LECTURE 4

Formation of a
contract
 a) Analyse the presumptions relating
to intention to
create legal relations
b) Explain the need for
consideration.
INTENTION TO CREATE LEGAL
RELATIONS
“To create a contract there must be a
common intention of the parties to enter
into legal obligations, mutually
communicated expressly or impliedly”
Atkin LJ in Rose & Frank Co v JR Crompton &
Bros Ltd [1923] 2 KB 261 at 293
Rebuttable presumptions
In social and domestic agreements there is a presumption
that there is no intention to create legal relations.

Balfour v Balfour [1919] 2 KB 571 –Husband worked

overseas and agreed to pay maintenance to wife
monthly. Later failed. Wife sued. H&W – domestic agt
– no intention to create legal relation. W’s action
failed.

Presumption can be rebutted

Merritt v Merritt
Merritt v Merritt
A husband left his wife. There was £180 left owing on the house which
was jointly owned by the couple. The husband signed an agreement
whereby he would pay the wife £40 per month to enable her to
meet the mortgage payments and if she paid all the charges in
connection with the mortgage until it was paid off he would transfer
his share of the house to her. When the mortgage was fully paid, he
refused to transfer his share to her.

Held:
The agreement was binding. The Court of Appeal distinguished the
case of Balfour v Balfour on the grounds that the parties were
separated. Where spouses have separated it is generally considered
that they do intend to be bound by their agreements. The written
agreement signed was further evidence of an intention to be bound.
•  
Rebuttable presumptions
In business or commercial agreements, there is a presumption that the
parties did intend to create legal obligations

Presumption can be rebutted

Rose & Frank Co v Crompton & Bros Ltd [1925] AC 445
Business agreement contained a clause that it was not entered into as a formal
or legal agreement and would not be subject to legal jurisdiction in the
courts but was a record of the purpose and intention of the parties to
which they honorably pledged themselves, that it would be carried
through with mutual loyalty and friendly co-operation.

It was held that the agreement was not binding owing to the inclusion of the
"honorable pledge clause".
What is consideration?
s.26 CA provides that as a general rule: an agreement without
consideration is void.

S.2(d) CA defines ‘consideration’ as follows; when at the desire

of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing,
something, such act or abstinence or promise is called a
consideration for the promise.

The value one party pays in exchange of the promise of

another.
 Exceptions to general rule that an agreement without
consideration is void are provided in Section 26:

a) s.26(a) CA states an agreement made without consideration is

void unless it is expressed in writing and registered under the
law (if any) for the time being in force for the registration of
such documents, and is made on account of natural love and
affection between parties standing in a near relation to each
other.

b)s26(b) it is an agreement to compensate a person who has

already voluntarily done something for the promisor – past
consideration
 Adequacy of Consideration
• Under Malaysian law, consideration need not be adequate.
S.26 Explanation 2 provides that an agreement is not void
merely because the consideration is inadequate.

• Example; ‘A agrees to sell a horse worth $1,000 for $10... the

agreement is a contract notwithstanding the inadequacy of
the consideration.

• Phang Swee Kim v Beh I Hock (1964) MLJ 383 – pg 149

LEGAL CAPACITY – who can enter
into a contract
• S.11 CA 1950 – the parties to a contract must
have the capacity i.e. must be competent
otherwise the contract would be invalid.

• General rule all persons have the power to

enter into a contract EXCEPT: -

A. Minors
B. Intoxicated people
C. Mentally disordered people
MINORS- people below the age of
18 years (Age of Majority Act 1971)
• General rule minors cannot enter into a contract
– the law wants to protect the minors.

• Exception to 3 types of contract: -

a. Contract of necessaries – food, shelter,
medical services, clothing (properly
evaluated)
b. Contract of Insurance; and
c. Contract of Education (Gov.t of M’sia vs
Gurcharan Singh – scholarship to a minor?) ;
MENTALLY DISORDERED &
INTOXICATED PEOPLE
• S.11 CA 1950 – Everyone is competent, who is of
sound mind is not disqualified from entering
into a contract.
• S.12 (1) CA 1950 – A person is of sound mind
when he is capable of understanding and
forming a rational judgment to its effects.
• Therefore a mentally disordered and intoxicated
person can enter into a contract when they are of
sound mind.

E.g. During intervals of sound mind.