Malaysian Contract Law

In Malaysia, our contract law is basically governed and enforced by the Contract Act 1950. The remedy of specific performance presupposes the existence of a valid contract between the parties to the controversy. The terms of the contract must be definite and certain. This is significant because equity cannot be expected to enforce either an invalid contract or one that is so vague in its terms that equity cannot determine exactly what it must order each party to perform. It would be unjust for a court to compel the performance of a contract according to ambiguous terms interpreted by the court, since the court might erroneously order what the parties never intended or contemplated. Based on my understanding of the law of contract, as a general rule, performance of a contract must be exact and precise and should be accordance to with what the parties had promised. Section 38(1) of the Contracts Act 1950 provides that the parties to a contract must either perform or offer to perform their respective promises, unless such performance has been dispensed with by any law. In order to form a contract agreement that is enforceable by law, the following six elements must be fulfilled:

1. Proposal or offer
2. Acceptance
3. Consideration
4. Intention to create legal relations
5. Capacity to contract
6. Free consent

Proposal or offer

An offer can be oral or written as long as it is not required to be written by law. It is the definite expression or an overt action which begins the contract. It is simply what is offered to another for the return of that person’s promise to act. It cannot be ambiguous or unclear. It must be spelled out in terms that are specific and certain, such as the identity and nature of the object which is being offered and under what conditions and/ or terms it is offered.

Acceptance

As a general proposition of law, the acceptance of the offer made by one party by the other party is what creates the contract. This acceptance, as a general rule, cannot be withdrawn, nor can it vary the terms of the offer, or alter it, or modify it. To do so makes the acceptance a counter-offer. Though this proposition may vary from state to state, the general rule is that there are no conditional acceptances by law. In fact, by making a conditional acceptance, the offeree is rejecting the offer. However the offerer, at his choosing, by act or word which shows acceptance of the counter-offer, can be bound by the conditions tendered by the offeree. From the newspaper, Wang claimed that Ngan was interested in co-operating with her on a development project in Xi’an Quijiang, China, which she initiated and planned. Ngan made an offer to Wang to cooperate with her on the project. They signed an agreement on 26 February 2007. As a result of the signing agreement, Wang is presumed to accept the offer.

Consideration

Consideration for a contract may be money or may be another right, interest, or benefit, or it may be a detriment, loss or responsibility given up to someone else. Consideration is an absolutely necessary element of a contract. As a word of caution, it should be noted that consideration has to be expressly agreed upon by both parties to the contract or it must be expressly implied by the terms of the contract. A potential or accidental benefit or detriment alone would not be construed as valid consideration. The consideration must be explicit and sufficient to support the promise to do or not to do, whatever is applicable. However, it need not be of any particular monetary value. Mutual promises are adequate and valid consideration as to each party as long as they are binding. This rule applies to conditional promises as well. As additional clarification, the general rule is that a promise to act which you are already legally bound to do is not a sufficient consideration for a contract. The courts determine the application. Under the signed agreement, Ngan agreed to pay Wang RM13 million as remuneration and 25% shares in a company called CM Xi’an Qujiang Properties (M) Sdn Bhd. Wang will be appointed as deputy manager or director to manage the company. The action by Wang is a good consideration for the promise by Ngan.

Intention to create legal relations

It is a basic requirement to the formation of any contract, be it oral or written, that there has to be a mutual assent or a “meeting of the minds” of the parties on all proposed terms and essential elements of the contract. It has been held by the courts that there can be no contract unless all the parties involved intended to enter into one. This intent is determined by the outward actions or actual words of the parties and not just their secret intentions or desires. Therefore, mere negotiations to arrive at a mutual agreement or assent to a contract would not be considered an offer and acceptance even thought the parties agree on some of the terms which are being negotiated. Both parties must have intended to enter into the contract and one can not have been misled by the other. That is why fraud or certain mistakes can make a contract voidable. The agreement between Wang and Ngan is a business agreement. Therefore, the rebuttable presumption according to case laws as discussed above would suggest that Wang and Ngan are intended to be legally bound. Furthermore, no exclusion clause was mention on the agreement. The signed agreement confirms that both parties intention to be legally bound.

Capacity to contract

The general presumption of the law is that all people have a capacity to contract. A person who is trying to avoid a contract would have to plead his or her lack of capacity to contract against the party who is trying to enforce the contract. Section 11 of the Contracts Act 1950 provides 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”. It means that the person who enters into the contract must have the full capacity in terms of age and mind. The age of majority in Malaysia is 18 years old.

Both Wang and Ngan were older than 18 years old when they enter into the contract. Section 12 (1) of the Contract Act 1950 provides that “A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.” As a result, the agreement is valid.

Free consent

A contract is not enforceable if its object is considered to be illegal or against public policy. In many jurisdictions contracts predicated upon lotteries, dog races, horse races, or other forms of gambling would be considered illegal contracts. When entering into agreement, the parties must be free consent to contract. The free consent as provided in Section 10(1) “All agreements are contracts if they are made by the free consent of parties competent to contract…” Under Section 14, consent must be free and not caused by

1. coercion, as defined in section 15;
2. undue influence, as defined in section 16;
3. fraud, as defined in section 17;
4. misrepresentation, as defined in section 18; or
5. mistake, subject to sections 21, 22 and 23.

Coercion is described in Section 15 of the Contracts Act 1950 as the “the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement”. Undue influence in Section 16 of Contract Act 1950 is said to exist when “the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”. Section 17 of the Contracts Act 1950 explains that fraud refers to acts committed by a party to a contract with the intent to deceive the other contracting party. Misrepresentation would refer to untrue made by a representor and that induce the other to enter into a contract. Mistake under the Contract Act 1950 includes a mistake as to a matter of fact (by one or both parties) and mistake as to any law in force or not in force in Malaysia.The agreement made between Wang and Ngan did not consist of coercion, under influence, fraud, misrepresentation and mistake. So, both parties entered into the contract on their own free will and free of consent.The terms and conditions on the agreement must be clear and certain because an uncertain agreement is voidable. Also, the business that Wang and Ngan are doing does not involve illegal activity. Since all the elements above are present in the dealing

between Wang and Ngan, the formation of the signed contract on Feb 26, 2007 is valid.In this case, Tan Sri Ngan did not perform his promises as stated in the agreement signed by both Ngan and Wang. Therefore, Wang appointed a lawyer to sue Ngan for the breach of contracts and seek for the compensation as promised in the agreement of RM13mil and other losses. This case is similar with the case of:

LIM YOH v. ASTANA STRATEGI (M) SDN. BHD. & ANOR[1998] 3 M.L.J 117, High Court.

The plaintiff was one of the 37 co-proprietors of all that piece of land known as Lot 579 held under Grant No. 2958 (now Geran No. 16359), Mukim Ayer Panas, Daerah Jasin, Malacca. By a sale and purchase agreement dated 20 January 1996 (‘the agreement’) she agreed to sell her 11742/335540 undivided shares therein to the first defendant for a sum of RM245,407.80. Clause 19 of the agreement provides that:

Time whenever mentioned shall in all respects be of the essence of the contract.

Upon execution of the agreement the first defendant paid the plaintiff a deposit of RM24,540.78. With regard to payment of the balance the second schedule to the agreement provides that:

The balance of the purchase price of Ringgit Malaysia TWO HUNDRED

Section 38(1) of the Act provides that the parties to a contract must either perform, or offer to perform, their respective promises, unless the performance is dispensed with or excused under the Act, or of any other law. Section 56 of the Act regulates the position when time is of the essence of a contract. It reads as follows:

56.(1) When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.

(2) if it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do the thing at or before the specified time, but the promisee is entitled to compensation from the promisor for any loss occasioned to him by the failure.

(3) if, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed the promisee accepts performance of the promise at any time other than that agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of the acceptance, he gives notice to the promisor of his intention to do so. These provisions of our law are akin to the distinction in English law between a condition the breach of which entitles the other party to treat himself as discharged from liability under the contract and a warranty which merely gives him a right to damages.

B. Explain the possible remedies that Wang may claim.

Damages is the basic remedy available for a breach of contract. It is a common law remedy that can be claimed as of right by the innocent party. The object of damages is usually to put the injured party into the same financial position he would have been in had the contract been properly performed. Sometimes damages are not an adequate remedy and this is where the equitable remedies (such as specific performance and injunction) may be awarded.

There are five remedies for breach of contract that possible for Wang to claim:

1. Rescission of contract
2. Damages
3. Specific Performance
4. Injunction
5. Quantum Meruit

Rescission of contract

Under section 40 of contract law, rescission is said “when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract unless he has signified, by words or conduct, his acquiescence in its continuance”. Any non performance contract of either party will entitle the other party to rescind the contract. For example in the case of :

Travelsight (M) Sdn Bhd & Anor v Atlas Corp Sdn Bhd [2003] 6 MLJ 658

Pursuant to a sale and purchase agreement dated 15 March 1996, the first plaintiff agreed to purchase from the defendant a piece of property known as suite no: 1202, Tower No: B, Wisma Pantai, Kuala Lumpur (hereinafter referred to as the said “property”) for the purchase price of RM816,696 subject to the terms and conditions as contained in the sale and purchase agreement (hereinafter referred to as the said “agreement”). Credit facilities were extended by the second plaintiff – RHB Bank Berhad, to the first defendant and so, pursuant to a loan agreement cum deed of assignment dated 6 December 1996 the first plaintiff had assigned all its rights to the said agreement to the second plaintiff absolutely.

Damages

Section 74 of Contract Act 1950 ,an innocent party may claim damages from the party in breach in respect of all breaches of contract. The damages may be nominal or substantial. Nominal damages are awarded where the innocent party has suffered no loss as a result of the other’s breach and substantial damages are awarded as monetary compensation for loss suffered as a result of the other party’s breach.For an innocent party to obtain substantial damages he must show that he has suffered loss as a result of the breach (remoteness) and the amount of his loss (measure). It is up to the party in breach to argue that the innocent party has failed to mitigate his loss. This is an equitable remedy granted at the court’s discretion.

Specific performance

Specific performance is a discretionary remedy granted by the court, and it is under the Specific Relief Act 1950. It is a decree by the court to compel a party to perform his contractual obligations. It is usually only ordered where damages are not an adequate remedy It is a general rule that specific performance will not be ordered if the contract requires performance or constant supervision over a period of time and the obligations in the contract are not clearly defined. Specific performance is often ordered in relation to building contracts because the contract deals with results rather than the carrying on of an activity over a period of time and it usually defines the work to be completed with certainty

Injunction

Injunction is classified under Part III of the Specific Relief Act 1950 as ‘Preventive Relief’. It is an equitable remedy and therefore only granted at the discretion of the court. It is awarded in circumstances where damages would not be an adequate remedy to compensate the claimant because the claimant needs to restrain the defendant from starting or continuing a breach of a negative contractual undertaking (prohibitory injunction) or needs to compel performance of a positive contractual obligation (mandatory injunction). In exercising its discretion the court will consider the same factors as above for specific performance and will use the balance of convenience test (weighing the benefit to the injured party and the detriment to the other party). An injunction will not be granted if its effect would be to compel a party to do something which he could not have been ordered to do by a decree of specific performance.

Quasi-Meruit

It creates obligations at common law, distinct from obligations under a contract. It is an area of law in its own right.Quasi-contractual remedies are sometimes available either as an alternative to a remedy for breach of contract or where there is no remedy for breach of contract. For example in the case of :

Constain Civil Engineering Ltd vs Zanen Dredging & Contracting Co (1997) 85 BLR 77

The instructions given did not constitute authorized variations of the subcontract works because they required work to be done outside the scope of the subcontract entitling the Subcontractor to payment on aquantum meruit basis.

Describe the types of damages that Wang may claim from Ngan.

In this case, the remedy for the breach of contract is damages. RM13mil is the damages or compensation that required by the 49 year old businesswoman from China. She required the Malaysian business tycoon to pay her RM13mil for her efforts in a development project in Xi’an Qujiang, China. The usual remedy for breach of contract is an award of damages. The claim for damages of contract breach is given under Sections 74 to 76 of Contract Act 1950. There are three types of damages that the claimant can claim which are as below:

• Compensation for loss or damages caused by breach of contract
• Compensation for failure to discharge obligations resembling those created by the contract
• Compensation for breach of contract where penalty is stipulated for

Based on the above information, the claimant may recover damages for other expenses incurred as the result of the breach of contract. They might claim for loss of profit as in the case of :

Lee Hin v. Mohamed Abubakar [1958] MLJ 25.

The lose which arises naturally resulting from the breach by the defendant

The claimant can claim for special damages such as the difference between the prices of goods as contracted as in the case of: East Asiatic Co. Ltd v. Othman [1966] 2 MLJ 38. As the result of breach of contract by Ngan, Wang can claim up to RM13 million of the remuneration and the 25% shares in CM Xian Qujiang Properties Sdn Bhd. In the mean time, Wang can claim for the loss of salary and income due to Ngan failed to appoint her as the deputy manager or director in the company. The salary income loss is measureable and it is direct loss to Wang. So, it is claimable. Lastly, Wang can claim up to RM1 mil as in the agreement when Ngan fail to meet the terms of the contract.

If the project that they planned to undertake is detrimental to the Malaysian economy (for instance producing materials that will compete with the Malaysian products), do you think that such a contract is enforceable under the law? Give reasons to your answer. [5 marks]

Contract Act 1950 section 2(g) provides that “An agreement not enforceable by law is said to be void”. A contract will be considered as unlawful and void if it consists of any one of the following criteria:

• It is forbidden by law
• Defeats the provision of any law
• Is fraudulent
• Implies injury to person or property of others
• Is regarded as immoral or opposed to public policy

Under the Contract Act 1950 section 24(e) “Any contract which its consideration or object is regarded as immoral or opposed to public policy is void under the law”. Section 24 illustration (k) shows an example of Immoral Contract. Section 24 illustration (f) shows an example of against public policy. A contract involve in illegal business is unenforceable by law as in section 24(a). Moreover, an agreement that will hurt other people or properties will be considered void too.

For this case, for instance producing materials that will compete with the Malaysian products, the contract will be held as legal and is enforceable by law provided that the producing material does not involve in any of the above criteria. The contract is enforceable by law as long as the producing materials are legal, does not hurt others, and not against the public policy. For Example in the case of :

The Aspinall Curzon Ltd v Khoo Teng Hock [1991] 2 MLJ 484

In each of the above cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

Discuss the possible defences that Ngan may put forward in the above suit.

Ngan may use the defense that the contract is terminated or discharge before the expiry. When a contract is discharged, the parties are no longer bound by it and are free from further obligations.As long as Ngan can provide valid reason for discharge of contract, he is free from further obligation. For this case, the defense that Ngan can put forth against the claim by Wang is by using Section 40 of the Contract Act 1950. “When a 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”. Ngan need to prove that Wang did not perform up to the standard as per the contract agreement, or the successful of getting approval from Xian Qujiang authorities is Ngan sole’s effort. Wang failed to perform her duty and therefore resulting in a breach of contract. Then, Wang’s claim of RM13mil remuneration and the RM1 mil of compensation are not valid.For example in the case of :

Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149

This case raised the question of what is known as a performance bond in relation to an interlocutory injunction to prevent a call or demand on such performance bond

Ngan may use the discharge by impossibility as the defense to put forward the suit too. Section 57(2) of Contract Act 1950 said that “A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. An impossible action can occur during the term of the contract after the contract is made and the contract is void at the point the action becomes impossible. CM Xian Qujing Properties (M) Sdn. Bhd might be closed down after the contract. As a result, Ngan could not provide 25% of the share in this company as per the discharge by impossibility clause.

Assuming the project that Wang and Ngan planned is materialized, discuss the relationship between the two of them and their rights and obligations under the law of partnership. [10 marks]

If the project that Wang and Ngan planned is materialized, the relationship between the two of them will further enhance as partnership, and it is governed by Partnership Act 1961 as long as their business does not include clubs, societies mutual benefit organization and building societies. Partnership Act 1961 defines partnership as “the relation which subsists between persons carrying on a business in common view of profit.”In partnership, usually there is an agreement to be made by the parties which lay down certain terms and conditions relating to the partnership business, and duties and responsibilities of the partner involved. It will also outline the right and other terms relating to business management, division of capital and profits of each partner. If the partners did not provide the terms of partnership in their partnership agreement, the parties could refer to the Partnership Act 1961 section 21 to 33.

Partnership Act 1961 section 26 said that all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm. The partners will bear the losses together, adopt profit sharing policy. Section 26(b) said that every partner who made any payment and incurred personal liabilities in the course of the firm’s business is entitled to be indemnified by the firm. a partner making, for the purposes of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of eight per cent per annum from the date of the payment or advance. However, as a partner, Wang and Ngan is no entitle to interest on capital before the ascertainment of profits. As stated in Section 26(e) of Partnership Act 1961, every partner may take part in the management of the partnership business, which means Wang and Ngan have equal responsibilities in managing their company. According to the Partnership Act 1961, no partner is entitled to remuneration for acting in the partnership business. If any one of Wang or Ngan would like to introduce a new partner into their business, he or she shall get the consent of the other partner. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. The accounting and financial books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business.

As a business partner, Wang and Ngan must be honest to each other because the partnership relationship is based on the principle of uberrimae fidei (utmost good faith). Under section 30 of Partnership Act 1961, “Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives”. In the case of :

Law v. Law (1904) All ER 526,

the court held that the partner who had the information must disclose it. Every partner must account to the firm for any benefit derived by him, without the consent of the other partners, from any transaction concerning the partnership or from any use by him of the partnership property, name, or business connection.

As a partner each of them must account to the company for any secret profit or benefit derived by him. Lastly, Wang or Ngan could not operate another business which will direct compete with their current business or in the same business nature.

Assuming the project between Wang and Ngan is carried out as planned, discuss the extent of liability of Ngan as a partner to Wang if she has involved in corruption in order to get their development project approved by the authority in China.

Assuming that Wang and Ngan are partners and it will be governed by Partnership Act 1961. As per section 12 of the Partnership Act 1961, “Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act”. If Wang was involved in the corruption case in China in order to get the development project approval, the partnership company between Wang and Ngan will be held liable for Wang’s act similar to the case of Hamlyn v. Houston & Co [1903] 2 KB 82. The reason is that the approval of the development project will be an advantage for the partnership business. Furthermore, if the court can prove that the corruption or bribe money is from the partnership company, then both Wang and Ngan will be held for corruption.

Do you consider Wang as an agent to Ngan in China? Discuss.

I will consider Wang as an agent to Ngan in China. Ngan, a Malaysian, will need a local people to help and assistance to act on his behalf or become his proxy to perform certain act in China. In this case, Ngan may appoint Wang as an agent to deal with the local government or as a real estate agent to purchase a land in China. As a result, their agreement is governed by the Contract Act 1950 section 135. It said that an “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”. Ngan as the principal could employ Wang as an agent to deal with the Chinese local government. Wang, as an agent, must obey the principal’s instruction. If there is no instruction from the principal, Wang shall act according to the customs prevail. In return, Ngan as a principal shall pay Wang commission or other remuneration unless the agency relationship is gratuitous.For example in the case of:

Pernas Trading. Sdn Bhd v Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124

In this case the appellants sued the respondents for a sum of $22,997.76 being the balance of the price of chemicals and fertilisers sold and delivered by the appellants to the respondents. In their defence, the respondents denied liability and went on to claim that it was made known to the appellants at the time of the order that the ultimate buyer was Syahazam Sdn Bhd; in other words the defendants claimed that in the purchase of these goods they were agents for Syahazam Sdn Bhd.