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 free. 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 service, employment contracts, partnership contracts and insurance policies.
The formation of a contract is based on obligations that are freely assumed rather than imposed. Liability in contract is based on voluntary undertaking of the obligations by the individual. As such, the law assumes that:
The parties are free to make a contract any way they wish, based on the concept of freedom and equality. In making the bargains, the parties enjoy equal position. The obligation imposed under a contract is self-imposed, entered freely by the parties
The law is only concerned with the fulfillment of certain conditions by the parties so that the transaction can be recognized as a legally binding agreement and enforceable.
Malaysian Contract law is embodied in Contracts Act 1950 (CA 1950), which is based on the English law of contract. However it should be noted that there are other statutes which may impact contractual transactions, Government Contracts Act 1949.
English Law relating to contracts is applicable in Malaysia in relation to areas not covered by Malaysian legislation or Malaysian case law: section 3 and section 5, Civil Law Act 1956.
Definition of a contract
Section 2(h) of CA 1950 states that �an agreement enforceable by law is a contract�. The strongest contract, in terms of enforceability, has an offer, acceptance, consideration for the exchange, clearly sets out the terms of the agreement without ambiguity and is signed by the involved parties with proper capacity to enter into the contract.
Hence, a contract can be defined as: � An agreement enforceable by the law between two or more parties to do or to abstain from doing some act/acts, their intention being a create legal relation and not merely to exchange mutual both having given something or having promised to give something of value as consideration for any benefit derived from the agreement.�
Thus each of the parties to a contract wants or needs something the other party has in its power to give and each of the parties is willing to give up something of its own in order to secure what the other party has.
Basic elements of a Valid Contract an Overview
From the definition above, it may be concluded that the basis of a contract is agreement between parties. Although agreement is essential, it is may be concluded that the basic of a contract is agreement between parties. Although agreement is essential, it is by itself insufficient for a binding contract. A binding contract goes beyond more agreement, in that it involves a bargain between the parties. A such, the existence of other elements is also required to allow an agreement to transform into a contract and make it enforceable in law.
For a valid contract, the basic elements that need to exist are:
(a) Agreement (comprising offer and acceptance): The existence of an offer and an acceptance are a means of analysing the process of negotiation to decide whether a contract has been made and if so, when it was made. Mutual assent of the parties is the basis of an agreement.
(b) Consideration: This is the value given by the parties for the promise that is being made. Usually consideration takes the form of money, property or services.
(c) Intention to create legal relation: Both parties to the agreement would need to have intention to create legal relations once the offer has been accepted.
(d) Capacity: If the parties do no enter into the agreement willingly, the agreement could be regarded as invalid. Genuine consent to enter into a contract can be affected by a number of issues. For example, during the contractual negotiations, there may have been :
– undue influence
– mistake as to the terms and indentify of the person
– unconscionable conduct
– duress or coercion
The presence of any of the above factors will likely mean that consent was not freely given by one of the parties and therefore that said party may be able to rescind the contract.
Certainty: All the terms of a contract should be clear and precise such that the parties know what they are agreeing to.
Legality: Any agreement to violence the law or any agreement forbidden by law is void. Thus contracts involving the commission of a crime or for immoral purposes are illegal and unenforceable in law. Contracts are illegal for two reasons. Firstly, because their object is illegal for two reasons: firstly, because their object is illegal; secondly, because although the object is perfectly legal, the manner of making it is against the law.
Formation of Contract
The parties must agree on the rights and obligations to be create under the contracts. Agreement that is reached through a process of offer and acceptance is a fundamental part of any contract because it requires consensus ad idem, the meeting of the minds of the parties entering into the contract.
Offer (or proposal)
An offer or proposal is made when one of the parties involved in the negotiations states the terms on which without further alteration, he is ready to be bound into a legally binding, enforceable agreement with the other party once the other party accepts the offer.
The person making the offer or proposal is called the promisor (or offeror). The person to whom the proposal or offer is being made to is known as the promise (or offeree). If this person accepts the offer, then he also called the acceptor.
An offer is referred to in section 2(a) of CA 1950 as a proposal which is made when �one person signifies to another his willingness to do or obtain from doing anything, with a view to obtaining the assent of that other to such act or abstinence.
Thus the promisor is actually presenting to the other party certain terms that can either be accepted or rejected but which is not open to further negotiation.
In Preston Corp Sdn Bhd v Edward Leong & Ors (1982), the Federal Court expressed the view that on offer is an intimation of willingness by an offeror to enter into a legally binding contract and that its terms must either expressly or impliedly indicate that it is become binding upon acceptance by the offree.
An offer may be made to a specific person, to any member of a group of persons or to the public at large. An offer can be regarded either as:
� A bilateral offer � where the offer is made to a particular person or group of people. The identify of both the offeror and offeree are known.
� A unilateral offer offer � where the offer is made to the world at large. Only the identify of the offeror is known.
Rules of a Valid offer
An offer can be made either expressly (in writing or orally) or can be implied from the conduct. If the parties agree that the whole contract should be in writing, then the written contract must be, and will be taken to be, the complete record of the contract to reflect the intentions of the parties. With regard to written contracts, the courts are reluctant to go beyond that writing to interpret a particular term.
Where a contract is entered into party written and party oral, if the document looks as though it contains all the terms and details, it may be difficult to prove that in fact it is not the entire contract. An offer must be clear, precise, definite and complete. In Grunthing v Lynn (1831), the offeror promised to pay a further sum for a horse if it was �lucky�. The court held that the offer was too vague as it was not specific enough to constitute an offer.
For an offer to be valid, it must be communicated. Section 4(1) of CA 1950 states that �the communication of a proposal is complete when it comes to the knowledge of the person to whom is made. Unless the offer is brought to the notice of the offeree, there is no question of acceptance by the offeree. Once communicated, the promise (or offeree) has a choice of whether to accept or reject the offer. This reconfirms the need for the parties to reject the offer. This reconfirms the need for the parties to genuinely consent to the contract because without a genuine consent, there can be no agreement because the parties.
In a Taylor v Laird (1856), the captain of a ship, employed for a trading and exploring voyage, refused to go any further and resigned his command. He subsequently helped to work the ship home and wanted to claim his wage for this work.
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