Past year q and answer on CAPACITY OF CONTRACT

After having obtained excellent results in his SPM Examinations, Daniel aged 17 years,
applied for and was offered a scholarship by the Perak State Government (PSG) to
pursue a course of studies leading to a degree in law at the Perak University. The course
was for a duration of 5 years. Accordingly, a scholarship agreement was entered into
between the PSG and Daniel. It was a term of the agreement that upon successful
completion of his studies, Daniel shall be required to serve the PSG for a period of 5
years. It was further agreed that in the event Daniel were to breach the agreement, he
shall be required to pay on demand to PSG an agreed sum of RM 60,000 as
compensation.

Daniel successfully completed his law course and commenced employment with the PSG
Government as a Legal Officer. After having worked for a period of 3 years, Daniel
resigned from his job and joined a law firm in Petaling Jaya as one of their lawyers.
PSG immediately wrote to Daniel and demanded from him the sum of RM 60,000 as
compensation for his breach of the scholarship agreement failing which they have
threatened to sue Daniel to recover the stated amount. Daniel denied liability on the
ground that he was a minor when he executed the scholarship agreement.

Advise the PSG on the remedies available to them.

Answer Guide:

Issues:

• Whether the contract between PSG and Daniel is valid or void?

• What remedy is there to protect PSG’s interest?

Law and Application:

• There are 3 areas of the law relating to minors that the student must consider when
attempting to advise the PSG, namely:-

• the law affecting contracts entered into by minors generally – Mohori Bibee; Tan Hee Juan
etc.

• the statutory claim by the SSG under s. 69 of the Contracts Act 1950 for ‘necessaries’

supplied;

• Scholarship agreements under the Contracts (Amendment) Act 1976.

• PSG is advised to bring their claim for the full sum under the CAA.

• What is the effect of the agreement entered into by Daniel as a minor?

• s.10 CA – provides inter alia that for an agreement to be a contract the parties should be
‘competent to contract’. It is an essential ingredient in the formation of contracts.

• The persons who are not competent to contract are stated under s. 11 , namely …. those who
are not of the age of majority…

• Pursuant to s.2 of the Age of Majority Act 1971, the age of majority for contracts is 18
years.

• Daniel was 17 years of age at the time of the agreement. He was a minor at the material
time of the contract and was therefore legally incompetent to contract.

• The CA is silent as to the effect of such a contract. The leading case on this subject is the
Privy Council case of Mohori Bibee v. Dhurmodas Ghose (1903) a case that originated from
India where the Indian Contracts Act is in pari materia with our law and where it was held
that a contract entered into by minors are not voidable but void.

• The case involved a minor who had executed a mortgage of his property in favour of a
money lender who had advanced him a loan on the security of his property. The Privy
Council held that the mortgage was void and the lender was not entitled to recover moneys
advanced to the minor with knowledge of his minority.

• The decision in Mohori Bibee was followed by the Malaysian High Court in the case of Tan
Hee Juan v. Teh Boon Keat & Lai Soon [1934]. The Court held that a minor was incompetent
to contract and accordingly the transfers of land executed by the minor in favour of the
purchasers were declared to be void. The Court has also refused to order a refund of the
purchase monies received by the minor.

• Examine the effect of s. 66 on void contracts. The Privy Council was of the view that the
section was not applicable in the case of minors who are incompetent to contract.

• PSG is therefore advised not to sue Daniel under contract.

• There is an exception under s. 69 CA where a minor is required to pay for necessaries

supplied during his minority. This is a statutory claim under the Contracts Act.

• Explain what are ‘necessaries – See Nash v. Inman [1908]; and Govt. of Malaysia v.
Gurcharan Singh where education was decided to be a necessary.

• Daniel will be bound under s. 69.

• But how much has he to repay to PSG under s.69? Does he have to pay the RM 60,000
named in the agreement as compensation for the breach?

• S. 69 requires the minor to ‘reimburse’ the supplier for necessaries supplied i.e. a
reasonable sum of money and not the contracted sum.

• Since Daniel has served PSG for 3 years of the required 6 years, the reimbursement for the
loss to PSG would be the unexpired period of his contract i.e. 2 years. This would amount to
RM 60,000/60 months (5 years) x 24 (2 years) = RM 24,000 : See : Gurcharan Singh.
• Daniel would be required to only pay the sum of RM 24,000.

• Can PSG bring an action against Daniel under the Contract (Amendment) Act 1976,. But to
be allowed to rely on the CAA, PSG will be required to provide facts that would permit them
to bring their claim under the Contracts (Amendment) Act. The Act makes provisions with
respect to scholarship agreements.

• A “scholarship agreement” is defined under Section 2 .

• “Appropriate authority” has been defined to mean “the Federal Government or a State

Government, a statutory authority, or an approved educational institution”. And an “approved

educational institution” has been defined in Section 3.

• PSG being the State Government is an “appropriate authority” and can therefore rely on the
Contracts (Amendment) Act to bring this claim.

Conclusion:

• S. 4 provides that the scholarship agreement is not invalidated on the ground that the scholar
i.e. Daniel, is not of the age of majority – a minor can enter into such scholarship agreements.

• S. 5 provides that the whole sum named in the scholarship agreement would have to be paid
by the scholar and irrespective of whether actual damage or loss was suffered by such a
breach.

• PSG is therefore advised to commence an action against Daniel under the CAA 1976 in
which case they would be entitled to receive the full sum i.e. RM 60,000 as compensation
from Daniel for his breach of the agreement.