Chapter 3- Contract

CONTRACTSITI SUHAIDAH BINTI SAHAB

DEPT. OF BUILDINGFACULTY OF ARCHITECTURE PLANNING AND SURVEYING

UNIVERSITI TEKNOLOGI MARASHAH ALAM

OUTCOME Student to understand the importance of

contract Able to identify the elements of contract Capable to define the elements of contract

CONTENT Importance of contract Introduction Making a contract/ formation of contract Offer Acceptance

IMPORTANCE OF CONTRACT Contract law is important as it is a way of

regulating relationships. We can safely make arrangements with other

people if we know those agreements have the force of law.

INTRODUCTION

The principal source of Malaysian Contract is the Malaysian Contracts Act 1950, which is applicable throughout Malaysia. It is similar to the Indian Contract Act 1872 which was formed from the English Law.

Hence, English law may be used at certain level where there is a need to fill in gaps in the Act but it is subjected to the restriction imposed by Section 3 and 5 of the Civil Law Act 1956.

INTRODUCTION The Contract Act contains many illustrations

and although they do not form part of the Sections of the Act, they cannot be ignored or brushed aside: Mohamed Syedol Ariffin v Yeoh Ooi Gark [1916] 2 AC 575.

INTRODUCTION Treitel (1995) in the Law of Contract defines a

contract as: An agreement giving rise to obligations

which are enforced or recognised by law. The factor which distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties

Anson further define in the Principles of the Law of Contract: A legally binding agreement made between

two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others

INTRODUCTION According to Section 2(h); contract is defined

as ‘an agreement enforceable by law is a contract.

Engineering Contract Dictionary: a binding agreement between two or more persons which creates mutual rights and duties which is enforceable at law

INTRODUCTION Contractual relationships arise in three ways:

Through agreement between the parties (consensual contract)

Through one party performing some act in reliance upon a promise, often implied, by the other (unilateral contract)

  Through the execution of a deed e.g. purchasing a house

Simple Contra

ct

Contract under

seal

MAKING A CONTRACT Unilateral and Bilateral Contracts

Essential elements of a contract

MAKING A CONTRACT Unilateral contract – the performance remains

outstanding on 1 party only (i.e. the offeror), while the other party (i.e. the offeree/acceptor) having already performed what is required of it.

SITUATION TO PONDER…

Example: Ad 1-Mr B found the the cat and returned it to Mr A. Mr A refused to pay Mr B $500 but only agreeing to pay him $100. Can B sue A ? If so, for how much ?

SITUATION TO PONDER…

Example Ad 2:

Mr B found the cat and returned it to Mr A. Mr A is only willing to pay $1 to Mr B. Can Mr B sue him ? If so, for how much ?

ELEMENTS OF CONTRACT The basic elements of contract are as

follows:1. Offer2. Acceptance of the Offer3. Intention to create legal relations4. Consideration5. Certainty6. Capacity

Formation of Contract under the Contracts Act 1950

1. There must be a valid offer and an unqualified acceptance [s.2].

2. There must be an intention to create legal relation.3. There must be a valuable consideration, except in

the case of contract under seal [s.2d]. 4. There must be a genuine consent by the parties,

for example, there must be no duress involved [s.10, s.14].

5. The contract must be lawful [s.10(1)].6. The parties must have legal capacity to contract

[s.11].7. The terms of the contract must be sufficiently

certain [s.30].

Formation of Contract under the Contracts Act 1950 Section 10(1) lays down several elements

when it states that an agreement must be made by the free consent of parties competent to contract foe a lawful consideration and with a lawful object

When one of the elements above is missing the agreement is not a contract. A social agreement cannot be a contract as it lacks the elements to create legal relations, which can bind a contract.

FIRM OFFER/ PROPOSAL

UNQUALIFIED ACCEPTANCE

CONSIDERATION

INTENTION TO CREATE LEGAL RELATIONS

CERTAINTY OF TERMS

LEGAL CAPACITY TO CONTRACT

FREE CONSENT

LAWFUL OBJECT & CONSIDERATION

PHYSICAL/ LEGAL POSSIBILITY

VALID/ ENFORCEABLE AGREEMENT

Elements of a valid/

enforceable agreement

Formation of Contract under the Contracts Act 1950

In the case of Sri Kajang Rock Products Sdn Bhd v Maybank Finance Bhd (1992) VC George J stated that to constitute a valid contract, there must be:- Separate and define parties thereto; those parties

must be in agreement, that there is consensus ad idem; Those parties must intend to create legal relations

in the sense that the promises of each side are to be enforceable simply because they are contractual promises;

And the promises of each party must be supported by consideration.

1) OFFER/ PROPOSAL

ELEMENTS OF CONTRACT (1) Offer/ Proposal

A person making an offer is called an offeror. The person to whom the offer is made, and who

thus can accept it is called the offeree. The offer is a statement of intent by the offeror

to be legally bound by the terms of the offer if it is accepted, and the contract exists once acceptance has taken place.

ELEMENTS OF CONTRACT (1)

Salleh Abbas FJ in Preston Corp Sdn Bhd v Edward Leong stated: ...An offer is an imitation of willingness by the

offeror to enter into a legally binding contract. Its terms either expressly or impliedly must indicate that it is become binding on the offeror as soon as it has been accepted by the offeree

ELEMENTS OF CONTRACT (1)

An offer – a definite promise or proposal made by the offeror to the offeree (NB: not necessarily the performer) with the intention to be bound by such promise or proposal without further negotiation. e.g. “I give you $100 for [your] doing some work.”e.g. “I give you $100 for [your] not suing me.“e.g. “I will not sue you if you repay me $100.”

ELEMENTS OF CONTRACT (1) Section 2(a) of the Contracts Act 1950 lays

down the following definition: ... 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 the act abstinence, he is said to make a promise

Rules of offers:1. To one or a number of persons

Carlil v Carbolic Smoke Ball Co. Ltd. (1893)The company advertised a patent medicine,

the smoke ball, with the promise that if a purchaser used it correctly and still got flu, then the company would pay them £100. Mrs Carlil did get flu after using the smoke ball in the correct way. The court enforced her claim for £100 on the ground that the promise was an offer that could be accepted by anyone who used the smoke ball correctly and still got flu.

An advertisement may sometimes be an offer and sometimes be an invitation to

treat – the crucial point – definite intention to be bound

Rules of offers:2. Must be communicated s.4 (1)

Taylor v Laird (1856)Taylor gave up the captaincy of a ship and

then worked his passage back to Britain as an ordinary crew member. His claim for wages failed. The ship owner had received no communication of Taylor’s offer to work in that capacity.

Communication of proposal Section 3 of the Contract Act 1950 states that

an offer/proposal is deemed to have been made by any act or omission of the party proposing by which he intends to communicate the proposal or which has the effect of communicating it

Sec 4 (1) Contracts Act 1950, the communication of an offer/ proposal is complete when it comes to the knowledge of the person to whom it is made ie the promise or offeree

Principle: acceptance cannot be effectively made in ignorance of the offer because such acceptance is contrary to the principle of ‘Consensus ad idem’

Felthouse v Bindley (an auctioneer) (1862) An uncle and nephew had negotiated over the sale of the

nephew’s horse. The uncle had said “If I hear no more from you I shall consider the horse mine at £30.15”. The nephew did not reply but wishing to sell the horse to his uncle, he told the defendant (an auctioneer) who was selling farm stock for him not to sell the horse but an auctioneer inadvertently sold it.

The uncle tried to sue the auctioneer in tort but failed. It was held that the uncle could not prove that the horse was his. The nephew had not actually accepted the offer to buy although the nephew intended to sell the horse to his uncle; he had not communicated that intention. Thus, no contract between the parties (uncle and nephew) and the property in the horse was not vested in the claimant. Therefore, the leading silence does not amount to acceptance.

Contrast: Brodgen v Metropolitan Railway Co (1877) 2 App Cas

666: P sent a draft contract to D offering to sell coal. D did not expressly accept the offer but used the coal when they were supplied.

Held: Implied acceptance.

A proposal to be capable to be accepted must be clear and equivocal/not ambiguous

Guthing v. Lynn [1981]“A” bought a horse from “B” and promised

that “if the horse was lucky he would give five pounds more or buy another horse”

Held: Such a proposal was too lose to be capable of being effectively accepted by the promisee.

Rules of offers:3. All terms must be brought to notice of offeree

Rules of offers:4. May specify conditions to be followed

Yates v Pulleyn (1975)An option to purchase land was

required to be exercised by notice in writing ‘sent by registered or recorded delivery post’. When the option was sent by ordinary post only, it was invalid.

Rules of offers:

5. Maybe revoked (cancelled) or may lapse (due to time) s.5 (1)

Routledge v. Grant (1828)Grant had offered his house for sale

on understanding that the offer would remain open for six weeks. When he took it off the market within six weeks that was legitimate because there was no acceptance

All offers must have an effective life In an event whereby an offeror stipulates a

time during which an acceptance must be made, the offer will automatically lapse once the specified periods expires unless it is extended by the offeror

Macon Works & Trading Sdn Bhd v Phang Hon Chin & Anor [1976] 2 MLJ 177

Fraser v Everett [1889] 4 Ky 512 The defendant, through a broker had requested the plaintiff's firm to

telegraph to London for 100 shares in Bentong STM Co Ltd. The contract was for the purchase of ‘transfer and scrip’

2nd March Messr. Fraser & Co telegraphed to the plaintiff in London to purchase the share

At the date it was known to the plaintiff that the shares had been issued at a better price in Singapore

The Plaintiff applied to the company to issue share warrants for the 100 shares so purchased by him for the defendant

On 29th March- plaintiff advised the firm that the said shares were being so exchanged to ‘Bearer’ scripts and were not ready to send by that mail

On receipt on this advise on 25th April 1889, Fraser & Co. Gave notice to defendant that the shares were being so exchanged & not ready to be mailed

The share warrants arrived by MM mail steamer Melbourne on 15th May 1889

19th April 1889, the steamer left for London and plaintiff tendered the same to the defendant

The Defendant refused to complete his purchase and to pay the contract price for the shares

The plaintiff therefore brought this action to recover $600 damages for breach of contract in refusing to accept the shares

Held1. A person who contracts for the purchase of ‘transfer

and scrip’ cannot be compelled to take a ‘bearer- warrant’

2. There is no rule of law like the saying ‘Silence gives consent’ applicable to mercantile contracts and an omission to reply does not constitute a waiver

3. Under a contract for scrips for mining shares ‘expected to be mailed about the end of March’ and which mailed would have arrived on 23rd April is not a delivery within a reasonable time, to have the scrips mailed early in April and to offer them on 15th May

Revocation of Offer/ Proposal Timing

An offer may be revocked at any time before communication of its acceptance is complete as against the offeror/ proposer, but not afterwards

Mode Section 6 of the Contracts Act 1950 stipulates that

an offer may be revoked or withdrawn in any of the following ways: By communication of a notice of revocation by the

offeror to the other party by the lapse of 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; Macon Works & Trading Sdn Bhd v Phang Hon Chin & Anor [1976] 2 MLJ 177

Ramsgate Victoria Hotel Co. Ltd v. Montefiore (1866) Montefiore had offered to buy shares in June but the

company only issued the shares in November. It was held that his offer to buy had lapsed.

By the failure of the acceptor to fulfil a condition precedent to acceptance

By the death or mental disorder of the offeror/ proposer, if the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance

Communication This is covered by section 4(3) of the Act which

states: The communication of the revocation is complete:

a) As against the person who make it, when it is put into course of transmission to the person to whom it is made so as to be out of the power of the person who makes it

b) As against the person to whom it is made when it comes to his knowledge

The offeror must communicate the withdrawal to the offeree

Byrne v. Van Tienhoven (1880)On 1st Oct Van Tienhoven wrote to Byrne,

offering to sell certain goods.On 8th Oct he changed his mind and sent a

letter withdrawing the offer.On 11th Oct Byrne accepted the offer in a

telegramOn 15th Oct he confirmed in writingOn 20th Oct Byrne received Van Tienhoven’s

letter withdrawing the offer.Held: The letter was invalid because it had not

been received until after Byrne’s acceptance.

INVITATION TO TREAT

Invitation to treat is not an offer

Goods displayed on shelves in a self-service shop.

Goods on display in a shop window.

Goods or services advertised in a newspaper or magazine.

INVITATION TO TREAT Invitation to treat/offer - The proposal

before the actual “offer” e.g. goods catalogue, mail order catalogue,

advertisements in newspaper, display of goods in the shelves of a supermarket

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd (1953)

Boot altered one of their shops to self-service. Under the UK Pharmacy and Poisons Act 1933, a registered pharmacist was required to present at the sale of certain drugs and poisons and had authority to prevent customers from taking goods out of the shop if he thought fit.

There was an allegation that the defendant infringed the Act. The display of goods did not constitute an offer. The contract of sale was not made when a customer selected goods from the shelves, but when the company’s employee at the cash desk accepted the offer to buy what had been chosen. There was, therefore supervision in the sense required by the Act at the appropriate time.

Fisher v Bell (1961)The defendant was a shop keeper, who had

displayed a flick knife marked with a price in his shop window; he had not actually sold any. He was charged under the Restriction of Offensive Weapons Act 1959 for selling an “offensive/prohibited weapon”. The court had to decide whether he was guilty of offering the knife for sale. It was decided that the shopkeeper displaying a flick knife in the window was not offering it for sale. It was merely invitation to treat.

Partridge v Crittenden (1968)A prosecution for “offering for sale”

a wild bird under the Protection of Birds Act 1954 failed. The advertisement (“Bremblefinch cocks, bramblefinch hens, 25s each”) was not an offer but an invitation to treat.

Gibson v Manchester City Council (1979)Gibson returned his completed

application form when receiving an invitation to buy his house from the council. When there was a change of policy by the council, Gibson’s action for breach of contract failed. His completed application was an offer to buy, not an acceptance of any offer by the council.

2) ACCEPTANCE

INTRODUCTION

Sec 2(b) Contracts Act 1950 When the person to whom the offer is made

signifies his assent thereto, the proposal is said to have been accepted.

A proposal/offer, when accepted, became a promise.

Acceptance – comes into existence upon the offeree unconditionally accepts the offer e.g. The offeree says, “OK, I accept.”

Contrast with e.g. The offeree says, “I accept subject to

conditions….” e.g. The offeree says, “I accept but…..”

RULES OF ACCEPTANCE1. Must be communicated to offeror [s.2(a)].

1. Power v Lee (1908) 99 LT 284: P applied to be a headmaster. Management board agreed to accept his offer but the decision was communicated by a member who was not authorised. Held: No acceptance.

2. Must be unconditional [s.7(a)].3. Must be made in the method described [s.7(b)].4. Can only be made by party to whom the offer was

made.5. Must be made within prescribed time – before

lapsed, revoked or rejected.6. Cannot be revoked without consent of the offeror

[s.5(2)].

PROBLEMS ASSOCIATED WITH OFFER AND ACCEPTANCE

Davies & Co. Ltd v William Old (1969) Shop fitters, following their successful tender, contracted

with the architects in a building contract to sub-contract to the builders. The builders, under instruction from the architects, issued an order for work to the shop fitters. They did this on their own standard form that included a clause that they would not pay for work until they themselves had been paid [pay when paid]. The shop fitters later sued for payment.

Held: the shop fitter’s action failed. The builders’ standard form / [pay when paid clause] was a counter-offer that the shop fitters had accepted by carrying on with the work.

British Steel Corporation v Cleveland Bridge and Engineering Co. (1984)

CBE were sub-contracted to build the steel framework of a bank in Saudi Arabia. The work required four steel nodes that they asked BSC to manufacture. BSC wanted a disclaimer of liability for any loss caused by late delivery. The parties were never able to agree on this and so no written agreement was ever made. BSC, however, did make and deliver three nodes, but the last was delayed because of a strike. CBE refused to pay for the three nodes and claimed that BSC was in breach of contract for late delivery of the fourth.

Held: There was a total disagreement over a major term, the judge in the case found it impossible to recognize that a contract existed. He did order that BSC be paid for what they had supplied based on quantum meruit.

ACCEPTANCE V COUNTER OFFER

Acceptance must be made on exactly the same terms as proposed without modifications or variations. (Absolute & Unqualified)

A counter offer is treated as rejection of original proposal.

If the parties are in process of negotiation, there is no question of an agreement

A B

I promise to do X

I promise to do Y

There are 2 independent offers:Tinn v Hoffman & Co (1873) 29 LT 271: Crossing in post –

ignorance of the other’s offer – no contract

Lau Brothers v. China Pacific Navigation (1965) Negotiations for the delivery of logs were

conducted through a series of telegrams and letters. Whilst still in the negotiating stage, the defendants withdrew.

Held: there was no contract formed – they are still in the process of negotiation. Thus, the defendants withdrawal was valid.

Sec 4(2) : Communication of acceptance is complete to offeror when it is put in a course of transmission to him, so as to be out of the power of the acceptor and against the person to whom it was made, when it comes to his knowledge.

An acceptance may be revoked at any time before the communication of its acceptance is complete as against the acceptor, but not afterwards.

THANK YOU…RECAP..