Case Examples of Contract Offer and Acceptance

A contract is an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration and is enforceable by law. [2] It is important to note that there are four elements generally required for the formation of a contract:

(i) Proposal (offer);

(ii) Acceptance;

(iii) Intention to create legal relations; and

(iv) Consideration.

An offer is a proposal to enter into an agreement with another person or an offer is the expression of ones intent to another person to form a contract. An offer must contain some essential terms; including the price and subject matter of the contract. The person making the offer must also communicate it to the other party. It can be made either orally or in writing or implied by the conduct of the person making the offer. It can also be made to an individual, or a group of persons, or to the whole world at large.

An acceptance is one person’s compliance with the terms of an offer made by another person or it is the unconditional consent to the terms of the offer. [5] To make a binding contract the acceptance must exactly match the offer. The offeree must accept all the terms of the offer. However, in certain cases it is possible to have a binding contract without a matching offer and acceptance.

Main Body

Acceptance is the signification by an offeree of a final, unconditional and unqualified intention to exercise the power conferred on him or her by the offeror of concluding a contract with the latter on precisely the terms specified in the offer. An acceptance, which is ones manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer. An acceptance of an offer must be absolute and unconditional. In order for the acceptance to be effective all of the terms of the offer must be accepted without change or condition. Ordinarily, acceptance must be expressed or communicated by the offeree to the offeror, in order to manifest mutual assent. The manner in which acceptance is to be communicated may be specified in the offer, in which case that becomes the exclusive means of acceptance. But if the offer prescribes no means any reasonable and usual mode may be adopted. The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence.

But there are some exceptions to the general rule;

There are basically two types of contracts, bilateral and unilateral. Bilateral is the most common type, which involves two parties the offeree and the offeror making an offer in return for a consideration. While unilateral involves two parties but only one party is making the promise or promises. A typical example is the reward contract: A promises to pay a reward to B if B finds A’s dog. B is not obliged to find A’s dog, but A is obliged to pay the reward to B if B finds the dog. In this example, the finding of the dog is a condition precedent to A’s obligation to pay. In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree’s performance is also treated as the price, or consideration, for the offeror’s promise.

Communication of acceptance is unnecessary where that right is waived by the offeror to the offeree. The offeror may express or impliedly waive the need for communication of acceptance by the offeree e.g. where goods are dispatched by an offeror in response to an offer to buy them by the offeree.

The general principle is that a contract is formed when acceptance is actually communicated to the offeror. The postal rule is an exception to the general principle. The postal provides that the contract is formed when a properly prepaid and properly addressed letter of acceptance is posted. The postal rules ONLY apply when the ‘acceptance’ is sent by post. Acceptance here takes effect when the letter is posted. In other words, where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties, then acceptance is complete as soon as the letter is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror.

Illustrations

Taking into account Malaysia’s contract act of 1950, Part 2 section 4

(1) The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

(2) The communication of an acceptance is complete—

(a) 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

(b) As against the acceptor, when it comes to the knowledge of the propose

(3) The communication of a revocation is complete—

(a) 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

(b) As against the person to whom it is made, when it comes to his knowledge.

Basically this act or law is telling us that for any contract to be binding, an acceptance of the offer must be communicated to the offeror (proposer).

Relevant cases:

See the cases of;

Entores v Miles Far East Corp [1955]

Where Lord Denning stated that the offeree must communicate acceptance or someone authorised by the offeree. If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance.

Stevenson v McLean (1880)

On Saturday, the defendant offered to sell iron to the plaintiff at 40 shillings a ton, open until Monday. On Monday at 10am, the plaintiff sent a telegram asking if he could have credit terms. At 1.34pm the plaintiff sent a telegram accepting the defendant’s offer, but at 1.25pm the defendant had sent a telegram: ‘Sold iron to third party’ arriving at 1.46pm. The plaintiff sued the defendant for breach of contract and the defendant argued that the plaintiff’s telegram was a counter-offer so the plaintiff’s second telegram could not be an acceptance.

It was 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.

Conclusion

To summarize it all, for every contract to be binding, there must be communication of acceptance communicated to the offeror by the offeree or someone appointed by the offeree. There are some few exceptions to the statement but generally speaking, acceptance must be communicated to the offeror

QUESTION 2 (B)

Explain the law on the intention to create legal relations in the formation of contract. In your explanation, make reference to case law.

ANSWER

Introduction

One of the elements for binding a contract is the intension to create legal relations. An agreement supported by consideration is not enough to create a legally binding contract; the parties must also have an intention to create legal relations. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties. An offer is an expression of willingness to contract on specified terms, made with the intention that it shall become binding as soon as the person to whom it is addressed accepts it.

Main Body

We now come to what is sometimes referred to as the third essential ingredient for formation of contract. Intension to create legal relations is simply an intend from both parties i.e the offeror and the offeree to take legal action the other, if there is a breach of that contract. Agreements, which are initially not intended to be pursued in court, will not be entertained later in court. There are two forms of agreements in regards’ to intension to create legal relations;

Social or Domestic Agreements: This group covers agreements between family members, friends and workmates. The law presumes that social agreements are not intended to be legally binding. However, if it can be shown that the transaction had the opposite intention, the court may be prepared to rebut the presumption and to find the necessary intention for a contract. The cases show it is a difficult task to rebut such a presumption. Agreements between a husband and wife living together as one household are presumed not to be intended to be legally binding, unless the agreement states to the contrary.

Business or Commercial Agreements: In business agreements the presumption is that the parties intend to create legal relations and make a contract. This presumption can be rebutted by the inclusion of an express statement to that effect in the agreement. As to commercial agreements, there is a presumption that the parties do intend to make a legally binding contract. It is not necessary in the ordinary run of commercial agreements for the plaintiff to prove that there was such an intention. However, the defendant may rebut the presumption by reference to the words used by the parties and/or circumstances in which they used them.

Firstly, in ordinary commercial contracts, there is a strong presumption that intention is present. It is possible to displace this presumption, but it is very difficult to do so. Secondly, in domestic and family arrangements there is a weak presumption that there is no intention to create legal relations. This presumption can be easily displaced.

Relevant cases:

See the cases of;

Kleinwort Benson v Malaysia Mining Corp (1989)

The plaintiff bank agreed with the defendants to lend money to a subsidiary of the defendants. As part of the arrangement, the defendants gave the plaintiffs a letter of comfort which stated that it was the company’s policy to ensure that the business of its subsidiary is at all times in a position to meet its liabilities. The subsidiary went into liquidation and the plaintiffs claimed payment from the defendants.

It was held that the letters of comfort were statements of the company’s present policy, and not contractual promises as to future conduct. They were not intended to create legal relations, and gave rise to no more than a moral responsibility on the part of the defendants to meet the subsidiary’s debt.

Balfour v Balfour (1919)

The defendant, who worked in Ceylon, came to England with his wife on holiday. He later returned to Ceylon alone, the wife remaining in England for health reasons. The defendant promised to pay the plaintiff £30 per month as maintenance, but failed to keep up the payments when the marriage broke up. The wife sued. It was held that the wife could not succeed because: (1) she had provided no consideration for the promise to pay £30; and (2) agreements between husbands and wives are not contracts because the parties do not intend them to be legally binding.

Conclusion

Intension to create legal relations is one of the elements in forming a contract. In summary, the law to create legal relations is major aspect in the formation of a contract. Social and domestic agreements are presumed not to have legal intent and as such most cases relating to social agreements do not hold out in court. While business or commercial agreements are presumed to have legal intend so they very much hold out in court.

QUESTION 2 (C)

‘Consideration must be sufficient but need not be adequate’. Consider the meaning of this statement.

ANSWER

Introduction:

Consideration is simply something of value received by a promisor from a promisee. It can take the form of a right, interest or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility, given, suffered or undertaken by the other. Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. In a bilateral contract—an agreement by which both parties exchange mutual promises—each promise is regarded as sufficient consideration for the other. In a unilateral contract, an agreement by which one party makes a promise in exchange for the other’s performance, the performance is consideration for the promise, while the promise is consideration for the performance.

Consideration must have a value that can be objectively determined. A promise, for example, to make a gift or a promise of love or affection is not enforceable because of the subjective nature of the promise. The general rule is that an agreement made without ‘consideration’ is void unless it comes under one of its exceptions. Under the sec, an agreement without consideration is valid if it is expressed in writing; registered (if required under the law); is made on account of natural love and affection between parties standing in a near relation to each other. •All in all, there are different types of consideration i.e. executory, executed and past consideration. (a) Executory consideration consists of a promise to do or to abstain from doing something e.g. A agrees to supply eggs in future on credit to B in return for B’s promise to pay. (b) Executed consideration consists of doing an act e.g. Peter offers a reward of RM500 to anyone who shall return his lost dog. (c) Past consideration consists of something wholly performed before making of the promise e.g. A heard B’s cry for help who was caught in a building that is being destroyed as a result of fire outbreak. A decided to help by saving B’s life. Later B promised to give A RM1000 for saving his life.

Main Body

Consideration must be sufficient (legally recognisable) but not always adequate. It is important to note that the ‘consideration’ need not be adequate, but rather sufficient. If the promisor gets what he asks for in return for his promise, he has received sufficient consideration and is bound. It is immaterial that his promise is far more valuable than the price he asked for. The general rule is consideration need not be adequate but sufficient but there are some few exceptions which makes a contract in general voidable and might make the court reconsider the general rule of consideration;

I- Undue Influence: Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible. This is also subdivide into two parts:

(a) Presumed undue influence: , the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence. Such classes include: Parent/child, Guardian/ward, Priest/member of parish, Solicitor/client, Doctor/patient

(b) Actual undue influence: An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.

II- Duress/Coercion: Duress is defined as a “threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition.” A contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract.

III- Misrepresentation: Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. It is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation.

IV- Mistake: A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement.

V- Fraud: This is the intentional and knowingly inducing a person into a contract with the full awareness that the information’s in the contract are wrong.

VI- Illegality: When people enter into a contract with the consideration or offer being illegal this makes the entire contract void.

Having said this, they are the exceptions, which might make a contract voidable, and as a result no contract will be formed.

Relevant cases:

See the cases of;

Phang Swee Kim v Beh I Hock [1964]

The respondent alleged that the appellant has trespassed on his land and he instituted an action claiming for possession and also for an account of all income received by the appellant from the land. The appellant counterclaimed for a declaration that she was entitled to the said land. At the hearing, the appellant contended that there was an oral agreement made between her and the respondent in which the respondent agree to transfer the land to her on payment of $500. However on appeal, the Federal Court held that by virtue of explanation 2 to section 26 of the Contracts Acts 1950, the inadequacy of the consideration was immaterial. There was good consideration under Section 2(d) of the Contracts (Malay States) Ordinance 1950 and judgment was made in favor of the appellant. In addition there was no evidence of suppression of the value of the property, misrepresentation, or fraud.

University Malaya v Lee Ming Chong (FC) 1986

Facts: Lee was given a scholarship to study in Canada on one condition that he must work for the University for 2.5 years. Upon Lee’s return, he left the University and argued that he had not provided consideration and hence there is no contract between Lee and UM. Federal court held that there was consideration as UM paid the fees. Even if there was no consideration the agreement is still valid as s 4(c) Contracts (Amendment) Act 1976 provides that a scholarship agreement is not void by absence of consideration.

Conclusion

The statement, consideration must be sufficient but need not be adequate simply means: Providing something is given in return for a promise, it does not matter that it is not much, or not what the promise would usually be considered worth. Courts would not inquire into the adequacy of consideration so long as there are some. The reason for this rule is due to the old idea of freedom of contract, which required that the parties themselves should be allowed to make bargains that suit them without interference from courts. The court will not intervene to require equality in the value exchanged, as long as both parties have freely entered into the agreement.

GENERAL REFERENCES

Books

Ahmad Masum [2009]. Lecture Notes on Law for Engineers, MMU.

Ahmad S.A [2003]. Principle of the Law of Contact in Malaysia, Malayan law journal.

Malaysia [1049]. Contracts Act 1950, Malayan parliament.

Webpages

http://en.wikipedia.org/wiki/ccontract

https://www.scribd.com/doc/6281204/Law-in-Malaysia

http://www.agc.gov.my/agc/index.php

https://www.lawteacher.net/consideration_Lecture.php