Elements of a Valid Contract

>Introduction

We bump into contracts almost every day. Contracts are usually being made orally e.g. boarding a train, purchasing coffee at a shop, purchase cloth at an online store.

However occasionally written contracts are sometimes required, such as when buying a car or an apartment. A contract were created because that there is an agreement between two parties which is enforceable by law. Offer and acceptance analysis is a common methodology in contract law used to determine whether an agreement exists amongst the two parties. The others are consideration and intention to create legal relationship between parties in forming a contract. The Law of Contract in Malaysia is governed by the Contract Acts 1950.

Section 2(h)1 states that an agreement enforceable by law is a contract. 

Elements of valid contract (375)

 

Element	Explanation
Offer	When a party or a person signifies his willingness to enter into a contract with another person. An offer is the starting point and the formation of a contract. 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 – Contract Act 1950.
Acceptance	When a person to who an offer has been made to another person and that person makes an acceptance to the offer made. The basic rule on contract acceptance is that the person who made the offer and the person who accepted the offer must correspond with each other.
Consideration	It is the price of the promises made. For example Ahmad sell his car for RM80k to Ali. In this case, car is the consideration of Ali and RM80k is the consideration of Ahmad.
Capacity	Each contracting party must have the capacity to enter into its contract. Such person must have reached the age of majority according to the Age of Majority Act 1971 and be of sound mind at the time when the contract is made. When the law limits a person for engaging the contract, the contract is voidable for incapacity.
Intention	Two parties which enter into a contract must have intimate relationship between them to create legal relations. If there are no intentions between both parties, then there is no intention to create the agreement. Agreements of a social or domestic nature do not contemplate legal relationship; as such they are not contracts.
Free Consent	A person is deemed not to freely consent to enter into a contract if he is influenced by coercion, undue influence, fraud, misrepresentation and mistake when entering into the contract. “Two or more persons are set to consent when they agree upon the same thing in the same sense” Indian Contract Act, Section 13.
Certainty	A contract must contain conditions which are clear in meaning and not vague or uncertain. Contracts which are vague cannot be enforce by law. The content of the contract must be clear an understandable in oral or in writings.
Valid Object	A contract made must be for matters which are not against the law. There are certain agreements which have been expressly declared void by the law such as illegal activities. Some invalid objects examples are unnatural events like bringing life from the death, immoral events or opposed to the public policies.

 

First Element of Contract: Offer 

The first element to constitute a valid contract is offer. Some argue that ‘offer’ and ‘proposal’ have similar meanings. Some jurist indicates that the term ‘offer’ and ‘proposal’ have a slight different meaning.

In fact, the word ‘proposal’ which is used in the Malaysian Contracts Act 1950 could have a broader meaning than the word ‘offer’ (Dr Adnan Trakic). The starting point in the formation and constitute of a contract is an offer or a proposal. It is an essential and important element of a contract. Without offer or a proposal, contract would not form. Agreements which are not enforceable by law are null and void.

The Contracts Act 1950 is a specific Malaysian legislation which governs contracts. 

The term ‘offer’ has not been defined in this Act, but the term ‘proposal’ has. At first sight, it seems that the meaning of an offer and a proposal is the same, but linguistically, as well as from a legal point of view, a difference can be drawn between these two terms. The word ‘proposal’ has a rather general meaning compared to the word ‘offer’ which is more specific.

Nevertheless, the definition of ‘proposal’ in s 2(a) of the Contracts Act 1950 implies the definition of an offer under Common law. There are two types of offer, one is unilateral and the other one is supply of information. In a unilateral contract, the party who made an offer that makes promise if other party performing a certain act, the offer is accepted when the act is performed. Unilateral case is shown in the case of Carlill v Carbolic Smoke Ball Company. In this case, Carbolic Smoke Ball Co made an advertisement that anyone who, by using their product, ie carbolic smoke balls, contracts influenza will be rewarded with $100. 

In fact, they deposited $1000 with Alliance Bank displaying the seriousness of their offer. Mrs Carlill used the carbolic smoke balls as prescribed and yet she caught influenza. As a result of it, she claimed the $100 reward.

Carbolic Smoke Ball Co contended that there was no binding contract between the parties as their statement was addressed to the whole world, and it is impossible to have a contract with the whole world. The Court of Appeal observed that the contract cannot be concluded with the whole world, but that an offer can be made to the whole world, and the parties who come forward and accept an offer would be in a contractual relationship with the offeror. (Carlil v Carbolic Smoke Ball Company, 1892). 

The second type of offer is bilateral. In a bilateral contract, both parties are bound by their exchange of promises. For example, A sell car to B for RM50k and B will only buy car from A for RM50k if A sell the car with upgraded sports rim.

A agreed to sell car to B for RM50k with upgraded sports rim that B requested. 

Second Element: Acceptance 

The second element to form a contract is acceptance. According to Contract Act section 2 (b), acceptance is the final expression of assent to the terms of an offer. Acceptance is a final and unqualified expression to the terms of an offer as mention in section 7 of Contract Act 1950.

In an acceptance, the acceptor is agreed to the offer and its terms from the offeror, unless it is a counter-offer. In Hyde v Wrench case demonstrate that counter-offer cancels the original offer. Wrench offered to sell his farm in Luddenham to Hyde for £1000, an offer which Hyde declined. On 6 June 1840 Wrench wrote to Hyde’s agent offering to sell the farm for £1000, stating that it was the final offer and that he would not alter from it. Hyde offered £950 in his letter by 8 June, and after examining the offer Wrench refused to accept, and informed Hyde of this on 27 June.

On the 29th Hyde agreed to buy the farm for £1000 without any additional agreement from Wrench, and after Wrench refused to sell the farm to him he sued for breach of contract. 

Under the circumstances there exists no valid binding contract between the parties for the purchase of this property. The defendant offered to sell it for £1000, and if that had been at once unconditionally accepted there would undoubtedly have been a perfect binding contract; instead of that, the plaintiff made an offer of his own, to purchase the property for £950, and he thereby rejected the offer previously made by the defendant. It was not afterwards competent for Hyde to revive the proposal, by tendering an acceptance of it and that; therefore, there exists no obligation of any sort between the parties (Hyde v Wrench, 1840). 

The acceptance must be communicated, whereby the communication of the offer is completed once the acceptances become knowledge to the offeree. The acceptance must be communicated to the offeree, that the person who made the offer. If another person accepts the offer on his behalf without his authorization, the acceptance is not valid.

Silence cannot be construed as an acceptance. Example case Felthouse v Bindley, the offeror cannot write the words “If I Hear no more from you, it means that you have accepted the offer” (Felthouse v Bindley, 1862). 

Third Element: Intention 

Another element to form a valid contract is intention with the intent to create a legal relationship between both or more parties. In a social or domestic nature in an agreement, the law created a presumption that the agreement does not have intention to create a legal relationship. In this third element, there are two types of agreement that often used by people which is first; the social agreement.

Social agreements are usually made by friends or families, without the intention being enforceable. For example children and parents, a domestic agreement, does not create a legal relationship. In the example case of Merrit v Merrit, the principle rebutted where two spouses who formed an agreement over their matrimonial home were not on good terms. Mr. Merritt and his wife jointly owned a house.

Mr. Merritt left to live with another woman.

They made an agreement (signed) that Mr. Merritt would pay Mrs. Merritt a £40 monthly sum, and eventually transfer the house to her, if Mrs. Merritt kept up the monthly mortgage payments.

When the mortgage was paid Mr. Merritt refused to transfer the house (Merrit v Merrit, 1970). 

The other type of agreement for this element is business agreements. Business agreements are treat differently than social or domestic agreement by the law. The agreement revoked if evidence is produced that there was clearly no intention to create a legally binding agreement.

For example the case Carlill v Carbolic Smoke Ball Co, where the defendant made an extravagant claims in advertisement about the ability of their smoke ball in preventing influenza. The advertisement that they advertised in newspaper is that if anyone who, by using their product, ie carbolic smoke balls, contracts influenza will be rewarded with $100. In fact, they deposited $1000 with Alliance Bank displaying the seriousness of their offer. The defendant contended that the advertisement in the newspaper was “a mere puff” and was not intended to create a legal relationship with the public. However the court rejected this appeal as the bank deposit was a strong evidence that the defendant had intended a legal accountability when they issued their advertisement (Carlil v Carbolic Smoke Ball Company, 1892). 

Fourth Element: Consideration 

The fourth element in an agreement or contract is consideration. Consideration is referring the price paid in exchange or price agreed for both parties to perform an act. For an agreement to be considered as a contract, it must either be supported by consideration or be a formal contract.

As stated in the Contracts Act 1950, when at the desire of promisor, the promise or any other person has done abstained from doing, or does or obtains of doing, or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise. 

The promisor is the person who undertaking to perform the consideration and the other hand the promisee, is the acceptance of the consideration. Considerations that have already performed is said to be executed. In this element, a mere promise into a contract that law will enforce.

For examples, Amir wants to buy car from Abu for RM20k and Abu sold the price with RM20k as considered the price is justifiable. Another example, Pian agrees to sell his bike to Lin, who agrees to pay RM 1000. If Lin pays the money in return for the bike and the contract is made, then this is a present consideration. If the payment and the transfer ownership of the bike are to take place at a time after the contract is made, then the consideration is future consideration. If Lin is to purchase Pian’s bike for RM 1000 and Pian is to reply on work that Lin performed for Pian last week, then it is called past consideration.

The act that of consideration is already past. 

Recommendation 

Offer and proposal should be clearly stated in the Contracts Act 1950, whereby the proposal terms should be define as it coverage is wider prospect. Although it has similarity to the terms offer, proposal should have a separate section as guidance for forming contract. Recommendation to amend the Contracts Act 1950 by adding provision(s) on standard form consumer contracts.

The problem with this alternative is the general nature of the 1950 Act. It does not have specific provisions dealing with contents or the terms of a contract. A specific legislation on standard form consumer contracts with specific provisions on form and content of the said contract. This method of regulating standard form contracts is regarded as the best method for Malaysia, bearing in mind the limitations of other legislations. Improvement of communication illustrations as mention in Section 2 (4) as modern world has different type of communication example online social media. 

Suggest that using example of communication via Facebook whereby a promisor promise to offer a gift in return if the promise done an agreed act example click on ‘like’ at the page. The Contracts Act 1950 should have a better act on protecting the consumers. Thus while a consumer can now worry less about whether he or she may claim under a defective contract, the same might not be said for a notice, for example, one notice excluding liability for negligence when using a swimming pool or car park, for example, is not covered, which clearly limits its scope to standard form contracts, and does not mention notices.

Children below the age of 16 not competent to enter into a contract of employment. This act should add as an exception as at least people of age as young as 14 years old should enter the contractual of employment. This is because some family may experience difficulties to continue their lives and children as young as 14 years are capable to work and help their families. Scholarship contracts also should amended to 16 years old from 18 years old. This is because some students who have talents may jump to universities earlier. 

Conclusion 

It can be concluded that every enforceable contract is based on a mutual agreement between the contracting parties which would not be possible to achieve without an offer and acceptance. The discussion of this paper has been limited only to one of these essential elements for the formation of contracts, ie an offer. Furthermore, in order to have a binding contract, the parties need to come to an agreement.

Whether an agreement has been concluded between the parties is a difficult question which needs to be determined by the courts. Thus, the courts would apply the objective test in determining whether an agreement has been achieved on both parties. In conclusion, our law is good enough but it doesn’t recognized a minor for enter into a contract. But with some amendment, it will benefit the minor.

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