All the Main Elements Constituting Valid Contract

List and discuss with examples all the main elements constituting a valid contract.

The question listed above is the first question of this assignment. As the question itself, the answer to this question would be about the main elements constituting a valid contract and examples of them with cases.

According to Section 2(h) of CA 1950, a contract is an agreement enforceable by law. In other words, a contract is an agreement enforceable by the law between two or more parties or to abstain from doing some act or acts, their intention being to create legal relation and not merely to exchange mutual promise both having given something or having promised to give something of value as consideration for any benefit derived from the agreement.

QUESTION 1

There are 4 main elements constituting a valid contract which is offer, acceptance, intention to create legal relation and consideration. There are 4 more other basic elements besides the main ones mentioned just now, which is, certainty, legality, capacity and consent.

Before any contracts are formed, agreement is required, which comprises both offer and acceptance. An offer is an undertaking made with the intention that it shall become binding on the person making it as soon as it is accepted by the person to whom it is addressed. It may be made to a specific person, a group of persons or to the public at large and an offer must be distinguished from an invitation to treat. The most important factor to differentiate between an offer and an invitation to treat is the intention of the parties. For instance, advertisements or display of goods, they are regarded as merely supplying information or notifying others regarding the goods or services, therefore, they are considered as invitation to treat because they are inviting the other party to make an offer. To give an example with a case about the display of goods differ from an offer; let’s see Fisher v Bell (1961). In Fisher v Bell (1961), a shopkeeper had offered for sale a flick knife and exhibited it in his ship window. As the law prohibited the sale of offensive weapons, he was convicted. On appeal, however, the court held that ‘offer for sale’ has a technical meaning in law, and a shop window display is an invitation to treat, not an offer in contractual terms, the conviction was therefore quashed. In Pharmaceutical Society of Great Britain v Boots Cash Chemicals (Southern) Ltd (1953), it was held that goods on the shelves are an invitation to treat and the offer occurs at the counter, at which point the customer offers to buy a certain good for a certain price and cashier can either choose to accept or reject the offer.

For a contract to be valid there must be a proper acceptance by the offeree. It basically occurs when the offeree signifies his assent to the offeror. Acceptance must be in accordance to the terms of the offeror and must be communicated to the offeror of made in accordance to the method prescribed by offeror. Communication plays a very important role in order for the contract to be valid as for there to be a valid contract, the offeree must convey his acceptance to the offeror and acceptance is only effective when it is communicated or brought to the notice of the offeror. Silence does not amount to acceptance. The offeror cannot bind the offeree by stating that if the offeree fails to communicate or does nothing on his part; it would be constructed as acceptance. To give an example of it with a case, let’s look into Felthouse v Bindley (1862).

Facts:

Mr. Felthouse wrote to his nephew who wanted to sell a horse to him, stating that ‘If I hear no more about him, I consider the horse mine…’ Subsequently, there was no notice from his nephew and Felthouse considered the horse his own. The horse was not delivered to Mr. Felthouse and later there was an auction at the nephew’s property for the other livestock. The nephew told the auctioneer, Mr. Bindley, not to sell the horse at the auction but Bindley accidently sold it. Felthouse sued the auctioneer and his action could only succeed if it could be shown that Felthouse actually owned the horse.

Held:

Mr. Felthouse did not have ownership of the horse as there was no acceptance of the contract. Acceptance must be communicated clearly and cannot be imposed due to silence of one of the parties. Although the nephew had expressed interest in completing the sale, there was no communication of that intention. As such, there was no valid contract.

Silence can be amount to acceptance only under some exceptions, such as where acceptance is conveyed to an authorized agent of the offeror, where communication of acceptance has been waived by the offeror, where communication of acceptance can be implied through the conduct of the acceptor, and where the postal method is used to convey acceptance. As mentioned, acceptance can occur when it is communicated. Besides communication, acceptance can occur by post. Acceptance by post is deemed to take effect when the letter is correctly addressed, properly stamped and placed into the post box. Acceptance is said to be complete as soon as it is posted. Example to this is, The household Fire and Carriage Accident Insurance Company (Limited) v Grant (1878-79).

Facts:

The defendant applied for shares in the plaintiff’s company. The company’s acceptance of the offer was posted to him was never received. The plaintiff went bankrupt and their books showed the defendant owing for the price of shares, less dividends. The defendant refused to pay on the ground that he did not receive an acceptance, and was not a shareholder. The plaintiff’s liquidator filed a suit against him.

Held:

There was a valid and binding contract because once posted, acceptance was complete. The post office was a common agent so acceptance occurred when it reached the defendant’s agent. The postal acceptance rule balances the parties’ interests: the offeror can make communication of acceptance a condition of the contract, or can inquire if he does not receive a timely acceptance. The offeree would have to inquire if his acceptance was received before knowing if he was bound. In addition, fraud could result if acceptance was dependent on it being received by the offeror.

The offeror is bound by the contract the moment the acceptor posts his letter of acceptance irrespective of whether the proposer has knowledge of acceptor’s actions and the offeree will only be bound once the proposer receives and has knowledge of the letter of the acceptance. The postal rule is not applicable to telecommunication such as telephone, telex or telegraph. In such circumstances, the contract is deemed to be complete when acceptance is actually received by the offeror or his agent.

As there is acceptance, there is revocation. According to Section 5 of CA 1950, acceptance may be revoked at any time before communication of the acceptance is complete as against the offeree but not afterwards. For example, Susan proposes, by a letter sent by post, to sell her house to Andrew. Andrew accepts the proposal by a letter sent by post. Susan may revoke her proposal at any time before or at the moment when Andrew posts his letter of acceptance, but not afterwards. Andrew may revoke his acceptance at any time before or at the moment when the letter communicating reaches Susan, but not afterwards. In other words, communication of revocation is complete as against the person who makes it, when it is put into a 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, and as against the person to whom it is made, when it comes to his knowledge.

Intention to create legal relations is the third main element constituting a valid contract. An agreement reached between an offeror and an offeree will be legally binding contract only if the parties intended that they should be legally bound. The parties’ intention to be bound can be expressly stated or be implied from their actions. Where intentions are expressly stated, the courts would not impute otherwise unless there is strong evidence to prove the contrary. However in the event intentions are to be implied from the conduct of the parties, there are certain presumptions that would be considered depending on the relationship between the parties to the agreement. In social and domestic agreements between family and friends, there is a presumption that these agreements are not meant to be legally binding unless the contrary can be proven. Such a presumption can be rebutted if it appears from the circumstances that the parties intended to be legally bound. In business and commercial agreements which are more formal in nature, there is a presumption that there is intention to create legal relations. As such, any agreement would be regarded as legally binding unless the contrary is proven. For instance, an unambiguous declaration in a commercial contract that it is to be binding in honour only and not in law will be accepted by the courts. Also, the intention to exclude legal consequences must be set out clearly in unambiguous words. The onus of proof is on the party who alleges that no legal effect is intended. The intention to create legal relations may be expressed or implied. Expressed as, there is no issue in this matter because the intentions of the parties are clearly spelt out. Implied as, this is where the intention is not clear but need to be presumed. The law assumes that in two ways. First as in, social domestic agreements, there is no intention to create legal relations unless it is rebutted and second as in, business commercial agreements, there is an intention to be legally bound unless the contrary can be proven.

Consideration, as the last main element constituting a valid contract, is an essential element to the formation of a valid contract. It is either money or money’s worth, basically it is some benefit accruing to one party or some detriment suffered by the other.

In other words, a simplistic definition of consideration may be ‘the price paid for the purchase of a promise’. Consideration can be regarded as what each party gives in return for what it gains from the other party. According to the definition by Lush J in Currie v Misa (1874-80), consideration is, as some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Consideration for the promise is when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, something, such act or abstinence or promise, according to Section 2(d) of CA 1950.

Consideration can be regarded as something which is of value that is given for the promise made in a contract. The value of consideration given need not be adequate but must be sufficient. It also may move from the promise or even the third party. Lastly, it can be executor, executed or past.

Those mentioned until now are the 4 main elements constituting a valid contract furthermore, as mentioned above; there are 4 more basic elements required which are, certainty, legality, capacity and consent.

In order to have a valid contract all parties to a contract must have capacity to enter into a contract. Capacity refers to the legal ability to enter into a contract and the law generally presumes that everyone has capacity to contract except certain categories of persons. According to Section 11 of CA 1950, every person is competent to contract who is of the age of majority according to the law to which he is subject, of sound mind and not disqualified from contracting by any law to which he is subject.

For certainty, according to S30, CA 1950, agreements that are not certain in meaning or which the meaning is not capable of being made certain, are void. The terms of an agreement must be clear, precise and certain. It cannot be vague. An agreement which is ambiguous and uncertain is not capable of being accepted as a valid contract.

Sometimes, a contract may be legal and thus unenforceable. Such agreements which are forbidden by law, of the nature as to defeat any law, fraudulent, involves or implies injury to person or property of another, court regard it as immoral, or opposed to public policy, are regarded as void.

Lastly, for consent, contracts must be entered into with the free consent of the parties. In other words, the both parties involved in a contract must enter the contract with freely given consent. Consent is not freely given when it is caused by coercion, undue influence, fraud, misrepresentation, and mistake. These are vitiating factors which result in discharge of the contract.

CONCLUSION (Q1)

Contracts are not only applicable to business but are also part of our everyday life. A contract is made out of the simple act of purchasing a newspaper, using a credit card to buy a dress or paying a parking fee. Other contracts such as the sale and purchase of property are more complex, requiring formal written documents. Contract forms the basis in many transactions, for instance the buying and selling of goods and services, employment contracts, partnership contracts and insurance policies. The law is only concerned with the fulfillment of certain conditions by the parties so that the transaction can be recognised as a legally binding agreement and enforceable.

INTRODUCTION (Q2)

Question 2: Write notes with examples on the three most important remedies available for breach of contract.

The question listed above is the second question to this assignment given, which would be answered with the three most important remedies available for breach of contract.

Before answering the second question, what is REMEDY? Remedy is the solution for any illegality occurred to a person by compensating such losses, damage, defects sufferings etc.

QUESTION 2

Remedies that are available for breach of contract would depend on the effect and impact of the breach. There are basically 4 possible remedies which are, rescission of contract, damages, specific performance and injunction. Before looking into the three most important remedies available, let’s look into the first remedy given among the four remedies above, rescission of contract.

On a breach of a condition of a contract, the injured party may treat the contract as at and end or rescinded and refuse to perform of fulfill his part of the contract. According to s 40, CA 1950, when one party to a contract has refused to perform, or disabled himself from performing his promise in its entity, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. For example, let’s look into the example given under s 76, CA 1950.

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her RM100 for each night’s performance. On the sixth night A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the contract.

Damages are one of the most important remedies available for breach of contract and there are four types of damages. The aim of damages is to put the innocent party into a position he would have been, had the contract been performed. According to Section 76 of CA 1950, the injured party or the party that has suffered loss has a right to compensation for the loss or damage suffered, due to the breach of contract.

The first type of the damages is compensatory or ordinary damages. Compensatory or ordinary damages are given to the party who has suffered loss caused by the breach of contract. The general position with regard damages for breach of contract is that damages may be recovered as long as they are not too remote. In other words, damages may only be recovered if the relevant losses either arise naturally as a result if the breach or do not arise naturally but are losses which the parties knew, at the time they made the contract, would be a probable result of a breach. The principles mentioned, stemmed from the decision in Hedley v Baxendale (1854) which is also provided in s 74 (1) of CA 1950.

Hedley v Baxendale (1854)

Facts:

The plaintiff was a miller whose operations were stopped due to the breakage of crank shaft. The shaft had to be sent to the manufacturer for repair. The plaintiff sent the crank shaft using the services of the defendant who was operating as carriers. The plaintiff informed the defendant that the crank shaft had to be sent immediately as the mill operations had stopped. The carriers failed to perform and delivery took several days instead of the one day promised. As a result, the plaintiff lost several days of operation and sued the defendant for the lost profits, ie profits the plaintiff would have earned had the crank shaft been delivered on time.

Held:

An aggrieved party will be unable to recover consequential losses resulting from a breach unless the losses are ‘natural’ consequences of breach; or the affected party had expressly informed the other of the circumstances which would generate the losses. In this case, the defendant had no means of knowing that the plaintiff would lose profits if the shipment of the shaft was delayed since this information was not communicated directly to them. Therefore, the loss of profits was not reasonably contemplated by both the parties when they made the contract.

Thus, it can be concluded that indirect of consequential damages are only recoverable if they are reasonably foreseeable by both of the parties at the time of the contract as arising naturally from such breach. Recoverable damages must not be too remote.

The second type of the damages is exemplary damages. Exemplary damages are damages requested and or awarded by the court when the defendant’s willful acts were malicious, violent, oppressive, fraudulent, wanton, or grossly reckless. These damages are awarded both as a punishment and to set a public example.

The third and the fourth type of the damages are liquidated damages and nominal damages. Liquidated damages are monetary compensation whose amount the parties agree upon during the formation of a contract for the injured party to collect as compensation if a specific breach occurs. Nominal damages are damages which consist of a small amount of cash payment which the court orders to be paid to the plaintiff who has suffered no quantifiable pecuniary loss. The award serves as a token of honour to the rights of the plaintiff. Nominal damages is often sought to obtain a legal record of who was at fault.

The remaining two most important remedies available for the breach of contract after damages are specific performance and injunction. Specific performance is a court order requiring performance exactly as specified in the contract. This remedy is rare, except in real estate transactions and other unique property, as the courts do not want to get involved with monitoring performance. In other words, specific performance is an equitable remedy, specialized remedy used by the courts when no other remedy such as money, will adequately compensate the injured party. It is a discretionary remedy and not a arbitrary remedy, ie an injured party may ask for an order of specific performance but it is up to the court whether or not to grant it.

Last one important remedy for the breach of contract is injunction. Injunction is a court order directing one party to perform or to refrain from doing a certain act. It is used especially in situations where a monetary award for damages would not satisfy a plaintiff’s claim or would not protect personal or property right from irreparable harm.

CONCLUSION (Q2)

When a party to a contract unjustifiably fails or refuses to perform his part of the contract, the other party has a right of legal action. The methods which are given by the law to an innocent party by which he may enforce a right or redress an injury are called ‘remedies’.

Equitable remedies are generally remedies other than the payment of damages. This would include such remedies as obtaining an injunction, or requiring specific performance if a contract.