Business law - assignment PDF

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Summary

The assignment studied on the six elements of establishing a valid contract namely: (1) offer or proposal; (2) acceptance; (3) consideration; (4) intention to create a legal relation; (5) legal capacity; and (6) clarity of the contract. In addition, the assignment also discusses about the contract o...

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TABLE OF CONTENTS

1.0 INTRODUCTION.............................................................................................................3 2.0 ELEMENTS OF A VALID CONTRACT.......................................................................4 2.1 Offer or Proposal............................................................................................................4 2.2 Acceptance.....................................................................................................................5 2.3 Consideration..................................................................................................................6 2.4 Intention to create a legal relation..................................................................................6 2.5 Legal Capacity................................................................................................................7 2.6 Clarity of the Contract....................................................................................................8 3.0 CONTRACT OF SALE OF GOODS..............................................................................9 3.1 Meaning of Contract of Sale of Goods...........................................................................9 3.2 Meaning of Conditions and Warranties..........................................................................9 3.3 Implied Terms under the Sale of Goods Act 1957.......................................................10 3.3.1

Implied terms as to title......................................................................................10

3.3.2

Implied terms as to sale of goods by description...............................................11

3.3.3

Implied terms as to fitness of goods and of merchantable quality.....................12

3.3.4

Implied terms as to sale by sample....................................................................14

3.4 Recommendations for Amendment of Malaysian Law................................................14 3.4.1

Enacting a statutory definition of “merchantable quality”.................................14

3.4.2

Enacting a statutory definition for “sale by description”...................................15

3.4.3

Prohibition of exclusion or restriction of liability for implied terms.................16

4.0 SUMMARY.....................................................................................................................16 5.0 LIST OF REFERENCES...............................................................................................17

1.0

INTRODUCTION

Contracts and agreements come into play in almost every aspect of life. This thus makes the study and application of the law of contract make up the core component of the learning and practice of law. Under the Malaysian law, all matter pertaining to contracts or agreements are governed and enforced under the provisions contained in Contract Act 1950. Section 2(h) of the Contract Act 1950 defines contract as an agreement that is enforceable by the law. Agreement on the other hand is defines as every promise and every set of promises forming the consideration for each other by the provision of Section 2(e) of the Act. In simpler words, agreement refers to a promise that is being exchanged between two or more parties involving some sort of consideration for one another. A promise, as provided under the provision of Section 2(b), is formed when the person to whom a proposal is made signifies his assent thereto thus rendering the proposal to have been accepted. A proposal, when accepted, becomes a promise. In every agreement, a promise will form the consideration for both the promisor and promisee. Consideration, as interpreted by the provision of Section 2(d) of the Act, refers to the act whereby the promisor, the promisee or any other person, at their own desire, has done or abstained from doing, or does or abstains from doing, or agrees to do or to abstain from doing something. It is important to understand that not all agreements are contracts. Section 10 of the Contract Act 1950 provides that agreements are contracts only if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void by any provision of the Act. In other words, an agreement can only be considered as a contract if it is legally binding between the parties involved in the agreement. If the agreement cannot be legally enforced by the law, the agreement does not constitute a contract under the Act.

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2.0

ELEMENTS OF A VALID CONTRACT

2.1

Offer or Proposal

An agreement, as mentioned in the previous section of this report, is formed through the process of offer and acceptance between two or more parties. An offer under the context of Contract Act 1950 is also equals to a proposal. Section 2(a) provides that, a person is making a proposal if he signifies to another his willingness to do or to abstain from doing something, with a view to obtain the assent of the other person to the act or abstinence. An offer is considered as a requisite of a valid contract considering that an agreement can only be established when one party accepts the offer made by another party. Without the making of such offer, acceptance cannot be established and therefore, an agreement cannot be achieved (MacMillan & Stone, 2012). The case of Storer v Manchester City Council (1974) provided an insight on the definition of proposal in which the court is in the opinion that a proposal is an expression of willingness to do contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the other party to whom the proposal was made. A proposal can be made either to an individual or a group of people, or to the public at large. A proposal can be made to an individual or a group of people as according to the provision of Section 2(b) that reads “…. when a person to whom the proposal is made” which signifies that a proposal can be made to a single person and only that person to whom the offer was made can accept such offer. A proposal can also be made to the public at large whereby anyone who meets all the terms of the proposal may accept the proposal. This is evident in the case of Carlill v Carbolic Smoke Ball Co (1982) whereby the court held that an advertisement containing certain terms in exchange of a monetary reward constituted a binding unilateral offer that could be accepted by anyone who fulfilled such terms. The company was found to have been bound by its advertisement which was construed as an offer, which was later accepted by the buyer who has fulfilled the terms of the offer thus creating a valid binding contract before the law. In terms of the communication of proposal, Section 4(1) of the Act provides that the communication of a proposal is completed once it comes to the knowledge of the person to whom it was made. A proposal must first be communicated before it can be accepted. In this sense, no acceptance can be made until the promisee is made aware of the existence of the offer. 3

2.2

Acceptance

An acceptance is the final and unqualified expression of assent to the terms of an offer. This is established under the provision of Section 2(b) of the Act. A binding contract can only be formed if the acceptance is made in accordance with the terms of the offer made or in the manner specified thereto. A mere acknowledgement of an offer does not constitute an acceptance under the law (MacMillan & Stone, 2012). An acceptance also must be communicated to the offeror or proposer before a valid contract can be established. This is provided under the provision of Section 4(2) of the Act which provides that the communication of acceptance is complete as against the proposer when it is put in a course of transmission to him, and as against the acceptor when it comes to the knowledge of the proposer. As mentioned earlier, Section 2(b) of the Act requires the person to whom the proposal was made to signify his assent thereto. This provision implies a positive act of acceptance whereby silence, absence of response or just total disregard of the proposal does not constitute an acceptance as there is no positive act of acceptance on the part of the other party. This is evidence in the case of Felthouse v Bindley (1862) where in this case, the court held that no contract was established between the plaintiff and his uncle since the plaintiff failed to give a reply to the offer made by his uncle. The plaintiff silence did not constitute an acceptance under the law. Section 7(1) of the Act on the other hand provides that the communication of the acceptance must be absolute and unqualified and, as according to section 7(2), it shall be expressed in some usual and reasonable manner. If the proposer has previously specified on the manner in which the proposal is to be accepted and the acceptor failed to communicate the acceptance in that manner, the proposer may insist for the proposal to be accepted in the prescribed manner within a reasonable time after the acceptance was communicated to him. Failure of the proposer to insist the acceptance to be made in the prescribed manner within the reasonable time would signify that he has accepted such acceptance. This can be seen in the case of Eliason v Henshaw (1819) where in this case, the plaintiff specified that the acceptance to the offer should be made by mail coach. The defendant however sent the acceptance by post on the assumption that it would reach the plaintiff faster. Unfortunately the mail was late and the Court held that the plaintiff was justified to refuse the defendant’s acceptance.

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2.3

Consideration

The fourth element of a contract is consideration. The definition of consideration is sets out in the case of Currie v Misa (1875) whereby the court held that a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss of responsibility given, suffered or undertaken by the other. Under the context of the Contract Act 1950 on the other hand, Section 2(d) of the Act interprets the word “consideration” to refer to the act whereby the promisor, the promisee or any other person, at their own desire, has done or abstained from doing, or does or abstains from doing, or agrees to do or to abstain from doing something. Referring to the provision of Section 10(1) discussed above, the consideration of an agreement of contract is deemed lawful unless for the reasons stated under Section 24 where a consideration would be deemed as unlawful if it is forbidden by a law, it is of such a nature that, if permitted, it would defeat any law, it is fraudulent, it involves or implies injury to the person or property of another, or the court regards it as immoral, or opposed to public policy. The section further provides that every agreement of which the consideration is unlawful is deemed as void. The agreement is also deemed as void if any part of the considerations is unlawful as provided under Section 25 of the Act. The Act further provides under Section 26 that an agreement made without consideration is deemed as void unless it specifies the exceptions permissible under the provision of the same section. These exceptions are, if the agreement is made in writing and registered and is made on the account of natural love and affection between parties, or if it is a promise to compensate for something that has been done voluntarily, or if it is a promise to pay a debt barred by limitation law. In any of these cases, such agreement constitutes a valid contract despite the lack of consideration. 2.4

Intention to create a legal relation

Intention to create a legal relation in this context refers to the motion that all parties to the contract must have the necessary intention to enter into a legally binding contract for the contract to be valid. The existence of the intention to create a legal relation signifies the readiness of all contracting parties to accept the legal consequences of having entered into a contract (Valente, 2010).

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In cases where social, domestic and family arrangements exist where there is natural love and affection between the parties, the courts would normally presume that the intention to create a legal relation does not exist based on the assumption that the parties have no intention to have legal consequences from the agreement no matter how and in what manner such statement of intention has been made between the parties (Valente, 2010). This is evident in the case of Balfour v Balfour whereby a statement of intention made by the husband to give a monthly allowance to his wife is not a contract due to the family arrangement existed between the parties. This is however not the case in the event of business arrangements. In a business arrangement, there is a presumption that the statement of intention found in the promises made between the parties is binding intention that is capable of establishing a legally binding contract. Thus, there is a strong presumption that the parties to the agreement intend to be legally bound unless this presumption is successfully rebutted before the court (Nik Malini, Nur Izzati, Nurul Hasliza & Nur Dalila, 2015). A contract would not be enforceable, legal, and binding by the law in the event where the intention to create a legal relation is absent between the contracting parties. This thus renders the parties unable to seek legal action upon the other and the contract will be regarded as a mere agreement and is not binding upon the contracting parties to follow. 2.5

Legal Capacity

The element of legal capacity of the contracting parties in establishing a valid contract is provided under the provision of Section 10(1) which provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void by any provision of the Act. Parties competent to contract in the context of this section refer to the legal capacity of the parties to enter into a valid contract. The legal capacity of contracting parties are provided under Section 11 of the Act which states that every person who is of age of majority, and who is of sound mind, and is not disqualified from contracting by any law is competent to contract. The age of majority as according to the provision of Section 2 of the Age of Majority Act 1971 for Malaysians is eighteen years old which means that, a person would be competent to enter into a valid contract once he or she has reached eighteen years of age. In the context of sound mind on the other hand, a person is said to be of sound mind for the purpose of contracting if at the time when the contract is made, the person is capable of understanding the contract and 6

forming a rational judgement in relation to its effect upon his interests as provided by Section 12(1) of Contract Act 1950. Section 12(2) further elaborates that a person who is usually of unsound mind but occasionally of sound mind, is allowed to enter into a valid contract when he is of sound mind and Section 12(3) provides that a person who is usually of sound mind but occasionally of unsound mind, is not allowed to enter into a valid contract when he is of unsound mind. 2.6

Clarity of the Contract

An enforceable contract requires certainty of terms. That is to say, for an agreement to be a contract, it must be apparent what the terms of the contract are. If an important term is not settled, the agreement is not a contract. A statement of intention to enter into a legal relation though made and established does not constitute an intention if the offer is uncertain and vague as in the case of Guthing v Lynn (1831). The fact of the case being that the buyer of a horse, who was the plaintiff in this case, promised the seller that they would pay $5 more for the horse, or buy another horse from the seller if the horse was lucky. The horse was not in the condition that the plaintiff believed and a dispute arose between the parties as to whether the seller was owed the conditional payment mentioned by the buyer. The court held that the condition to pay $5 extra for the horse if it was lucky, was deemed to be too vague to create a binding contract between the parties. The words contained in an agreement must be clear so that the parties can be sure of the terms upon they are contracting. For a valid contract to be established and legally binding, the term of the contract should be stated clearly and understood by the contracting parties (MacMillan & Stone, 2012). This element of a valid contract is emphasized under the provision of Section 30 of the Act which outlines the importance of clarity in contract whereby the section provides that agreements which the meanings are not certain, or capable of being made certain are void. This is further elaborates through the illustrations given for the section where Illustration (a) provides that in situation where A agrees to sell to B “a hundred tons of oil”, the agreement is void as there is nothing to show what kind of oil was intended by A.

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3.0

CONTRACT OF SALE OF GOODS

3.1

Meaning of Contract of Sale of Goods

The contract of sale of goods is defined under the provision of Section 4(1) of the Sale of Goods Act 1957 which refer to a contract whereby the property in goods is agreed to be transferred from the seller to the buyer in exchange for a price. A contract of sale may exist between one-part owner and another and can be either absolute or conditional as provided under Section 4(2) of the same Act. Goods in this context is defined by Section 2 of the Act to refer to any kind of movable property other than actionable claims and money, and include stocks and shares growing crops, grass and things attached to or forming part of the land which are agreed to be severed before the sale or under the contract of sale. Section 4(3) of the Act further explained that where a contract of sale exists in the event where the property in goods is transferred from seller to the buyer, the contract is known as a sale. But in the event where the transfer of the property in goods is to take place at a future time or subject to certain condition to be fulfilled in future, the contract is known as an agreement to sell. According to Section 4(4), an agreement to sell will become a sale once the time allocated for the transfer of the property of goods to take place has elapsed or the conditions have been fulfilled. 3.2

Meaning of Conditions and Warranties

Sale of Goods Act 1957 has made a distinction between conditions and warranties that exist in a particular contract of sale. According to Section 12(1) of the Act, a stipulation in the contract of sale with reference to the goods sold can be either a condition or a warranty. Section 12(2) defined a condition as a stipulation that is essential to the main purpose of the contract and the breach of which will give rise to a right for either the seller or the buyer to treat the contract as repudiated. For example, ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/l. ‘Y’ pointing at a particular vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on that the car only has a top mileage of 15 km/ l. This amounts to a breach of condition because the seller made the stipulation which forms the essence of the contract. In this case, the mileage was a stipulation that was essential to the main purpose of the contract and hence its breach is a breach of condition. Section 12(3) on the other defined a warranty as stipulation collateral to the main purpose of the cont...