therefore, the paying
banker must ensure that it complies with that mandate to avoid from being
liable.
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TOPIC 9
If the banker made a payment to the wrong person, the banker still has the right
to debit the amount from the customer's account. However, the banker must
fulfill the following provisions before it can be protected:
(a)
(b)
The banker pays it in good faith and in the ordinary course of business
without knowledge such indorsement has been forged or made without
authority (Section 60 of the BEA);
(c)
The banker pays it in good faith and in the ordinary course of business
without knowledge that the cheque was not indorsed where there is an
irregular indorsement (Section 82 of the BEA); and
(d)
If when the cheque is crossed, the banker pays in good faith and without
negligence and in accordance with the crossing (Section 79(2) and Section
80).
9.11
When a bearer of a cheque presents the cheque to his bank to be credited into his
account, the bank is under the duty to collect the amount from the paying
banker. The bearer's bank is called the collecting banker.
The collecting banker will be liable to its customers if there is a breach of contract,
that is, failure to make collection as ordered by its customer. The banker who
wrongly collects for a customer who is not entitled to the money, is also liable to
the true owner.
Section 85 of the BEA gives protection to the banker which collects payment of
cheques for customers who has no title or has a defective title. The banker is not
liable to the true owner if:
(a)
TOPIC 9
(b)
(c)
SELF-CHECK 9.6
Try to make a comparison of the duties of the paying banker and the
collecting banker. State your answer in a table form.
By a revocation order;
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
If the customer does not have sufficient amount to honour the cheque.
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TOPIC 9
EXERCISE 9.2
State four out of 10 conditions which enable the authority of a bank to
make payment be terminated.
1.
2.
B.
C.
D.
TOPIC 9
There are three forms of cheques: undated cheques, overdue cheques or stale
cheques and postdated cheques.
If a cheque has been materially altered without the drawers consent, the
drawer will be discharged from liability. If the bank honours the cheque, the
bank cannot debit the amount from the drawer's account.
It is part of the contract between the bank and its customers that the
customers will take extra precaution when writing cheques to avoid forgery.
The paying bankers duty is to pay the right person according to his
customers mandate. So, if the paying banker pays the amount of the cheque
to the wrong person, the bank has breached its duty and must bear the loss.
However, the Bill of Exchange Act 1949 provides some protection for the
paying bank. In order to be protected the paying banker must fulfil certain
conditions laid down in Section 59, Section 60, Section 82(1), Section 79(2)
and Section 80.
Banker
Cheques
Bill delivery
Indorsement
Bills of exchange
Negotiable instruments
Topic Introduction to
10
Syariah
Principles
Governing
Commercial
Transaction
LEARNING OUTCOMES
By the end of the topic, you should be able to:
1.
2.
3.
4.
INTRODUCTION
You have learned about the law relating to commercial transaction according to
Common law and Malaysian law in Topics 2 through 9. Now, you will learn the
law relating to commercial transactions according to Syariah law.
TOPIC 10
In this topic, we will be studying the definition of contracts from the Syariah
point of view, the pillars of a valid contract, the doctrine of khiyar (option) and
various types of Syariah contracts which are commonly used in commercial
transactions.
10.1
A contract is the basis of the Syariah law of transaction. Thus, it is very important
for us to understand the basic principles of a valid contract from the Syariah law
point of view. It should be noted here that Syariah law of contracts is based on alQuran, hadith of Prophet SAW, Ijma of jurists, Qiyas and other sources of
Syariah law. Among the evidence for the legalisation of contract are as follows:
Surah al-Maidah 5:1; which means:
O you who believe! Squander not your wealth among yourselves in worthless
dealings, but let there be trade by mutual consent...
Prophet SAW expressly stated that Muslims are bound by their conditions...
(narrated by Al-Bukhari)
10.1.1
The Arabic word for contract is aqd which literally means tie or bond.
According to Ala Eddin Kharofa (2000), the word aqd literally means tying
tightly, as in tying a rope.
Definition
Literally contract or aqd means tying tightly as in tying a rope.
Technically, Muslim jurists are of the opinion that aqd has two meanings;
general and specific. For the general meaning, aqd is whatever a person has
intent to do or perform, either based on his own decision, for example, as in
endowment (waqaf) and remission of debt (ibra), or requiring the consent of at
least two parties as in sale, hire and agency.
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As for the specific meaning of aqd, it is a connection of the words of one party
(ijab) to the words of the other parties (qabul) which constitute a legal binding
contract and enforceable by law.
Ala Eddin Kharofa (2000) further explained that contracts according to Syariah
law is an expression of the matching between a positive proposal made by one of
the contractors and the acceptance of the other contractor in a way which has an
impact on the subject of the contract.
SELF-CHECK 10.1
Could you explain if there are any differences in the definition of
contract or aqd according to Syariah law and Common law?
10.1.2
In Topic 2 we have discussed that there are certain conditions that should be
fulfilled in order to form a valid contract. The conditions are; offer, acceptance,
consideration, capacity, intention, certainty and free consent. Similarly, under
Syariah law, there are also certain conditions for the formation of a contract. The
said conditions are also known as pillars or rukn in Arabic. It refers to the musthave components in a formation of a contract.
The majority of Mazhabs namely the Maliki, Syafie and Hanbali Mazhabs are of
the opinion that there are three pillars or rukn to a contract:
(a)
(b)
(c)
However, the Hanafi jurists hold that there is only one condition of a contract
which is a statement of contract or sighah. However, all aspects will
automatically follow the statement. Figure 10.1 show us conditions or pillars of a
contract.
TOPIC 10
(a)
Sighah comprises of offer (ijab) and acceptance (qabul). Thus, the contract
is said to be concluded once there is an ijab and qabul. In other words we
can say that sighah is actually evidence showing that both of the
contracting parties have an intention to create legal relations between them.
According to Syariah law, ijab and qabul can be conveyed in a number of
ways such as verbally, through writing and gestures. However, it is
unanimously agreed among the jurists that verbal communication is the
best way for the contracting parties to express their intention. Besides that,
the jurists prefer that the contracting parties use past tense to conclude their
contract. For example the use of words I sold and I bought.
A contract may also be concluded in writing if the writing is clear, readable
and understandable by both of the contracting parties. Contracts can be
concluded in writing even if the two parties are capable of speaking.
However, for contract of marriage, it has to be concluded orally unless the
two parties are unable to speak. As for using gestures in concluding a
contract, the majority of jurists are of the opinion that it is admissible if the
parties are not capable of speaking.
Now, let us look at the definition of ijab and qabul in detail.
Definition of Ijab
Ijab is the offer made by the first party to the contract (that is, the
offeror). Ijab here means confirmation because it gives and confirms the
freedom of acceptance to the second party (that is, the offeree).
Definition of Qabul
Qabul is an acceptance. When an offer is accepted by the offeree it is
said that an acceptance is made. When there is an effective acceptance,
an agreement is made between the parties which become legally
binding.
We can conclude that, generally, the definition of ijab and qabul under
Syariah law is similar to the definitions of offer and acceptance as we have
discussed in Topic 2.
Muslim jurists have stipulated that there are three conditions for the
validity of offer and acceptance in a contract. The conditions are as
illustrated in Figure 10.2.
(i)
TOPIC 10
(ii)
khiyar al-majlis.
(b)
person acquires proper mental awareness and attains the age of puberty
(bulugh). Muslim jurists are of the opinion that in order to form a valid
contract, both contracting parties must possess ahliyyah al ada kamilah
which means that the parties must fulfil the following attributes:
(i)
(ii)
TOPIC 10
(ii)
SELF-CHECK 10.2
1.
2.
3.
10.1.3
There are various types of khiyar recognised by Syariah law. However, we will
only focus our discussion on the four famous khiyar in Syariah contract. Table
10.1 provides a simple explanation about the selected khiyar.
TOPIC 10
Explanation
10.2
There are many types of contracts in Syariah law. The types are classified
according to the different features and criteria of each contract. However, the
majority of Muslim jurists divide the contract based on its nature into two main
types of contract, namely, unilateral and bilateral contracts. Figure 10.5 shows the
said classification.
TOPIC 10
Explanation
Example
(muawadat)
Contracts pertaining
to the utilisation of
usufruct (manfaah)
Contract
Contract pertaining
to service
Wakalah
Jualah
Contracts
of
partnership (shirkah)
Musharakah
Mudharabah
Contract of security
Suretyship (kafalah)
Contract of Exchange
(tawthiqat)
of
hire
(Ijarah)
Transfer
of
debt
(hawalah)
Mortgage (rahn)
Contracts of safe
custody (wadiah)
Wadiah
ACTIVITY 10.1
Compare and contrast between unilateral and bilateral contracts in
Syariah law.
10.2.1
Sale of goods is the most important contractual relationship in our daily life.
Almost every day we enter into contracts of sale of goods, either as a buyer or a
seller. Generally, we can say that the contract of sale of goods occurs when there
is a transfer of ownership of specific object in exchange for an equivalent.
(a)
Definition
Now let us look at the definition of sale of goods according to Muslim
jurists:
(b)
Legality
The evidence of permissibility of contract of sale is derived from the
Quranic injunction, hadith of prophet (SAW) and ijma of jurists. Among
others are:
Surah Al-Baqarah, 2:275
(ii)
TOPIC 10
The price
Contract (ijab and qabul)
10.2.2
Conditions
Wakalah
(a)
Definition
Now let us examine the definition of wakalah according to Muslim jurists:
Literally wakalah means:
Protection or delegation
Technically wakalah refers to:
A contract where a person authorises another to do a certain welldefined legal action on his behalf
(b)
Legality of Wakalah
Legality of wakalah is confirmed in the al-Quran, Hadith of prophet (SAW)
and ijma of jurist. Among others are:
Surah Al-Kahfi, 18:19
Let then, one of you with these silver coins to the town, and let him find
out what food is purest there, and bring you thereof (some) provision.
Surah Al-Nisa, 4:35
If ye fear a breach between them twain, appoint (two) arbiters, one from
his family, and the other from hers...
(c)
Conditions of Wakalah
There are some conditions that must be fulfilled in order to form a valid
wakalah contract. Now let us look at Table 10.4.
Table 10.4: Elements and Conditions of Wakalah
Essential Elements
Conditions
Principal (muwakkil)
Agent (wakil)
TOPIC 10
Subject
matter
(muwakkal fih)
(d)
Types of Wakalah
According to Muslim jurists, wakalah can be divided as shown in Figure
10.6
(i)
(ii)
General Wakalah
It is a general delegation of power by principal to the agent, for
example if the principal informs the agent: I delegate to you all my
affairs.
Even though in this circumstance it seems that the principal gives full
authority to the agent to act on his behalf, it does not cover any
harmful things to the principal, such as a gift or divorce. Thereby, the
agent has no authority to divorce the principals wife without express
authority from the principal.
10.2.3
Contract for hire (ijarah) is one of the contracts that falls under the transaction
pertaining to the utilisation of usufruct (manfaah). It is different from contract of
sale because it involves the transfer of usufruct (manfaah) for a consideration
rather than property or goods. The consideration here could be in terms of rent,
in cases of hire of things or wages, in case of hire of services.
(a)
Definition
Now let us look at the definition of contract of hire according to Syariah
law.
Literally ijarah means:
Lease, rent or wage
Technically ijarah is defined as:
A contract on using the benefit or services in return for compensation
(b)
Legality
The evidence of permissibility of ijarah is derived from the Quranic
injunction, hadith of prophet (SAW) and ijma of jurists. Among others:
Surah Al-Alaq, 65;6:
... and if they breastfeed for you, then give them their payment
TOPIC 10
(d)
Conditions
Benefit or usufruct
(manfaat)
Property
Rental
Contract (ijab and qabul)
10.2.4
Definition
Now let us look at the definition of contract of partnership according to
Muslim jurists:
Literally sharikah means:
Mixing
Technically sharikah is defined by Hanafi jurists as:
A contract between partners on both capital and profit.
TOPIC 10
(b)
Legality
The legality of contract of partnership can be found in the Quran, hadith
and ijma. Among others are:
Surah Saad 38: 24
... and truly, many partners (in a business) who oppress one another,
except those who believe and work deeds of righteousness, and they are
few...
Surah Al-Nisa, 4:12
(sharekat amwal)
Explanation
Two or more persons agree to participate in a capital
to be used in trade and the profits would be divided
between them according to a specified ratio. This
type of partnership is subdivided into two types:
Partnership of professions
(sharekat sanai)
Capital-labour partnership
(mudharabah)
(d)
TOPIC 10
Conditions
Partners
Capital
Not debt
Specific amount
Business or trade
Profit/loss sharing
10.2.5
Definition
Literally kafalah means:
Guarantee
Technically kafalah is defined as:
To add obligation to obligation in respect of a demand for something
(b)
Legality
Surah Yusuf 12:72
They said: We have lost the (golden) bowl of the king and from him who
produces it is (the reward of) a camel load and I will bound by it (zaim)
Al-Bukhari narrated that Salamah bin al-Akwa said:
We were with the Prophet SAW when a deceased person was brought.
They said: Ya Rasulullah perform prayers on him? He said: Has the
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(d)
TOPIC 10
10.2.6
Conditions
Must be obligatory.
Definition
Literally wadiah means:
To leave, lodge or deposit
Technically wadiah is defined as:
An asset given to someone for safekeeping without any return.
(b)
Legality
Surah An-Nisa: 58
Verily, Allah commands that you should render back the trusts to those, to
whom they are due.
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Those who are faithfully true to their trusts (amanah) and their covenants.
And those who strictly guard their prayers. These are indeed the inheritors.
Hadith of Prophet Muhammad SAW:
Give a mandate to the people who trust you and you must not betray the
people who betrayed you. (Narrated by: Abe Daud, Tirmidzhi and
Hakim)
(c) Types of Contract of Wadiah
Now let us look at Figure 10.10:
TOPIC 10
(d)
Conditions
Depositor or owner
(al-muwaddi)
Custodian or depositee
(al-wadi)
wadiah)
Storable.
Contract (sighah)
EXERCISE 10.1
1.
2.
3.
4.
Contract or aqd is a connection of the words of one party (ijab) to the words
of the other parties (qabul) which constitute a legal binding contract and
enforceable by law.
The contract in Syariah law consists of three pillars which are: the statement
of contract (sighah), the contracting parties and the subject matter of the
contract.
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Muslim jurists have classified a contract based on its nature into two,
unilateral and bilateral. Bilateral contracts are further divided into six
classifications as follows:
Conference of Rulers
Judiciary
Court
Legislation
Custom
Legislature
Executive
Subsidiary Legislation
Federal Constitution
Syariah Law
Judicial precedent
TOPIC 10
Lee, M. P. (2005). General principle of Malaysian law (5th ed.). Shah Alam,
Malaysia: Penerbit Fajar Bakti.
Parmer, J. N. (1960). Colonial labour policy and administration: A history of labor
in the rubber plantation industry in Malaya, c 1910 - 1941. New York, NY:
J. J. Augustin Incorporated Publisher.
Rau & Kumar (2005). General principles of the Malaysian legal system. Petaling
Jaya, Malaysia: International Law Book Services.
Sharifah Suhana Syed Ahmad (2007). Malaysian legal system (2nd ed.). Kuala
Lumpur, Malaysia: Malayan Law Journal Sdn. Bhd.
Wan Arfah Hamzah. (2009). A first look at the Malaysian legal system. Shah
Alam, Malaysia: Oxford Fajar Sdn. Bhd.
Wu, M. A. (2003). Hicklings Malaysian public law. Petaling Jaya, Malaysia:
Pearson Malaysia.
278
ANSWERS
Answers
TOPIC 1: INTRODUCTION TO MALAYSIAN LEGAL
SYSTEM
Exercise 1.1
1.
(i)
Session Court
(ii)
High Court
State has no exclusive power to legislate on Islamic law in its true sense.
This is because state legislative assembly may enact Islamic law only
concerning those matters specified in item 1 of List 11 (state list) in the
Ninth Schedule of the Federal Constitution.
TOPIC 2:
Exercise 2.1
1.
Issue
Was Alis revocation of his proposal effective?
Support
Section 5(1) a proposal may be revoked before the communication of
its acceptance is complete against the proposer.
Case
ANSWERS 279
2.
Conclusion
Ali was bound by the contract because the revocation cannot be
effective after the contract was formed. If Ali failed to perform his
promise, he could be sued.
Overall Conclusion
There was a binding contract between Ali and Adam.
Exercise
2.2
1.
1.
Issue
Was Mees revocation of acceptance effective?
Support
Section 5(2) an acceptance may be revoked before the communication
of acceptance is complete against the promisee (Zul).
When is the communication of acceptance complete against Zul?
According to Section 4(2)(b), after the letter of acceptance reaches Mee.
Case
280
2.
ANSWERS
Conclusion
Because the communication of revocation of acceptance was complete
at 10am, there was therefore no binding contract between Mee and Zul.
Overall Conclusion
Mee is not entitled to sue Zul on breach of contract.
Exercise 2.3
1.
Issue
Can Man enforce his father's promise?
Support.
Section 26 an agreement without consideration is void.
in writing.
registered.
Case
2.
Conclusion
The relation between a father and son is a near relation and there is
natural love and affection between them. If the agreement was in
writing and registered, Man can claim on the contract even if he had not
given any consideration. Therefore, the contract is valid and binding on
his father.
Overall Conclusion
The contract is valid according to Section 26(a). Man can claim if all the
elements in Section 26(a) are complied with.
ANSWERS 281
Exercise 2.4
1.
Issue
Was Joyah liable or was there a valid contract?
Support.
Section 10 of the Contracts Act 1950 all contracts are valid if they are
made by parties competent to contract.
Section 11 a major.
Case.
2.
Conclusion
Joyah can be sued for breach of contract.
Overall Conclusion
The contract was valid and binding and Joyah was therefore liable.
282
ANSWERS
Exercise 2.5
1.
Issue
Can the Bank rescind the contract?
Support
Section 12(1) and (2).
Case
2.
Conclusion
The Bank is liable and cannot rescind the contract.
Overall Conclusion
The contract is valid.
Exercise 2.6
C
ANSWERS 283
Issue
Can Mansor sue the secretary of the charitable club?
Support
Section 24(e) the agreement is opposed to public policy. The contract
will injure the public service and encourages bribery. Effect of contract
void.
Case
Ex dolo malo no oritur actio a court will not assist parties to an illegal
contract.
2.
Overall Conclusion
Mansor cannot bring legal action against the charitable club secretary.
Exercise 3.2
Issue
Whether the restraint made on Meng is valid.
Support
Section 28 restraint of trade is void to the extent of the restriction.
Case
284
ANSWERS
Conclusion
Meng is liable for breach of contract.
Overall Conclusion
The contract is valid and enforceable and his former partners can sue Meng.
Exercise 3.3
1.
Issue: Whether the chettier can sue Ahmad for failure to pay back his loan.
Case
Raymond Banham & Anor v. Consolidated Hotels Ltd. The law only
prohibits unregistered engineers from making the contract and not to
restrict the formation of a contract or rescind the contract.
Section 66 maxim ex dolo malo no oritur actio.
ANSWERS 285
2.
Conclusion
Ahmad is not liable to return the money he borrowed because a court
will not permit the chettiar to gain any benefit out of contract which
defeats the law. If it is permitted, the court states its worry that this
might encourage moneylenders not to register as stipulated under the
Act.
Overall Conclusion
Ahmad need not worry because he does not have to return the money
he borrowed except if the chettiar succeeds in using the exception to the
maxim.
Exercise 3.4
1.
Issue
Was there coercion on C by A?
Support
Section 14 no free consent if there is coercion.
Section 15 threaten to commit an act forbidden by the Penal Code for
the purposes of causing harm to C, with the intention of forcing him to
sign the contract.
Case
Kesarmal s/o Letchman Das v. Valiappa Chettiar.
Section 19 effect of voidable contract it is voidable at Cs option.
Section 66 the return of benefits (restitution) under voidable
contracts.
286
2.
ANSWERS
Conclusion
C could rescind the contract on the ground of coercion and is entitled to
get back the rubber estate.
Overall Conclusion
C was not liable to transfer the rubber estate to A because of consent
given due to coercion and can rescind the contract.
Exercise 3.5
1.
Issue
Was As act of keeping silent a fraud?
Support
Explanation to Section 17 mere silence is not fraud.
Exceptions to Section 17 when silence is in itself equivalent to speech.
Section 19 a contract could be rescinded at the option of the person
whose consent was given due to fraud.
Section 66 the return of benefits under voidable contracts.
2.
Conclusion
B is entitled to rescind the contract, must return the car to A and be able
to recover his money.
Overall Conclusion
The contract was voidable at B's option due to fraud.
Exercise 3.6
Issue
Could Dee rescind the contract because of Mi's misrepresentation?
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ANSWERS 287
Support
Section 18(a) the positive assertion of untrue facts believed to be true.
Section 19 the contract is voidable.
Exception if Dee had the means of discovering the truth with ordinary
diligence, his failure to discover the truth will validify the contract.
Conclusion
Dee cannot rescind the contract with M because the contract falls under the
exception, that is, Dee had the means to discover the truth.
Overall Conclusion
The contract is valid
Exercise 3.7
1.
Issue
Can Bakar rescind the transfer of land which he had signed?
Support
Section 23: mistake made by one party as to matter of fact is valid.
Exception:
A contract is voidable if it is a mistake as to type of document.
General Rule: Subramaniam v. Retnam a contract is binding as soon
as it was signed.
Maxim non est factum
Case: Awang bin Omar v. Haji Omar & Anor wrongly believed the
type of document either due to illiteracy, unsoundness of mind,
blindness or deceit.
Section 66 the return of benefit.
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288
2.
ANSWERS
Conclusion
The contract is voidable at Bakar's option because there was a mistake
as to a matter of fact as to type of document.
Overall Conclusion
B is not bound by the document which he signed.
Issue
Can Auntie Bees son rescind the contract on grounds of undue
influence?
Support
Section 16(1) elements which must be complied with.
Section 16(2) presumption on who is in the dominant position. There is
a trust relation between a nurse and the patient and the effect of making
a contract with a person mentally affected by illness.
Case 1
Case 2
3.
ANSWERS 289
Issue
Whether the contract between Restaurant Sedap and MEO Meat Sdn. Bhd. is
discharged by frustration.
Support
Section 57(2) a contract is frustrated when there is a change in the
circumstances which renders a contract legally or physically impossible of
performance
Case
Lee Kin v. Chan Suan Eng, where there was a lease which provided for
renewal every five years. A new law was passed prescribing annual
renewals. The court held that the lease was frustrated because of the new
law.
Overall Conclusion
Restaurant Sedap cannot bring legal action against Meo Meat Sdn Bhd.
Exercise 4.2
1.
Issue
Whether Jay Lo can sue Sasha for breach of contract?
Support
Section 57(2) a contract is frustrated when there is a change in the
circumstances which renders a contract legally or physically impossible
of performance
Case
Robinson v. Davidson
The contract was that the defendant must play the piano at a concert on
a specified date. On the specified date, the defendant was unable to
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290
ANSWERS
perform as she was ill. It was held that the contract was discharged by
frustration.
Overall Conclusion
Jay Lo cannot bring legal action against Shasha.
2.
3.
Issue: Whether the company can sue Jojo for breach of contract.
Support
Section 40 When a party to a contract has refused to perform, or
disabled himself from performing his promise in its entirety, the
promise may put an end to the contract.
Section 65 The effect of an innocent party putting an end to the
contract is that the innocent party must restore any benefits which he
may have received from the other party.
Section 74(1) When a contract has been broken, the party who suffers
by the breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby,
which naturally arosefrom the breach.
Case
Ban Hong Joo Mine Ltd v. Chen & Yap Ltd where in this case the
appellant had refused to make fortnightly payments for the work that
had already been done by the respondent. The appellant also ordered
the respondent to stop their work. It was held that the respondent can
treat the contract as being repudiated and they are entitled to sue the
appellant for the work that has been done.
ANSWERS 291
4.
Overall Conclusion
The company may rescind the contract and claim damages from Jojo.
TOPIC 5: AGENCY
Exercise 5.1
1.
2.
According to Section 149 of the Contracts Act 1950, if a principal does not
authorise an agent to do an act for him, the principal is entitled either to
ratify or to disown the act of the agent. In the situation, Maimunah had
instructed Zainab to buy some flour for her at RM1 per kg. When Zainab
bought them in her own name and at RM1.10 per kg, Maimunah is entitled
to disown or reject by not paying for the price of the flour.
3.
4.
(a)
(b)
The act done by the agent was due to a real state of emergency.
(c)
Exercise 5.2
1.
292
ANSWERS
3.
4.
(b)
(c)
If the principal failed to pay the commission, the agent may exercise a
lien.
(d)
A principal may:
(a)
(b)
(c)
(d)
(e)
Exercise 5.3
1.
To exercise his duty with due care, diligence and use such skills
which he has. Section 165 of the Contracts Act 1950 provides that an
agent appointed according to any special skill is bound to conduct as
much skill, diligence as well as due care when carrying out that duty.
The relevant case is Keppel v.Wheeler, where an agent while carrying
out his duty was negligent because he failed to inform the principal
about the new higher price offered by the third party for the sale of
the principals house. The court held that the agent must pay for the
difference in the price due to his negligence.
(b)
(c)
ANSWERS 293
instructions. If it impossible to do so, the agent must act with due care
to protect the interest of the principal.
2.
3.
Did Joe let his personal interest conflicted with his duty?
Section 168 of the Contracts Act 1950 provides that an agent must not let his
interest conflict with his duty. In Wong Mun Hai v. Wang Tham Fatt, an
agent sold the land which belonged to his principal, to his own wife. His
act was decided as in conflict with his duty.
4.
2.
3.
Implied condition that a seller has the title in the goods, a buyer
therefore will receive quiet possession and the goods are free from
only encumbrances or charges.
(b)
(c)
Implied condition that the goods must fit and be of quality if the
buyer made known the purpose for which the goods was bought, if
the buyer relied on the seller's skill when buying it, if the buyer
bought goods which the seller usually sells and if he did not buy it
based on its brand.
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294
(d)
4.
ANSWERS
Implied condition that goods bought by sample is the same with the
given sample.
Section 14 provides:
(a)
The seller must have the right to sell the goods at the time of the
transfer.
(b)
In the case of Rowland v. Divall, the original owner sued for the car
bought by Rowland because Divall sold it without the owner's
consent. The court held that Divall had no right to sell and therefore
Rowland must return it to the owner.
(c)
The buyer must receive and enjoy quiet possession of the goods.
(d)
Exercise 6.2
1.
2.
3.
(a)
If an owner by his conduct, allows a seller to sell his goods for him,
the owner is therefore not permitted from denying that the seller has
no authority to do so.
(b)
(c)
(d)
If the seller received goods under a voidable contract but that contract
was not rescinded at the time the sale was made to the buyer.
(e)
(f)
ANSWERS 295
Exercise 6.3
1.
Section 31 A seller is under the duty to deliver goods to a buyer, and the
buyer must accept the delivery as well as pay the price of the goods.
2.
(ii)
Seller
If the seller failed to inform the buyer that he had insured the
goods transported by sea, the seller therefore must bear the risks if
the goods were damaged or lost.
Buyer
3.
If the goods are delivered to a distant place, the buyer must bear
the risk that the goods were damaged or lost.
(b)
(c)
The agent keeps the goods or document with the owners permission.
(d)
The sale was made in the seller's usual practice as a mercantile agent.
(e)
Exercise 6.4
1.
296
ANSWERS
2.
Exercise 7.2
1.
Quiet possession means a hirer shall have possession of the goods without
any interference or claims from the seller or third party. The case of Jones v.
Lavington defined quiet possession as there should be no interference
from a seller or other individuals through the seller against the goods
under the agreement.
2.
The goods was examined by the buyer and no defect was found after
such examination.
(b)
3.
4.
Exercise 7.3
1.
(b)
ANSWERS 297
2.
3.
Exercise 7.4
1.
(c)
(d)
2.
Section 7(1)(b) Before goods are transferred to a hirer, the owner must
have the right to sell the goods. In Ahmad Ismail v. Malayan Motors Co,
the owner transferred a car which the police thought was stolen. After
investigation, the car was not a stolen car. Therefore, the owner had the
right to transfer to the hirer.
3.
(b)
The hirer may sue for damages from the person who made the
misstatement;
(c)
The hirer may sue for damages from the agent who made the
misstatement; and
(d)
The hirer may not be prevented from taking the above action if there
is a misstatement.
4.
Section 10 gives a hirer who bought two or more goods from the same
owner the right for the payment to be distributed.
5.
(b)
298
ANSWERS
(d)
KFCL was entitled to sue for recovery of the car. As a hirer, Kamil was
entitled to:
Be given a Fifth Schedule notice in respect of Acknowledgement of
acceptance by SKKB [Section 16(3)].
(a)
Within 21 days after delivery of the Fifth Schedule notice, to settle all
arrears and to request KFCL to return the car to him or to introduce
another person who agrees to buy the car in cash [Section 18(1)(a)].
(b)
Sue for any balance from the value of the car if there is a balance from
the amount he had paid.
TOPIC 8: INSURANCE
Exercise 8.1
1.
2.
The insurance contract was void. In Goh Chooi Leng v. Public Life
Assurance Co Ltd, the insured did not act in good faith because he did not
disclose at the time he completed the proposal form that he used to
undergo treatment for tuberculosis. The court therefore decided that the
insurance contract was void.
3.
The material facts are facts which if known by the insurer, would affect his
decision whether to accept or reject the risks; and if he accepts the risks to
fix the rate of premium.
4.
ANSWERS 299
Exercise 8.2
1.
The basic clause is the answer which was given by the insured at the time
he answered the questions stated in the insurance proposal form.
2.
If a misstatement was given, the insurer is not liable to settle the insured's
claim. In Dawsons v. Bonnin, when the insured gave wrong information in
respect of the place where the insured lorry was kept, and the lorry later burnt
down, the court held that the insurer was not liable for the insured's loss.
3.
4.
5.
6.
In New India Assurance Co Ltd v. Pang Piang Chong, the insurer refused
to pay an insureds claim when he caused the accident. The insured denied
that he or persons he permitted to drive his vehicle was once convicted for
driving offences. In fact, the insured was once convicted for driving
without a licence and not displaying the "L" sign. The court held that the
answers given were not deception or non disclosure of material facts.
7.
8.
300
ANSWERS
In Goh Chooi Leng v. Public Assurance Co Ltd, the insured lied while he
completed the proposal form. Therefore, the insurance company need not
pay and the contract was void.
2.
The acceptance must be written on the bill and signed by the drawee.
(ii)
It must not express that the drawee will perform his promise by any
other means than the payment of money.
Exercise 9.2
1.
2.
By order of termination.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Based on Section 49, when a notice of dishonour is received, the party who
received it must give notice to any prior parties. A delay in giving notice
that it is not done within reasonable time will exclude any previous parties
from being liable.
ANSWERS 301
2.
(b)
General Wakalah
It is a general delegation of power by principal to the agent. For
example if the principal informs to the agent: I delegate to you all my
affairs.
(c)
Restricted Wakalah
Where the agent has to act within certain conditions. For example, if
the principal informs the agent: I delegate to you to buy a house for
RM300,000. In this situation, the agent has to strictly observe this
condition. If the agent fails to do so, the transaction is not binding on
the principal.
(d)
Absolute Wakalah
Absolute wakalah is contradictory to restricted wakalah, where no
condition is put for the transaction. For example, if the principal
assigns an agent to buy a house and he does not specify the price, the
method of payment or other conditions. However an agent is still
bound to act within the prevailing practices and customs.
302
3.
ANSWERS
Partner
Each one partners should meet all the requirements of principal
(muwakkal) and agent (wakil). Please refer to Table 10.3.
(b)
Capital
(c)
Not debt
Specific amount
Business or Trade
(d)
Profit Loss
(e)
4.
(b)
(c)
ANSWERS 303
(d)
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