Essay: Elements and Validity of Contract under Section 14 of Contracts Act 1950 (Malaysia)

Introduction
A contract is defined as ‘an agreement enforceable by law’ or ‘agreement which is legally binding between the parties an agreement which binds the parties concerned. To have an agreement, there must be an offer and an acceptance of that offer. According to the legislation in Malaysia, contract has been defined as what has been stipulated in the “Contract Act, 1950 (Act 136) (Revised 1974)”. But when there is no provision made or covered under the Contracts Act, or if a particular subject has been covered by the Contract Act but there are no provisions relating to the subject, in the other words is the subject is not exhaustive, English Law are applied by virtue of the “Civil Law Act”. If the Contract Act has any provision which differ from English Law, the provision of the Contract Act shall prevail. To have a contract, certain essential elements must be present which I will be discussing further in this essay. The contract must not of course be affected by circumstances which render the contracts unenforceable, voidable, void or illegal. The basic elements constituting a contract are agreement (offer, acceptance of the offer), intention to create legal relations, considerations, certainty, and capacity.
Elements of Contract
2.1 Offer
An offer is necessary for the formation of the contract. Section 2(a) of the Contracts Acts describes that :
‘when a person signifies to the other his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the Act or Abstinence, he is said to make a proposal’.
The first limb of Section 2(c) of the Contracts Act describes the person who is making the proposal as ‘Promisor’.
Under the Contracts Act, a proposal or offer is something which is capable of being converted into an agreement by the acceptance of the offer. A proposal must be a definite promise to be bound provided certain specified terms are accepted. The promisor must have declared his readiness to undertake an obligation upon certain terms, leaving the option of its acceptance or refusal to the offer. An offer to some definite class can only be accepted by that person. An offer to the world at large can be accepted by anyone. This can be illustrated by the famous case of Carlill v Carbolic Smoke Ball and Co.
The facts are as follows :
Carbolic Smoke Ball Co. Ltd. advertised that they would offer $1,000 to anyone who still succumbed to influenza after using a certain remedy for a fixed period. The plaintiff duly used it but nevertheless, contracted influenza. The plaintiff then sued for the money. The Court of Appeal held that the plaintiff was entitled to the $1,000 as she had accepted the offer made to the world at large. Whether an advertisement is an offer or an invitation to treat depends on the intention to treat depends on the intention of the parties in each case. The courts have held that advertisements of bilateral contracts are not offers whereas advertisements of unilateral contracts are construed to be offers.
2.2 Acceptance
Agreement comes into existence when an offer is accepted. The acceptance must be made while the offer is still in force, i.e, before it has lapsed, been revoked or rejected, acceptance is thus only possible if the offer is still in force. Once the acceptance is completed, the offer becomes irrevocable. Section 2 (b) Contracts Act provides that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to have been accepted. A proposal, when accepted, becomes a promise. The person who is accepting the proposal is the ‘promisee’. Section 9 of the said Act provides that so far as the acceptance of any promise is made in words, the acceptance is said to be expressed. If the acceptance is made other than in words, the acceptance is said to be implied. For a proposal to be converted into a promise, the acceptance of that proposal must be absolute and unqualified. If the parties are still negotiating, an agreement is not yet formed ( Lau Brothers @ Co. v. China Pacific Navigation Co.Ltd ). In this case, negotiations for delivery of logs were conducted through a series of telegrams and letters. Whilst still in the negotiating stage, the defendants withdrew. Was there a binding contract between the two parties? The court held that the parties were still in a state of negotiating and no agreement was formed. Therefore, the defendants were justified in withdrawing.
2.3 Intentions to Create Legal Relations
An agreement is not a binding contract unless the parties intend to create legal relations. If parties indicate that they do not wish their agreement to be binding on them, the law would respect their intention. Although the Contracts Act is silent on the intention to create legal relations as one of the requirements of a valid contract, case law clearly dictates the necessity of this requirement. There are, however, cases where no intention to enter into legal relations can be imputed.
Example of cases where the agreements merely represent family arrangements are such as (Choo Tiong Hin Ors v. Choo Hock Swee) and (Phiong Khon v. Chonh Chai Fah), and in cases where concessions were made in the course of business negotiations. In domestic arrangements there is a presumption against the existence of an intention to create legal relations whilst in commercial arrangements the rebuttable presumption is that legal relationships are intended (Esso Petroleum Co.Ltd v. Customs @ Exercise Commissioner). Generally, it is up to the courts to ascertain the intentions of the parties from the language used and the context in which they are used.
2.4 Consideration
When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. Under Malaysian law, consideration need not be adequate. Explanation 2 to Section 26 of the Contracts Act provides that an agreement is not void merely because the consideration is inadequate. Illustration ( Section 26 shows the application of the rule ‘A person agrees to sell a horse worth $1,000 for $10…The agreement is a contract not withstanding the inadequacy of the consideration. The issue of adequacy of consideration was dealt with by the federal court in Phang Swee Kim v. Beh I Hock. Under the Contracts Act, a party to an agreement can enforce the promise even if he himself has given no consideration as long as somebody has done so.
2.5 Certainty
The terms of an agreement cannot be vague but must be certain. An agreement which is uncertain or is not capable of being made certain is Void. For example, if Ali agrees to sell to Mary a hundred crates of toys without specifying what kind they are, such an agreement is void on the grounds of uncertainty. Similarly if Ali agrees to sell to Mary his house for RM300,000 or 400,000, such an agreement is also void. On the hand, if Ali is the dealer in plastic toy soldiers only and he agrees to sell ‘a hundred crates of toys‘, the type of toys dealt with by Ali indicates the meaning of the word ‘Toys’. Similarly, if Ali agrees to sell to Mary his house at a price to be fixed by his wife, there is no uncertainty as the price is capable of being made certain. In Karuppan Chetty v. Suah Thian, the requirement of certainty was not met when the parties agreed upon the granting of a lease at 35.00 per month for as long as he likes.
2.6 Capacity
The parties entering into a contract should also be competent to contract, i.e, they must have the legal capacity to do so. In Malaysia, the age of majority is eighteen years age of majority Act 1971. In Mohori Bibee V. Dharmodas Ghose, the privy Council had held that an infant cannot make any valid contracts. The general rule in Malaysia is that contracts made by infants are void. However, there are some exceptions to this rule.
These are the following :
Contracts for Necessaries
Contracts Of Scholarship
Contracts Of Insurance
There are a few categories of persons who do not have legal power to enter into any contract they are minors ,corporations, mentally disordered persons and drunkards.
Minors
Incapacity is imposed by law upon a minor not as a punishment, but to protect him from the consequences of his inexperience; A minor is a person below the age 21 years old.
Corporations
A corporation or a company is an illegal person. It is distinct from the individual persons who are shareholders of the corporation. It has a legal existence separate and distinct from the shareholders.
Mentally disordered and drunken persons
If a person, at the time of contracting, is suffering from a mental disability and is incapable of understanding the nature of the contract, the contract is voidable at his instance if he can prove that his disability was known to the other party.
According to section 2(g) of the Contracts Act,
”an agreement not enforceable by law is said to be void”.
This appears simple but actually it can be seen that this provisions merges all the common law categories which are mentioned later in the same Act. Traditionally, a contract which cannot be enforced is classified as void, voidable or un unenforceable. When agreement is void, it is null so that no rights of any kind can pass or be created under it. Instances of void contracts that have already been considered earlier are those without consideration or those too vague to be enforced. In addition, several statutes render certain types of contracts void. A voidable contract is an agreement which is valid unless and until it is set aside by one of the parties concerned. Hence rights and duties may arise under it and third parties may also acquire rights under such agreements unless they have been avoided earlier .
3. Factors and Effects Under Section 14 of Contracts Act 1950
Section 14 of Contracts Act 1950 states that:
“Consent is said to be free where it is not caused by one of the following: coercion, undue influence, fraud, misrepresentation, and mistake.”
3.1 Fraud
Fraud is defined in Section 17 of the Contracts Act to include certain acts which are committed with intent to induce another party to enter into a contract. Section 17 then lays down five different acts which may constitutes fraud. As a general rule, it may be stated that whatever a person causes another to act on a false representation which the maker himself does not believe to be true he is said to have committed a fraud. Fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party or to induce him to enter into a contract.
3.2 Misrepresentation
Section 18 of the Contracts Act defines the word ‘misrepresentation’. It reads as follows :
Misrepresentation includes;
The positive assertion, in a manner not warranted by the information of person making it, of that which is not true, though he believes it to be true;
Any breach of duty which, without an intent do deceive, gives an advantage to the person committing it, or anyone claiming under him.
Causing, however innocently a party to an agreement to make a mistake as to the substance of the thing which is the subject of agreement.
The basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in its truth whereas, in case of misrepresentation, he my believe the representation to be true. As in the case of fraud, silence in certain situations where there is a duty imposed to disclose, may amount to a misrepresentation ( Section 18(b) ).
3.3 Mistake
Section 21 of the Contracts Act which provides for cases where there mistake of facts reads,
“Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.”
The basis rendering agreements void under Section 21 is that there has been no free consent between the parties. For a mistake, to be operative Under Section 21, it must be a mistake essential to the agreement. Section 22 provides for the cases where there is mistake as to law. It reads, A contract is not voidable because it was caused by mistake as to any law in force in Malaysia has the same effect as a mistake of fact.
4. Summary
A contract is defined as ‘an agreement enforceable by law’ or ‘agreement which is legally binding between the parties an agreement which binds the parties concerned. To have an agreement, there must be an offer and an acceptance of that offer. According to the legislation in Malaysia, contract has been defined as what has been stipulated in the “Contract Act, 1950 (Act 136) (Revised 1974)”. The contract must not of course be affected by circumstances which render the contracts unenforceable, voidable, void or illegal. The basic elements constituting a contract are agreement (offer, acceptance of the offer), intention to create legal relations, considerations, certainty, and capacity. As of Factors and Effects Under Section 14 of Contracts Act 1950, it states that Consent is said to be free where it is not caused by one of the following : coercion, undue influence, fraud, misrepresentation, and mistake.