Essential Elements of a Contract in Malaysia

Part A: Write an essay on the essential elements of a contract in Malaysia

A contract is a legally binding agreement. It is not always easy to establish whether the basic requirements of a contract, such as offer and acceptance, the necessity or otherwise of consideration, the capacity of the parties, the reality of their consent, and so on, exist. Dicey and Morris lay down a simple rule, [1] that ‘the formation of a contract is governed by that law which would be the proper law of the contract if the contract was validly concluded’. In Malaysia, the essential elements of a contract are Offer, Acceptance, Intention to create legal relations, and Consideration.

Offer

In order for a contract to be created, one of the parties must make an offer to the other party. A person who makes an offer is known as an offeror. A person to whom an offer is made is known as an offeree. An offer is made when an offeror proposes a set of terms to an offeree, with the intention that if the proposed terms are accepted they wil create a binding contract between the two parties. By accepting the terms proposed, the offeree would aso agree to become legally bound by them. This acceptance would therefore form a contract. As a contract is a legally binding agreement, neither an offer nor an acceptance should be made without a willingness to accept the legal consequences.

Invitation to treat

An invitation to treat is not an offer, it is only an invitation to make an offer. An offer shuld not be made by a person who is not fuy prepared to take legal consequences of its being accepted. But a response to an invitation to treat cannot result in a binding contract.

A court decides whether or not one of the parties has made an offer by looking at what it thinks that both of the parties intended. All the circumstances of the case will be considered in reaching this decision.

Advertisement can amount either to offers or to invitations to treat. If an advertisement is an offer then a person who accepts the offer makes a contract with the person who advertised. If an advertisement is only an invitation to treat then it cannot be accepted in such a way that a contract is thereby formed.

Offer of a unilateral contract

In a unilateral, or one-sided, contract, one party, known as the offeror, makes a promise in exchange for an act (or abstention from acting) by another party, known as the offeree. If the offeree acts on the offeror’s promise, the offeror is legally obligated to fulfill the contract, but an offeree cannot be forced to act (or not act), because no return promise has been made to the offeror. After an offeree has performed, only one enforceable promise exists, that of the offeror.

A unilateral contract differs from a Bilateral Contract, [2] in which the parties exchange mutual promises. Bilateral contracts are commonly used in business transactions; a sale of goods is a type of bilateral contract.

Reward offers are usually unilateral contracts. The offeror (the party offering the reward) cannot impel anyone to fulfill the reward offer. An offeree can sue for breach of contract, however, if the offeror does not provide the reward after the offeree has fulfilled the contract’s requirements.

Goods in shops

Customers who buy goods in shops make contracts to buy those goods. A display of goods in a shop window does not amount to an offer to sell the goods displayed. The display is ony an invitation to treat.

Acceptance

Offeree who receive the offer from the offeror menas he or she already accept the offer that has been made to him or her. Acceptance is simply some indication by the person receiving the offer that the offer is accepted. The acceptance must be clear and absolute and without conditions attached. The objective bystander must be able to determine that the offer has been accepted.

The acceptance must be made before the offer has expired. Most offers contain a time limit within which the offer can be accepted. Once the offer has expired, it can not be accepted unless the person making the offer has renewed it. If there is no time limit by which the offer must be accepted, then the law requires the offer be left open for acceptance for a reasonable period of time. What exactly is a reasonable period of time will depend upon the particular circumstances of each case. The offer must be accepted before it is withdrawn. An offer can be withdrawn before acceptance unless one of the terms of the offer is that it will remain open for acceptance until a specified time. On occasion, the circumstances of the dealings between the parties may be such that the law would impose a term on the parties to keep the offer open for acceptance for a reasonable period of time.

Acceptance of an offer to enter into a unilateral contract

Unilateral contracts are usually accepted by conduct. There is no acceptance until the relevant act has been completely performed. For an example – If Nadia says to Elaiza that she will give Elaiza RM30 if Elaiza cleaned her room, Elaiza woud not be entitled to the money until the job is finished, and could not do a half-way job and ask for RM 15.

Acceptance must be unconditional

An acceptance must accept the precise terms of an offer.

Offer and Acceptance made over the internet

As there have been no significant decisions by the courts as to when a contract is concluded over the internet. There are two main ways in which such contract might be formed. First, a contract could be made by exchange of emails. Second, a customer might visit a website and buy goods or services described there.

Temination of offers

As soon as an offer is accepted, a contract is created. However, an offer which has been made might cease to exist in many ways, and once an offer has ceased to exist, it can no longer be accepted. The terminations include:

Revocation – It is called off by the offeror

Refusal – Offeree refuses an offer then, as far as that offeree is concerned, the offer is terminated and cannot later be accepted.

Lapse of time – Offer will end when the time limit expires.

Intention to create Legal Relations

The acceptance of an offer will create a contract ony if the offeror and offeree appeared to intend to create a legally binding agreement. It is therefore said that it is a requirement of a contract that there must be an intention to create legal relations.

In deciding whether or not there was an intention to create legal relations, the court takes an objective view of the parties’ intentions. The court does not ask what the parties actually intended, but looks at what they appeared to the reasonable person to intend.

Agreements made in business or commercial context

If an agreement is made in a business or a commercial context, there is a presumption that the parties did intend to make a contract. As this is only presumption, it is not a cast-iron rule but only a starting point. It will therefore be up to the party who is claiming that there was no intention to create legal relations to introduce evidence to show that the presumption was not correct. It might be possible to do this, but if the presumption is not rebutted, then there will be a contract.

Agreements made in a social or domestic context

Social agreements are made between friends. Domestic agreements are made between the members of a family. When either a social or a domestic agreement or made, the courts begin with the presumption that the parties do not intend to make a contract. A part who claims that such an agreement is a contract, will need to introduce evidence to show that thisis what both parties appeared to intend. This may well be possible.

Consideration

Consideration is usually described as being something which represents either some benefit to the person makin a promise, [3] or some detriment to the person to whom the promise is made, [4] or both.

Promisor an Promisee

In Most contracts, two promises will be exchanged, so each party is both a promisor and a promisee. In a contract case, the claimant will often be arguing that the defendant has broken the promise made to the claimant, and therefore the claimant will usually be the promise, and the defendant will be the promisor.

Consideration need not benefit the promisor

Consideration need not benefit the promisor – so there can be consideration where the promisee suffers some detriment at the promisor’s request, but this gives no particular benefit to the promisor. Another way in which consideration can be given by the promisee without benefiting the promisor is where contracts are made for the benefit of third party.

Executory Consideration

Consideration is executory when there is an exchange of  promises to perform acts in the future. For example, A promises to deliver widgets to B at some future date and B promises to pay A for the widgets when he receives the shipment. If A does not deliver the widgets to B,  B can sue A for breach of contract.

Executed Consideration

When a promise is made in exchange for an act, when that act is performed, it is executed consideration. Using the example above, if A timely delivers the widgets to B, A’s consideration becomes executed.

Past Consideration [5]

Every contract requires an offer, acceptance, and consideration.  Consideration is the exchange of benefit and detriment (e.g., the making of a promise in exchange for an act).   If  a party voluntarily acts and then the other party makes a promise, the act is said to be “past consideration” (since the act was already performed and not made in  exchange for the promise).

For example, A gives B a ride to the market and  back home again.  When A delivers B to his house, B promises to give A some gas money.  A cannot sue B to enforce B’s promise since the consideration (A’s act of giving B a ride) occurred before B’s promise.  A gave B the ride without expecting anything in return.  (A did not give B a ride in exchange for B giving A gas money.)

Part B: Explain the factors that may make a contract voidable

Contracts which impose a continuing liability on a minor are avoidable by the minor. This means that the contracts are valid, except that the minor has the option to avoid the ontract or call the contract off. A minor who is to avoid these types of voidable contract must do so either before reaching the age of 18 or within a reasonable time of having reached the age of 18. The main types of contracts voidable by a minor are contracts of partnership, contracts to buy shares and contracts to take a lease of property.

There are several factors make cause a contract to be voidable [6] . Contracts are voidable when the consent of one of the parties to the contract is caused by:

Coercian (under section 15);

Fraud – unless it is fraud by silence under section 17 and the party on whom the fraud was perpetrated had the means of discovering the truth with ordinary diligence (s 17);

Misrepresentation – unless the party whose consent was caused by the misrepresentationhad the meansof discovering the truth with ordinary diligence (s 18);

Undue influence – Under section 16;

Both parties to the contract (promisor and promisee) intend that time should be of the essence of the contract and the contract was not performed in the specified time (s 56);

A party to the contract (promisor/promisee) refuses to perform or has disabled him/herself from performing his/her promise in its entirety (s 40).