LL1303 Law of Contract I: Introduction to Law of Contract PDF

LL1303 Law of Contract I: Introduction to Law of Contract Haji Muhammad Danish Iqbal Bin Haji Ariffin  Contents ▪ Definition of Agreement ▪ Types of Agreement ▪ Definition of Contract ▪ Elements of a Valid Contract ▪ Traditional Analysis of a Contract ...

LL1303 Law of Contract I: Introduction to Law of Contract Haji Muhammad Danish Iqbal Bin Haji Ariffin  Contents ▪ Definition of Agreement ▪ Types of Agreement ▪ Definition of Contract ▪ Elements of a Valid Contract ▪ Traditional Analysis of a Contract  Definition of Agreement ▪ The Contracts Act 1984, Chapter 106 uses the words ‘agreement’ and ‘contract’. ▪ The words ‘agreement’ and ‘contract’ is distinct from one another as per Section 2 of the Contracts Act, Chapter 106. ▪ According to Section 2(e) of the Contracts Act, Chapter 106: Every promise and every set of promises forming the consideration for each other is an agreement. ▪ In an agreement, there is a promise from both sides. ▪ Example: A promises to sell his car to B and in return B promises to pay a sum of RM60,000 to A. There is an agreement between A and B. ▪ A promise is a result of an offer (proposal) by one person and its acceptance by the other. ▪ Example: When A makes a proposal to sell his car to B for RM60,000 and B accepts this proposal, there results a promise between the two persons.  Definition of Agreement ▪ Section 2(b) of the Contracts Act, Chapter 106 defines promise as under: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted; a proposal, when accepted, becomes a promise. ▪ Thus, when there is a proposal from one side and the acceptance of that proposal by the other side, it results in a promise. This promise from the two parties to one another is as an agreement. ▪ Unlike English law, the Contracts Act 1984, Chapter 106 makes a distinction between an agreement and a contract. However, law students and legal practitioners in Brunei Darussalam are so used to English common law that they use the words agreement and contract loosely and interchangeably. This is incorrect.  Types of Agreement ▪ The following are the different types of agreements: (a) Contracts According to section 2(h) of the Contracts Act, Chapter 106: A contract is an agreement which is enforceable by law. (b) Void agreements According to section 2(g) of the Contracts Act, Chapter 106: An agreement not enforceable by law is said to be void. For instance, an agreement by a minor has been held to be void. Sections 24 to 30 make a specific mention about agreements which are void. Those agreements include an agreement without consideration and an agreement in restraint of marriage. (c) Voidable contracts According to section 2(i) of the Contracts Act, Chapter 106: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. In some contracts, one of the parties to the contract has an option to avoid the same if he so likes. For instance, when the consent of a party has been obtained by coercion, undue influence, fraud or misrepresentation, he has a right to avoid the contract. If a party entitled to avoid the contract does not avoid it, the contract remains valid. After the contract is avoided, it becomes void.  Types of Agreement Void Agreement and Voidable Contract Distinguished ▪ A void agreement is a nullity from its inception and no rights will accrue to any party thereto or his transferee etc. ▪ A voidable contract is a valid contract until it has been avoided, and therefore, until the contract has been avoided, rights may accrue in favour of the parties or their transferees etc. ▪ A voidable contract becomes void if the party entitled to avoid it, avoids the same.  Types of Agreement Illegal Agreements ▪ There are certain agreements which are ‘illegal’ in the sense that the law forbids the very act, the doing of which is contemplated by the agreement. ▪ Example: An agreement to commit a crime or a tort, or the sale of dangerous drugs, or an agreement which tends to corrupt public life, or an agreement to defraud public revenue, is illegal. ▪ Such an agreement patently opposed to public policy. The law forbids the making of such agreements. ▪ An illegal agreement may be distinguished from a mere ‘void’ agreement which may not be opposed to public policy. ▪ Example: An agreement to do an impossible act or an agreement that is uncertain is void although there may be nothing in such an agreement which is opposed to public policy. ▪ The law does not forbid the making of such agreements, although if the parties have made such an agreement, the same is not enforceable in a court of law. ▪ Whether an agreement can be termed as illegal or not may depend upon the degree to which it is opposed to public policy. ▪ Example: A clause in an agreement in restraint of trade or an agreement in restraint of marriage is void but we may not term it as an ‘illegal’ agreement as we do when it is an agreement to commit a crime.  Types of Agreement ▪ Let's take a look at the following examples: (1) A finds B's purse and gives it to him. B promises to give A $50. The promise by B to give A $50 is good consideration. This is a contract. (2) A agrees to sell to B a hundred tons of oil'. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. The courts will not enforce such an agreement. (3) A promises, for no consideration, to give to B $1,000. This is a void agreement because B did not provide any consideration to A in return for his promise. It is only a gift from A to B. It means that there is no contract between A and B as the agreement is void and not enforceable by law. (4) A, intending to deceive B, falsely represents that the horse is good for stud purposes and thereby induces B to buy the horse. The agreement between A and B is a contract as it is enforceable by law. However, B can avoid the contract because of A's misrepresentation or fraud. (5) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void for the mistake of an essential fact made by both parties and is not enforceable by law. (6) A, B and C enter into an agreement for the division among them of gains acquired by fraud. The agreement is void as its object is unlawful. The agreement is not enforceable by law. ▪ Thus, not all agreements are contracts. Only agreements enforceable by law are contracts. An agreement not enforceable by law is void.  Definition of Contract ▪ As we have seen earlier, not all agreements are contracts. However, all contracts are agreements. ▪ A contract may be defined as a legally enforceable agreement between two or more persons. ▪ According to Section 2(h) of the Contracts Act, Chapter 106: An agreement enforceable by law is a contract. ▪ Some agreements may be enforceable by law and others not. Agreement enforceable by law is contract, agreement not enforceable by law is void agreement. ▪ Example: An agreement to buy and sell a car is a valid contract enforceable by law, but an agreement to buy and sell dangerous drugs is a mere agreement not enforceable by law.  Elements of a Valid Contract ▪ In order that an agreement becomes a contract, it has to satisfy all the essentials of a valid contract as mentioned in Section 10 of the Contracts Act, Chapter 106: (1) All agreements are contracts if they are – (a) made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and (b) not hereby expressly declared to be void. ▪ The essentials needed for a valid contract are as follows: (1)An agreement between the two parties. An agreement is the result of a proposal or an offer by one party followed by its acceptance by the other. (2)There should be free consent of the parties, when they enter into an agreement. (3)The agreement should be between parties who are competent to contract. (4)There should be lawful consideration and lawful object in respect of that agreement. (5)The agreement must not be one which has been declared to be void. ▪ If any of these essentials or characteristics are missing, the agreement is not a contract, and the courts will not enforce it.  Elements of a Valid Contract ▪ In the case of Bekalan Sains P&C Sdn Bhd v Bank Bumiputra Malaysia Bhd, Abdul Malik Ishak JCA stated that the following key characteristics are the essential elements in the formation of any contract: (1) Offer (2) Acceptance (3) Consideration (4) Intention to be bound (5) Mutuality (6) Capacity (7) legality ▪ In the case of Sulisen Sdn Bhd v Kerajaan Malaysia, the court stated that: The offer and acceptance when taken together would form the ‘agreement’ and that agreement must be supported by consideration in order to establish the obligation. It is the parties that must intend that the agreement to have legal force and the courts will only enforce what the parties intend should be enforced. The parties too must agree on the same thing and this would be known as mutuality. The parties too must have the capacity of reaching binding agreement and the subject matter of the agreement must be legal.  Traditional Analysis of a Contract ▪ Traditionally, in deciding whether the parties have reached an agreement, the law looks for an offer by one party and an acceptance to the terms and conditions of that offer by the other. There would be a bargaining process leading up ultimately to an agreement or meeting of the minds (consensus ad idem). ▪ This is the traditional method of analysis of an offer and an acceptance which have been applied by the courts in determining the formation of a contract. ▪ But for a contract to be formalised, all the terms and conditions must be fulfilled. The failure to fulfill a term or a condition would not give rise to a concluded contract. ▪ In the case of Sri Kajang Rock Products Sdn Bhd v Maybank Finance Bhd, the High Court stated that: To constitute a valid contract there must be separate and definite parties thereto; those parties must be in agreement, that is there must be consensus ad idem; those parties must intend to create legal relations in the sense that the promises of each side are to be enforceable simply because they are contractual promises and the promises of each party must be supported by consideration. ▪ Therefore, the basic requirements of a contract are that there must be a proposal (offer), acceptance, intention to create legal relations and consideration. These are the traditional requirements of a contract taught to students in law schools.