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EUT 440 ENGINEERS IN SOCIETY TOPIC 2: CONTRACT LAW LECTURERS: DR. KHADIJAH MOHAMED MDM. ROHIZAN HALIM CONTRACT LAW IN MALAYSIA: BACKGROUND English law (common law, equity & statute) forms part of the laws in Malaysia and still applicable Section 3(1)(a) Civil Law Act 1956 states that courts should apply Common Law and the Law of Equity as administered in England: in Peninsular Malaysia: 7 April 1956. in Sabah: 1 December 1951. in Sarawak: 12 December 1949 Section 5(1) Civil Law Act 1956 states that the principles of English commercial law apply in Peninsular Malaysia except Penang and Malacca in absence of local legislations. EUT440 LAW 2 KM2013 2 …BACKGROUND The case law related to the boundaries of application. Jamil Bin Harun v. Yang Kamsiah & Anor [1984] 1 MLJ 217. It was decided that courts have the authority to decide whether to follow English Law (common law and law of equity) or Federal law, considering the circumstances and the scope the written law permits to do so. Smith Kline & French Laboratories Ltd. v. Salim (Malaysia) Sdn. Bhd.[1989] 2 CLJ. 228. It was held that the courts have the authority to put aside any Common Law or Law of Equity which cannot be applied in Malaysia. EUT440 LAW 2 KM2013 3 CONTRACT LAW IN MALAYSIA Contract law is governed by the Contracts Act (CA) 1950. The Act is a re-enactment of the Contracts (Malay States) Ordinance 1950. Principles of contract originated from England, but the original Ordinance was a reproduction of the Indian Contract Act of 1872. The functions of the contract law- establishes what kinds of promises will be legally binding. supplies procedures for enforcing legally binding promises, or agreement. EUT440 LAW 2 KM2013 4 WHAT IS CONTRACT? An agreement between two or more parties that creates an obligation to perform (or not perform) a particular duty. S.2(h) CA 1950 – “an agreement enforceable by law is a contract”. S.10(1) CA 1950 – „All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with lawful object, and are not hereby expressly declared to be void‟. All contracts must be built upon an agreement although not all agreements are automatically contracts e.g: social agreements & domestic agreements. EUT440 LAW 2 KM2013 5 TYPES OF CONTRACT Formal vs Informal Contracts. Formal, need a seal v informal, simple & without seal. Unilateral vs Bilateral Contracts. Unilateral, a promise on 1 side v bilateral, promises on both sides. Unilateral: Carbolic Smoke Ball case Forms of Contract Oral Written EUT440 LAW 2 KM2013 6 ELEMENTS OF CONTRACT A legally enforceable contract constitutes the elements of contract (1) Offer/proposal (I‟ll fix your sink this weekend, if you pay me RM50) (2) Acceptance (You‟ve got a deal) (3) Consideration (The value received and given – the money and the sink fixed) (4) Intention to create legal relations (5) Certainty (6) Legal Capacity (7) Free Consent EUT440 LAW 2 KM2013 7 ESTABLISHING OFFER AND ACCEPTANCE S.2(a) CA 1950: Proposal – “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 to such act or abstinence”. S.2(b) CA 1950: 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”. A legally recognized offer and an acceptance creates a “meeting of the minds‟, or mutual assent, between the parties. EUT440 LAW 2 KM2013 8 EXAMPLE Ali wants to sell his car. He makes an offer to sell his car to Rahim for RM25,00.00. If Rahim say yes, the offer is said to be accepted. A person who make an offer is now referred as promisor (offeror) and the party accepting the proposal as promisee (offeree). Once the offer has been made and accepted, it becomes a promise or an agreement. EUT440 LAW 2 KM2013 9 TYPES OF OFFER Specific: the offer only can be accepted by a person who has been offered. Boulton v Jones (1857) 2 H & N 564. Jones used to have business dealings with Brockle Hurst. He sent an order (offer) to Brockle Hurst for the purchase of certain goods. By the time the order reached Brockle Hurst, he had sold his business to Boulton. Boulton receiving the order sent all the goods to Jones as per the order without informing Jones of the changing of the hands of the business. When Jones learnt that the goods were not supplied by Brockle Hurst, he refused to pay for the goods. His contention was that he had never placed an order to Boulton, the offer being made to Brockle Hurst, and therefore had no intention to make a contract with Boulton. Held: Jones was not liable to pay. EUT440 LAW 2 KM2013 10 …TYPES OF OFFER General: the offer is general as it is made to the public. Carlill v Carbolic Smoke Ball Co.[1892] EWCA Civ 1 The defendant company advertised that a reward of £ 100 would be paid to any person who contracted influenza, cold, or any other disease associated with cold even after using the smoke balls of the company – a preventive remedy, 3 times a day, for 2 weeks in accordance with the printed directions. The plaintiff had seen the advertisement, used the smoke balls according to the printed directions and for a period as specified, but still contracted influenza. She sued the defendant company to claim the reward. Held: that the advertisement constituted the offer to the whole world at large ( – general offer) which was accepted by the plaintiff by conduct. ( – by using smoke balls). EUT440 LAW 2 KM2013 11 WHEN IS AN OFFER EFFECTIVE? S.4(1) CA 1950 – A proposal/offer is only effective if it is communicated to the acceptor. 3 elements are necessary for an offer to be effective (mutual assent): Intention: There must be serious, objective intention by the offeror to become bound by the offer. Non-offer situations include: expressions of opinion, statements of intention, preliminary negotiations & advertisements, catalogues and circulars. Definiteness: The terms of the offer must be reasonably certain + definite. Communication: The offer must be communicated to the offeree. EUT440 LAW 2 KM2013 12 OFFER V INVITATION TO TREAT „Invitation to treat’ - a sort of preliminary communication which passes between the parties at the stage of negotiation. Advertisement in newspapers, catalogues, circulars & display of goods in self-service mall. Auction sale. Invitations to make offers rather than offers, thus, the „advertisor‟ would have several offers to choose from and could accept the best one without incurring any liability for the rest he/she rejected. EUT440 LAW 2 KM2013 13 TERMINATION OF THE OFFER S.6 CA 1950: A proposal is revoked— (a) by the communication of notice of revocation by the proposer to the other party; (b) by the lapse of the 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; (c) by the failure of the acceptor to fulfil a condition precedent to acceptance; or (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. EUT440 LAW 2 KM2013 14 ACCEPTANCE To establish a contract, the acceptance must be communicated to the offeror/promisor. Only offeree/agent may accept the offer. S.2(b) CA 1950: “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”. EUT440 LAW 2 KM2013 15 REQUIREMENTS OF ACCEPTANCE (1) Acceptance must unqualified). be unequivocal (absolute and S.7(a) CA 1950: any modification or variation of the proposal does not constitute an acceptance but amounts to a counter-proposal by the party to whom the original proposal was made). Case: HYDE v. WRENCH [1840] 3 Beav. 344 ER 132 6 June: Def. offered to sell his estate to the Plf. for £100. 8 June: Plf. replied and made a counter offer to purchase at £950 (counter-offer), but the Def. refused. 27 June: Plf. wrote to Def. saying he was prepared to pay the original sum demanded. Held: no contract existed between them since Plf. had rejected the original proposal on 8 June so that he was no longer capable of accepting it later. EUT440 LAW 2 KM2013 16 …REQUIREMENTS OF ACCEPTANCE (2) Acceptance must be expressed in some usual and reasonable manner S.7(b) CA 1950: acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in that manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance. EUT440 LAW 2 KM2013 17 COMMUNICATION OF ACCEPTANCE General rule: acceptance of a proposal must be communicated to the proposer/promisor. Exception: Postal rule (parties involved are not dealing face to face). S.4(2) CA 1950: the communication of an acceptance is complete – (a) 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; and (b) As against the acceptor, when it comes to the knowledge of the proposer. EUT440 LAW 2 KM2013 18 CONSIDERATION S.2(d) CA 1950: “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”. Consideration is defined as the value given in return for a promise. Sufficiency & adequacy of consideration. Something of legally sufficient value must be given in exchange for the promise; and Must be a bargained-for exchange. EUT440 LAW 2 KM2013 19 CONTRACTUAL CAPACITY The legal ability to enter into a contractual relationship. S.11 CA 1950: Capacity – “every person is competent to contract who is of the age of majority… , and who is of sound mind, ….” Age of Majority Act 1971: the age of majority (adult) in Malaysia is18 years. S.12(1) CA 1950: „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 interest‟. EUT440 LAW 2 KM2013 20 …CONTRACTUAL CAPACITY 3 types of people who do not have the capacity to enter a contract are minors, intoxicated persons and mentally incompetent persons. Exception of contract by minors: Contracts for necessity; scholarship; insurance, and relating to marriage, divorce and dower. Sound mind: (a) (b) A patient in a mental hospital, who is at intervals of sound mind, may contract during those intervals. A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, cannot contract whilst such delirium or drunkenness lasts. EUT440 LAW 2 KM2013 21 INTENTION 2 assumptions of intention Social @ domestic agreements – are not intended to create legal relations unless proven otherwise. Commercial agreements – are intended to create legal relations unless proven otherwise. EUT440 LAW 2 KM2013 22 CERTAINTY The terms of an agreement cannot be vague but must be certain. A agrees to sell to Mary a hundred crates of toys without specifying what kind they are; such an agreement is void. S.30 CA 1950: An agreement which is uncertain is void. In Karuppan Chetty v. Suah Thian (1916) 1 F.M.S.L.R. 300, the contract was held void for uncertainty because the parties agreed to lease of $35 per month „for as long as he likes‟. The terms are uncertain as the duration of the lease is not specified or capable of being made certain. EUT440 LAW 2 KM2013 23 FREE CONSENT S.10(1) CA 1950: “agreements are contracts if they are made by the free consent of parties competent to contract …” What constitutes consent? S.13 CA 1950: Two or more persons are said to consent when they agree upon the same thing in the same sense”. S.14 CA 1950 : Consent is said to be free when it is not caused by: (a)Coercion, as defined in s.15 (b)Undue influence, as defined in s.16 (c)Fraud, as defined in section 17 (d)Misrepresentation, as defined in s.18 (e)Mistake, subject to sections 21,22-23. EUT440 LAW 2 KM2013 24 VOID AND ILLEGAL CONTRACTS For a contract to be valid and enforceable, it must be formed for a legal purpose. Contracts contrary to public policy? Contracts in restraint of trade Unconscionable clauses Exculpatory clauses – “once broken considered sold”? Contract to commit an immoral act & contract that prohibits marriage. A offers a young man RM3000 if he refrains from marrying A’s daughter. If the young man accepts, no contract is formed (the contract is void) because it is contrary to public policy. EUT440 LAW 2 KM2013 25 …VOID AND ILLEGAL CONTRACTS Not enforceable by law S.24 CA 1950: the consideration or object of an agreement is lawful unless: forbidden by law if permitted, would defeat any law fraudulent implies injury to a person or property of another court regards it as immoral or opposed to public policy EUT440 LAW 2 KM2013 26 DISCHARGE OF CONTRACT Contract that is otherwise VALID may be unenforceable if the parties have not genuinely assented to the terms or the contract is not in the proper form. Contract discharge Discharge by agreement of the parties ~ by rescission, novation or accord and satisfaction; Discharge based on impossibility of performance~ by complete performance or inadequate performance (constitutes a material breach of contract). EUT440 LAW 2 KM2013 27 BREACH OF CONTRACT Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract. Breach of contract is a type of civil wrong. EUT440 LAW 2 KM2013 28 REMEDIES S.66 CA 1950: When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. A contracts with B to deliver to him 250 gantangs of rice before the 1st of May. A delivers 130 gantangs only before that day, and none later. B retains the 130 gantangs after the 1st of May. He is bound to pay A for them. A contracts to sing for B at a concert for RM1,000, which are 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. EUT440 LAW 2 KM2013 29 …REMEDIES Remedies from the court: Damages - to compensate the innocent party for losses suffered as result of the contract being breached by the party in breach. Compensatory, consequential, punitive, nominal, liquidated. Rescission and restitution Specific performance - a decree directing a contract or certain act should be performed specifically according to its original terms Injunction - An order of court refrain the party to whom it is addressed from doing a specified act. Election of remedies: A common law doctrine under which a non-breaching party must choose ONE remedy from those available to prevent double recovery. EUT440 LAW 2 KM2013 30