THE LAW OF CONTRACT

A contract is an agreement between 2 or more parties which is legally binding between

them.

Under S2(h) of the Contracts Ac 1950, a contract is an agreement enforceable by law.

The principle legislation for the law of Contract in Malaysia is the Contracts Act 1950.

The basis of all contracts is an agreement. Therefore, all contracts must be built upon an
agreement but not all agreements automatically amounts to a contract.

Agreements become a contract if the essential elements of a contract is fulfilled.

Example:
offer, acceptance, consideration ,intention to create legal relations, certainty and
capacity

OFFER AND ACCEPTANCE

Proposal or Offer

Section 2(a) of the Contracts Act 1950 defines proposal (or offer) to mean when one
person signifies to another his willingness to do or abstain from doing anything, with a
view to obtain the assent of that other to the act or abstinence.

An offer is an expression of willingness to contract on certain terms. It must be made

with an intention that it will become binding (obligation that cannot be broken) upon
acceptance.

PROMISOR/OFFEROR the person making the offer/proposal

PROMISEE/OFFEREE - the person accepting the proposal

Example 1

A approaches B and states, Id like to rent your 500 acres to plant vegetables and I will
pay 40% of the input costs and receive 40% of the profits. Person B agrees to Person
As terms.

In Example 1, A makes the offer and B accepts the offer. .

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Example 2:

A approaches B and states, I will not grow crops on my land for ten years if I receive
RM 500 per acre per year. B agrees to As terms.

In Example 2, Person A makes the offer and Person B accepts the offer.

WHAT ARE THE REQUIREMENTS OF A PROPOSAL?

The subject matter of the proposal / offer must be certain; and

The proposal must be communicated to the offeree - Section 4 (1) The
communication of a proposal is complete when it comes to the knowledge of the
person to whom it is made.

A unilateral offer is where one party offers and the other party accepts by
performing.

Example of unilateral offer Carlill v Carbolic Smoke Ball Co. Ltd.

In an advertisement by Carbolic Smoke Ball (CSB), they advertised that if anyone

bought and used their product in accordance to the instructions given and their
influenza isnt cured, the company will pay the person 100. Mrs. Carlill bought
and used the product following the instructions given. However she continued to
suffer from influenza. Therefore, she claimed against CSB.

DECISION

The court held that CSB had made a unilateral offer to the world at large,
which included Mrs. Carlill. However, one should note that the offer was a
conditional offer because there was a condition attached to the offer, namely
that the buyer must also follow the instructions given by CSB. Mrs. Carlill had
indicated her acceptance by buying and following the conditions of CSB, when
she followed the instructions in the box when she used it. The contract was
complete and valid and therefore, the court held that CSB must pay Mrs. Carlill as
promised.

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Offer must be distinguished from an option, preliminary negotiations and an invitation
to treat.

OFFER v OPTION

An option is a device whereby the offeror keeps his offer open for a specified time in
return for a price

Example: A makes an offer to B to sell his car for RM 40,000.The offer to be open for 10
days from date of the offer provided B agrees to pay A RM10.

OFFER V PRELIMINARY NEGOTIATIONS

An offer must be distinguished from a mere supply of information because not all
statements made in the course of negotiations can be considered as an offer that can be
accepted to form a contract.

Harvey v Facey [1893]

P: Will you sell us Bumper Hall Pen? Telegraph lowest cash price.
D: Lowest price for Bumper Hall Pen, 900.
P: We agree to buy Bumper Hall Pen for 900 asked by you. Please send us
your title deeds.

DECISION
It was held that there was no contract. The second telegraph was not an offer, but only
an indication of the minimum price if the defendants ultimately resolved to sell, and the
third telegram was therefore not an acceptance.

The 3rd telegram is an offer which was capable of acceptance, but was never accepted.
Also the reply by D was not an offer but merely a supply of information as to what
is the minimum price.

OFFER V INVITATION TO TREAT (ITT)

An ITT is an invitation to make an offer, negotiate ore deal and hence has no legal
consequences and cannot be accepted to form a contract.

In Hart v Mills [1846] 15 LJ Ex 200, the court described an invitation to treat as an offer
to negotiate, no offer to be bound by any contract and offers to receive offers

Examples

Display of Goods
Advertisements
Auctions
Tenders

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Display of Goods

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd.

Pharmaceutical Society of GB charged Boots Cash Chemist Ltd for breaching the law
against selling drugs that were labelled as poison without the supervision of a
registered pharmacist. This is because the drugs were displayed on a shelf in the
pharmacy and customers could pick it up themselves and take it to the counter for
payment.

It was highlighted to the court that although a pharmacist wasnt dispensing the drug
to the customer, a registered pharmacist was always present at the casher to advise
customers and ensure relevant procedure of dispensing such drugs were followed
before the casher accepts the money from the customer.

The court held that the display of the drugs at the shelf was merely an invitation
to treat from Boots Chemist and not an offer. The customer makes an offer to
buy at the cashier. Acceptance is indicated and the contract concluded only when
the cashier rings the till of the cash register.

Therefore, Boots Chemist was incompliance of the requirement because when the
customer picked up the drug from the shelf, the sale wasnt concluded; instead the sale
was concluded only when the customer made an offer to buy and it was accepted by
the cashier ringing the till with the presence of a pharmacist.

Fisher v Bell

A shopkeeper displayed a flick knife for sale in his shop window. This was not allowed
under the Offensive Weapons Act 1939 (UK).He was charged with offering for sale the
offending weapon under the Act.

Held
He was not guilty as he had not offered the knife for sale as the display was an ITT
and not an offer.

RATIONALE OF AN ITT

If selecting an item from the display shelf amounts to a sale, ownership would have
passed to the customer at this point of time though he has not paid for it and he may not
be able to change his mind about the purchase.

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Other examples of an invitation to treat are:

Price list / Request for Price Quotes/ Supply of information

Harvey v Facey

Advertisements , catalogues & circulars

Syarikat Gunung Sejahtera Sdn Bhd v. Lim Sze On & Ors. [2007] 5 MLJ 201 the
Court of Appeal stated that as a general rule, an advertisement is considered
by courts to be not an offer but a mere invitation to treat, that is to say, an offer
to make offers.

Partridge v Crittenden (1968)

Partridge published a classified where he indicated he had Bramblefinch cocks
and Branmblefinch hens but the advertisement itself did not make any offer for
the sale of the birds. However, another person sent a cheque to Partride and
asked for a hen, which Partridge provided in a box.

However, in terms of the Protection of Birds Act, 1954, offering for sale this
particular species of wild birds was an offence and Partridge was convicted by
the Magistrate.

On appeal, the high court decided that the advertisement was not an offer but an
invitation to treat.

NOTE:
However, the advertisements which come under the category of unilateral
contracts are considered as offers rather than invitations to treat.
Advertisements of bilateral contracts (job advertisements) are not offers!!!!
It depends on the intentions of the parties in a case.

Auctions - Payne v Cave

Payne v Cave
D made the highest bid and withdrew it before the fall of the hammer. The court
held that the bid itself constituted the proposal or the offer which the auctioneer
was free to accept by the fall of the hammer or reject it. Since the bid was
withdrawn before the fall of the hammer, there was no contract between the
parties.

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 How does an auction take place?

When the auctioneer asks for biddings, this is an invitation to treat .

An offer is made when the bid is put in. The highest bid is the final offer.

Section 5(1) CA 1950 states that a proposal can be revoke at any time before
acceptance.

In the auction house, by trade practice, the fall of the hammer indicates
acceptance by the auctioneer Payne v Cave.

When can the offer be withdrawn?

Before the hammer falls. If it is withdrawn after the hammer has fallen, then you are
bound as the auctioneer has accepted your offer, and a contract is formed.

Tender

A tender is a call for persons to place offers or do something or supply goods.

A tender is an ITT and not an offer.

Example: A university wants to erect a new building and hence advertises for qualified
builders to send in their tenders. This tenders will be examined and by the university
and then decision will be made to accept any of them. A contract will come into
existence when the tender by a specific company is selected. The tender is a single
offer converted into a contract by acceptance.

TERMINATION OF AN OFFER

OFFER CAN BE TERMINATED BY

Acceptance

Rejection

Counter Offer

Lapse of time, failure of condition precedent or death/mental disorder

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 Acceptance

An offer comes to an end when it is accepted. Therefore, it is not surprising that the
Contracts Act does not provide acceptance as a method of termination of an offer.

Rejection

If an offer is rejected, it comes to an end.

Counter offer

This is where the offeree introduces a new term to an offer.

Example: A wants to sell his car to B for RM50,000 and B indicates he will buy it for
RM40,000.Therefore, B is introducing a new term and hence is making a counter offer.

Revocation
Revocation refers to the canceling or annulling of something previously done
(withdrawal).

An offer/ proposal can be revoke at any time before it is accepted:

This is found in Section 5 (1) CA which states that a proposal may be revoked at any
time before the communication of its acceptance is complete as against the proposer but
not afterwards This simply means that revocation of a proposal must be
communicated to the offeree before it is accepted by the offeree.

Routledge v Grant
Grant offered to buy Routledge horse and gave him 6 weeks to decide whether to
accept the offer. Before the 6 weeks had lapsed, Grant withdrew his offer. It was held
that in absence of Routledge having accepted, Grant was entitled to revoke his offer.

S 4 (3) The communication of a revocation is complete

(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) as against the person to whom it is made when it comes to his knowledge

Byrne & Co v Van Tienhoven (1880)

Posting of letter of revocation is communicated to the addressee when it is received and

not when it is posted.

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Section 6 provides four ways of how an offer can be revoked.

S6 (a) states that an offer can be revoke by the communication of the notice of
revocation by the proposer to the other party.

This means the offeror must communicate his notice of revocation to the offeree
E.g. In order to revoke his offer, X must communicate the notice of revocation of his
offer to Y before Y accepts.

S6 (b) states that an offer can be revoke by the lapse of time prescribed in the proposal
for its acceptance, or, if no time is so prescribe, by the lapse of a reasonable time,
without communication of the acceptance.

S6 (c) states that an offer can be revoke by the failure of the acceptor to fulfill a
condition precedent to acceptance. A proposal may contain a condition precedent. If the
offeree is unable to fulfill this condition precedent, this will result in the proposal being
terminated.

What is the meaning of failure to fulfill a condition precedent?

E.g. If a company offers to employ an applicant on condition he passes a health test, if

the applicant fails his health test, he has failed to fulfill the condition precedent.

Financing Ltd. v Stimson

A car was to be delivered in the same condition (with the steering wheel, tyres and in a
good state) as it was seen at the time of the agreement. But at the time of delivery the
car was in a very poor state. The court held that the conditions had not been fulfilled.

S6 (d) states that an offer can be by the death or mental disorder of the proposer, if the
fact of the death or mental disorder comes to the knowledge of the offeree before
acceptance.

ACCEPTANCE

Section 2(b) CA 1950 defines acceptance;

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;

Acceptance is one person's compliance with the terms of an offer made by another,

Similar to an offer, the acceptance to an offer must also be effectively communicated to

the offeror before the contract is concluded and there is a valid contract.

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Rules of Acceptance:

The offeree must signify his acceptance.

Sec 2(b) Contracts Act 1950 when the person to whom the proposal is made signifies
his accentthe proposal is said to be accepted.

This means in order for there to be a valid contract the offeree must convey his
acceptance to the offeror. There must be a positive act of acceptance

Example: performing conditions of the offer

Section 9 - if the acceptance is made in words, the acceptance is expressed. If the

acceptance is made other than in words, the acceptance is implied.

When the proposal is accepted then under Section 2 (c) - the person making the
proposal is now called the promisor and the person accepting the proposal is called
the promisee.

Acceptance in only complete when it is communicated to the offeror.

This means the acceptance is only effective when it is communicated or brought
to the notice of the offeror.

In the case of acceptance under the Postal Rule:

i. What if the acceptance is by a letter sent by post?

ii. What happens if the letter of acceptance does not reach the Proposer, e.g.
where the letter goes astray or is lost?

Postal rule is an exception to the general requirements of communication (which is

acceptance is only good when the letter arrives)

This exception was devised in Adams v Lindsell Acceptance is complete when posted.
This puts the risk of delay and loss on the offeror.

Section 4(2) (a) states that the communication of an acceptance is complete as

against the proposer (offeror) when it is put in a course of transmission to him (the
offeror), so as to be out of the power of the acceptor (offeree).

When the letter is posted the acceptor has put it in the course of transmission in such a
way that he no longer has any control over it. The transaction becomes binding on the
proposer irrespective of any delay or disappearance of the letter of acceptance in the
course of transit.

Entores Ltd. v Miles Far East Corporation it was held that when a contract is made by
post it is clear law that acceptance is complete as soon as the letter is put into the post
box, and that is the place where the contract is made.

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The local authority for the above postal rule principle is Ignatius v Bell i.e. acceptance
is complete upon posting where communication by post is the method contemplated by
the parties.

When is the postal rule excluded?

The postal rule may be excluded by the express terms of the offer.

In the case of Holiwell Securities v Hughes the offer prescribed that the acceptance
must be by notice in writing to the intending vendor (promisee). It was held that mere
posting of the letter of acceptance is not sufficient.

It may also be excluded in cases of instantaneous circumstances e.g. telephone,

telex, telefax or in todays case using sms.

Entores v Miles Far East Corp. [1955] 2 QB 327

Facts:

The plaintiff, based in London, sent an offer by telex (an instant, electronic method) to
purchase copper cathodes from the defendant, based in Amsterdam. The defendant
accepted by telex.

Held:

The postal rule does not apply to electronic forms of communication which are
instantaneous or virtually instantaneous. Therefore, acceptance must be communicated.
It provides no direct authority on the issue of when a telexed acceptance takes effect.

Denning LJ: .. the rule about instantaneous communications between the parties is
different from the rule about the post. The contract is only complete when the
acceptance is received by the offeror; and the contract is made at the place where the
acceptance is received.

Exception where acceptance need not be communicated:

The general rule that acceptance must be communicated can be dispensed with if:

(i) the proposer has dispensed with or waived the need for acceptance, or

(ii) the proposer allows the conditions of the proposal to be performed without
acceptance being communicated i.e. by action or by conduct as in a unilateral
contracts e.g. Carlill v Carbolic Smokeball Co.

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 Acceptance must be in reliance on the offer
The person who wants to accept the offer must be aware of the offer. This is the
necessary nexus between offer and acceptance.

R v Clarke
The Australian govt. offered a reward for information leading to the arrest and
conviction of persons responsible for the murder of 2 police officers. Clarke and T
were arrested in connection with one of the killings. Clarke made a statement and
gave evidence, after which T and one other were convicted for that murder. Nobody
was charged with the other murder. Clarke later claimed the reward for the first
time.

When giving the information, Clarke did not act "in reliance upon the offer or with the
intention of entering into any contract". Clarke gave the information solely to clear
himself.

Acceptance must be within reasonable time

Section 6 (b) states - A proposal is revoked by the lapse of time prescribed in the
proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable
time, without communication of the acceptance.

What is reasonable time depends on the circumstances of the case in question.

Ramsgate Victoria Hotel v Montefoire (1866)

The defendant offered to purchase shares in the claimant company at a certain price. Six
months later the claimant accepted this offer by which time the value of the shares had
fallen. The defendant had not withdrawn the offer but refused to go through with the
sale. The claimant brought an action for specific performance of the contract.

Held:
The offer was no longer open as due to the nature of the subject matter of the contract
the offer lapsed after a reasonable period of time. Therefore there was no contract and
the claimant's action for specific performance was unsuccessful

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 Acceptance must be in the prescribe manner
Section 7 (b) provides that acceptance must be expressed in some usual and reasonable
manner, unless the proposal prescribes the manner in which it is to be accepted.

Offeror cannot prescribe silence as a manner of acceptance

It has been held that the offeror cannot prescribe silence as a manner of acceptance.

Felthouse v Bindley
Ps uncle offered to buy a horse from P for 30 adding, ...if I hear no more about him, I
consider the horse mine at that price. P did not reply to the letter and the question
arose as to whether the uncles letter made good acceptance. It was held that Ps silence
did not amount to acceptance of the offer to buy the horse at 30.

Acceptance must be absolute and unqualified

Section 7 CA states, to convert a proposal into a promise the acceptance must -
be absolute and unqualified;

Section 7 (a) means the acceptance must be absolute and unqualified so that there is
complete consensus. If the parties are still negotiating, there is no agreement yet or
if any new terms or conditions are brought into the picture then there would be no
acceptance.

Here are two situations where acceptance is not absolute and is qualified:

Counter offer
Acceptance subject to a contract

Counter offer

An acceptance which is qualified by the introduction of a new term or condition may be

seen as a counter offer see Hyde v Wrench. Any modifications to the terms of the
proposal by the offeree would amount to a counter proposal.

A counter offer is no acceptance. The effect of a counter offer is that it rejects or

destroys the original offer and replaces it with a new offer, this time, from the other
party who was offered originally.

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Hyde v Wrench

6 June - D offered to sell his estate to P for 1000.

7 June P replied that he will pay 950 here P made a counter offer.
8 June - D refused to accept Ps proposal.

When D refused, P wrote again this time agreeing to pay 1000 this is an attempt to
revive the original proposal.
It was held that no acceptance had taken placed because Ps letter of 8 June amounts to
a rejection of the original proposal which could not be revived.

(ii) Acceptance Subject to contract

In cases where the parties agreed but the acceptance is qualified with the term subject
to contract or subject to a formal contract. Here the acceptance is subject to a
condition.

Conditional acceptance is no acceptance until the offeror agrees to the condition.

Therefore the condition would have to be fulfilled before there can be a contract.

This is because the intention of the parties is not to make a concluded bargain as yet,
unless and until they have executed a formal contract.

Low Kar Yit & Ors V Mohd Isa & Anor

D gave option to Ps agent to purchase a parcel of land subject to a formal contract being
drawn up and agreed by the parties. Ps agent exercised the option but D failed to sign
the agreement. P sued for breach of contract.
The High Court held there was no binding contract. The option on the face of it was
clearly conditional upon and subject to a formal contract to be drawn up and agreed
upon between the parties.

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REVOCATION OF ACCEPTANCE

How can a person revoke his acceptance?

S 5(2) CA states that an acceptance may be revoke at any time before the
communication of its acceptance is complete as against the proposer, but not
afterwards.
The above means that the acceptor after having accepted an offer and now wants to
revoke his acceptance, he must do so before his notice of acceptance reaches the offeror.

Illustration:

Alice proposes, by a letter sent by post, to sell her house to Ben.

Ben accepts Alices proposal and replied by letter which he posted back to Alice.

Ben may revoke his acceptance but it must be at any time before his letter of
acceptance reaches Alice, but not afterwards.

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