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LAW OF CONTRACT.pptx

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LAW OF CONTRACT.pptx

  1. 1. LAW OF CONTRACT ELEMENT 1 & 2; PROPOSAL & ACCEPTANCE
  2. 2. OBJECTIVES At the end of this lesson the students should be able to: • Understand the definition of contract • List the essential elements of a valid legal contract • Understand the definition of proposal & acceptance and their relevant rules • Able distinguished a proposal from an invitation to treat
  3. 3. WHAT IS A CONTRACT? • A contract is an agreement between 2 or more parties that is legally binding between them. • The principal legislation for the law of contract is the Contracts Act 1950 (hereinafter referred to as CA) • Under the CA 1950, Section 2(h), it is referred to as ‘an agreement enforceable by law’
  4. 4. Continue… • The basis of all contracts is an agreement, that is to say that all contracts must be built upon an agreement. But not all agreements are automatically a legal binding contract. Contract Agreement • Agreements are contracts if they fulfilled the essential elements of a contract.
  5. 5. ESSENTIAL ELEMENTS OF A CONTRACT • The main elements of a valid contract are: 1. Proposal/Offer 2. Acceptance 3. Consideration 4. Intention to create legal relations 5. Certainty 6. Legal Capacity 7. Free Consent
  6. 6. WHAT IS A PROPOSAL? • proposal = offer • Section 2(a) of the CA, a proposal is made ‘when one person signifies to another his willingness to do or abstain from doing anything, with a view of obtaining the assent of that other to such act or abstinence. • Meaning:  When an offeror communicates his willingness to offer something to the offeree with an intention to get consent from the offeree to accept the offer, then it becomes an offer.
  7. 7. Continue… • Section 2(b), ‘when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted’. • Upon such acceptance of the application by the person, an agreement between the parties is created. • The proposal become a ‘promise’ & the party making the proposal is referred to as the ‘promisor’ & the party accepting the proposal, is known as the ‘promisee’.
  8. 8. Continue… •HOWEVER, some statements or acts are not a proposal. •They are usually termed as ‘Invitation to treat’ (hereinafter referred to as ITT). •A proposal must be distinguished from an ITT, due to the fact that acceptance of an ITT does not create an agreement.
  9. 9. WHAT IS ‘INVITATION TO TREAT’? • ITT is not a proposal, but a sort of preliminary communication, which passes between the parties at the stage of negotiation, for instance: • a price list • a display of goods with price tags in a self- service supermarket • an advertisement • a tender • an auctioneer inviting bids for a particular article
  10. 10. THE RATIONALES OF ITT • Based on common sense and the practicalities & realities of commercial transactions. • e.g. An Auction • In an auction, articles are listed to be auctioned to the highest bidder. Let say an auctioneer is considered making a proposal when inviting bids, then when a bidder makes a bid, the bidder is considered accepting the proposal, and an agreement comes into being at that stage.
  11. 11. Continue… • This defeat the very purpose of auction, i.e. to get the highest bid for a particular article. If the auctioneer is making a proposal when he invites bid to auction an article, then the first person to bid is considered accepting the proposal to buy that article, regardless of whether the bidder is bidding the highest price or not.
  12. 12. Continue… • In other words, once that happen, there’s an agreement and the auctioneer can no longer calls for other bidder to bid. • Hence, the actual state of law is that in an auction, the auctioneer is only making an invitation to treat or invitation of offers of the highest price from bidder.
  13. 13. Continue… • e.g. A Display of goods • Same state of law applies for display of goods in a shop. If selecting an article from the shelf constitutes a sale agreement, ownership will have passed to the customer at the point of selection, i.e. by putting the goods in the basket or trolley, even though he or she has not paid for it. Worst the customer would not be able to change his or her mind about the purchase.
  14. 14. Continue… • Hence, displays of goods in a shop is only an invitation to treat as decided by the following case. • Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953]
  15. 15. Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953] • Facts: • The defendants were charged under the Pharmacy and Poisons Act 1933 (U.K.) which provided that it was unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist. The case depended on whether a sale had occurred in the self-service shop when a customer selected articles, that he desired to purchase and placed them in a wire basket. The payment was to be made at the exit where a cashier was stationed and in every case involving drugs, a pharmacist supervised the transaction and was authorized to prevent a sale.
  16. 16. Continue… • Held: (Judgement) • The Court ruled that the display was only an invitation to treat. A proposal to buy was made when the customer placed the articles in the basket. Hence the contract of sale would only be made at the cashier’s desk. That being the principle, the shop owners had not made an unlawful sale.
  17. 17. • Another e.g. of ITT is advertisement as decided in the following case which, affirms the general rule that an advertisement is only an invitation to applicants to make an offer and not an offer itself
  18. 18. • Advertisement • When a person advertises in a newspaper or on social media, he is not making an offer but merely invites the public/netizen to make an offer.The advertiser has no obligation to accept the offer. A contract is concluded when he agrees to accept the offer made by the public/netizen. • Case: Harris v Nickerson (1873) • ●The defendant advertised for a sale of goods on certain dates at a particular place.The plaintiff traveled to the location and discovered that the goods had been withdrawn from the sale. The plaintiff sued the defendant claiming damages as he alleged that the defendant had breached the contract. • ● Held:The claim was rejected by the court since the advertisement was merely an ITT.
  19. 19. • **Exception** • ❖When the advertiser promises to pay some amount in the advertisement, it is not an ITT but an offer because there is a binding obligation on the part of the advertiser to fulfill the promise.When the public/netizen accepts the offer, a contract is concluded. • ❖ Refer to Carlill v. Carbolic Smoke Ball Co. (under general offer
  20. 20. To Whom Can A Proposal Be Made? 1) A particular person 2) General public • If made to a particular person, only that person may accept the proposal. This is based on the wordings of Section 2(b) of the CA, which provides ‘when the person to whom the proposal is made signifies his assent thereto …’ • If it is made to the general public, then anyone who meets all the terms of the proposal may accept.
  21. 21. Carlill v Carbolic Smoke Ball Co. [1893] • Facts: • The defendants’ company offered that they would offer 1000 pounds to anyone who still succumbs to influenza after using the company’s medicine according to the instructions for a fixed period.The plaintiff duly used the product, but nevertheless contracted influenza.The plaintiff then sued for the money. • Held: • The Court of Appeal decided that the plaintiff had accepted the offer of the company made to the whole world at large and is therefore entitled to the money.
  22. 22. COMMUNICATION OF PROPOSAL • S4(a): Proposals must be communicated to the other party to the extent that the party accepting the proposal is aware of the existence of such proposal in the first place. • The fact that the other party has done something, which coincidentally appear as if he is accepting the proposal without being actually aware of the proposal does not bring an agreement into being. • R v Clarke (1927)
  23. 23. R v Clarke (1927) • Clarke was arrested and charged with murder. Clarke gave information to the police which led to the arrest of another culprit, without knowing that there was a reward by the government. Later, Clarke claimed the reward but failed. ● Held: Clarke was not entitled to claim the reward since he did not know about the reward at the time he gave the information to the police.
  24. 24. WHAT IS AN ACCEPTANCE? • Accepts offer as it is being made • Section 2(b) of the CA provides that when the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. • A proposal once accepted becomes a promise, and the agreement comes into being. • Section 2(c) calls the person accepting the proposal the promisee.
  25. 25. RULES OF ACCEPTANCE • Absolute and unqualified acceptance • Made within a reasonable time • Acceptance must be communicated
  26. 26. 1.Absolute & Unqualified Acceptance • The acceptance must be absolute and unqualified. Section 7(a) of the CA provides that in order to convert a proposal into a promise the acceptance must be absolute and unqualified. • What is an absolute and unqualified acceptance? • It means it must be made on exactly the same terms as proposed without any modifications or variations.Any modifications or variations of the proposal does not constitute an acceptance, but may amount to a counter proposal/offer.
  27. 27. Counter offer….. • When A makes a proposal to B, B has the choice to accept or to reject it. • But if B makes a new proposal by changing or modify the offer eg: price of the goods, B is said to have made a counter offer
  28. 28. Effect of the counter offer… • A’s original proposal of offer is destroyed and it can no longer be accepted. • A has become the acceptor while B has become the proposer. • A has the choice either to accept or to reject B’s proposal (counter offer)
  29. 29. Hyde v. Wrench [1840] • Facts: • The defendant offered to sell his estate to the plaintiff on June 6 for 1000 pound. On June 8 in reply, plaintiff made a counter proposal to purchase the estate at 950 pound. On June 27, the defendant refused to accept this offer.Two days later, the plaintiff wrote to the defendant that he was prepared to pay 1000 pound.The defendant refused and the plaintiff sued for specific performance. • Held: • The Court ruled that there’s no acceptance because the plaintiff’s letter on 8th June had rejected the original proposal, which could not be revived.
  30. 30. Stevenson v. Mclean (1880) • Facts: • The plaintiffs and the defendant were negotiating about the sale of a quantity of iron.The sequence of events were as follows: • Saturday: The defendant wrote to the plaintiffs offering to sell the iron at 40s per tonne nett cash. Offer open till Monday. • Monday: The plaintiffs telegraphed to the defendant in the morning requesting to know whether the defendant would accept 40s to be paid over two months or if not, the longest limit the defendant would give.
  31. 31. Continue… • 10.01 am - The defendant received the plaintiffs’ telegram and subsequently sold the iron to a third party. • 1.00 pm - The plaintiffs, while waiting for the reply sold the iron to a third party,Walker before 1.00 pm. • 1.25 pm - The defendant telegraphed to the plaintiffs that he had sold the iron. • 1.34 pm - The plaintiffs having had no reply from the defendant, telegraphed again accepting the defendant’s offer at 40s cash. • 1.46 pm - The defendant’s 1.25 pm telegram revoking the offer arrived at the plaintiff premises.
  32. 32. Continue… • The plaintiffs sued for breach of contract.The defendant pleaded in defense that the telegram sent by the plaintiffs on Monday morning was a rejection of the defendant’s offer and constitute a new proposal on the plaintiffs’ part. • Held: • The court held that the plaintiffs’ telegram on Monday morning was meant only as an inquiry and was not a counter proposal. There was no rejection of the offer and therefore there was a valid binding contract between the parties when the plaintiffs accepted the offer of the defendant in the 1.34 pm telegram.
  33. 33. 2. Made Within a Reasonable Time • Section 6(b) of the CA reads, ‘a proposal is revoked… by the lapse of the time prescribed, or if no time is so prescribed, by the lapse of reasonable time, without communication of the acceptance… • What amounts to ‘reasonable time’? • It is a question of fact depending on the circumstances of each case, e.g. the nature of the subject matter or the method by which the offer is communicated.
  34. 34. Continue… • HashimYeop A.Sani J. in the case Macon Works & Trading Sdn Bhd v. Phang Hon Chin, relates the rationale of this rule: • ‘An offer lapses after a reasonable time not because this must be implied in the offer but because failure to accept within a reasonable time implies rejection by the offeree. As a consequence, the Court can take into account the conduct of the parties after the offer was made in deciding whether the offeree has allowed too long a time to lapse before accepting.’
  35. 35. 3. Acceptance Must Be Communicated • Acceptance must be communicated to the proposer or offeror for there to be binding Contracts. • While the communication of an acceptance may be waived, it will still be necessary for the addressee to do something positive to accept such as actual performance of the conditions of the proposal or express his acceptance in an acceptable manner.
  36. 36. Continue… • Section 2(b) requires the person to whom the proposal is made to signify his assent thereto to a proposal. ‘Signifies his assent thereto’ implies a positive act of acceptance on the part of the addressee. • Silence, absence of response or just total disregard of the proposal is not acceptance as there is no positive act that can be related to the proposal. [Find Felthouse v. Bindley (1862) 142 ER 1037]
  37. 37. Case: Felthouse v Blindly • ●The plaintiff offered by letter to buy his nephew’s horse and said “If I hear no more about it, it shall consider the horse is mine”.The nephew did not give any answer but told B, the auctioneer to keep the horse out of the auction sale. However, B sold the horse to someone by mistake. Plaintiff sued B. • ● Held:There was no contract between the plaintiff and his nephew because there was no communication of acceptance by his nephew. Silence does not amount to acceptance.
  38. 38. Continue… • Section 3 of the Contracts Act provides that communication of the acceptance is deemed to be made by – any act; or omission – of the party accepting, by which he intends to communicate the acceptance & which has the effect of communicating it. • Manner and Mode of Communication: • Section 7 (b) of the Act, an acceptance must also be ordinarily communicated & made in some usual manner if no method of acceptance is prescribed.
  39. 39. Continue… • If the proposer/offeror specifies a particular mode of acceptance, then it must be made in accordance to the prescribed mode. • If it is not made in such a manner, the proposer/offeror may within a reasonable time insist that the proposal to be accepted in the prescribe manner. • An acceptance can be made: • in writing/ orally/ by conduct; or by combination of these method.
  40. 40. When is the Communication Of Acceptance ‘Complete’? • General Rule: • An acceptance is completely communicated when it is actually brought to the notice or comes to the actual knowledge of the offeror. (f2f, by calling, by fax) • Exception: • The Postal Rule Communication. (by post, email, WhatsUp etc)
  41. 41. The Postal Rule • Section 4(2) of the CA provides an exception to the general rule of communication of acceptance where the parties have intended the use of the post as a means of communication. • According to the subsection: • The communication of an acceptance is complete – • as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; & • as against the acceptor, when it comes to the knowledge of the proposer.
  42. 42. Continue… • See illustration (b) of Section 4: • B accepts A’s proposal by a letter sent by post. • The communication is complete: • as against A, when the letter is posted; • as against B, when the letter is received by A.
  43. 43. Effect of the Postal Rule • The proposer is bound when the offeree/acceptor posts the letter of acceptance even though the proposer has no knowledge of the acceptance. • When the letter is posted, the acceptor has put it ‘in a course of transmission’ in such a way that he no longer has any control over it. • The transaction becomes binding upon the proposer irrespective of any delay or disappearance of the letter of acceptance in the course of transit/transmission.
  44. 44. Continue… • Whereas, acceptance is complete as against the acceptor only when the letter of acceptance reaches and comes to the knowledge of the proposer. • This means that while the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor himself is not bound until it is actually received by the proposer. • First case: Adams v. Lindsell (1818)
  45. 45. Adams v. Lindsell (1818) • Facts: • The defendant wrote to the plaintiff offering to sell wool on certain terms.The defendant however, misdirected the letter and it reached the plaintiff later than usual. Upon receiving the letter of offer, the plaintiff immediately posted his acceptance. • Meanwhile, the defendant (thinking that the plaintiff was not interested in the offer) had already sold the wool to a third party. • Held: • It was held by the court that acceptance was complete upon posting.
  46. 46. The Rationale of the Rule • Evolved from reasons of practical convenience arising from the delay that is inevitable in delivering letters. • On the ground that the offeror who chooses to start negotiations by post takes the risk of delay and accidents in the post.
  47. 47. Ignatius v. Bell (1913) • Facts: • The defendant (Bell) gave an option to the plaintiff to purchase a piece of land on the condition that the option must be exercised on or before 20 August 1912 by a notice in writing. The plaintiff exercised the option by posting a letter on 16 august.The defendant only received the letter on 25 August. The plaintiff sued for specific performance. • Held: • The Court of Appeal, Selangor held that the parties had decided on the usage of the post service as a means of communication and thus s. 4 of the Contracts Enactment applies.
  48. 48. Scope of the Rule • The rule also applies to telegram sent through post. • Instantaneous communication such as telephone and telex are governed by the general rule. • This fact had been stressed in: • Case: Entores Ltd. V. Miles Far East Corp. • In this case the EnglishCourt ofAppeal classified communications by telex with instantaneous communications
  49. 49. Exclusion from the Effect of the Rule • Generally, in present time, it is wise for proposer who wanted to use letters sent through post as a means of acceptance to provide adequate protection for themselves. • For instance by stipulating in the proposal that acceptance is only complete upon receipt of the letter.That would exclude the postal rule by express terms of the proposal
  50. 50. RECAP DISCUSSION OFFER & ACCEPTANCE Job Advertisement – Accountant Aya Needle Co. Sdn Bhd. Minimum Wages RM 1500 Working Hours 9 a.m.-5 p.m. The Company is actually inviting offers of job applications from the public. Ads -a form of Invitation to treat Bad Apply for the Job Bad is actually making an offer to work with Aya Needle Co. with salary RM 1500 & working hours from 9 a.m.-5p.m. Aya Needle Co. Sdn Bhd Considered Bad Suitable Candidate for the job
  51. 51. Continue… Agree to accept Bad Agree to accept Bad but with additional Conditions: Minimum wages is RM 1000 Additional Working Hours Acceptance of the offer made by Bad The Co. is actually making another offer/Counter-Offer A contract (agreement) is created The Co must wait for Bad’s Acceptance for there to be a contract (agreement)
  52. 52. Continue… • The company is inviting applicants to work with the company through the advertisement & since the company is not bound to accept the offers made by the applicants, then the advertisement is only a form of invitation to treat. • Thus, Bad in the above e.g. by offering to work for Aya Needle Co. in the hope that the company will accept his application, is making a proposal.
  53. 53. Continue… • If the company agrees to accept Bad’s offer, then there is an acceptance on the part of the company. • The company’s acceptance of Bad’s offer to work with them establishes an agreement or promise. Bad is the promisor and the company the promisee and an agreement is created.
  54. 54. Continue… • If the company agrees to accept Bad with additional conditions, then the company modifications or variations of the proposal does not constitute an acceptance, but amount to a counter proposal/offer. • The company now has become the offeror, & Bad the offeree. It is up to Bad whether he is willing to accept the offer. If he does, then he becomes the promisee and the company the promisor and an agreement is also created.
  55. 55. REVOCATION OF PROPOSAL • Once a proposal is communicated, it remains open until it lapses or is withdrawn. A proposal may be revoked at any time before acceptance is communicated. • Section 5(1) of the CA provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterward.
  56. 56. Continue… • There are a few ways by which a proposal may be revoked. Section 6 states amongst others: a) By communication of notice of revocation b) By lapse of the time prescribed/ by lapse of reasonable time c) By failure of the acceptor to fulfill the condition of the proposal d) By death /mental disorder of the proposer, if the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.
  57. 57. Communication of Notice of Revocation • Under subsection (a) the revocation of the proposal must be communicated by the proposer to the other party before it accepts. • In the event of acceptance by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office.Therefore, withdrawal of the proposal must necessarily be communicated by the proposer to the offeree before such posting or delivery.
  58. 58. Continue… • The application of this rule is found in the Illustration to Sec. 5: • A proposes, by a letter sent by post, to sell his house to B. • B accepts the proposal by a letter sent by post. • A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. • There appears to be no local case with respect to this rule but it had been determined in England in Byrne v. Tienhoven (1880), and the law appears to be similar.
  59. 59. Byrne v. Tienhoven (1880) • Facts: • In this case the defendant offered to sell 1,000 boxes of tinplates to the plaintiff.The following communications took place: • 1 October: Defendant posted letter of offer in Cardiff to the plaintiff in NewYork. • 8 October: Defendant posted a letter revoking the offer of October 1. • 11 October: Plaintiff received the letter of offer posted on October 1 and sent acceptance by telegram the same day. It also followed up with letter of acceptance on 15 October. • 20 October: Defendant’s letter of revocation received by plaintiff.
  60. 60. Continue… • Held: • The court ruled that there was a contract between the parties because the revocation of the offer posted on 8 October was not effective till 20 October when it was received by the plaintiff but in the meantime, the latter had already accepted the offer on 11 October when the telegram was sent.
  61. 61. Lapse of the Time prescribed/ Lapse of Reasonable Time • Subsection (b) deals with revocation by lapse of time and provides for two situations: i. Lapse of time occurring upon the expiration of the time prescribed in the proposal for its acceptance; & ii. Where no time is prescribed, by the lapse of a reasonable time. • What a reasonable time is depends on the facts and circumstances of each case.
  62. 62. Ramsgate Victoria Hotel Co. v Montefiore (1866) • Facts: • The defendant applied for shares in the company in June and paid a deposit into the company bank. It was not till November that the company informed the defendant that shares had been allotted to him and that the balance of the purchase price should be paid.The defendant refused to accept the shares. • Held: • The refusal was justified because such a proposal should have been accepted within a reasonable time.The period between June and November was clearly not reasonable.The rationale for this rule, was stated by HashimYeop A Sani J. in Macon Works &Trading Sdn Bhd v. Phang Hon Chin & Anor. [1976] 2 MLJ 177. {Refer above}
  63. 63. Failure of the Acceptor to fulfill the Condition of the Proposer • Subsection (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance. • For instance, a company offers to employ an applicant on condition that he passes a skills test. If the applicant fails the test, the proposal is obviously revoked because the applicant has failed to fulfill a condition precedent.
  64. 64. Death /Mental Disorder of the Proposer • Subsection (d) deals with death or mental disorder of the proposer subsequent/after to the communication of the proposal. • The two events does not automatically result in the demise of the proposal.The fact of the death or mental disorder must be known to the acceptor before acceptance. Only then the proposal is no longer available for acceptance. • Acceptance without prior knowledge of the death or mental disorder of the proposer is nevertheless, a good acceptance.
  65. 65. REVOCATION OF ACCEPTANCE • It may seem strange that an acceptance can be revoked but that is the law with respect to that acceptance which is not complete as against the acceptor. • Section 5(2) states ‘An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterward.
  66. 66. Continue… • The Illustration to section 5 provides an example of revocation of acceptance made by post: • A proposes by a letter sent by post, to sell his house to B. • B accepts the proposal by letter sent by post. • B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards
  67. 67. Case: Dunmore v Alexander ●When the letter of acceptance and the letter of revoking the acceptance reached the offeror simultaneously, the acceptance was revoked effectively.

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