LAW OF

CONTRACT

LESSON OUTLINE

INTRODUCTION
ELEMENTS OF A CONTRACT:
1. Offer
2. Acceptance
3. Consideration
4. Capacity
5. Intention
6. Free Consent
7. Certainty
8. Valid Object
VOID AND ILLEGAL CONTRACT
DISCHARGE OF CONTRACT
REMEDIES

INTRODUCTION

Contract defined by Sec. 2(h) - an agreement

enforceable by law is a contract
Specific Legislation - Contract Act 1950 - but
English law still applicable by virtue of Civil Law
Act.
Function of contract:
to secure the expectation created by a promise of
future performance or expectation will be paid for its
breach.
facilitate forward planning of the transaction in terms
of cost and value, responsibilities of parties and
preparation for contingencies.

Contract therefore - the instrument by which

separate and conflicting interests of the parties
can be reconciled and brought to common goal.

ELEMENTS OF CONTRACT
1. Offer

Sec.2 (a) - offer or proposal - when a person signify his

willingness to do or abstain from doing anything.
Proposal or offer - something which is capable of being
converted into an agreement by its acceptance.
Must be a definite promise to be bound - provided that
certain specific terms are accepted.
Lack of offer and acceptance - contract void ab initio

Sec. 4 (1) -offer must be communicated - effective when it

comes to the knowledge of the offeree.
R v. Clarke - communication of proposal regarding capture
of convict

Offer can be made to a particular person or to the general

public
Carlill v. Carbolic Smoke Ball - offer made to the rest of the
world but the contract is made with that limited portion of
the public who come forward and perform the condition

To be an offer, the offeror must not merely

feeling his way towards an agreement if that
is the case, then it is not offer but is an
invitation to treat
Examples of ITT:
Advertisements in the paper for the post of a doctor
- ITT
Auctioneer inviting a bid ITT (but a bidder making a
bid is an offer)
Catalogue advertising goods for sale
Goods on display in a shop

Cases:
Boots Cash Chemist Ltd sale of poison under
pharmacist supervision
Majumder V. Attorney General of Sarawak
advertisement for the post of a medical officer

2. Acceptance

Sec.2 (b) - when the person to whom the proposal is made

signify his assent thereto.
Acceptance can be expressed or implied (inferred from
conduct)
Acceptance must be accepted on exactly the same terms as
the proposal without any variation or modification it must
be absolute and unqualified
Any modification / variation to the offer is a counter proposal and is equivalent to rejection
Hyde v.Wrench - offer 1000, accept 950
Stevenson v. McLean - request for additional information
is not counter proposal
Acceptance must be communicated with some positive
action silence cannot be imposed as acceptance
Felthouse v. Bindley
Exception : - proposer dispense with it
- acceptance in form of performance
Acceptance must be within reasonable time - Sec.6(b)
Acceptance may also be revoked at any time before the
communication of the acceptance is complete against the
acceptor

Sec.4 - Acceptance through post - an exception to

the general rule that acceptance must be
communicated a.k.a. The Postal Rule
Sec.4 - communication of acceptance is completea. As against the proposer, when it is put in a
course of transmission to him, so as to be out of
the power of the acceptor
b. As against the acceptor, when it comes to the
knowledge of the proposer
Illustration to the section:
B accept As proposal by a letter sent by post
The communication of the communication is
complete:
as against A, when the letter is posted
as against B, when the letter is received by A

Termination of offer

Revocation must also be communicated

Fitch v.Snedaker
Revocation of proposal possible if acceptance
is not complete.
Sec. 6 - A proposal may be withdrawn under
four circumstances

By communication of notice of revocation by the

proposer to the other party Bryne V. Tienhoven
By lapse of time (prescribed or reasonable)
Ramsgate Victoria Hotel v. Montefiore
By failure of acceptor to fulfill a condition precedent
to acceptance Hyde V. Wrench
By death or mental disorder of the proposer if such
fact comes to the knowledge of the acceptor before
acceptance Bradbury V. Morgan

3. Intention To Create Legal Relation

Not provided by Contract Act but by case laws

Mere agreement is not enough to contemplate the
existence of a legal contract.
Sometimes can be imputed from the nature of the
agreement, for e.g :
acceptance to a dinner
acceptance to an offer to play a game of soccer
acceptance of an offer to pay for half of the petrol cost
Thus parties to a transaction may state that they do not
intend to enter into any binding obligation.
Intention is particularly relevant when it comes to cases
where legal contracts are not normally made like in
domestic arrangements Balfour v. Balfour
However in a commercial agreements, the presumption is
that there is intention to create legal relations- Winn V.Bull

4. Consideration

Sec.26 - as a general rule - agreement without consideration

is void
Sec. 2 (d) defined what is consideration.
Types of consideration
i) Executory consideration
ii) Executed consideration
iii) Past consideration
Consideration need not be adequate - Phang Swee Kim v. Beh
Hock
Consideration need not move from the promisee - Venkata
Chinnaya v. Verikataramaya - consideration provided by
mother
Past consideration is good consideration - Kepong Prospecting
Ltd..
Part payment from the full amount is valid consideration
Exception to the rule that agreement without compensation is
void - Section 26:
a. agreement made on account of natural love and affection
b.agreement to compensate for past voluntary act
c. agreement to compensate act the promisor legally compelled to do
d.agreement to pay a statute barred debt.

5. Certainty
The terms of an agreement cannot be vague but
must be certain.
If uncertain or incapable of being made certain void.
Intentions of the parties will be frustrated because
of uncertainty and the court will usually not interfere
At common law - two aspects of uncertainty:
due to language used
failure to reach agreement on fundamental term of the
agreement

In Contract Act - uncertainty provided by Sec. 30 agreements,the meaning of which is not certain, or
capable of being made certain, are void.
Case:
- Karuppan Chetty v. Suah Thian - lease at $35.00
per month as long as he likes

6. Capacity

Parties to a contract should be competent to contract, i.e

have the legal capacity to do so.
Where one or more of the parties to a contract lack the
capacity - contract invalid / void. - Tan Hee Juan
Sec. 11 - Every person is competent to contract who is of
the age of majority according to the law to which he is
subject, and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject.
Age of majority- 18 years - Age of Majority Act 1971
Exception:

contract for necessaries Nash V.Inman

scholarship Govt. of Malaysia v. Gurcharan Singh
Marriage contracts
insurance
Apprenticeship

Sound mind - Sec 12(1) - ..capable of understanding it

and forming rational judgement as to its effect upon his
interest.
Includes incapacity due to sickness, alcohol or drugs

PRIVITY OF CONTRACT

After a valid contract has been formed - to

whom does the obligation extend? What are the
limits of the contractual agreement.
The general rule under common law - no one
but the parties to a contract can be entitled to
it, or bound by it.
Contract cannot confer rights on third party
Price v. Easton - payment of debt on behalf of another
Dunlop Pneumatic Tyre v. Selfridge.

Contract cannot impose liability on third party

e.g. relationship between building owner - contractor sub contractor

However, a claim can still lie in tort.

CONTENTS OF A CONTRACT
1. Express and Implied Terms

Contents made up of terms - expressed or implied

1. Express terms - has been specifically agreed upon by the
parties -orally, in writing or both.
Express terms are straightforward and can be identified just
by looking at the contract document.
2. Implied terms - term that is read into the contract by the
court.
Form an integral part of the contract though not expressly
provided - necessary to give business efficacy to the contract

Terms may be implied by :

1. Custom and usage pertaining to a particular transaction.
Preston Corporation - implied a term based on trade usage
regarding ownership of film positives used to print books
Must satisfy - notoriety, certainty and reasonableness
2.

1.
2.
3.

Statutory Provision
Statutes that imply terms into a contract:
Sales of Goods Act 1957
Hire - Purchase Act 1967
National Land Code 1965

3. The courts , based by the intention of the parties

Cases:
Yong Ung Kai v. Enting - implied a term that must have
been in the mind of the parties to get license to cut
the timber
the officious bystander test i.e. oh, of course!.

2. Conditions and Warranties

Another classification of terms

Definition of both terms - given by Sales of Goods Act
1957
Sec 12 (2) SOGA - condition - a stipulation essential to
the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated.
Sec 12 (3) SOGA - warranty - a stipulation collateral to
the main purpose of the contract, the breach of which
gives rise to claim for damages but not a right to reject
the goods or repudiate the contract.
Whether a term is a condition or warranty - depends on
the intention of the parties - the court will help to
determine.

3. Exemption Clause

Defined as a term of a contract that attempts either to

modify the principal obligation(s) arising out of the contract
or to limit / exclude the liability of a party which would
otherwise arise as a result of a breach by that party.
Common in standard contract - the operation of which
depends on the construction of the contract.
In case of disputes- court will interpret - contra
proferentum.
If the clause is ambiguous - will be interpreted to the
disadvantage of the party who will benefit from clause.
In case of negligence - need clear and unambiguous words
to exclude liability.
In case of serious / fundamental breach - exemption clause
will not cover the parties who made the clause.
- Port Swettenham v. T.W.Wu and Company
There are also some statutes which modify the effect of the
exemption clause to provide more protection to consumers.
Also - exemption clause cannot give benefit to third party
nor make another party liable

Free Consent

Sec 10 of Contract Act - agreements are

contracts if they are made by the free consent of
the parties.
Sec 14 - consent is free when not caused by one
or more of the following:
1. Coercion - Sec 15
2. Undue influence - Sec 16
3. Fraud - Sec 17
4. Misrepresentation - Sec 18
5. Mistake - Sec 21, 22 and 23
Void - agreement that lacks any legal effect from
the beginning - void ab initio.
Voidable contract - Sec 2 (i) an agreement which is
enforceable by law at the option of one or more parties,
but not the others.

1. Coercion.

Coercion defined as committing or threatening to

commit any act forbidden by the Penal Code, or the
unlawful detaining of any person / property with the
intention of causing any person to enter into an
agreement.

Kesarmal v. Valiappa Chettiar - transfer made

under Sultans order in the presence of
Japanese officers during the occupation
considered voidable.
Chin Nam Bee Development payment of extra
$4000 under threats to cancel booking of
houses

2. Undue Influence

Exist when the relations subsisting between the parties are

such that one of the parties is in the position to dominate the
will of the other and uses that position to obtain an unfair
advantage over the other.
Therefore the elements of undue influence:

Position to dominate
Use that position to obtain unfair advantage

Position to dominate exist when:

Has real or apparent authority over the other e.g.:

parent-child
Morley v. Loughnan
Stand in fiduciary relation to the other e.g.:
religious leader follower, solicitor-client
Allcard v. Skinner
Tate v. Williamson
Made contract with a mentally incapacitated person
by reason of age, illness or distress.
Inche Noriah v. Shaikh Allie

Burden of proving no undue influence - on the person in

position to dominate

3. Fraud

Sec 17 Five acts that would constitute fraud:

Suggestion of fact that is not true
Active concealment of fact - Horsfall v. Thomas inserting metal plug in a cannon is active concealment
Promise made without intent to perform it
Other act fitted to deceive
Any acts the law declares to be fraudulent
There must be an intention to deceive - that is made
knowingly, without belief in its truth or reckless whether
it true or false
Generally silence does not constitute fraud - the misled
party has the duty to exercise ordinary diligence
However, under certain circumstances silence or non
-disclosure may constitute fraud
Takes into account the relationship btw parties and
where silence is equivalent to speech
Duty to exercise ordinary diligence applies to fraud by
silence only not other cases of fraud
Weber v. Brown - number of rubber trees

4. Misrepresentation.

Misrepresentation refer to certain false statement of

existing or past fact made by a person before or at the
time of making the contract which induces a party to enter
into a contract.
Basic difference between misrepresentation and fraud is
that in fraud the person making the representation does
not himself believe in its truth - but for misrepresentation may himself believe it true.
Like fraud - when there is a duty to disclose - silence may
amount to misrepresentation.
However under the Contract Act - Sec 19 - misled party has
duty to exercise due diligence
Tan Chye Chew v. Eastern Mining Metals contract not
voidable despite the misrepresentation as the party has
means of discovering the truth with ordinary diligence.

To be actionable:

1. There must be false representation - Keates v. Lord Cardogan

2. The representation is one of fact , not opinion - Bisset v.
Wilkinson.
3. The statement was addressed to the party misled - Peek v.
Gurney.
4. The statement must induce the contract - Attwood v. Small

5. Mistake

Sec. 21 of the Contract Act - where both the parties under

the agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void - for lack

of free consent.
Sec 22 - mistake as to the law - contract not voidable
due to mistake of law in force in Malaysia, but if the law
not in force in Malaysia - like mistake of fact.
Sec 23 - mistake as to one party (unilateral) - contract
is valid
Mistake of fact made by both parties can be as to : Existence of the subject matter

Strickland v. Turner. - annuity for a dead person

Identity of the subject matter

Falck v. Williams - identity of charter parties

Quality of the subject matter

Kennedy v. Panama Royal Mail. - shares in a mail company

Possibility of performing the contract.

Sheikh Brothers v. Ochsner. - manufacture sisal

 Sec

VOID AND ILLEGAL

CONTRACT

2 (g) - Contract which is not

enforceable by law.
Sec 24 Contract with unlawful
consideration / object is void i.e.:
a- forbidden by law - Hee Cheng V. Krishnan
attempts to transfer TOL land
b- of such nature as to defeat the law -Tan
Bing Hock attempts to assign logging rights
c- fraudulent -Palaniappa Chettiar
d-involves / implies injury to person /
property. - Syed Ahamed Alhabshee V. Puteh
e- immoral / against public policy - Pearce V.
Brooks hire of vehicles for prostitution

There are also Sec 25 to Sec 31 which provides

for other instances that renders a contract void
in law.

Sec 25 - any part of a single consideration / any

part of several consideration unlawful
Chung Khiaw Bank Ltd.
Sec 26 - agreement made without consideration.
Sec 27 - agreement in restraint of marriage.
Sec 28 - agreement in restraint of trade
Wrigglesworth v. Anthony Wilson
restrained from practicing as lawyer within
five miles from KB for two years
Sec 29 - agreement to restraint legal proceeding
Corporation Royal Exchange v. Teck Guan
Sec 30 - agreement void for uncertainty.
Sec 31 - agreement by way of wager.

Consequence Of Void And Illegal Contract.

General rule under CA - ex turpi causa non
oritur actio - no action will arise from a wrong
done.
Contracts under sec 27, 28 and 29 - not void in
toto - severable.
Sec 66 - Right of restitution - doctrine of unjust
enrichment
Ahmad b. Udoh paid $1500 as deposit for lease of
padi land which was illegal
Yeep Mooi v. Chu Chin Chua money deposited with a
company carrying unlicensed business is recoverable

DISCHARGE OF CONTRACT

Contract is discharged when it is terminated in one of

these ways:
1. By performance.
2. By consent or agreement between the parties
3. By impossibility (frustration)
4. By breach.

1.By Performance.

Performance must be strictly in accordance with terms of

the contract.
Sec 38 (1) - parties to a contract must either perform or
offer to perform their respective promises unless such
performance has been dispensed with by any law.
When time is of the essence - Sec 56
Performance by third party - Sec 41
Letchumi Ammal terms of contract that requires
personal performance must be done by promissor
Haji Nik Ishak v. Nik Zainab if a promisee accepts
performance from a third party, cannot afterwards
enforce it against promisor

2. By Consent or Agreement.

Contract created by consent can be extinguished

by consent either express or implied.
Express consent may be given at time of contract
or subsequent to that.
E.g. discharged at the occurrence of an event.
Waiver, release, novation or rescission.

Sec 63 - if the parties to a contract agree to

substitute a new contract for it, or to rescind or
alter it, the original contract need not be
performed.
Sec 64 - 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.

3. By Impossibility / Frustration.

Two categories of impossibility of contract

When impossibility is at the time of making the contract - an
agreement to do an act impossible in itself is void.
A contract is frustrated when there is a change in the
circumstances which renders a contract legally or physically
impossible of performance not merely difficult or more onerous
Sec 57(2) - a contract to do an act which after the contract is
made becomes impossible, or by reason of some event which the
promisor could not prevent, becomes void when the act becomes
impossible or unlawful.
In applying the rule - court will examine the circumstances
surrounding the frustration , including whether it is self induced
or not.
A contract may be discharged in any of the following
circumstances:
1. Destruction of the subject matter - Taylor v. Caldwell
there must be total destruction - not partial due to Sec 12 of SRA
2. Supervening event defeat the whole purpose / object of the contract.
Henry v. Krell.
3. Death or personal incapacity especially in regards of personal
obligation.
4. Supervening illegality - Lee Kin v. Chan Suan Eng.

Effect of frustration - automatically end the contract

Sec 66 CA provides for restitutionary remedy.

4. By Breach
Sec 40 - When a party to a contract has refused to
perform, or disabled himself from performing, his
promise in its entirety, the promisee to the contract,
unless he has signified, by words or conduct, his
acquiescence in its continuance.

Party not in breach has the option of

continuing with the contract and claim
damages or repudiate the contract.
Sec 65 - when a person at whose option a contract is

voidable rescinds it, the other thereto need not perform

any promise therein contained in which he is promisor.
The party rescinding a voidable contract shall, if he has
received any benefit thereunder from another party to
such contract, restore the benefit, so far as may be, to
the person from whom it was received.

Cases :

Choo Yin Loo v. Visuvalingam

Ban Hong Joo Mine Ltd. V. Chen & Yap

REMEDIES

There are several remedies provided by the law to give

relief to the party not in default in a breach of contract.
1. Rescission of Contract. - Sec 40
2. Damages. - Sec 74 to 76
3. Specific Performance. - The Specific Relief Act 1950
4. Injunction. - Specific Relief Act.

1.Rescission

as dealt with in the previous part under sec. 40

2.Damages

Damages are granted to a party as compensation for the

damage, loss or injury done / suffered through breach of
contract - but damage cant be too remote or indirect.
Damages can be classified as substantial, nominal or
exemplary.
Sec 74 - when a contract has been broken, the party who
suffers is entitled to receive..compensation for any loss
or damage.which naturally arose in the usual course of
things..or which the parties knew, when they made the
contract, to be likely to result from the breach.

Illustrations to sec74 also indicate that the aggrieved

party may recover damages for other expenses incurred as a result of the
breach,
for loss of profits arising out of the breach,
for the difference btw the price of goods as
contracted for and the actual price the goods were
sold for as result of the breach.

Sec 75 - When a contract has been broken, if a sum is

named in the contract as the amount to be paid in case
of such breachor any other stipulation by way of
penaltythe party complaining of the breach is entitled
to receivereasonable compensation not exceeding the
sum named or the penalty stipulated for.
The effect of fixing the sum - to determine the upper
limit of compensation.
Nevertheless, party seeking damages is also under the
duty to mitigate the loss - Kabatasan Timber Extraction
Co.

3. Specific Relief.

The Specific Relief Act provides for the remedy of specific

performance - which is discretionary by nature.
It a decree of the courts directing the contract to be performed
according to its terms.
Sec 11 in trust cases and where no adequate relief.
Sec 12 - presumption in cases of transfer of land
Sec 18 - court has power to award damages in lieu of SP
Sec 21 - court has discretion to refuse specific performance if
cause undue hardship to the defendant.
Sec 20 - circumstances where no SP can be enforced:
where money is adequate relief.
contract with minute details.
contract dependant on personal qualification.
contract that will need supervision of the court.
contract with uncertain terms.
contract revocable by nature.
contract made by trustee in excess / breach of their power
contract made on behalf of public or private corporation in
excess of its power.
contract the involves performance of continuous duty
extending over a period longer than three years from its date.
contract which a material part of the subject matter has
ceased to exist even before the contract is made

4. Injunction.
An equitable remedy that can be varied or dissolved
Sec 50 of SRA provides for two types of injunctions:

1. Interim Injunction.

Used by a party to maintain the status quo of a

subject matter pending full trail of the case.
To continue until a specified time / full order of the
court.
May be granted at any period during a suit.
Must consider that there are serious question to be
tried, that compensation would be adequate and it
is proper on the balance of convenience.
Can be mandatory injunction or a restraining order.

2. Perpetual Injunction.

Granted by decree made after a full trial based on

the merits of the case - defendant will be
permanently prohibited.
No injunction where the contract cannot
specifically enforced.

Thats All Folks!