5 business law

CAPACITY (ELEMENT 3 OF A CONTRACT)

Definition of Capacity: Capacity refers to a person’s legal ability and competence to enter into a contract.
Statutory Framework: * Section 10: States that all agreements are contracts if they are made by parties who are competent to contract. * Section 11: Defines the elements of competence. A person is competent to contract if they meet three criteria: 1. Age of Majority: They must be at least $18$ years of age. 2. Sound Mind: They must be mentally capable. 3. Not Disqualified: They must not be disqualified from contracting by any law to which they are subject (e.g., bankruptcy).

AGE OF MAJORITY

General Rule: Under Malaysian law, the age of majority is $18$ years, as stipulated by Section 2 of the Age of Majority Act 1971. Any contract entered into by an infant (minor) below this age is generally considered void.
Key Case Law for the General Rule: * Mohori Bibee v Dharmodas Ghose (1903) 30 Cal. 539: This case established the fundamental principle that contracts with minors are void ab initio. * Tan Hee Juan v Teh Boon Keat [1934] MLJ 96: The Plaintiff, an infant, executed a transfer of land in favor of the Defendant as security for a loan. The court adopted the principle from Mohori Bibee and held that transfers of land by infants were void.
Consequences of a Void Agreement (Section 66): * Section 2(g): Defines a void contract as an agreement not enforceable by law. * Obligation to Restore: When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under that agreement is bound to restore it or make compensation for it to the person from whom it was received.

EXCEPTIONS: VALID AGREEMENTS BY MINORS

Despite the general rule, certain contracts entered into by minors are considered valid and enforceable.

1. Necessaries (Section 69 of the Contracts Act): * Definition: Necessaries include things essential to the existence and reasonable comfort of the infant, such as food and clothes. * Reimbursement: A person who supplies "necessaries" to a minor is entitled to be reimbursed from the minor’s property. * Case: Nash v Inman [1908] 2 KB 1: A tailor sued a minor for the cost of clothes supplied, including fancy waistcoats worth $\pounds 22$ . The court held the clothes were not necessaries because, although suitable for the minor's station in life, the minor already had an adequate supply of clothing. Therefore, the contract was not enforceable.
2. Scholarship Agreements: * Section 4(a) of the Contracts (Amendment) Act 1976: A scholarship agreement involves an award, bursary, loan, or scholarship granted by the Federal or State government, a statutory authority, or an approved educational institution (like a university approved by the Minister). * Case: Government of Malaysia v Gurcharan Singh & Ors (1971) 1 MLJ 211: Gurcharan received a government scholarship for teacher training with the condition to serve the government for $5$ years post-graduation. He left his service before the term ended. When sued, he claimed the contract was void due to his lack of capacity at the time of signing. The court held that education constitutes a "necessity" to a minor under Section 69, making the contract valid. Gurcharan was found in breach.
3. Insurance Contracts: * Financial Services Act 2013: An infant over the age of $10$ may enter into an insurance contract. * Requirement: If the infant is below the age of $16$ , they require the written consent of their parents or guardian.
4. Contracts of Service/Employment: * Employment Act: A minor is competent to enter into a contract of service and has the capacity to sue for wages or breach of contract. * Case: Clement v London and North Western Rly [1894]: A minor working as a railway porter was provided an insurance scheme. He later wanted the adult worker's scheme. The court held the original agreement was valid because it was generally to his benefit.

SOUND MIND AND DISQUALIFICATION

Sound Mind (Section 12(2)): A person is of sound mind for the purpose of making a contract if, at the time of making it, they are capable of understanding the contract and forming a rational judgment regarding its effect upon their interests.
Unsound Mind/Influence of Substances: A contract made by a person of unsound mind or under the influence of drinks/drugs is prima facie valid.
Burden of Proof: To invalidate such a contract, the person must prove: 1. That they did not understand the nature of the contract at the time. 2. The other party knew or ought to have known of this disability. * Case: Imperial Loan v Stone: Established these criteria for challenging validity based on mental state.
Disqualification: A person may be disqualified from contracting by law, such as being declared bankrupt under the Insolvency Act 1967.

CONSIDERATION (ELEMENT 4 OF A CONTRACT)

General Rule (Section 26): An agreement made without consideration is VOID.

Types of Consideration

Executory Consideration: A promise to perform an action at a future time (e.g., A promises to pay B $RM100$ if B washes A's car later).
Executed Consideration: The promise is enforceable only after the required act has been completed by the offeree (e.g., A promises to give B $RM100$ after B runs around Taylor’s $10$ times).
Past Consideration: An action done before the promise was actually made. Usually, this is not valid unless it falls under specific statutory exceptions (e.g., A finds B’s cat and returns it; B then promises to pay A).

EXCEPTIONS TO THE REQUIREMENT OF CONSIDERATION (SECTION 26)

Section 26(a): Natural Love and Affection: * Conditions: 1. The agreement is in writing and registered. 2. It is made on account of natural love and affection. 3. The parties stand in a near relation to each other. * Case: Tan Soh Sim v Tan Saw Keow (1951): A contract between heirs and adopted children involving a deceased's property. The court held the contract void because it did not meet the requirement of "near relation" according to the specific customs or laws applicable.
Section 26(b): Past Consideration: * The act must be done at the desire of the promisor, and there is a subsequent promise to compensate for that act. * Illustration (c): A finds B’s purse and returns it. B promises to give A $50$ . This is a valid contract.
Section 26(c): Debt Barred by Limitation Law: * Conditions: 1. The promise must be in writing. 2. It must be signed by the promisor or their authorized agent. * Illustration (e): A owes B $1,000$ , but the debt is barred by the statute of limitations. A signs a written promise to pay B $500$ on account of the debt. This is a valid contract.

ADEQUACY AND LEGALITY OF CONSIDERATION

Adequacy vs. Sufficiency: Consideration must be sufficient but need not be adequate. * Explanation 2 of Section 26: The adequacy of consideration is not important for the validity of the contract. * Case: Phang Swee Kim v Beh I Hock [1964] MLJ 383: The defendant agreed to transfer land to the plaintiff for a payment of only $500$ . The court held that the inadequacy of the consideration was immaterial; the $500$ was considered good consideration.
Performance of Existing Public Duty: Performing an existing duty imposed by law is generally not consideration unless it goes beyond what is required. * Case: Glassbrook Bros v Glamorgan CC [1924] UKHL 3: A coal mine owner requested a stationary police guard during a strike and promised to pay $2,200$ . After the strike, the owner refused to pay, arguing the police were just doing their duty. The court held that since the police provided protection beyond their normal statutory requirements, the payment could be claimed.
Privity of Consideration: Consideration may move from the promisee/offeree or a third party. * Case: Venkata Chinnaya v Verikatara Ma’ya (1881): A mother provided consideration for her sons. The court held this was good consideration; it does not have to move specifically from the promisee.
Accord and Satisfaction (Section 64): Every promisee may dispense with or remit the performance of the promise, or may accept any satisfaction they think fit (e.g., accepting a lesser sum as full payment). * Case: Kerpa Singh v Bariam Singh (1966) 1 MLJ 38: If a creditor accepts a smaller payment from a debtor as full settlement of the debt, they are barred from seeking the remaining balance later.