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.

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

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

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

Tuesday, July 6, 2010

Partnership (Law 346)

PARTNERSHIP

Meaning and Nature of Partnership

Partnership
[1] is defined by Section 3(1) of the Partnership Act 1961 as ‘ the relation, which subsists between persons carrying on a business in common with a view of profit’[2]. No person may be a partner with himself. There must be at least two or more persons to form a partnership. Section 3(2) excludes from statutory definition of partnership.

The relation between members of any company association which is:-
a) registered as a company under Companies Act, 1965 or as a co-operative society under any written law relating to co-operative societies or
b) formed or incorporated by or in pursuance of-
i) any other law having effect in Malaysia or any part thereof; or
ii) letters, patent, Royal Charter or Act of the Parliament of the United Kingdom.

Clubs and societies as well as mutual benefit organizations and building societies cannot be considered as partnership. It was held in Soh Hood Beng v Khoo Chye Neo (1897) 4 SSLR 115 that Chinese loan association does not fall under the ambit of partnership. By virtue of Section 47(2) of the Act there cannot be an association of more than twenty persons formed or carrying on business in partnership. As that contravenes Section 14 (3) of the Companies Act 1965, unless it is a partnership of professionals, eg doctors, solicitors or dentists.

To explore partnership in detail it is worthwhile exploring the characteristics as revealed by the definition..

1. The relationship, which subsists, is one contract. A partnership agreement is a contract. However, it is not enough just to agree to be partners; you must also be in a business, which has started. eg. if Airil and Juanpe decide that they will run a shop as partners, they are not partners in the eye of the law until the shop is actually operating. Preparation stage is not partnership contract. as we can see in the case of Spicer (Keith) Ltd v Mansell [1970] 1 All ER 462, M and B lost their jobs. They agreed to go into business together and for a limited company to run a restaurant. While they were forming the company and before it had received its certificate of incorporation from the registrar, B ordered some goods from Specier’s for the business. They also opened a bank account in the name of the company. The company was eventually formed but not bound by the contract which B had made because it was not in existence at the time.

B went bankrupt before Spicer’s had been paid. So rather than prove in a bankrupt, Spicer sued M on the basis that he was a partner of B. Held. B and M were not partners. They were not carrying business together in partnership. They were preparing to carry on a business as a company as soon as they could

2. A partnership is between persons, but a company, being a legal person can be a partner with human person. the members of the company may have limited liability while the human person has not. Two mote limited companies can be a partner.

3. Parties must be carrying on a business, and for this reason a group of people who run a social club would not be a partnership.

4. There must a view of making profit.

5. Sharing gross profit.

According to Sir Montague Smith in Mollowo, March & Co v Court of Wards (1872) LR 4 PC 419 at 436, “to constitute a partnership the parties must have agreed to carry on business, or to share profit in some way common.
[3]. Thus in a partnership, each partner is an agent whose acts are binding on the other partners who are his principals, and each partner is again a principal who in turn is bound by the acts of the other partners. Section 7 provides:-

“ Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.”

Firm and Firm Name

Persons entering into partnership with one another are, for the purpose of Partnership Act, called collectively a firm, and the name under which their business is carried on is called the firm name. Contrary to popular believe, a partnership does not have to be created by a formal deed. For example, two individuals, who have started a business in retailing in pursuance to an agreement to become partners, will be considered by law to be partners until the conclusion of the partnership agreement.

A partnership business must be registered under the appropriate law, depending on the location of the business. In Peninsular Malaysia it is the Registration of Business Act 1956. A creditor is entitled under Section 6 of the Registration of Business Act5 1956 to rely on the particulars kept in the Business Registry to ascertain whether a person has remained a partner of a firm at the commencement of a suit
[4].

In both English and Malaysian law, a firm has no legal existence distinct from its members . It has no legal entity. In Alagappa Chettiar v Coliseum Café [1962] MLJ 111, The appellant is the owner of premises known as No 102 Batu Road and the respondent is a firm of partners carrying on business of a cafe and hotel in Nos 98, 100 and 102 Batu Road. The present appellant brought an action in the Sessions Court for recovery of possession of his premises No 102 and for mesne profits. The learned President was of the opinion that the defendant firm though registered as a business had not the power to become tenants as so constituted and he gave judgment for the appellant.

The respondent appealed to the High Court and Hashim J allowed the appeal. From this decision the appellant appealed to the Court of Appeal. A preliminary point was raised by counsel for the respondent that as “he amount or value of the subject matter at the trial is less than five hundred dollars” there was no right of appeal unless leave was obtained from the High Court or from the Court of Appeal.

The only other point raised was that it was suggested that since a partnership firm is not a legal entity in law, the firm cannot hold a tenancy. – rejecting the opinion of the trial court that the partnership known as Coliseum Café, although registered as a business, had no power to become tenants as so constituted, his Lordship went on to say that ‘ a single individual can be a tenant, and equally can eight partners be joint tenant’. ‘ Coliseum Café or Hotel, as such is not a legal persona, but a label used by a number of individuals trading in partnership under one name.




Held:
(1) the profits claimed must be taken into account in determining whether the amount or value of the subject matter was more or less than $500;

(2) in this case the respondent had not made out the allegation on which his preliminary objection rested;

(3) the letting in this case created the relationship of landlord on the one hand and the partners on the other, and though there had been a change of partners over the years, members of each new partnership arising from each change by virtue of s 206(g) and (j) of the Contracts (Malay States) Ordinance, 1950, had continued de jure to assume obligations and enjoy benefits of the tenancy. This followed from the fact that when the tenancy agreement was made no reliance was placed upon the “personnel of the Partners


Consideration Affecting Existence of Partnership

(1) Joint Tenancy and Tenancy in Common
[5]

Joint Tenancy and Tenancy in Common refers to ownership of property by two or more persons. Such an ownership alone does not imply the existence of a partnership if it is not designated to share the net profit as a result of the relationship.

A joint tenancy arises where there exists (a) unity of possession (b) unity of title (c) unity of time (d) unity of interest. The most distinct element in such tenancy is survivorship, on the death of a joint tenant, the entire property vests in the survivor or survivors

A tenancy in common arises when two or more persons own distinct and undivided share in the property. The death of a tenant in common does not result in the acquisition of his shares by the surviving partners but passes to his next of kin or according to his will if he has left one.

A joint ownership of a land or any property by two or more parties does not necessarily make them partners, not even if the actually conducted their business activities on the property.

(2) Sharing of Gross Returns
[6]

A distinct must be made between a specific interest in the profits and a claim on the gross takings. This is best illustrated in the case of Sutton & Co v Grey
[7] in which the court held that the commission earned by one, for business introduced by his to a firm to stockbrokers, did not amount to a specific interest in the profit.

In Cox v Coulson
[8] the defendant, a theatre manager was sued as a partner, for an injury alleged to have been caused to the plaintiff by a person the plaintiff claimed to be the defendant’s partner. The only relationship between the defendant and that person was an agreement to share whatever might come from a theatrical group performance. The court held that there was no partnership in this situation.



Sharing of Profits
[9]

As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Here the court has to examine all the circumstances of the cases in order to ascertain the intention of the parties, without giving undue weight to any of such circumstances including the question of the sharing of profit.
[10] In Davis v Davis [1984] 1 Ch 393 two brothers held certain houses as tenants in common. They also had a business. They let one of the houses and employed the proceeds in enlarging the business. It was held that they were partners as to the business but not to the houses, and the property acquired for expanding the business was not partnership property.

If one advances a sum of money (RM 25,000) to a firm and receives payment by installments of RM 500 monthly, this does not qualify him as a partner. Payment can be in the form of a salary plus a commission of the share of the profits. This arrangement does not make the recipient to be considered as a partner. Sometimes this category is also known as salaried partner.

In Walker v Hirsh
[11] plaintiff advanced a monetary sum to H & Co, controlled and owned by two individuals. P signed an agreement with H & Co which included clauses, inter alia, that P would be paid salary plus one –eight (1/8) of the profits, and losses and the agreement could be determined with four moths notice. P was previously a clerk and continued to discharge clerical duties in H & Co after the agreement. The firm gave his notice as agreed, in which case he brought an a action claiming to be a partner and demanding the dissolution of the firm. The court held that he was only a servant of the firm and not as partner as what he claims to be.
Formation of Partnership

The agreement is not required by the partnership Act 1961 to take any special form, though it is usually written. Writing is preferred as it makes it easy to ascertain the right and duties of the partner. In an agreement to form a partnership, as in all contracts, there must be free consent and consideration.

Capacity to be a firm’s member

Persons who have capacity to contract, including those of a religion, women, limited companies, and aliens may enter into the partnership agreement but others also may do the same thing in certain instances.

According to the age of Majority Act 1971, a minor is a person under the age of 18. In William Jacks and Co (Malaya) Ltd v Chan and Yong Trading Co
[12], The plaintiffs claimed against the defendants the sum of $12,734.91 for goods sold and delivered by the plaintiffs to the defendants. The writ was served on Chan and Yong the partners of the defendant firm. Yong did not take any steps to defend but Chan denied the plaintiffs’ claim on the following grounds namely that (a) no firm by the name of Chan & Yong Trading Co ever existed and that if such a company did exist he was not a partner thereof (b) he had not in any way represented or held himself out as partner of the said firm (c) the goods bought from the plaintiffs were for the personal use of Yong who was a minor and that therefore the partners were not liable.

Held:
(1) Chan was a partner of “Chan & Yong Trading” and “Chan & Yong Construction” and on the evidence “Chan & Yong Trading Co” and “Chan & Yong Trading” were one and the same firm because there was no evidence that there were two separate firms by these two separate names;

(2) Chan represented himself to be a partner in the firm by approaching a salesman of the plaintiffs to ask for credit facilities with the plaintiff company, by registering the partnership with the Registrar of Businesses and by opening a banking account with his own money in the name of the partnership with the Bangkok Bank. Each mode of representation was sufficient to fix him with liability as a partner of the firm;

(3) the fact that Yong made use of the goods bought from the plaintiffs for his own purpose did not mean that the partnership and consequently the partners were not liable. Further as Yong had not taken any steps after attaining the age of majority to repudiate the partnership he was also liable as a partner of the firm.

However in Goode v Harrison [1984] AC 607 a debt contracted during minority would not bind the contractor of he did not repudiate the partnership agreement on attaining the age of majority. It was further held that to avoid incurring liability on the firms future debts the minor who became of age should repudiate the partnership agreement before such debts were incurred.

Types of Partners

Partners can be described as follows
a) A general partner – that is, he is a partner in the fullest sense.
b) An active partner – that is , he is a partner who actively participates in the management of the business and is known to the world as a partner.
c) A dormant partner – sometimes called as the sleeping partner, that is, a partner who takes no active part in the management but is nevertheless liable as a partner.
d) A quasi partner – that is, a person who, in fact, is not a partner but who is liable for debts of the partnership as a consequence of holding out, that is causing people to believe he is a partner.
e) A salaried partner – commonly found in professional firms, may receive a fixed remuneration irrespective of profits or fixed salary every month plus a small percentage of the profits. The firm is fully responsible for his acts

Relations of partners to outsiders

Every partner is an agent to the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on the usual was business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner
[13]. –. – British Homes Assurance Corporation v Peterson [1902] 2 Ch 404

The above mentioned section states that each partner in an agent to other partner. Each partner when contracting with outsiders are agents and principals at the same time.

There are four elements which must be satisfied for the act of the partner to bind the firm and other partners.

1. the act must be done in relation to the partnership business
2. carrying on usual way of business
3. the act must be done in the capacity as a partner and not as an individual person.
4. the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

An act or instruments relating to the business of the firm and done executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners
[14].

Re Briggs & Co (1906)

A father and son were partners in a firm. The firm was in financial difficulties. They were being pressed by the creditors and they have no money to pay back the creditors. The assigned book debts to the creditors. The son deal with this without informing the other partner i.e the father. Later they firm was declared bankrupt and the trustee sought to set a side the agreement stating that it was executed by the individual. Court held that the agreement was bonding because it was an instrument relating to the business of the firm and there was some intention to bind the firm.

When one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.
[15]

This section explain that if a partner uses the fund of the firm for his personal purposes which is not connected with the ordinary course of business, than the other partners will not be liable for his act, but if it was authorised by the other partners therefore all the partners can be made liable.

If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.
[16]




Liability of Partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner.
[17] If a partner dies, his estate becomes severely liable for the debts and obligations in so far as they remain unsatisfied but subject to the prior payment of his separate debts.

If a partner who is not authorised to act on behalf of the firm for any transaction, and the third party knows about it, and if the third party goes on to contract with the unauthorized partner, the other partners cannot be held liable for his unauthorised act.

Illustration.
Linda has supplied furniture worth RM50,000/- to the firm of Azizul, Samdan and Najib Enterprise. Linda has not been paid her 50,000/-.

Linda may sue Azizul, Samdan and Najib Enterprise. But if there is insufficient common partnership property to satisfy the debt, she can levy execution against the private property of the partners – Azizul, Samdan and Najib.. On the other hand, Linda may choose to sue only one partner.


Incoming Partners

When a person is admitted as a partner into an existing firm he immediately assumes the liability of a partner but he will not be liable for anything done before he became a partner except by special agreement
[18]. Although the special agreement is enforceable by any of the parties to it, creditors of the old firm do not have any right under it against the incoming partner. Therefore any debts contracted before he joined the firm are to be shouldered by his co partners alone. However the Partnership Act does not impose any restriction or prohibit ant incoming partner from concluding an agreement whereby he holds himself liable to the firm’s creditors for debt contr4acted while he was the partner of the firm

Retiring Partners

When a partner retires from the firm, he remains liable for the partnership debts incurred before his retirement. This is clearly stated in Section 19(2), which says that ‘a partner who retires from the firm, he remains liable for the partnership debts incurred or obligations incurred before retirement’.

However a ‘retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.
[19]

Where the debts incurred after a partner’s retirement, he is still liable to persons who deal with the firm after a change in its constitution unless he has given express notice to such persons that he is no longer a partner.

In Phillips Singapore Private ltd v Han Jong Kwang & Anor [1989] 2 MLJ 323, it was held that the mere fact of registration of retirement in the Registry of Business will not give notice to a third party of that party.

Liability of partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner.

a) A partner’s liability in contract is governed by Part II of the Partnership Act 1961. According to that, a partner’s liability for debts and obligation if the firm incurred while he is a partner. This means that there is only one cause of action and if it is exhausted no further action against any member of the firm can be commenced.
[20]

b) Liability in torts has been provide for in Section 12 of the Partnership Act 1961. It is to be noted here that by virtue of Section 14 a partner is jointly and severally liable for torts committed by co partner while both are members of the firm.

c) Under section 13 (a) of the Partnership Act 1961, a partner is liable for his co partner’s misapplication of money received by the co partner in the course of his apparent authority

Rights and duties of partners in the Absence of Agreement

all partners are entitled to share equally in the capital and profits of the business and must contribute equally to losses.
Every partner may take part in the management of the firm
No partner is entitled for any remuneration while acting as a partner
No person may introduce a partner with the consent of other partners
No partner is entitle to the interest on capital before the ascertainment of the profits


Dissolution of Partnership

Partners are at liberty to fix the duration of the partnership. Where no fixed term has been agreed upon for the duration of the partnership, any partner may terminate the partnership at any time on giving notice of his intention to do so to all the other partners – section 28(1)

By agreement

The partnership articles may fix the duration of partnership, and the partnership is terminated on the expiry of the period. The partners may mutually agree to dissolve the partnership at anytime.

By operation of law

Expiration. If the partnership it entered into for a fixed term
(s.34 (1)(a)) or for a single adventure or undertaking (s.34 (1)(b) ), the partnership is dissolved on the expiration of the fixed term or termination of the adventure or undertaking.

Notice. If the partnership is entered into for an undefined time, any partner may determine the partnership at any time by notice to the partners (s.34 (1)(c)). Such a partnership is a partnership at will and may be determined at any time on notice. The partnership is dissolve as from the date mentioned in the notice as the date of dissolution. If no date is mentioned, it is dissolved from the date of the communication (s.34 (2)).

Death or bankruptcy

Every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.

By charging on shares

Where a partner suffers his share of the partnership property to be charged with payment of his personal debt, the other partners have the option of dissolving the partnership (s.35 (2)).

By supervening illegality

If an event occurs which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry on in partnership, the partnership is dissolved (s.36).

6. Dissolution by the Court
The courts by virtue of section 37 of the Partnership Act 1961 may dissolve a partnership on the application by the other partner.

a) Partner’s mental incapacity
The court may dissolve the firm when a partner becomes in sane by virtue of section 37 (a). The partner concerned must be unable to perform his duties, because of mental disorder, of managing his property and affairs. The insanity must be of permanent nature, otherwise there can be no grounds to dissolve the partnership.
[21]



b) Partner’s physical incapacity

According to section 37(b) Partnership Act 1961, The incapacity must be permanent. In Whitwell v Arthur (1865) 35 Beav 140, a partner was paralysed for some months. By the time the case reached the court the partner had recovered and the court did not grant the dissolution

c) Conduct Prejudicial to the business

Section 37(c) Partnership Act 1961 provides that a partnership may be dissolved when a partner is found to be guilty of any misconduct. This situation will be considered by the courts a s ‘ affecting prejudicially the carrying on of the business. Moral misconduct is not enough unless, in the view of the court, it is likely to effect the business. In snow v Milford (1868) 18 LT 142, a partner’s massive adultery all over Exeter was not regarded by the court as sufficient grounds for dissolution under the section.

d) Breach of agreement

The court may dissolve a partnership by section 37(d) partnership Act 1961 when one partner breaches the partnership agreement either willfully or persistently. Here the word willful means a serious breach inflicting damage to the business or on the firm. However the court will not interfere if the breach was a minor one and has no impact on the business of the firm. Thus occasionally bad tempered or behaving rudely will not suffice.
Note: No partner can force dissolution by his own default.

e) Business carried on at a loss.

This is provided by section 37(e) Partnership Act 1961. if the business can only be carried on at a loss that it can be petitioned to the court to dissolve the partnership. As we know the essential of having a partnership is in order for two or more people to get together in the common view of making profit. If this purpose is defeated then it is proper for the courts to dissolve the partnership.

f) On Just and equitable ground.

According to section 37(f) Partnership Act 1961 the court may dissolve the partnership if it is just and equitable to do so. In re Yenidje Tobacco Co Ltd 2 Ch 426, a company dissolution based upon the fact that the company was in reality a partnership, that deadlock between the partners is enough for dissolution, even though the business is prospering.




[1] The partnership comes into existence when two or more individuals pool their skills, labour, capital and other resources together to form a business concern jointly – The law of partnership in Singapore and Malaysia 2nd Edt Peter Knh Soon Kwang
[2] Mollwo, March & Co v The Court of Wards (1872) L.R 4 PC 419
[3] Yeow Chesn v Teo Guan Chiang [1948] MLJ 154..
[4] Hup Aik Ting Mining Co v Kam Hoy Trading [1969] 1 MLJ 93
[5] Section 4(a)
[6] Section 4(b)
[7] [1894] 1 QB 285 at 291.
[8] [1961] 114 L.T 599
[9] Section 4(c)
[10] Davis v Davis
[11] (1884) 278 Ch D 460
[12] [1964] MLJ 105
[13] Section 7 of the Partnership Act 1961 -
[14] Section 8 of the Partnership Act 1961
[15] Section 9 of the Partnership Act 1961
[16] Section 10 of the Partnership Act 1961
[17] Section 11 – Osman v Chang Kang Swi (1924) 4 FFMSLR 292
[18] Section 19(1)
[19] Section19(3)
[20] In England this situation has been changed by s. 3 of the Civil Liability (Contribution) Act 1978.
[21] Jones v Noy (1833) My & K 125