CHAPTER 2

FORMATION OF CONTRACTS
Definition

The law of contract in Malaysia is governed by

the Contracts Act 1950.

A contract is generally defined as ‘an agreement

between two or more parties that is legally
binding between them’.
 Under Section 2(h) of the Contracts Act 1950,
‘an agreement enforceable by law is a
contract.’

 However, all agreements are not contracts …

if they lack the essential elements of a
contract. Then it cannot be enforced by law.
 (Eg… a promise by a father to give RM5k to
the son if he passes his law exam……)
Elements of a Contract

The main elements required to form a valid

contract:

 Agreement: Proposal & Acceptance

 Consideration
 Intention
 Capacity
 Free consent
 Certainty
Agreement :Proposal and Acceptance

 Under Section 2(a) CA 1950, a proposal is

made when one person signifies to another his
willingness to do or abstain from doing
anything, with a view to obtain the assent of
the other to such act or abstinence.
 Section 2 (c) of CA, 1950:-
“the person making the proposal is called the
“promisor…”
A proposal must be a definite promise to be
bound provided certain specified terms are
accepted.
In business transactions, there are
circumstances which appear to be a proposal
but actually it is only a mere request to
negotiate or invitation for the other party to
make a proposal.
Malaysian Case law

 In the Federal Court case of

Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui
(1984), where there was a lack of offer and
acceptance, the purported hire-purchase
agreement was declared void ab initio, or void
from the beginning.
ROD : ’’Hey Tom, I’m selling my Mercedes for
RM50,ooo…”
The next day Tom transfers RM50k to Rod…..
But Rod has sold the car to Tim….!!!!!
Invitation to treat

A proposal must be distinguished from an

invitation to treat.

 An invitation to treat (ITT) iswhere a party

merely invites offers, which he is then free to
accept or reject.
 For e.g. display of goods with price tags,
advertisement for a sale, tenders, catalogues,
menus, etc
 An advertisement, thus, is an attempt to
induce an offer.

 In the case of Majumder v Attorney General

of Sarawak (1967), the Federal Court held
that an advertisement in the newspaper for
the post of a doctor was an invitation to treat.
Fisher v Bell (1961)

Facts : Bell, a shopkeeper had displayed a flick

knife in his shop window with a price tag on
it.

The issue before the court was whether the

placing of the flick knife in the window with a
price tag attached amounted to a ‘sale’ or an
‘offer to sell’
Held : Bell had not committed an offence
because the display of goods in a shop
window only amounted to an ‘invitation to
treat’ and not a sale.
Pharmaceutical Society of Great Britain v Boots
Cash Chemist Ltd (1953)

Facts :
The defendant was charged for failing to comply
with the Pharmacy and Poisons Act 1933 which
stated that it was illegal to sell specified poisons
without supervision by a registered pharmacist.
The defendant operated a self-service shop where
a customer selected goods, put them into a wire
basket then paid for the goods at the cashier’s
desk. At the cashier’s desk a registered pharmacist
supervised the transaction.
Contd…

Held :
The defendant did not make an illegal sale
since display of goods can only be regarded
as invitation to treat. The customer was the
one who made the proposal to buy and the
contract was completed when the cashier
accepted payment for the goods
However, there may be situations when an
advertisement amounts to an offer or
proposal.

Look at Carlill v Carbolic Smoke Ball Co Ltd

(1893), where the advertisement of a
unilateral contract was held to be an offer.
CARLILL v CARBOLIC SMOKE BALL
 Carlill v Carbolic Smoke Ball Co Ltd
(1893)
Facts :
The defendant advertised in the newspaper that they
would pay £100 to anyone who still suffered influenza
after taking the medicine according to the prescription
sold by the defendant. The defendant also declared
that they had deposited £1000 in the Alliance Bank to
show their sincerity in the matter. The plaintiff used
the above-said medicine but still contracted influenza.
She asked for the compensation that had been
promised by the defendant in the newspaper.
Contd….

Held :
The plaintiff(Mrs. Carlill) was entitled to the
£100 because the defendant’s
advertisement was a proposal addressed to
the public at large and the plaintiff had
accepted the proposal by purchasing the
medicine and using it according to the
prescription.
Communication of Proposal

 Section 4(1) CA 1950 states:

“The communication of a proposal is complete

when it comes to the knowledge of the
person to whom it is made.”
Taylor v Laird

Facts : 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.
Held : that he could not do so as his offer to help
bring the ship home was not communicated,
therefore there had been no opportunity to
accept or reject his offer.
Taylor v Laird
Termination of Proposal

A proposal may be terminated in several ways:-

 by acceptance
 by rejection
 by revocation before acceptance
Section 5 (1) of CA 1950 states:
 
“A proposal may be revoked at any time before
the communication of its acceptance is
complete as against the proposer, but not
afterwards”.

As a general rule, when acceptance is complete, an

agreement is formed so that there is no question
of revocation.
By virtue of Section 6 of CA1950, a proposal
may be withdrawn in any of the following
circumstances:-
a) By communication of the notice of
revocation by the proposer to the party to
whom the proposal was made.
b) By lapse of the time prescribed in the
proposal or if no time is prescribed by
the lapse of a reasonable time.
c) By the failure of the acceptor to fulfill a
condition precedent to acceptance.

d) By the death or mental disorder of the

proposer, if the fact of the proposer’s
death or mental disorder comes to the
knowledge of the acceptor before
acceptance.
Byrne v. Van Tienhoven (1880)
 

 1st of October - the defendant posted a letter of offer

from Cardiff to the plaintiff in New York.
 8th October- the defendant posted a letter revoking
the offer made on Oct 1st.
 11th October - the plaintiff received the letter of offer
posted on 1st Oct and sent acceptance by telegram the
same day.
 15th October - the plaintiff sent the letter of
acceptance.
 20th October - the plaintiff received the defendant' s
letter of revocation.
Byrne v Van Tienhoven

HELD : that there was a contract

between the parties. t
of the offer posted on 8th Oct was only
effective on 20th Oct (when the plaintiff
The plaintiff had accepted the
offer on 11th Oct when he sent the telegram
accepting the offer.
Acceptance

Section 2 (b) CA 1950 states:

“When the person to whom the proposal is
made signifies his assent thereto, the
proposal, when accepted, becomes a promise”.

Section 2 (c) CA 1950 refers to the person

accepting the proposal as the ‘promisee’.
Acceptance must be absolute and unqualified.

Section 7(a) of CA 1950 states:

“In order to convert a proposal into a
promise, the acceptance must be absolute
and unqualified”.

If parties are still negotiating, an agreement is

not formed yet.
Any acceptance which is qualified by the
introduction of a new term may be
considered as a counter-offer or counter-
proposal and this is treated as a rejection of
the original proposal.

 This destroys the original offer.

Hyde v Wrench (1840)

 6th June - the defendant wrote to the plaintiff

and offered to sell his estate to the plaintiff
for £1000
 8th June Plaintiff replied, he made a counter-
proposal to purchase at £950.
 On 27th June the defendant rejected the
plaintiff’s offer
 29th June the plaintiff offered £1000
The defendant refused to sell and the plaintiff
sued for breach of contract.

Held :
That no acceptance had occurred because
plaintiff’s letter on 8 June had rejected the
original proposal which could not be revived.
Hence, a counter proposal destroys the original
offer.
 However, merely requesting for further information is not a
counter offer.

Stevenson Jacques & Co v Mc Lean

On Saturday, the defendant offered to sell iron to the plaintiff

at 40 shillings a ton, open until Monday. On Monday at 9.42
am, the plaintiff sent a telegram asking if he could have
credit terms. After receiving it the defendant sold the iron
to another purchaser and at 1.25 pm sent a telegram to the
plaintiff informing them about the sale..
At 1.34 pm the plaintiff sent a telegram
accepting the defendant’s original offer.
The plaintiff claimed that the last telegram was
an acceptance of the defendant’s offer.

Held : that the plaintiff’s first telegram was not

a counter-offer but only an enquiry, so a
binding contract was made by the plaintiff’s
second telegram
 Acceptance must be made within a
reasonable time.
Section 6 (b) of CA 1950:-
“A proposal is revoked by the lapse of the time
prescribed in the proposal for its acceptance,
or, if no time is so prescribed, by the lapse of
a reasonable time, without communication
of the acceptance”.
 What amounts to the reasonable time is a
question of fact. It depends on the circumstances
of each case.

Ramsgate Victoria Hotel Co. Ltd vs. Montefiore

(1866)
The offer to purchase shares had not been accepted
within a reasonable time and the offer had
therefore lapsed. There was no contract created.
Acceptance must be expressed in some usual
and reasonable manner unless the proposal
prescribes the manner in which it is to be
accepted.

 
Tinn v Hoffman

The offer required acceptance by return of

post. It was held by the court that there
could been acceptance by any means arriving
not later than a letter sent by return,
e.g. by telegram or by verbal message…"reply
by return of post" included an equally
speedy method
Section 7 (b) of CA 1950 states:

- When the promisee deviates from the prescribed

form, the promisor must not keep
silent.
- If he does so and fails to insist upon the prescribed
manner, he is considered
as having accepted the acceptance in the modified
manner.
 
 In other words, this section states that
acceptance must be expressed in some usual
and reasonable manner, unless the promisor
prescribes the manner in which it is to be
accepted.
Acceptance

The general rule : Acceptance must be

communicated

 The promisee must communicate acceptance

of the offer or proposal to the promisor and
agreement is not complete until such
communication is affected.
In certain circumstances however, it is not
necessary to communicate the acceptance
formally

 Section 8 of the CA 1950 provides:

“Performance of the conditions of a
proposal…is an acceptance of the proposal”.
Carlill v Carbolic Smoke Ball Co. Ltd.
 
Acceptance by post (Postal Acceptance Rule)

In England - the communication of acceptance

is complete upon posting.

However, in Malaysia , the CA 1950 has

stipulated different times when the
communication of acceptance is complete.
Section 4 (2) of CA 1950 states:

 The communication of an acceptance is

complete-as against the proposer, when it is
put in a course of transmission to him, so
as to be out of the power of the acceptor; and
as against the acceptor, when it comes to
the knowledge of the proposer
(p/s see illustration in lecture notes)
Ignatius v Bell (1913)
Principle: Acceptance is complete upon
posting where the communication by post
is the method contemplated by the parties.

However, this rule that acceptance is

complete upon posting may be excluded by
the express terms of the offer.
Holiwell Securities Ltd v Hughes (1974)
Acceptance using instantaneous modes of
communication such as telephone, telex and
fax.
Rule: An acceptance made by these modes
must actually come to the knowledge of
the promisor.

Entores Ltd. v. Miles Far East Corporation

(1955)
Recap on Proposal & Acceptance

 https://www.youtube.com/watch?v=Y_AaZ0s
3OUU
CONSIDERATION

General Rule in Section 26 CA 1950 :An agreement

without consideration is void.

Section 2(d) CA 1950 defines consideration as,

 “when at the desire of the promisor, the promisee 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.”
Consideration

There are 3 types of consideration:

(i) Executory consideration – when one

promise is made in return for another
promise.
K Murugesu v Nadarajah (1980)
The appellant agreed to sell a house to the respondent .
The agreement was written on a scrap of paper. It read
in part as follows,".... I agree to sell my house ............to
Mr. Nadarajah, the present tenant of the house for
RM26,000 within 3 months from the date. Signed.... It
was held that the agreement must be seen as a case of
executory consideration. A promise made by one party
in return for a promise made by the other, in such a case
each promise is consideration for the other.
 Executed consideration – when a promise is made in
return for the performance of an act.

Carlill v Carbolic Smoke Ball Co. Ltd. (1893)

The offer made by the Company in the advertisement

remained open until Mrs Carlill bought the smoke balls ,
and the consideration remained executory until she
used it and contracted influenza. This act of
performance was the consideration and it remained
executory until the performance was completed.
Past consideration - it is something which is
wholly performed before the promise was
made. It was made or given not in response
to the promise. The promise is subsequent to
the act and is independent of it.
In English law: Past consideration is not a good
consideration but in Malaysian law past
consideration is good consideration
Kepong Prospecting Ltd. V. Schmidt (1968) 
Exceptions to the General Rule on Consideration :-

a) An agreement on account of natural love and affection -

Section 26 (a) of CA 1950
An agreement made on account of natural love and affection
would be held to be binding if these requirements are
present :-
  (i) it is expressed in writing
(ii) it is registered (if applicable)
(iii) it is made on account of natural love and
affection between parties standing in near relation to each
other.
 
Re Tan Soh Sim [1951]
Re Tan Soh Sim
 A woman on her deathbed expressed her intention to
leave all her properties to her four adopted children.

 Held: The court held that the claims of the adopted

children were not effective as it was contrary to
Section 26(a) - that it was not in writing, and there
was no natural love and affection between parties
standing in near relation to each other, since the four
children were adopted and did not have natural
relations (blood ties) with the woman.
Re Tan Soh Sim

 THE ISSUE OF THE CASE 1) Whether there is

near relation between Tan Soh Sim and her
four adopted children?

 This raised the further question what exactly

was meant by “near relations” under section
26 (a) of the Ordinance.
Re Tan Soh Sim

 However, they are not nearly related to the

family of their adaptive mother. Therefore,
the legal next-of- kin of Tan Soh Sim were not
in near relation to the four adopted children
of Tan Soh Sim. Thus, there is no valid natural
love and affection between them the
contract was invalid.
 https://www.youtube.com/watch?v=WU_yZ3
RJ8yk
b) An agreement to compensate for something
voluntarily done - Section 26 (b) of CA1950

There are two (2) limbs to this exception:-

 
- it is a promise to compensate either wholly or in
part the other person (promisee)
- the promisee has voluntarily done something for
the promisor or something which promisor was
legally compellable to do
c) A promise to pay a statute-barred debt –
Section 26(c) of CA 1950 A statute-
barred debt refers to a debt which cannot be
recovered through legal action because of a
lapse of time fixed by law i.e. under the
Limitation Act 1953, the time limit is 6 years
from the time the cause of action arises.
This exception is subject to several conditions
namely:-

(i) the debtor made a fresh promise to pay

the statute-barred debt
(ii) the promise is in writing and signed by the
person to be charged therewith or his
authorized agent in that behalf.
Consideration need not be adequate

If the promisor gets what he asks for in return

for his promise, he has received sufficient
consideration and he is bound. It is
immaterial that his promise is far more
valuable than the price he asked for.  
Bolton v. Madden (1873)

It was held that the adequacy of consideration is for the

parties to consider at the time of making the arrangement
and not for the court when it is sought to be enforced.

Phang Swee Kim v. Beh I Hock (1964)

 
It was held that the transfer of land for RM500 is valid as
there as was no evidence of fraud or duress.
 
 Consideration need not move from the
promisee or any other person" – Section 2(d)

A party to an agreement can enforce a promise

even though he has given no consideration, so
long as somebody else has done so.

Venkata Chinnaya v Verikatara Ma’ya (1881)

 
Recap video on consideration

 https://www.youtube.com/watch?v=1NA-0fc-
flw
CERTAINTY in CONTRACT

The terms of an agreement cannot be vague but

must be clear & certain.
An agreement which is uncertain or is not capable of
being certain is void.
Karuppan Chetty v Suah Thian (1916)
Section 30 Contracts Act 1950 states:

“Agreements, the meaning of which is not certain, or

capable of being made certain are void”.
http://icontractlaw.weebly.com/certainty.html
INTENTION TO CREATE LEGAL
RELATION
 The CA of 1950 is silent on the intention to
create legal relation as one of the
requirements of a valid contract.

 However it is essential in forming a binding

contract through case law.
Two presumptions have developed in the
determination of intention with respect
to agreements.
However, the presumptions are rebuttable.

a) in social, domestic and family agreements,

the presumption is that there is no intention
to create legal relations.
Balfour v Balfour

 A husband promised to pay his wife £30 a

month while she remained in England and
he worked in Ceylon. Their marriage broke
down and the wife brought an action to
reclaim money she said her husband owed
her..
 It was held that in an agreement made
between members of a family in the course of
family life, the law will ordinarily imply from
the circumstances of the case that the parties
did not intend their agreement to have legal
consequences
 However, not all social, domestic or family
agreements are not legally enforceable.
The presumption is rebuttable.
Meritt v. Meritt (1970)
 

The husband left his wife they met to make

arrangements for the future. The husband
agreed to pay £40 per month maintenance,
out of which the wife would pay the
mortgage. When the mortgage was paid off
he would transfer the house from joint names
to the wife’s name. He wrote this down and
signed the paper, but later refused to transfer
the house.
 It was held that when the agreement was
made, the husband and wife were no longer
living together.
 Therefore they must have intended the
agreement to be binding, as they would base
their future actions on it. This intention was
evidenced by the writing. The husband
therefore had to transfer the house to the
wife.
 b) in commercial agreements, the
presumption is that the parties intend to
create legal relations and make a contract
unless the parties specify otherwise.
Edwards v Skyways (1964)
 

The Ds promised all their pilots, that if they

were made redundant, then the employer ie
the D would pay them an ex-gratia sum

The P was made redundant and argued that the

words ‘ex-gratia’ (without admission or
liability e.g gift) showed that there was no
ITCLR.
Held :
The words ex-gratia did not exclude contractual
intention. They simply meant that the
employers did not admit any pre-existing
liability on their part, but not to preclude the
legal enforceability of the settlement. Thus,
the D was bound by the promise.
CAPACITY

https://www.youtube.com/watch?v=VlBy6dUovuk

Generally, every person is competent to enter into a

contract.

However, 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,
and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject”.
Who are therefore competent to contract?
 -who is of the age of majority and
 -one who is of sound mind

 The effect of contracts made by those who are incompetent is not

stipulated under the Act.

Reference must therefore be made to case law.

https://www.youtube.com/watch?v=yFUCBga-aoI
(Mohori Bibie v Dharmodhas Ghose)
 

 
Mohori Bibie v. Dharmodas Ghose (1903)

The appellant lent the respondent (a minor) 20,000

rupees at 12 % interest by way of mortgage
secured by some houses that belonged to the
minor. Later, the minor’s mother as his guardian
commenced an action against the appellant and
claimed for a declaration that the mortgage was
void on the ground of lack of capacity.
Held : that the contract entered into the minor was void.

https://www.youtube.com/watch?v=Asi_QsHo1Gg
Mohori Bibie v Dharmodas Ghose

https://www.youtube.com/watch?v=FuGbWglQfKU

Applied in a Malaysian case :-

Leha bt Jusoh b Awang Johari b Hashim

Tan Hee Huan v Teh Boon Keat (1954)- transfers of land

executed by an infant were void.
Therefore,GR in M’sia = contracts made by infants are void
and by virtue of Section 2(g) CA 1950,a void contract cannot
be enforced by law.

There are however exceptions to this rule:-

a) Contract for necessaries
b) Contract of scholarship
c) Contract of insurance
d) Contract of service

 
Contract for necessities

 Sec 69 – seller can get paid for his supplies

 Burden of proof on him (seller @ Plaintiff) to
prove that goods supplied were necessities
for the minor

 Nash v Inman

 Govt of Malaysia v Gurcharan Singh

Contract for Scholarships

 Section 4(a) Amendments Act 1976

- Only valid for government scholarships
Contract for Insurance

 Section 153(1) & (2) Insurance Act 1996

Contract for Services / Apprenticeship

2 legislation allowing minors to enter into

contracts of service
 Employment Act 1955
 Children & Young Persons (Employment) Act
1976

Doyle v White City Stadium

 S 66 CA 1950 – any person who has received any
advantage under the agreement with a minor is
bound to restore it or to make compensation for it.
S12 (a)
A patient in a mental hospital who is of sound mind,
may contract during those intervals.
S 12 (b)
A sane man, who is drunk cannot make a rational
judgment cannot contract while in the state of
drunkenness.
FREE CONSENT- consent is free if not
caused by :-

Coercion UI Fraud

Misrep Mistake
Free Consent

 S 10CA 1950 – all agreements are contracts only if

they are made by the free consent of parties.
 Consent is free if not obtained by:-

i)Coercion S 15 – Kesarmal s/o Letchman Das v

Valiappa Chettiar

ii) UI S 16 – Ragunath Prasad v Sarju Prasad

iii) Fraud s17

iv) Misrep S18 –
a)Positive assertion : With v O’Flanagan (1936)
b)Any BOD : Oriental Banking Corporation V
John Fleming
c) Causing a party to an agreement to make a
mistake as to the substance which is the
subject : R v Kylsant
v) Mistake
Contract Law in movie scenes for
Business Law
 https://www.youtube.com/watch?v=0Sf731qT
Jh4