What Is Law, Consideration and the Principle of a Contract

Learning Outcomes:

-To show an understanding of what constitutes a consideration.

– To be able to identify the factors affecting the court’s decision in the findings of ‘consideration’ in relation to performance of an existing duty.

– Be able to give reasons for your approach.

2. What are the general principles in the formation of a contract? What are the various forms of remedies available for a breach of contract? Give examples with cases.

1.0 INTRODUCTION

What is law? In general knowledge, law is a rule and regulation. And it is usually made by a government that is used to order the way in which a society behaves, or the whole system of such rules. There are different kinds of rules within the world, including Contract law, Criminal law, Civil law, Property law, Tort law and others. Law is always affects politics, economics and society in numerous ways and different country apply different kind of law. For the characteristics of a ‘good’ law, it must be universal, accepted, enforceable and consistent. It is very important to a country to has their set of law, because law can govern the behavior of the citizen in society.

The law of contract is one of the laws around the world. It always is apply by the people every day. We can defined the word ‘contract’ as ‘an agreement enforceable by law, which is an agreement legally binding between the parties’. In Malaysia, the law that governs contract law is calling Contract Act 1950 and Malaysia Contract Act is from India.

1.1 Consideration

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 consideration is an agreement by which both parties exchange mutual promise that 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.

Under common law, there can be no binding contract without consideration, which was defined in an 1875 English decision as “some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”.

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 not required in contracts made in civil law systems and many common law states have adopted laws which remove consideration as a prerequisite of a valid contract.

Consideration maybe executory where a promise is given for a promise or it may be executed where an act or forbearance is given for a promise. For example, if the customer pays upon booking or ordering, it called executed consideration. If the customers pays the contract price at a little date agreed by both parties it is called executor consideration. Consideration must be provide ( given) by the offeree (promisee) but need not moved to the promisor. Where the act put forward by a party to a contract as consideration has perform before any promise of payment was made by the other promise that can be regarded as past consideration and its effect no consideration at all.

Although consideration is essential for the formation of a contract the doctrim of promissory equitable esstopped seems to allow a possible exception. At English common law, if party A owe person B, RM10 and wish discharge his death by paying B RM9. A must obtained the agreement of B and A must provide B with some consideration for giving up his right to the full payment of RM10. (unless the release is under seal). Therefore, the payment of the lesser sum is satisfaction of a greater sum on the day the dept is due is not considered as satisfaction of the whole sum. This is the rule from Pinnel’s case that was reaffirmed in the case of Fookes & Beer (1884).

1.2 Performance Existing Duty In Commercial

Where a promisor makes a promise and the promisee in return agrees to perform an existing legal (public or contractual) duty, the promisee’s agreed return may be good consideration (and the promisor’s promise will thus be binding) if the promisee agrees to do something more than the existing duty, by taking on additional risks or obligations, or by varying the nature of the obligation (Glasbrook Brothers v Glamorgan County Council [1925] AC 270).

In the case (Glasbrook Brothers v Glamorgan County Council [1925] AC 270), is a colliery requested police protection during a strike, in the form of a body of officers quartered on the premises. The police only had the resources to make visiting patrols, but offered to place constables at the site for a financial contribution. After the strike the police presented the Colliery with a bill for services rendered, which the colliery refused to pay. It was held that although performing a statutory duty could not be sufficient consideration to support an agreement, the action of the police was beyond statutory requirements, and payment could be claimed.

There was consideration that an act done prior to a promise can be good consideration in some cases; in particular, it will be good consideration if the act done was done at the promisor’s request, the parties understood that the act would be remunerated in some way and, if the promise had been given in advance of the act it would be legally enforceable.  In this case all three elements were present.  In particular, the defendant had requested that Pao On retain 60% of shares and the parties understood at that time that that act would be compensated by the provision of a guarantee. (Pao On v Lau Yiu Long[1979]3WLR435).

Pao On v Lau Yiu Long[1979] state that Pao On agreed to sell shares to Fu Chip (controlled by Long) in consideration for certain shares.  To protect the share value, Pao On and Fu Chip agreed that pao On would retain 60% of the acquired shares until April 1974.  However, in April 1973, Pao On refused to proceed with the contract unless Long agreed to indemnify him against the value of the retained shares falling below a set level.  Long agreed, but only to ensure public confidence in the company.  The sale proceeded an Pao On sought to enforce the indemnity.

1.3 Performance Existing Duty In Domestic

A person who makes an offer may decline to require notice of acceptance if he or she wishes. One who makes an offer dispenses with the requirement of notice of acceptance if the form of the offer shows that notice of acceptance is not required. To accept an offer, a person need only follow the indicated method of acceptance. If the offeror either expressly or impliedly intimates in his offer that it will be sufficient to act without giving notice of acceptance, performance is sufficient acceptance without notification. Refer to the case [Carlill v. Carbolic Smoke Ball Co. [1893] Q.B. 256 (C.A.)].

Carlill v. Carbolic Smoke Ball Co. [1893] state that Carbolic Smoke Ball Co. (D) manufactured and sold The Carbolic Smoke Ball. The company placed ads in various newspapers offering a reward of 100 pounds to any person who used the smoke ball three times per day as directed and contracted influenza, colds, or any other disease. After seeing the ad Carlill (P) purchased a ball and used it as directed. Carlill contracted influenza and made a claim for the reward. Carbolic Smoke Ball refused to pay and Carlill sued for damages arising from breach of contract. Judgment for 100 pounds was entered for Carlill and Carbolic Smoke Ball appealed.

Contracts related to the social aspect of marriage will not be enforced by the courts. Contracts between spouses related to business relationships can be enforced. Courts are willing to support negotiated divorce settlements and written statements of support. Agreements between husband and wife over matters that affect their daily lives are not subject to contractual interpretation, even when consideration is present. Spouses normally intend that the terms of their agreements can be varied as situations develop. See the case of [Balfour v. Balfour, 2 K.B. 571 (1919)]

Balfour v. Balfour, 2 K.B. 571 (1919) states that Mr. Balfour and Mrs. Balfour were lived in Ceylon and visited England on a vacation. Mrs. Balfour remained in England for medical treatment and Mr. Balfour agreed to send her a specific amount of money each month until she could return. Mr. Balfour later asked to remain separated and Mrs. Balfour sued for restitution of her conjugal rights and for alimony equal to the amount her husband had agreed to send.

Mrs. Balfour obtained a decree nisi and five months later was granted an order for alimony. The lower court entered judgment in favor of Mrs. Balfour and held that Mr. Balfour’s promise to send money was enforceable. The court held that Mrs. Balfour’s consent was sufficient consideration to render the contract enforceable and Mr. Balfour appealed.

1.4 Conclusion

In my point of view, I agreed that performance of an existing duty should not constitute consideration. Existing duty, does it amount to consideration? Consideration is a benefit to the promisor, a detriment to the promisee or both. Consideration existed when there was some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other 1. Both parties must agree for there to be a contract. Existing duty is where a promisee is already bound to perform an existing legal duty. To go above and beyond that which they are already contracted is consideration.

2.1 Principal of formation contract

Intention to create legal relationship

Offer Acceptance

Consideration

Principal of formation contract discusses the factors that are vital to the formation of a valid contract in legal terminology, offer, acceptance, consideration, and the intention to create a legal relationship. The law of contract is of enormous complexity. Contract pervades the professional life of the artist. Leasing a work space, buying turps at the local hardware shop, insuring works, getting the tradesman around the corner to do some frames, selling a piece to a studio visitor, having an exhibition of works, all involve the creation of a contractual relationship, the formulation of contractual rights and responsibilities and the possibility of legal recourse if those mutual expectations are not fulfilled.

2.1.1 Offer

An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed.

There must be an offer and that the offer must be accepted but it is the very root of any bargain. Because it is the basis of the transaction, an offer must be in reasonable detail, it must be clear just what is being offered and on what terms.

Offer is an agreement between 2 or more parties. There is an expression of willingness to enter into a contract made with a legal intention that it shall be binding and it is legally enforced by law.

There is two type of offer which are Unilateral and bilateral.

–Bilateral

A bilateral contract is an agreement in which both parties make a promise or promises to the other party. For example A offers to sell his house to B for RM250000 . B accepts the offer by promising to pay A.

–Unilateral

In a unilateral contract, only one party to the contract makes a promise and the offeree accepts the offer by performing a certain act. The offer can be made to one party or to the world at large through an advertisement. The offer is accepted once the act is performed. Only one person makes the promise. There is no obligation for the other party to make any promise. For the example, A promises to pay a reward to B if B finds A’s dog. In this situation there can be only B can perform the act and once that act is performed A is obliged to pay the reward. The finding of the dog is a condition precedent to the reward which means you get the money after the dog is found. See the case of [Carlill v Carbolic Smoke Ball Company [1893] QC].

Carlill v Carbolic Smoke Ball Company [1893] QC

The Carbolic Smoke Ball Company made a product called a smoke ball that it claimed could protect the user from getting influenza (flu). The Company published advertisements claiming that it would pay £100 to anyone who still got sick with influenza after using its product. The company even deposited £1000 with the Bank, to show their genuine intention in the matter.

Mrs Carlill bought one of the balls and used it in the manner specified, yet still managed to get influenza. When she asked for the reward the Carbolic Company claimed that there was no enforceable contract between it and the user of the smoke ball on the grounds that there was no acceptance of the offer, because Mrs Carlill had never notified the Company that she accepted its offer, nor furnished any consideration.

2.1.2 Invitation to treat (ITT)

Invitation to treat is not an offer. It is willingness to negotiate a contract. If the negotiations are successful then it becomes an offer hence an agreement enforceable by law. Refer to the case [Harvey v. Facey, [1893] A.C. 552.]

Harvey v. Facey, [1893] A.C. 552.

Facey was in negotiations with the Mayor and Council of Kingston regarding the sale of his store. Harvey sent Facey a telegram stating: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer paid.” On the same day, Facey sent Harvey a reply by telegram stating: “Lowest price for Bumper Hall Pen £900.” Harvey sent Facey another telegram agreeing to purchase the property at the asking price. Facey refused to sell and Harvey sued for specific performance and an injunction to prevent Kingston from taking the property. The trial court dismissed on the grounds that an enforceable contract had not been formed and Harvey appealed. The Supreme Court of Jamaica reversed and Facey appealed.

2.1.3 Acceptance

Acceptance is a final and unqualified expression of assent to the terms of an offer. Acceptance validates the contract, it gives it life. It is at that moment that a contract exists; that there is consensus ad idem (assuming a valid offer and consideration). It also must be clear, unequivocal, and unconditional and made by the person to whom the offer is intended. See the case of [Livingstone v. Evans (1925)] .

Livingstone v. Evans (1925)

The defendant’s agent wrote to the plaintiff and offered to sell some land.  The plaintiff wired the defendant’s agent and said he’d take it at a lower price.  The defendant’s agent wired back and said he couldn’t lower the price.  At the same time, the defendant sold the land to someone else.  Then the plaintiff wired to accept the offer, but to no avail.  The plaintiff sued for specific performance. The court says that if the defendant’s agent hadn’t sent the message about not being able to lower the price, there would be no questioning that there was no contract because the counteroffer was a rejection of the original offer.  However, the court finds (narrowly) that the message from the defendant’s agent was not merely a rejection of the counteroffer but also a renewal of the original offer.  In that case, as far as the plaintiff knew, the offer was still open when he accepted at the original price.  The court thus finds that a binding contract was formed.

2.2 Breach of Contract

Breach of contract can be defined as a party to a contract fails to perform precisely and exactly, his obligations under the contract. Breach of contract may be either actual or anticipatory.

Actual breach occurs where one party refuses to form his side of the bargain on the due date or performs incompletely. See the case of Poussard &Spiers V Pond.

Poussard &Spiers V Pond

An actress was employed to play the leading part in a French operetta as from the beginning of its run. She was unable to take her role until a week after the season had started.The producers who had engaged a substitute refused her services.

Anticipatory breach occurs where one party announces, in advance of the due date for performance, that he intends not to perform his side of the bargain. The innocent party may sue for damages immediately the breach is announced. See the case of Hochster v De La Tour Queen’s Bench [1853].

Hochster v De La Tour Queen’s Bench [1853]

Defendant entered into an agreement where defendant would engage plaintiff as a courier under defendant’s  employ to commence on a future date, where they would travel into a foreign country in that capacity on that day, for a monthly salary for a term of three months.  Prior to the date of departure the defendant renounced the agreement.

2.3 Remedies of Breach Contract

There are several types of remedies. First, the major remedy available at common law for breach of contract is an award of damages. This is a monetary sum fixed by the court to compensate the injured party.

In order to recover substantial damages the innocent party must show that he has suffered actual loss; if there is no actual loss he will only be entitled to nominal damages in recognition of the fact that he has a valid cause of action. See the case of [Victoria Laundry (Windsor) Ltd V Newman Industries Ltd (1949) 2 KB 428]

Victoria Laundry (Windsor) Ltd V Newman Industries Ltd (1949) 2 KB 428This case involved the late delivery of a boiler to the plaintiffs who were dyers. The dyers claimed loss of profits arising in the ordinary course of business, and loss of exceptional profits on especially advantageous government contracts.

It was held that the ordinary loss of profits fell within the first head and was recoverable. The exceptional profits on government contracts fell within the second head and were not recoverable as the defendant had no knowledge that the boiler was required to fulfill unusually profitable contracts. 

Second, liquidated damages clauses is a damages of a certain amount or calculable at a certain rate will be payable, the courts will normally accept the relevant figure as a measure of damages. See the case of [Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd.]

Third, specific performance is an order of the court requiring performance of a positive contractual obligation. An injunction is an order of the court requiring a person to perform a negative obligation. specific performance it is an equitable remedy and the court exercises its discretion according to the same principles as with specific performance, see also the case of [Walter V Morgan (1861)].

[Walter V Morgan (1861)]

The defendant agreed to grant the plaintiff a mining lease over land he had just bought. Specific performance was refused as the plaintiff had produced a draft lease and induced the defendant to sign the agreement in ignorance of the value of the property. The plaintiff had hurried the defendant into signing the lease before he knew the value of the property.

2.4 CONCLUSION

In overall the assignment, I opinion that rule of law is law that a dead end in itself. Under the rule of law, a system of strong, independent courts should have the power and authority, resources, and the status to hold government officials, even top leaders, responsible to the nation’s laws and set of laws. For this reason, judges should be well trained, professional, independent, and fair. To serve their necessary role in the legal and political system, judges must be committed to the principles of democracy.

Finally, I would like to say thank you to my Introduction to Law’s lectures, Mr. Harry, who give me a lot of information about the assignment. Besides that, I want appreciate to all my friends and family members who give me the important information and moral supporting.