Hospitality Law PDF - Formation of Contract

2 CONTRACT I: FORMATION OF CONTRACT  LEARNING OUTCOMES After studying this chapter, you should be able to: q Identify the elements of a basic contract. q Analyse a reservation or booking in terms of formation of contract. q Identify some measures that hosp...

2 CONTRACT I: FORMATION OF CONTRACT  LEARNING OUTCOMES After studying this chapter, you should be able to: q Identify the elements of a basic contract. q Analyse a reservation or booking in terms of formation of contract. q Identify some measures that hospitality businesses adopt in order to avoid problems concerning formation of contract. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–3  INTRODUCTION q A contract is an agreement between two or more parties that is legally enforceable. q Legally enforceable: when one party fails to perform his side of the contract, the other party can bring an action in court. q Breach of contract: when one party fails to perform his side of the contract. q A contract need not be in writing. It can be concluded orally (through exchange of words). q A contract can sometimes be inferred from the parties’ conduct (behaviour). Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–4  ELEMENTS OF A CONTRACT Figure 2.1 Elements of a contract Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–5  1. OFFER q In Malaysia, an offer is known as a ‘proposal’, which is defined in section 2(a) of the Contract Act 1950 as: 1. An expression of willingness to contract on specified terms (i.e. a person’s willingness to do something or abstain from doing something) 2. With the intention that it is to be binding once accepted (i.e. There must be an intention by the person making an offer to be bound by the offer if accepted by the other party.) q An offer can be made orally, in writing or by conduct. q Offeror: a person who makes an offer. q Offeree: a person to whom an offer is made (has the power to either accept/reject an offer). q There are two types of offer: 1. Unilateral offer 2. Bilateral offer Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–6  OFFER (cont.) Distinction between Bilateral & Unilateral Offer Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–7  OFFER (cont.) Requirements of an Offer/Proposal/Promise q There must be a genuine intention by the offeror to enter into a bargain & be contractually bound. q An offer must be clear and definite. e.g. A offers to sell B his CD player for $50. q The offer must be communicated to the offeree v section 3 of the Contracts Act 1950. v Section 4(1) of the Contracts Act 1950 states that communication of an offer is complete as soon as it comes to the knowledge of the offeree. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–8  OFFER (cont.) Offer Distinguished q An offer must be distinguished from the following which are not offers: - An invitation to treat (an invitation to another person to make an offer). - Request for information (if you require some extra information about a deal, this is not an offer). - Supply of information (if you simply supply information, this is not an offer); Harvey v Facey Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–9  OFFER (cont.) Examples of Invitation to Treat (ITT) Display of goods q The display of goods in a shop/self-service shop is an invitation to treat. q The customer makes the offer to the cashier by presenting the goods at the cashier. q The cashier accepts the offer by scanning the goods and requesting payment. Reasons why a display of goods is an invitation to treat: q The shop may have a limited stock of the item, therefore if the display of goods was an offer & if two individuals saw the ‘offer’ at the same time and there was only one available item, the shopkeeper would be in breach of contract to one of the individuals. Ø Fisher v Bell Ø Pharmaceutical Society of Great Britain v Boots Cash Chemists Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–10  OFFER (cont.) Examples of Invitation to Treat (ITT) Advertisements q As a general rule, an advertisement is an invitation to treat. Reasons why an advertisement is an invitation to treat: q If an advertisement is considered an offer, theoretically, an unlimited number of people could accept that offer, which causes obvious problems when the advertisement is for a limited amount of goods, as the seller would be in breach of contract to each individual whom they could not provide goods for. q Partridge v Crittenden However, in some instances an advert can amount to an offer: q An example of this would be where an individual puts a poster up, offering money to anybody who finds his lost dog. This is an example of a unilateral contract where the offeror makes a promise in exchange for an act by any offeree. q A practical example of this is seen in Carlill v Carbolic Smoke Ball Co Ltd Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–11  OFFER (cont.) Where an advert can amount to an offer q In the Carlill case an advertisement promised a £100 reward to anybody who contracted influenza after using the Carbolic Smoke Ball in a certain way over a fixed period of time. This is a unilateral contract as there is only obligations for one of the parties – i.e anybody could choose to use the smoke ball, but they didn’t have to, but the seller had to pay the £100 if anybody met the requirements. q The defendant had deposited £1,000 with a bank for the purpose of paying these £100 rewards. Therefore, the court decided that as the terms were certain, and there was a clear display of intent displayed via the deposit of £1,000 for the reward payments, the advertisement should be construed as an offer. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–12  OFFER (cont.) Further Examples of Invitations to Treat (ITT) Tenders q A tender is where an individual seeks specific goods or services and advertises their need for them. This is construed as an invitation to treat, and any response to the tender will be an offer. Automated machines q If an automatic vending machine or an automatic ticket machine at a carpark was an ITT, then inserting the coin or card would be the offer & if the coin or card was not accepted because the machine was either empty or out of order, then there would be no legal consequences. q However, if it was an offer, then inserting a coin or card into the machine would be acceptance of the offer and if the machine did not deliver (if empty or out of order), then the proprietor of the machine would be liable for breach of contract. q Thornton v Shoe Lane Parking. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–13  OFFER (cont.) Further Examples of Invitations to Treat (ITT) Auction q The advertisement of an auction, or the putting up of items for bids, is an invitation to treat and not an offer to sell. Offer is made by the bidder(s). Auctioneer is free to accept/reject the offer. Auctioneer makes an acceptance at the fall of the hammer. Online promotions q Most online promotions are considered invitation to treat. However, a contract can be concluded online where a person responds to online products advertised. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–14  OFFER (cont.) Revocation of offer q This is a withdrawal of an offer. q An offeror who changes his mind can ‘revoke’ his offer provided that it has not been accepted by the offeree: section 5(1) of the Contracts Act 1950. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–15  2. ACCEPTANCE q Definition: Section 2(b) CA 1950 Acceptance occurs when the offeree signifies his assent (agreement) to the proposal. q When an offeree accepts an offer, he is said to have made known (by words or conduct) that he agrees to the terms of an offer. q An acceptance must be absolute and unqualified: s.7(a) CA 1950 q Acceptance must match the terms of the offer. q Acceptance = Offer (mirror image) q There is no acceptance if an offeree introduces his own terms or qualifies his acceptance with a modifier. Such responses that modify an offer are called counter-offers. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–16  ACCEPTANCE (cont.) Counter Offer q A counter offer is where an offeree responds to an offer by making an offer on different terms. This has the effect of destroying the original offer which is no longer open for the offeree to accept. q Hyde v Wrench Facts: W offer to sell H his property for $1000. H said he would pay $950 but W refused. H then said he would pay $1000 but W still refused. H sued saying there was a legal agreement between the parties. Court Held: There was no contract. Where a counter-offer is made, this destroys the original offer which is no longer open to the offeree to accept. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–17  ACCEPTANCE (cont.) (Agreement) Figure 2.3 Distinction between acceptance and counter-offer Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–18  ACCEPTANCE (cont.) q As a general rule, acceptance must be communicated to the offeror. q There are two exceptions to this general rule: - Unilateral offer (acceptance by performance) - Postal rule of acceptance (acceptance is effective as soon as the letter is posted) Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–19  ACCEPTANCE (cont.) Postal Rule of Acceptance q The postal rule states that an acceptance by post takes effect when the letter of acceptance is posted and not when the acceptance is actually received. q Where it is within the contemplation of the parties that post might be used as a means of communicating the acceptance, then the acceptance is complete as soon as it is posted. q It can only apply where: Refer to: s. 7(b) of CA 1950 Ø The offeror specifies that acceptance may be by way of post; OR Ø where it is reasonable to post the acceptance (e.g. where the offer itself was sent by post). q So long as the letter is properly addressed, stamped & posted, a contract is formed when the letter is posted even if the offeror is not aware of the posting, or if the letter is lost in the post, or even if the letter is never delivered or reaches its destination. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–20  ACCEPTANCE (cont.) Postal Rule of Acceptance q A case example is Adams v Lindsell. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–21  Acceptance (cont) q How can the hospitality industry avoid problems in relation to formation of contract? q Put a condition on actual communication of acceptance. q Avoid asking for acceptance by post - exclude the Postal Rule. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–22  Acceptance (cont) Silence q As a general rule, silence does not amount to acceptance. q There must be some act on the part of the offeree to indicate acceptance. q The offeror cannot impose a condition that the offeree’s silence shall constitute acceptance. q E.g. the offeror cannot impose a condition that ‘if we have not heard from you, we assume that you have given your consent’. q Felthouse v Bindley Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–23  3. CONSIDERATION Consideration is ‘value’ for a promise. It need not be quantified in terms of money. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–24  CONSIDERATION (cont.) Types of Consideration Executed Consideration q Can be seen in unilateral contracts: Carlill v Carbolic Smoke Ball Ø Example: Finding a dog (A offers $200 to anyone who finds & returns his dog) Ø A promise to do something in return for an act Executory Consideration q Can be seen in bilateral contracts Ø Example: buying a house Ø Where the parties exchange promises to do something in the future. Past Consideration q If one party voluntarily performs an act, & the other party then makes a promise, the consideration for the promise is said to be in the past. q For example, A gives B a lift home in his car. On arrival B promises to give A $10 towards the petrol. q The act is already completed before the promise is made. A’s consideration of giving B a lift is in the past before the promise to pay is made. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–25  CONSIDERATION (cont.) Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–26  4. INTENTION TO CREATE LEGAL RELATIONS (ITCLR) Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–27  INTENTION TO CREATE LEGAL RELATIONS (cont.) Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–28  5. Capacity to Contract q Capacity is a person’s ability to enter into a contract q Section 10 of the Contract Acts 1950 states that parties must be competent to contract. q Section 11 of the Contract Act 1950 provides that a person is competent to contract when he is: Ø of the age of majority Ø of sound mind, & Ø not disqualified by any law. q Section 2 of the Age of Majority Act 1971 states that the age of majority is 18 years old. Thus only those who have attained the age of majority (18 years old) are legally competent to enter a valid contract. A person who is below 18 years old is a minor in Malaysia. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–29  CAPACITY TO CONTRACT (cont.) General Rule All contract entered by a minor are void (not valid). Exception Valid agreements that a minor can enter into include: 1. Contracts for Necessities 2. Scholarship agreements A scholarship agreement between a minor & an appropriate authority (federal govt, state govt, educational institution) is valid. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–30  CAPACITY TO CONTRACT (cont) Contract for ‘necessaries’ q A minor can contract for ‘necessaries’ i.e contracts that supply the minor with the basic necessities of life. q Examples include food, clothing, shelter, medical care and even education. q Such goods/services must be suitable to the minor’s actual needs & status in life at the time of sale & delivery. q Education, training and employment contracts entered into by ‘young persons’ (Children and Young Persons (Employment) Act 1966) are considered necessaries. A ‘young person’ refers to a person who is 15 years old or above but under the age of 18 years old. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–31  PRIVITY OF CONTRACT q Only parties to a contract may be sued or be sued. q Persons who are not parties to a contract cannot be bound by its terms. q However, in the hospitality and tourism industry, customers/clients often make bookings on behalf of many people, e.g. spouses, children or friends. q There are exceptions to the principle. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–32  PRIVITY OF CONTRACT Jackson v Horizon Holidays Facts: q Jackson entered into a contract with a travel agent for a family holiday. The holiday was a huge disappointment. The selected hotel was overbooked so they were transferred to an inferior hotel which was dirty & did not have the expected facilities. Decision: q Jackson (the Plaintiff) recovered 500 pounds for ‘mental stress’ due to a disastrous holiday. Jackson was claiming for the distress that the family suffered. Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–33  SUMMARY Figure 2.1 Elements of a contract Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–34  ADDITIONAL EXERCISES 1. What is the difference between offer and ‘counter-offer’? 2. Explain the concept of postal acceptance rule? 3. What are the differences between the requirements of ‘consideration’ in Malaysian contract law and English contract law? 4. Explain the concept of ‘rebuttable presumption’ in the context of ‘intention to create legal relations’? Hospitality LAW Second Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–35