Contract Law

  Contract Law

  In Malaysia, our contract law is basically governed and enforced by the Contract Act 1950. The remedy of specific performance presupposes the existence of a valid contract between the parties to the controversy. The terms of the contract must be definite and certain. This is significant because equity cannot be expected to enforce either an invalid contract or one that is so vague in its terms that equity cannot determine exactly what it must order each party to perform. It would be unjust for a court to compel the performance of a contract according to ambiguous terms interpreted by the court, since the court might erroneously order what the parties never intended or contemplated. Based on my understanding of the law of contract, as a general rule, performance of a contract must be exact and precise and should be accordance to with what the parties had promised. Section 38(1) of the Contracts Act 1950 provides that the parties to a contract must either perform or offer to perform their respective promises, unless such performance has been dispensed with by any law. In order to form a contract agreement that is enforceable by law, the following six elements must be fulfilled:

• Proposal or offer
• Acceptance
• Consideration
• Intention to create legal relations
• Capacity to contract
• Free consent
• Proposal or offer

An offer can be oral or written as long as it is not required to be written by law. It is the definite expression or an overt action which begins the contract. It is simply what is offered to another for the return of that person's promise to act. It cannot be ambiguous or unclear. It must be spelled out in terms that are specific and certain, such as the identity and nature of the object which is being offered and under what conditions and/ or terms it is offered.

Terms of contract

Contracts can be in writing, made orally, or created through the actings of the parties. For clarity, most commercial contracts are in writing to maintain a proper record of the agreement. Oral contracts create a greater potential for disputes on the terms with the parties having problems evidencing their position.

Contracts can be formed through a course of dealing between the parties. Again, the terms and conditions may not be clear. Common terms are likely to be incorporated in these contracts but if they are not written down there are still evidential problems.

It is common for contracts to be on a company's standard terms and conditions. Problems can arise when both parties purport to contract on their own standard terms and conditions. Qualified acceptance of an offer while imposing your own standard terms and conditions is seen as a counter offer. Obviously being unaware of which terms and conditions the parties are contracting does not provide the desired clarity or certainty of the contract.

There are different tactics for those parties who wish to contract on their own terms and conditions including incorporating the terms into as many pre-contractual documents as possible and ensuring that the terms appear on the last document between the parties before the delivery of goods.

 Capacity to contract 

The general presumption of the law is that all people have a capacity to contract. A person who is trying to avoid a contract would have to plead his or her lack of capacity to contract against the party who is trying to enforce the contract. Section 11 of the Contracts Act 1950 provides that “Every person is competent to contract, who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject”. It means that the person who enters into the contract must have the full capacity in terms of age and mind. The age of majority in Malaysia is 18 years old.

Both Alex and Ngan were older than 18 years old when they enter into the contract. Section 12 (1) of the Contract Act 1950 provides that “A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.” As a result, the agreement is valid.

 Free consent

A contract is not enforceable if its object is considered to be illegal or against public policy. In many jurisdictions contracts predicated upon lotteries, dog races, horse races, or other forms of gambling would be considered illegal contracts. When entering into agreement, the parties must be free consent to contract. The free consent as provided in Section 10(1) “All agreements are contracts if they are made by the free consent of parties competent to contract...” Under Section 14, consent must be free and not caused by

1. coercion, as defined in section 15;
2. undue influence, as defined in section 16;
3. fraud, as defined in section 17;
4. misrepresentation, as defined in section 18; or
5. mistake, subject to sections 21, 22 and 23.

Coercion is described in Section 15 of the Contracts Act 1950 as the “the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement”. Undue influence in Section 16 of Contract Act 1950 is said to exist when “the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”. Section 17 of the Contracts Act 1950 explains that fraud refers to acts committed by a party to a contract with the intent to deceive the other contracting party. Misrepresentation would refer to untrue made by a representor and that induce the other to enter into a contract. Mistake under the Contract Act 1950 includes a mistake as to a matter of fact (by one or both parties) and mistake as to any law in force or not in force in Malaysia.

Illegal/Void Contract

A contract is illegal if it involves doing something that is a criminal act or a civil wrong, or against the public good. For example, it is an offences to sell a firearm to a person not licensed to hold one, so a contract to sell a firearm in these circumstances is illegal. A contract whose purpose is to get the party to it to break another legally enforce contract that the party has made already is also illegal. Moreover, a contract which otherwise would be legal is illegal if its subject matter is to be used for an unlawful purpose. So, if a firearm dealer were to agree to sell a firearm to a person licensed to hold a firearm knowing that the buyer intends to use it to kill someone, that contract would be illegal.

Courts will not enforce an illegal contract. Money paid or property transferred under an illegal contract cannot normally be recovered. There are exceptions however. For example, where a contract is made illegal by a passed for the protection of a class of people, a member of that class can get back money paid or property transferred by her or him under the contract. So a tenant would be able to recover money paid to a landlord which the landlord is prohibited by an Act to collect.

Breach of Contract 

A contract is breached (broken) when either one or both parties fails to perform as promised in the contract. A breach may occur when a party:

• refuses to perform its promises under the contract
  
• does something that the contract prohibits, or
• prevents the other party from performing its obligations under the contract.

Some contract breaches are more serious than others. The law distinguishes between material (or total) breaches and immaterial (trivial) breaches of contract.

Material Breach of Contract

A material breach of contract (sometimes referred to as a "total" breach), is serious and gives rise to a cause of action in court. A material breach goes to the very heart of the contract. It renders the contract "irreparably broken" and defeats the purpose for making it in the first place. For example, suppose your company agrees to pay a violinist $500 to play at a company-hosted event, but the violinist shows up at the party without his violin. The violinist has materially breached the contract to perform if he cannot play.

When there is a material breach of contract, the injured party can go to court and seek damages–a money payment adequate to cover economic losses resulting from the breach. A total breach of contact will also usually terminate the non-breaching party’s duty to perform any of the promises he or she made in the contract. For example, your company would have no legal duty to pay the violinist who couldn’t play as promised.

Immaterial Breach of Contract

An immaterial breach of contract is a trivial breach that does not render the contract irreparably broken or defeat its purpose. An immaterial breach does not terminate the contract. Example: A building owner enters into a service contract for a heating system that provides that the system will be inspected each month on Thursday. Contrary to the contract, the service person makes inspections on Mondays. This act is a technical breach of the contract, but it is immaterial, unless for some significant reason the inspections needed to be done on Thursday as opposed to any other day. Since this breach is immaterial, the contract can’t be terminated by the building owner. The two sides should work out an accommodation—the service person can agree to show up on Mondays, or the building owner accepts that the inspections will be done on Thursdays, perhaps in return for paying slightly less.

 Remedies

Remedies the means to achieve justice in any matter in which legal rights are involved. Remedies may be ordered by the court, granted by judgment after trial or hearing, by agreement (settlement) between the person claiming harm and the person he/she believes has caused it, and by the automatic operation of law. Some remedies require that certain acts be performed or prohibited (originally called "equity"); others involve payment of money to cover loss due to injury or breach of contract; and still others require a court's declaration of the rights of the parties and an order to honor them. An "extraordinary remedy" is a means employed by a judge to meet particular problems, such as appointment of a referee, master or receiver to investigate, report or take charge of property. A "provisional remedy" is a temporary solution to hold matters in status quo pending a final decision or an attempt to see if the remedy will work.