definition of a contract

Introduction

Contracts are not only applicable to businesses but are also part of our everyday life. A contract is made out of the simple act of purchasing a newspaper, using a credit card to buy a dress or paying a paring fee. Other contracts such as the sale and purchase of property are more complex, requiring formal written documents.

Contract forms the basis in many transactions, for instance the buying and selling of goods and services, employment contracts, partnership contracts and insurance policies.

The formation of a contract is based on obligations that are freely assumed rather than imposed. Liability in contract is based on voluntary undertaking of the obligations by the individual. As such, the law assumes that:

The parties are free to make a contract any way they wish, based on the concept of freedom and equality.

In making the bargains, the parties enjoy equal position.

The obligations imposed under a contract are self-imposed, entered freely by the parties.

The law is only concerned with the fulfillment of certain conditions by the parties so that the transaction can be recognized as a legally binding agreement and enforceable.

Malaysian Contract law is embodied in Contracts Act 1950 (CA1950), which is based on the English law of contract. However it should be noted that there are other statutes which may impact contractual transactions, eg Government Contracts Act 1949

English Law relating to contacts is applicable in Malaysia in relation to areas not covered by Malaysia in relation to areas not covered by Malaysian legislation or Malaysian case law: Civil Law Act 1956.

Definition of a contract

Section 2(h) of CA1950 states that “an agreement enforceable by law is a contrct”.

The strongest contract, in terms of enforceability, has an offer, acceptance, consideration for the exchange, clearly sets out the terms of the agreement without ambiguity, and is signed by the involved parties with proper capacity to enter into the contract.

Hence, a contract can be defined as:

“An agreement enforceable by the law between two or more parties to do or to abstain from doing some act/acts, their intention being to create legal relation and not merely to exchange mutual promise both having given something or having promised to give something of value as consideration for any benefit derived from the agreement.”

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Thus each of the parties to a contract wants or needs something the other party has in its power to give, and each of the parties Is willing t give up something of its own in order to secure what the other party has.

Agreement

The parties must agree on the rights and obligations to be created under the contract. Agreement that is reached through a process of offer and acceptance is a fundamental part of any contract because it requires consensus ad idem, ie the meeting of the minds of the parties entering into the contract.

Raffles v Wichelhaus (1864)

Facts:

The parties entered into a contract to buy a cargo of cotton on board a ship called “The Peerless” sailing from Bombay to Liverpool. Unknown to both parties, “The Peerless” had a sailing from Bombay to Liverpool in October and in December. The defendant intended to buy the cotton arriving on the October sailing while the plaintiff believed it was the December sailing which had been agreed. When the cotton arrived in December, the defendant refused to accept the cotton and repudiated the agreement, stating that the agreement was for the cotton on the other sailing. The plaintiff sued for breach of contract.

Held:

The court applied an objective text and stated that a reasonable person would not have been able to state with certainty which sailing had been agreed. Therefore, the contract was void as there was no consensus ad idem because both parties did not agree on the same element in the contract.

Offer (or proposal)

An offer or proposal is made when one of the parties involved in the negotiations states the terms on which without further alteration, he is ready to be bound into a legally binding, enforceable agreement with the other party once the other party accepts the offer.

An offer is referred to in 2(a) of CA1950 as a proposal which is made when one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence.

The person making the offer or proposal is called the promisor or offeror. The person to whom the proposal or offer is being made to is known as the promisee or offeree. If this person accepts the offer, then he is also called the acceptor.

In Preston Corp Sdn Bhd v Edward Leong Ors (1982), the Federal Court expressed the view that an offer is an intimation of willingness by an offeror to enter into a legally binding contract and that its terms must either expressly or impliedly indicate that it is to become binding upon acceptance by the offeree.

An offer may be made to a specific person, to any member of a group of persons or to the public at large. An offer can be regarded either as:

A bilateral offer – where the offer is made to a particular person or group of people. The identity of both the offeror and offeree are known.

A unilateral offer – where the offer is made to the world at large. Only the identity of the offeror is known.

Hyde v wrench (1840)

Facts:

The defendant offered to sell his farm for $1000. The plaintiff’s agent said he would give $950 for it. The defendant said he would think about it and in the end wrote back to say that he could not accept the lower price. Upon getting the defendant’s letter the plaintiff wrote back stating that he would pay the original asking price of $1000. The defendant now refused to sell at the original price and the plaintiff sued for specific performance.

Held:

If the offer of $1000 was accepted in the first instance, it would undoubtedly been a binding contract. However as the original offer had been altered, it thus acted as a rejection of the original offer. Thus the original offer cannot be revived. As such there exists no obligation of any sort between the parties.

Acceptance

Acceptance may be made in writing, orally or implied by conduct, but if a method of acceptance has been prescribed by the offeror, then acceptance must be according to the manner prescribed.

In Taylor v Allan (1966), the court held that the offer of a motor insurance was deemed accepted by conduct when the offeree drove his car in reliance on the insurance.

In Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui (1984), it was held that where a statutory provision sets out a condition precedent before an offer can be accepted, non compliance with that condition will result in no contract whatsoever.

Persons purporting to accept an offer must be aware or have knowledge of the offer. Thus an offer cannot be accepted retrospectively by someone who is unaware of the existence of the offer.

Acceptance must be made in reliance upon the offer and it must correspond with all the terms of the offer. The parties must agree to accept the same conditions that have been laid down by offeror because without such consensus between the parties, no true contract can exist.

Acceptance must be made within a reasonable time. What amounts to reasonable time would depend on the circumstances of each case.

Felthouse v Bindley (1862)

Facts:

Mr Felthouse wrote to his nephew who wanted to sell a horse to him, stating that “if I hear not more about him, I consider the horse mine…” Subsequently, there was no notice from his nephew and Felthouse considered the horse his own. The horse was not delivered to Mr Felthouse and later there was an auction at the nephew’s property for the other livestock. The nephew told the auctioneer, Mr Bindley, not to sell the horse at the auction but Bindley accidently sold it. Felthouse sued the auctioneer and his action could only succeed if it could be shown that Felthouse actually owned the horse.

Held:

Mr Felthouse did not have ownership of the horse as there was no acceptance of the contract. Acceptance must be communicated clearly and cannot be imposed due to silence of one of the parties. Although the nephew had expressed interest in completing the sale, there was no communication of that intention. As such, there was no valid contract.

Intention to create legal relations

An agreement reached between an offeror and an offeree will be a legally binding contract only if the parties intended that they should be legally bound.

Although every contract is an agreement, not all agreements are contracts. For example, Susana and Pearly agree to meet at a restaurant for dinner at 7.30pm. such agreements are normally made without intending there to be any legal consequences if either Susana or Pearly does not turn up. It is merely a social agreement and not a contract.

The parties’ intention to be bound can be expressly stated or be implied from their actions. Where intentions are expressly stated, the courts would not impute otherwise unless there is strong evidence to prove the contrary. However in the event intentions are to be implied from the conduct of the parties, there are certain presumptions that would be considered depending on the relationship between the parties to the agreement.

In social and domestic agreements between family and friends, there is a presumption that these agreements are not meant to be legally binding unless the contrary can be proven. Such a presumption can be rebutted if it appears from the circumstances that the parties intended to be legally bound.

In Balfour v Balfour (1919) , the husband went to work in Ceylon and agreed to pay his wife $30 per month. He did not pay the money and the wife sued. It was held that there was not contract because the parties did not intend to create a legal relationship.

In business and commercial agreements which are more formal in nature, there is a presumption that there is intention to create legal relations; there is intention to create legal relations. As such, any agreement would be regarded as legally binding unless the contrary is proven. For instance, an unambiguous declaration in a commercial contract that it is to be binding in honor only and not in law will be accepted by the courts. Also, the intention to exclude legal consequences must be set out clearly in unambiguous words. The onus of proof is on the party who alleges that no legal effect is intended.

In Edwards v Skyways (1964), the plaintiff who was a pilot was made redundant by the defendant. He has been informed by his pilots’ association that he would be given an ex gratia payment. The defendant failed to pay and the pilot sued. The defendant argued that the use of the words “ex gratia” implied that there was no intention to create legal relations. The court held that this agreement related to business matters and was presumed to be binding and the defendants had failed to rebut this presumption.

Consideration

Section 26 of CA 1950 provides that an agreement without consideration is void. Thus, consideration is a without consideration is an essential element to the formation of a valid contract. Where no consideration is given by the promise, the promisor merely owes a moral obligation to perform the contract.

Example:

If Jenny promises to give Susie Rm 500 as a gift on her birthday, this promise cannot be enforced by a court because Susie has not provided any consideration for the promise.

However, s26 provides that an agreement made on account of natural love and affection is valid if the following conditions are met:

It is in writing

It is registered (if applicable) and

The parties stand in a near relation to each other.

In Re Tan Sob Sim (1951), the court held that the nearness of the relation depends on the type or group of people to which the parties belong and the family concerned.

Conclusion

While some of the contracts are unpleasantly bending and restrictive, in general they are very useful to protect both parties from any surprises. For example, while cell phone company wants to be sure it will get monthly payments for its service, you, in turn, want to be sure to get quality, reliable service on a daily basis with no surprise extra charges.

Web design and development service is no different from any other services that you get from other companies. If web Design Company is here to make money, it for sure needs to protect itself from excessive work or any possible surprises.  From the other perspective, if client ordered a website, he wants to be sure to get exactly what he ordered, in time and on budget.

Unfortunately, sometimes because of the relatively young industry age, sometimes because of lack of understanding the business aspect, in many cases contracts or its important details are overlooked by both parties. This leads to failed deadlines and rising costs, ruined relationship and other business related losses.

Q2.

Write notes with examples on the three most important remedies available for breach of contract.

When a party to a contract unjustifiably fails or refuses to perform his part of the contract, the other party has a right of legal action. The methods which are given by the law to an innocent party by which he may enforce a right or redress an injury are called “remedies”.

Remedies that are available for breach of contract would depend on the effect and impact of the breach. Possible remedies are:

Rescission of contract

Damages

Specific performance

Injunction

Equitable remedies are generally remedies other than the payment of damages. This would include such remedies as obtaining an injunction, or requiring specific performance of a contract.

Rescission of contract

On a breach of a condition of a contract, the injured party may treat the contract as at an end (or rescinded) and refuse to perform or fulfil his part of the contract.

When one party to a contract has refused to perform, or disabled himself 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.

An example is provided in the illustration as follows:

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her RM100 for each night’s performance. On the sixth night A willfully absents herself form the theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfilment of the contract.

Damages

Compensatory or ordinary damages

These are damages that are given to the party who has suffered loss caused by the breach of contract.

The general position with regard to damages for breach of contract is that damages may be recovered as long as they are not too remote. In other words, damages may only be recovered if the relevant losses:

Arise naturally as a result of the breach

Do not arise naturally but are losses which the parties knew, at the time they made the contract, would be a probable result of a breach.

Hadley v Baxendale (1854)

Facts:

The plaintiff was a miller whose operations were stopped due to the breakage of a crank shaft. The shaft has to be sent to the manufacturer for repair. The plaintiff sent the crank shaft using the services of the defendant who was operating as carriers. The plaintiff informed the defendant that the crank shaft has to be sent immediately as the mull operations gas stopped. The carriers failed to perform and delivery took several days instead of the one day promised. As a result, the plaintiff lost several days of operations and sued the defendant for the lost profits, ie profits the plaintiff would have earned had the crank shaft been delivered on time.

Held:

An aggrieved party will be unable to recover consequential losses resulting from a breach unless the losses are a “natural” consequence of breach: or the affected party has expressly informed the other of the circumstances which would generate the losses, in this case, the defendant has no means of knowing that the plaintiff would lose profits if the shipment of the shaft was delayed since this information was not communicated directly to them. Therefore, the loss of profits was not reasonably contemplated by both the parties when they made the contract.

Thus, it can be concluded that indirect or consequential damages are only recoverable if they are reasonably foreseeable by both of the parties at the time of the contract as arising naturally form such breach. Recoverable damages must not be too remote.

Exemplary damages

Exemplary damages are damages requested and awarded by the court when the defendant’s willful acts were malicious, violent, oppressive, fraudulent, wanton, or grossly reckless. These damages are awarded both as a punishment and to set a public example.

Although often requested, exemplary damages are seldom awarded.

Liquidated damages

Liquidated damages are monetary compensation whose amount the parties agree upon during the formation of a contract for the injured party to collect as compensation if a specific breach occurs.

Damages can be liquidated in a contract only if

The injury is either uncertain or difficult to quantify , or it would be difficult to prove the loss, or it would be difficult to find another adequate remedy

The amount is reasonable and is considered the actual or anticipated harm caused by the contract breach

The damages are structured to function as damages, not as a penalty

If the above criteria are not met, a liquidated damages clause will be void.

Nominal damages

Nominal damages are damages which consist of a small amount of cash payment which the court orders to be paid to the plaintiff who has suffered no quantifiable pecuniary loss. The award serves as a token of honour to the rights of the plaintiff.

Nominal damages is often sought to obtain a legal record of who was at fault.

Specific performance

Specific performance is an equitable remedy. It is a specialized remedy used by the courts when not other remedy (such as money) will adequately compensate the injured party.

Specific performance is a discretionary remedy and not an arbitrary remedy, ie an injured party may ask for an order of specific performance but it is up to the court whether or not to grant it.

Specific performance is not a usual remedy. If a legal remedy will put the injured party in the position he would have enjoyed has the contract been fully performed, then the court will use that option instead. The most common reason courts grant specific performance is most commonly granted for contracts connected with land, it is not ordinarily granted for contracts connected with land, it is not or ordinarily granted in sales of goods unless it is for the purchase of a rare or unique product.

For example, Roslan offers to sell Azmin his beachfront house and Azmin accepts.. Roslan subsequently decides to keep the house. Since there is no other house exactly like Roslan’s, Azmin may be entitled to specific performance of the contract and the court may compel Roslan to sell the house.

Injunction

An injunction is an order of the court restraining a person from doing a specific act in the future. It is granted only when it is just and equitable to do so having regard to all the circumstances of the case.

In respect of contracts, an injunction may be sought to prevent a party from committing a breach of contract. For example, the court may order that a seller be restrained from selling land to anyone else when the seller has contracted to sell that land to the plaintiff.

A court may award damages to an injured party either in addition to, or in substitution for, and order of injunction.

Conclusion

For the purpose of this study, two national legal systems and two supranational texts have been studied. Aiming to define the similarities and differences that those are offering in the definition and the main remedies available to the aggrieved party in case the non-performance of the contract, this note is tempted to conclude that the prima facie sharp differences, are in reality greatly diminished by various exceptions. Thus, although in principle, performance in specie is an exceptional remedy, in practice it could be awarded if it is more appropriated than damages. French law, on the other hand, notwithstanding his preference for specific performance has also experienced limitations to the principle as this note has illustrated. In relation to other remedies, such as termination, after a profound study, the difference does not appear greater either. The different supranational texts that have been taken into account for the purpose of this paper, appear to have efficiently managed to conciliate Civil and Common law interest in their provisions on remedies. Their preference, for specific performance could be, nevertheless, a source of preoccupation for English lawyers. The effect of these dispositions is nonetheless limited by the texts themselves, allowing some flexibility in the appreciation to national legislators.