Contractual Relationship Case Study

Introduction on case study

In the case study, Itua wanted to expand his business to include costume hire, where he had approach Baju Murah Sdn Bhd (BM) and Baju Lagi Murah Sdn Bhd (BLM) to make an offer or invitation to treat. However, upon hearing from his friend, Sunil that Wong had also opened a costume hire shop, he had panic and written notes to BM and BLM to inform that he was no longer interest in the costumes. However, BM and BLM had advised acceptance via voicemail and fax respectively.

Based on the facts of the case study, there is a need to determine whether there are any the contractual relationship between Itua and 3 parties, namely Wong, BM and BLM. In order to determine whether there is existence of contractual relationship, the facts stated in the case must satisfy the elements of a contract, namely offer, acceptance of the offer, intention to create legal relations, consideration, certainty and capacity.

The discussion will be focused on whether there is an offer made or it was just an invitation to treat, the rules of revocation and acceptance are satisfied and there existence of contractual relationship with reference made to the legislation in Malaysia governing contracts, known as Contracts Act 1950 (Act 136) (Revised 1974). The objective is to advise Itua on his contractual relationship if any, supported by discussion of relevant legal cases.

2. Contractual relationship between Itua and Wong

Based on the information given in the case study, Itua heard from his friend, Sunil, that Wong has opened a costume hire shop, which means that Itua will have to compete with Wong for business. There was no evidence of basic elements required for the formation of a contract such as an offer, acceptance of the offer, intention to create legal relations, consideration, certainty and capacity.

Since there is no evidence or elements of contracts to support the existence of a contractual relationship, it was concluded that there is no contractual relationship between Itua and Wong.

3. Contractual relationship between Itua and Baju Murah Sdn Bhd

Itua had visited BM and enquired whether the costumes are for sale. The manager replies that they might consider and allows Itua to inspect the costumes. Itua had expressed his interest in buying the costumes and fax a letter to BM stating “I am interested in buying the collection of costumes in your back closet. The highest price I would pay would be RM5,000.00 for the lot”. To further understand the relationship between Itua and BM, there is a need to determine whether the faxed letter to BM was an offer made or just an invitation to treat.

In Section 2(a) of the Contracts Act, 1950, states that when one person signifies to another his willingness to do or to abstain from doing anything, with a view of obtaining the assent of that other to the act or abstinence, he is said to make a proposal. Itua had stated in his fax message that the “highest price he would pay is RM5,000.00” shows that he is not making a firm offer to buy. He is merely stating he would pay only if the price is right and the maximum he would consider is RM5,000.00.

With reference made to an Indian case of Macpherson v. Appana where a statement of the lowest price is merely a statement where the vendor may sell is not an offer but invitation to treat. In the said case, A offered to buy B’s lodged for Rs.6,000, adding that he could pay more, if reasonably. B’s agent replied, “won’t accept less than Rs. 10,000”. This was accepted by A but B refused to perform the contract on the ground that he did not make any offer or counter offer but was merely inviting offer (Agarwal, 35).

It was held that a mere quotation was not an offer but an invitation to offer, therefore, there was no concluded contract. Hence, the Indian case supports that the fax written by Itua was not an offer but an invitation to treat. When Itua stated that the highest price he would pay is RM5,000.00 is infact an attempt to induce offer.

That night at dinner, Itua heard from his friend, Sunil that Wong has opened a costumes hire shop and this had alarmed Itua. Itua had written a note and slide it under the door at BM to inform that he is no longer interested in the costumes. For revocation to be effective, it must be communicate as provide for under Section 6(a) of Contracts Act 1950 which reads :

6. A proposal is revoked :

(a) by the communication of notice of revocation by the proposer to the other party.

In Section 4(3) of the Contracts Act 1950 deals with the communication of revocation which states :

4. (3) The communication of a revocation is complete :

1. as against the person who makes it, when it is put into a course of transmission to the person whom it is made, so as to be out of the power of the person who makes it; and
2. as against the person whom it is made when it comes to his knowledge.

1. Further stated in Section 5(1) of the Contracts Act 1950 that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. Hence, the revocation note written by Itua and slid under the door of BM was not complete until it had come to the knowledge of the manager of BM.

However, later that night, Itua’s friend Sunil had talked to the manager of BM and told him that Itua doesn’t want to buy the costumes. The manager immediately telephone and left a voice message stating that they accept his offer to purchase the costumes for RM5,000.00 and will deliver on Friday. Only on the following day, Itua listens to the acceptance message from BM.

As a general rule, an agreement is formed when acceptance is complete. In Section 5 of the Contracts Act 1950 reads :

2. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
3. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

In this instance, there is a need to determine whether the revocation had come to the knowledge of BM and that it was revoked before the communication of acceptance.

Further research under Section 2.33 of the Common Law, it was stated the notice of the revocation must be given by the offeror or come to the notice of the offeree from a reliable source. Hence, BM has knowledge on the revocation of the purported offer of Itua from Sunil. Therefore, the revocation is considered complete when Sunil told the manager of BM that Itua was no longer interested to buy the costumes. Sunil, a reliable source, had informed the manager of BM prior the acceptance had come to the knowledge of Itua.

However, from the beginning, Itua had not made an offer to BM and it was just a mere invitation to treat. Therefore, it was not necessary for Itua to revoke the offer and at the same time, BM had not responded to the invitation to treat by making an offer. As there was no offer made by BM, the acceptance made by BM was not proper in the absence of an offer. Even if there were an offer made by Itua, the acceptance by BM would have been considered revoke when BM came to know of Itua’s decision from Sunil. Based on the facts discussed, it concludes that there is no contractual relationship between Itua and BM.

Reference List

Agarwal, Dr. V.K. 2000. LAW OF CONTRACTS. Selangor D.E. : Syarikat Percetakan Ihsan.

Lee, M.P. 2005. General principles of Malaysian law 5th edition. Selangor D.E. : Oxford Fajar.

McTaggart, D., C. Findlay, and M. Parkin. 2007. ECONOMICS. New South Wales : Pearson Education Australia.

Salvatore D., 1993. International Economics. New York : Macmillan Publishing Company.