2016

L E C T U R E

N O T E S

ACCA MYS PAPER F4

CORPORATE

&

BUSINESS LAW

DAVID | CHAU

EDITION

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C H A P T E R

03

LAW OF
OBLIGATION

The Law of Obligations is one branch

of private law under the civil law legal
system.
It is the body of rules that regulates
the

rights

and

duties

between

individuals. Such rights and duties

are referred to as obligation.
1. Law of Obligation: Law of Contract

A contract is a written or spoken agreement, that is intended to be

enforceable by law. In order to form a contract that is validly made
and is binding between the parties, the following elements must be

fulfilled:
Offer and Acceptance
Consideration
Intention to create legal relations

Section 2(h) of the Contracts Act 1950 states that an agreement

enforceable by law is a contract.

As a general rule, a contract may be written or oral (Syed Jaafar bin

1.1

OFFER

To form an Agreement, there must first be an Offer and Acceptance.

Section 2(a) of the Contracts Act 1950 defines proposal as when

Syed Ibrahim v Maju Mehar Singh Travel Tours Sdn Bhd 1999)

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 he is said to make a proposal.

Affin Credit (Malaysia) Sdn Bhd v Yap Yen Fui 1984 provides that if
there is a lack of an offer an acceptance, there would not be any
agreement and, the agreement may be void ab initio (void at the
beginning).

Unilateral Offer

Carlill v Carbolic Smoke Ball Co 1893

Facts: The manufacturer of a medicine advertised on newspaper and
undertake to pay 100 to anyone who uses their medicine and
nevertheless contracted influenza. The claimant Mrs Carlill used the
medicine and contracted influenza. The manufacturer (defendant)
argued that such offer could not be made to the whole world.

Held: An offer could be made unilaterally. The wording of the

advertisement amounts to an offer, and was accepted by Mrs Carlill by
using the medicine.

Invitation to Treat

Where a party initiates a negotiation he is making an invitation to treat,

An invitation to treat means an invitation to the other party to make an

which cannot be accepted to form a binding contract.

offer. Such invitation to treat cannot be taken as an offer.

Examples of invitations to treat: Auction Sales, Advertisements, and

Exhibition of goods for sale.

i.

Auction Sales

In an auction sale, the bidder made an offer to buy at the price they are
prepared to buy, and acceptance is made by the auctioneer.

ii.

Advertisements

An advertisement of goods for sale is to induce offers to buy.

Partridge v Crittenden 1968

Facts: Partridge placed an advertisement for several exotic birds and

was prosecuted under Protection of Birds Act 1954 for offering for sale
of such exotic birds.

Held: Advertisement only constitute an invitation to treat and not an

offer to sell.

iii.

Exhibition of goods for sale

Displaying goods in a shop is usually an invitation to treat.

Fisher v Bell 1961

Facts: A shopkeeper was prosecuted for offering for sale an offensive
weapon by displaying a flick knife in his shop window.
Held: The display of an article with a price on it in a shop window is
merely an invitation to treat.

Termination of Offer

An offer may only be accepted if the offer is still valid. If there is no

acceptance to the offer, the offer may be terminated.

Section 5(1) of the Contracts Act 1950, a proposal may be revoked

at any time before the communication of its acceptance is complete
against the proposer. Revocation is effective only when the offeree has

knowledge of it.

Section 6 of the Contracts Act 1950 provides for the ways a proposal
may be revoked:-

(i)

By the lapse of time prescribed in the proposal for its acceptance, or if

no time is prescribed, by the lapse of a reasonable time, without
communication of the acceptance.

(ii)

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

acceptance.

(iii)

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

Routledge v Grant 1828

Facts: Grant offered to purchase Routledges house and expressly
stated that the offer shall remain open for 6 weeks. Before the lapse of
6 weeks, Grant withdrew the offer.

Held: Grant was entitled to withdraw the offer at any time before the
offer is accepted.

Ramsgate Victoria Hotel Co v Montefiore 1866

Facts: Defendant has applied for Plaintiffs shares and was only
allotted the shares applied for after 3 months. Defendant refused to
accept the shares.

Held: The Plaintiff had not accepted within a reasonable time and the
refusal by Defendant was justified.

Jaafar Bin Ibrahim v Gan Kim Kin 1985

Facts: Respondent conditionally agreed to transfer her half share of a
piece of land to the Appellant, provided the Appellant obtain state
authority approval by 31 December 1977, failing which the agreement
would be null and void. Appellant did not fulfill the condition.

Held: Contract is void since condition is not fulfilled by deadline.

1.2

ACCEPTANCE

Section 2(b) of the Contracts Act 1950 provides: When the person
whom the proposal is made signifies his assent thereto, the proposal

is said to be accepted; a proposal, when accepted, becomes a promise.

The contract comes into effect once the offeree has accepted the terms
presented to them. The parties will now be bound by the terms that
they have agreed.

An acceptance must be unqualified acceptance of the terms of an offer.

By virtue of Section 7 (a) of the Contracts Act 1950, if the terms are
varied, it amounts to a counter offer.

Communication of Acceptance

Section 3 of the Contracts Act 1950 provides that an acceptance

must be communicated to the proposer.

Section 7(b) of the Contracts Act 1950 provides that an acceptance

must be expressed in a usual and reasonable manner.

Felthouse v Bindley 1862

Facts: Claimant wrote to his nephew offering to buy a horse, saying

that if I hear no more about him, I consider the horse mine. The
nephew intended to accept the uncles offer but did not reply. The
horse was sold to someone else.
Held: The Claimant has no title to the horse. Silence does not amount
to acceptance.

The Postal Rule

The postal rule states that, where the mode of communication is by

post, the acceptance is complete and effective as soon as a letter is
posted, even though it may be delayed or even lost altogether in the
post

Section 4(2) of the Contracts Act 1950 provides that: The

communication of an acceptance is complete
(a)

as against the proposer, when it is put in a course of transmission

(b)

as against the acceptor, when it comes to the knowledge of the

to him, so as to be out of the power of the acceptor; and

proposer.

Adams v Lindsell 1818

Facts: The defendant made an offer by letter to the claimant on 2
September 1817 requiring an answer in course of post. Once the

claimant received, the claimant immediately posted a letter of

acceptance, which reached the defendants on 9 September of the

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same year. The defendant sold the goods to another buyer on 8

September.

Held: The acceptance was made in course of post and no time limit
was imposed, hence acceptance was effective when posted on 5
September.

For other modes of communication that is instantaneous, acceptance

takes place when the offeror received the acceptance.

Entores v Miles Far East: it was held that the rule about
instantaneous communications between the parties is distinctive from
the postal rule. The contract is only complete when the acceptance is
received by the offeror.

1.3

CONSIDERATION

Section 2(d) of the Contracts Act 1950 provides that: When at the
desire of the promisor, the promise or any other person has done or
abstained from doing or promises to do or abstain from doing,
something, such act or abstinence of promise are called consideration
of the promise.

Consideration refers to what each party brings to the contract.

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Consideration may also be in the form of an act done or even an

abstinence from doing something Osman bin Abdul Ghani & Ors v
United Asian Bank Bhd 1987.

Section 26 of the Contracts Act 1950 provides that agreement made

without consideration is void

Exceptions to Section 26 of the Contracts Act 1950 that an

agreement without consideration is void, unless:
o

it is expressed in writing and registered under the law and

made an account of natural love and affection between
parties standing in near relation to each other.

Illustration: A, for natural love and affection, promises to give his son,
B, $1000. A puts his promise to B in writing. This is a contract.
o

It is a promise to compensate wholly or in part a person who

has voluntarily done something for the promisor or
something which the promisor could legally be compelled
to do

Illustration: A finds Bs purse and gives it to her. B promises to give A

$50. This is a contract.

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Illustration: A supports Bs infant son. B promises to pay As expenses

in so doing. This is a contract.
o

It is a promise to pay a debt barred by limitation law.

Illustration: A owes B $1000 but the debt is barred by limitation. A signs

written promises to pay B $500 on account of the debt. This is a
contract.

For a consideration to be valid, the following rules must be met

o
o
o

Performance must be legal. The courts will not enforce illegal

considerations;
Performance must be possible
Consideration must be sufficient but not necessarily adequate.

The court will also look into the following factors to ensure that a
particular act of promise can be deemed consideration:o
o

Consideration need not be adequate; and

Consideration must be sufficient.

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Adequacy and Sufficiency of Consideration

Section 26 of the Contracts Act 1950 provides that an agreement to

which the consent of the promisor is freely given is not void merely
because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the court in determining
the question of whether the consent of the promisor was freely given.

Consideration need not be equal in value to the consideration received

in return.

Consideration is sufficient if it has some identifiable value.

Explanation 2 of Section 26 provides that:

o

Illustration (f) : A agrees to sell a horse worth $1000 for merely

$10, as long as consent to the agreement was given freely; the
adequacy is no longer an issue.

Chappell & Co Ltd v Nestle Co Ltd 1959

Facts: Records were sold for 7.5 pence together with three chocolate
wrappers.
Held: Even though the chocolate wrappers have only minimal value,
they are considered as part of the consideration.

Thomas v Thomas 1842

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Facts: Claimants husband by his will expressed that his wife should
have the use of his house during her life. The executor rented the
house to the wife for 1 per year.

Held: The 1 rent paid is considered as a consideration.

The law only requires an element of bargain, not necessarily that it

should be a good bargain.

Part payment is good consideration

Common Law Position

Pinnels Case 1602

Facts: Cole owed Pinnel 8.50 which dued on 11 November. Coled

payed part of the debt which Pinnel accepted in full settlement.

Held: Part payment was not consideration. However, agreement to

accept part-payment would be binding if the debtor, at the creditors
request, provide some fresh consideration.
Malaysian Law Position

Section 64 of the Contracts Act 1950 allows the promise to dispense

with or remit wholly or in part of the performance of the promise made
to him or he can accept any promise which he thinks fit.

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Illustration (c) of Section 64 provides that A owes B $5,000. C pays to

B $1,000 and B accepts them in satisfaction of his claim on A. This
payment is a discharge of the whole claim.

Associate Pan Malaysia v Syarikat Teknikal & Kejuruteraan Sdn

Bhd 1990 provides that S 64 is a departure from the common law
position.

1.4

Certainty and Capacity

Certainty

Section 30 of the Contracts Act 1950 provides that agreements, the

meaning of which is not certain, or capable of being made certain, are
void.

Illustration (a): A agrees to sell to B a hundred tons of oil. There is

nothing whatever to show what kind of oil was intended. The
agreement is void from uncertainty.

Karuppan Chetty v Suah Thian 1916 : Court held that the agreement
to lease of $35 per month for as long as he likes was void because
there was no certainty to the limit and the length of the lease.

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Capacity

Generally, a person entering into a contract must have age capacity,

mind capacity and not be disqualified by any law.

Section 11 Of Contracts Act 1950 provides Every person is

competent to contract who is of the age of majority according to the
law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.

Section 10 of Contracts Act 1950 provides All agreement 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
hereby expressly declared to be void.

Age of Majority : 18 years old (Section 2 of the Age Majority Act 1971)