Elements of a Valid Contract in Business Law

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  1. Introduction
All contracts are agreements but not all agreements are contracts. A contract is a binding agreement between two or more individuals that is enforceable by law. The Law of Contract in Malaysia is governed by the Contracts Act 1950. Section 2(h)[1] states that an agreement enforceable by law is a contract. Offer and acceptance analysis are the traditional approaches used in contract law to determine whether an agreement exist between two parties. The others are consideration and intention to create legal relationship between the parties in forming a contract. Section 10 (1)[2] states 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 hereby expressly declared to be void.
  1. Verbal and written contracts
It could be written or even be in oral. Contracts can be written by using formal or informal terms, or entirely verbal or spoken. It is a promise made between two or more parties that which allow the courts to make judgement. Some contracts have to be in writing, for example credit contracts, insurance contracts, agreements to buy and sell real estate, and agreements to buy cars from registered dealers.
  1. Standard form contracts
Standard form contracts are commonly used by businesses that provide services to large numbers of customers. Your dealings with your electricity company, your insurer, your bank and so on are governed by this type of contract. They are offered on a "take it or leave it" basis - you won't be given the opportunity to quibble over details you're not happy with. The type of agreement chosen to be elaborated in this assignment is the service agreement which is also a standard form contract.
  1. Elements of a Valid Contract
The basic elements in the formation of a contract are offer, acceptance, consideration, capacity, intention to create legal relation, free consent, certainty and valid object. The relevant provisions of the Contract Law Act 1950 for the following elements are as follows:
  1. Offer
Section 2(a)[3] states that when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal;
  1. Acceptance
Section 2(b)[4] states 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;
  1. Consideration
Section 2(d)[5] states when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;
  1. Capacity
Section 11[6] states 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.
  1. Intention to create legal relation
Such an element is not denoted compulsory to form a valid contract in the Malaysian context of Contract Act did not. In this respect, the Malaysian constitution permits the use of English common law which is the Civil Law Act 1956.
  1. Free consent
Section 14[7] states consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.
  1. Certainty
Section 30[8] states agreements, the meaning of which is not certain, or capable of being made certain, are void.
  1. Valid object
Section 24[9] states the consideration or object of an agreement is lawful, unless— (a) it is forbidden by a law; (b) it is of such a nature that, if permitted, it would defeat any law; (c) it is fraudulent; (d) it involves or implies injury to the person or property of another; or (e) the court regards it as immoral, or opposed to public policy. In each of the above cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. I have enclosed an example of agreement and the brochure of the plans by the service provider to this document. It is a service agreement with P1.Com. A service agreement is a type of agreement that falls under the broader realm of contract law. It defines the relationship between a customer and a service provider. In short, a service agreement outlines what services are to be provided, when they are to be provided, their costs, and the responsibilities of each party involved in the agreement.
  1. Offer
A display of goods in a shop window is an invitation to treat. An invitation to treat is not an offer, it is only an invitation to make an offer. Advertisement can amount either to offers or to invitations to treat. If an advertisement is an offer then a person who accepts the offer makes a contract with the person who advertised. If an advertisement is only an invitation to treat then it cannot be accepted in such a way that a contract is thereby formed. An offer should not be made by a person who is not fully prepared to take legal consequences of its being accepted. But a response to an invitation to treat cannot result in a binding contract. The offer can be seen here when P1.com provides the brochure of the plans currently held (brochure attached to this document for reference). If a customer is interested, customer would then be given the registration form. In here customer would be able to read the agreement particulars at the back of the registration form. Should customer agree to these terms, they may proceed to fill in their particulars, select the plan which they wish to subscribe to and seal the agreement with a signature on the registration form.
  1. Acceptance
[10]A promise or act on the part of an offeree indicating a willingness to be bound by the terms and conditions contained in an offer. Also, the acknowledgment of the drawee that binds the drawee to the terms of a draft. There are 3 types of acceptance. It may be conditional, express, or implied. Conditional Acceptance : A conditional acceptance, sometimes called a qualified acceptance, occurs when a person to whom an offer has been made tells the offeror that he or she is willing to agree to the offer provided that some changes are made in its terms or that some condition or event occurs. This type of acceptance operates as a counteroffer. A counteroffer must be accepted by the original offeror before a contract can be established between the parties. Another type of conditional acceptance occurs when a drawee promises to pay a draft upon the fulfilment of a condition, such as a shipment of goods reaching its destination on the date specified in the contract. Express Acceptance : An express acceptance occurs when a person clearly and explicitly agrees to an offer or agrees to pay a draft that is presented for payment. Examples of expressly accepting a contract include your signature, orally agreeing to the offer, shaking hands, or even exchanging business cards with the offer and accepted terms. Express acceptance is the most obvious and leaves no room for doubt that the offer was accepted. Implied Acceptance : An implied acceptance is one that is not directly stated but is demonstrated by any acts indicating a person's assent to the proposed bargain. Implied acceptance typically does not involve a contract, but rather is oral and action-based in nature. For instance, if you’ve always hired the same person to paint your house every three years and you stop by their shop and tell them that it’s been three years, they may just simply show up and paint your house, knock on the door, and you pay them. This was implied acceptance of the offer. The customer offered to let the painter paint his house again, and the painter accepted by going over to his house and painting it. Implied acceptance is typically only considered valid if you have a previous history of this type of acceptance already with this person. The acceptance context given below from the terms and conditions for P1 4G is of express acceptance. The context states : [11]It is important that you read these Terms carefully before signing the acceptance on the Registration Form. By signing on the Registration Form, you signify your acceptance to the Terms herein stated and to that posted online at www.p1.com.my.
  1. Consideration
Consideration is where something with monetary value exchanged for an act, benefit, forbearance, interest, promise, right, or goods or services. I have found the following information from https://www.nolo.com/legal-encyclopedia/consideration-every-contract-needs-33361.html which helped me understand the different angles to this single element. The website states : One of the parties was already legally obligated to perform. For example, a police officer cannot claim the reward for capturing a wanted suspect, because the officer is already legally obligated to capture and arrest people who break the law. The promise amounts to a gift, not a contract. If your rich uncle promises to give you money to buy a house, without any strings attached, that is a promise to make a gift. If he changes his mind, you can't force him to come up with the cash because his promise was one-sided; you have not done or promised to do anything in exchange. On the other hand, if you make a down payment on a house in reliance on his promise, and your uncle knows about it, a court may enforce his original promise. Although it still isn't a true contract, the law recognizes that it's necessary to hold people to their promises once others take action on the assumption that the promise will be kept. This legal theory -- called "promissory estoppel"-- treats promises as contracts if the promise was reasonably relied upon. The exchange is for "past consideration." When someone promises to give you something in return for something you've already done -- "I'm going to pay you $500 because you quit smoking last year" -- a court will not enforce the promise to make the payment because the performance (quitting smoking) wasn't bargained for. You did it without knowing that someone would come along later and offer to pay for it. The bargained-for promise is illusory. For example, the laws in Maria's state prohibit firing an employee for refusing to sign a noncompete agreement. Maria signs one anyway, under threat of losing her job. The agreement is unenforceable because Maria's employer cannot do what it promised (or threatened) to do. A better approach would have been to provide Maria with some benefit or compensation if she signed the agreement, rather than threatening to fire her if she didn't. In the P1.com agreement, customer knows on what to expect of the service from the information given under the charges column. The details stated are : [12]Charges 7.1. Subscriber will be billed monthly for the Service subscribed. The types of charges that Subscriber incur will vary depending on the selected Service Package and data usage by Subscriber. Billing for Service will commence on the Service Activation Date. 7.2. The first bill shall include activation fee, one month advance monthly access fee, Device charge (if applicable), pro-rated monthly access fee and other applicable charges. Access fee will be pro-rated at the 1st monthly bill if Service Activation Date is after the billing date. All monthly bills will include, but not be limited to, service charges, the applicable taxes and other applicable charges associated with the Service. 7.3. Monthly bills can be viewed online via the Self Care Account portal. An e-mail notification will be sent to the Subscriber’s email address as stated in the Registration Form once a new bill is generated and has been placed online in the Self Care Account portal. A fee of Ringgit Malaysia Five (RM5.00) per bill will be charged if physical printed bills are required. Request for physical printed bills must be made directly to P1. 7.4. Payment of monthly bill by Subscriber to P1 can be made via auto debit by credit card, cash and/or other modes of payment acceptable by P1. Payment via auto debit by credit card is subject to approval of P1 and Subscriber shall provide P1 with the required information of Subscriber’s credit card and any other necessary information upon request. Subscriber shall be responsible for the validity of its credit card to ensure continuous Service. P1 reserves the right to suspend Service to Subscriber in the event any payment by Subscriber credit card is not successful. 7.5. In the event the amount stated in P1’s bill or any part thereof remains unpaid after the stipulated due date, P1 reserves the right to temporarily suspend the account and charge the Subscriber interest on the sum that remains unpaid at the rate of 1.5% interest per month to be calculated from the stipulated due date to the date of full payment, or Ringgit Malaysia Ten (RM10.00) per month whichever is the greater. Acceptance of late or partial payment shall not waive P1’s right to collect the full amount of all charges billed for Service. Notice of any dispute must be made by Subscriber in writing to P1 within thirty (30) days from the date of the relevant monthly bill failing which Subscriber shall be deemed to have accepted the bill and no objection raised after the said period will be entertained. If the objections relate solely to part of the amount on the invoice, P1 may request that Subscriber pay the undisputed part of the invoice by the due date. The paid amount will be credited back to Subscriber’s account in the event that after due investigation it is found that Subscriber’s dispute and objection is valid. 7.6. P1 reserves the right to suspend or terminate provision of the Service when Subscriber fail to pay the amount indicated on the invoice nor raised any objection to same in writing by the due date without further notice nor compensation to Subscriber. 7.7. Subscriber is obligated to make reasonable inquiry in the event that Subscriber has not received any given month’s monthly bill within the expected time period. Subscriber acknowledges that non receipt of any statement of account, any monthly bill, statement or any correspondence in relation to the Service subscribed shall not be a valid reason for the Subscriber to withhold or delay payment to P1.
  1. Capacity
Power provided under law to a natural person or a juridical person to enter into binding contracts, and to sue and be sued in its own name. Certain class of people are exempted from the category of people who are capable of entering into contract. They are infants/minors; insane; people under the influence of drug; bankrupt and enemy alien. The capacity section can be seen under 23 of P1.com agreement as follows : Subscriber’s Warranties and Acknowledgement. [13] 23.1. Subscriber hereby warrants that:
  1. he/she/it has the legal capacity to enter into these Terms and is 18 years of age (by date) or above and a resident of Malaysia; and
  2. if Subscriber is a body corporate, it has the required corporate authority to enter, execute and be bound by these Terms.
23.2. Subscriber acknowledges that he/she/it has read and fully understood all the terms and conditions herein upon accepting these Terms and agrees to be bound by the same upon P1 accepting its application for the Service.
  1. Summary
From this assignment we get to learn the types of contracts and basic elements found in a valid contract. The basic elements were then supported by the provisions found in our Contracts Law 1950. An agreement was later chosen in which few of the elements are elaborated and applied to the selected agreement. The selected elements are offer, acceptance, consideration and capacity. Here we learn how every element is applied and seen in our day to day life. Every goods or services obtained is either an agreement or a contract. The obvious now reflects what learnt from this subject and practised it everywhere. From shopping, gym memberships to our various activities. Reference Contracts Act 1950 : https://www.agc.gov.my/Akta/Vol.%203/Act%20136.pdf P1.com agreement : https://www.p1.com.my/images/pdf/4G%20T&C%20v5.2.2.pdf https://law.freeadvice.com/general_practice/contract_law/kind_acceptance.htm https://definitions.uslegal.com/c/capacity-to-contract/ https://www.nolo.com/legal-encyclopedia/consideration-every-contract-needs-33361.html
[1] Contracts Act 1950, s 2 (h) [2] Contracts Act 1950, s 10 (1) [3] Contracts Act 1950, s 2(a) [4] Contracts Act 1950, s 2 (b) [5] Contracts Act 1950, s 2 (d) [6] Contracts Act 1950, s 11 [7] Contracts Act 1950, s 14 [8] Contracts Act 1950, s 30 [9] Contracts Act 1950, s 24 [10] https://legal-dictionary.thefreedictionary.com/acceptance [11] 2nd para of Terms & Conditions - P1.com agreement [12] P1.com agreement, no 7 [13] P1.com agreement, no 23
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Elements of a valid contract in Business Law. (2017, Jun 26). Retrieved June 24, 2024 , from

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