List and discuss with example all the main elements constituting a valid contract.
Write notes with examples on the three most important remedies available for breach of contract.
INTRODUCTION QUESTION 1
In any society, the members of the society choose to abide by rules designed to enhance the quality of life of that group. Violations of the rules are typically met with same form of negative consequence imposed by group members. In some cases, rules of conduct are passed down to successive generations by societal customer and mores. In other cases, the rules are expressly stated in the written laws governing the society. One important job of the courts is the enforcement of societal laws. It is also the job of the courts to enforce contracts.
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.
The basic elements constituting a contract are offer, acceptance of the offer, intention to create legal relation, consideration, certainty, capacity, and legality. Firstly is offer. An offer or proposal is necessary for the formation of an agreement section 2(a) of the Contracts Act states that ‘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 or abstinence, he is said to make a proposal. Under the Contracts Act and English law, a proposal or offer is something which is capable of being converted into an agreement by its acceptance. A proposal must be a definite promise to be bound provided certain specified terms are accepted. The promisor or sometimes also know as 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 communication of a proposal is complete when it comes to the knowledge of the person to whom it is made Section 4(1), Contract Act. This means that an offer or proposal is effective once it is communicated to the offeree by the offeror. The communication of an offer or a 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 in Section 3, Contract Act. A proposal made in words that means oral or written is said to be expressed. If a proposal is made other than in words example is by conduct, it is said to be implied in Section 9. Contract Act.
An offer should be contrasted with an invitation to treat. An option is merely an undertaking to keep the offer open for a certain period of time in return for a price whether. Advertisement is an offer or an invitation to treat would depend on the intention of the parties. The general rule is that advertisements are regarded as merely supplying information or notifying others regarding the advertiser’s good or services. Although an advertisement may indicate a price for the goods or services, that is simply the advertiser providing a guide as to what price is expected from parties interested to purchase. The advertisement is basically inviting the other party to make an offer.
Acceptance in section 2(b), Contracts Act provides that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to have been accepted. In Taylor v Allan (1966), the court held that the offer of a motor insurance was deemed accepted by conduct when the offeree drove his car inn reliance on the insurance. Other cases is in Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui (1984), it was held that where a statutory provision sets out a condition precedent before an offer can be accepted, non compliance with that condition will result in no contract whatsoever. A proposal, when accepted, be comes a promise. Section 2(c), Contracts Act calls the person accepting the proposal the promise. Section 9 of the said Act provides that so for as the acceptance of any promise is made in words, the acceptance is said to be expressed. If the acceptance is made other than in words, the acceptance is said to be implied. Acceptance may be made in writing, orally or implied by conduct, but if a method of acceptance has been prescribed by the offeror, then acceptance must be according to the manner prescribed.
Communication of acceptance is for there to be a valid contract, the offeree must convey his acceptance to the offeror. Acceptance is only effective when it is communicated or brought to the notice of the offeror. Generally, silence cannot 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 construed as acceptance. In Felthouse v Bindley (1862) it was held that 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. 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. In The Household Fire and Carriage Accident Insurance Company (Limited) v Grant (1878-79) the court held that 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.
Intention to Create Legal Relations is although the Contracts Act is silent on the intention to create legal relations as one of the requirements of a valid contract; case law clearly dictates the necessity of this requirement. There are, however, cases where no intention to enter into legal relations can be imputed. In domestic arrangements there is a presumption against the existence of an intention to create legal relations whilst in commercial arrangements the rebuttable presumption is that legal relationships are intended for example is in Esso Petroleum Co. Ltd. v. Customer @ Excise Commissioner. Generally, it is up to the courts to ascertain the intention of the parties from the language used and the context in which they are used.
Consideration is in Section 26 of the Contracts Act provides that, as a general rule, an agreement without consideration is void. The word consideration is defined in Section 2(d) of the said Act as follows: when, at the desire of the promisor, the promisor or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. In Re Tan Soh Sim (1951), the court held that the nearness of the relation depends on the type or group of people to which the parties belong and the circumstances of the family concerned. In University Malaya v Lee Ming Chong (1986), the defendant was given a scholarship to study in Canada on the condition that he must work for the University for two-and-a-half years. Upon the defendant’s return, he left the University contending that since he had not provided consideration, there was no valid contract between them. The Federal Court held that there was sufficient consideration as the university had paid the defendant’s fees. Further, even if there was no consideration, the agreement was regarded as valid by virtue of s 4(c) of the Contracts (Amendment) Act 1976.
Executory consideration is when there is an exchange of promises to perform acts in the future. Executed consideration is a promise that has been performed thus giving rise to the obligation on the offeror to perform his promise. Past consideration is where a promise is performed before the formation of the contract.
Certainty is 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. For example, if Ali agrees to sell to Mary a hundred crates of toys without specifying what kind they are, such an agreement is void on the grounds of uncertainty. Similarly if Ali agrees to sell to Mary his house for RM 200,000 or RM 300,000, such an agreement is also void.
On the other hand, if Ali is a dealer in plastic toy soldiers only and he agree to sell a hundred creates of toys the type of toys dealt with by Ali indicates the meaning of the word ‘toys’. Similarly, if Ali agrees to sell to Mary his house at a price to be fixed by his wife, there is no uncertainty as the price is capable of being made certain.
In Karuppan Chetty v. Suah Thian, the requirement of certainty was not met when the parties agreed upon the granting of a lease’ at RM 35.00 per month for as long as he likes.
Capacity is the parties entering into a contract should also be competent to contract; example is they must have the legal capacity to do so. Section 11 of the Contract Act is that 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. In Malaysian, the age of majority is eighteen years. Age of Majority Act, 1971. In Mohori Bibee v. Dharmodas Ghose, the Privy Council held that an infant cannot make any valid contracts. Thus the general rule in Malaysia is that contracts made by infants are void. However, there are some exceptions to this rule. These are the following contracts for necessaries, contracts of scholarship, and contracts of insurance.
Legality is even where all the requirements of a valid contract discussed above are present, a contract may be illegal and thus unenforceable. Agreements are contracts if inter alia they are made for lawful consideration and with lawful object s 10, CA 1950. section 24 of CA 1950 further provides that the following consideration and objects are unlawful: it is forbidden by law, it is of the nature as to defeat any law, it is fraudulent, it involves or implies injury to person or property of another and the court regards it as immoral, or opposed to public policy.
CONCLUSION QUESTION 1
From the definition above, it may be concluded that the basis 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 mere agreement, in that it involves a bargain between the parties. As such, the existence of other elements is also required to allow an agreement to transform into a contract and make it enforceable in law. They have seven elements must be present and they are agreement (comprising offer and acceptance), consideration, and intention to create legal relation, capacity, consent, certainty, and legality.
INTRODUCTION QUESTION 2
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. If contracts terms are broken, and the contract is enforceable, the consequences can be significant. The plaintiff can pursue a variety of options when it is clear that the other party has breached a contract.
Remedies that are available for breach of contract would depend on the effect and impact of the breach. Possible remedies are Rescission of contract, Damages, Specific performance, and Injunction and others is Quantum meruit, rectification. Equitable remedies are generally remedies other than the payment of damages. This would include such remedies as obtaining an injunction, or requiring specific performance of a contract. Rescission of contract is on a breach of a condition of a contract, the injured party may treat the contract as an end (or rescinded) and refuse to perform or fulfil his part of the contract. When one party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promise may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance: s 40, CA 1950. a person who rightly rescinds a contract is also entitled to damages under s 76, CA 1950.
Damages are granted to a party as compensation for the damage, loss or injury he has suffered through a breach of contract. Section 74 of the Contracts Act sets out the provision for such compensation. Compensation for loss or damage caused by breach of contract. For example is when a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, or which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. In Hadley v Baxendale (1854) the court held that an aggrieved party will be unable to recover consequential losses resulting from a breach unless the losses are a ‘natural’ consequence 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.
Compensation for failure to discharge obligation resembling those created by contract: for example is when an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default as if the person had contracted to discharge it and had broken his contract.
The example of illustrations is A contracts to sell and deliver 50 gantanges of saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 gantangs of saltpetere of like quality at the time when the saltpetere of like quality at the time when the saltpetere ought to have been delivered. A contract to buy from B, at a stated price, 50 gantangs of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.
Types of damages are compensatory or ordinary damages, exemplary damages, liquidated damages, and nominal damages. Compensatory or ordinary damages that are given to the party who has suffered loss caused by the breach of contract. The general position with regard to damages for breach of contract is that damages may be recovered as long as they are not too remote. 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 as a public example. Liquidated damages are monetary compensation whose amount the parties agree upon during the formation of a contract for the injured party to collects 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
Mitigation of loss is the party seeking damages is under a duty to mitigate the loss. Explanation to Section 74. In Kabatasan Timber Extraction Co. v. Chong Fah Shing the Federal Court recognized this general duty and held that the plaintiffs claim should be reduced accordingly.
Specific Relief Act, 1950 provides for the remedy of specific performance. Specific performance is a discretionary remedy. Under Section 21 of the Specific Relief Act, the court has discretions to refuse specific performance where the granting of it would cause undue hardship to the defendant.
Section 11(2) of the Specific Relief Act provides that specific performance may be granted in respect of agreements relating to land transactions where there is a presumption that the breach of a contract to transfer immovable property cannot be adequately relived by compensation in money. Specific performance may also be granted in respect of executory contracts and in cases where actual damage cannot be ascertained.
However, the court will exercise its discretion not to decree specific performance under Section 20 of the Specific Relief Act where damages will provide an adequate remedy in Section 20(1)(a) Specific Relief Act. In Yeo Long Seng v. Lucky Park (Pte.) Ltd. the court refused to grant specific performance as damages could provide an adequate remedy. Section 20(1)(c) of the Specific Relief Act also provides that specific performance will also be refused where the terms of the contract are uncertain, as in Lim Nyuk Chan v . Wong Sz Tsin, or where there has been delay in bringing the action, or where there is evidence of fraud. The court will also refuse to grant specific performance where to do so would require the constant supervision of the court of Lee Sau Kong v. Leow Chang Chiang. Specific performance is also not granted to contracts for personal services- Dato Abdullah bin Ahmad v. Syarikat Permodalan Kebangsaan Bhd. @ Ors.
Under Section 18 of the Specific Relief Act, the court has the power to award damages in addition to or in lieu of specific performance.
An injunction is the remedy of an interlocutory injection is used by a party to maintain the status quo of the subject-matter in a pending suit. A mandatory injunction is a court order requiring something to be done. An injunction may also be in the form of a restraining order, stopping something from being done. This type of injunction is called the prohibitory injunction. For example, in Broome (Selangor) Rubber Plantations v. R.H. Whitley an injunction was granted restraining an employee from entering into employment as a manager or assistant of any plantation in the States of Selangor and Negeri Sembilan other than the estate of his employers until the expiry of his contract of service. This case may be contrasted with the case of Wrigglesworth v. Wilson Anthony which was discussed above under the subtopic on Restraint of Trade and Legal Proceedings.
An injunction is an equitable remedy. Thus, it can be varied or dissolved if the court discovers later that the application for injunction was made on suppressed facts or that the facts upon which the order was granted no longer exist. An order for injunction is an equitable remedy which is also regulated by Specific Relief Act 1950. Section 50 of Specific Relief Act 1950 provides that it is a preventive relief granted at the discretion of the courts. In respect of contracts, an injunction may be sought to prevent a party from committing a breach of contract. For example, the court may order that a seller be restrained from selling land to anyone else when the seller has contracted to sell that land to the plaintiff. A court may award damages to an injured party either in addition to, or in substitution for, an order of injunction.
Quantum meruit determines the amount to be paid for services, for example is where the parties to a contract have failed to agree on a price or where a party has carried out work in the reasonable expectation of a contract being formed but an agreement is never reached on the essential terms of that contract. If a person sues for payment for services in such circumstances, the court will calculate the amount due based on time and usual rate of pay or the customary charge, based on quantum meruit by implying a contract existed.
CONCLUSION QUESTION 2
Remedies that are available for breach of contract would depend on the gravity of the effect and impact of the breach. The types of remedies that are available are rescission of contract, damages, specific performance, and injunction. Rescission of contract is the contract is annulled and both sides are excused from further performance and any money advanced is returned. Damage is an equitable quantum of money is paid to the plaintiff to compensate for any loss. 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. 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.
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General Principles of Malaysian law, 5th edition, Lee Mei Pheng, 1957-2007, Selangor Darul Ehsan.
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Contracts act 1950 (Act 136), contracts ( Amendment) act 1976 (A 329) & Government Contracts Act 1949 ( Act 120), 5th January 2010.
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