The law of agency is governed by Part X of the Contracts Act 1950. An agent is defined as a person employed to do any act for another or represent another in dealings with third person[1]. The person for whom such act is done, or who is so represented, is called the “principal”
In other words, agency is the relationship which subsists between the principal and the agent, who has been authorized to act for him or represent him in dealings with others
e.g. Azzizul appoints Samdan to sign the agreement on his behalf, here Azzizul is called the principal and Samdan is his agent.
Thus in agency there are in effect two contracts:-
i. the first made between the principal and the agent from which the agent derives his authority to act for and on behalf of the principal; and
ii. the second, made between the principal and the third party through the work of the agent.
A. Who can be come an agent/principal?
Section 136 CA - Any person who is eighteen years old and above and who is of sound mind may be a principal. As between the principal and third persons, any person may be come an agent, but persons of unsound mind and who are below 18 years of age are not liable towards their principal for acts done by them as agents[2]
eg. if A employs B (a minor) to buy some goods from C on his behalf and C supplies the goods, A cannot allege that he is not liable to pay for the goods just because B is not at the age of majority. A is still liable to pay C for the goods.
B. CREATION OF AGENCY
Like any other contracts, a contract of agency can be expressed or implied for the circumstances and the conduct of the parties. In other words, the authority of an agent may be expressed (given by words spoken or written) or implied (inferred from things spoken or written or from the ordinary course of dealings.)
eg. X lives in Ipoh and owns a shop in Kuantan. The shop is managed by Y who normally orders goods from Z in X’s name for the purpose of the shop and Y then pays for the goods out of X’s fund with X’s knowledge.
Section 138 CA provides that no consideration is necessary to create an agency.
By express appointment by the principal
By implied appointment by the principal
by ratification by the principal
by necessity i.e. operation of law
by the doctrine of estoppel
KGN Jaya Sdn Bhd v Pan Reliance Sdn Bhd [1996] 1 MLJ 233
The Court of Appeal held that the law does not require that an agency or sub agency agreement must be in writing.
Further more, Part X of the Contracts Act 1950, which contains the relevant provisions on agency does not contain any requirement that the appointment of an agent or sub agent has to be in writing or be evidence in writing.
1. BY EXPRESS APPOINTMENT
Express appointment may be in written or oral form. An example of an express appointment made in writing is a Power of Attorney. Even a letter written or words spoken may be effective in appointing an agent.
2. BY IMPLIED AGREEMENT
The Law can infer the creation of an agency by implication when a person by his words or conduct holds out another person as having authority to act for him.[3]
e.g. If he allows another person to order goods on his behalf and habitually pays for them, an agency may be implied. In such terms he will be bound by the contracts as if he has expressly authorised them.
Chan Yin Tee v William Jacks & Co (Malaya) Ltd [1964] MLJ 290
The appellant and Yong (a minor), were registered as partners. At a meeting with a representative of the respondent company, the appellant held himself out to be Yong’s partner. Goods were supplied to Yong but were not paid for. The respondent company obtained judgement against the appellant and Yong. The appellant appeal to FC which held that since the appellant had held Yong out of his agent who had the authority to do things on his behalf, the appellant was liable for Yong’s act.
By virtue of Section 7 of the Partnership Act 1961, partners are each other’s agents when contracting in the course of the partnership business.
BY RATIFICATION
Agency by ratification can arise in any one of the following situations:-
i. An agent who was duly appointed has exceeded his authority or
ii. A person who has no authority to act for the principal has acted as if he has the authority.
Section 149 CA 1950 –
Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts. If he ratifies them, the same effect will follow as if they had been performed by his authority.
When the principal accepts and confirms such a contract, the acceptance is called ratification. ratification may be expressed or implied[4]
Ratification is retrospective i.e. it dates back to the time when the original contract was made by the agent and not from the date of the principal’s ratification.
e.g. On 2 January 1996, A appointed B as his agent to buy a car not exceeding RM100,000/-. On 5 January B went to GRG Motors and ordered a car costing RM135,000/-, telling GRG Motor’s salesman that he was buying the car on A’s behalf. On 12 January, GRG Motors deliver the car to A. If A confirms and adopts the contract on 12 January, then B is said to be an agent through ratification. A can also rejects the contract since B had exceeded his authority.
Contract can be ratified under the following circumstances:-
The act must be authorised
The agent must, at the time of the contract, expressly act as an agent for the principal[5] i.e. he must not allow the third party to think that he is the principal.
Keighley Maxted & Co v Durant
An agent, R was authorised by the appellants to buy wheat at a certain price. The agent exceeded his authority and bought at a higher price in his own name but intending it for Keighley. Keighley agreed to take the wheat at that price but failed to take delivery. The court held that Keighley was liable to the Durant since R at the time of the contract did not profess to act as an agent.
SRM Meyappa Chettiar v Lim Lian Koo [1954] 20 MLJ 246
PC, the attorney of SC, entered into an agreement with the respondent under which the PC handed over to the respondent a piece of land belonging to his principal in consideration of RM 7,000/- and agreed ‘ upon the return of normal conditions, the vendor shall obtain a special power of attorney from the said SC now in India and execute the true and lawful transfer of the said land at the purchaser’s own expenses’. He further agreed that if he was unable to obtain the necessary power from his principal the RM7,000/- will be return to the respondent. At the trial, the learned judge held that the agreement had been satisfied by SC and therefore dismissed a claim for recovery of possession of the land. The Court of Appeal held that the terms of the agreement showed that PC was acting in his personal capacity and therefore the principal of ratification could not apply to the agreement
The principal only applies where the agent has professed to contract for his principal who afterwards ratifies.
The doctrine is thus stated by Tindal C.J in Wilson v Tumman [1843] 6 M&C 242 at page 242
The act done for another, by a person, not assuming to act for himself, but for such other person, tough without any precedent authority whatever, becomes the act of the principal, if subsequently ratified by him, is the known and well established rule of law. In that case the principal is bound by the act, whether it be for his detriment or his advantage, and whether it to be founded on a tort or on a contract, to the same effects as by, and with all the consequences which follow from the same act done by his previous authority.
The agent must have a principal, who is in actual existence or capable of being ascertained, when a contract is made. No one can ratify a contract if he is not a party competent to a contract at the date of the contract.
Kelner v Baxter [1866] LRE 2 CP 174
A contract to buy a hotel made by an agent on behalf of the company which is about to be formed, could not be ratified by the company since it did not exist at the time. The agent therefore held for the contract unless the third party agreed to release him.
The principal must have contractual capacity at the time when the contract is being made and at the time of ratification.
The principal must at the time of ratification, have full knowledge of all material facts, unless it can be shown that he intended to ratify the contract whatever the facts may be and assume responsibility from them[6]
The principal must ratify the whole act or contract
The ratification must not injure the third party, i.e. it must not subject the third party to damages or terminated his right or interest[7]
BY NECESSITY
An agency by necessity may be created if the following three conditions are met:-
1. It is impossible for the agent to get the principal’s instruction[8]
2. The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal with respect to the interest committed to his charge e.g. when an agent sells perishable goods belonging to his principal to prevent from rotting.
3. The agent of necessity must have acted in good faith.
In an emergency an agent has authority to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, his own case, under similar circumstances[9]
BY ESTOPPEL
A person cannot be bound by a contract made on his behalf without his authority. However, if he by his words and conduct allows a third party to believe that the particular person is his agent even when he is not, and the third party relies on it to the detriment of the third party, he will be estopped or precluded from denying the existence of that person’s authority to act on his behalf.
C. Agency in Relation to Banking
The law of agency is relevant to bankers because the relation between a banker and a customer is based on agency. Furthermore, bank employees are agents of the bank.
D. Bank as Agent of Customers
The relationship between a banker and his customers are generally that of a debtor and a creditor or vice versa.
Foley v Hill [1848] 9 ER 1002
When a banker receives money from his customers as deposit, the banker is a debtor and his customers are creditors. On the other hand, where a banker advances money as a loan or other credit, or extends banking facilities to his customer, the bank is the creditor and the customer is the debtor.
When a customer hires a safe deposit box in which he keeps his valuables, the bank is the customers agent.
E. Bank Employees as Agent for the Bank
Within a bank, employees of the bank are agents for the bank. Thus employees who are so authorised may act on behalf of the bank. The bank, as employer, is vicariously liable for the torts committed by its employees in the course of business.
F. Duties of Principal and Agent
The rights and duties of the principal and agent depend on the express or implied terms of the contract of agency. Where there is no such contract of agency, the rights and duties of an agent to his principal and vice versa are laid down in Section 164 – 176 of the Contracts Act 1950
a) Section 164 – Agent’s duty in conducting principal’s business
b) Section 165 – Skills and diligence required from the agent
c) Section 166 - Agent’s account
d) Section 167 – Agent’s duty to communicate with the principal
e) Section 168 – Right of principal when agent deals, on his own account, in business of agency without the principal
f) Section 169 – Principal’s right to benefit gained by agent dealing on his own account in business of agency
g) Section 170 – Agent’s right to retainer out of sums received on principals account
h) Section 171 – Agent’s duty to pay sums received for the principal
Mahesan v Malaysian Government Officers Co Operative Housing Society Ltd [1978] 1 MLJ 149
The appellant who was a director and secretary of the respondent co operative society bought land at the price of RM 944,000 on behalf of the respondent. The appellant knew that the vendor had earlier paid RM 456,000 for it but did not inform the respondent accordingly. It turned out that the appellant had received RM 122,000 as a bribe or secret profit from the vendor.
held: The respondent could recover either the bribe or the amount of the actual loss suffered by it as a result of entering into the contract.
i.Section 172 – When agent’s remuneration becomes due.
j.Section 173 – Agent not entitled to remuneration for business misconduct.
k. Section 174 - Agents’ lien on principal’s property.
l. Section 175 – Agent to be indemnified against consequences of lawful acts.
m. Section 176 – Agent to be indemnified against consequences of acts done in good faith.
G. DUTY OF PRINCIPAL TO AGENT
The duties of principal to agent is provided under section 175 – 178
Section 175 – agent to be indemnified against consequences of lawful acts
Section 176 - agent to be indemnified against consequences of acts done in good faith
Section 177 – non liability of employer of agent to do criminal act
Section 178 – compensation to agent for injury caused by principal’s negligent.
H. THE AUTHORITY OF AN AGENT
An agent’s authority may be actual or apparent. Actual authority is authorised expressly given by the principal (orally or written) or implied from the express authority given, from the circumstances of the case, custom or usage of trade, and the conduct of parties.
I. TERMINATION OF AGENCY
Section 154 – 163 of Contract Act 1950 deal with the manner which an agent may be terminated.
J. TERMINATION BY THE ACT OF THIRD PARTY.
When both parties agree that the agency shall terminate, the agency is terminated. The principal may revoke the authority of the agent at any time before it has been exercised to bind the principal.
When the agency is for an indefinite period of time, the agent can terminate the agency by giving reasonable notice of termination to the principal - Section 159.
K. TERMINATION BY OPERATION OF LAW
An agency may be revoked by operation of law in any of the following circumstances.:-
i. When the contract of agency has been performed
ii. Upon the expiry of the period fixed in the contract
iii. Death of the principal or agent
iv. When the principal or agent become insane
v. When the principal or agent become insolvent
vi. Upon the happening of a event which renders the agency unlawful.
[1] Section 135
[2] Section 137
[3] Section 140 and the illustrations.
[4] Section 150 – Ratification may be expressed or implied in the conduct of the person on whose behalf the acts are done.
[5] Section 149 CA 1950
[6] Section 151 Contract Act 1950
[7] Section 153 Contract Act 1950
[8] Section 142 Contract Act 1950
[9] Section 142 Contract Act 1950
Friday, August 27, 2010
Tuesday, July 13, 2010
Consideration
CONSIDERATION
An agreement without a valid consideration is void unless they belong to one of those categories of agreement listed in the same section as being exempted from the rule.
Section 2(d) Contact Act 1950
“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 so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise”
Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. When the promisor promises to do or to abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or abstinence or a price to perform a future act or abstinence.
Example
A lost his cat and offered a reward of RM 1000/- to anyone who finds it and returns it to A. B finds the cat and returns it to A. Here B pays the price for A promise by performing the act which by Sec 2(d) is the consideration of the promise.
TYPES OF CONSIDERATION
Consideration can be classified as: -
1. Executory
2. Executed
3. Past
1. Executory Consideration
It is when one promise is made in return for another or a promise in return of promise.
Example: -
M promised to sell his mobile phone to K for RM550/- and K promised to pay the price upon delivery by M. Here, the promise to sell is in return to promise to buy.
See Murugesu v Nadarajah [1980] 2 MLJ 82
M agreed to sell his house to N. An agreement was written on a scrap paper and says as follows: -
I agree to sell my house No. (address) held under…. to Mr. N, the present tenant of the house at $26,000/- within three months from the date.
M later refused to sell the house and a specific performance was ordered at the trial and the appellant took the matter to Federal Court. The appeal was dismissed, gave effect to Illustration of Section 24. Chang Min Tat F.J held:
“The agreement must be seen to be a case of Executory consideration. A promisee is made by one party in return for a promise made by the other; in such a case each promise is the consideration for the other”
Example
A agrees to sell his car for RM20,000/- to B. B promise to pay the sum of RM 20,000/- in consideration for A’s promise to sell the car, and A’s promise to sell the car is the consideration for B’s promise to pay the RM20,000/-. These are lawful considerations.
2. Executed Consideration
It is when a promise is made in return for the performance of an act.
Example
M lost his pen and offered RM 200/- to anyone who finds and returns the documents to him. K found M’s pen in response to the offer and returns them to M. By returning the pen, K has given consideration to M’s promise to pay. Should M refuse to pay, K may take an legal action against him.
3. Past Consideration
Where a promise is made subsequent to and in return for an act that has already been performed, the promise is made on account of a past consideration.
Example
If K finds and returns M’s pen and in gratitude, M promise to pay K RM200/- the promise is made in return for a prior act.
Under English law the general rule is that past consideration is insufficient to support a contract
Section 2(d) by the words “ has done or abstained from doing”
suggests that an act prior to the promise is sufficient to constitute consideration even though it is clearly past provided it is done at the desire of the promisor
Kepong Prospecting Ltd & S.K Jagatheesan & Ors v A.E Schmidt & Marjorie Schmidt [1968] 1 MLJ 170.
S a consultant engineer has assisted another in obtaining a prospecting permit for mining iron ore, he helped in the subsequent formation of Kepong Prospecting Ltd and was appointed as its MD. After the company was formed they entered into an agreement whereby the company undertook to pay 1% of the value of all ore sold from the mining land.
This being ‘in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services…….
Were the services rendered after the incorporation but before the agreement sufficient consideration? This was clearly past consideration. The Privy Council ruled that it did constitute a valid consideration so that Schmidt was entitled to his claim on the amount.
EXCEPTIONS TO GENERAL RULE
Section 26 Contract Act 1950:
An agreement made without consideration is void unless:-
a. it is in writing and registered – Section 26 (a) (love and affection)
it must be expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents and is made on account of natural love and affection between parties standing in near relation to each other.
** under English law natural love and affection are not recognized as a valid consideration as was decided in Brett v JS & his Wife(1600) 79 ER 9 & 7
see. Re Tan Soh Sim & Ors v Tan Saw Keow [1951] MLJ 21
A woman on her deathbed expressed her intention to leave all her properties to her four adopted children. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) i.e. it was not in writing and there was no natural love and affection between parties standing in near relation to each other
b. or is a promise to compensate for something done Section 26 (b)
It is a promise to compensate wholly or in part a person who has already voluntarily done something for the promised or something which the provision was legally compellable to do
There are three limbs to the exception
i. it is a promise to compensate either wholly or in part the other person
ii. the promisee has voluntarily done something for the promisor. The act must be performed voluntarily. Voluntarily was defined in the case of J.M. Wotherspoon & Co Ltd v Henry Agency House [1962] MLJ
iii. An agreement to compensate for an act the promisor was legally compellable to do.
The necessary ingredients are :-
a. promisee has voluntarily done an act
b. the act is one which the promisor was legally compellable to do
c. an agreement to compensate, wholly or in part, the promisee for the act
Example.
A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
** if X pays a fine imposed by the court on Y who promises to compensate him, that promise is binding under this provision
c. or is a promise to pay debt barred by limitation law. Section 26 (c)
A statute barred debt refers to a debt, which cannot be recovered through legal action because of a lapse of time fixed by the law.
Section 26(c) creates an exception to this rule but subject to several conditions:-
1. The debtor made a fresh promise to pay the statute barred debt.
2. The promise is in writing and signed by the person to be charged or his authorized agent in his/her behalf
Example
A owes B RM1000/-, but the debt is barred by limitation. A signs a written promise to pay B 500 on account of the debt. This is a contract
ADEQUACY OF CONSIDERATION
Does it matter that M sells his house worth RM1million for RM5/- to N. Is the amount of RM5/- sufficient consideration? Legally, it appears that the adequacy of consideration is immaterial.
An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the adequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.
Illustration (f)
A agrees to sell his horse worth RM1000/- for RM10/-. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.
See. Phang Swee Kim v Beh I Hock [1964] MLJ 383
Sale of a land for $500/- when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration.
The trail court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision of the Trail judge was reversed and applied explanation 2 and illustration (f) of Section 26.
See Kedari bin Ranu v Atmarambhat (1965 – 67) 3 BCHR 11.18,19
Thomas v Thomas (1842) 2 QB 851[1]
CONSIDERATION NEED NOT MOVE FROM THE PROMISEE
In English Law consideration must move from the promisee i.e. the person who receives the promise must himself give something in return. In Malaysia a party to an agreement can enforce a promise even though he has given no consideration, so long as somebody else has done so – Section 2(d).
Example
Assume that there are 3 parties to an agreement. A,B, & C. C promises to pay A RM1000/- if B will repair C’s car. B repairs C’s car and C does not pay A anything. Although A has given no consideration for C’s promise he may institute legal proceeding against C
WAIVER OF PERFORMANCE
The general rule in English law is that waiver of a right that is not supported by consideration void.
Example
A owes B RM1000/- which is due, B asks A to return RM100/- in full settlement. The waiver is not binding on B who may later change his mind and claim the balance owing, because the promise to forgo the balance is not supported by consideration.
A person who does no more than what he is already legally obliged to perform or under a public duty to perform cannot hold the other party to his promise. Payment of a smaller sum is not a satisfaction of a legal obligation to pay a larger sum. – Pinnel’s case (1602) 77 ER 237
See Section 64 Contract Act 1950:-
“ Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
Illustration (b)
A owes B $5000/-. A pays to B $200/-, and B accepts in satisfaction of the whole debt, $2000/- paid at the time and place at which the $5000/- were payable. The whole debt is discharged.
See. Kerpa Singh v Bariam Singh [1966] 1 MLJ 38
BS owed $8,869.94 under a judgment debt. BS’s son wrote to KS offering $4000/- in full settlement of his father’s debt and endorsed a cheque for the amount. He stipulated that should KS refuse to accept, he must return the cheque. KS’s legal advisers, having cashed the cheque and retain the money proceeded to secure the balance of the debt by issuing bankruptcy notice on the debtor. The Federal Court ruled that the acceptance of the cheque from the debtor’s son in full satisfaction precluded them from claiming the balance.
see PEMBINAAN PURCON V ENTERTAINMENT VILLAGE (M) SDN BHD [2004] 1 MLJ 545
[1] A rental of $1.00 is a good consideration even though it is obviously inadequate.
An agreement without a valid consideration is void unless they belong to one of those categories of agreement listed in the same section as being exempted from the rule.
Section 2(d) Contact Act 1950
“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 so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise”
Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. When the promisor promises to do or to abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or abstinence or a price to perform a future act or abstinence.
Example
A lost his cat and offered a reward of RM 1000/- to anyone who finds it and returns it to A. B finds the cat and returns it to A. Here B pays the price for A promise by performing the act which by Sec 2(d) is the consideration of the promise.
TYPES OF CONSIDERATION
Consideration can be classified as: -
1. Executory
2. Executed
3. Past
1. Executory Consideration
It is when one promise is made in return for another or a promise in return of promise.
Example: -
M promised to sell his mobile phone to K for RM550/- and K promised to pay the price upon delivery by M. Here, the promise to sell is in return to promise to buy.
See Murugesu v Nadarajah [1980] 2 MLJ 82
M agreed to sell his house to N. An agreement was written on a scrap paper and says as follows: -
I agree to sell my house No. (address) held under…. to Mr. N, the present tenant of the house at $26,000/- within three months from the date.
M later refused to sell the house and a specific performance was ordered at the trial and the appellant took the matter to Federal Court. The appeal was dismissed, gave effect to Illustration of Section 24. Chang Min Tat F.J held:
“The agreement must be seen to be a case of Executory consideration. A promisee is made by one party in return for a promise made by the other; in such a case each promise is the consideration for the other”
Example
A agrees to sell his car for RM20,000/- to B. B promise to pay the sum of RM 20,000/- in consideration for A’s promise to sell the car, and A’s promise to sell the car is the consideration for B’s promise to pay the RM20,000/-. These are lawful considerations.
2. Executed Consideration
It is when a promise is made in return for the performance of an act.
Example
M lost his pen and offered RM 200/- to anyone who finds and returns the documents to him. K found M’s pen in response to the offer and returns them to M. By returning the pen, K has given consideration to M’s promise to pay. Should M refuse to pay, K may take an legal action against him.
3. Past Consideration
Where a promise is made subsequent to and in return for an act that has already been performed, the promise is made on account of a past consideration.
Example
If K finds and returns M’s pen and in gratitude, M promise to pay K RM200/- the promise is made in return for a prior act.
Under English law the general rule is that past consideration is insufficient to support a contract
Section 2(d) by the words “ has done or abstained from doing”
suggests that an act prior to the promise is sufficient to constitute consideration even though it is clearly past provided it is done at the desire of the promisor
Kepong Prospecting Ltd & S.K Jagatheesan & Ors v A.E Schmidt & Marjorie Schmidt [1968] 1 MLJ 170.
S a consultant engineer has assisted another in obtaining a prospecting permit for mining iron ore, he helped in the subsequent formation of Kepong Prospecting Ltd and was appointed as its MD. After the company was formed they entered into an agreement whereby the company undertook to pay 1% of the value of all ore sold from the mining land.
This being ‘in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services…….
Were the services rendered after the incorporation but before the agreement sufficient consideration? This was clearly past consideration. The Privy Council ruled that it did constitute a valid consideration so that Schmidt was entitled to his claim on the amount.
EXCEPTIONS TO GENERAL RULE
Section 26 Contract Act 1950:
An agreement made without consideration is void unless:-
a. it is in writing and registered – Section 26 (a) (love and affection)
it must be expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents and is made on account of natural love and affection between parties standing in near relation to each other.
** under English law natural love and affection are not recognized as a valid consideration as was decided in Brett v JS & his Wife(1600) 79 ER 9 & 7
see. Re Tan Soh Sim & Ors v Tan Saw Keow [1951] MLJ 21
A woman on her deathbed expressed her intention to leave all her properties to her four adopted children. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) i.e. it was not in writing and there was no natural love and affection between parties standing in near relation to each other
b. or is a promise to compensate for something done Section 26 (b)
It is a promise to compensate wholly or in part a person who has already voluntarily done something for the promised or something which the provision was legally compellable to do
There are three limbs to the exception
i. it is a promise to compensate either wholly or in part the other person
ii. the promisee has voluntarily done something for the promisor. The act must be performed voluntarily. Voluntarily was defined in the case of J.M. Wotherspoon & Co Ltd v Henry Agency House [1962] MLJ
iii. An agreement to compensate for an act the promisor was legally compellable to do.
The necessary ingredients are :-
a. promisee has voluntarily done an act
b. the act is one which the promisor was legally compellable to do
c. an agreement to compensate, wholly or in part, the promisee for the act
Example.
A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
** if X pays a fine imposed by the court on Y who promises to compensate him, that promise is binding under this provision
c. or is a promise to pay debt barred by limitation law. Section 26 (c)
A statute barred debt refers to a debt, which cannot be recovered through legal action because of a lapse of time fixed by the law.
Section 26(c) creates an exception to this rule but subject to several conditions:-
1. The debtor made a fresh promise to pay the statute barred debt.
2. The promise is in writing and signed by the person to be charged or his authorized agent in his/her behalf
Example
A owes B RM1000/-, but the debt is barred by limitation. A signs a written promise to pay B 500 on account of the debt. This is a contract
ADEQUACY OF CONSIDERATION
Does it matter that M sells his house worth RM1million for RM5/- to N. Is the amount of RM5/- sufficient consideration? Legally, it appears that the adequacy of consideration is immaterial.
An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the adequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.
Illustration (f)
A agrees to sell his horse worth RM1000/- for RM10/-. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.
See. Phang Swee Kim v Beh I Hock [1964] MLJ 383
Sale of a land for $500/- when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration.
The trail court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision of the Trail judge was reversed and applied explanation 2 and illustration (f) of Section 26.
See Kedari bin Ranu v Atmarambhat (1965 – 67) 3 BCHR 11.18,19
Thomas v Thomas (1842) 2 QB 851[1]
CONSIDERATION NEED NOT MOVE FROM THE PROMISEE
In English Law consideration must move from the promisee i.e. the person who receives the promise must himself give something in return. In Malaysia a party to an agreement can enforce a promise even though he has given no consideration, so long as somebody else has done so – Section 2(d).
Example
Assume that there are 3 parties to an agreement. A,B, & C. C promises to pay A RM1000/- if B will repair C’s car. B repairs C’s car and C does not pay A anything. Although A has given no consideration for C’s promise he may institute legal proceeding against C
WAIVER OF PERFORMANCE
The general rule in English law is that waiver of a right that is not supported by consideration void.
Example
A owes B RM1000/- which is due, B asks A to return RM100/- in full settlement. The waiver is not binding on B who may later change his mind and claim the balance owing, because the promise to forgo the balance is not supported by consideration.
A person who does no more than what he is already legally obliged to perform or under a public duty to perform cannot hold the other party to his promise. Payment of a smaller sum is not a satisfaction of a legal obligation to pay a larger sum. – Pinnel’s case (1602) 77 ER 237
See Section 64 Contract Act 1950:-
“ Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
Illustration (b)
A owes B $5000/-. A pays to B $200/-, and B accepts in satisfaction of the whole debt, $2000/- paid at the time and place at which the $5000/- were payable. The whole debt is discharged.
See. Kerpa Singh v Bariam Singh [1966] 1 MLJ 38
BS owed $8,869.94 under a judgment debt. BS’s son wrote to KS offering $4000/- in full settlement of his father’s debt and endorsed a cheque for the amount. He stipulated that should KS refuse to accept, he must return the cheque. KS’s legal advisers, having cashed the cheque and retain the money proceeded to secure the balance of the debt by issuing bankruptcy notice on the debtor. The Federal Court ruled that the acceptance of the cheque from the debtor’s son in full satisfaction precluded them from claiming the balance.
see PEMBINAAN PURCON V ENTERTAINMENT VILLAGE (M) SDN BHD [2004] 1 MLJ 545
[1] A rental of $1.00 is a good consideration even though it is obviously inadequate.
Separate Legal Entity (Law 346)
LEGAL PERSONALITY
NATURE AND FORMATION OF COMPANIES
The law relating to companies in Malaysian is contained in the Companies Act, 1965. This Act is based on the English Companies Act 1948 and the Australian Uniform companies Act 1961. It is due in these historical ties, that the English and Australian Law has some significance on Malaysian Company Law. This is why you will see English and Australian judicial precedents being referred to, and applied in interpreting certain provisions of the Malaysian Companies Act.
It must be stressed here that since this Act is a piece of legislation that has its provisions constantly amended to keep up with the times, there may be slight changes to company law from time to time. It would be very helpful for you to ensure that the Act you refer to is the latest amended version.
NATURE OF COMPANIES
A company is a corporate body of a corporation. A corporation is an artificial legal person. The law sees it as separate and independent of the persons who are members of that corporate body. The legal recognition given to the company is provided by S.16(5) of the Companies Act, 1965. it says:
“On and from the date of corporation specified in the of incorporation…the subscribers to the memorandum together with such other person as from time to time become members of the company shall be a body corporate by the name set out in the memorandum…”
in other words, after fulfilling all the requirement of the Act incorporate the company, and the Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a new legal entity comes into existence. The company, an artificial person, is ‘born’ out of the process of law. This new entity is separate from its members. Like a natural person it has its own name and can own property.
This means that the company can use own name to enter into transactions and need not go through its members, and that the company’s assets do not belong to the members. The reason for creating the legal fiction of the separate legal personality has been said to be a matter of convenience. The separate legal personality concept is useful in large companies where there are many shareholders, and these shareholders are frequently changing. If the company does not have a separate legal personality, it would mean that a change among the shareholders would require a transfer of the company’s assets.
Liabilities and contract form the former group of shareholders to the present group. It would entail a lot of difficulties to deal with multiple transfers. On top of that it would be difficult to keep up with the frequent transaction of shares on the market.
PRE-INCORPERATION DOCUMENTS
After the name of the company has been approved, the persons responsible must submit to the CCM the pre-incorporation documents together with the required fees, and a copy of the approval letter for the use of the name. The pre-incorporation documents are:
(i.) The memorandum and articles of association
(ii.) A statutory declaration by persons before appointment as director, or by a promoter
(iii.) A declaration by the person who has agreed to be the company secretary
The application for the registration of the company must be made within the three months of the application for the reservation of the name of the company.
CERTIFICATE of INCORPORATION
Once the CCM is satisfied that all the incorporation documents are in order, the CCM will issue the Certificate of Incorporation to the company. This certificate is the ‘birth certificate’ of a company. Once a company has been registered, it is recognized as a separate legal entity.
TYPES OF COMPANIES
Companies in Malaysia are classified according to (i) liability, (ii) private or public status.
Companies classified according to liability.
Types of companies.
company limited by shares
company limited by guarantee
company limited by share and guarantee
unlimited company
COMPANIES LIMITED BY SHARES
S.4 defines ‘company limited by shares’ as a company formed on the principle of having the liability of its members limited by the memorandum to the amount (if any) unpaid on the shares respectively held by them. This is the most common form of company. The liability of a member of this company will depend on whether his shares are fully paid or not. If he holds fully paid shares, he has no further liability to the company. If the company becomes insolvent he cannot be made to contribute to the assets of the company. Only if his shares are partly paid, he will be liable to contribute to the company’s assets, up to the amount still unpaid on his shares.
COMPANY LIMITED BY GUARANTEE
A company limited by guarantee id defined by section 4 as ‘a company in the principle of having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up’.
This type of company does not have a share capital and so does not require the members is specified in the memorandum of association. If the company is wound up, then a person who has been its member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the company while he was a member. This liability extends to those who has left the company but was a member within a year before the company wound up.
Although this type of company does not have a share capital, it is a separate legal entity. It is not normally used for trading, but is often formed to run clubs and other organizations that is maintained by subscription, social activities and donations.
CLASSIFICATION AS PRIVATE OR PUBLIC COMPANIES
Classification according to status
Private Company
According to S.15(1)
Ø restrict right to transfer shares
Ø limit number of members to no more than 50
Ø prohibit invitation or offer of shares or debentures to public
Ø prohibit invitation or offer public to deposit money with company
According to S.15(1), a company is classified as a private company if its memorandum or articles:
Ø restrict the right to transfer shares. There is no prescribed form of restriction. The articles can have restrictions such as giving of pre-emption to other members before shares can be transferred to other persons, or there is to be no transfer of shares unless the directors approve. These restrictions will discourage membership as then the share would be difficult to sell.
Ø Limit the number of members to not more than 50. If shares are jointly held they are considered as held by one person. Employees of the company or its subsidiaries who are not members are not counted.
Ø Prohibit any invitation or offer to the public to subscribe for shares in or debentures of the company.
Ø Prohibit any invitation to the public to deposit money with the company.
A private company may have a share capital with limited or unlimited liability. As private companies do not seek funds from public, they enjoy certain privileges that are not given to public companies. A private company may be distinguished from a public company in having the word ‘Sendirian’ or the abbreviation ‘Sdn.’ as part of its name. If the company is a limited liability company then this word should come before the word ‘Bhd.’ e.g. the name of Syarikat Dua Lima, a private limited company, will appear as Syarikat Dua Lima Sdn. Bhd.
THE RELATIONSHIP OF LEGAL PERSONALITY TO LIMITED LIABILITY
It has been said that the most popular reason why a company is formed is to take advantages of the limited liability principle. However, it must be remembered that although a company is a separate legal personality, it can have unlimited liability. In order words, the shareholders may still be liable for the company’s debts.
A corporate body with limited liability means the shareholders of a company limited by shares are not liable for more than what they have to contribute for the shares they get. If the company is limited by guarantee, they are not liable for more than amount they have agreed to contribute to the assets on winding up.
The limited liability of a company has been said cost involved in the separation of ownership of the shares and control of the company. However, this may be true only for public companies. This has been said as a company has limited liability, it reduces the need to monitor management and other shareholders. Limited liability together with free transfer of shares, will also facilitate the market for control.
This is considered as an incentive for the management to perform efficiently. Apart from that, and other than making the shares marketable, limited liability would increase the volume of transactions that would improve the information fed to the market place. Limited liability also allows shareholders to diversity their shareholdings. Lastly, limited liability will result in a positive attitude to risk taking and so would facilitate investment decisions.
SEPARATE LEGAL ENTITY AND THE CONSEQUENCES THAT FLOW FROM IT.
The legal recognition given to the company is provided by s.16(5) of the Companies Act, 1965. It says:
“On and from the date of incorporation specified in the certificate of incorporation… the subscribers to the memorandum together with such other persons as from time to time become members of the company shall be a body corporate by the name set out in the memorandum.
Apart from recognizing the company as a legal entity, s.16(5) states the effect of incorporation are:
“…shall be a body corporate…capable forthwith of exercising all the functions of an incorporated body and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up…”
Thus you can see the effect of incorporation as follows:
a body corporate comes into existence capable of exercising all the functions of an incorporated company;
it has the ability to sue and be sued;
it enjoys perpetual succession;
it has the power to hold property; and
the liability of the members depend on the type of company
A Body Corporate
A body corporate is a legal person that is created and given recognition by the law. This legal person is actually a legal fiction. It is an artificial legal person unlike human individuals who are known as natural persons. According to s.4(1) a ‘corporation’ is any body corporate wherever formed and includes any foreign company.
A company is a type of corporation that is recognized by the law as having powers and liabilities like an individual. The courts first recognized the company as an individual having a separate legal personality in the case of:
Salomon v A. Salomon & Co. Ltd. (1897) AC 22
Salomon was a boot and shoe manufacturer. He ran his business as a sole trader. In 1892 Salomon formed a limited liability company. He gave his wife and children one share each in the company. He then sold his shoe and boot business to the company for f39, 000. In consideration for the business, the company paid him partly in cash, partly in 20, 000 f1 shares, and partly in f10, 000 debentures issued by the company. By being a debenture holder, Salomon becomes a secured creditor of the company.
Salomon continued to run the business as one-man company. The business did not do well and after some time became insolvent. What was left of the assets of the company were not enough to pay off the creditors. It was mostly used to pay off the debenture held by Salomon. The other creditors tried to claim that Salomon had no right to the remaining assets as the sale of this business to the company was a sham, and that his wife and children were merely his nominees, and that Salomon and the company were in fact one and the same.
The House of Lords held that the incorporation process made Salomon and his company two separate persons. Even if the business were the same as before, and it was still managed by Salomon himself, the company was not an agent or trustee for the members. Although Salomon beneficially owned all the issued shares of the company, the court also recognized him as a separate person who can be a secured creditor with enforceable rights against the company.
The principle establishing the separate legal personality of the company from the members was applied in the case of:
Lee v Lee’s Air Farming (1961) AC 12
Lee formed Lee’s Air Farming Ltd. and held all the shares, except for one. The company was formed to undertake the business of aerial crop spaying. Lee was employed as the company’s pilot. He was killed in an accident while carrying out his work. His wife claimed workmen’s compensation under the New Zealand law, and she could only succeed if she could show that Lee was in effect an employee.
The Privy Council held although Lee was the controller of the company, personally he was separate from the company. He could enter into a contract with the company, and could be an employee.
Can Sue and be Sued
As the company is a separate legal entity, it can sue and be sued in its own name. It can sue in respect of rights that it has, and if it has liabilities, others may sue against it. The members of the company generally cannot take any legal action on behalf of the company. Only the company itself can enforce its rights. This is called the ‘proper plaintiff’ rule and it was established in the case of:
Foss v Harbottle (1843) 2 Hare 461
Two shareholders of a company brought action against directors of the company for misapplication and improper use of the company’s property.
The court held that as the injury complained of was injury to the company and not to the members. As such the members could not take action. Only the company had the right to sue.
Perpetual Succession
After a company is incorporated, it continues to exist until it is dissolved according to the law or it is struck off the register. Even if the membership changes, or all the original members die, the company does not come to an end. This continuous life of the company is said to be perpetual succession.
In the case of Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561;
The company had a husband and a wife as its only shareholders. They were also the company’s directors. They died in an accident, leaving behind an infant child. After their death the company still existed. The problem that arose was, as the shareholders and directors had died, the shares could not be transferred as according to the will of the deceased to the infant child.
The court thus allowed the personal representative of the deceased to appoint directors of the company, so that these directors could allow the transfer of the shares to the child.
Power to Own Properly
S. 19 mentions that a company has the ‘power to hold land’. This can be taken to mean that a company can own other types of property too. The property of a company is its own, and not that of its members. Even if a member holds almost all the shares of a company, he does not have any proprietary interest in the company’s property. Once a person has sold or given his property to the company he no longer has any right over it. The property belongs to the company, and the member no longer has any right or interest.
Macaura v Northern Assurance Co. Ltd. (1925)AC619;
Macaura owned an estate and he sold all the timber one the estate to company called Irish Canadian Sawmills Ltd. All the shares in the company were owned by him or his nominee. Macaura had insured the timber that he sold to the company in his own name. After the insurance was taken, a fire broke out destroying the timber. When Macaura claimedn the insurance company refused to pay.
The House of Lords agreed that Macaura had no right to claim, because when he sold the timber to the company, he had given up his interest in it. The timber was the property of the company and Macaura no longer had insurable interest in it.
Liability of the Members
Once a company is incorporated it is liable for its own debts and obligations. The members are not responsible for it. This is one of the advantages of a company that has limited liability. In a company limited by shares, the members will make a contribution to the capital and he will be given shares. If the company should suffer losses, the shareholder is not liable to contribute any more to the company if he has fully paid for his shares. His actually loss would be the amount he has paid for the shares. Creditors of the company cannot be take any action against the members, because the members are separate from the company.
In the case of In the Application for Re Yee Yut Ee (978)2 MLJ 142
Yee was the secretary of a company that was a wholly-owned subsidiary of an American corporation. The company had retrenched their staff and dispute arose as to the retrenchment benefits. The matter was brought to the Industrial Arbitration Court where an award was made in the company’s absence. As the company did not comply with the award, the Arbitration Court ordered that Yee be personally liable as he had been appointed director by then.
The High court held that a director is nor liable for the company’s debts.
LIFTING THE VEIL OF INCORPORATION
The veil of incorporation is a fiction created by law separating the company as a legal personality from the people behind it. Once a company is incorporated, this veil comes down separating the company from the members. Normally the courts would not look beyond the ‘corporate veil’ to see who is behind the company and why the company was established. As you have seen from the effect of incorporation, the shareholders of a company cannot be personally sued for the company’s debts and obligations.
Sometimes the strict application of the separate legal entity principle, does have its disadvantages. We have seen in Macaura’s case where the application of the separate legal personality principle caused hardship to the one who owned almost all the shares of the company, who cannot claim for insurance taken under his own name. There are also cases where third parties suffer. Where a company is limited liability company, the creditors will suffer if the company incurs debts which it is unable to pay, as the shareholders are not liable beyond the amount they have contributed in full for their shares.
Due to some of the undesirable consequences of incorporation, company law recognizes a number of exceptions to the principle of veil of incorporation. Under these exceptional circumstances, the law looks at the situation and will ignore the separation between the company and its members or officers. This is called ‘Lifting the veil’. When the court lifts the corporate veil, the members or officers will be made liable for the company’s obligations. The corporate veil is lifted under situations provided by statue, and also according to the judicial decision under the common law.
[1] Section 36 CA 1965
[2] Section 44(2) CA 1965
[3] Section 48(4) CA 1965
[4] Section 121(2) CA 1965
NATURE AND FORMATION OF COMPANIES
The law relating to companies in Malaysian is contained in the Companies Act, 1965. This Act is based on the English Companies Act 1948 and the Australian Uniform companies Act 1961. It is due in these historical ties, that the English and Australian Law has some significance on Malaysian Company Law. This is why you will see English and Australian judicial precedents being referred to, and applied in interpreting certain provisions of the Malaysian Companies Act.
It must be stressed here that since this Act is a piece of legislation that has its provisions constantly amended to keep up with the times, there may be slight changes to company law from time to time. It would be very helpful for you to ensure that the Act you refer to is the latest amended version.
NATURE OF COMPANIES
A company is a corporate body of a corporation. A corporation is an artificial legal person. The law sees it as separate and independent of the persons who are members of that corporate body. The legal recognition given to the company is provided by S.16(5) of the Companies Act, 1965. it says:
“On and from the date of corporation specified in the of incorporation…the subscribers to the memorandum together with such other person as from time to time become members of the company shall be a body corporate by the name set out in the memorandum…”
in other words, after fulfilling all the requirement of the Act incorporate the company, and the Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a new legal entity comes into existence. The company, an artificial person, is ‘born’ out of the process of law. This new entity is separate from its members. Like a natural person it has its own name and can own property.
This means that the company can use own name to enter into transactions and need not go through its members, and that the company’s assets do not belong to the members. The reason for creating the legal fiction of the separate legal personality has been said to be a matter of convenience. The separate legal personality concept is useful in large companies where there are many shareholders, and these shareholders are frequently changing. If the company does not have a separate legal personality, it would mean that a change among the shareholders would require a transfer of the company’s assets.
Liabilities and contract form the former group of shareholders to the present group. It would entail a lot of difficulties to deal with multiple transfers. On top of that it would be difficult to keep up with the frequent transaction of shares on the market.
PRE-INCORPERATION DOCUMENTS
After the name of the company has been approved, the persons responsible must submit to the CCM the pre-incorporation documents together with the required fees, and a copy of the approval letter for the use of the name. The pre-incorporation documents are:
(i.) The memorandum and articles of association
(ii.) A statutory declaration by persons before appointment as director, or by a promoter
(iii.) A declaration by the person who has agreed to be the company secretary
The application for the registration of the company must be made within the three months of the application for the reservation of the name of the company.
CERTIFICATE of INCORPORATION
Once the CCM is satisfied that all the incorporation documents are in order, the CCM will issue the Certificate of Incorporation to the company. This certificate is the ‘birth certificate’ of a company. Once a company has been registered, it is recognized as a separate legal entity.
TYPES OF COMPANIES
Companies in Malaysia are classified according to (i) liability, (ii) private or public status.
Companies classified according to liability.
Types of companies.
company limited by shares
company limited by guarantee
company limited by share and guarantee
unlimited company
COMPANIES LIMITED BY SHARES
S.4 defines ‘company limited by shares’ as a company formed on the principle of having the liability of its members limited by the memorandum to the amount (if any) unpaid on the shares respectively held by them. This is the most common form of company. The liability of a member of this company will depend on whether his shares are fully paid or not. If he holds fully paid shares, he has no further liability to the company. If the company becomes insolvent he cannot be made to contribute to the assets of the company. Only if his shares are partly paid, he will be liable to contribute to the company’s assets, up to the amount still unpaid on his shares.
COMPANY LIMITED BY GUARANTEE
A company limited by guarantee id defined by section 4 as ‘a company in the principle of having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up’.
This type of company does not have a share capital and so does not require the members is specified in the memorandum of association. If the company is wound up, then a person who has been its member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the company while he was a member. This liability extends to those who has left the company but was a member within a year before the company wound up.
Although this type of company does not have a share capital, it is a separate legal entity. It is not normally used for trading, but is often formed to run clubs and other organizations that is maintained by subscription, social activities and donations.
CLASSIFICATION AS PRIVATE OR PUBLIC COMPANIES
Classification according to status
Private Company
According to S.15(1)
Ø restrict right to transfer shares
Ø limit number of members to no more than 50
Ø prohibit invitation or offer of shares or debentures to public
Ø prohibit invitation or offer public to deposit money with company
According to S.15(1), a company is classified as a private company if its memorandum or articles:
Ø restrict the right to transfer shares. There is no prescribed form of restriction. The articles can have restrictions such as giving of pre-emption to other members before shares can be transferred to other persons, or there is to be no transfer of shares unless the directors approve. These restrictions will discourage membership as then the share would be difficult to sell.
Ø Limit the number of members to not more than 50. If shares are jointly held they are considered as held by one person. Employees of the company or its subsidiaries who are not members are not counted.
Ø Prohibit any invitation or offer to the public to subscribe for shares in or debentures of the company.
Ø Prohibit any invitation to the public to deposit money with the company.
A private company may have a share capital with limited or unlimited liability. As private companies do not seek funds from public, they enjoy certain privileges that are not given to public companies. A private company may be distinguished from a public company in having the word ‘Sendirian’ or the abbreviation ‘Sdn.’ as part of its name. If the company is a limited liability company then this word should come before the word ‘Bhd.’ e.g. the name of Syarikat Dua Lima, a private limited company, will appear as Syarikat Dua Lima Sdn. Bhd.
THE RELATIONSHIP OF LEGAL PERSONALITY TO LIMITED LIABILITY
It has been said that the most popular reason why a company is formed is to take advantages of the limited liability principle. However, it must be remembered that although a company is a separate legal personality, it can have unlimited liability. In order words, the shareholders may still be liable for the company’s debts.
A corporate body with limited liability means the shareholders of a company limited by shares are not liable for more than what they have to contribute for the shares they get. If the company is limited by guarantee, they are not liable for more than amount they have agreed to contribute to the assets on winding up.
The limited liability of a company has been said cost involved in the separation of ownership of the shares and control of the company. However, this may be true only for public companies. This has been said as a company has limited liability, it reduces the need to monitor management and other shareholders. Limited liability together with free transfer of shares, will also facilitate the market for control.
This is considered as an incentive for the management to perform efficiently. Apart from that, and other than making the shares marketable, limited liability would increase the volume of transactions that would improve the information fed to the market place. Limited liability also allows shareholders to diversity their shareholdings. Lastly, limited liability will result in a positive attitude to risk taking and so would facilitate investment decisions.
SEPARATE LEGAL ENTITY AND THE CONSEQUENCES THAT FLOW FROM IT.
The legal recognition given to the company is provided by s.16(5) of the Companies Act, 1965. It says:
“On and from the date of incorporation specified in the certificate of incorporation… the subscribers to the memorandum together with such other persons as from time to time become members of the company shall be a body corporate by the name set out in the memorandum.
Apart from recognizing the company as a legal entity, s.16(5) states the effect of incorporation are:
“…shall be a body corporate…capable forthwith of exercising all the functions of an incorporated body and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up…”
Thus you can see the effect of incorporation as follows:
a body corporate comes into existence capable of exercising all the functions of an incorporated company;
it has the ability to sue and be sued;
it enjoys perpetual succession;
it has the power to hold property; and
the liability of the members depend on the type of company
A Body Corporate
A body corporate is a legal person that is created and given recognition by the law. This legal person is actually a legal fiction. It is an artificial legal person unlike human individuals who are known as natural persons. According to s.4(1) a ‘corporation’ is any body corporate wherever formed and includes any foreign company.
A company is a type of corporation that is recognized by the law as having powers and liabilities like an individual. The courts first recognized the company as an individual having a separate legal personality in the case of:
Salomon v A. Salomon & Co. Ltd. (1897) AC 22
Salomon was a boot and shoe manufacturer. He ran his business as a sole trader. In 1892 Salomon formed a limited liability company. He gave his wife and children one share each in the company. He then sold his shoe and boot business to the company for f39, 000. In consideration for the business, the company paid him partly in cash, partly in 20, 000 f1 shares, and partly in f10, 000 debentures issued by the company. By being a debenture holder, Salomon becomes a secured creditor of the company.
Salomon continued to run the business as one-man company. The business did not do well and after some time became insolvent. What was left of the assets of the company were not enough to pay off the creditors. It was mostly used to pay off the debenture held by Salomon. The other creditors tried to claim that Salomon had no right to the remaining assets as the sale of this business to the company was a sham, and that his wife and children were merely his nominees, and that Salomon and the company were in fact one and the same.
The House of Lords held that the incorporation process made Salomon and his company two separate persons. Even if the business were the same as before, and it was still managed by Salomon himself, the company was not an agent or trustee for the members. Although Salomon beneficially owned all the issued shares of the company, the court also recognized him as a separate person who can be a secured creditor with enforceable rights against the company.
The principle establishing the separate legal personality of the company from the members was applied in the case of:
Lee v Lee’s Air Farming (1961) AC 12
Lee formed Lee’s Air Farming Ltd. and held all the shares, except for one. The company was formed to undertake the business of aerial crop spaying. Lee was employed as the company’s pilot. He was killed in an accident while carrying out his work. His wife claimed workmen’s compensation under the New Zealand law, and she could only succeed if she could show that Lee was in effect an employee.
The Privy Council held although Lee was the controller of the company, personally he was separate from the company. He could enter into a contract with the company, and could be an employee.
Can Sue and be Sued
As the company is a separate legal entity, it can sue and be sued in its own name. It can sue in respect of rights that it has, and if it has liabilities, others may sue against it. The members of the company generally cannot take any legal action on behalf of the company. Only the company itself can enforce its rights. This is called the ‘proper plaintiff’ rule and it was established in the case of:
Foss v Harbottle (1843) 2 Hare 461
Two shareholders of a company brought action against directors of the company for misapplication and improper use of the company’s property.
The court held that as the injury complained of was injury to the company and not to the members. As such the members could not take action. Only the company had the right to sue.
Perpetual Succession
After a company is incorporated, it continues to exist until it is dissolved according to the law or it is struck off the register. Even if the membership changes, or all the original members die, the company does not come to an end. This continuous life of the company is said to be perpetual succession.
In the case of Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561;
The company had a husband and a wife as its only shareholders. They were also the company’s directors. They died in an accident, leaving behind an infant child. After their death the company still existed. The problem that arose was, as the shareholders and directors had died, the shares could not be transferred as according to the will of the deceased to the infant child.
The court thus allowed the personal representative of the deceased to appoint directors of the company, so that these directors could allow the transfer of the shares to the child.
Power to Own Properly
S. 19 mentions that a company has the ‘power to hold land’. This can be taken to mean that a company can own other types of property too. The property of a company is its own, and not that of its members. Even if a member holds almost all the shares of a company, he does not have any proprietary interest in the company’s property. Once a person has sold or given his property to the company he no longer has any right over it. The property belongs to the company, and the member no longer has any right or interest.
Macaura v Northern Assurance Co. Ltd. (1925)AC619;
Macaura owned an estate and he sold all the timber one the estate to company called Irish Canadian Sawmills Ltd. All the shares in the company were owned by him or his nominee. Macaura had insured the timber that he sold to the company in his own name. After the insurance was taken, a fire broke out destroying the timber. When Macaura claimedn the insurance company refused to pay.
The House of Lords agreed that Macaura had no right to claim, because when he sold the timber to the company, he had given up his interest in it. The timber was the property of the company and Macaura no longer had insurable interest in it.
Liability of the Members
Once a company is incorporated it is liable for its own debts and obligations. The members are not responsible for it. This is one of the advantages of a company that has limited liability. In a company limited by shares, the members will make a contribution to the capital and he will be given shares. If the company should suffer losses, the shareholder is not liable to contribute any more to the company if he has fully paid for his shares. His actually loss would be the amount he has paid for the shares. Creditors of the company cannot be take any action against the members, because the members are separate from the company.
In the case of In the Application for Re Yee Yut Ee (978)2 MLJ 142
Yee was the secretary of a company that was a wholly-owned subsidiary of an American corporation. The company had retrenched their staff and dispute arose as to the retrenchment benefits. The matter was brought to the Industrial Arbitration Court where an award was made in the company’s absence. As the company did not comply with the award, the Arbitration Court ordered that Yee be personally liable as he had been appointed director by then.
The High court held that a director is nor liable for the company’s debts.
LIFTING THE VEIL OF INCORPORATION
The veil of incorporation is a fiction created by law separating the company as a legal personality from the people behind it. Once a company is incorporated, this veil comes down separating the company from the members. Normally the courts would not look beyond the ‘corporate veil’ to see who is behind the company and why the company was established. As you have seen from the effect of incorporation, the shareholders of a company cannot be personally sued for the company’s debts and obligations.
Sometimes the strict application of the separate legal entity principle, does have its disadvantages. We have seen in Macaura’s case where the application of the separate legal personality principle caused hardship to the one who owned almost all the shares of the company, who cannot claim for insurance taken under his own name. There are also cases where third parties suffer. Where a company is limited liability company, the creditors will suffer if the company incurs debts which it is unable to pay, as the shareholders are not liable beyond the amount they have contributed in full for their shares.
Due to some of the undesirable consequences of incorporation, company law recognizes a number of exceptions to the principle of veil of incorporation. Under these exceptional circumstances, the law looks at the situation and will ignore the separation between the company and its members or officers. This is called ‘Lifting the veil’. When the court lifts the corporate veil, the members or officers will be made liable for the company’s obligations. The corporate veil is lifted under situations provided by statue, and also according to the judicial decision under the common law.
[1] Section 36 CA 1965
[2] Section 44(2) CA 1965
[3] Section 48(4) CA 1965
[4] Section 121(2) CA 1965
Monday, July 12, 2010
Proposal and AcceptanceEMT 119)
PROPOSAL AND ACCEPTANCE
The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is made when one party accepts an offer made by the other party.
Store v Manchester CC [1974] W.L.R 1403
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 person to whom it is addressed.
An agreement between two or more parties is constituted by a proposal and an acceptance of it
Section 2(a) Contracts Act 1950 –
A proposal is made
… When one person signifies to another his willingness to do or abstain from doing, with the view to obtaining the assent of that to the act or abstinence, he is said to make a proposal’
Although the word proposal is used in the act, it carry’s the same meaning as “offer” in the English law.
It can be inferred that the proposal has become a promise and then he is called the promisor and the person accepting the promise is called the promisee.
eg Azizul offers to buy Samdan’s car for RM10,000/-. Azizul is making a proposal, hoping that Samdan will accept. When Samdan accepts the offer, an agreement or promise between them is created.
In the above situation Azizul is the offeror and Samdan is the offeree.
An offer must be clear, complete, final and specific to avoid any vagueness.
Guthing v Lynn (1831) 2B & AD 232
Lynn offered to buy a horse from Guthing. He was to pay 5 pounds extra if the horse brought him good luck. The condition laid was held by the court to be too vague to constitute a binding contract.
Tan Geok Khoon & Gerald Francis Robless v Pava Terubong Estate Sdn Bhd [1988] 2 MLJ 672
Plaintiff were executors and trustees of deceased’s estate. They claimed various correspondence between the deceased and the defendant constituted a contract. The court agreed because the deceased had agreed to and accepted a counter offer from the defendant and paid the balance of the price. Defendant had accepted payment by issuing a receipt signed by a director.
TO WHOM CAN A PROPOSAL BE MADE
A proposal may be addressed either to an individual, or to a group of persons, or to the world at large, and may be made expressly or by conduct.
See Carlill v Carbolic Smoke Ball Co.
a) a particular person
X went to Y’s shop and offered to buy a pair of shoes. X’s offer cannot be accepted by Z who owns a shoe shop nearby because he overheard X’s offer.
Section 2(b) Contracts Act provides that
… when a person to whom the proposal is made” which appears to say that only the addressee may accept the proposal.
Boulton v Jones (1857) 2H & N 564
Defendant had business dealing with a shopkeeper named Brocklehurst. The defendant had ordered some stocks from B but on the day of the order B had sold his business to the Plaintiff. The Plaintiff delivered the goods without informing the Defendant of the change of ownership.; The Defendant then refused to make any payments. It was held that the plaintiff had no rights to accept an offer not made to him.
b) To the General Public
Here anyone who meets all the terms of the proposal may accept the proposal.
Eg. Azizul offered RM 100/- for the safe return of his cat at an address advertised. Azizul’s offer is to the general public and those who read or knew of the offer may accept the offer and claim for the reward
Carlil v Carbolic Smoke Ball Co
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
COMMUNICATION OF PROPOSAL
Section 4(1) Contracts Act 1950
The communication of a proposal is complete when it come to the knowledge of the person to whom it is made.
Unless there is a communication of the proposal there can be no acceptance to form an agreement.[1] The fact that the other party has done something which coincides with proposal without being aware of the proposal does not bring an agreement into being. A party accepting the proposal must be aware of its existence.
In one sense a proposal cannot take effect until it is received, for until the offeree knows about it, he can take no action in reliance on it.
Eg. A party who usually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of rewards for its return.
R v Clarke (1927) 40 C.L.R
The Australian Government offered a reward for information leading to an arrest and conviction of persons responsible for the murder of Two Police officers. X and Clarke were arrested and charged with murder but later Clarke gave information leading to arrest of Y. X & Y were later convicted and Clarke claimed for the reward. Clarke failed to claim the reward as the information he gave was to clear himself and not in reliance of the offer to reward.
Taylor v Laird (1856) 25 LJ Ex 329
T resigned as a skipper of L’s ship in the middle of a voyage. T however assisted to sail the ship home. The court held T cannot claim for fees due as he had failed to make known his offer to sail the ship home and L had no opportunity either to accept or refuse the offer. No contract existed.
Invitation to Treat
What is an Invitation to treat? An invitation to treat is not a proposal. There can be no acceptance as to constitute a binding contract. When parties negotiate with the view of making a contract, many preliminary communications may pass between them before the definite proposal is made. One party may simply respond to a request for information (eg. By stating the price at which he might be prepared to sell his house[2]) That party is then said to make an “invitation to treat”. In this situation he does not himself make an offer but invites the other party to do so.
Patridge v Crittenden
Invitation to treat is an offer to make an offer.
Example: display of goods with price tags in a self service supermarket, an advertisement or an auction inviting bids for a particular article.
Harts v Mills (1846) 15 Lj Ex 200
“………… you offer to negotiate, or you issue advertisement that you have got a stock of books to sell or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate …. Offer to receive offers …..”
Display of goods for sale
The general rule is that a display of price marked goods in a shop window is not an offer to sell goods but is an invitation to treat to customers to make offer to buy.[3]
Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1953) 1 QB 401
Article was wrapped and had a price tags displayed to the customers. Sale for such articles are governed by the Pharmacy and Poisons Act 1933 (UK). The Act specifies that it is unlawful to sell certain poisons unless such sale was supervised by a registered Pharmacist.
Was the display of such articles an offer or an invitation to treat? The court ruled that the display was only an invitation to treat. A proposal to buy occurred only when the customer placed the articles in the basket and brought them to the cashiers. The proposal may be accepted or denied. The contract of sale would only be made at the cashier’s desk.
Advertisement.
The general rule is that an advertisement is only an invitation to treat.
Eckhardt Marine GMBH v Sheriff Mahkamah Tinggi Malaya [2001] 3 CLJ 864
Gopal Sri Ram JCA held:
“Advertisement amounted to an invitation to treat and the appellant made a conditional offer by way of its letter and the offer was in fact accepted. There was therefore a binding contract between the parties. Furthermore the appellant through his authorized agent has acknowledged that its offer had been accepted by the sheriff and was therefore estopped from denying that there was a valid and binding contract between the parties.”
It is essential to note that not all advertisements is an invitation to treat. It can be an offer to which another party can accept. In order to decide whether it is an invitation to treat or a proposal, we have to look at the intention of the parties involved.
Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
TENDER
Tender is also an invitation to treat and the person who announced the tender may accept or refuse the offer made by the readers of the said tender.
Spencer v Harding (1870) LR 5 CP 561
The defendant had sent out letters of tender for a said article. The Plaintiff’s tender was the highest but the defendant did not accept it. The Court held that the defendant was right to refuse the offer because no contract had existed between them. A letter of tender is only an invitation to treat.
COUNTER OFFER AND ACCEPTANCE
Section 2 (b) Contracts Act 1950
“ 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.
The acceptance must be made on exactly the same terms proposed without modifications or variations – must be as provided in section 7(a) Contract Act – absolute and unqualified.
Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal).
Hyde v Wrench (1840) 3 Beav 33
D offered to sell his estate to the P for £ 1000/- on 6th June. On 8th June in reply the P made a counter – proposal to purchase at £950/-. When D refused to accept proposal on 27th June, the P wrote to accept the original proposal. The court held that there were no acceptance because P’s letter dated 8th June had rejected the original proposal which could not be revived.
** However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information.
ACCEPTANCE
An Acceptance is final and unqualified expression of assent to the terms of an offer. A mere acknowledgement of an offer would not be an acceptance, nor is there an acceptance where a person who has received an offer to sell goods merely relies that it is his intention to place an order [4]
The main reason for the rule is that it could cause hardship to an offeror if he is bound without knowing that his offer had been accepted.
However take note that it was discussed Bloxhami’s case that there can be a contract if the offeror knows about the acceptance although it was not brought to his notice by the offeree.
However, there will be no contract if the communication is made by the third party without the authority of the offeree – see Powell v Lee
COMMUNICATION OF ACCEPTANCE
The general rule is that acceptance of a proposal must be communicated to the proposer for there to be a binding contract between the parties.[5]
For an acceptance to be communicated it must normally be brought to the notice of the offeror.
Section 4(2) Contracts Act 1950
The Communication of an acceptance is complete –
a) 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, and
b) as against the acceptor, when it comes to the knowledge of the proposer.
Section 7 (b) Contracts Act 1950
Be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner which it is to be accepted, and the acceptance is not made in that manner, the proposal may within a reasonable time after the acceptance is communicated to him insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
Acceptance must ordinarily be communicated and made in some usual and reasonable manner if no method of acceptance is prescribed. However, if the proposal specifies a particular mode of acceptance and it is not followed, the proposer is entitled to insist on it. It is essential that the proposer act within a reasonable time after the communication of acceptance. If he does nothing, he would have been deemed to have accepted. The duty to object lies with the proposer. Note that the English law differs from our position, as it does not require such positive objection.
Eliason v Henshaw (1819) 4 Wheaton 225
E offered to purchase flour from H. E specified that acceptance of offer be made by mail coach to Harper’s Ferry. H sent the acceptance by post to Georgetown on the assumption that it would reach E faster. Unfortunately the mail was late and the Court held E was justified to refuse H’s acceptance.
The exceptions to the rule that acceptance must be communicated are as follows:-
i. The proposer has dispensed with the need for it.
ii. The proposer allows the party to whom the proposal is made to perform the condition of a proposal i.e acceptance taking the form of performance of an act stated in the proposal. A common sense approach to the law.
E.g. Carlil v Carbolic Smoke Ball
D argued that the P should have communicated acceptance to them. This was rejected by the court. Performance was sufficient to constitute acceptance if that was the intention of the proposer.
iii. The proposer allows ‘ the acceptance of any consideration for a reciprocal promise which may be offered with a proposal.
What is reciprocal promise? Section 2(f) CA defines it as promise which form the consideration or part of the consideration for each other.
Eg. A sends B a cheque for RM 1000/- with the proposal that it will the consideration for B’s agreement to sell his motorbike. If B cashes the cheque even though he has yet to communicate to A of his acceptance. B is deemed to have accepted the proposal. B has accepted a consideration for a reciprocal promise offered with a proposal.
POSITIVE ACT OF ACCEPTANCE
Section 2(b) requires the person to whom the proposal is made to signify his assent thereto to a proposal. This implies a positive act of acceptance. 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.
Felthouse v Bindley (1862) 142 ER 1037
D was an auctioneer for the sale of F’s property and farm. F’s uncle was interested in buying a horse, which was up for sale. He wrote F a letter stating his willingness to buy the horse and said if he did not receive any answer from F, he would take it that the horse was his. D however sold the horse to another. The court held that there was no contract as F failed to give reply – silence is not acceptance.
Acceptance must be made within a reasonable time. In Fraser v Everett the court held that acceptance for sale of shares had to be made within reasonable time, taking into view the nature of the mining shares involved, which fluctuates the nature.
The rationale for this rule can be found in Macon’s case [1976] 2 MLJ 177
“…. 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 time laps before accepting’ per Hashim Yeop Sani J.
ACCEPTANCE THROUGH POST
Section 4(2) Contracts Act provides for the exceptions that acceptance is only by communication.
The Communication of an acceptance is complete –
c) 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, and
d) as against the acceptor, when it comes to the knowledge of the proposer.
The proposer is bound when the offeree posts the letter even though the proposer has no knowledge of the acceptance. When the letter is posted the acceptor has put in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding irrespective of any delay or disappearance in the course of transit. This was clearly stated in Entores Ltd v Miles Far East Corp [1955] 2 QB per Lord Denning
“……..when a contract is made by post it is clear law throughout the common law countries that acceptance is complete as soon as the letter is put into the post box and that is the place where the contract is made ….”
Ignatius v Bell (1913) 2 FMSLR 115
P sued for specific performance over his rights to purchase D’s land. The option was to be exercised on or before 20th August 1912. the parties had contemplated the use of post as means of communication. P sent a notice of acceptance by registered post in Klang on 16th August 1912 but was not delivered until 25th August 1912 because P was away. The letter was at the Post Office until picked up by D. The court applied Section 4 Contracts Act and held that the option was duly exercised by the P when the letter was posted on 16th August 1912.
On the other hand, acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. While the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor is not bound until it was actually received by the proposer.
Eg Azizul proposes by letter to sell his house to Samdan and Samdan accepts it in the same manner. Azizul is bound at the moment Samdan dispatches the letter through the post but he himself is not bound until it actually reaches Azizul.
** Proposer may protect themselves by stipulating in a proposal that acceptance is complete only upon receipt.
The postal rule also applies to telegram sent through the post office. Instantaneously communications such as telephone, telex and fax are governed by the general rule. The case of Brinkibon (1983) 2 AC 34 affirms the rule in Entores with regards to communication by telex. The court held that it is sound general rule that “ where the conditions of simultaneity are met and where it appears to be within the mutual intention of the parties that contractual exchanges would take place in this way”
Reference always be made to the intention of the parties and sound business practice.
REVOCATION OF PROPOSAL
A proposal, once communicated, remains open until it lapses or is withdrawn. The proposer may revoke it at any time before acceptance.
Section 5(1) Contracts Act 1950..
“ A proposal may be revoked at any time before the communication of its acceptance is complete against the proposer but not afterwards”
Section 6 Contract Acts states that a proposal is revoked:-
a. by the communication of notice of revocation by the proposer to the other party.
b. By the lapse of the time prescribed in the proposal for its acceptance, or , if no time is prescribed, by the lapse of reasonable time, without the communication of the acceptance.
c. By the failure of the acceptor to fulfill a condition precedent to acceptance, or
d. By the death or mental disorder of the proposer. If the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.
Where it is by way of subsection (a) the revocation must be communicated by the proposer to the other party before it accepts. If acceptance is set by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office. Withdrawal must necessarily be communicated by the proposer to the offeree before such posting or delivery.
Eg Azizul proposes by letter sent by post to sell his house to Samdan. Samdan accepts by a letter sent by post. Azizul may revoke his proposal at any time before or at the moment when B puts his letter of acceptance but not afterwards [6]
Byrne v Van Tienhoven (1880) 5 CPD 334
D offered to sell 1000 boxes of tinplates to P. upon receipt of the offer letter, P sent his acceptance by telegram on 11th October. On 8th October D wrote to P revoking his offer made on 1st October. The letter of revocation by D was no effect because at the time the P received the letter and he had already made an acceptance.
** Must the communication of revocation be made by the proposer personally? NB the English position differs from the local rule. Our law is clearer and avoids this difficulty.
Dickson v Dobbs (1876) Ch D 468
Revocation of offer need not be communicated by the offeror personally as long as the offeree becomes aware that the proposer has withdrawn the proposal or changed his mind.
Section (b) deals with revocation by lapse of time; by way of expiration of time prescribed in the proposal or if no time is prescribed by the lapse of reasonable time.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109
In June M offered to buy R company’s share. In November, the company allotted the share to M who had by then refused to accept on the grounds that the proposal should have been accepted within reasonable time. The period between June and November was clearly not reasonable.
Section (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance.
Financing Ltd v Simson (1962) 1WLR 1184
The Court held that an offer by a hirer under Hire Purchase agreement to the finance company is subject to a condition precedent that the car be in good condition. Here, the car was stolen and damaged before the company received the offer from the Hirer. The hirer was not bound by the agreement.
Section (d) deals with the condition when the proposer died or became mentally disordered subsequent to the communication of proposal. What happens when the acceptance was made without knowing that the offeror has since died or become mentally unsound?
Re Whelan (1897) 11 R 575
The offer lapsed when the offeree had knowledge of the offeror’s death.
Bradbury v Morgan (1862) 1 H&C 249
The court held that if the offeror’s death is not known, acceptance may still be made and effective for a valid contract.
REVOCATION OF ACCEPTANCE
Section 5(2) Contracts Act 1950:-
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Illustrations
A proposes by 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 A, but not afterwards.
[1] Section 2(a) Contracts Act
[2] Harvey v Facey [1893] AC 552
[3] Fisher v Bell [1961] 1QB
[4] OTM Ltd v Hydranautic [1981] 2 Llyods Rep 211.214
[5] Great Northern Railway v Withan [1873] L.R 9 CR
[6] see illustration Section 5
The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is made when one party accepts an offer made by the other party.
Store v Manchester CC [1974] W.L.R 1403
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 person to whom it is addressed.
An agreement between two or more parties is constituted by a proposal and an acceptance of it
Section 2(a) Contracts Act 1950 –
A proposal is made
… When one person signifies to another his willingness to do or abstain from doing, with the view to obtaining the assent of that to the act or abstinence, he is said to make a proposal’
Although the word proposal is used in the act, it carry’s the same meaning as “offer” in the English law.
It can be inferred that the proposal has become a promise and then he is called the promisor and the person accepting the promise is called the promisee.
eg Azizul offers to buy Samdan’s car for RM10,000/-. Azizul is making a proposal, hoping that Samdan will accept. When Samdan accepts the offer, an agreement or promise between them is created.
In the above situation Azizul is the offeror and Samdan is the offeree.
An offer must be clear, complete, final and specific to avoid any vagueness.
Guthing v Lynn (1831) 2B & AD 232
Lynn offered to buy a horse from Guthing. He was to pay 5 pounds extra if the horse brought him good luck. The condition laid was held by the court to be too vague to constitute a binding contract.
Tan Geok Khoon & Gerald Francis Robless v Pava Terubong Estate Sdn Bhd [1988] 2 MLJ 672
Plaintiff were executors and trustees of deceased’s estate. They claimed various correspondence between the deceased and the defendant constituted a contract. The court agreed because the deceased had agreed to and accepted a counter offer from the defendant and paid the balance of the price. Defendant had accepted payment by issuing a receipt signed by a director.
TO WHOM CAN A PROPOSAL BE MADE
A proposal may be addressed either to an individual, or to a group of persons, or to the world at large, and may be made expressly or by conduct.
See Carlill v Carbolic Smoke Ball Co.
a) a particular person
X went to Y’s shop and offered to buy a pair of shoes. X’s offer cannot be accepted by Z who owns a shoe shop nearby because he overheard X’s offer.
Section 2(b) Contracts Act provides that
… when a person to whom the proposal is made” which appears to say that only the addressee may accept the proposal.
Boulton v Jones (1857) 2H & N 564
Defendant had business dealing with a shopkeeper named Brocklehurst. The defendant had ordered some stocks from B but on the day of the order B had sold his business to the Plaintiff. The Plaintiff delivered the goods without informing the Defendant of the change of ownership.; The Defendant then refused to make any payments. It was held that the plaintiff had no rights to accept an offer not made to him.
b) To the General Public
Here anyone who meets all the terms of the proposal may accept the proposal.
Eg. Azizul offered RM 100/- for the safe return of his cat at an address advertised. Azizul’s offer is to the general public and those who read or knew of the offer may accept the offer and claim for the reward
Carlil v Carbolic Smoke Ball Co
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
COMMUNICATION OF PROPOSAL
Section 4(1) Contracts Act 1950
The communication of a proposal is complete when it come to the knowledge of the person to whom it is made.
Unless there is a communication of the proposal there can be no acceptance to form an agreement.[1] The fact that the other party has done something which coincides with proposal without being aware of the proposal does not bring an agreement into being. A party accepting the proposal must be aware of its existence.
In one sense a proposal cannot take effect until it is received, for until the offeree knows about it, he can take no action in reliance on it.
Eg. A party who usually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of rewards for its return.
R v Clarke (1927) 40 C.L.R
The Australian Government offered a reward for information leading to an arrest and conviction of persons responsible for the murder of Two Police officers. X and Clarke were arrested and charged with murder but later Clarke gave information leading to arrest of Y. X & Y were later convicted and Clarke claimed for the reward. Clarke failed to claim the reward as the information he gave was to clear himself and not in reliance of the offer to reward.
Taylor v Laird (1856) 25 LJ Ex 329
T resigned as a skipper of L’s ship in the middle of a voyage. T however assisted to sail the ship home. The court held T cannot claim for fees due as he had failed to make known his offer to sail the ship home and L had no opportunity either to accept or refuse the offer. No contract existed.
Invitation to Treat
What is an Invitation to treat? An invitation to treat is not a proposal. There can be no acceptance as to constitute a binding contract. When parties negotiate with the view of making a contract, many preliminary communications may pass between them before the definite proposal is made. One party may simply respond to a request for information (eg. By stating the price at which he might be prepared to sell his house[2]) That party is then said to make an “invitation to treat”. In this situation he does not himself make an offer but invites the other party to do so.
Patridge v Crittenden
Invitation to treat is an offer to make an offer.
Example: display of goods with price tags in a self service supermarket, an advertisement or an auction inviting bids for a particular article.
Harts v Mills (1846) 15 Lj Ex 200
“………… you offer to negotiate, or you issue advertisement that you have got a stock of books to sell or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate …. Offer to receive offers …..”
Display of goods for sale
The general rule is that a display of price marked goods in a shop window is not an offer to sell goods but is an invitation to treat to customers to make offer to buy.[3]
Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1953) 1 QB 401
Article was wrapped and had a price tags displayed to the customers. Sale for such articles are governed by the Pharmacy and Poisons Act 1933 (UK). The Act specifies that it is unlawful to sell certain poisons unless such sale was supervised by a registered Pharmacist.
Was the display of such articles an offer or an invitation to treat? The court ruled that the display was only an invitation to treat. A proposal to buy occurred only when the customer placed the articles in the basket and brought them to the cashiers. The proposal may be accepted or denied. The contract of sale would only be made at the cashier’s desk.
Advertisement.
The general rule is that an advertisement is only an invitation to treat.
Eckhardt Marine GMBH v Sheriff Mahkamah Tinggi Malaya [2001] 3 CLJ 864
Gopal Sri Ram JCA held:
“Advertisement amounted to an invitation to treat and the appellant made a conditional offer by way of its letter and the offer was in fact accepted. There was therefore a binding contract between the parties. Furthermore the appellant through his authorized agent has acknowledged that its offer had been accepted by the sheriff and was therefore estopped from denying that there was a valid and binding contract between the parties.”
It is essential to note that not all advertisements is an invitation to treat. It can be an offer to which another party can accept. In order to decide whether it is an invitation to treat or a proposal, we have to look at the intention of the parties involved.
Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
TENDER
Tender is also an invitation to treat and the person who announced the tender may accept or refuse the offer made by the readers of the said tender.
Spencer v Harding (1870) LR 5 CP 561
The defendant had sent out letters of tender for a said article. The Plaintiff’s tender was the highest but the defendant did not accept it. The Court held that the defendant was right to refuse the offer because no contract had existed between them. A letter of tender is only an invitation to treat.
COUNTER OFFER AND ACCEPTANCE
Section 2 (b) Contracts Act 1950
“ 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.
The acceptance must be made on exactly the same terms proposed without modifications or variations – must be as provided in section 7(a) Contract Act – absolute and unqualified.
Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal).
Hyde v Wrench (1840) 3 Beav 33
D offered to sell his estate to the P for £ 1000/- on 6th June. On 8th June in reply the P made a counter – proposal to purchase at £950/-. When D refused to accept proposal on 27th June, the P wrote to accept the original proposal. The court held that there were no acceptance because P’s letter dated 8th June had rejected the original proposal which could not be revived.
** However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information.
ACCEPTANCE
An Acceptance is final and unqualified expression of assent to the terms of an offer. A mere acknowledgement of an offer would not be an acceptance, nor is there an acceptance where a person who has received an offer to sell goods merely relies that it is his intention to place an order [4]
The main reason for the rule is that it could cause hardship to an offeror if he is bound without knowing that his offer had been accepted.
However take note that it was discussed Bloxhami’s case that there can be a contract if the offeror knows about the acceptance although it was not brought to his notice by the offeree.
However, there will be no contract if the communication is made by the third party without the authority of the offeree – see Powell v Lee
COMMUNICATION OF ACCEPTANCE
The general rule is that acceptance of a proposal must be communicated to the proposer for there to be a binding contract between the parties.[5]
For an acceptance to be communicated it must normally be brought to the notice of the offeror.
Section 4(2) Contracts Act 1950
The Communication of an acceptance is complete –
a) 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, and
b) as against the acceptor, when it comes to the knowledge of the proposer.
Section 7 (b) Contracts Act 1950
Be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner which it is to be accepted, and the acceptance is not made in that manner, the proposal may within a reasonable time after the acceptance is communicated to him insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
Acceptance must ordinarily be communicated and made in some usual and reasonable manner if no method of acceptance is prescribed. However, if the proposal specifies a particular mode of acceptance and it is not followed, the proposer is entitled to insist on it. It is essential that the proposer act within a reasonable time after the communication of acceptance. If he does nothing, he would have been deemed to have accepted. The duty to object lies with the proposer. Note that the English law differs from our position, as it does not require such positive objection.
Eliason v Henshaw (1819) 4 Wheaton 225
E offered to purchase flour from H. E specified that acceptance of offer be made by mail coach to Harper’s Ferry. H sent the acceptance by post to Georgetown on the assumption that it would reach E faster. Unfortunately the mail was late and the Court held E was justified to refuse H’s acceptance.
The exceptions to the rule that acceptance must be communicated are as follows:-
i. The proposer has dispensed with the need for it.
ii. The proposer allows the party to whom the proposal is made to perform the condition of a proposal i.e acceptance taking the form of performance of an act stated in the proposal. A common sense approach to the law.
E.g. Carlil v Carbolic Smoke Ball
D argued that the P should have communicated acceptance to them. This was rejected by the court. Performance was sufficient to constitute acceptance if that was the intention of the proposer.
iii. The proposer allows ‘ the acceptance of any consideration for a reciprocal promise which may be offered with a proposal.
What is reciprocal promise? Section 2(f) CA defines it as promise which form the consideration or part of the consideration for each other.
Eg. A sends B a cheque for RM 1000/- with the proposal that it will the consideration for B’s agreement to sell his motorbike. If B cashes the cheque even though he has yet to communicate to A of his acceptance. B is deemed to have accepted the proposal. B has accepted a consideration for a reciprocal promise offered with a proposal.
POSITIVE ACT OF ACCEPTANCE
Section 2(b) requires the person to whom the proposal is made to signify his assent thereto to a proposal. This implies a positive act of acceptance. 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.
Felthouse v Bindley (1862) 142 ER 1037
D was an auctioneer for the sale of F’s property and farm. F’s uncle was interested in buying a horse, which was up for sale. He wrote F a letter stating his willingness to buy the horse and said if he did not receive any answer from F, he would take it that the horse was his. D however sold the horse to another. The court held that there was no contract as F failed to give reply – silence is not acceptance.
Acceptance must be made within a reasonable time. In Fraser v Everett the court held that acceptance for sale of shares had to be made within reasonable time, taking into view the nature of the mining shares involved, which fluctuates the nature.
The rationale for this rule can be found in Macon’s case [1976] 2 MLJ 177
“…. 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 time laps before accepting’ per Hashim Yeop Sani J.
ACCEPTANCE THROUGH POST
Section 4(2) Contracts Act provides for the exceptions that acceptance is only by communication.
The Communication of an acceptance is complete –
c) 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, and
d) as against the acceptor, when it comes to the knowledge of the proposer.
The proposer is bound when the offeree posts the letter even though the proposer has no knowledge of the acceptance. When the letter is posted the acceptor has put in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding irrespective of any delay or disappearance in the course of transit. This was clearly stated in Entores Ltd v Miles Far East Corp [1955] 2 QB per Lord Denning
“……..when a contract is made by post it is clear law throughout the common law countries that acceptance is complete as soon as the letter is put into the post box and that is the place where the contract is made ….”
Ignatius v Bell (1913) 2 FMSLR 115
P sued for specific performance over his rights to purchase D’s land. The option was to be exercised on or before 20th August 1912. the parties had contemplated the use of post as means of communication. P sent a notice of acceptance by registered post in Klang on 16th August 1912 but was not delivered until 25th August 1912 because P was away. The letter was at the Post Office until picked up by D. The court applied Section 4 Contracts Act and held that the option was duly exercised by the P when the letter was posted on 16th August 1912.
On the other hand, acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. While the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor is not bound until it was actually received by the proposer.
Eg Azizul proposes by letter to sell his house to Samdan and Samdan accepts it in the same manner. Azizul is bound at the moment Samdan dispatches the letter through the post but he himself is not bound until it actually reaches Azizul.
** Proposer may protect themselves by stipulating in a proposal that acceptance is complete only upon receipt.
The postal rule also applies to telegram sent through the post office. Instantaneously communications such as telephone, telex and fax are governed by the general rule. The case of Brinkibon (1983) 2 AC 34 affirms the rule in Entores with regards to communication by telex. The court held that it is sound general rule that “ where the conditions of simultaneity are met and where it appears to be within the mutual intention of the parties that contractual exchanges would take place in this way”
Reference always be made to the intention of the parties and sound business practice.
REVOCATION OF PROPOSAL
A proposal, once communicated, remains open until it lapses or is withdrawn. The proposer may revoke it at any time before acceptance.
Section 5(1) Contracts Act 1950..
“ A proposal may be revoked at any time before the communication of its acceptance is complete against the proposer but not afterwards”
Section 6 Contract Acts states that a proposal is revoked:-
a. by the communication of notice of revocation by the proposer to the other party.
b. By the lapse of the time prescribed in the proposal for its acceptance, or , if no time is prescribed, by the lapse of reasonable time, without the communication of the acceptance.
c. By the failure of the acceptor to fulfill a condition precedent to acceptance, or
d. By the death or mental disorder of the proposer. If the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.
Where it is by way of subsection (a) the revocation must be communicated by the proposer to the other party before it accepts. If acceptance is set by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office. Withdrawal must necessarily be communicated by the proposer to the offeree before such posting or delivery.
Eg Azizul proposes by letter sent by post to sell his house to Samdan. Samdan accepts by a letter sent by post. Azizul may revoke his proposal at any time before or at the moment when B puts his letter of acceptance but not afterwards [6]
Byrne v Van Tienhoven (1880) 5 CPD 334
D offered to sell 1000 boxes of tinplates to P. upon receipt of the offer letter, P sent his acceptance by telegram on 11th October. On 8th October D wrote to P revoking his offer made on 1st October. The letter of revocation by D was no effect because at the time the P received the letter and he had already made an acceptance.
** Must the communication of revocation be made by the proposer personally? NB the English position differs from the local rule. Our law is clearer and avoids this difficulty.
Dickson v Dobbs (1876) Ch D 468
Revocation of offer need not be communicated by the offeror personally as long as the offeree becomes aware that the proposer has withdrawn the proposal or changed his mind.
Section (b) deals with revocation by lapse of time; by way of expiration of time prescribed in the proposal or if no time is prescribed by the lapse of reasonable time.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109
In June M offered to buy R company’s share. In November, the company allotted the share to M who had by then refused to accept on the grounds that the proposal should have been accepted within reasonable time. The period between June and November was clearly not reasonable.
Section (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance.
Financing Ltd v Simson (1962) 1WLR 1184
The Court held that an offer by a hirer under Hire Purchase agreement to the finance company is subject to a condition precedent that the car be in good condition. Here, the car was stolen and damaged before the company received the offer from the Hirer. The hirer was not bound by the agreement.
Section (d) deals with the condition when the proposer died or became mentally disordered subsequent to the communication of proposal. What happens when the acceptance was made without knowing that the offeror has since died or become mentally unsound?
Re Whelan (1897) 11 R 575
The offer lapsed when the offeree had knowledge of the offeror’s death.
Bradbury v Morgan (1862) 1 H&C 249
The court held that if the offeror’s death is not known, acceptance may still be made and effective for a valid contract.
REVOCATION OF ACCEPTANCE
Section 5(2) Contracts Act 1950:-
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Illustrations
A proposes by 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 A, but not afterwards.
[1] Section 2(a) Contracts Act
[2] Harvey v Facey [1893] AC 552
[3] Fisher v Bell [1961] 1QB
[4] OTM Ltd v Hydranautic [1981] 2 Llyods Rep 211.214
[5] Great Northern Railway v Withan [1873] L.R 9 CR
[6] see illustration Section 5
Proposal and Acceptance (law 416)
PROPOSAL AND ACCEPTANCE
The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is made when one party accepts an offer made by the other party.
Store v Manchester CC [1974] W.L.R 1403
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 person to whom it is addressed.
An agreement between two or more parties is constituted by a proposal and an acceptance of it
Section 2(a) Contracts Act 1950 –
A proposal is made
… When one person signifies to another his willingness to do or abstain from doing, with the view to obtaining the assent of that to the act or abstinence, he is said to make a proposal’
Although the word proposal is used in the act, it carry’s the same meaning as “offer” in the English law.
It can be inferred that the proposal has become a promise and then he is called the promisor and the person accepting the promise is called the promisee.
eg Azizul offers to buy Samdan’s car for RM10,000/-. Azizul is making a proposal, hoping that Samdan will accept. When Samdan accepts the offer, an agreement or promise between them is created.
In the above situation Azizul is the offeror and Samdan is the offeree.
An offer must be clear, complete, final and specific to avoid any vagueness.
Guthing v Lynn (1831) 2B & AD 232
Lynn offered to buy a horse from Guthing. He was to pay 5 pounds extra if the horse brought him good luck. The condition laid was held by the court to be too vague to constitute a binding contract.
Tan Geok Khoon & Gerald Francis Robless v Pava Terubong Estate Sdn Bhd [1988] 2 MLJ 672
Plaintiff were executors and trustees of deceased’s estate. They claimed various correspondence between the deceased and the defendant constituted a contract. The court agreed because the deceased had agreed to and accepted a counter offer from the defendant and paid the balance of the price. Defendant had accepted payment by issuing a receipt signed by a director.
TO WHOM CAN A PROPOSAL BE MADE
A proposal may be addressed either to an individual, or to a group of persons, or to the world at large, and may be made expressly or by conduct.
See Carlill v Carbolic Smoke Ball Co.
a) a particular person
X went to Y’s shop and offered to buy a pair of shoes. X’s offer cannot be accepted by Z who owns a shoe shop nearby because he overheard X’s offer.
Section 2(b) Contracts Act provides that
… when a person to whom the proposal is made” which appears to say that only the addressee may accept the proposal.
Boulton v Jones (1857) 2H & N 564
Defendant had business dealing with a shopkeeper named Brocklehurst. The defendant had ordered some stocks from B but on the day of the order B had sold his business to the Plaintiff. The Plaintiff delivered the goods without informing the Defendant of the change of ownership.; The Defendant then refused to make any payments. It was held that the plaintiff had no rights to accept an offer not made to him.
b) To the General Public
Here anyone who meets all the terms of the proposal may accept the proposal.
Eg. Azizul offered RM 100/- for the safe return of his cat at an address advertised. Azizul’s offer is to the general public and those who read or knew of the offer may accept the offer and claim for the reward
Carlil v Carbolic Smoke Ball Co
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
COMMUNICATION OF PROPOSAL
Section 4(1) Contracts Act 1950
The communication of a proposal is complete when it come to the knowledge of the person to whom it is made.
Unless there is a communication of the proposal there can be no acceptance to form an agreement.[1] The fact that the other party has done something which coincides with proposal without being aware of the proposal does not bring an agreement into being. A party accepting the proposal must be aware of its existence.
In one sense a proposal cannot take effect until it is received, for until the offeree knows about it, he can take no action in reliance on it.
Eg. A party who usually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of rewards for its return.
R v Clarke (1927) 40 C.L.R
The Australian Government offered a reward for information leading to an arrest and conviction of persons responsible for the murder of Two Police officers. X and Clarke were arrested and charged with murder but later Clarke gave information leading to arrest of Y. X & Y were later convicted and Clarke claimed for the reward. Clarke failed to claim the reward as the information he gave was to clear himself and not in reliance of the offer to reward.
Taylor v Laird (1856) 25 LJ Ex 329
T resigned as a skipper of L’s ship in the middle of a voyage. T however assisted to sail the ship home. The court held T cannot claim for fees due as he had failed to make known his offer to sail the ship home and L had no opportunity either to accept or refuse the offer. No contract existed.
Invitation to Treat
What is an Invitation to treat? An invitation to treat is not a proposal. There can be no acceptance as to constitute a binding contract. When parties negotiate with the view of making a contract, many preliminary communications may pass between them before the definite proposal is made. One party may simply respond to a request for information (eg. By stating the price at which he might be prepared to sell his house[2]) That party is then said to make an “invitation to treat”. In this situation he does not himself make an offer but invites the other party to do so.
Patridge v Crittenden
Invitation to treat is an offer to make an offer.
Example: display of goods with price tags in a self service supermarket, an advertisement or an auction inviting bids for a particular article.
Harts v Mills (1846) 15 Lj Ex 200
“………… you offer to negotiate, or you issue advertisement that you have got a stock of books to sell or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate …. Offer to receive offers …..”
Display of goods for sale
The general rule is that a display of price marked goods in a shop window is not an offer to sell goods but is an invitation to treat to customers to make offer to buy.[3]
Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1953) 1 QB 401
Article was wrapped and had a price tags displayed to the customers. Sale for such articles are governed by the Pharmacy and Poisons Act 1933 (UK). The Act specifies that it is unlawful to sell certain poisons unless such sale was supervised by a registered Pharmacist.
Was the display of such articles an offer or an invitation to treat? The court ruled that the display was only an invitation to treat. A proposal to buy occurred only when the customer placed the articles in the basket and brought them to the cashiers. The proposal may be accepted or denied. The contract of sale would only be made at the cashier’s desk.
Advertisement.
The general rule is that an advertisement is only an invitation to treat.
Eckhardt Marine GMBH v Sheriff Mahkamah Tinggi Malaya [2001] 3 CLJ 864
Gopal Sri Ram JCA held:
“Advertisement amounted to an invitation to treat and the appellant made a conditional offer by way of its letter and the offer was in fact accepted. There was therefore a binding contract between the parties. Furthermore the appellant through his authorized agent has acknowledged that its offer had been accepted by the sheriff and was therefore estopped from denying that there was a valid and binding contract between the parties.”
It is essential to note that not all advertisements is an invitation to treat. It can be an offer to which another party can accept. In order to decide whether it is an invitation to treat or a proposal, we have to look at the intention of the parties involved.
Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
TENDER
Tender is also an invitation to treat and the person who announced the tender may accept or refuse the offer made by the readers of the said tender.
Spencer v Harding (1870) LR 5 CP 561
The defendant had sent out letters of tender for a said article. The Plaintiff’s tender was the highest but the defendant did not accept it. The Court held that the defendant was right to refuse the offer because no contract had existed between them. A letter of tender is only an invitation to treat.
COUNTER OFFER AND ACCEPTANCE
Section 2 (b) Contracts Act 1950
“ 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.
The acceptance must be made on exactly the same terms proposed without modifications or variations – must be as provided in section 7(a) Contract Act – absolute and unqualified.
Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal).
Hyde v Wrench (1840) 3 Beav 33
D offered to sell his estate to the P for £ 1000/- on 6th June. On 8th June in reply the P made a counter – proposal to purchase at £950/-. When D refused to accept proposal on 27th June, the P wrote to accept the original proposal. The court held that there were no acceptance because P’s letter dated 8th June had rejected the original proposal which could not be revived.
** However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information.
ACCEPTANCE
An Acceptance is final and unqualified expression of assent to the terms of an offer. A mere acknowledgement of an offer would not be an acceptance, nor is there an acceptance where a person who has received an offer to sell goods merely relies that it is his intention to place an order [4]
The main reason for the rule is that it could cause hardship to an offeror if he is bound without knowing that his offer had been accepted.
However take note that it was discussed Bloxhami’s case that there can be a contract if the offeror knows about the acceptance although it was not brought to his notice by the offeree.
However, there will be no contract if the communication is made by the third party without the authority of the offeree – see Powell v Lee
COMMUNICATION OF ACCEPTANCE
The general rule is that acceptance of a proposal must be communicated to the proposer for there to be a binding contract between the parties.[5]
For an acceptance to be communicated it must normally be brought to the notice of the offeror.
Section 4(2) Contracts Act 1950
The Communication of an acceptance is complete –
a) 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, and
b) as against the acceptor, when it comes to the knowledge of the proposer.
Section 7 (b) Contracts Act 1950
Be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner which it is to be accepted, and the acceptance is not made in that manner, the proposal may within a reasonable time after the acceptance is communicated to him insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
Acceptance must ordinarily be communicated and made in some usual and reasonable manner if no method of acceptance is prescribed. However, if the proposal specifies a particular mode of acceptance and it is not followed, the proposer is entitled to insist on it. It is essential that the proposer act within a reasonable time after the communication of acceptance. If he does nothing, he would have been deemed to have accepted. The duty to object lies with the proposer. Note that the English law differs from our position, as it does not require such positive objection.
Eliason v Henshaw (1819) 4 Wheaton 225
E offered to purchase flour from H. E specified that acceptance of offer be made by mail coach to Harper’s Ferry. H sent the acceptance by post to Georgetown on the assumption that it would reach E faster. Unfortunately the mail was late and the Court held E was justified to refuse H’s acceptance.
The exceptions to the rule that acceptance must be communicated are as follows:-
i. The proposer has dispensed with the need for it.
ii. The proposer allows the party to whom the proposal is made to perform the condition of a proposal i.e acceptance taking the form of performance of an act stated in the proposal. A common sense approach to the law.
E.g. Carlil v Carbolic Smoke Ball
D argued that the P should have communicated acceptance to them. This was rejected by the court. Performance was sufficient to constitute acceptance if that was the intention of the proposer.
iii. The proposer allows ‘ the acceptance of any consideration for a reciprocal promise which may be offered with a proposal.
What is reciprocal promise? Section 2(f) CA defines it as promise which form the consideration or part of the consideration for each other.
Eg. A sends B a cheque for RM 1000/- with the proposal that it will the consideration for B’s agreement to sell his motorbike. If B cashes the cheque even though he has yet to communicate to A of his acceptance. B is deemed to have accepted the proposal. B has accepted a consideration for a reciprocal promise offered with a proposal.
POSITIVE ACT OF ACCEPTANCE
Section 2(b) requires the person to whom the proposal is made to signify his assent thereto to a proposal. This implies a positive act of acceptance. 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.
Felthouse v Bindley (1862) 142 ER 1037
D was an auctioneer for the sale of F’s property and farm. F’s uncle was interested in buying a horse, which was up for sale. He wrote F a letter stating his willingness to buy the horse and said if he did not receive any answer from F, he would take it that the horse was his. D however sold the horse to another. The court held that there was no contract as F failed to give reply – silence is not acceptance.
Acceptance must be made within a reasonable time. In Fraser v Everett the court held that acceptance for sale of shares had to be made within reasonable time, taking into view the nature of the mining shares involved, which fluctuates the nature.
The rationale for this rule can be found in Macon’s case [1976] 2 MLJ 177
“…. 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 time laps before accepting’ per Hashim Yeop Sani J.
ACCEPTANCE THROUGH POST
Section 4(2) Contracts Act provides for the exceptions that acceptance is only by communication.
The Communication of an acceptance is complete –
c) 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, and
d) as against the acceptor, when it comes to the knowledge of the proposer.
The proposer is bound when the offeree posts the letter even though the proposer has no knowledge of the acceptance. When the letter is posted the acceptor has put in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding irrespective of any delay or disappearance in the course of transit. This was clearly stated in Entores Ltd v Miles Far East Corp [1955] 2 QB per Lord Denning
“……..when a contract is made by post it is clear law throughout the common law countries that acceptance is complete as soon as the letter is put into the post box and that is the place where the contract is made ….”
Ignatius v Bell (1913) 2 FMSLR 115
P sued for specific performance over his rights to purchase D’s land. The option was to be exercised on or before 20th August 1912. the parties had contemplated the use of post as means of communication. P sent a notice of acceptance by registered post in Klang on 16th August 1912 but was not delivered until 25th August 1912 because P was away. The letter was at the Post Office until picked up by D. The court applied Section 4 Contracts Act and held that the option was duly exercised by the P when the letter was posted on 16th August 1912.
On the other hand, acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. While the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor is not bound until it was actually received by the proposer.
Eg Azizul proposes by letter to sell his house to Samdan and Samdan accepts it in the same manner. Azizul is bound at the moment Samdan dispatches the letter through the post but he himself is not bound until it actually reaches Azizul.
** Proposer may protect themselves by stipulating in a proposal that acceptance is complete only upon receipt.
The postal rule also applies to telegram sent through the post office. Instantaneously communications such as telephone, telex and fax are governed by the general rule. The case of Brinkibon (1983) 2 AC 34 affirms the rule in Entores with regards to communication by telex. The court held that it is sound general rule that “ where the conditions of simultaneity are met and where it appears to be within the mutual intention of the parties that contractual exchanges would take place in this way”
Reference always be made to the intention of the parties and sound business practice.
REVOCATION OF PROPOSAL
A proposal, once communicated, remains open until it lapses or is withdrawn. The proposer may revoke it at any time before acceptance.
Section 5(1) Contracts Act 1950..
“ A proposal may be revoked at any time before the communication of its acceptance is complete against the proposer but not afterwards”
Section 6 Contract Acts states that a proposal is revoked:-
a. by the communication of notice of revocation by the proposer to the other party.
b. By the lapse of the time prescribed in the proposal for its acceptance, or , if no time is prescribed, by the lapse of reasonable time, without the communication of the acceptance.
c. By the failure of the acceptor to fulfill a condition precedent to acceptance, or
d. By the death or mental disorder of the proposer. If the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.
Where it is by way of subsection (a) the revocation must be communicated by the proposer to the other party before it accepts. If acceptance is set by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office. Withdrawal must necessarily be communicated by the proposer to the offeree before such posting or delivery.
Eg Azizul proposes by letter sent by post to sell his house to Samdan. Samdan accepts by a letter sent by post. Azizul may revoke his proposal at any time before or at the moment when B puts his letter of acceptance but not afterwards [6]
Byrne v Van Tienhoven (1880) 5 CPD 334
D offered to sell 1000 boxes of tinplates to P. upon receipt of the offer letter, P sent his acceptance by telegram on 11th October. On 8th October D wrote to P revoking his offer made on 1st October. The letter of revocation by D was no effect because at the time the P received the letter and he had already made an acceptance.
** Must the communication of revocation be made by the proposer personally? NB the English position differs from the local rule. Our law is clearer and avoids this difficulty.
Dickson v Dobbs (1876) Ch D 468
Revocation of offer need not be communicated by the offeror personally as long as the offeree becomes aware that the proposer has withdrawn the proposal or changed his mind.
Section (b) deals with revocation by lapse of time; by way of expiration of time prescribed in the proposal or if no time is prescribed by the lapse of reasonable time.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109
In June M offered to buy R company’s share. In November, the company allotted the share to M who had by then refused to accept on the grounds that the proposal should have been accepted within reasonable time. The period between June and November was clearly not reasonable.
Section (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance.
Financing Ltd v Simson (1962) 1WLR 1184
The Court held that an offer by a hirer under Hire Purchase agreement to the finance company is subject to a condition precedent that the car be in good condition. Here, the car was stolen and damaged before the company received the offer from the Hirer. The hirer was not bound by the agreement.
Section (d) deals with the condition when the proposer died or became mentally disordered subsequent to the communication of proposal. What happens when the acceptance was made without knowing that the offeror has since died or become mentally unsound?
Re Whelan (1897) 11 R 575
The offer lapsed when the offeree had knowledge of the offeror’s death.
Bradbury v Morgan (1862) 1 H&C 249
The court held that if the offeror’s death is not known, acceptance may still be made and effective for a valid contract.
REVOCATION OF ACCEPTANCE
Section 5(2) Contracts Act 1950:-
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Illustrations
A proposes by 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 A, but not afterwards.
[1] Section 2(a) Contracts Act
[2] Harvey v Facey [1893] AC 552
[3] Fisher v Bell [1961] 1QB
[4] OTM Ltd v Hydranautic [1981] 2 Llyods Rep 211.214
[5] Great Northern Railway v Withan [1873] L.R 9 CR
[6] see illustration Section 5
The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is made when one party accepts an offer made by the other party.
Store v Manchester CC [1974] W.L.R 1403
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 person to whom it is addressed.
An agreement between two or more parties is constituted by a proposal and an acceptance of it
Section 2(a) Contracts Act 1950 –
A proposal is made
… When one person signifies to another his willingness to do or abstain from doing, with the view to obtaining the assent of that to the act or abstinence, he is said to make a proposal’
Although the word proposal is used in the act, it carry’s the same meaning as “offer” in the English law.
It can be inferred that the proposal has become a promise and then he is called the promisor and the person accepting the promise is called the promisee.
eg Azizul offers to buy Samdan’s car for RM10,000/-. Azizul is making a proposal, hoping that Samdan will accept. When Samdan accepts the offer, an agreement or promise between them is created.
In the above situation Azizul is the offeror and Samdan is the offeree.
An offer must be clear, complete, final and specific to avoid any vagueness.
Guthing v Lynn (1831) 2B & AD 232
Lynn offered to buy a horse from Guthing. He was to pay 5 pounds extra if the horse brought him good luck. The condition laid was held by the court to be too vague to constitute a binding contract.
Tan Geok Khoon & Gerald Francis Robless v Pava Terubong Estate Sdn Bhd [1988] 2 MLJ 672
Plaintiff were executors and trustees of deceased’s estate. They claimed various correspondence between the deceased and the defendant constituted a contract. The court agreed because the deceased had agreed to and accepted a counter offer from the defendant and paid the balance of the price. Defendant had accepted payment by issuing a receipt signed by a director.
TO WHOM CAN A PROPOSAL BE MADE
A proposal may be addressed either to an individual, or to a group of persons, or to the world at large, and may be made expressly or by conduct.
See Carlill v Carbolic Smoke Ball Co.
a) a particular person
X went to Y’s shop and offered to buy a pair of shoes. X’s offer cannot be accepted by Z who owns a shoe shop nearby because he overheard X’s offer.
Section 2(b) Contracts Act provides that
… when a person to whom the proposal is made” which appears to say that only the addressee may accept the proposal.
Boulton v Jones (1857) 2H & N 564
Defendant had business dealing with a shopkeeper named Brocklehurst. The defendant had ordered some stocks from B but on the day of the order B had sold his business to the Plaintiff. The Plaintiff delivered the goods without informing the Defendant of the change of ownership.; The Defendant then refused to make any payments. It was held that the plaintiff had no rights to accept an offer not made to him.
b) To the General Public
Here anyone who meets all the terms of the proposal may accept the proposal.
Eg. Azizul offered RM 100/- for the safe return of his cat at an address advertised. Azizul’s offer is to the general public and those who read or knew of the offer may accept the offer and claim for the reward
Carlil v Carbolic Smoke Ball Co
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
COMMUNICATION OF PROPOSAL
Section 4(1) Contracts Act 1950
The communication of a proposal is complete when it come to the knowledge of the person to whom it is made.
Unless there is a communication of the proposal there can be no acceptance to form an agreement.[1] The fact that the other party has done something which coincides with proposal without being aware of the proposal does not bring an agreement into being. A party accepting the proposal must be aware of its existence.
In one sense a proposal cannot take effect until it is received, for until the offeree knows about it, he can take no action in reliance on it.
Eg. A party who usually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of rewards for its return.
R v Clarke (1927) 40 C.L.R
The Australian Government offered a reward for information leading to an arrest and conviction of persons responsible for the murder of Two Police officers. X and Clarke were arrested and charged with murder but later Clarke gave information leading to arrest of Y. X & Y were later convicted and Clarke claimed for the reward. Clarke failed to claim the reward as the information he gave was to clear himself and not in reliance of the offer to reward.
Taylor v Laird (1856) 25 LJ Ex 329
T resigned as a skipper of L’s ship in the middle of a voyage. T however assisted to sail the ship home. The court held T cannot claim for fees due as he had failed to make known his offer to sail the ship home and L had no opportunity either to accept or refuse the offer. No contract existed.
Invitation to Treat
What is an Invitation to treat? An invitation to treat is not a proposal. There can be no acceptance as to constitute a binding contract. When parties negotiate with the view of making a contract, many preliminary communications may pass between them before the definite proposal is made. One party may simply respond to a request for information (eg. By stating the price at which he might be prepared to sell his house[2]) That party is then said to make an “invitation to treat”. In this situation he does not himself make an offer but invites the other party to do so.
Patridge v Crittenden
Invitation to treat is an offer to make an offer.
Example: display of goods with price tags in a self service supermarket, an advertisement or an auction inviting bids for a particular article.
Harts v Mills (1846) 15 Lj Ex 200
“………… you offer to negotiate, or you issue advertisement that you have got a stock of books to sell or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate …. Offer to receive offers …..”
Display of goods for sale
The general rule is that a display of price marked goods in a shop window is not an offer to sell goods but is an invitation to treat to customers to make offer to buy.[3]
Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1953) 1 QB 401
Article was wrapped and had a price tags displayed to the customers. Sale for such articles are governed by the Pharmacy and Poisons Act 1933 (UK). The Act specifies that it is unlawful to sell certain poisons unless such sale was supervised by a registered Pharmacist.
Was the display of such articles an offer or an invitation to treat? The court ruled that the display was only an invitation to treat. A proposal to buy occurred only when the customer placed the articles in the basket and brought them to the cashiers. The proposal may be accepted or denied. The contract of sale would only be made at the cashier’s desk.
Advertisement.
The general rule is that an advertisement is only an invitation to treat.
Eckhardt Marine GMBH v Sheriff Mahkamah Tinggi Malaya [2001] 3 CLJ 864
Gopal Sri Ram JCA held:
“Advertisement amounted to an invitation to treat and the appellant made a conditional offer by way of its letter and the offer was in fact accepted. There was therefore a binding contract between the parties. Furthermore the appellant through his authorized agent has acknowledged that its offer had been accepted by the sheriff and was therefore estopped from denying that there was a valid and binding contract between the parties.”
It is essential to note that not all advertisements is an invitation to treat. It can be an offer to which another party can accept. In order to decide whether it is an invitation to treat or a proposal, we have to look at the intention of the parties involved.
Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
The defendant’s advertised that they would offer a sum of 100 pounds to anyone who would still succumb to influenza after using a certain product according to the instructions for a fixed period. The plaintiff read the advertisement and used the product accordingly but still contracted with influenza. He claimed the 100 pounds from the defendants. The court held that the advertisement was an offer to the world at large and those who were willing to use the product as instructed had then accepted the offer. Acceptance need not be communicated to the Defendants. The defendants had in fact deposited 100 pounds into a bank account for any claims.
TENDER
Tender is also an invitation to treat and the person who announced the tender may accept or refuse the offer made by the readers of the said tender.
Spencer v Harding (1870) LR 5 CP 561
The defendant had sent out letters of tender for a said article. The Plaintiff’s tender was the highest but the defendant did not accept it. The Court held that the defendant was right to refuse the offer because no contract had existed between them. A letter of tender is only an invitation to treat.
COUNTER OFFER AND ACCEPTANCE
Section 2 (b) Contracts Act 1950
“ 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.
The acceptance must be made on exactly the same terms proposed without modifications or variations – must be as provided in section 7(a) Contract Act – absolute and unqualified.
Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal).
Hyde v Wrench (1840) 3 Beav 33
D offered to sell his estate to the P for £ 1000/- on 6th June. On 8th June in reply the P made a counter – proposal to purchase at £950/-. When D refused to accept proposal on 27th June, the P wrote to accept the original proposal. The court held that there were no acceptance because P’s letter dated 8th June had rejected the original proposal which could not be revived.
** However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information.
ACCEPTANCE
An Acceptance is final and unqualified expression of assent to the terms of an offer. A mere acknowledgement of an offer would not be an acceptance, nor is there an acceptance where a person who has received an offer to sell goods merely relies that it is his intention to place an order [4]
The main reason for the rule is that it could cause hardship to an offeror if he is bound without knowing that his offer had been accepted.
However take note that it was discussed Bloxhami’s case that there can be a contract if the offeror knows about the acceptance although it was not brought to his notice by the offeree.
However, there will be no contract if the communication is made by the third party without the authority of the offeree – see Powell v Lee
COMMUNICATION OF ACCEPTANCE
The general rule is that acceptance of a proposal must be communicated to the proposer for there to be a binding contract between the parties.[5]
For an acceptance to be communicated it must normally be brought to the notice of the offeror.
Section 4(2) Contracts Act 1950
The Communication of an acceptance is complete –
a) 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, and
b) as against the acceptor, when it comes to the knowledge of the proposer.
Section 7 (b) Contracts Act 1950
Be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner which it is to be accepted, and the acceptance is not made in that manner, the proposal may within a reasonable time after the acceptance is communicated to him insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
Acceptance must ordinarily be communicated and made in some usual and reasonable manner if no method of acceptance is prescribed. However, if the proposal specifies a particular mode of acceptance and it is not followed, the proposer is entitled to insist on it. It is essential that the proposer act within a reasonable time after the communication of acceptance. If he does nothing, he would have been deemed to have accepted. The duty to object lies with the proposer. Note that the English law differs from our position, as it does not require such positive objection.
Eliason v Henshaw (1819) 4 Wheaton 225
E offered to purchase flour from H. E specified that acceptance of offer be made by mail coach to Harper’s Ferry. H sent the acceptance by post to Georgetown on the assumption that it would reach E faster. Unfortunately the mail was late and the Court held E was justified to refuse H’s acceptance.
The exceptions to the rule that acceptance must be communicated are as follows:-
i. The proposer has dispensed with the need for it.
ii. The proposer allows the party to whom the proposal is made to perform the condition of a proposal i.e acceptance taking the form of performance of an act stated in the proposal. A common sense approach to the law.
E.g. Carlil v Carbolic Smoke Ball
D argued that the P should have communicated acceptance to them. This was rejected by the court. Performance was sufficient to constitute acceptance if that was the intention of the proposer.
iii. The proposer allows ‘ the acceptance of any consideration for a reciprocal promise which may be offered with a proposal.
What is reciprocal promise? Section 2(f) CA defines it as promise which form the consideration or part of the consideration for each other.
Eg. A sends B a cheque for RM 1000/- with the proposal that it will the consideration for B’s agreement to sell his motorbike. If B cashes the cheque even though he has yet to communicate to A of his acceptance. B is deemed to have accepted the proposal. B has accepted a consideration for a reciprocal promise offered with a proposal.
POSITIVE ACT OF ACCEPTANCE
Section 2(b) requires the person to whom the proposal is made to signify his assent thereto to a proposal. This implies a positive act of acceptance. 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.
Felthouse v Bindley (1862) 142 ER 1037
D was an auctioneer for the sale of F’s property and farm. F’s uncle was interested in buying a horse, which was up for sale. He wrote F a letter stating his willingness to buy the horse and said if he did not receive any answer from F, he would take it that the horse was his. D however sold the horse to another. The court held that there was no contract as F failed to give reply – silence is not acceptance.
Acceptance must be made within a reasonable time. In Fraser v Everett the court held that acceptance for sale of shares had to be made within reasonable time, taking into view the nature of the mining shares involved, which fluctuates the nature.
The rationale for this rule can be found in Macon’s case [1976] 2 MLJ 177
“…. 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 time laps before accepting’ per Hashim Yeop Sani J.
ACCEPTANCE THROUGH POST
Section 4(2) Contracts Act provides for the exceptions that acceptance is only by communication.
The Communication of an acceptance is complete –
c) 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, and
d) as against the acceptor, when it comes to the knowledge of the proposer.
The proposer is bound when the offeree posts the letter even though the proposer has no knowledge of the acceptance. When the letter is posted the acceptor has put in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding irrespective of any delay or disappearance in the course of transit. This was clearly stated in Entores Ltd v Miles Far East Corp [1955] 2 QB per Lord Denning
“……..when a contract is made by post it is clear law throughout the common law countries that acceptance is complete as soon as the letter is put into the post box and that is the place where the contract is made ….”
Ignatius v Bell (1913) 2 FMSLR 115
P sued for specific performance over his rights to purchase D’s land. The option was to be exercised on or before 20th August 1912. the parties had contemplated the use of post as means of communication. P sent a notice of acceptance by registered post in Klang on 16th August 1912 but was not delivered until 25th August 1912 because P was away. The letter was at the Post Office until picked up by D. The court applied Section 4 Contracts Act and held that the option was duly exercised by the P when the letter was posted on 16th August 1912.
On the other hand, acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. While the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor is not bound until it was actually received by the proposer.
Eg Azizul proposes by letter to sell his house to Samdan and Samdan accepts it in the same manner. Azizul is bound at the moment Samdan dispatches the letter through the post but he himself is not bound until it actually reaches Azizul.
** Proposer may protect themselves by stipulating in a proposal that acceptance is complete only upon receipt.
The postal rule also applies to telegram sent through the post office. Instantaneously communications such as telephone, telex and fax are governed by the general rule. The case of Brinkibon (1983) 2 AC 34 affirms the rule in Entores with regards to communication by telex. The court held that it is sound general rule that “ where the conditions of simultaneity are met and where it appears to be within the mutual intention of the parties that contractual exchanges would take place in this way”
Reference always be made to the intention of the parties and sound business practice.
REVOCATION OF PROPOSAL
A proposal, once communicated, remains open until it lapses or is withdrawn. The proposer may revoke it at any time before acceptance.
Section 5(1) Contracts Act 1950..
“ A proposal may be revoked at any time before the communication of its acceptance is complete against the proposer but not afterwards”
Section 6 Contract Acts states that a proposal is revoked:-
a. by the communication of notice of revocation by the proposer to the other party.
b. By the lapse of the time prescribed in the proposal for its acceptance, or , if no time is prescribed, by the lapse of reasonable time, without the communication of the acceptance.
c. By the failure of the acceptor to fulfill a condition precedent to acceptance, or
d. By the death or mental disorder of the proposer. If the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.
Where it is by way of subsection (a) the revocation must be communicated by the proposer to the other party before it accepts. If acceptance is set by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office. Withdrawal must necessarily be communicated by the proposer to the offeree before such posting or delivery.
Eg Azizul proposes by letter sent by post to sell his house to Samdan. Samdan accepts by a letter sent by post. Azizul may revoke his proposal at any time before or at the moment when B puts his letter of acceptance but not afterwards [6]
Byrne v Van Tienhoven (1880) 5 CPD 334
D offered to sell 1000 boxes of tinplates to P. upon receipt of the offer letter, P sent his acceptance by telegram on 11th October. On 8th October D wrote to P revoking his offer made on 1st October. The letter of revocation by D was no effect because at the time the P received the letter and he had already made an acceptance.
** Must the communication of revocation be made by the proposer personally? NB the English position differs from the local rule. Our law is clearer and avoids this difficulty.
Dickson v Dobbs (1876) Ch D 468
Revocation of offer need not be communicated by the offeror personally as long as the offeree becomes aware that the proposer has withdrawn the proposal or changed his mind.
Section (b) deals with revocation by lapse of time; by way of expiration of time prescribed in the proposal or if no time is prescribed by the lapse of reasonable time.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109
In June M offered to buy R company’s share. In November, the company allotted the share to M who had by then refused to accept on the grounds that the proposal should have been accepted within reasonable time. The period between June and November was clearly not reasonable.
Section (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance.
Financing Ltd v Simson (1962) 1WLR 1184
The Court held that an offer by a hirer under Hire Purchase agreement to the finance company is subject to a condition precedent that the car be in good condition. Here, the car was stolen and damaged before the company received the offer from the Hirer. The hirer was not bound by the agreement.
Section (d) deals with the condition when the proposer died or became mentally disordered subsequent to the communication of proposal. What happens when the acceptance was made without knowing that the offeror has since died or become mentally unsound?
Re Whelan (1897) 11 R 575
The offer lapsed when the offeree had knowledge of the offeror’s death.
Bradbury v Morgan (1862) 1 H&C 249
The court held that if the offeror’s death is not known, acceptance may still be made and effective for a valid contract.
REVOCATION OF ACCEPTANCE
Section 5(2) Contracts Act 1950:-
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Illustrations
A proposes by 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 A, but not afterwards.
[1] Section 2(a) Contracts Act
[2] Harvey v Facey [1893] AC 552
[3] Fisher v Bell [1961] 1QB
[4] OTM Ltd v Hydranautic [1981] 2 Llyods Rep 211.214
[5] Great Northern Railway v Withan [1873] L.R 9 CR
[6] see illustration Section 5
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