DPB3023: COMMERCIAL

LAW
CHAPTER 2: THE LAW OF CONTRACT

CLO 2: Interpret appropriately the basic concepts

and principles of commercial law in Malaysia.
At the end of this chapter, students should be able to;
Understand the meaning and elements of a contract.
Differentiate between different condition in a contract
and exemption clauses.
Understand the factors which can release parties to a
contract and remedies for breach of contract.
Explain the remedies for breach of contract

Law of Contract
2.1 Basis &
definition
of contract

2.4
Discharge
of contract
& remedies

2.2
Elements of
contract

2.3 Types
of contract

2.1 Basis & Definition of Contract

What Is
CONTRACT??
?

S2(h) Contract Act 1950 - An

agreement or promise enforceable
by law
An agreement which is legally
binding between the parties.

2.1 Basis & Definition of Contract

Free
Consent
Mere existence of consent would not be enough to
make an agreement enforceable. It is also necessary
that the consent should be devoid of any forced or
pressure.
Free consent is one of the essential elements of valid
contract. Parties to contract may agree upon the same
thing in the same sense, & along with the same;
consent received must be free from any compulsion or
pressure.
Lack of free consent would render the contract
voidable.

Position in
Malaysia

2.1 Basis & Definition of Contract

Contract law is governed by the Contract Act 1950

(Act 136) (Revised 1974). By application of the
Civil Law Act 1956, English law applies.
However, in the case of Song Bok Yoong v Ho Kim
Poui [1968] 1 MLJ 56 it was held that if there was
a conflict of provisions between the two acts, the
Contract Act 1950 would prevail

2.2 Elements of contract

Differences Between Contract & Promise
Basis
1. Meaning

Promise
When a proposal is
accepted by the person
to whom it is made,
with requisite
consideration, it is an
agreement.

2. Elements
Offer & acceptance
3. In writing

Contract
When an agreement is
enforceable by law, it
becomes a contract.

Agreement &
enforceability
Yes

No
4. Legally
binding

Yes
No

2.2 Elements of contract

Offer
Capacity
6 Elements
of a
Contract
Certainty
Considerati
on

Acceptanc
e of Offer
Intention
to create
legal
relations

Offer
Definitio
n

Revocati
on

Elements

Offer v
ITT

Types

ITT

Offer
Definition
S2(a) CA 1950 when one person signifies to another his
willingness to do or abstain from doing anything, with a view to
obtaining the assent of that other to the act or abstinence, he
is said to make a proposal
In other words, an offer is an indication to be legally bound
under definite and prescribed terms.
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 (the person to whom
the offer is made)

Elements of
Offer

Offer

1. Offeror the person making the offer

2. Offeree the person accepting the offer
3. If Offeror & Offeree are absent, then the agreement is void.
4. An offer must be communicated S4(1) CA 1950 states that
the communication of a proposal is complete when it comes to
the knowledge of the person to whom it is made. S3 CA 1950
states that a proposal can be expressed or implied.
5. An offer must be contrasted with Invitation to Treat (ITT)

Types of Offer

Offer

General
Specific
The offer is addressed
The offer is address to a
generally to any one who may
specific or particular person.
satisfy all the terms or
condition of the offer stipulated Also known as bilateral offer.
by the offeror.
Only the addressee may
accept the offer.
Anyone who meets or satisfies
all the terms of the offer is
Any other person, who is not
considered as making the
the addressee cannot make
acceptance to such offer.
the acceptance to the such
offer.
Ex case: CARLILL v CARBOLIC
SMOKE BALL CO (1893)

Offer
CARLILL v CARBOLIC SMOKE BALL CO
(1893)
Facts: Carbolic Smoke Ball Co. Ltd. advertised that they
would offer $1000 to anyone who still succumbed to influenza
after using a certain remedy for a fixed period. The plaintiff
duly used it but nevertheless, contracted influenza. The
plaintiff then sued for the money.
Held:
accepted

The plaintiff was entitled to the $1000 as she had

the offer made to the world large.

Invitation to
Treat

Offer

An offer must be distinguished from an invitation to treat.

An invitation to treat is not an offer, but rather is an offer to
consider offers.
Can be demonstrated through advertisements, display of
goods, tenders, catalogue, price and auctions
It is merely an invitation from one party to another party to
make an offer.

Offer
Offer v ITT

An offer should be contrasted with an option and an

advertisement. An option is merely an undertaking to
keep the offer open for a certain period of time.
The purpose of an option is usually to give the
offeree time to consider whether he in fact wishes to
buy the item under consideration or to give him time
to raise the necessary finance.

Offer
Offer v ITT

An option arises when the offeror promises to keep

the offer open for a specified period Goldsborough
Mort & Co LTD v Quinn(1910) 10 CLR 674.
An advertisement, on the other hand, is an attempt to
induce an offer Coelho v The Public Services
Commission (1964) MLJ 12, MN Guha Majumder v RE
Donough(1974)2 MLJ 114.

Offer
Offer v ITT

Whether an advertisement is an offer or an invitation

to treat depends on the intention of the parties in
each case.
The court have held that advertisements of bilateral
contracts are not offers whereas advertisements of
unilateral contracts are construed to be offers.

Offer
Offer v ITT

Majumder v Attorney- General of Sarawak - the

Federal Court held that an advertisement in the
newspaper for the post of a doctor was an invitation
to treat.
Payne v Cave (1789) - When an auctioneer invites
bids, he is merely making an invitation to treat, and
when a bidder makes a bid he is making an offer.

Offer
Revocation

S5(1) CA 1950 A proposal may be revoked at any time

before the communication of the acceptance is complete
as against the acceptor (offeree), but not afterwards.
S6(a) CA 1950 A proposal is revoked by the
communication of notice of revocation by the proposer
(offeror) to the other party.

Revocation

Offer

A proposal may be with drawn in any of the following

circumstances:
Communicating the notice of revocation by the proposer
to the party to whom the proposal was made under
S6(a) CA 1950
The time prescribed in the proposal for its acceptance
elapses, or if no time is prescribed for acceptance, by the
lapse of a reasonable time under S6(b) CA 1950.

Revocation

Offer

The failure of the acceptor to fulfil a condition

precedent to acceptance under S6(c) CA 1950.
The death or mental disorder of the proposer if the fact
of the proposers death or mental disorder comes to
the knowledge of the acceptor before acceptance
under S6(d) CA 1950.

Acceptance
Definition

Elements

Revocation

Communicati
on

Post

Acceptance
Definition
S2(b) CA 1950 when the person to whom the
proposal is made signified his assent thereto, the
proposal is said to be accepted; a proposal, when
accepted, becomes promise

S2(c) CA 1950 refers the person accepting the

proposal as the promisee

Acceptance
Definition
S9 CA 1950 there is an expressed acceptance if
the acceptance of any promise is made in words and
an implied acceptance of the acceptance is made
other than in words

Elements of
Acceptance

Acceptance

1. Absolute & qualified

In order for the proposal to be converted into promise,
the acceptance of that proposal must be absolute &
unqualified - S7 CA 1950
Case: Lau Brothers & Co v China Pacific Navigation Co.
Ltd. [1965] 1 MLJ 1 - If the parties are still negotiating,
an agreement is not yet formed.

Elements of
Acceptance

Acceptance

1. Absolute & qualified

If acceptance is not absolute or unconditional, it does
not comply with the conditions-if any-stated by the
offeror, it will amount to a counter-offer.
A conditional assent is not an acceptance.

Elements of
Acceptance

Acceptance

2. Reasonable period
An acceptance must be made within a reasonable
period S6(b) CA 1950.
What amounts to reasonable time is a question of fact
depending in the circumstance of each case.
Case: Ramsgate Victoria Hotel Co Ltd v Montefiore
[1866]

Acceptance
Ramsgate Victoria Hotel Co Ltd v Montefiore
[1866]
Facts: Montefiore applied for shares on 8 Jun but he was not
told until 23 November that his offer had been accepted and
that the shares had been allotted to him and that the balance
owing on the shares was now due. Montefiore refused to pay
and the company threatened to sue, alleging breach of
contract
Held:
The offer to purchase shares had not been
accepted within a reasonable time and the offer had therefore
lapsed. There was no contract created.

Elements of
Acceptance

Acceptance

3. Expression of acceptance
S7(b) CA 1950 acceptance must be expressed in
some usual & reasonable manner, unless the proposer
prescribes the manner in which it is to be accepted.
The proposer cannot prescribe silence as a manner of
acceptance
If he does so and fails to insist upon the prescribe
manner, he is considered as having accepted the
acceptance in the modified manner under S7(b) CA
1950.

Communicatio
n of
Acceptance

Acceptance

Acceptance is only effective when it has been

communicated (for example, over the telephone, by
letter, telex, facsimile, or by recorded by message).
S4(2)(a) CA 1950 provide the communication of
acceptance is complete as against the proposer when it
is put in a course of transmission to him.
S4(2)(b) CA 1950 provide the communication of
acceptance is complete as against the accepter when it
comes to the knowledge of the proposer.

Communication of
Acceptance - Post

Acceptance

Acceptance through post is complete when the letter

of acceptance is posted, even though it has not come
to the actual knowledge/received by the offeror.
The offeror is bound to the contract when the offeree
posts the letter of acceptance, even though the offeror
has no knowledge of acceptance.
The contract is binding on the offeror, irrespective of
any delay or disappearance of the letter of
acceptance.

Revocation

Acceptance

S4(3)(a) CA 1950 The communication of revocation

is complete when it is put in the 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
S4(3)(b) CA 1950 The communication of revocation
is complete as against the person to whom it is made
only when it comes to his knowledge

Revocation

Acceptance

S5(1) CA 1950 A proposal may be revoked at any

time before the communication of its acceptance is
complete as against the proposer, but not afterwards
S5(2) CA 1950 An acceptance may be revoked at any
time before the communication of the acceptance is
complete as against the acceptor, but not afterwards

Intention to Create Legal

Relations
There is no provision under the CA 1950. However,
case law clearly dictates the necessity for this
requirement.
Intention to create legal relation is classified into:
a) Social and domestic agreements parties
do not intend legal relations
b) Business or commercial agreements
parties do intend to create legal relations

Intention to Create Legal

Relations

a) Social and domestic agreements parties do not

intend legal relations
Courts will presume that agreements between
friends and/or family members are not intended to
be legally enforceable.
Case: Balfour v Balfour (1919)

Intention to Create Legal

Relations
Balfour v Balfour (1919)
Facts: Mr. Balfour worked overseas and leave his wife, Mrs.
Balfour in England. Mr. Balfour agreed to send $30
maintenance payments to his wife. The relationship later
soured and the husband stopped making the payments. The
wife sought to enforce the agreement.
Held:
The agreement was a purely social and domestic
agreement and therefore it was presumed that the parties did
not intend to be legally bound.

Intention to Create Legal

Relations

b) Business or commercial agreements

parties do
intend to create legal relations
Case: Carlill v Carbolic Smokeball Co. [1893]

Intention to Create Legal

Relations
Carlill v Carbolic Smokeball Co (1893)
Facts: Carbolic Smoke Ball Co. Ltd. advertised that they
would offer $1000 to anyone who still succumbed to influenza
after using a certain remedy for a fixed period. The plaintiff
duly used it but nevertheless, contracted influenza. The
plaintiff then sued for the money.
Held:
accepted

The plaintiff was entitled to the $1000 as she had

the offer made to the world large.

Consideration
S26 CA 1950 an agreement without
consideration is void.
S26(d) 1950 When, at the desire of the
promisor, the promise or any other person has done
or abstained from doing, or does or abstains from
doing, or promise to do or abstain from doing,
something, such act or abstinence or promise is
called a consideration for the promise
Consideration also be defined as a price for which
a promise is bought or the reason for the promise.

Rules for
Consideration

Consideration

1. Consideration Need Not be Adequate

E.g. B agrees to sell a horse worth $1,000 for
$10 The agreement is a contract
notwithstanding the inadequacy of the
consideration.

Rules for
Consideration

Consideration

2. Consideration May Be Past

E.g. A finds Bs purse and gives it to him. B
promises to give A RM50. This is a contract.

Rules for
Consideration

Consideration

3. Consideration for Guarantees

4. Natural Love and Affection is Good Consideration
it is expressed in writing
it is registered (if applicable) and
the parties stand in a near relation to each other.
5. Part Payment of a Debt is a Good Consideration
6. Consideration Need Not Move from the Promisee

Exception for
General Rules

Consideration

1. An agreement made on account of natural love

and affection.
English law does not recognize it. However, Malaysia
does recognize this exception under S26(a) CA
1950.
Thus, an agreement made on account of natural love
and affection would be held to be binding in Malaysia

Exception for
General Rules

Consideration

If the requirement under S26(a) CA 1950 are present:

a) It is expressed in writing.
b) It is registered (if applicable)
c) The parties stand in near relation to each other.
Near relation varies from one social group to another
as it depends on the custom and practice of such
group.

Exception for
General Rules

Consideration

2. A promise to compensate for something done

under S26(b) CA 1950. It is promise to compensate,
wholly or in part, a person who has already voluntarily
done something for the promisor, or something which
the promisor was legally compellable to do.

Exception for
General Rules

Consideration

3. A promise to pay a debt barred by limitation law

under S26(c) CA 1950. It is promise, made in writing
and signed by the person to be charged therewith, or
by his agent generally or specially authorize in that
behalf, to pay wholly or in part, a debt of which the
creditor might have enforce payment but for the law for
the limitation of suit.

Certainty
The terms of a contract must be certain and not vague.
Agreements, the meaning of which is not certain or
capable of being made certain, are void under S30 CA
1950.
E.g. Ming Electrical Sdn Bhd agrees to sell a television to
Mary without specifying the brand and the size of the
television. Such agreement is void on the grounds of
uncertainty. Similarly, if Ming Electrical Sdn Bhd agrees to
sell a television to Mary without specifying the price of the
television, the agreement is void on the grounds of
uncertainty.

Certainty

Case: Karuppan Chetty v Suah Thian [1916]

Held:
The terms of an agreement cannot be
vague but must be certain. An agreement which is
uncertain or is not capable of being made certain is
void.

Capacity
The parties entering into a contract should be
competent to contract, i.e. must have the legal
capacity to do so
Capacity the ability of the parties to a contract to
fully understand its terms and obligations.
S11 CA 1950 every person is competent to
contract who is of age of majority according to the
law to which he is subject. And who is of sound of
mind and is not disqualified from contracting by
any law to which he is subject

Capacity
According to Age of Majority Act 1971, the age of
majority is 18 years old.
Case: Mohori Bibee v Dharmodas Ghose
[1903]
Held: The court held that an infant cannot make
any valid contracts.

Exceptions to this
rule:

Capacity

An infants contract can be valid contract if it falls

in the following circumstances:
1. Contracts for necessaries S69 CA 1950
2. Contract of scholarship Contract
(Amendment) Act 1976
3. Contracts of insurance Insurance Act 1963
(Revised 1972)
4. Contract of service

Terminologies Related to
Contract
1. Express Term
It is essential requirement for a contract to be
legally binding that the parties have reached
the agreement.
The parties make their agreement verbally,
impliedly or in writing, or partly in writing
and partly verbally. These term of the
agreement which they have set out, in writing,
verbally or a mixture of the two are know as
express terms.

Terminologies Related to
Contract
2. Implied Term
Certain terms of contract are so obvious that it
goes without saying that they form part of a
contract. These are called as implied terms.
E.g. A reasonable person would argue that it is
implied that when a costumer books a room in
a hotel, he or she is entitle to be provided with
a bed as part of the price, although there is no
express term as such stated by the hotel.

Terminologies Related to
Contract

3. Condition
A condition is a term that is vital to the
contract.
The parties consider it so important that its
non-performance may be considered by the
injured party to rescind the contract and sue for
damages.

Terminologies Related to
Contract
4. Warranty
A type of term considered by the parties to be
of lesser importance to the main purpose o the
contract.
If it is breached, the injured part must still
perform their part of the contract but they have
the right to sue for damages for any loss that
they may suffer.

2.3 Types of Contract

Valid
Contract

Voidable
Contract
1.Coercion
2.Undue Influence
3.Fraud
4.Misrepresentatio
n
5.Mistake

Void &
Illegal
Contract

Valid Contract
A valid contract is a written or expressed agreement
between two parties to provide a product or service.
There are essentially 6 elements of a contract that
make it a legal and binding document.
A contract is enforceable when both parties agree to
something, back the promise up with money or
something of value, both are in sound mind and
intend to carry out their promise and what they
promise to do is within the law.

Voidable Contract
S10 CA 1950 provides inter alia that all agreements
are contract if they are made by the free consent of
parties.
S19(1) CA 1950 when consent to an agreement
is caused by coercion, undue influence, fraud,
misrepresentation, or mistake, the agreement is a
contract voidable at the option of the party whose
consent was so caused.

Voidable Contract

1. Coercion
S15 CA 1950 unlawful act done with intention of
causing the person to enter into an agreement

Voidable Contract
2. Undue Influence
S16(3) CA 1950 provides 3 matters to be dealt with
Undue Influence:
a. The relations between parties to each other must be
such that one is in a position to dominate the will of
other;
b. Where he hold a real or apparent authority over the
other, or where he stands in a fiduciary relation to the
other; or
c. Where he makes a contract with person whose mental
capacity is temporarily or permanently affected by
reason of age, illness or mental or bodily distress.

Voidable Contract
3. Fraud
S17 CA 1950 certain acts which are committed
with intent to induce another party to enter into a
contract
As general rule, wherever a person causes another
to act on false representation which the maker
himself does not believe to be true, he is said to
have committed a fraud.
There are 5 different acts which may constitute
fraud;

Voidable Contract
a. S17(a), the suggestion, as to fact, of that which is
not true by one who does not believe it to be true.
b. S17(b), the active concealment of fact by one
having knowledge of belief of the fact
c. S17(c), a promise made without any intention of
performing it,
d. S17(d), any other act fitted to deceive and
e. S17(e), any such act or omission as the law specially
declares to be fraudulent.

Voidable Contract
4. Misrepresentation
S18 CA 1950 - misrepresentation is confined to
innocent misrepresentation
Innocent misrepresentation is an untrue statement
that the speaker believes is accurate.
The basic difference between fraud and
misrepresentation is that, in fraud the person
making the representation does not himself believe
in its truth, where as for misrepresentation, he may
believes the representation to be true.

Voidable Contract

5. Mistake
S21 CA 1950 - where both parties to the contract
are under a mistake as to the matter of fact
essential to the agreement, the agreement is void.
It should be note that parties to a contract may
make various types of mistake in the process of
negotiating and agreeing to the contract.

Void & Illegal Contract

S2(g) CA 1950 A void contract is an agreement

that is not enforceable by law.
S24 CA 1950 The consideration or object of an
agreement is unlawful if it falls within any of the
subsections of the section

Void & Illegal Contract

According to S24 CA 1950, the consideration or object of an
agreement is lawful unless:
1. It is forbidden by a law
2. It is of such a nature that, if permitted, it would defeat any law
3. It is fraudulent
4. It involves or implies injury to the person or property of another
5. The court regards it as immoral, or opposed to public policy

Void & Illegal Contract

Consequences of Void or Illegal Agreements

The general rule under CA 1950 is that the courts
will not enforce an illegal contract.
S24 CA 1950 an agreement which is unlawful is
void.
S2(g) CA 1950 such agreement is not
enforceable by law.

Void & Illegal Contract

Consequences of Void or Illegal Agreements

S66 CA 1950 when an agreement is discovered
to be void or when a contract becomes void, the
person who received any advantage under such
an agreement or contract is bound to restore to
the other party or to pay adequate compensation
for the same.

2.4 Discharges of Contract &

Remedies
Discharges of
Contract
By
Performance
By
Impossibility
(Frustration
By Breach
By Agreement

Remedies
Damages
Quantum
Meruit
Specific
Performance
Injunction

By Performance

Discharges of Contract

As general rule, performance of a contract must

be exact and precise and should be in accordance
with what the parties has promised.
S38(1) CA 1950 parties to a contract must
either perform or offer to perform their respective
promises, unless such performance has been
dispensed with by any law

By Performance

Discharges of Contract

S42 CA 1950 when a promise accepts

performance of the promise from a 3rd person, he
cannot afterwards enforce it against the promisor
A contract is performance by the provision of the
stated service and accommodation or the delivery
of goods on the part of the seller and the payment
of the contract price by the buyer.

By Impossibility
(Frustration)

Discharges of Contract

If a party promises to carry out a particular act,

the law will hold them to their promise. This
principle is commonly known as the doctrine of
absolute liability.
S57(2) CA 1950 a contract is frustrated when
there is a change in the circumstances which
renders a contract legally or physically impossible
of performance

By Impossibility
(Frustration)

Discharges of Contract

There are 2 instances of frustration, i.e. when a

contract to do an act become impossible or
unlawful.
For frustration to apply, the impossibility of
performing the contract must arise without the
fault of either party.
E.g.: Events which will frustrate a booking contract
are for instance, the death of the seller or the
buyer in a business transaction.

By Impossibility
(Frustration)

Discharges of Contract

Robinson v. Davidson (1871) 6 L.R.

Exch, 269
In this case contract was that the defendant
must play the piano at a concert on a specified date. On
the specified date, the defendant was unable to perform
as she was ill.
Facts:

Held: It was held that the contract was discharge by

frustrated.

By Impossibility
(Frustration)

Discharges of Contract

Frustration can only arise where:

1. An unforeseen event outside the control of the
contracting parties (a supervening event) has
significantly or radically changed the obligations of the
parties from their original intentions;
2. Neither party caused the supervening event;
3. Neither contemplated the supervening event, so there
was no provision in the contract for it, and
4. The new circumstances would make it unjust to hold
the parties to their original contract

By Breach

Discharges of Contract

Where party fails to perform their obligations as

agreed, they are in breach of contract.
A breach can occur in some ways including:
1. A failure to comply with a term of the contract;
2. By a party announcing to the other party that they
are no longer interested in carrying out their
obligations prior to the time for performance
(anticipatory breach); and
3. A delay in the performance where time is of the
essence in the contract.

By Agreement

Discharges of Contract

When both parties to the contract agrees

that the contract should no longer continues,
then both the parties are discharged from their
obligation.

Remedies
Remedy is the method by which an injured party
enforces a right or corrects a loss.
The remedies available to the injured party will
depend on the nature of the breach and the
results will differ between the parties.
The usual remedy for a breach of contract is an
award of damages.

Damages

Remedies

The main purpose of damages is to enable the

innocent party to receive monetary compensation
from the party responsible for the breach of
contract.
S74 CA 1950 damages are granted to a party
as compensation for the damage, loss injury he
has suffered through a breach of contract

Damages

Remedies

The party may recover damages for other

expenses incurred as a result of the breach; for the
loss of profits arising as a result of the breach; and
for the difference between the price of goods as
contracted for and the actual price the goods were
sold as a result of the breach.

Quantum
Meruit

Remedies

Quantum meruit means as much as he has

earned and only arises in cases of part
performance.
The contract may be discharged by breach, but
where the contract is for goods or services, there
is a new implied contract imposed by law on the
party taking the benefit that it will pay a
reasonable amount for the quantum or portion
given.

Quantum
Meruit

Remedies

Quantum meruit can arise where:

1. A defendant has prevented a plaintiff from
carrying out the remainder of the contractual
duties;
2. The parties cannot agree on payment;
3. The parties agree on payment for the partperformance but not the actual amount.

Specific
Performance

Remedies

Specific performance is a discretionary order

granted by the courts directing a person to carry
out their obligations under the contract.
Specific Relief Act 1950 - specific performance
is a discretionary remedy
The court has a discretion to refuse specific
performance where the granting of it would cause
undue hardship to the defendant.

Injunction

Remedies

An injunction is a discretionary court order.

Unlike specific performance, this is a court order
restraining a party from breaking their contract
or from committing a wrongful act (an order
prohibiting performance) and will not be awarded
if damage are an adequate remedy.

Injunction

Remedies

An injunction may be:

1. Prohibitory preventing the breach of contract;
2. Mandatory requiring a person to perform
some contractual obligation;
3. Interlocutory it freezes the status quo
between the parties until the dispute can be
heard by the court

Injunction

Remedies

An injunction is an equitable remedy.

Thus, it can be varied or dissolved if the court
discovers that the application for injunction was
made on suppressed fact or that the facts upon
which the order was granted no longer exist.

THE END