Law of Contract Notes

CHAPTER 1: LAW OF CONTRACT

Prepared by: Ikhwan Naguib Bin Jusoh

Overview

• Introduction
• What is a Contract?
• Definition of Proposal & Acceptance
• Characteristics of Proposal
• Proposal to be Distinguished from ITT (Invitation To Treat)
• Proposal to be Distinguished from Counter Offer
• Acceptance
• Postal Rule & Instantaneous Communication
• Characteristics of Revocation
  • Revocation of Proposal
  • Revocation of Acceptance

Introduction

• Everyday in our life we enter into contracts.
• Examples:
  • Buying groceries in the market
  • Eating in a restaurant
  • Taking a bus
  • Buying a can of Coca-Cola from a vending machine

Contract vs. Agreement

• A contract involves an element of agreement, but not every agreement will result in a contract recognizable by law.
• Contract: An agreement enforceable by law.
• Contract: An agreement which is legally binding between the parties.
• Agreements are contracts IF they fulfill the essential elements of a contract.

Definition of a Contract

• A contract is an agreement between two or more parties that is legally binding between them.
• Parties agree to perform or avoid performing certain acts
• Section 2(h) of the Contracts Act 1950 (CA 1950): A contract is ‘an agreement enforceable by law.’
• Section 10(1): All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.
• A contract can be formed in these ways:
  • Verbally
  • In writing
  • Implied from the conduct of the parties

Contracts Act 1950

• The principal legislation for the law of contract is the Contracts Act 1950.
• Where there are no provisions in the Contracts Act 1950, English law applies by virtue of the Civil Law Act 1956.
• Where there is a contradiction between English Law and the Contracts Act 1950, the Contracts Act 1950 will prevail.

Parties to a Contract

• Example: Joe offering to buy Mek’s Blackberry Bold for RM 1000 with the hope that Mek will accept it. Upon acceptance by Mek, a contract between parties is created.
• Promisor/Proposer/Offeror: Person who makes the offer/proposal.
• Promisee/Acceptor: The person who accepted the proposal.
• Every section must be referred to CA 1950.
• Cases: Parties involved in the case should be indentified.
• EG: CARLILL V CARBOLIC SMOKE BALL CO.
  • PLAINTIFF: party who sues
  • DEFENDANT: party who is being sued

Elements of a Contract: Section 10(1)

• Proposal
• Acceptance
• Consideration
• Intention to create legal relations
• Capacity
• Certainty
• Free consent

Definition: Proposal & Acceptance

• General rules
• PROPOSAL
  • Statement or other indication made by the individual which is prepared to enter into a contract with another on certain terms
  • Section 2(a) of CA 1950: ‘when one person signifies to another his willingness to do or abstain from doing anything…he is said to make a proposal’
  • The ‘promisor’/ ‘offeror’ must have declared his readiness to undertake an obligation upon certain terms, leaving the option of its acceptance or refusal to the “offeree”.

Acceptance

• Section 2(b) of CA 1950: ‘when the person to whom the proposal is made signifies his assent thereto, the proposal is said to have been accepted.
  • Express acceptance: If acceptance is made in words
  • Implied acceptance: If the acceptance is made other than in words
• Section 4(1): A proposal is only complete when it comes to the knowledge of the offeree.
• Example:
  • Adam by offering to buy Maya’s iPhone for RM1000, in the hope that Maya will accept, is making a proposal.

Characteristics of Proposal

• Two types of proposal
  • Unilateral proposal
    • Requires acceptance in form of an act or a performance.
    • One party promises to do something to induce the other party to do something.
    • Are binding and enforceable against only one party (the party that makes the promise).
    • For instance, an advertisement to pay a reward for returning lost pets (promise for an act). This advertisement is an offer.
  • Bilateral proposal
    • Requires acceptance of unqualified promise.
    • All parties promise to do something for one another.
    • Bind all parties and are enforceable against all parties.
    • For instance, in a job advertisement, the job advertisement itself is not an offer but an ITT, the applicant is actually making an offer to work for the advertiser, if they accept the applicant’s offer, promise to give the applicant a position and remuneration in accordance with the advertisement (a promise for a promise).

An Offer Must Be Certain

• It is a condition that an offer must be certain, clear, complete, final and detailed to avoid any obscurity or doubt.
• If the offer is not clear, it is not to be regarded as a valid offer.
• In GUTHING v LYNN (1831), Lynn offered to buy a horse from Guthing on the condition that if the horse brings luck to him, he will pay another £5 extra. It was held that the offer was not final & incomplete. Therefore, it was invalid.

An Offer Must Be Communicated

• Unless there is communication of the proposal as suggested in Section 2(a) of CA 1950, ‘when one person signifies to another his willingness to do or abstain from doing anything…’, there can be no acceptance to form an agreement.
• The communication of offer is complete only when the offer comes to the knowledge of the offeree - Section 4(1) of CA 1950.
• If the offer has not been communicated to the offeree, there is no acceptance could be made to form a binding contract.
• A party who casually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of reward for its return.
• E.g: You found your neighbor's lost cat and returned it to him, unaware of the fact that your neighbor had advertised in the newspaper that reward will be given to those who found his cat.
• In this situation, you cannot claim for the reward because there is no contract between two of you.
• R v CLARK [1927]
  • The Australian Gov. offered a reward for the information leading to the arrest and conviction of the criminal.
  • One of the criminals, Clarke, gave info which leads to the arrest of Y.
  • Clarke was later acquitted and claimed for the reward.
  • HELD: he was not entitled to the reward because he was not aware of the reward when he gave the info to the government.

To Whom Can A Proposal Be Made?

• Proposal can be made either to:
  • Particular person or
    • Eg: Bala offer to sell his car, a Proton Saga, to Krishnan for RM20,000
  • To the general public
    • Eg: Ali advertised in the Berita Harian that he will reward RM500 to anyone who finds his pet, ostrich.
• Proposal made to a particular person, may only be accepted by that person. This is based on the wordings of Section 2(b) of the CA 1950, which provides ‘when the person to whom the proposal is made…’
• If proposal is made to the general public, then anyone who meets all the terms of the proposal may accept.
• CARLILL V CARBOLIC SMOKE BALL CO. [1893]
  • Defendant supplied some kind of drugs to cure influenza.
  • The defendant advertised that whoever used the product and still suffer from influenza will be offered some of money.
  • The plaintiff still suffered from influenza after using the product then sued the company for breach of contract.
  • Held:The advertisement was a proposal. The plaintiff accepted the offer made to the world at large. Therefore the defendant has to pay the money to the plaintiff.

Proposal Must Be Distinguished From Invitation To Treat (ITT)

• The CA 1950 does not contain any provision with respect to ITT thus English Law is applicable.
• An ITT is not a proposal but a sort of preliminary communication which passes between the parties at the stage of negotiations that might lead to an offer.
• ITT is only an invitation to induce offers. (merely an invitation from one party to another party to make an offer)
• Thus upon the customer making an offer it is up to the person making the ITT to accept or reject the offer.
• Examples of ITT:
  • Display of goods
  • Advertisements
  • Auction

Display of Goods in a Shop

• Generally do not constitute a proposal to sell.
• The shop owner merely holds himself prepared to consider proposals made to him at the suggested prices.
• The invitation is not capable of being accepted as it is not a proposal.
• The proposal is in fact made by the customer when he selects the desired goods.
• This well-established rule was clearly determined by the case of PHARMACEUTICAL SOCIETY OF GREAT BRITAIN v BOOTS CASH CHEMIST LTD [1953],
  • Customer went into Boots n picked up drugs without supervision.
  • Before the customer is able to purchase, his action was being prevented by the chemist.
  • The customer was angry with the situation n reported the matter to the PSGB stating that Boots selling drugs without supervision.
  • Held: Display Of Goods on the shelf is an ITT n not a proposal. No contract exist between customer n Boots. Thus Boots has not made an unlawful sale.
• FISHER v BELL (1960), the court held that the display of several kinds of flick-knives in a glass shop window is not an offer but only an invitation to the customers to make an offer to buy. Whether the offer is to be accepted or not, it depends on the discretion of the shop owner.

Advertisement

• An advertisement is only an invitation to attract people’s interest to make an offer. The advertiser is not an offeror/promisor.
• The person who read/saw/noticed the advertisement and make an offer to buy or to get whatever being advertised is an offer.
• Acceptance would be made by the advertiser/seller.
• COELHO v THE PUBLIC SERVICES COMMISSION [1964], Coelho had applied for a position in response to a newspaper advertisement.
  • He was later informed that his application had been accepted. After undergoing a period of training, he was posted to a position.
  • Subsequently, the PSC tried to terminate his employment on the basis that Coelho was appointed on probation.
  • It was held that the job advertisement was an invitation to any qualified persons to apply. The applications from the applicants were offers and such offers could be accepted by was of appointment. Therefore, there was a valid contract between Coelho and the PSC once he was appointed. Consequently, the termination of Coelho’s employment was invalid.

Auction Sale

• When an auctioneer requests bids, he is actually inviting the assembly of bidders to make offers to him.
• The auctioneer is only making an ITT. He invites the people present to make an offer. The bidders who make the bids are making the offers.
• The auctioneers may accept or reject the offer. Once the hammer falls, acceptance takes place and contract exists.
• Section 10 of the Auction Sales Act: “A sale by public shall be complete when the auctioneer announces its completion by the fall of the hammer…”
• HARRIS v NICKERSON (1873), the Nickerson acting in good faith, advertised that certain furniture would be auctioned on a particular day.
  • The Harris traveled to the auction with a commission to buy the furniture but it was withdrawn from the sale.
  • Harris sought for damages and claimed that Nickerson had breached a contract since the advertisement is an offer and his presence is an acceptance to such offer.
  • It was held that an advertisement is only an ITT, not an offer. Therefore was no contract and Harris was not entitled for any damages from Nickerson.

Proposal to be Distinguished From Counter Offer

• Situation whereby after a proposal has been made, suddenly either one of the party make a new proposal.
• If any changes have been made to the proposal, this is also a counter proposal.
• It is treated as REJECTION of the original proposal.
• Eg: When Lala makes a proposal to Lulu, Lulu has the choice to accept or to reject it. But if Lulu makes a new proposal by changing a vital terms of the contract (e.g. price of the goods), Lulu is said to have made a counter-offer.
• Effect of counter proposal
  • Lala’s original proposal or offer is destroyed and it can no longer be accepted.
  • Lala has become the acceptor while Lulu has become the proposer.
  • Lala has the choice either to accept or to reject Lulu’s proposal (i.e. counter offer)
• In HYDE v WRENCH [1840], the defendant offered to sell a piece of land to plaintiff for £1000 on 6th of June.
  • The plaintiff then made a counter-offer to purchase at £950 on 8th of June. However, the defendant refused to accept the new price.
  • The Plaintiff then immediately wrote to the defendant accepting the original offer of £1000 on 27th of June.
  • It was held that there was no acceptance because the plaintiff’s letter on 8th of June had rejected the original offer and not to be revived. Therefore, there was no valid contract.

Acceptance

• Section 2(b) defines acceptance as “the person to whom the proposal is made signifies his assent, the proposal is said to be accepted.
  • Once there is an acceptance, an agreement between the parties is created. A contract exists and it is binding upon the parties.
• Section 7 (a) CA 1950 “ the acceptance must be made on exactly the same terms as proposed without modifications or variation. It should be absolute and unqualified.

Characteristics of Acceptance

• It must be unconditional, i.e, ‘absolute’ & ‘unqualified’ [s.7(a) of CA 1950]
  • it must be accepted according to the terms of the contract.
  • any modification of the terms will destroy the validity of such acceptance.
• It must be accepted within a reasonable time [s.6(b) of the CA 1950]
  • if there is a fixed date given, it must be accepted before the date lapses.
  • if there is no fixed date, it must be accepted within a reasonable time.
• Silence does not constitute a valid acceptance. It requires a positive act of acceptance. [s.7(b) of CA 1950]
  • FELTHOUSE v BINDLY (1862), the plaintiff, uncle, write to his nephew offering to buy a horse saying “If I hear no more about him, I will consider him mine.” the nephew did not reply but told the auctioneer, the defendant, not to sell the horse. The defendant sold by mistake and the plaintiff sued the defendant for conversion.
  • It was held that there could no be conversion because there was no contract between the plaintiff and his nephew since the latter did communicated to the plaintiff’s offer. Silence is not acceptance.
• It can be made by performance.
  • For example, a taxi driver who drives his customer to specific destination is accepting the proposal made by the customer in form of performance.
• It must be communicated using usual mode or method [s.7(b) of CA 1950]
  • Exceptions;
    • Proposer has dispensed the need for it
    • Proposer allows acceptance taking the form of performance of an act stated in the proposal, or
    • Proposer allows ‘the acceptance of any consideration for a reciprocal promise which may be offered with a proposal’. [s.8 of CA 1950]
• The general rule is that acceptance should be communicated to the proposer in order for a contract to be legally binding.
• Section 4(2) the communication of an acceptance is complete
  • a) as against the proposer:
    • when the letter of acceptance is posted
  • b) as against the acceptor:
    • when it comes to the knowledge of the proposer.
• E.g. : YOU accept MY proposal by letter sent by post. In this situation, the communication of the acceptance is complete
  • against ME : when the letter is posted
  • against YOU : when the letter is received by ME
• By relying on the above mention section, there are two methods of accepting a proposal. First by using post. Second, by using instantaneous communication.

Postal Rule

• Proposer is bound when the acceptor posts the letter [S.4(2)(A) of CA 1950] even though the proposer has no knowledge of the acceptance or even the letter is delayed or disappeared in the course of transit. This is because that once the letter posted, the acceptor has no longer control over the letter.
• This rule is known as the postal rule. Under common law, the rule is that acceptance is complete once the letter is put in the letter box. It is place where the contract is made.
• IGNATIUS v BELL [1913], communication by post is the method agreed by the parties. Acceptance had been made by post. However, there was a delay in course of transmission. Court held that acceptance was complete. Contract exist between the parties.

Limitations of the rule

• It only applies to acceptance and not other types of communication such as proposal, counter offer and revocation.
• It only applies where it was reasonable for the acceptance to be sent by post.
• The rule can always be displaced by the offeror.
• HENTHOM v FRASER [1892], it only applies where it was reasonable for the acceptance to be sent by post.
• HOLWELL SECURITIES LTD v HUGHES [1974], if the offeror wants to be sure that the postal rule will not operate, this should be made explicit in the offer.

Instantaneous Communication

• Communication such as telephone, answering machine, fax, email and SMS. For this method of acceptance, section 4(2)(b) applies, whereby acceptance is complete as against the proposer when the acceptance comes to the knowledge of the proposer.
• It means that if the acceptor is using the method of accepting as above, the acceptance is complete only if the proposer is aware of such situation.
• If the acceptor is using the telephone, he must make sure that he talks to the proposer. If he is using answering machine, proposer has to listen to the massage. If he is using fax, email or SMS, the proposer must have read the massage.
• In ENTORES LTD v MILES FAR EAST CORPORATION [1955], acceptance for instantaneous communication takes place where it is received.
• In BRIMNES [1974], the court held that the communication was effective when it was received on the charterer’s telex machine during office hours although it was not actually read until the following morning.

Characteristics of Revocation

• Revocation refers to withdrawal of proposal by the proposer or withdrawal of acceptance by the acceptor.
• Requirements of a valid revocation;
  • It must be communicated.
    • The communication of revocation is complete as against the:
      • person who makes it- when it is communicated to the other person [s.4(3)(a) of CA 1950]
      • Person who receives it- when comes to his knowledge
  • Time of revocation
    • Proposal [s.5(1) of CA 1950]- at any time before the communication

Revocation of Proposal

• Sec. 5(1) CA 1950 provides that “ a proposal can be revoked anytime before the communication of its acceptance is complete against the proposer but not afterwards.
• Illustration under Section 5. A proposes by a letter sent by post to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance and not afterwards.
• Case: BYRNE v TIENHOVEN [1880] It involved communication by post. On 8th October the plaintiff had sent acceptance by telegram. On 20th October the letter of acceptance reached the plaintiff. court held; there was a contract between the parties because the letter of revocation reached the acceptor after the acceptor accepted the proposal.

Method of Revocation of the Proposal

• Sec 6(a) notice of revocation by the proposer to the other party
• 6(b) lapse of time or lapse of reasonable time
• Sec 6(c) failure of the acceptor to fulfill a condition precedent to the acceptance
• Sec 6(d) death or mental disorder

Revocation of Acceptance

• Sec. 5 (2) - An acceptance may be revoked at any time before the letter of acceptance reaches the proposer/offeror.
• Sec. 4(3) – The communication of revocation is complete as against the:-
  • a) person who makes it, when it is communicated to the other person.
  • b) person who receives it, when it comes to his knowledge.