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BMLW5103 Business Law
BMLW5103 Business Law
Course Guide Course Assignment Guide Topic 1 xi - xxi xxv xxix 1 2 4 4 5 7 7 11 11 13 16 17 18 18 20 21 24 24 26 27 29 30 33 33 34 35 36 41 45 45 45 Law of Contract (Proposal and Acceptance) 1.1 Definition of Contract and Elements of a Valid Contract 1.2 Proposal or Offer 1.2.1 To Whom Can the Proposal be Made? 1.2.2 The Difference between a Proposal and an Invitation to Treat 1.2.3 Proposal must be Clear and Communicated 1.2.4 Revocation of Proposal 1.3 Acceptance 1.3.1 Acceptance must be Absolute and Unqualified 1.3.2 Acceptance must be Communicated 1.3.3 Revocation of Acceptance Summary Key Terms References Law of Contract (Consideration) 2.1 Executory, Executed and Past Consideration 2.2 Exceptions to the Rule of Consideration 2.2.1 Agreement Made on Account of Natural Love and Affection 2.2.2 Agreement to Compensate a Past Voluntary Act 2.2.3 Agreement to Pay a Statute-Barred Debt 2.3 Must Consideration Move From the Promisee? 2.4 Adequacy of Consideration Summary Key Terms References Law of Contract (Intention to Create Legal Relations) 3.1 Domestic, Family and Social Agreements 3.2 Business or Commercial Agreements Summary Key Terms References
Topic 2
Topic 3
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Topic 4
Law of Contract (Capacity to Contract) 4.1 Minors 4.1.1 Valid Contracts (Exceptions to Minors) 4.2 Person of Sound Mind Summary Key Terms References Law of Contract (Free Consent to Contract) 5.1 Coercion 5.1.1 Effect of Coercion 5.2 Undue Influence 5.2.1 Real or Apparent Authority 5.2.2 A Fiduciary Relation 5.2.3 Mental Capacity is Temporarily or Permanently Affected by Reason of Age, Illness, or Mental; or Bodily Distress 5.2.4 Burden of Proof 5.2.5 Effect of Undue Influence 5.3 Fraud 5.3.1 Effect of Fraud 5.4 Misrepresentation 5.4.1 Effect of Misrepresentation 5.5 Mistakes 5.5.1 Mistake of Fact 5.5.2 Mistake of Law 5.5.3 Mistake as To Document 5.5.4 Effect of Mistake Summary Key Terms References Law of Contract (Void and Illegal Contract) 6.1 Contracts Forbidden by Law and If Permitted, Defeat the Law 6.2 Fraudulent Contracts 6.3 Contracts Injurious to Person or Property of Another 6.4 Contracts Immoral or Against Public Policy 6.5 Other Void Contracts 6.5.1 Contracts in Restraint of Trade 6.5.2 Contracts in Restraint of Legal Proceedings 6.5.3 Effect of Contracts under Section 28 And 29 6.6 Consequences of Illegality
47 48 49 54 57 57 58 59 60 61 62 62 63 64
Topic 5
64 66 68 70 71 72 74 74 76 76 77 80 82 82 83 84 86 86 87 89 90 91 92 92
Topic 6
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Summary Key Terms References Topic 7 Law of Contract (Discharge of Contract And Remedies) 7.1 Discharge by Consent or Agreement Between Parties 7.1.1 Novation, Rescission and Alteration 7.1.2 Remission of Performance 7.2 Discharge by Performance 7.2.1 Time and Place of Performance 7.2.2 Performance of Reciprocal Promise 7.2.3 Performance by Third Party 7.3 Discharge by Impossibility 7.3.1 Effect of Frustration 7.4 Discharge by Breach 7.5 Remedies 7.5.1 Rescission of Contract 7.5.2 Damages 7.5.3 Specific Performance 7.5.4 Injunction 7.5.5 Quantum Meruit Summary Key Terms References Law of Agency (Part 1) 8.1 Capacity 8.2 Formation of Agency 8.2.1 Agency by Express Appointment 8.2.2 Agency by Implied Appointment 8.2.3 Agency by Ratification 8.2.4 Agency by Necessity 8.2.5 Agency by Estoppel or Holding Out 8.3 Authority of an Agent 8.3.1 Actual Authority 8.3.2 Apparent or Ostensible Authority Summary Key Terms References
96 96 96 98 99 99 100 101 102 105 105 106 108 109 111 111 112 114 117 118 118 120 121 123 124 124 125 125 127 129 130 131 131 132 135 135 135
Topic 8
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Topic 9
Law of Agency (Part II) 9.1 Duties of Agent to Principal 9.2 Duties of Principal to Agent 9.3 Effects of Contracts Made by Agents 9.3.1 A Named Principal 9.3.2 An Undisclosed Principal 9.4 Termination of Agency 9.4.1 Termination by the Act of the Parties 9.4.2 Termination by Operation of Law Summary Key Terms References Law of Partnership (Part I) 10.1 Definition of Partnership and its Characteristics 10.2 Formation of Partnership 10.2.1 Partnership under the Law 10.2.2 Lawful Purpose 10.2.3 Capacity 10.2.4 Partnership Agreement 10.2.5 Registration of Partnership 10.3 Relationship of Partners and Outsiders (Third Parties) 10.3.1 Partner's Authority to Bind the Firm 10.3.2 Liability of Partners Summary Key Terms References Law of Partnership (Part II) 11.1 Relationship between Partners 11.1.1 Mutual Rights and Duties of Partners 11.1.2 Obligations of Partners to Act in Utmost Good Faith 11.2 Incoming and Outgoing (Retiring) Partners 11.3 Assignment of Share 11.4 Partnership Property 11.5 Dissolution of Partnership 11.6 Partnership Accounts Settlement Summary Key Terms References
137 137 146 153 153 153 154 154 156 157 158 158 159 160 165 165 165 166 166 166 168 168 170 177 178 178 180 181 184 186 186 187 189 192 193 194 195 196
Topic 10
Topic 11
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Topic 12
Law of Sale of Goods (Part I) 12.1 Definition of Goods 12.2 Contract of Sale 12.3 Terms of Contract 12.4 Implied Terms 12.4.1 Title 12.4.2 Sale of Goods by Description 12.4.3 Fitness for Purpose and Merchantable Quality 12.4.4 Sale by Sample 12.5 Transfer of Property in the Goods and Risk 12.5.1 Effects of the Contract Summary Key Terms References Law of Sale of Goods (Part II) 13.1 Transfer of Title by Seller Who is not the Owner and Its Exceptions 13.1.1 Estoppel 13.1.2 Sale by a Merchantile Agent 13.1.3 Sale by One of Joint Owners 13.1.4 Sale under a Voidable Contract 13.1.5 Sale by a Seller in Possession after Sale 13.1.6 Sale by a Buyer in Possession after Sale 13.2 Performance of Contract 13.3 Remedies for Breach 13.3.1 Breach by the Buyer 13.3.2 Rights of Unpaid Seller against the Goods (Sellers Remedies) 13.3.3 Breach by the Seller and the Buyers Remedies Summary Key Terms References Law of Hire-Purchase 14.1 Definition of Hire-purchase 14.2 Meaning of Goods under the Hire-purchase Act 1967 14.3 Formation of the Hire-purchase Agreement 14.3.1 Pre-contractual Obligations 14.3.2 Construction of a Hire-purchase Agreement 14.3.3 Post-contractual Obligations 14.4 Rights and Protections of Hirers 14.4.1 Implied Conditions
197 198 198 199 200 201 201 202 205 208 209 212 213 213 215 216 217 218 218 219 219 219 220 223 223 224 228 231 232 232 233 234 234 236 236 237 238 239 239
Topic 13
Topic 14
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14.4.2 Implied Warranties 14.5 Liability of Owner and Dealer for Misrepresentation 14.6 Statutory Rights of the Hirer 14.7 Repossession of Goods by the Owner 14.7.1 Procedures Prior To Repossession 14.7.2 Procedures during Repossession 14.7.3 Procedures after Repossession (Rights of The Hirer after Repossession) 14.8 Insurance Summary Key Terms References
240 240 240 242 243 244 245 246 249 249 250
COURSE GUIDE
COURSE GUIDE
COURSE GUIDE
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Table of Contents
Welcome to BMLW5103 What will you get from doing this course? Description of the course Aim of the course Objectives of the course How can you get the most from this course? Learning package Course topics Organisation of the course content How will you be assessed? Assessment Format What support will you get in studying this course? Tutorials MyVLE Online Discussion Facilitator/ Tutor Library resources Learner Connexxions How should you study for this course? Time commitment for studying Proposed study strategy xii xii
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WHAT WILL YOU GET FROM DOING THIS COURSE? Description of the Course
Being a student in a business course, knowledge on business law is expected. Thus, this course begins with detailed discussions on the Law of Contract. The understanding on this law of contract will help you to understand other types of contracts in business. The law of contract will cover discussions on the elements to form a valid contract, factors vitiating consent of parties, terms of contract, void contracts, termination of contracts and remedies available in cases of breach of contract. This is followed by the Law of Agency (Part I and II). In these topics, there will be discussions on the creation of agency contracts, the authority of persons acting as agents, rights and duties of agents and principles and the application of the law of agency in businesses. Subsequently, the law of Partnership (Part I and II) will be discussed. In contract of partnership, you will learn about the liabilities of partners in a partnership, the relationship between partners, the partnership property and the rules on dissolution of partnership. The course will also cover a discussion on the Law of Sale of Goods (Part I and II). In contract of sale of goods, you will learn the meaning of goods and the implied terms in the contract of sale of goods, product liability and transfer of title, and performance of contract and remedies available for breach. Finally, the discussion will focus on the Law of Hire-Purchase. The discussion covers the formation of the hire-purchase contract, the statutory rights of the hirer, the rules of repossession of goods by the owner and other important matter like insurance of the goods under a hire-purchase contract.
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Learning Package
In this Learning Package you are provided with THREE kinds of course materials: 1. 2. 3. The Course Guide you are currently reading The Course Content (consisting of 14 topics) and The Course Assignment Guide (which describes the assignments to be submitted and the examinations you have to sit for) will be given to you in a separate folder.
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Mind Map
A basic knowledge on Business Law is considered relevant for every business student and will assist them in handling their job assignments successfully. An overview of the course and a description of the contents are provided below.
Figure 1: Overview of the Course
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Table of Content
Topic 1 Topic 2 Topic 3 Topic 4 Topic 5 Topic 6 Topic 7 Topic 8 Topic 9 Topic 10 Topic 11 Topic 12 Topic 13 Topic 14 Law of Contract (Proposal and Acceptance) Law of Contract (Consideration) Law of Contract (Intention to Create Legal Relations) Law of Contract (Capacity to Contract) Law of Contract (Free Consent to Contract) Law of Contract (Void and Illegal Contract) Law of Contract (Discharge of Contract and Remedies) Law of Agency (Part I) Law of Agency (Part II) Law of Partnership (Part I) Law of Partnership (Part II) Law of Sale of Goods (Part I) Law of Sale of Goods (Part II) Law of Hire-Purchase
Course Content
This course consists of 14 topics altogether. Topic 1: Introduces the law which governs the formation of contracts in Malaysia. Along the discussion, the relevant provisions of the statute and the case-laws will be referred to in order to give us a clear understanding of the topic. Discusses the importance of consideration in a contract, without which a contract will be void. Discusses the requirement of intention in order to create legal relation and bind the parties in a contract. Discusses the need for the parties to have the capacity before entering into a valid contract. Discusses the importance of free consent by the parties to a contract, so much so that the parties consent must not be vitiated
Topic 2:
Topic 3:
Topic 4:
Topic 5:
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by any act of coercion, undue influence, fraud, misrepresentation, and mistakes. Topic 6: Discusses the circumstances under which contracts may become illegal contracts and therefore void. Discusses the various ways in which contracts will be discharged and the parties will be free from their obligations. Remedies available to the parties are also discussed in this topic. Discusses the meaning of agency, the purpose of agency contract, the types of agency contract, the statutory requirement for creation of agency contract and the scope of authority of the agent. Discusses duties of agents and principals, the rights of agents and principals, the effect of agency contract, and the rules of termination of agency contract. Discusses the important characteristics of partnership, the rules on formation of partnership, the relations of partners to outsiders and the liabilities of partners to third parties. Discusses the rights, duties and liabilities of partners, the obligations of partners to one another, the rules on partnership property, the grounds for dissolution of partnership and the consequences of dissolution of partnership. Discusses the meaning of goods, the classification of goods, the implied terms in a contract of sale of goods and the importance of transfer of property in the goods. Discusses the rule of nemo dat quod non habet and its exceptions, the effect of sale by a person other than the owner, the rules relating to the performance of contract of sale and the remedies available to the seller and buyer for breach of contract of sale of goods. Discusses the formation and nature of hire-purchase agreement, the important terms in hire-purchase agreement, the rights and liabilities of owner and hirer and the procedure for repossession of goods under hire-purchase agreement.
Topic 7:
Topic 8:
Topic 9:
Topic 10:
Topic 11:
Topic 12:
Topic 13:
Topic 14:
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ACTIVITY
These are situations drawn from situations to show how knowledge of the principles of learning may be applied to real-world situations. The activities illustrate key points and concepts dealt with in each chapter.
SELF-CHECK
Questions are interspersed at strategic points in the chapter to encourage review of what you have just read and retention of recently learned material. The answers to these questions are found in the paragraphs before the questions. This is to test immediately whether you understand the few paragraphs of text you have read. Working through these tests will help you determine whether you understand the chapter and prepare you for the assignments and the examination.
The main ideas of each topic are listed in brief sentences to provide a review of the content. You should ensure that you understand every statement listed. If you do not, go back to the topic and find out what you do not know.
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Key terms discussed in the topics are placed at the end of each topic to make you aware of the main ideas. If you are unable to explain these terms, you should go back to the topic to clarify.
At the end of each topic, a list of articles and topics of books is provided that is directly related to the contents of the topic. As far as possible, the articles and books suggested for further reading will be available in OUMs Digital Library which you can access and OUMs Library. Also, relevant Internet resources are available to enhance your understanding of selected curriculum concepts and principles as applied in real-world situations.
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Assessment Format
Please refer to myVLE.
Facilitator
Your facilitator will mark your assignments. Do not hesitate to discuss during the seminar session or online if: You do not understand any part of the course content or the assigned readings You have difficulty with the self-tests and activities You have a question or problem with the assignments.
Library Resources
The Digital Library has a large collection of books, journals, thesis, news and references which you can access using your student ID.
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Learner Connexxions
This is an online bulletin which provides interesting and relevant information to help you along the programme. There are many useful study hints and you can read about the experiences of other distant learners.
2.
Proposed Study Strategy The following is a proposed strategy for working through the course. If you run into any trouble, discuss it with your facilitator either online or during the seminar sessions. Remember, the facilitator is there to help you. (a) (b) The most important step is to read the contents of this Course Guide thoroughly. Organise a study schedule. Note the time you are expected to spend on each topic and the date for submission of assignments as well as seminar and examination dates. These are stated in your Course Assessment Guide. Put all this information in one place, such as your diary or a wall calendar. Whatever method you choose to use, you should decide on and jot down your own dates for working on each topic. You have some flexibility as there are 14 topics spread over a period of 14 weeks. Once you have created your own study schedule, make every effort to stick to it. The main reason students are unable to cope is because they get behind in their coursework. To begin reading a topic: Remember in distance learning much of your time will be spent on READING the course content. Study the list of topics given at the beginning of each topic and examine the relationship of the topic to the other thirteen topics. Read the topic overview showing the headings and subheadings to get a broad picture of the topic.
(c)
(d)
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(f)
Read the topic learning outcomes (what is expected of you). Do you already know some of the things to be discussed? What are the things you do not know? Read the introduction (see how it is connected with the previous topic). Work through the topic. (The contents of the topic has been arranged to provide a sequence for you to follow). As you work through the topic you will be asked to do the self-test at appropriate points in the topic. This is to find out if you understand what you have just read. Do the activities (to see if you can apply the concepts learned to real-world situations).
When you have completed the topic, review the learning outcomes to confirm that you have achieved them and are able to do what is required. If you are confident, you can proceed to the next topic. Proceed topic by topic through the course and try to pace your study so that you keep yourself on schedule. After completing all topics, review the course and prepare yourself for the final examination. Check that you have achieved all topic learning outcomes and the course objectives (listed in this Course Guide).
(g)
(h)
FINAL REMARKS
Once again, welcome to the course. To maximise your gain from this course, you should try at all times to relate what you have studied to the real world. Look at the environment in your institution and ask yourself whether the ideas discussed can be applied. Most of the ideas, concepts and principles you learn in this course have practical applications. It is important to realise that much of what we do in education and training has to be based on sound theoretical foundations. The contents of this course provide the principles and theories explaining human learning, whether it be in a school, college, university or training organisation. We wish you success with the course and hope that you will find it interesting, useful and relevant in your development as a professional. We hope you will enjoy your experience with OUM and we would like to end with a saying by Confucius Education without thinking is labour lost.
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Introduction Academic Writing (a) Plagiarism? (b) Documenting Sources (i) What is Plagiarism? (ii) How Can I Avoid Plagiarism? Direct Citation Indirect Citation Third-party Citation (c) Referencing Journal Articles Online Journal Webpage Book Article in Book Printed Newspaper Details about Assignments xxvi xxv
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INTRODUCTION
This guide explains the basis on which you will be assessed in this course during the semester. It contains details of the facilitator-marked assignments, and final examination of the course. One element in the assessment strategy of the course is that all students should have the same information as facilitators about the answers to be assessed. Therefore, this guide also contains the marking criteria that facilitators will use in assessing your work. Please read through the whole guide at the beginning of the course.
ACADEMIC WRITING
(a) Plagiarism (i) What Is Plagiarism? Any written assignment (essays, project, take-home exams, etc) submitted by a student must not be deceptive regarding the abilities, knowledge or amount of work contributed by the student. There are many ways that this rule can be violated. Among them are: A closely reasoned argument of an author is paraphrased but the student does not acknowledge doing so. (Clearly, all our knowledge is derived from somewhere, but detailed arguments from clearly identifiable sources must be acknowledged.) Large sections of the paper are simply copied from other sources, and the copied parts are not acknowledged as quotations. These often include essays written by other students or sold by unscrupulous organisations. Quoting from such papers is perfectly legitimate if quotation marks are used and the source is cited. Taking credit deliberately or not deliberately for works produced by others without giving proper acknowledgement. These works include photographs, charts, graphs, drawings, statistics, video clips, audio clips, verbal exchanges such as interviews or lectures, performances on television and texts printed on the Web. The student submits the same essay for two or more courses.
Paraphrases
Works by others
Duplication
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(ii)
How Can I Avoid Plagiarism? Insert quotation marks around copy and paste clause, phrase, sentence, paragraph and cite the original source. Paraphrase clause, phrase, sentence or paragraph in your own words and cite your source. Adhere to the APA (American Psychological Association) stylistic format, whichever applicable, when citing a source and when writing out the bibliography or reference page. Attempt to write independently without being overly dependent on information from anothers original works. Educate yourself on what may be considered as common knowledge (no copyright necessary), public domain (copyright has expired or not protected under copyright law), or copyright (legally protected).
(b)
Documenting Sources Whenever you quote, paraphrase, summarise, or otherwise refer to the work of another, you are required to cite its original source of documentation. Offered here are some of the most commonly cited forms of material : Direct Citation Simply having a thinking skill is no assurance that children will use it. In order for such skills to become part of day-to-day behaviour, they must be cultivated in an environment that value and sustains them. Just as childrens musical skills will likely lay fallow in an environment that doesnt encourage music, learners thinking skills tend to languish in a culture that doesnt encourage thinking (Tishman, Perkins and Jay, 1995, p.5) According to Wurman (1988), the new disease of the 21st century will be information anxiety, which has been defined as the ever-widening gap between what one understands and what one thinks that one should understand.
Indirect Citation
(c)
Referencing All sources that you cite in your paper should be listed in the Reference section at the end of your paper. Heres how you should do your Reference.
Journal Article Rozanah Ab Rahman and Kamal Halili Hassan. (2008). Regulating High-Risk Activities in Construction Industry in Malaysia: The Need For Legal Protection. Jurnal Undang-Undang dan Masyarakat, 12:246-258. Evnine, S. J. (2001). The universality of logic: On the connection between rationality and logical ability [Electronic version]. Mind, 110, 335-367. National Park Service. (2003, February 11). Abraham Lincoln Birthplace National Historic Site. Retrieved February 13, 2003, from http://www.nps.gov/abli/ Harlina Mohamed On and Rozanah Ab Rahman. (2007). Undang-Undang Perniagaan Malaysia. Kumpulan Usahawan Muslim Sdn. Bhd. Rozanah Ab Rahman. (2008). Duty of Safety and Health Officers in Prevention of Accidents at the Workplace In :(Ed., Azmawani Abd Rahman, Noor Azman Ali and Han Chun Kwong), Management Research Issues. UPM, Press. Pp. 53-64. Holden, S. (1998, May 16). Frank Sinatra dies at 82: Matchless stylist of pop. The New York Times, pp. A1, A22-A23.
Online Journal
Webpage
Book
Article in a Book
Printed Newspaper
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Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. 6. Define the meaning of contract; Explain the important elements that constitute a valid contract; Differentiate between a proposal and an invitation to treat; Identify the rules of acceptance and the exceptions; Describe the importance of communication in a proposal and an acceptance; and Discuss the principles relating to revocation of a proposal and an acceptance.
INTRODUCTION
This topic introduces the law which governs the formation of contracts in Malaysia. Throughout the discussion, the relevant provisions of the statute, in particular the Contracts Act 1950 and relevant case-laws will be referred to in order to give us a clear understanding of the topic. The Malaysian law of contract is governed by the Contracts Act 1950. However, the Act does not address all aspects of the law of contract. Thus, in absence of any provision relating to issues arising under the contract, reference may be made to English law by virtue of Section 5 of the Civil Law Act 1956. It is important to note that despite reference being made to English Law, these can only be treated as guidelines or persuasive authority and will not bind the decisions of the courts in Malaysia. Decisions of the courts in India may also be referred to since some of the provisions of the Indian Contracts Act are in pari materia with the Malaysian Contracts Act. However, this will be regarded as a source of reference only.
TOPIC 1
1.1
Section 2(h) of the Contracts Act defines contract as an agreement enforceable by law. In other words, a contract is an agreement that binds the parties who enter into it and it can be enforced against one another (Refer to Figure 1.1). It can be a contract to sell and purchase land, a contract of leasing, an insurance contract, etc. However, not all agreements are contracts, for example, a social agreement or agreements between family members. (This is also known as a domestic agreement). These agreements are not considered contracts because they are not intended to bind the parties in law.
Most contracts take the form of simple contracts whereby there are no specific formalities involved in the contract formation. The contracts are made orally or through implied actions of the parties, for example, selling and buying goods at the grocery shop or the market. However, there are contracts which are considered as complex in nature, like contracts entered into by companies doing the business of selling houses and lands, and jointventure contracts. These contracts are normally drafted and prepared in a written form, containing the details of the terms and conditions agreed by the parties therein. In order to form an agreement enforceable by law, the following elements (Refer to Figure 1.2) must exist: (a) (b) (c) (d) (e) (f) Proposal or Offer; Acceptance; Consideration; Intention to create legal relations; Capacity to contract; and Free consent.
TOPIC 1
Figure 1.2: Elements of a valid contract Table 1.1: Explanation on the Elements of a Contract Elements of contract Proposal or Offer Acceptance Proposer/Offeror Acceptor Consideration Intention to create legal relations Capacity to contract Free Consent Explanation When you signify your willingness to be bound by a contract with the other party. When you agree to accept the offer or proposal made by the other party who makes the proposal. A person who makes the offer. A person who accepts the offer. A value to be paid for a promise made. Every party to a contract must have the intention to create a legal relation. Every party to a contract must have the capacity to enter into a contract. Every party must enter into a contract with free consent; the contract must not be secured through fraud, coercion, undue influence, misrepresentation or mistake.
TOPIC 1
SELF-CHECK 1.1
1. 2. 3. 4. How do you distinguish between a social agreement and a contract? What are the important elements to form a valid contract? What are the advantages of having a contract in written form? Give two examples of standard forms of contract that are available in Malaysia.
1.2
PROPOSAL OR OFFER
What is a proposal or an offer? According to Section 2(a) of the Contracts Act 1950, as explained in Table 1.1, a proposal is said to exist when one person signifies to another, his willingness to do or to abstain from doing anything, with a view to obtain the assent of that other person to the act or the abstinence. In other words, a proposal is the readiness of the person who makes the offer to create a legal relation and to be bound by the law, whenever the terms of the proposal are agreed upon by the acceptor. There is a difference in the use of word under the Malaysian law and the English law though the meaning is similar. Under the English law, the term offer is used while under the Malaysian Contracts Act, the word proposal is used.
1.2.1
A proposal can be made to a specific or particular person and the proposal can be accepted by that person only. For example, A proposes B to sell his Perdana car at RM100,000. As proposal can only be accepted by B and not by other persons. A proposal can also be made to the public. In such situation, the acceptance can be made by any person who knows about the proposal and performs the obligations required by the proposer. The example of a proposal made to the public is illustrated in the case of:
TOPIC 1
1.2.2
Usually, before a proposal is made, the parties will hold some negotiations. The negotiation is an invitation to call for a proposal. There are many examples of invitation to treat, for instance, auctions and display of goods on the shelves in shops. The display of goods on the shelves in shops is also an invitation to treat and not a proposal by the shopkeeper. The proposal is made by the buyers when the buyers take the goods from the shelves and bring it to the counter for payment. The acceptance takes place when the seller accepts the payment from the buyer. In short, the contract was formed at the payment counter. A relevant case to explain the above principle is the case of:
TOPIC 1
Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern) Ltd (1953) 1 QB 401.
The defendants were charged under the Pharmacy and Poison Act 1933 (UK) which provided that it was unlawful to sell certain poison unless such sale was supervised by a registered pharmacist. Every sale of the drugs on the Poison List was supervised at the cash desk by a qualified pharmacist, who had the authority to prevent customers from taking goods out of the shop if he thought fit. In this case, the question arises whether a sale had occurred in the self-service shop when the customer selected articles which he desired to purchase and placed them in the wire basket. Held: The Court held that the display of goods did not constitute an offer but only an invitation to treat. A proposal to buy was made when the customer placed the articles in the basket. Hence, the contract of sale would be made at the cash desk when the cashier accepted the customers offer to buy what the latter had chosen. By that principle, the defendants (shop owners) had not made an unlawful sale.
In an auction, the auctioneer makes an invitation to bidders who come to the public auction to make a proposal. The proposal to bid at a certain price will come from the bidders and the auctioneer will accept or reject the proposal. Usually, the auctioneer will accept the highest bid or proposal from the bidders. An advertisement is also an invitation to treat by the advertiser. For example, advertisement for jobs in the newspapers. In the case of Coelho v. The Public Services Commission [1964] MLJ 12, the High Court ruled that the newspaper advertisement was an invitation for qualified persons to apply and the applications were treated as offers.
However, if the advertisement shows the willingness of the advertiser to do or to abstain from doing something, such advertisement is not an invitation to treat but a proposal by the advertiser. In this case, anyone who comes to perform the terms as required in the advertisement is said to have accepted the proposal. You may refer to the above case of Carlill which affirms the rule that the advertisement was an offer to the whole world and the company had the intention to contract with the section of the public who came forward and performed the condition in the advertisement.
TOPIC 1
1.2.3
In the Contracts Act 1950, Section 4(1) provides that the communication of a proposal is complete when the proposal comes to the knowledge of the person to whom it is made. In order to make the proposal effective, it must be clear and communicated. A proposal which is vague and uncertain may not lead to a binding contract. In the case of Ahmad Meah & Anor v. Nacodah Merican (1890) 4 Ky 583, an agreement to build a suitable house was held by the court as vague to constitute a binding contract.
A proposal must also be communicated to the acceptor. It can be communicated in any form, either orally or in written or through the implied action of the party. Logically, a person cannot accept a proposal which he does not know exist. Thus, a person who gives any information cannot claim for a reward if he does not know about the reward being offered. The relevant case to explain this principle is the case of:
1.2.4
Revocation of Proposal
The proposer may revoke his proposal at any time before acceptance. Under Section 5(1) of the Contracts Act 1950, a proposal may be revoked at any time
TOPIC 1
before the communication of its acceptance is complete as against the proposer, but not afterwards. The question is: When is the communication of acceptance complete as against the proposer? If the acceptance is made through instantaneous mode of communication such as telephone, telex, fax or oral, the acceptance is said to be communicated once it comes to the knowledge of the person to whom it is made. But, if the acceptance is made by post or telegram, the acceptance is complete as against the proposer at the time when the letter of acceptance is posted. Thus, in such situation, the revocation of the proposal must be made by the proposer before the letter of acceptance is posted by the acceptor. For example: A proposes, by a letter, sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. Next, Section 6 provides that a proposal is revoked: (a) When the proposer communicated the revocation of the proposal to the other party before its acceptance. If the revocation of proposal is made by post, the revocation is only effective when it comes to the knowledge of the acceptor and not at the time when the letter of revocation is posted. One relevant case to illustrate the principle is the case of:
TOPIC 1
The revocation of proposal need not be communicated by the proposer. It can be communicated by a third party who is acting on behalf of the proposer as an agent. For example, in the case of:
10
TOPIC 1
(b)
By the lapse of time prescribed in the proposal for its acceptance. If no time is prescribed, by the lapse of a reasonable time. An example of case to illustrate the principle is:
(d)
SELF-CHECK 1.2
1. Can a proposal be made to the public at large? 2. How do you distinguish between a proposal and an invitation to treat? 3. Must the acceptor know about the proposal before he can accept it? 4. Can the proposer revoke his proposal? 5. When does the revocation of proposal become effective in cases of revocation made by post? 6. What are the grounds for revocation of a proposal?
TOPIC 1
11
ACTIVITY 1.1
Discuss the following problem by applying the principle of law on proposal: Browny made an offer of RM1,000 in Looking Times to anyone who returned his Persian cat. Tony, a friend of Browny, found the Persian cat which he knew belonged to Browny. When Tony returned the Persian cat to Browny, Browny was so excited that he forgot all about the offer he had made. The next day, Tony came across the advertisement in Looking Times but when he went to see Browny to claim the reward, Browny refused to pay. Advise Tony.
1.3
ACCEPTANCE
What is an acceptance? According to Section 2(b) of the Contracts Act 1950, when the person to whom the proposal is made signifies his assent thereto, a proposal is said to be accepted: a proposal, when accepted, becomes a promise. This means, an acceptance is an agreement by the acceptor to the terms contained in the proposal made by the proposer. With that acceptance, a binding contract is said to exist. It is important that there is a positive act of acceptance made by the acceptor. If the acceptor keeps silence or fails to respond or totally disregards the proposal, then there is no acceptance because there is no positive act made by the acceptor. To determine whether an acceptance exists, the important rules on acceptance will be discussed below.
1.3.1
Section 7(a) of the Contracts Act 1950 provides that an acceptance must be absolute and unqualified. This means, the acceptance must be made on the same terms as provided in the proposal and there must not be any variation or modification. If the party varies or modifies the terms made in the proposal, an acceptance does not exist but that act will amount to a counter-proposal. The case to illustrate the rule is the case of:
12
TOPIC 1
Next, if the parties are still in the process of negotiation, there is no question of an agreement. An example is the case of:
Lau Brothers & Co v. China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1
The parties in this case conducted negotiations for the delivery of logs, through a series of telegrams and letters. Finally, the defendants withdrew from the negotiations. The issue was whether there was a binding contract between the parties? The court held that the parties were still in a state of negotiations and the defendants had the right to withdraw from it.
Another situation where a contract is not yet concluded is when there is a conditional acceptance. It happens when the acceptance is qualified by the term subject to a contract or subject to a formal contract being drawn up by the solicitors. This means, the parties do not intend to conclude their bargain until they executed a formal contract. The example of a case is:
TOPIC 1
13
Low Kar Yit & Ors v. Mohd Isa & Anor [1963] MLJ 165
The defendants gave an option to the plaintiffs agent to purchase a parcel of land subject to a formal contract being drawn up and agreed upon by the parties. The plaintiffs agent exercised the option but the defendant failed to sign the sale agreement. The plaintiff then brought a legal action for breach of contract. The court decided that: there was no binding contract because the option to purchase was conditional and subject to a formal contract to be drawn up and agreed upon by the parties. Thus, the exercise of the option has no legal effect and it was an agreement to enter into an agreement.
1.3.2
In order to form a binding contract between the parties, the acceptance of the proposal must be communicated to the proposer. Section 7(b), Contracts Act 1950, provides that the acceptance may be expressed in some usual and reasonable manner, unless the proposal prescribes a manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer 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. The principle provided in Section 7(b) means, if no method of acceptance is specified by the proposer, then the acceptance must be communicated and made in a usual and reasonable manner. For instance, if A offers to sell his bicycle to B, who stays next door to A, then the reasonable manner to accept the offer is by B going to As house to give his acceptance. If B wants to send a letter to accept As offer, the manner may be usual but it is unreasonable since they are staying next door. But if the proposal specifies a particular mode of acceptance and the acceptor does not follow it, then the proposer can insist on the mode of acceptance. The proposer must act within reasonable time after the acceptance is communicated. If not, then the proposer is said to have accepted the acceptance. (a) Act of acceptance In communicating the acceptance, it is not sufficient that the acceptor intends to accept the proposal without doing some positive act that relates to the proposal.
14
TOPIC 1
Thus, if the acceptor remains silence after being proposed, then the act of silence cannot constitute an acceptance. As what happened in the case of:
(b)
Exceptions It is clear that the general rule requires the communication of acceptance and this means the acceptance must be brought to the notice of the proposer. However, there are certain exceptions to the general rule, as follows: Acceptance through post (Postal Rule) If the parties have agreed to use the post as a means of communication, then the acceptance is complete or effective as soon as the acceptor posted his letter of acceptance, even though it never reaches the proposer. Section 4(2) (a), Contracts Act 1950 provides that: 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. Paragraph (a) means, when the acceptor posts his letter of acceptance, the proposer is bound to perform his obligation, even though the proposer does not know about the acceptance (for instance, the letter does not reach the proposer or delay in transit). A case to illustrate this principle is:
TOPIC 1
15
Paragraph (b) means, when the acceptor posts his letter of acceptance, he is not bound to perform his obligation until his letter of acceptance is received by the proposer. For example, if A proposes to sell his car to B (by letter) and B accepts the proposal (also by letter), A is bound at the time when B posts his letter of acceptance, but B himself is not bound until A receives the letter of acceptance. It also means that in the meantime, the acceptor may still withdraw his acceptance. If the proposer wishes to exclude the postal rule, he may provide protection for himself. For instance, the proposer may clearly state in his proposal that any acceptance is deemed completed only upon receipt. Acceptance through performance of an act stated in the proposal. In some cases, the acceptance need not be communicated to the proposer. Section 8 of the Contracts Act 1950 provides that performance of the conditions of a proposal is an acceptance of the proposal. In a unilateral contract (i.e., a proposal to the public at large), the acceptor need not communicate his acceptance to the proposer because when the proposer performs the conditions provided in the proposal, it becomes an acceptance. The situation is that where a proposer advertises to the public at large that a reward is being offered, it will be unreasonable for every person who wants to accept the proposal to inform the proposer of his intention to accept. Thus, performance is sufficient to constitute an acceptance if that is the intention of the proposer. A case example is:
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TOPIC 1
1.3.3
Revocation of Acceptance
As explained earlier, when the acceptor posts his letter of acceptance, he is not bound to perform his obligation until his letter of acceptance is received by the proposer. This means the acceptor may still withdraw his acceptance. According to 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. For example: A proposes (by a 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 time when) his letter of acceptance reaches A
SELF-CHECK 1.3
1. 2. 3. 4. 5. 6. What is the importance of an acceptance in a contract and what is the effect of a counter-proposal? How can the acceptor communicate his acceptance to the proposer? In an acceptance made by post, when is the communication of acceptance deemed completed as against the proposer? Can the performance of an act stipulated in the proposal amount to an acceptance? When can the acceptor withdraw his acceptance? What do you understand by the postal rule principle?
TOPIC 1
17
ACTIVITY 1.2
Discuss the following cases by applying the principle of law on acceptance: (a) On Friday 5 September, Hanna sent a telex to Adam offering to buy his piano at RM3,000. The telex was received by Adam at 4pm. Since the telex operator had gone home for the weekend, Adam posted a letter in the last post on Friday, accepting the proposal. The letter reached Hanna at 1.30pm on Monday, 8 September. Meanwhile, at 8.30am on 8 September, Hanna sent a telex to Adam withdrawing her proposal. Hannas telex reached Adam and was read by him immediately at 8.45am on 8 September. Adam sought after your advice. Advise Adam. T advertised his speed-boat in a newspaper for RM4,000. S wrote back offering to buy the speed-boat for RM3,500. T replied by return of post stating that he would accept RM3,750. Having received no reply from S, T wrote again saying he would accept his offer at RM3,500. Advise T.
(b)
Every contract is an agreement but not all agreements are contracts. An invitation to treat is not yet a proposal or an offer. It is an offer to make an offer. A proposal can be made to an individual person or to the public at large. A proposal must come to the knowledge of the acceptor before he can accept it. A proposal may be revoked at any time before acceptance. Revocation of proposal made by post is only effective when the acceptor receives the letter of revocation of a proposal. An acceptance must be made on the same terms as provided in the proposal without any variation or modification. An acceptance must be communicated to the proposer and made in usual and reasonable manner. In postal rule, the acceptance is effective upon the posting of the letter by the acceptor, even if the letter of acceptance never reaches the proposer.
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TOPIC 1
In unilateral contract, performance of the act stated in the proposal constitutes an acceptance of the proposal. The acceptor may revoke his acceptance before his letter of acceptance reaches the proposer.
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:
Ahmad Meah & Anor. v. Nacodah Merican (1890) 4 KY 583. Byrne v. Tienhoven (1880) 5C.P.D. 344. Carlill v. Carbolic Smoke Ball Co. Ltd. (1893) 1 QB 256. Coelho v. The Public Services Commission [1964] MLJ 12. Dickinson v. Dodds (1876) 2 Ch 468. Felthouse v. Bindley (1862) 11 CB (NS) 869. Hyde v. Wrench (1840) 3 Beav. 334. Ignatius v. Bell (1913) 2 FMSLR 115. Lau Brothers & Co. v. China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1. Low Kar Yit & Ors. v. Mohd. Isa & Anor [1963] MLJ 165.
TOPIC 1
19
Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern) Ltd. (1953) 1 QB 401. Ramsgate Victoria Hotel Co. v. Montefiore (1866) L.R. 1 Ex.Ch. 109. Williams v. Carwardine (1883) 5C&P 566.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. Explain the importance of consideration in contracts; List the exceptions available to the rule of consideration; Discuss the principle relating to the adequacy of consideration; and Compare the difference in principle of consideration under the Malaysian law and the English law.
INTRODUCTION
Consideration is another important element of a contract and any agreement made without consideration is a void agreement. Section 26 of the Contracts Act 1950 provides that an agreement made without consideration is void. According to Section 2(d) of the Contracts 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 or to abstain from doing, something, such act or abstinence or promise is called a consideration of the promise. It means, if the promisee (i.e., the person accepting the proposal): Has done or abstained from doing; or Does or abstains from doing; or Promises to do or to abstain from doing,
TOPIC 2
21
some acts according to the promisors (person making the proposal) desire, that act or abstinence or promise is called consideration. Therefore, consideration is a price that you pay to buy a promise or an act of the other person. Take an example where you lose your mobile phone while travelling on a train and you offered a RM100 reward to anyone who found and returned the mobile phone to you. Later, A found and returned the mobile phone to you. In such case, you promised to pay RM100 and A paid the price for your promise by performing the act. Thus, the act of returning the mobile phone to you is the consideration for the promise. The case of Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27 on consideration, where the court held that forbearance to sue could amount to a valid consideration.
2.1
(iii) past consideration. Consideration may be executory when one promise is made in return for another promise. For example, you (refer to Figure 2.1) agree to sell a fax machine to B for RM2,000. Here, Bs promise to pay RM2,000 is the consideration for your promise to sell the fax machine and your promise to sell the fax machine is the consideration for Bs promise to pay RM2,000. These are lawful considerations. Promises which form the consideration for each other are called reciprocal promise, and every promise and sets of promises forming the consideration for each other is an agreement. Next, consideration may be executed when one promise is made in return for the performance of an act. For instance, you advertise a reward of RM100 to anyone who finds and returns your lost watch. C finds and returns the watch to you in response to the offer. Cs consideration for your promise is executed. Only your liability remains outstanding which is to pay C the RM100 reward. Figure 2.1 demonstrates the difference between these two considerations.
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TOPIC 2
Apart from the executory and executed considerations, if a promise is made in return for an act that has already been performed, that act is regarded as past consideration. For example, D found and returned your lost chain and in gratitude, you promised to reward D RM100. Your promise to reward D is made in return for Ds consideration that has passed. Under English law, past consideration will not support a claim in contract because the act which was performed before the promise of reward was made is regarded as gratuitous. However, under the Malaysian Contracts Act 1950, past consideration is sufficient to support a promise because Section 2(d) and Section 26 (b) apply to past consideration. The words has done or abstained from doing referred to an act which has been performed before the promise is made. Thus, the position in Malaysia is that, even though the consideration is past, it is valid if it is done at the desire of the promisor.
TOPIC 2
23
The Malaysian case which applied the principle of past consideration is the case of:
Kepong Prospecting Ltd & S.K. Jagatheesan & Ors v. A.E. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170
Schmidt, a consulting engineer, had assisted another in obtaining a prospecting permit for mining iron ore in the state of Johore. He also helped in the formation of the company (Kepong Prospecting Ltd) and was appointed the Managing Director. Subsequently, Schmidt entered into an agreement with the company. In the agreement, the company agreed to pay him one per cent of the value of all ore sold from the mining land. This was in consideration of the services rendered by Schmidt on behalf of the company before its formation, after incorporation and for future services.... Later, an issue arose in this case, whether the services rendered by Schmidt after the incorporation of the company but before the agreement was made, were sufficient to constitute a valid consideration, even though they were past. The Privy Council held that it was a valid consideration and Schmidt was entitled to claim the amount.
SELF-CHECK 2.1
1. 2. What are the differences between executed, executory and past consideration? Can past consideration support a claim in contract?
24
TOPIC 2
ACTIVITY 2.1
Discuss the following problem by applying the principle of law on consideration: Intan and Berlian were neighbours. Intan had to go abroad for business arrangements. Before she left, she told Berlian, Please look after my house. After four weeks of Intan being away, Intans house caught fire and Berlian could only save Intans wedding album. When Intan returned home, she thanked Berlian for saving her wedding album which she treasured so much and promised Berlian that she would pay RM100 for what Berlian had done. Now Intan refused to pay what she has promised. Advise Berlian.
2.2
The general rule of consideration under Section 26 of the Contracts Act 1950 provides that an agreement without consideration is void. However, there are exceptions to this general rule. With these exceptions, even though the agreement is made without consideration, the agreement is still valid and will be enforceable. The exceptions include the following:
2.2.1
This exception is provided in Section 26(a) of the Contracts Act 1950. The rule provides that any agreement which is made without consideration is still valid if it is 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 a near relation to each other.
TOPIC 2
25
This means the agreement that is not supported by any consideration is valid if it fulfils the following conditions: (a) (b) (c) The agreement is made in writing; The agreement is registered under the existing law which requires its registration; and The agreement is made on account of natural love and affection between the parties standing in near relation to each other.
For example: A, for natural love and affection, promises to give his son, B, RMl,000. A puts his promise to B into writing and registers it under a law for the time being in force for the registration of such documents. This is a contract. Under the exception, there is a phrase near relation that is attached to the position of the parties in the agreement. What is meant by near relation? It is not defined in the Act, but a case example in which an attempt was made to define the term is the case of:
The court granted that: Chinese adopted children are related to the adoptive parents and brothers, but they were not nearly related to the family of their adoptive mother. Thus, the uncles and aunties of the adoptive mother did not stand in near relation to their nephews and nieces. In such a case, there was no natural love and affection between the signatories and the donees. The agreement was void.
26
TOPIC 2
Therefore, in order to enforce the agreement made on account of natural love and affection, the court must be satisfied that the parties who enter into the agreement must stand in near relation to each other besides having natural love and affection. The term near relation is not defined in the Act. Thus, what signifies near relation may be different for every social group, depending on the ethnic groups and their customs. This is because the personal law relating to family matters is applicable to the groups.
2.2.2
This is the exception provided in Section 26(b) of the Contracts Act 1950. The rule provides that an agreement without consideration is valid if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do. It means, if the promisee has done some act voluntarily on his own will, for the promisor (without being requested by the promisor) and subsequently the promisor promises to compensate the promisee for such act, then that promise is enforceable. Similarly, if the promisee has done some act (an act which the promisor is compellable to do in law, for example, paying tax to the government) voluntarily on his own will for the promisor, the promise made by the promisor to compensate the act is also enforceable. For example: A supports B's infant son. B promises to pay A's expenses in doing so. This is a contract and A can enforce Bs promise. Similar to Section 2(d), this exception covers the principle of past consideration which has been explained above. If Section 2(d) covers an act which has been done at the request of the promisor, Section 26(b) covers an act which has been done voluntarily by the promisee (before the promise to compensate the promisee is made by the promisor). What is meant by voluntarily is not defined in the Act but a case example that considered the term is the case of:
TOPIC 2
27
2.2.3
This is another exception provided in Section 26(c) of the Contracts Act 1950. The rule provides that an agreement without consideration is valid if it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. What it means under this exception is that, the promisor is liable to pay a previous debt (which the creditor cannot recover through legal action because the time within which the creditor must commence legal action is limited by statute) if the following conditions arise:
28
TOPIC 2
The debtor makes a fresh promise to pay the statute-barred debt; and The promise is made in writing and signed by the person to be charged or his authorised agent. For example: A owes B RM1,000, but the debt is barred by limitation. A signs a written promise to pay B RM500 on account of the debt. This is a contract.
What is meant by a statute-barred debt? It is a debt which cannot be recovered because the time allowed to a party to enforce his legal rights is limited by the Limitation Act 1953. The Limitation Act provides six years as the time limit for any party to take legal action in contract. The six years run from the time the cause of action arises (usually from the time of the breach of contract by the contracting party). Therefore, the promise to pay a statute-barred debt under this exception will form a new cause of action although without consideration, and the fresh promise is valid. This is provided in Section 26(2) of the Limitation Act 1953.
SELF-CHECK 2.2
1. 2. 3. 4. What is the general rule of consideration? Is there any exception available to the general rule of consideration? What was the decision of the court in the case of J.M. Wotherspoon & Co Ltd v. Henry Agency House [1962] MLJ 86? What are the important conditions required in an agreement to pay a statute-barred debt?
TOPIC 2
29
ACTIVITY 2.2
Discuss the following problems by applying the principle of law on the exception to consideration: (a) Mr Ajay was a successful business man. One day, he promises his eldest son, Suresh, that he wishes to transfer one of his bungalows to Suresh to show how much he loved him. Mr Ajay made his promise in writing and registered it. A few years later, when Suresh married Salwath, Suresh requested from Mr Ajay the possession of the bungalow for him to start his matrimonial life. However, Mr Ajay was reluctant to accept Salwath as his daughter-in-law and refused to give Suresh the bungalow. Advise Suresh. Azrai, a bank manager, left for his hometown in haste as his mother passed away. He left his briefcase containing important documents on his table. Unfortunately, a fire broke out at the bank. Baini, the secretary of the bank manager, saw the briefcase and realising that the briefcase was important to her boss, dashed into the room and took the briefcase with her. Azrai reported back to work the subsequent week and felt so relieved that the briefcase was not destroyed in the fire. Azrai promised to give Baini a reward in the sum of RM1,000 in return for Bainis act. Several weeks passed and there was no sign of Azrai giving Baini the reward. Baini came to see Azrai for the reward but Azrai refused to pay her on the basis that it was Bainis duty as his secretary to do so. Advise Baini.
(b)
2.3
After understanding the general rule of consideration and the exceptions, it is important to know from whom the consideration can come. Must the consideration come from the promisee only or can the consideration come from some other persons (who is not the party in the contract)? The principle relating to who should furnish a consideration is different in the Malaysian Contracts Act and the common law of England. Under common law, consideration must move from the promisee. This means, the person who gets the promise must personally give something in return as the consideration for the promise. The idea is that, if a person furnishes no consideration, he takes no part in the contract. Under the Malaysian Contracts Act, the promisee can enforce
30
TOPIC 2
the promise even though he personally does not give any consideration. Such consideration can come from some other persons. The authority for this principle is in Section 2(d) of the Contracts Act which provides the words any other person, in the following part of the provision: ........the promisee or any other person has done or abstained from doing...... Therefore, even though the promisee does not give any consideration for a promise made by the promisor, he can still claim for the promise if the consideration is given by some other persons. For example: A promises to pay B RM1,000 when C paints As house. As soon as C completes the work (paints As house), B can claim the amount of RM1,000 from A although B does not personally give any consideration for As promise. This is because the consideration has moved from C. A case to illustrate this principle is:
2.4
ADEQUACY OF CONSIDERATION
Another important principle is the adequacy of consideration. The question is: must consideration be adequate? Can you sell your house worth RM100,000 for only RM100 to Mr Man? Is the amount of RM100 sufficient as consideration for your promise? According to Explanation 2 of Section 26, Contracts Act 1950, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate...... What is meant by the provision is that, the
TOPIC 2
31
adequacy of consideration is immaterial. The consideration given for the promise need not be adequate as long as the agreement has been entered into by the parties with free consent. Free consent means the parties do not enter into such contract under fraud, oppression, misrepresentation, suppression of the value of property, urgent necessity for money, weakness of understanding or ignorance. For example: A agrees to sell a horse worth RMl,000 for RMl0. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. Thus, if you agree to sell your house that worth RM100,000 to Mr Man for only RM100, this agreement is a contract, provided that your consent to sell at that amount is freely given. You are not under fraud or oppression, etc., to sell at that price. However, Explanation 2 of Section 26 further reads, ......but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given. This clause means the court will consider the adequacy of consideration, only when the issue of free consent is raised by the contracting party. For example: A agrees to sell a horse worth RM1,000 for RMl0. A denies that consent to the agreement was freely given. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A's consent was freely given. A case to illustrate this principle is:
32
TOPIC 2
Hence, the agreement to transfer the land to the appellant for the $500 payment was valid and the promise was enforceable because the consent was freely given by the respondent although the consideration was inadequate.
SELF-CHECK 2.3
1. 2. 3. 4. Can the promisee enforce the promise made by the promisor if the consideration is given by some other persons? Would the principle on the above situation (para (a) above) be the same under the English common law? What is meant by adequacy of consideration? Why is the free consent of the promisor important in considering the adequacy of consideration?
ACTIVITY 2.3
Discuss the following problems by referring to the relevant principle of law on consideration: (a) Mr J, who decided to make a home improvement to his cottage, had requested K to paint his cottage and to build up certain fences around the cottage. He promised to pay K double the usual payment charged by other contractors for that purpose and the arrangement was agreed to by K. The next day, K sent his nephew, M, to start the work. M managed to complete the said improvement work within two weeks. Upon completion of the work, K came to see Mr J for the payment. However, Mr J refused to pay K because he got to know that it was M who had performed the work and not K. Advise K whether he could claim for the payment from Mr J. Zaitun, a local trader in the town offered Hana a sale of a slimming apparatus which is worth RM10,000 in the market for only RM1,000, as she decided to clear the stock of that model (SE101). Hana agreed to buy the apparatus and to collect it from Zaituns office. On the day of collection, Zaitun changed her mind and told Hana that she had wrongly decided to sell the apparatus at that price. Advise Hana as regards the validity of the contract.
(b)
TOPIC 2
33
An agreement made without consideration is a void agreement. When one promise is made in return for another promise, it is known as executory consideration. Executed consideration is when one promise is made in return for the performance of an act. An agreement made on account of natural love and affection is valid without consideration if it is made in writing, registered under the law (if any) and made between parties standing in near relation. Past consideration is valid under the Malaysian Contracts Act 1950 but not under English common law. The exception under Section 26(b) of the Contracts Act 1950 requires the promisee to have done an act voluntarily, before the promise to compensate the act is made by the promisor. An agreement to pay a statute-barred debt is valid without consideration, provided the debtor makes a fresh promise to pay, in writing, and signed by him or his authorised agent. Consideration can move from the promisee or any other person under the Malaysian Contracts Act 1950. Consideration need not be adequate so long as the promisor has freely given his consent to the agreement.
34
TOPIC 2
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.
Cases:
J.M.Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86. Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170. Lampleigh v. Braithwait (1615) 80 ER 255. Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27. Phang Swee Kim v. Beh I Hock [1964] MLJ 383. Re Tan Soh Sim [1951] MLJ 21. Venkata Chinnaya v. Verikataramaya (1881) I.L.R. 4 Mad. 137.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. Explain the importance of intention to create legal relations in an agreement; Discuss the presumption of intention in domestic, family and social agreements; Analyse the situations in which the presumption of intention is rebuttable; and Compare the presumption of intention in business or commercial agreements.
INTRODUCTION
Any agreement made between the parties (the proposer and the acceptor) will only become a binding contract if both parties intend to make the contract enforceable. The element of intention has not been defined in the Contracts Act 1950 and there is no provision in the Act which clearly provides the element of intention as one of the elements to form a valid contract. The provisions which may imply to the element of intention is the word with a view used in Section 2(a), and the word at the desire used in Section 2(d) of the Act. However, the principles in the English common law will apply in the absence of such provision
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under the Contracts Act 1950. In determining whether there is an intention by the parties to create a legally binding contract, the law has divided an agreement into two categories: (a) (b) Domestic, Family and Social Agreements; and Business Agreements.
3.1
In domestic, family and social agreements, the presumption made is that the parties in the contract do not intend for their agreement to create legal relations. This means, the parties to the agreement do not contemplate any legal consequence to arise from their agreement. It is because this type of agreement is made every day between the family and social members and between spouses for many arrangements, that no parties would intend to go to court for breach of such arrangements and promises made. The English case which established the principle is the case of:
Therefore, in the above case that involved husband and wife, there is a presumption of no intention to create legal relations. However, if the presumption can be rebutted on the evidence that there was a serious intent, then a different situation will appear. For example, where a husband and wife were living together but not in amity or were separated when the agreement was made, the court may enforce the agreement. The following case illustrates the situation:
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The above case shows that the presumption that no intention is present in ordinary domestic or social arrangement may be rebutted if there is a proof of the true intention of the parties which may be inferred from the language they use and the circumstances in which they use it. Apart from the cases involving husband and wife, there were other cases which involved other family and personal relationships. The following cases illustrate the situations in which the court presumed that legal relations were intended.
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Since the true intention of the parties may be inferred from the language they use, it is important that the words used by the parties are certain. If the words are uncertain, then the agreement will not be enforced because the uncertainty may lead to the conclusion that there is no intention to create legal relations. Example of cases are as follows:
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In Padavattons case, although there seemed to be an assumption that there was a contractual intent in the mothers promise because it caused Mrs Padavatton to leave her job to study law, the vagueness of the arrangement with Mrs Jones had negatived that intent.
SELF-CHECK 3.1
1. 2. 3. 4. 5. How does the law determine the existence of an intention in any agreement between two parties? What is the presumption on intention to create legal relations in a domestic, family and social agreement? In relation to question (b) above, is this presumption rebuttable? How? What was the principle established by the court in the case of Merritt v. Merritt [1970] 2 All ER 760? Must the words used by the parties in their agreement be certain and unambiguous? Why?
ACTIVITY 3.1
Discuss the following problems by applying the principle of law on intention to create legal relations: (a) Three sisters, Viv, Valerie and Victoria, agree to form a syndicate for the purpose of making a weekly entry in a fashion contest in a local newspaper. Viv and Valerie do not know much about fashion and give Victoria RM7.00 each week. Victoria fills in and sends off the contest forms every week and she always fills the forms in her own name. After one month, one of the entries that Victoria sent won a RM10,000 prize. Viv and Valerie are very happy to know about the news and want to claim their share. Victoria now refuses to share. Advise Viv and Valerie. Mr and Mrs Alan are husband and wife. Lately, they quarrelled over the week because Mr Alan was very busy with his business trips and had no time for a vacation with Mrs Alan. Mrs Alan had expressed her intention to go back to her hometown if the situation remained the same. After a series of argument, Mr Alan promised Mrs Alan that if he got a new business offer, he would take Mrs Alan to Neverland for a vacation. Mrs Alan was very happy and gave up her intention to go back to her hometown. Two months later, Mr Alan was offered a new business contract and Mrs Alan wanted to enforce the promise made by her husband. Explain whether she will succeed in her claim.
(b)
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3.2
In business or commercial agreements, the presumption made is that the parties in the contract have the intention to create legal relations. This means the parties to the agreement contemplate a legal consequence to arise from their arrangements. The presumption is a strong one and can be seen in the judgment of:
However, it is not necessary that there is an intention to create legal relations just because the parties are in business. The parties to a business transaction may state that they do not intend to enter into any legal obligation. In such case, the court will then treat their promises as binding in honour only. The following cases illustrate this point:
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Rose and Frank Co v. Crompton (JR) & Brothers Ltd [1925] AC 445.
In this case, the agreement between the claimant and the defendants contained an Honourable Pledge Clause as follows: This arrangement is not entered into nor is this memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the courts of the United States of America or England..... The Court held that: The agreement was not binding on the parties. It is however important to note that most business agreements are to be regarded as binding in the absence of the Honorouble Pledge Clause or anything similar to this, because such clauses are relatively rare in the business world. Apart from the above, there are various other clauses used in business agreements that negate contractual intention. The most common is the use of the words subject to contract or subject to formal contract. Such agreement gives rise to no legal liability. The case to explain this is the case of:
Therefore, the insertion of the words subject to contract renders the agreement to be unenforceable. It means a binding contract will come into existence only when a subsequent formal contract is entered into by the parties. Up to this time, either party is free to re-negotiate or even to withdraw from their arrangements.
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Low Kar Yit & Ors v. Mohd. Isa & Anor. [1963] MLJ 165
The defendant in this case gave an option to the plaintiffs agent to buy a parcel of land subject to a formal contract to be drawn up and agreed upon by the parties. Subsequently, the plaintiffs agent exercised the option but the defendant failed to sign the agreement for sale. The plaintiffs brought an action for specific performance or (alternatively) damages for breach of contract. The Court held that: The option was conditional upon and subject to a formal contract to be drawn up and agreed upon between the parties. Thus, the exercise of the option amounted to nothing more than an agreement to enter into an agreement.
In most instances like the above cases, the use of the words subject to contract infers that there is no intention by the parties to create legal relations. However, the Privy Council had rejected a subject to contract issue in a case involving a booking pro forma signed by the purchaser to purchase a house to be built by a housing developer. The case is:
Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1
MLJ 56 The purchaser (respondent) signed a booking pro forma for the purchase of a house to be built by the housing developer (appellants). After the payment of a deposit was made and the pro forma was signed, the appellants informed the respondent that the price of the house was to be increased. The respondent did not agree and applied to the court for specific performance. The appellant argued that the pro forma was subject to contract. Thus, no contractual obligation arose from the pro forma itself until a further document was agreed and signed. The argument was rejected by the court. The Lordships held that: The appellants were bound by the pro forma and could not argue that it did not create an obligation to purchase and sell the property.
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Note: The provision as to booking pro forma has been abolished and under the current provisions of the Housing Development (Control and Licensing) Act 1966, it is an offence to collect any money from a purchaser as a booking pro forma.
SELF-CHECK 3.2
1. 2. What is the presumption on intention to create legal relations in a business or commercial agreement? Is there any reason for the parties of a business transaction to say that they do not have the intention to be bound by their arrangements? How does the clause subject to contract render the agreement to be unenforceable?
3.
ACTIVITY 3.2
Discuss the following case by applying the principle of law on the intention to create legal relations: On 10 July 2002, Mr Ferrera claimed to have submitted two football pool coupons to Bigwood Pools Ltd. Each coupon drew a fee of RM3.24 for football matches played on 11 July and one of the coupons was a winning coupon entitling him to RM174,000. Bigwood, however, refused to pay and denied that they had ever received the winning coupon. Bigwood also relied on a clause printed on each coupon which stated that: The following transaction should not give rise to any legal relationship or legally enforceable. It is binding in honour only. Decide whether there was a binding contract between Mr Ferrera and Bigwood Pools Ltd.
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An agreement without an intention to create legal relations does not bind the parties to the agreement. In domestic, family and social agreements, the parties are presumed to not have any intention to create legal relations. The presumption of no intention may be rebutted if there is a proof of true intention of the parties. Uncertainty of words in an agreement may render the agreement unenforceable. In business or commercial agreements, the parties are presumed to have the intention to create legal relations. Various clauses used in business or commercial agreements have the effect that negate the contractual intention.
Text Books: Guest, A. G. (1988). Ansons Law of Contract (26th ed.). Singapore: Oxford University Press. Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson
and Longman. Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.
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Cases:
Balfour v. Balfour [1919] 2 K.B. 571. Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1 MLJ
56.
Edwards v. Skyways Ltd [1964] 1 All ER 494. Gould v. Gould [1969] 3 All ER 728. Jones v. Padavatton [1969] 2 All ER 616. Jones v. Vernons Pools Ltd [1938] 2 All ER 626. Low Kar Yit & Ors. v. Mohd. Isa & Anor. [1963] MLJ 165. Merritt v. Merritt [1970] 2 All ER 760. Parker v. Clark [1960] 1 W.L.R. 286. Rose and Frank Co. v. Crompton (JR) & Brothers Ltd [1925] AC 445. Simpkins v. Pays [1955] 3 All ER 10. Winn v. Bull (1877) 7 ChD 29.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. Explain the importance of contractual capacity of a minor to contract; Describe the types of contract validly entered into by a minor; Examine the effect of a minor contract; Explain the importance of mental capacity for purposes of contract; and Discuss the status of contract made by a person of unsound mind.
INTRODUCTION
In forming a valid contract, it is paramount that the person who enters into the contract must have the full capacity in terms of age and mind. This means the person who has not reached the age of majority, or is of unsound mind, cannot make a valid contract (Refer to Figure 4). This is provided by Section 11 of the Contracts Act 1950 whereby every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
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The following discussion will also look into the status of a contract entered into by a minor and person of unsound mind.
4.1
MINORS
A minor or an infant is a person who is below the age of majority. Under the Age of Majority Act 1971, the age of majority is 18 years. With regards to the minors contractual capacity, the general rule is that all contracts entered into by a minor are void. The authority was derived from the following Indian case of:
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The local case that applied the decision in the Mohori Bibees case was the case of:
Normally, when a contract is void, under Section 66 of the Contracts Act 1950, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. However, the Privy Council in Mohori Bibees case decided that a party who is a minor cannot be compelled to repay any monies that he has received in the contract. Thus, Section 65 of the Indian Contracts Act (similar to Section 66, Malaysian Contracts Act) does not apply to a minor contract. It applies to a contract between competent parties, whereas in a case involving a minor, the contract never exists from the beginning. In the case of Tan Hee Juan, the plaintiff (minor) had received the purchase price for the transfers of land to the defendant. However, when the court made an order declaring the transfers void, the court refused to order the minor to refund the purchase price paid by the defendant.
4.1.1
There are certain exceptions available to contracts entered into by a minor. It includes those exceptions under the:
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Exceptions to Minors The Age of Majority Act 1971 (including matters relating to marriage, divorce, dower, adoption; religion and religious rites and usages of any class of persons within Malaysia; and any other written law fixing the age of majority). The Contracts Act 1950 (contract for necessaries). The Contracts (Amendment) Act 1976 (contract of scholarships). The Insurance Act 1963 (Revised 1972) (contract of insurance). Exceptions under the Age of Majority Act 1971 The Age of Majority Act provides exceptions to the general rule that minor contracts are void. The exceptions include: (i) (ii) The capacity of any person to act in matters relating to marriage, divorce, dower and adoption; The religion and religious rites and usages of any class of persons within Malaysia; and
(a)
(iii) Any other written law fixing the age of majority. The above provision shows that minors can enter into contracts of promise of marriage and the contracts are valid. Apart from marriage contracts, etc., minors can also make a valid contract depending on the statute that provides the age of majority for particular purposes. For example, the age for voting is 21 years and the age of a young person to join a trade union is above 16. An example of a case where a minor entered into a valid contract of promise of marriage is the case of:
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In the above case, the contract was a valid contract and enforceable although the party to the contract was a minor. (b) Contract for Necessaries Contract for necessaries is another exception to the general rule. A minor who enters into a contract for necessaries is liable for the contract. According to Section 69 of the Contracts Act 1950, if a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. It is important to observe the principles in Section 69 as follows: The necessaries have been supplied to a minor. The minor is also liable for necessaries supplied to his dependants (wife and children). The supplier of necessaries may only claim for reimbursement (a reasonable price). The minor is not personally liable and this means he is liable to pay only if he has the property to do so.
The above principles will therefore apply to contract for necessaries entered into by a minor. The contract will be valid if the minor has been supplied with articles which are considered as necessary to the minors actual requirements and suited to the minors condition in life. For example, food,
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shelter, clothing, medical services, and education. The Contracts Act 1950 does not define the word necessaries but the concept has been mentioned by the Lordship in the case of Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211, by holding that education was necessaries for the minors.
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necessaries even though they are useful for the minor. As illustrated by the following case:
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Appointment to a course of study; and Facility for the purpose of education or learning.
Appropriate authority includes: The Federal Government; A State Government; A statutory authority; and An educational institution.
The above rule, however, is not applicable to contract of scholarships between minors and private organisations. (d) Contract of Insurance Contract of insurance also constitutes an exception to the minors contract. Section 153 of the Insurance Act 1963 (Revised 1972) provides that a minor over the age of ten may enter into a contract of insurance but if he or she is under sixteen years, the written consent of the parents or guardians is essential.
4.2
With regards to capacity to contract, it is important that at the time of making the contract, the contracting party must not suffer from mental disability. Section 11 of the Contracts Act 1950 states that every person is competent to contract...who is of sound mind, and is not disqualified from contracting by any law to which he is subject. Section 11 is followed by Section 12(1) of the Contracts Act 1950 which provides that a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. Further, Section 12(2) and (3) state that a person who is usually of unsound mind, but occasionally of sound mind, may make a contract during the period when he is sound. Conversely, a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
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The examples of contracts covered under Section 12 can be seen in Illustrations (a) and (b) as follows:
Illustration (b)
A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.
Illustration (a)
A patient in a mental hospital, who is at intervals of sound mind, may contract during those intervals.
In Matthews v. Baxter (1873) LR 8 Exch 132, Matthews agreed to buy houses from Baxter. He was so drunk as not to know what he was doing. Afterwards, when sober, he ratified and confirmed the contract. It was held that both parties were bound by it.
The Contracts Act 1950 does not state the status of contracts entered into by persons of unsound mind. Under English common law, the contract is voidable if the fact of mental disorder or intoxication can be proven, and the other party knew this. Thus, the drunken person can ratify contracts when sober, as in the above case of Matthew.
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SELF-CHECK 4.1
1. 2. 3. 4. 5. What is the legal effect of a contract entered into by a minor? Is there any exception to the above principle? What are the important principles laid down in Section 69 of the Contracts Act 1950? Can the contracting party sue a minor for damages under contract for necessaries? What is the effect of a contract entered into by a person who is of unsound mind?
ACTIVITY 4.1
Discuss the following cases by applying the principles of law on capacity to contract: (a) Alan is a college university student, aged 17. He had difficulty in coming to the college and decided to purchase a Modenas (the national motorcycle of Malaysia) from Ismail. Alan paid RM500 as deposit for the motorcycle and promised to pay the balance of the purchase price in two weeks time. After two weeks, Alan failed to come up with the balance and Ismail wanted to claim the payment from Alan. At the same time, Alan, who was in need of money, had disposed the motorcycle to his other friend, Rani. Can Ismail succeed in his claim? Discuss. Norman, aged 17, enters into a contract of apprenticeship with Roy to become an enterpreneur in a health product. For that purpose, Norman is given training on marketing the product. An outlet is provided for Norman to carry out this task and goods worth RM10,000 are ordered for Norman. Later, Roy has difficulty supervising Normans training and disagreement arises between them. Norman is not happy and decides to withdraw himself from the training. Roy is not happy either and brings an action for damages for breach of contract of RM20,000. Discuss the legal action that can be taken by Roy against Norman.
(b)
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Contracts made by minors are void. Marriage contract, contract for necessaries, contract of scholarship and contract of insurance constitute valid contracts for minors. Contract for necessaries include contract to supply goods or services to the minors which suit their condition in life. However, the supplier of necessaries may only claim a reasonable price from the minor. A minor is only liable to pay from his property and is not personally liable. The burden to prove that goods or services supplied are necessaries is on the supplier. A person who is competent to contract includes a person who is of unsound mind. A person may make a contract during the period when he is sound.
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Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:
Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211. Matthews v. Baxter (1873) LR 8 Exch 132. Mohori Bibee v. Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539. Nash v. Inman [1908] 2 KB 1. Rajeswary & Anor. v. Balakrishnan & Ors. (1958) 3 MC 178. Roberts v. Gray [1913] 1 KB 520.
Tan Hee Juan v. Teh Boon Keat [1934] MLJ 96.
T op i c
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. Explain the importance of free consent to contract; Describe the elements that affect the free consent of the contracting parties; Examine the effect of contracts made under coercion, undue influence, fraud, misrepresentation and mistake; Explain the circumstances under which a contract does not become voidable by reason of lack of free consent; and Discuss the principle on the burden of proof in contracts made without free consent.
INTRODUCTION
Previous chapters have discussed the important elements to form a valid contract. Apart from the elements, free consent of the parties to enter into contract is also essential in determining the legality of the contract. As provided by Section 10(1) of the Contracts Act 1950 that all agreements are contracts if they are made by the free consent of parties competent to contract...... There are various factors which can affect an agreement once it has been formed. These factors which affect the true consent of one or both parties may release the party from contractual obligation. Under Section 13 of the Contracts Act, 1950, two or
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more persons are said to consent when they agree upon the same thing in the same sense. Therefore, under Section 14, consent must be free and not caused by : Coercion (Section 15); Undue influence (Section 16); Fraud (Section 17); Misrepresentation (Section 18); or Mistake (Section 21, 22 and 23).
5.1
COERCION
Coercion under Section 15 of the Contracts Act 1950 means the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. It means, if a person commits or threatens to commit any act forbidden under the Penal Code 1950 (the criminal law of the country) with the intention to make the other party enter into a contract with him, then he is said to have employed coercion. According to Explanation to Section 15, it is immaterial whether the Penal Code is or is not in force in the place where the coercion is employed. What is meant by the explanation provision is illustrated below:
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A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Penal Code. A afterwards sues B for breach of contract at Taiping. A has employed coercion, although Section 506 of the Penal Code was not in force at the time when or place where the act was done. Coercion under Section 15 covers the common law duress which means actual violence or threats of violence to the contracting party. In the case of:
Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119, the Court held that a transfer executed under the order of the Sultan, issued under duress of two Japanese officers during the Japanese Occupation of Malaya was invalid.
In the case, consent was not freely given and the transfer became voidable at the will of the party whose consent was so caused. In another case of Chin Nam Bee Development Sdn Bhd v. Tai Kim Choo & 4 Ors. [1988] 2 MLJ 117, the respondents purchased houses to be constructed by the appellants. Each respondent had signed a sale and purchase agreement to purchase a house at RM29,500. The respondent was then made to pay an additional amount of RM4,000. The issue was whether the additional payment was made voluntarily or under threat by the appellants to cancel the respondents booking. The Court held that the payment was not voluntary and had been made under threat. There was coercion as defined in Section 15 of the Contracts Act 1950.
5.1.1
Effect of Coercion
Where there is element of coercion in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 19(1) of the Contracts Act 1950 provides that when consent to an agreement is caused by coercion...the agreement is a contract voidable at the option of the party whose consent was so caused.
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The term voidable refers to an agreement which gives one or more parties but not the other, the choice of either affirming or rejecting it. Thus, the agreement is valid and binding until the party entitled to avoid it chooses to do so.
5.2
UNDUE INFLUENCE
When a person enters into a contract under the influence exercised by another person, the contract can be rescinded on the ground of undue influence. According to Section 16(1) of the Contracts Act 1950, a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Based on the wording of Section 16(1), the two important aspects of undue influence are: (a) (b) The domination of the will by one party over the other; and Obtaining an unfair advantage.
Further, in Section 16(2), a person is said to be in a position to dominate the will of another where: (a) (b) (c) He holds a real or apparent authority over the other; or He stands in a fiduciary relation to the other; or He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental; or bodily distress.
5.2.1
A person holds a real or apparent authority over the other, for instance; parents authority over a child and husbands authority over a wife. For example:
Illustration (a)
A, having advanced money to his son, B, during his minority, upon B's coming of age, obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence.
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5.2.2
A Fiduciary Relation
A person stands in a fiduciary relation to the other, for instance; the relationship of a solicitor-client, a doctor-patient, a trustee-beneficiary and a religious adviserfollower. For example:
Illustration (b)
A, a man enfeebled by disease or age, is induced by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. Undue influence applies to every case where influence is acquired and abused, or where confidence is reposed and betrayed. In the case of Tate v. Williamson (1866) LR 2 Ch App 55, T (an Oxford undergraduate), aged 23, was being pressed to pay his college debts. He asked his great-uncle to advise him how he should find the means to pay. The great-uncle was unable to advise in person, owing to ill health, thus, he deputed the defendant (his nephew) to do so. Conversations took place between T and the defendant in which T expressed the desire to sell part of his estate. The defendant offered to buy it for 7000. Before the sale was completed, the defendant obtained a report from a surveyor on the property and it was valued at 20,000. The defendant did not disclose this fact to T, but proceeded with the purchase. It was held that the purchase must be set aside. The defendant, having been asked to give advice, stood in a confidential relationship to T. This prevented him from becoming a purchaser of the property without the fullest communication of all material information which he had obtained as to its value.
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Another example of a case where a confidential relationship arises is the case of:
5.2.3
Mental Capacity is Temporarily or Permanently Affected by Reason of Age, Illness, or Mental or Bodily Distress
When a person makes a contract with another person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress, the presumption is that the person will dominate another persons will, to obtain advantage which is unfair to the other person. The other person could be old, or sick, or suffering from certain illnesses or diseases, or in a state of unsound mind, that affect his mental capability and also physical suffering.
In the case of Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468, the Court held that the charge document that has been signed by the third plaintiff who was of unsound mind could be set aside at his option.
5.2.4
Burden of Proof
According to Section 16(3)(a) of the Contracts Act 1950, where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. For example:
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Illustration (c)
A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. In case where undue influence is shown to exist, the presumption of its exercise can be rebutted by proof that the party reposing the confidence has formed a free judgement, independent of any kind of control. The way to establish this is by showing that the person has received independent legal advice and took it. However, a transaction will also be upheld despite the absence of independent advice. The essential is to show that the transaction was the result of the free exercise of independent will.
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Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196.
The respondent was the registered proprietor of a piece of land. She claimed that she was induced by fraud and undue influence of the first and second appellant to transfer her land to the second appellant. The Federal Court held that the appellants and respondent were in a solicitorclient relationship and the transaction was unconscionable. Therefore, the burden was on the appellants to rebut the presumption of undue influence. In this case, the appellants had not discharged that burden and thus the transaction was set aside.
5.2.5
Where there is element of undue influence in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 20 of the Contracts Act 1950 provides that when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.
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SELF-CHECK 5.1
1. 2. 3. 4. 5. 6. What is meant by coercion? What are the important ingredients to establish undue influence? What is the legal effect of a contract made under coercion and undue influence? Who must prove that a contract is not induced by undue influence? In what type of relationship is a person said to be in a position to dominate the will of another in a contract? What is the importance of independent legal advice in undue influence cases?
ACTIVITY 5.1
Discuss the following cases by applying the principle of law on free consent of contracting parties: (a) Mr Best lived with Mr Hard for many years in a house owned by Mr Best. Mr Hard was a man given to violence. After he threatened Mr Best, Mr Best sold the house to Mr Hard for RM30,000. A year later, Mr Hard died and his widow claimed the ownership of the house. However, Mr Best wanted to set aside the sale of the house to Mr Hard on the ground of duress. Explain whether he can succeed. One evening, Jack met Susan and told her that Adam would sue him for his failure to pay the money he owed Adam, amounting to RM100,000. After Jack revealed his problem to Susan, Susan persuaded Jack to sell his bungalow to her at the price of RM100,000, to enable Jack to pay up his debt to Adam. Jack immediately agreed with Susans proposal because Susan was the only one in his heart. Jack had always listened to Susan and would fulfil Susans wishes. A contract to transfer the bungalow to Susan was done and six months later, Susan left Jack to marry her friend, Mark. Jack was frustrated and happened to know that his bungalow was worth RM300,000 at the time of the transfer. Now, Jack decided to set aside the contract on the ground of undue influence. Discuss.
(b)
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5.3
FRAUD
Fraud refers to acts committed by a party to a contract with the intent to deceive the other contracting party. According to Section 17 of the Contracts Act 1950, fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:......... (a) The suggestion, as to a fact, of that which is not true by one who does not believe it to be true. It means fraud will exist when the party to a contract is suggesting a fact which is not true to another party, and he himself knows that the fact is not true. In the case of:
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Illustration (c)
B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through As ignorance, B is able to buy the estate at an undervalued price. The contract is voidable at the option of A.
A promise made without any intention of performing it. Any other act fitted to deceive. Any such act or omission as the law specially declares to be fraudulent.
Notwithstanding the above principles, Explanation to Section 17 states that, mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.
An example of case to illustrate the principles: In Keates v. Lord Cadogan (1851) 10 C.B. 591, The plaintiff sued for damages arising from the defendants fraud in letting to the plaintiff a house which he knew for immediate occupation (without disclosing that it was in a ruinous condition). The Court rejected the claim and held that there was nothing amounting to deceit (fraud).
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However, the same Explanation (Section 17) continues to provide that, ......unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech". The above statement means, there are circumstances in which failure by one party to speak out may amount to fraud. Firstly, where there is a legal duty to disclose the material facts (duty of disclosure) to the other party in a contract. This duty arises where the relationship between the contracting parties is in the nature of fiduciary relationship, as in a solicitor-client relationship. For instance:
5.3.1
Effect of Fraud
Where there is element of fraud in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 19(1) of the Contracts Act 1950 provides that when consent to an agreement is caused by ......., fraud, ........, the agreement is a contract voidable at the option of the party whose consent was so caused. However, according to Exception to Section 19 of the Contracts Act, 1950, if such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
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This means, if the party who was deceived has the means or capable of investigating the truth of the facts given by the other party, by taking reasonable appropriate measures, then the untruth facts cannot render the contract void. Thus, the contract cannot be rescinded. In the case of:
Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ
201, The Court held that the respondent had sufficient means to carry out his own inspection or investigation in determining the truth of the facts in their contract. Thus, there was no fraud on the appellants part.
Further, Explanation to Section 19 also provides that, a fraud or misrepresentation which did not cause the consent to a contract of the party on whom the fraud was practised; or to whom the misrepresentation was made, does not render a contract voidable. This means, the false statement does not give rise to a cause of action if it has not induced or caused the other party to enter into the contract. The representee must have relied on the statement of the representor. In the case of:
5.4
MISREPRESENTATION
Misrepresentation refers to an untrue statement made by a representor and that induces the other party to enter into a contract. Misrepresentation under Section 18 of the Contracts Act 1950 includes: (a) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.
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(b)
Any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him. Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. In brief, misrepresentation is a representation of untrue or misleading statement of fact, made by a party to the contract, to induce the other party to enter into the contract. The difference between fraudulent misrepresentation and misrepresentation under Section 18 is that, misrepresentation under Section 18 is made without any intention to deceit. In other words, a misrepresentation in which no element of fraud is present. This is because the party making such a statement honestly believes in the truth of the statement, or negligently or innocently makes such statement which is untrue or causes another to make a mistake of fact. It is important that the statement represented is a statement of fact and not only a statement of opinion. In the case of:
(c)
5.4.1
Effect of Misrepresentation
Where there is element of misrepresentation in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 19(1) of the Contracts Act 1950 provides that when consent to an agreement is caused by ......., or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
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However, according to Exception to Section 19 of the Contracts Act, 1950, if such consent was caused by misrepresentation or ......., the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. For instance:
SELF-CHECK 5.2
1. 2. 3. 4. 5. 6. 7. What is meant by fraud and misrepresentation? What is the difference between fraudulent misrepresentation and innocent misrepresentation? What is the legal effect of a contract made under fraud and misrepresentation? What is meant by silence is no fraud? Is there any exception to the above principle? Under what circumstance a contract cannot become voidable by reason of fraud and misrepresentation? What is the implication of not exercising ones ordinary diligence to discover the truth of a statement made in a contract under fraud and misrepresentation?
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ACTIVITY 5.2
Discuss the following problems by applying the principles of law on consent of the contracting parties: (a) Tim is a mechanic who wishes to take a partner into his business. During negotiations between Tim and Kyra, Tim states that the income of the business is RM60,000 a year. The accounts which Tim produces show that the income is not quite RM60,000 a year and Kyra asks about the balance. Tim then produces further accounts to show how the figure is made up. However, Kyra does not examine the accounts in detail and agrees to become a partner. Later, Kyra discovers the true position and seeks to rescind the contract on the ground of fraud. Advise Tim. Jade was induced to lend money to a company by a representation made by its directors that the money would be used to improve the companys buildings and generally expand the business. In fact, the directors intended to use the money to pay off the companys existing debts because the creditors were pressing hard for payment. Jade then discovered that she had been misled and sought the legal advice to sue the directors for damages for fraud and misrepresentation. Advise Jade.
(b)
5.5
MISTAKES
Mistake under the Contracts Act 1950 includes a mistake as to a matter of fact (by one or both contracting parties) and mistake as to any law in force or not in force in Malaysia. Sections 21 and 23 of the Contracts Act 1950 provide for the effect of a contract entered into under a mistake of fact. Under Section 21, both parties to the contract are under a mistake of fact, and under Section 23, only one of the parties is under a mistake of fact which is essential to the contract made.
5.5.1
Mistake of Fact
According to Section 21, where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. According to Section 23, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. The above provisions provide that if the mistake of fact is done by both parties in a contract, the contract will be void. But if the mistake is done by one of the
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parties to a contract, then the contract will not be voidable. Examples of cases are illustrated below:
Section 21 of the Contracts Act 1950 covers the English common law classification of common mistake and mutual mistake. Common mistake occurs when both parties make the same mistake as to the subject matter of the contract, while mutual mistake occurs when both parties misunderstand each other. In the case of:
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Section 23 covers the unilateral mistake in English common law. The example of case is:
5.5.2
Mistake of Law
Mistake of law is provided under Section 22 of the Contracs Act 1950. Section 22 states, a contract is not voidable because it was caused by a mistake as to any law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact. For example:
Illustration
A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.
Thus, if the mistake is made by the contracting parties as to the law in force in Malaysia, the contract is not voidable. But if the mistake is made as to the law not in force in Malaysia, then the contract is void.
5.5.3
Mistake as to Document
A party who has made a mistake as to the nature of a document he has signed, is bound by the terms of the contract.
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In Subramaniam v. Retnam [1966] 1 MLJ 172, The defendant had signed a written acknowledgment of a loan provided in the English language. Even if the defendant was ignorant of the language, he was bound by the terms he had signed (provided there was no fraud or misrepresentation). However, there is an exception in English law that allows the defence of non est factum, and the Malaysian courts applied the principle in the local cases. Non est factum means it is not his deed. Thus, it is a plea that the agreement is not the act of the person. In the case of:
Awang bin Omar v. Haji Omar & Anor [1949] MLJ Supp 28,
The plaintiff and the second defendant entered into a contract and the performance was guaranteed by the first defendant (who was induced by the second defendant, to sign a document). The first defendant did not know English and he was persuaded to sign in the mistaken belief that he was merely witnessing his brothers signature. The High Court ruled that there was a mistake as to the nature of the document signed and therefore, the first defendant was not liable.
5.5.4
Effect of Mistake
When a contract is void (for mistake), according to Section 66 of the Contracts Act 1950, any person who has received any advantage under the agreement is bound to restore it or to make compensation for it to the person from whom he received it. An example is illustrated below:
Illustration (a)
A pays B $1,000 in consideration of Bs promise to marry C (As daughter). C is dead at the time of the promise. The agreement is void, but B must repay A the $1,000.
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Section 30 of the Specific Relief Act 1950 also provides remedy of rectification in cases where the parties made a contract under a mistake and the contract does not accurately record the true intention of the parties. Section 30 states, when, through fraud or a mutual mistake of the parties, a contract or other instrument in writing does not truly express their intention, either party, or his representative in interest, may institute a suit to have the instrument rectified..... the court may at its discretion rectify the instrument so as to express that intention, so far as this can be done without prejudice to rights acquired by third persons in good faith and for value. It is also important that the order to rectify must not be prejudicial to the rights of an innocent third party. An example is provided in the illustration below:
Illustration (a)
A, intending to sell to B his house and one of three godowns adjacent to it, executes a conveyance prepared by B, in which, through Bs fraud, all three godowns are included. Of the two godowns which were fraudulently included, B gives one to C and lets the other to D for rent, neither C nor D having any knowledge of the fraud. The conveyance may, as against B and C, be rectified so as to exclude from it the godown given to C, but it cannot be rectified so as to affect Ds lease.
Under the English common law, the remedy of rectification is available in equity. The local case below is a case where rectification of a document was granted to the claimant.
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SELF-CHECK 5.3
1. 2. 3. 4. 5. 6. What is the effect of a contract made under a mistake of fact? What is the difference between common/mutual mistake and unilateral mistake? What is the effect of a contract made under a mistake of law? What is the meaning of the rule of non est factum? Is the English common law rule of non est factum apply to the Malaysian cases? Is the remedy of rectification available in mistake cases?
ACTIVITY 5.3
Discuss the following cases by applying the principles of law on free consent of the contracting parties: (a) Nadia agrees to buy a camera and Hans agrees to sell the same. Explain how the mistakes in the following would affect the contract: (i) (ii) Nadia believes that she is obtaining credit over four months whereas Hans believes that it is a cash sale. Nadia believes that he is buying from Vince and not from Hans.
(b)
Mr Sam advertised his Durian Orchard for sale. Kamal was one of those who was interested in the orchard because he had seen Mr Sam using the adjacent field to graze cows. Kamal always wanted to graze cows that would bring him profit apart from maintaining the orchard. Later, Kamal obtained the details of the sale advertisement which clearly stated that the field in question was not part of the sale since it did not belong to Mr Sam. Kamal did not read this statement and believed that the field would be included in the sale. Kamal then bought the orchard from Mr Sam. After the sale was completed, Kamal discovered that the field was not included in the sale and intended to set aside the contract. Advise Kamal.
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Coercion is the act of committing or threatening to commit any act forbidden by the Penal Code, with the intention to make the other party enter into a contract. The effect of a contract made under coercion is voidable. To establish a contract made under undue influence requires the elements of domination of will and obtaining unfair advantage. The burden of proving that the contract is not induced by undue influence is on the person dominating the will of another. The presumption of undue influence can be rebutted by proving the other party taking independent legal advice. Contracts made under undue influence will become voidable. Fraud covers an act committed by one contracting party with the intent to deceive another. Mere silence is no fraud. Failure by one party to speak out will amount to fraud if there is a duty of disclosure. Element of fraud makes the contract voidable. A contract under fraud is not voidable if the party being the victim of fraud had the means of discovering the truth with ordinary diligence. A false statement which does not induce or cause the party to enter into a contract does not render the contract voidable. Innocent misrepresentation in a contract is not made with the intention to deceive but the contract is voidable. Mistake of fact will render a contract void if it is a common or mutual mistake. Unilateral mistake does not render a contract voidable. A contract made under a mistake of law in force in Malaysia is not voidable. A contract which is void under a mistake of fact requires the party who has received the advantage to restore it to the other party. The defence of non est factum is accepted in mistake cases but in exceptional circumstances. Remedy of rectification is allowed in a contract made under mistake.
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Mistake Ordinary diligence Real/apparent authority Rectification Undue influence Voidable contract
Text Books: Guest, A. G. (1988). Ansons Law of Contract (26th ed.). Singapore: Oxford University Press. Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:
Awang bin Omar v. Haji Omar & Anor [1949] MLJ Supp 28. Bisset v. Wilkinson [1927] AC 177. Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468. Chin Nam Bee Development Sdn Bhd v. Tai Kim Choo & 4 Ors. [1988] 2 MLJ 117. Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196. Keates v. Lord Cadogan (1851) 10 C.B. 591. Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119. Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198. Lim Hong Shin v. Leong Fong Yew (1918) 2 FMSLR 187.
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Lloyds Bank, Ltd. v. Bundy [1975] QB 326. Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814. Raffles v. Wichelhaus (1864) H&C 906. Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57. Subramaniam v. Retnam [1966] 1 MLJ 172. Tamplin v. James (1898) 15 ChD 215. Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201. Tate v. Williamson (1866) LR 2 Ch App 55. Tufton v. Sperni [1952] 2 T.L.R. 516.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. Explain the status of contracts with unlawful consideration or object; List several kinds of void contracts; Describe the importance of reasonable restraint in contracts; Explain the effect of contracts in restraint; and Discuss the consequence of illegal contracts.
INTRODUCTION
Section 2(g) of the Contracts Act 1950 provides that an agreement not enforceable by law is said to be void. Under Section 24, the consideration or object of the agreement is unlawful (see Figure 6.1) when it: (a) (b) (c) (d) (e) is forbidden by law; defeats the provisions of any law; is fraudulent; implies injury to person or property of others; or is regarded as immoral or opposed to public policy.
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Whereas Section 27 of the Contracts Act considers an agreement which affects the freedom and stability of marriage of any person as void. Section 28 makes an agreement that restrains trade transaction as void agreement. The same also applies to an agreement that restricts a person from enforcing his absolute rights under any law or limits the time for a person to enforce his rights. These kinds of agreements are regarded as void according to Section 29 of the Contracts Act, 1950.
6.1
Section 24(a) and (b), Contracts Act 1950. Some statutes do not provide specific provisions concerning void or illegal contract but some provide that failure to conform to any law provisions would cause the contract to be void. An example of this is Section 31 of the Contracts Act 1950 which states that any wager contract is void and no legal action can be taken to recover money won out of such wager. The same is also stressed in Section 26 of Civil Law Act 1956. It provides that all agreements, either made orally or written, by way of gaming or wagering shall be null and void. No legal action can be taken to recover money or valuable things won out of the same.
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In the case of Rasiah Munusamy v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291, the respondent orally agreed to sell and transfer a house to the appellant, which the respondent undertook to build. However, the agreement contravened Rule 12(1) of the Housing Developers (Control and Licensing) Rule 1970 which requires every contract of sale to be in writing. The Court held that there was nothing in the rules which provided that verbal agreement was invalid. The court further held that although the oral agreement contravened Rule 12(1), the appellant-purchaser clearly belonged to a class for whose protection the statutory prohibition was imposed. Therefore, he could enforce it.
Chung Khiaw Bank Ltd. v. Hotel Rasa Sayang Sdn. Bhd. & Anor [1990] 1 MLJ
356. The appellants extended loans to the respondents and the loan was secured by documents and guarantees. The documents evidencing the loans showed that the hotel whose shares were being purchased by a company had given financial assistance to that company. This act contravened Section 67 of the Companies Act 1965.
The Court held that: The transactions were tainted with illegality.
In the case of Hee Cheng v. Krishnan [1955] MLJ 103, The plaintiff entered into an agreement with the defendant for a purchase of a piece of land held under Temporary Occupational License (TOL). The defendant breached the contract and the plaintiff claimed for specific performance of the agreement. The agreement, however, was in contravention of Rule 41 of the Land Rules 1930 which provides that a licence for temporary occupation of a state land shall not be transferable. The Court held that the agreement was an attempt to sell a land under the TOL. Such an attempt if allowed would frustrate the law. Therefore, it was unlawful by reason of Section 24 of the Contracts Act.
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In Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221, The defendant held a logging licence in Pahang under the Forest Rules 1935 which prohibited transfer without written approval from the District Forest Officer. The defendant agreed to assign his rights under the licence (to extract timber) to the plaintiff. The Court held that the contract was illegal.
6.2
FRAUDULENT CONTRACTS
Section 24(c), Contracts Act 1950 Any contract which its consideration or object is fraudulent is void. An example of a fraudulent contract is found in the following illustration.
6.3
Section 24 (d), Contracts Act 1950 Any contract which its consideration or object causes injury to person or property of another is void under the law. In the case of Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243), The defendant, who was a trustee of a piece of land belonging to a minor, had agreed to sell it to the plaintiff. Since the sale of the land, if allowed, would affect the interest of the minor, the Court held that the transaction was void.
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6.4
Section 24(e), Contracts Act 1950 Any contract which its consideration or object is regarded as immoral or opposed to public policy is void under the law. Immoral Contracts
In Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80, The plaintiff initiated a claim for the refund of money he lent to a brothel business. The Court held that the money lent for the purpose of brothel business was not recoverable for illegality. The object of the agreement was clearly immoral.
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In the case of Parkinson v.College of Ambulance Ltd & Harrison [1925] 2KB 1, The secretary of the defendant charity promised to secure a knighthood for the plaintiff if he would make an adequate donation. He did with a promise of more should the knighthood be forthcoming. He then sued for the return of the money when he did not receive the honour.
(b)
(d)
Contracts prejudicial to the freedom and stability of marriage A contract is void if it restricts a persons ability to marry, or promotes any act which weakens the stability of marriage. Also a contract between spouses who are living together, that provides terms in the event of future separation, is void because it encourages the parties to get into divorce. Another kind of contract is a marriage brokerage contract to find a spouse for a person in return for a fee; it is also void as it is against public policy.
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SELF-CHECK 6.1
1. 2. 3. When does a consideration or an object of an agreement become unlawful? What kind of contracts are regarded as against public policy? What is the status of a contract with an unlawful object or consideration?
ACTIVITY 6.1
1. Joey, a remisier, paid RM20,000 to Harry, the Director of a few listed companies, for insider information which he intended to use in determining how to invest his clients funds. Insider trading is an offence under Section 132A of the Companies Act 1965. Harry has since failed to provide any information to Joey and has indicated that he has no intention of ever doing so. Advise Joey as to whether he could recover the RM20,000 paid to Harry. Gesmar had brought into Malaysia certain jewellery which he has failed to declare to the customs. He has also failed to pay customs duty to the authority. Later, he filed a claim for indemnity against the insurers for the loss of the jewellery at his home through theft. Decide whether Gesmar could enforce the indemnity clause.
2.
6.5
The following provisions provide for other kinds of contracts to be regarded as void: (a) Section 25, Contracts Act 1950. A contract is void if the consideration for one or more objects is in part unlawful. Section 26, Contracts Act 1950. A contract made without consideration is void except in the circumstances provided.
(b)
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(c)
Section 27, Contracts Act 1950. A contract in restraint of marriage of a person other than a minor is void. Section 28, Contracts Act 1950. A contract in restraint of trade, profession or business is void except in certain limited circumstances. Section 29, Contracts Act 1950. A contract in restraint of legal proceedings is void except contracts to refer a dispute to arbitration and certain written contracts relating to award of scholarships by the Government. Section 30, Contracts Act 1950. A contract that is uncertain is void. Section 31, Contracts Act 1950. A contract by way of wager is void except a subscription or contribution made in favour of certain prizes for horse-racing.
(d)
(e)
(f)
(g)
6.5.1
According to Section 28 of the Contracts Act 1950, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
In the case of Wrigglesworth v. Anthony Wilson [1964] MLJ 269, The plaintiff entered into an agreement to restrain the defendant from practising as an advocate and solicitor within five miles of Kota Bharu town for a period of two years after the termination of his service contract with his employer. Later, the defendant left the employment and set up a practice in Kota Bharu town. The plaintiff applied for an injunction to restrain the defendant from practising, in breach of the promise. The Court held that the restraint is void.
Under common law, any contract that prevents a person from practising a profession, trade or any lawful business is enforceable provided the restraint is reasonable. In other words, English common law only invalidates contracts with unreasonable restraint. However, in Malaysia, Section 28 clearly provides that a
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contract which prevents a person from exercising lawful profession, trade or any kind of business is void. There are three exceptions under Section 28. Those exceptions are as follows: (a) Exception 1 One who sells the goodwill of a business may agree with the buyer to refrain carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein: Provided that such limits appear to the court reasonable, regard being had to the nature of the business. Exception 2 Partners may, upon or in anticipation of dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits. Exception 3 Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.
(b)
(c)
6.5.2
According to Section 29 of the Contracts Act 1950, an agreement whereby a person is restricted from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunal, or which limits the time within which he may thus enforce his rights, is void to that extent. In the case of Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92, There was a clause in a fire insurance policy which stated: If the claim be made and rejected, and an action or suit be not commenced within three months after such rejection, all benefit under this policy shall be forfeited. The Court held that this clause reduced the period within which an assured might bring a suit for compensation to a period less than that sanctioned by the limitation statute. Thus, the clause infringed Section 28 of the Contracts Enactment (now Section 29 of the Contracts Act 1950) and was to that extent, void.
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There are three exceptions to the general rule, as follows: (a) Exception 1 This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in the arbitration shall be recoverable in respect of the dispute so referred. Exception 2 Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration on any question between them which has already arisen, or affect any law as to references to arbitration. Exception 3 Nor shall this section render illegal any contract in writing between the Government and any person with respect to an award of a scholarship by the Government wherein it is provided that the discretion exercised by the Government under that contract shall be final and conclusive and shall not be questioned by any court.
(b)
(c)
6.5.3
Contracts in restraint of trade and in restraint of legal proceedings are not void in toto but only void to the extent of the restraints. This means, only the invalid part of the contract is unenforceable but the rest of the contract will be enforceable.
6.6
CONSEQUENCES OF ILLEGALITY
The general rule at common law and under the Contracts Act 1950 is that the courts will not enforce illegal contracts and assist the parties: ex turpi causa non oritur actio (no action will arise from a wrong done). The consequences of illegality do not apply to contracts in restraint of marriage, restraint of trade and restraint of legal proceedings. Those contracts are void only to the extent of the restraint.
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In Seong Sam v. Goon Food On (1933-34) FMSLR 169, The plaintiff bought a share in three tickets from the defendant. One of the tickets won a prize which was not paid in full by the defendant. The plaintiff sued for the balance but the defendant claimed illegality of the contract, being a wager. The Court held that an agreement for the purchase of a share in a ticket in a public lottery was illegal and not merely void. Therefore, the plaintiff was a party to an illegal agreement and she could not maintain an action based on the agreement.
Under the Contracts Act 1950, Section 66 which is regarded as restitutionary provision, may be applied. Once a contract becomes void, restitution is possible provided the illegality is not known to the party seeking it. In Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82, The respondent and the appellants entered into an agreement for a lease of paddy field for a period of six years and $1500 was paid pursuant to the agreement. The agreement was illegal, contravening Section 3(1) of the Paddy Cultivators Ordinance. Subsequently, the appellants refused to allow the respondent to till the land. The respondent took legal action to recover the sum paid to the appellants and the appellants claimed illegality of the agreement. The Federal Court held that the parties were ignorant of the fact that they were executing an illegal agreement. Hence, Section 66 would apply and the respondent was entitled to recover the deposit paid.
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That means, if the considerations of the contract are partly lawful and partly unlawful, the whole agreement is void if it is not possible to sever the considerations. For example:
Illustration
A promises to supervise, on behalf of B, a legal manufacture of indigo and an illegal traffic in other articles. For both jobs, A is promised a salary of $1,000 a year. The agreement is void since the object of As promise and the consideration for Bs promise being in part unlawful.
Accordingly, Section 58 provides that, where persons reciprocally promise, firstly, to do certain things which are legal, and secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. This provision applies to contracts which are severable. For example:
Illustration
A agrees to sell a house to B and B agrees to buy it for $10,000. But if B uses it as a gambling house, he will instead pay $50,000. The first set of reciprocal promises for sale of the house at $10,000 is a contract while the second set is void.
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SELF-CHECK 6.2
1. 2. 3. 4. 5. 6. Can a contract be made to restrain a person from marrying another? What is the effect of an uncertain contract? Is contract in restraint of trade enforceable? What are the exceptions to contract in restraint of legal proceedings? Will the court assist the parties to an illegal contract? Can a party to an illegal contract apply for restitution under Section 66 of the Contracts Act 1950?
ACTIVITY 6.2
Discuss the following problems by applying the relevant principles of law: (a) Robin, a milk roundsman, was employed by Mr White to deliver milk to his customers. Robin agreed that for one year after leaving his job, he would not serve or sell milk or dairy produce to persons who (within six months before he left employment) were customers of his employer. Later, Robin left his employment with Mr White in order to work as a roundsman for West Dairies. Robin then took the same milk round as he had worked when he was with Mr White. Decide whether there was a breach of contract by Robin. Nothern was a manufacturer of machine guns and other military weapons. He sold the business to a company, giving certain undertakings which restricted his business activities. The company was amalgamated with another company and Nothern was employed by the new entity as managing director. In his contract, Nothern agreed that for 25 years he would not manufacture guns or ammunition in any part of the world, and would not compete with the company in any way. Decide whether this covenant regarding the business sold was valid and enforceable.
(b)
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TOPIC 6
An agreement not enforceable by law is said to be void. Any contract which its consideration or object is fraudulent is void. Contract injurious to person or property of another is void. Immoral contracts and contracts opposed to public policy are void. A contract made without consideration is void. A contract in restraint of marriage of a person other than a minor is void. A contract that is uncertain is void. Contracts in restraint of trade and in restraint of legal proceedings are void to the extent of the restraints. The courts will not enforce illegal contracts and assist the parties to the contract. Restitution is possible provided the illegality is not known to the party seeking it.
Text Books: Guest, A. G. (1988). Ansons Law of Contract (26th ed.). Singapore: Oxford University Press. Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
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Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:
Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82. Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80. Chung Khiaw Bank Ltd. v. Hotel Rasa Sayang Sdn. Bhd. & Anor [1990] 1 MLJ 356. Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92. Foster v. Driscoll [1929] 1 KB 470. Hee Cheng v. Krishnan [1955] MLJ 103. Parkinson v.College of Ambulance Ltd & Harrison [1925] 2KB 1. Rasiah Munusamy v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291. Seong Sam v. Goon Food On (1933-34) FMSLR 169. Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243). Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221. Wrigglesworth v. Anthony Wilson [1964] MLJ 269.
T op i c
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. 6. Describe the various ways by which a contract may be discharged; Explain the lawful and unlawful ways of discharging a contract; Discuss the remedies available to the parties in a contract; Identify the circumstances under which remedies may not be granted; Explain the requirement of principles in various remedies available; and Distinguish the importance of each remedy in a contract.
INTRODUCTION
This topic explains the situations in which contracts can be discharged and the remedies available to the parties in a contract. When a contract is terminated, it is said to be discharged and the contracting parties are free from further obligations arising from it. A contract may be discharged by any one of the following ways: (a) (b) Discharge by consent or agreement between parties; Discharge by performance;
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(c) (d)
7.1
A contract that is created by consent can be discharged by consent. Consent may be given at the time of the contract or subsequently. For example, the parties may agree at the time of making the contract that on the occurence of an event, the contract will be discharged. Consent given subsequent to the contract may be a waiver, release, novation, remission or rescission. Sections 63 and 64 of the Contracts Act 1950 provide for the discharge of contract by consent.
7.1.1
According to Section 63 of the Contracts Act 1950, if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Novation is the substitution or replacement of a new contract for an earlier one. The effect of novation is to release the obligation of the parties under the earlier contract. For example:
Illustration (a)
A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B had been contracted. The consideration for the new agreement is the mutual discharge of the original contract and consent of all parties is secured. For example:
Illustration (c)
A owes B $1,000 under a contract. B owes C $1,000. B orders A to credit C with $1,000 in his books, but C does not assent to the agreement. B still owes C $1,000, and no new contract has been entered into. An example of alteration of a contract, as follows:
Illustration (b)
A owes B $10,000. A enters into arrangement with B, and gives B a mortgage of his (As) estate for $5,000 in place of the debt of $10,000. This is a new contract and extinguishes the original contract.
7.1.2
Remission of Performance
Section 64 of the Contracts Act 1950 provides that, every promisee 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. The provision allows the party to remit the performance of the contract, which will apply to the following situations: (a) Payment of a lesser sum in satisfaction of a larger sum. For example:
Illustration (b)
A owes B $5,000. A pays to B, and B accepts, in satisfaction of the whole debt, $2,000 paid at the time and place at which the $5,000 were payable. The whole debt is discharged. (b) Payment of a lesser sum by a third party to satisfy a larger debt.
Illustration (c)
A owes B $5,000 and a third party, C, pays to B $1,000 and B accepts it in satisfaction of his claim on A. This payment discharge the whole claim.
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(c)
Illustration (d)
A owes B under a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts the sum of $2,000. This is a discharge of the whole debt, whatever may be its amount. (d) An arrangement between a debtor and his creditors to settle debts.
Illustration (e)
A owes B $2,000, and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a composition of fifty cents in the dollar upon their respective demands. Payment to B of $1,000 is a discharge of Bs demand.
7.2
DISCHARGE BY PERFORMANCE
A contract is said to be discharged when the parties to the contract has performed what they have agreed to do in the contract. Section 38(1) of the Contracts Act 1950 provides that the parties to the contract must either perform, or offer to perform, their respective promises, unless such performance has been dispensed with or excused under this Act or of any other law.
Further, Section 38(2) of the Contracts Act 1950 provides that, promises bind the representatives of the promisors in case of the death of the promisors before performance, unless a contrary intention appears from the contract. The following illustrations explain the provision:
Illustration (a)
A promises to deliver goods to B on a certain day on payment of RM1,000. A dies before that day. As representatives are bound to deliver the goods to B, and B is bound to pay the RM1,000 to As representatives.
Illustration (b)
A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by As representatives or by B. Meanwhile, Section 40 of the Contracts Act 1950 provides, when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by word or conduct, his acquiescence in its continuance. It means that with the promisees consent, a contract will continue to exist even though promisors act has already amounted to a breach of the contract.
7.2.1
Parties to the contract must perform their obligations according to the time and place that they have agreed in the contract. Otherwise, the contract is voidable at the option of the promisee. According to Section 47 of the Contracts Act 1950, where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time.
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The question "what is a reasonable time" is, in each particular case, a question of fact. In Section 48, when a promise is to be performed on a certain day, and the promisor has undertaken to perform it without of application by the promisee, the promisor may perform it at any time during the usual hours of business on the day and at the place at which the promise ought to be performed. For instance:
Illustration
A promises to deliver goods at Bs warehouse on 1st of January. On that day, A brings the goods to Bs warehouse, but after the usual hour for closing it, and they are not received; A has not performed his promise. And according to Section 49, when a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place, and within the hours of business. Whether time of performance is to be of the essence of the contract, is stated in the case of:
Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118 In this case, the developer appellant was supposed to perform certain obligations for the respondent. Nevertheless, the appellant delayed in performing their obligation. Although the appellant was late, the respondent allowed the delivery dates to pass by agreeing to the work being done by the appellant and by further ordering extra work.
Held: The respondent cannot rescind the contract because he had waived his right to do so by allowing the appellant to still perform the obligation after the time had passed. Thus, the respondent had to treat the contract as subsisting. The statement of the Lordships: If in a contract in which time is of the essence, a party fails to perform it by the stipulated time, the innocent party has the right either to rescind the contract, or to treat it as still subsisting. If he treats it either expressly or by conduct as still continuing, the contract exists but time ceases to be of the essence and becomes at large.
Place of performance of a contract is provided under Section 50 of the Contracts Act 1950 which provides where no place is specified for performance, and the promise is to be performed without application by the promisee, it is the duty of the promisor to ask the promisee where he would like the contract to be performed. For instance:
Illustration
If A undertakes to deliver a thousand gantangs of rice to B on a fixed day, A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to B at that place.
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7.2.2
According to Section 52 of the Contracts Act 1950, when a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. A case to explain the provision:
Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174
There was an agreement for the sale of land where the defendant-vendor was to execute a valid transfer and deliver vacant possession of the land to the plaintiff upon paying the deposit. Held : They were reciprocal promises to be performed simultaneously because the plaintiff was ready and willing to perform. Since the defendant could not give vacant posession by the due date, the defendant was in breach, which entitled the plaintiff to repudiate the contract and obtain the return of the deposit.
7.2.3
Section 41 of the Contracts Act 1950 states, if it is the intention of the parties that the contract should be performed by the promisor himself, then it must be performed by him personally. However, according to Section 42, if a promisee accepts performance of the promisee from a third party, he cannot afterwards enforce it against the promisor. In the case of:
Chin Swee Onn v Puchong Realty Sdn. Bhd [1990] 1 MLJ 108
The parties agreed to transfer land to each other, the consideration for the appellants parcel being $25,000 and that of the respondents, $14,000. It was also agreed that the difference of $11,000 would be settled by two sons of the respondent; one would be responsible for $4,000 and the other for $7,000. The $7,000 was not paid and the appellant thereupon claimed payment from the respondent. Held: As the appellant had agreed to accept performance of the promise from the third party, he could not under Section 42 of the Contracts Act 1950, enforce it against the respondent.
7.3
DISCHARGE BY IMPOSSIBILITY
Impossibility of performance covers two situations. Impossibility at the time a contract is made and impossibility after it has been made. Impossibility at the time a contract is made (under Section 57(1)) means, an agreement to do an act impossible in itself, which is void. For example:
Illustration (a)
An agreement to discover treasure by magic is void.
Impossibility after a contract has been made (under Section 57(2)) means, a contract becomes impossible to perform subsequent to its making. Section 57(2) of the Contracts Act 1950 states, a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. This principle covers the doctrine of frustration in common law. The frustration doctrine is applied on the ground that there is supervening impossibility which causes the whole purpose of a contract to be different from what was undertaken by the contract or its performance has become unlawful. Therefore, frustration refers to circumstances that occur, where there is no default by the contracting
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parties to perform their contractual obligations. Supervening impossibility will discharge a contract. The circumstances under which a contract may be discharged by supervening impossibility are as follows: (a) Destruction of the subject-matter of the contract. Example of cases:
H A Berney v Tronoh Mines Ltd [1949] MLJ 4 Held: the contract of employment was discharged by frustration on the outbreak of war when Japan invaded Malaya.
(b)
Supervening events defeat the whole purpose or object of the contract. As in the case of:
(c)
Death or personal incapacity of a party to the contract. Under this circumstance, the party to the contract has undertaken a personal obligation. Therefore, personal qualification and skill of the person are the basis of the contract. Supervening illegality.This refers to a contract where its performance becomes unlawful, due to a change in the law. A case for instance:
(d)
7.3.1
Effect of Frustration
When a contract is automatically terminated by reason of frustration, the contract becomes void and Section 66 of the Contracts Act 1950 applies. According to Section 66, when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. For example:
Illustration (d)
A contracts to sing for B at a concert for RM1,000, which is paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the RM1,000 paid in advance.
Section 15 of the Civil Law Act 1950 (Revised 1972) is also relevant to frustration contract. Section 15(2) provides that money due but not paid before frustration ceases to be payable. But if the money has actually been paid, it must be restored. If the party in the contract has incurred expenses in performing the contract
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before frustration, the court has the discretion to order payment not exceeding the amount of the said expenses.
7.4
DISCHARGE BY BREACH
Section 40 of the Contracts Act 1950 states, when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. This means, when a promisor fails to perform his obligations or to tender performance, there is a breach of the contract which entitles the party not in breach to take appropriate action which may include repudiation. For example:
Illustration (a)
A is a singer, and enters into a contract with B, the manager of the theatre, to sing at his theatre two nights a week during the next two months. B engages to pay her $100 for each nights performance. On the sixth night, A wilfully absents herself from the theatre. B is at liberty to put an end to the contract.
Ban Hong Joo Mine Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83
Held: The deliberate refusal of the appellants to make fortnightly payments for work already done and their order to the respondents to stop work left the respondents with no option but to treat the contract as having been repudiated, and to sue for payment for the work which had been done.
The party not in breach has the option either to continue or repudiate the contract. If the party not in breach chooses to continue with the contract, the obligation of both parties sustains and the party not in breach could still claim for damages. As illustrated below:
Illustration (b)
A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her at the rate of $100 for each night. On the sixth night, A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through As failure to sing on the sixth night.
SELF-CHECK 7.1
1. 2. 3. 4. 5. 6. 7. 8. 9. How can a contract be discharged? What is the effect of novation? Under what situations remission of performance is allowed to the party in contract? Is time of performance essential in a contract? Can the performance of a contract be done by a third party? What is the meaning of frustration in contract? What are the circumstances under which a contract may be discharged by supervening impossibility? What is the effect of frustration? What is meant by breach that entitles the party to discharge a contract?
ACTIVITY 7.1
Discuss the following problems by applying the relevant principles of law: (a) An action was brought by Mr Fernando for damages for nonacceptance of 5,200 bags of Moghul rice by Mr Roshan. The sold note stated that the rice was to be shipped during the months of November and/or December 2007. A total of 5,100 bags was put on board ship on 31 October 2007, and the remaining 100 bags on 3 November 2007. Mr Roshan refused to take delivery because the rice was not shipped in accordance with the terms of their contract. Discuss the rights of Mr Fernando and Mr Roshan in the above contract.
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(b)
Edward agreed to let Daw have a room for the purpose of viewing the Parade for Visit Malaysia Year 2007 on 1 September 2007, for RM550. The contract provided that the money be payable immediately. The procession did not take place because of heavy rain and flood. Daw who had paid RM300 on account, left the balance unpaid. Daw sued to recover the RM300 and Edward counter-claimed for RM250. Advise the parties on their rights in the above contract. Steve agreed in April 2007 to engage Smith as a courier for Malaysian travel, his duties to commence on 1 June 2007. On 11 May 2007, Steve wrote to Smith saying that he no longer required Smiths services. Feeling unsatisfied, Smith decided to commence an action for breach of contract on 22 May 2007. Steve contended that there was no cause of action until the date due for performance. Advise Smith.
(c)
7.5
REMEDIES
In cases of breach of contract, the party not in default may claim one or more of the following remedies: (a) (b) (c) (d) (e) Rescission of contract; Damages; Specific Performance; Injunction; and/or Quantum Meruit;
7.5.1
Rescission of Contract
Under Section 40 of the Contracts Act 1950, when a party to a contract has refused to perform, or disabled himself from performing, his promise, the promisee may put an end to the contract........ It means that non-performance of a contract by any of the party to the contract will entitle the other party to rescind the contract.
7.5.2
Damages
provided under Sections the measure of damages common law rule in the provides that an injured
The claim for damages in cases of breach of contract is 74 to 76 of the Contracts Act 1950. Section 74 provides recoverable by the claimant. This section re-enacts the case of Hadley v. Baxendale (1854) 9 Ex 341. The rule party is entitled to the following: (a)
Damages arising naturally, that is, according to the usual course of things resulting from the breach.
(b)
If the party is claiming special damages for loss, he must show that the other party knew at the time of making the contract that the special loss is likely to result from the breach. This is explained in the case of:
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Tham Chew Toh v. Associated Metal Smelters Ltd [1972] 1 MLJ 171
The defendant-appellant had agreed to sell a metal melting furnace to the plaintiff-respondent, giving an undertaking that the melting furnace would have a temperature of not lower than 2,600 degrees F. This specification was not fulfilled and consequently, the respondent brought an action alleging breach of condition and claimed damages, including loss of profits. Held: The appellant would not normally be liable for payment of damages for loss of profits unless there was evidence that the special object of the furnace had been drawn to their attention and they had contracted on the basis that delay in delivery would make them liable to payment for loss of profits. Since the appellant knew of the requirement to deliver a furnace capable of producing the specified temperature and the urgency of delivery, they were liable to pay for certain loss of profits suffered by the respondent. (c) The compensation given is not for any remote and indirect loss or damage sustained as a result of the breach.
Mitigation of loss It is also the duty of the party to take reasonable steps to mitigate losses flowing from a breach. If the party has failed to mitigate losses, he cannot later recover any loss flowing from his neglect. A case to illustrate this:
Classification of Damages
Substantial It is a pecuniary compensation that put the plaintiff in the position he would have enjoyed if the contract had been performed. Small token of award that is given when the plaintiff has proved there is a breach, but he did not suffer actual loss. A sum awarded which is far greater than the actual pecuniary loss suffered by the plaintiff. It is commonly given upon the breach of any duty that has been prescribed by the statute. Damages that may be assessed by mere arimethic calculation. Damages that cannot be ascertained.
Nominal Exemplary
7.5.3
Specific Performance
Specific performance is a discretionary remedy granted by the court. It is a decree of the court directing that the contract shall be performed specifically according to its terms. The remedy is granted under the Specific Relief Act 1950. Section 11(1) of the Specific Relief Act 1950 provides that, specific performance may be granted by the court in the following circumstances:
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(a)
When the act agreed to be done is in the performance, wholly or partly, of a trust.
Illustration
A holds certain stock in trust for B. A wrongfully disposes of the stock. The law creates an obligation on A to restore the same quantity of stock to B, and B may enforce specific performance of this obligation.
(b)
When no standard exists to ascertain the actual damage caused by the nonperformance of the act agreed to be done.
Illustration
A agrees to buy, and B agrees to sell, a picture by a dead painter and two rare China vases. A may compel B specifically to perform this contract, for there is no standard for ascertaining the actual damage which would be caused by its non-performance.
(c)
An act agreed to be performed is such that its non-performance would not afford adequate relief.
Illustrations
(i) A contracts with B to sell him a house for RM1,000. B is entitled to a decree directing A to convey the house to him, he paying the purchasemoney. In consideration of being released from certain obligations imposed on it by its Act of Incorporation, a railway company contracts with Z to make an archway through their railway to connect lands of Z served by the railway, to construct a road between certain specified points, to pay a certain annual sum towards the maintenance of this road, and also to construct a siding and a wharf as specified in the contract. Z is entitled to have this contract specifically enforced, for his interest in its performance cannot be adequately compensated for by money; and the court may appoint a proper person to superintend the construction of the archway, road, siding, and wharf.
(ii)
(iii) A contracts to sell, and B contracts to buy, a certain number of railwayshares of a particular description. A refuses to complete the sale. B may compel A specifically to perform this agreement, for the shares are limited in number and not always to be had in the market, and their possession carries with it the status of a shareholder, which cannot otherwise be procured. (iv) A contracts with B to paint a picture for B, who agrees to pay therefore RM1,000. The picture is painted. B is entitled to have it delivered to him on payment or tender of the RM1,000.
(d)
When it is probable that pecuniary compensation cannot be obtained for the non-performance of the act agreed to be done.
Illustration
A transfers without endorsement, but for valuable consideration, a promissory note to B. A becomes insolvent, and C is appointed as his assignee. B may compel C to endorse the note, for C has succeeded to As liabilities and a decree for pecuniary compensation for not endorsing the note would be fruitless.
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Further, Section 20(1)(a) of the Specific Relief Act 1950 clearly states that specific performance will not be granted where monetary compensation is adequate.
7.5.4
Injunction
Injunction as a remedy is classified under Part III of the Specific Relief Act 1950 as Preventive Relief. It is granted at the discretion of the court and it can be either temporary or perpetual (Section 50). Section 51 of the Specific Relief Act 1950 explains the injunctions as follows: 1. Temporary injunctions (or interlocutory or interim injunction) are to continue until a specified time, or until the further order of the court. They may be granted at any period of a suit, and are regulated by the law relating to civil procedure. A perpetual injunction (or permanent injunction) can only be granted by the decree made at the hearing and upon the merits of the suit; the defendant is thereby perpetually enjoined from the assertion of a right, or from the commission of an act, which would be contrary to the rights of the plaintiff.
2.
The temporary injunction is granted by the court to preserve the status quo pending the resolution of a legal action. A perpetual injunction can only be granted after a full trial and upon the merits of a case, and the defendant is permanently prohibited from doing the act or asserting a right for which the injunction was granted. In the case of:
Neoh Siew Eng & Anor v. Too Cheng Kwong [1963] MLJ 272
Held: The court granted a perpetual injunction by ordering the defendant who was a landlord of the plaintiff to keep all communication pipes in proper repair and to comply with all regulations of the Waterworks Department so that water supply to the premises rented by the plaintiffs would not be disconnected.
Further principles in Section 55 of the Specific Relief Act 1950 provides that where a contract consists of affirmative agreement and negative agreement, the court cannot compel specific performance of the affirmative agreement but shall grant injunction to perform the negative agreement. For instance:
Illustration
A contract with B to sing for twelve months at Bs theatre and not to sing elsewhere. B cannot obtain specific performance of the contract to sing but he may be able to secure an injunction to restrain A from singing at any other place of public entertainment.
An example of case:
Pertama Cabaret Nite Club Sdn. Bhd v. Roman Tam [1981] 1 MLJ 149
A singer had signed a contract to appear and sing at the appellants night club for a number of days, and the contract provided that in the event of a breach, the respondent should not perform in Kuala Lumpur during the fixed period of the contract. Later, the singer dishonoured the contract by singing in a rival club. The court had granted an interlocutory injunction.
7.5.5
Quantum Meruit
This remedy means that the claimant will be awarded as much as he has earned or deserved. The remedy can be used contractually or quasi-contractually. Contractually, quantum meruit may be used to recover a reasonable price or remuneration where there is a contract for the supply of goods or services but the parties have not fixed any precise sum to be paid. Quasi-contractually, a claim of quantum meruit may be made where, for instance, work has been done under a void contract. The claimant cannot recover damages for breach because no valid contract exists, but he may recover on a quantum meruit basis.
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In the case of Craven-Ellis v. Canons Ltd [1936] 2 All ER 1066, The claimant was employed as managing director by the company under a deed which provided for remuneration. The articles provided that directors must have qualification shares, and must obtain these within two months of appointment. The claimant and other directors who appointed him never obtained the required number of shares so that the deed was invalid. However, the claimant had rendered services, and he is now sued on a quantum meruit for a reasonable sum by way of remuneration. Held: He succeeded on a quantum meruit, there being no valid contract.
SELF-CHECK 7.2
1. 2. 3. 4. 5. 6. 7. What are the remedies available to the parties in a contract? Can the plaintiff claim damages more than the amount of his actual loss? What is the importance of mitigating losses in claim for damages? When will the court grant the remedy of specific performance? In what circumstance is specific performance not to be granted? What is injunction? What is the difference between temporary injunction and perpetual injunction?
ACTIVITY 7.2
Discuss the following problems by applying the relevant principles of law: (a) AG Sdn Bhd (AGSB) has been awarded a tender to supply sugar for Yummy Biscuits Factory (YBF) for two years. According to the agreement, AGSB has to deliver 500 bags of sugar every month to the factory. Last month, AGSB managed to deliver only 200 bags of sugar and due to that, YBF has to reduce production and reject orders from customers. Advise YBF whether they can claim damages from AGSB. On 3rd December 2007, Kenchana agreed to deliver a new boiler to Dewi in two months time but she failed to do so. Kenchana delivered the said boiler 12 weeks later, after the two months period for delivery due. As a result, Dewi lost her normal business profits during the period of delay and also the profits from dyeing contracts which were offered to her during the period. Dewi now wishes to claim damages from Kenchana for her losses. Can she succeed? Discuss. Cempaka, a distinguished actress, had entered into a contract in which she agreed to act exclusively for the film company (Famous Production) for 18 months. Subsequently, she was anxious to obtain more money and thus left Famous Production to enter into a contract with another film company, Starhill Production. Famous Production found out about this and asked for an injunction to restrain Cempaka from carrying out the contract with Starhill Production. Advise Famous Production on its chance of success.
(b)
(c)
When a contract is terminated, it is said to be discharged and the contracting parties are free from further obligations arising from it. A contract that is created by consent can be discharged by consent. The effect of novation is to release the obligation of the parties under the earlier contract.
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A contract is said to be discharged when the parties to the contract have performed what they have agreed to do in the contract. An agreement to do an act impossible in itself is void. An injured party is entitled to damages arising naturally resulting from the breach. A claim for special damages requires the party to show that the other party knows that special loss is likely to result from the breach. There is a general duty requiring that reasonable steps must be taken to mitigate losses flowing from a breach. Specific performance is a discretionary remedy granted by the court. Injunction as a remedy is classified as Preventive Relief.
Injunction Performance
Quantum Meruit
Remedies Specific performance
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman. Wu M. A. & Vohrah B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases:
Ban Hong Joo Mine Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83. Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174.
Chin Swee Onn v Puchong Realty Sdn. Bhd [1990] 1 MLJ 108. East Asiatic Co. Ltd v. Othman [1966] 2 MLJ 38. H A Berney v Tronoh Mines Ltd [1949] MLJ 4. Hadley v. Baxendale (1854) 9 Ex 341. Kabatasan Timber Extraction Co. v. Chong Fah Shing [1969] 2 MLJ 6. Kerpa Singh v Bariam Singh [1966] 1 MLJ 38. Krell v Henry [1903] 2 KB 740. Lee Hin v. Mohamed Abubakar [1958] MLJ 25. Lee Kin v. Chan Suan Eng [1933] MLJ 197. Neoh Siew Eng & Anor v. Too Cheng Kwong [1963] MLJ 272. Pertama Cabaret Nite Club Sdn. Bhd v. Roman Tam [1981] 1 MLJ 149. Taylor v. Caldwell (1863) B&S 826. Tham Chew Toh v. Associated Metal Smelters Ltd [1972] 1 MLJ 171. Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. 2. 3. 4. 5.
Define the meaning of agency; Explain the purpose of agency contract; Describe the types of agency contract; Explain the statutory requirements for creation of agency contract; and Discuss the scope of authority of the agent.
INTRODUCTION
The relationship between a principal and an agent is very important because at times, a person needs help and assistance from another person to act on his behalf or become his proxy to perform certain acts. For example, where a person intends to sell his land, he may need the service of a real estate agent to sell the land on his behalf. The owner will then authorise the real estate agent to deal with the land. This is where the agency relationship comes into existence. In Malaysia, the law of agency is governed by Part X of the Contracts Act 1950. Section 135 of the Act defines an agent as a person employed to do any act for another or to represent another in dealings with third persons, and a principal as the person for whom such act is done, or who is so represented. From the definition above, it can be said that the contract of agency is divided into two:
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(a) (b)
A contract between the principal and agent, where the agent attains the authority to act for and on behalf of the principal; and A contract between the principal and third party through an agent.
An agent can therefore enter into contracts with third parties that are binding on the principal.
8.1
CAPACITY
Section 137 of the Contracts Act 1950 provides a requirement for a person to become an agent. According to the provision, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal. For example, A hires B, who is 16 years old, to buy goods from C on his behalf. C supplies the goods to A through B, but B sells the goods for his benefit. A cannot deny his responsibility to C on the ground that B is a minor. A is still liable to C for the payment of the goods and A cannot claim damages from B.
8.2
FORMATION OF AGENCY
There are several ways for a contract of agency to exist (see Figure 8.1), as follows: (a) (b) (c) (d) (e) By express appointment; By implied appointment; By ratification; By necessity; and/or By estoppel or holding out.
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Ex pr es s
Ap po in m en t
FORMATION OFAGENCY
ut gO din
ol H l/ e top Es
ty si es ec N
8.2.1
An agency by express appointment is created through verbal or written authorisation by the principal to the agent. The principal gives express authority to the agent as stated in the first part of Section 140 of the Contracts Act, 1950. According to Section 140, an authority is said to be express when it is given by words spoken or written.
8.2.2
The second part of Section 140 of the Contracts Act 1950 provides for implied appointment of an agent. The appointment is implied when the authority can only be drawn from the circumstances of the case, which means things that were spoken or written, or act done by the parties in the ordinary course of dealing.
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For example, A stays in Shah Alam and has a shop in Kuala Lumpur. Most of the time, B, who manages the shop, orders and pays for goods from Y, using As name. Here it is clear that B has an implied authority from A, as an agent to deal with Y in purchasing goods for the shop. There are, however, situations where the authority given under the express appointment by the principal does not specify the extent of the agents authority. In such a case, an agent who has been authorised to do certain acts, will have the authority to do other acts, which are connected to the authorised act. This principle is laid down in Section 141(1) of the Act that says, an agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do the act. Also provided in Section 141(2) of the Act, an agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business. For instance, M appointed (either verbally or written) N, who lives in Kota Bharu, as an agent to market his product in Kota Bharu. In his appointment, it did not specify the extent of authority in which N can act. Therefore, as a marketing agent, N has the authority to deal with the advertisement, packaging, distribution and transportation of the product as well as other matters that are connected with his appointment. In Summers v. Solomon (1897) AC 22, a real estate agent was instructed by a hotel owner to find a buyer for the hotel. The agent did as instructed and received a deposit from a prospective buyer. The owner then brought an action to cancel the agents act. The Court held that even though the agent was not expressly authorised to receive deposits from prospective buyer, he was presumed to have acted under the ambit of implied authority of an agent.
Implied appointment of agency also exists between partners in a partnership business. Under common law, an agency relationship exists between husband and wife. It is presumed that a wife has the authority to buy necessaries for their living by pledging her husbands credit. The assumption is rebuttable if the husband can prove that the wife was given sufficient allowance for buying goods, or the wife was sufficiently provided for with the goods, or the order was
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unreasonable, or he expressly forbade his wife to pledge his credit or he expressly warned the trader not to supply his wife with the goods.
8.2.3
Agency by Ratification
Agency by ratification can arise if one of the situations below exists: (a) (b) when an agent exceeded his authority; or when a person is not an agent, but acted as if he has the authority to act as an agent.
In the event of the above, Section 149 of the Contracts Act 1950 provides that, where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts. If the principal accepts the contract, such acceptance is known as ratification. Ratification renders the principal liable to the contract, as if the agent has been authorised to do such act. Ratification can be done expressly or impliedly as provided in Section 150 of the Contracts Act 1950. For example, A, without authority, buys goods for B. Afterwards B sells them to C on his own account. Bs conduct implies a ratification of the purchase made for him by A.
In Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [1952] MLJ 25, part payment on an overdraft by the principal (which had been arranged by the agent without the principals authority) was an implied ratification of the loan. Ratification operates retrospectively. Thus, the ratified contract is considered valid or effective from the date it was made by the agent and not from the date of ratification. For example, on 3 January, P appointed E as an agent to purchase goods at the price of not exceeding RM200,000. On 5 June, E agreed to purchase goods from Z at the price of RM220,000. In this case, E was not authorised to purchase the goods exceeding the amount given by the principal. Therefore, P had the option to either ratify or reject Es contract with Z. If P accepted Es act on 7 June, E would therefore become an agent by ratification. Consequently, the contract entered by E and Z was valid on 5th June and not on 7 June.
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However, such ratification by the principal can only be done under the following conditions:(a) The unauthorised act must be recognised by the law and not a void contract. At the time the contract was made, the agent must have acted as an agent for the principal. Therefore the agent must disclose that the contract was entered into on behalf of his principal. In the case of Keighley Maxted & Co v. Durant [1901] AC 240, the appellants authorised the agent to buy wheat at a certain price. The agent exceeded his authority and bought at a higher price, in his own name. The principal, however, agreed to take the wheat at the higher price but failed to take delivery. It was held that the principal (Keighley) was not liable and could not ratify the contract because at the time of the contract, the agent has acted in his own capacity.
(b)
(c)
At the time the contract was made, the agent must have actual principal in existence. At the time of ratification, the principal must have full knowledge of the material facts to be ratified, unless there is evidence to show that he does not care of the facts that he intends to ratify. According to Section 151 of the Contracts Act 1950, no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. In Kelner v. Baxter (1866) LR 2 CP 174, a contract to buy a hotel on behalf of a company by an agent could not be ratified by the company because it did not exist at that time.
(d)
(e)
The principal must ratify the whole contract. He cannot ratify only part which is advantageous to him and reject the rest. Section 152 of the Contracts Act 1950 provides a person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which the act formed a part.
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(f)
Ratification must not affect, injure or terminate a third partys rights. Section 153 of the Contracts Act 1950 provides that an act done by one person on behalf of another......which.....would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have that effect. Ratification must be exercised within a reasonable time. In Grover & Grover v. Mathews [1910] 2 KB 401, a fire insurance policy ratified after the event insured against had happened was held to be ineffective.
(g)
(h)
At the time the contract was made and at the time of ratification, the principal must have contractual capacity.
8.2.4
Agency by Necessity
Agency by necessity arises when there is an emergency situation and it becomes necessary for the agent to act to preserve the principals property. Section 142 of the Contracts Act 1950 provides that, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. For an agency by necessity to exist, the following conditions must be fulfilled.
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(a)
The Court held that: The plaintiff was entitled to damages because
the defendants were not agents of necessity. They have failed to communicate with the plaintiff. (b) The agent acted to prevent the principal from incurring loss or damages. If the goods are not perishable goods like clothes or furniture, it will not give rise to emergency situation that requires disposal of them. Therefore, an agent who acted in such case will be liable for the loss suffered by the principal. The agent acted in good faith for the interest of the principal. The agent may be considered has acted in good faith to protect the interest of the principal if he collects the payment from the third party in order to prevent his principal from suffering losses, if the third party does not pay certain amount after using services provided by the principal.
(c)
8.2.5
Under Section 190 of the Contracts Act 1950, when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by those acts or obligations if he has, by his words or conduct, induced such third persons to believe that those acts and obligations were within the scope of the agents authority.
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For instance, E tells X in the presence of P that he is Ps agent and is authorised to make contract on behalf of P. In actual fact, E is not Ps agent. P does not deny Es statement. When X sold goods to E, X may claim for the payment of the goods from P, and P was estopped from denying the existence of Es authority.
8.3.1
(a)
Actual Authority
Express actual authority Express actual authority is expressly given by the principal (orally or in writing) to the agent. For example, T appoints S as his agent to purchase goods not exceeding RM10,000. In such case, Ss actual authority is to purchase goods on behalf of T, not exceeding RM10,000. Implied actual or usual authority Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. For example, T appoints S as his agent to sell Ts car. S has implied authority to allow the purchaser to test drive the car. In Watteau v. Fenwick [1893] 1 QB 346, The defendant appointed a manager to run a public house. A licence was taken out in the managers name. The defendant forbade the manager to buy cigars on credit, which was disregarded by the manager. The plaintiff then claimed for the price of the cigars from the defendant. The Court held that the defendant (as the principal) was liable to pay because a manager of a public house usually had the authority to make such purchases. Therefore, the plaintiff could rely on the usual authority of the manager if he has no knowledge of the restrictions imposed by the principal.
(b)
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8.3.2
Apparent authority arises where a principal (by words or conduct) makes the third party believe that the agent has the authority to make contracts for the principal. According to Section 190 of the Contracts Act 1950 when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by those acts or obligations if he has, by his words or conduct, induced such third persons to believe that those acts and obligations were within the scope of the agents authority. In Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] 3 AllER 16, The Court held that the company (defendant) was liable for the contract of hiring of motor vehicles made by the company secretary. Although the company secretary exceeded his actual authority in hiring the motor vehicles from the plaintiffs, the act was within the usual authority of a company secretary, and it was considered as part of the company administration.
The principal is, therefore, precluded from denying the authority of the agent because the element of estoppel applies. It is due to the representation made by the principal to the third party that leads the third party to believe that the agent has such authority.
In the case of Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. Butterwoths Digest, The Court held that the assistant manager had apparent authority because the general manager had represented to the plaintiffs that advertisements should be done through the assistant manager.
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SELF-CHECK 8.1
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Who is an agent? Can a minor become an agent ? What are the ways of formation of agency contract? Must the appointment of an agent be done expressly? Under what circumstances can the principal ratify his agents act? Does ratification of agency contract operate retrospectively? What are the conditions for an agency by necessity to exist? What is meant by agency by estoppel? What is the importance of an authority to an agent? What is the difference between actual authority and ostensible authority?
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(b)
(c)
(ii)
On the 10th of February, upon reaching KRT, Yuppie discovered that the shop was closed beginning 9th February and would be opened on 15th February 2004. Without contacting Charlie for further instruction, Yuppie went to Pasar Mini Sayugia (PMS), which agreed to buy all the rice bags at the price of RM3,000. Later, Yuppie went to TE and bought 150 kilograms of salted fish on behalf of Charlie. Advise Charlie on the legal claims that he can take against Yuppie.
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Agency arises from an agreement between the principal and the agent. In the agreement, the principal authorises the agent to do things on behalf of the principal. The formation of an agency contract can be done through an express or implied appointment, ratification, necessity or estoppel. Agency by express appointment can be done verbally or in writing. Agency by ratification arises when the principal accepts the contract made by the agent who exceeds his authority or acts without authority. A ratified contract is valid and effective from the date the contract was made. Agency by necessity arises when there is an emergency situation which would require the agent to act promptly. Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. Apparent authority arises where a principal makes the third party believes that the agent has the authority to make contracts for the principal.
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.
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Cases:
Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. Butterwoths Digest. Grover & Grover v. Mathews [1910] 2 KB 401. Keighley Maxted & Co. v. Durant [1901] AC 240. Kelner v. Baxter (1866) LR 2 CP 174. Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [195] MLJ 25. Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] 3All ER 16. Springer v. Great Western Railway Company [1921] 1 KB 257. Summers v. Solomon (1897) AC 22. Watteau v. Fenwick [1893] 1 QB 346.
Topic
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. List the duties of agents and principals; Describe the rights of agents and principals; Discuss the effect of agency contract; and Explain the rules of termination of agency contract.
INTRODUCTION
An agency relationship arises out of an agreement between the principal and the agent. The agreement confers the rights and duties to the principal and agent, whether express or implied. However, if the contract does not specify the rights and duties of the parties, the provisions in Sections 164 to 178 of the Contracts Act, 1950 will be applicable. The provisions in Section 164 to 174 govern the duties of an agent to his principal and the provisions in Section 175 to 178 deals with the principals duties to his agent.
9.1
As far as the duty of an agent to his principal is concerned, the agent is obliged to do the following for the principal: 1. Obey the principals instructions. According to Section 164 of the Contracts Act 1950, "an agent is bound to conduct the business of his principal according to the directions given by the principal....Where the agent acts otherwise, if any
loss sustained, he must make it good to his principal, and if any profit accrues, he must account for it. The provision provides that an agent who fails to carry out his principals instructions will result in breach of contract and consequently, the agent will be liable for any loss sustained by the principal. For example, the principal instructed his agent to purchase certain goods at a certain price. However, the agent purchased at more than the authorised price and as a result, the agent was to be personally liable for the payment of the price of the goods. If the principals order is clearly illegal, the agent has no obligation to obey the order.
In the case of Turpin v. Bilton (1843) 5 Man & G 455, an agent failed to insure his principals ship although he had been ordered to do so. When the ships lost, the court decided that the agent was liable for the losses.
2.
Act according to the customs prevailing if there is no instruction from the principal. According to Section 164 of the Contracts Act 1950, "an agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts the business. Therefore, the provision requires the agent to act according to the customs which prevail in doing business of the same kind if there is no clear instruction from the principal. Otherwise, he has to make good any loss sustained by the principal.
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Illustration (a)
A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make the investment. A must make good to B the interest usually obtained by such investments.
Illustration (b)
B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.
3.
Exercise care and diligence in carrying out his work and to use skill as he possesses. Section 165 of the Contracts Act 1950 provides that an agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct. The following case and illustrations explain the provision above. It means if an agent failed to carry out his duty diligently, skilfully and with due care, the agent must make good any loss sustained by the principal as result of his act.
In the case of Keppel v Wheeler [1927] 1 KB 577, the plaintiff employed the defendant to sell his house. The plaintiff received an offer and accepted it subject to contract. A few days later, X made a higher offer for the property but the defendant did not communicate this offer to the plaintiff. As a result, the first offer was signed. The court held that the defendant was liable to the plaintiff for the difference between the two offers.
Illustration (a)
A, a merchant in Kuala Lumpur, has an agent, B, in London, to whom a sum of money is paid on As account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss (e.g., by variation of rate of exchange), but not further.
Illustration (b)
A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making proper and usual enquiries as to the solvency of B. B, at the time of the sale, is insolvent. A must make compensation to his principal in respect of any loss sustained.
Illustration (c)
A, an insurance-broker employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses, nothing can be recovered from the underwriters. A is bound to make good the loss to B.
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Illustration (d)
A, a merchant in England, directs B, his agent at Kelang, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise. 4. Render proper accounts when required. According to Section 166 of the Contracts Act 1950, an agent is bound to render proper accounts to his principal on demand. This means the agents duty is to account for all monies and the property handled by him as agent for the principal and to produce such accounts when demanded by the principal. 5. Pay the principal all sums received on his behalf. Section 171 of the Contracts Act 1950 provides that the agent is bound to pay to his principal all sums received on his account (subject to the deductions in Section 170). According to Section 170, an agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. Section 174 of the Contracts Act 1950 also gives the agent the right to retain his principals property in his possession until his remuneration is paid. According to Section 174, in the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other properties, whether movable or immovable, of the principal received by him, until the amount due to himself for commission,
disbursements and services in respect of the same has been paid or accounted for to him. 6. Communicate with the principal. It is the duty of an agent to communicate with his principal. As provided in Section 167 of the Contracts Act 1950, it is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. 7. Avoid conflict of interest with own duty. It is the agents duty not to let his personal interest conflict with his duty. Obviously, an agent must not become a party in a transaction and he must act solely for the benefit of the principal. For instance, A directs B to sell As estate, but B buys the estate for himself in the name of C. Thus, if the principal discovers the truth, he has the right to repudiate the transaction. For the example above, A on discovering that B has bought the estate for himself, may repudiate the sale if he can show that B has dishonestly concealed any material fact, or the sale has been disadvantageous to the principal. According to Section 168 of the Contracts Act 1950, if an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. Consequently, the principal has the right to claim any benefit gained by the agent from the transaction. As laid down in Section 169 of the Contracts Act 1950, if an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.
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For instance, A directs B to buy a certain house for him. B tells A it cannot be brought, and buys the house for himself. On discovering this, A may compel B to sell it to him at the price he gave for it. 8. Not to make any secret profit out of the performance of his duty. An agent is also under a duty not to make secret profit out of the performance of his duty. Secret profit may include payment of a secret commission or any financial advantage received by the agent, above the commission or remuneration agreed by the parties. An agent can only keep the profit if the principal consents to it. Otherwise, the principal may take the following actions: (a) Repudiate the contract if it is disadvantages to him (Section 168 of the Contracts Act 1950). Recover the amount of the secret commission from the agent (Section 169 of the Contracts Act 1950). Refuse to pay the agent his commission or other remuneration as illustrated in the following case:
(b)
(c)
In the case of Andrews v Ramsay & Co [1903] 2 KB 635, the plaintiff instructed the defendant to sell property and agreed to pay him 50 pounds as commission. The defendant received 100 pounds from a purchaser as deposits for the property. The defendant paid 50 pounds to the plaintiff and kept the other 50 pounds in payment of his commission with the plaintiffs consent. Later, the plaintiff discovered that the defendant received 20 pounds as commission from the purchaser. The plaintiff sued to recover the 20 pounds and also the 50 pounds he had paid the defendant. It was held that he could recover both sums.
(d) (e)
Dismiss the agent for breach of duty. Sue the agent and third party giving the secret commission, for damages for any loss he may have sustained through entering into the contract.
In Mahesan v. Malaysia Govt. Officers Co-operative Housing Society Ltd. [1978] 1 MLJ 149, the respondent society bought land at a price of $944,000 from the vendor who had paid earlier $456,000 for it. The appellant knew of this fact but failed to inform the society. After the sale was completed, the society discovered the fact that the appellant had received $122,000 as a bribe or secret commission from the vendor for the sale of the said land. The Privy Council held that the Housing Society could recover either the bribe or the amount of the actual loss suffered by it as a result of entering into the contract.
In the case of Boardman v. Phipps [1966] 3 All ER 721, Lord Denning said: Once it is found that the agent has used his principals property or his position so as to make money for himself, it matters not that the principal lost no profit or suffered no damage.the reason is simply because it is money which the agent ought not to be allowed to keep. He gained unjust benefit by the use of his principals property or his position and must account for it.
9.
Not to disclose confidential information or documents entrusted to him by his principal. As an agent for the principal, he is usually entrusted with the principals confidential information or documents. Thus, an agent must not disclose or reveal this information to other persons.
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In the case of L.S Harris Trustee Ltd v. Power Packing Services (Hermit Road) Ltd (1970) 2 Lloyds Rep 65, the court held that the agents action revealing the information about the defendants fire insurance policy had given right to the defendant to terminate the contract and sued for damages. 10. Not to delegate his authority. An agent must not delegate his authority to another person because an agency relationship is personal in nature and involves trust and confidence, placed by the principal on his agent. This principle is in line with the maxim "delegatus non potest delegare" which means "a delegate cannot delegate. It is also provided in Section 143 of the Contracts Act 1950 that, "an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of the agency, a sub-agent must, be employed. However, to this rule there are exceptions. Thus, an agent may delegate his authority or appoint a sub agent under the following circumstances: (a) (b) (c) (d) (e) (f) Where the principal approves of the delegation of authority; Where it is presumed from the conduct of the parties that the agent shall have power to delegate his authority; Where the customs of the trade or business permits delegation; Where the nature of the agency is such that delegation of the authority to another person is necessary to complete the business; In cases of necessity or unforeseen emergency (for instance, due to sickness of agent); or Where the act to be done is purely ministerial or clerical and does not involve the exercise of discretion.
9.2
As far as the duty of a principal to his agent is concerned, the principal is obliged to do the followings in carrying out his duties under the agency contract: 1. Pay the agent any commission or other remuneration unless the agency relationship is gratuitous. The amount of commission to be payable to an agent depends on the terms of the contract of agency. Generally, the right to receive commission or other remuneration arises when the agent has done all that he had agreed to do. Where no amount is agreed, the agent is entitled to reasonable remuneration. However, an agent loses his right to remuneration if there is misconduct (wrongful or improper conduct) in the business of the agency. Section 173 of the Contracts Act 1950 provides that, "an agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted. For example, A employs B to recover $100,000 from C and to invest in good securities. B recovers the $100,000 and invests $90,000 in good securities and the other $10,000 in securities which he ought to have known to be bad. As a result, A loses $2000. B is entitled to the remuneration for recovering the $100,000 and for investing the $90,000. But he is not entitled to any remuneration for investing the $10,000 and he must make good the $2000 loss to A. Another example, A employs B to recover $1,000 from C. Through Bs misconduct, the money is not recovered. B is entitled to no remuneration for his services, and must make good the loss. 2. Not to wilfully prevent or hinder the agent from earning his commission A principal cannot employ another agent if an agent has already been appointed to carry out certain duties. Particularly, if the appointed agent is already in the midst of negotiations and the act of appointing another agent is to deprive the original agent from earning his commission. Indemnify the agent for acts done in the exercise of his duties According to Section 175 of the Contracts Act 1950,
3.
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the employer of an agent is bound to indemnify him against the consequences of all lawful acts done by the agent in exercise of the authority conferred upon him. It means the principal must indemnify the agent when he incurred loss or liability in exercising his authority. For example:
Illustration (a)
B, at Kelang, under instructions from A, in Taiping, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.
Illustration (b)
B, a broker at Taiping, by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards, A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends but is unsuccessful, and has to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses. Subsequently, Section 176 of the Contracts Act 1950 provides that, where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it cause an injury to the rights of third person. It means the agent has the right to be indemnified by his principal for any expenses incurred and consequences of any act, while the agent is acting in good faith in the execution of his authority, even if it causes injury to third person.
For example:
Illustration (a)
A, a decree-holder and entitled to execution of Bs goods, requires the officer of the court to seize certain goods, representing them to be the goods of B. The officer seizes the goods, and is sued by C, the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C, in consequence of obeying As directions.
Illustration (b)
B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and for Bs own expenses. However, if the agent is employed to do a criminal act, the principal is not bound to indemnify the agent against the consequences of the act. This is provided in Section 177 of the Contracts Act 1950, where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act. For example:
Illustration (b)
B, the proprietor of a newspaper, publishes, at As request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.
Consequently, if the agent suffers injury during the course of his duty due to his principals neglect or want of skill, Section 178 of the Contracts Act 1950 provides that,
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the principal must make compensation to his agent in respect of injury caused to the agent by the principals neglect or want of skill. For example, A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskilfully put up, and B is, in consequence, hurt. A must make compensation to B. An agent loses his right to an indemnity if he acts beyond his authority or negligently performs his duty. This can be seen in following case of:
Davison v. Fernandes (1889) 6 TLR 73. The defendant in this case asked
the plaintiff to quote the price of some stock ex dividend, but the plaintiff quoted the price cum dividend. Due to plaintiffs negligence, he failed to inform the defendant accordingly. The defendant then authorised the plaintiff to sell the stock. The plaintiff sold and had to pay the dividend to the purchaser (under the rules of the London Stock Exchange).
The Court held that: The plaintiff was not entitled to be indemnified by
the defendant.
In case of Solloway and Anor. v. McLaughlin [1938] MLJ 23, the Privy Council held that agents who engaged in a fraudulent scheme to defraud their principals, will forfeit their right to an indemnity in respect of transactions which form part of the fraud.
SELF-CHECK 9.1
1. 2. 3. 4. 5. 6. 7. 8. What are the agents duties towards his principal under the law? What is the liability of an agent who breaches the duty? What actions can be taken by a principal who discovers his agent making a secret profit? Can an agent delegate his authority to another person? Why? Under what circumstance can an agent appoint a sub-agent? Give at least one example. What are the legal duties of a principal to his agent? Under what situations will an agent lose his right to remuneration? What are the conditions under which a principal is not bound to indemnify his agent?
ACTIVITY 9.1
Discuss the following questions: (a) Hasnan employed Lenny, an auctioneer, to sell certain property for him and agreed to pay Lenny a commission on the sale and other miscellaneous expenses including printing and advertising costs. From the contract, Lenny received discounts from the printers and advertisers but charge Hasnan the full amount of the contract price and kept the discounts for himself. Decide whether Lenny is bound to account Hasnan for the discounts that he received.
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(b)
Mr Kim employed a firm of estate agents to sell his bungalow for him. Goh, a member of the firm, represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. In actual fact, this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. Goh himself had no knowledge of the underpinning. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning, sued Mr Kim for damages for fraud. Advise Mrs Irene whether her action would succeed. Mr Kim employed a firm of estate agents to sell his bungalow for him. Goh, a member of the firm, represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. In actual fact, this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. Goh himself had no knowledge of the underpinning. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning, sued Mr Kim for damages for fraud. Advise Mrs Irene whether her action would succeed. Ramoo and Santhi employed Ryder and Co, a firm of merchants to buy goods for them. Ryder & Co bought the goods in their own names from Mr Kye. Mr Kye did not inquire whether they were acting as agents or principals, and supplied the goods on credit. Ramoo and Santhi paid Ryder & Co for the goods in the ordinary course of business. A fortnight later, Ryder & Co stopped payment and did not settle the payment to Mr Kye. Upon discovering the agency, Mr Kye sued Ramoo and Santhi for the price. Can Mr Kye succeed?
(c)
(d)
(e)
Mr Kim employed a firm of estate agents to sell his bungalow for him. Goh, a member of the firm, represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. In actual fact, this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. Goh himself had no knowledge of the underpinning. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning, sued Mr Kim for damages for fraud. Advise Mrs Irene whether her action would succeed. Ramoo and Santhi employed Ryder and Co, a firm of merchants to buy goods for them. Ryder & Co bought the goods in their own names from Mr Kye. Mr Kye did not inquire whether they were acting as agents or principals, and supplied the goods on credit. Ramoo and Santhi paid Ryder & Co for the goods in the ordinary course of business. A fortnight later, Ryder & Co stopped payment and did not settle the payment to Mr Kye. Upon discovering the agency, Mr Kye sued Ramoo and Santhi for the price. Can Mr Kye succeed?
(f)
9.3
The effect of contracts made by agents will be discussed in relation to the categories of principal. The kinds of principals include: A named principal; A disclosed principal but not the name; and An undisclosed principal.
9.3.1
A Named Principal
A named principal is a principal whose name has been revealed to the third party by the agent. The third party knows that the agent is contracting as an agent and knows the principal for whom the agent is acting. Thus, the agent is not liable for the contract and the contract is binding on the principal. However,
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there are exceptions under Section 183 of the Contracts Act 1950, where an agent would be personally liable for the contract as follows: (a) (b) (c) (d) Where the agent agrees to accept personal liability; Where the agent executes a deed in his own name; Where the agent signs a negotiable instrument in his own name; and/or Where the agent exceeds his authority and the principal does not ratify the contract.
9.3.2
An Undisclosed Principal
An undisclosed principal is the principal whose identity and existence is not disclosed by the agent to the third party at the time of contract. The third party who enters into a contract with the agent of undisclosed principal is bound by it if he discovers that the contract is actually made on behalf of undisclosed principal. If the third party does not know that a person he deals with is acting as an agent, he has the right to sue the agent or the principal or both. Section 186 of the Contracts Act 1950 says, "in cases where an agent is personally liable, a person dealing with him may hold either him or his principal, or both of them, liable.
Illustration
A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
The agent may be held personally liable on the contract because the third party does not know that the agent is acting for someone. In the case of Pernas Trading Sdn Bhd v. Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124, the respondents ordered chemicals and fertilisers for themselves (rather than on behalf of the principal), but they denied liability when the appellants sued for the balance of the price. The Federal Court held that although the respondents were agents for a principal, they had contracted for themselves. Therefore, they were personally liable.
According to Section 183(b) of the Contracts Act 1950, if the agent does not disclose the name of the principal, the agent is presumed to be personally liable.
9.4
TERMINATION OF AGENCY
Termination of agency is dealt with under Sections 154 to 163 of the Contracts Act 1950. Generally, agency contract may be terminated in the following ways: (a) (b) Act of the parties; or Operation of law.
9.4.1
(a) (b) (c)
The termination by the act of the parties may be made in the following ways: By mutual agreement of both principal and agent By revocation of authority by the principal By renunciation of the agency by the agent
According to Section 154 of the Contracts Act 1950, an agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated or declared a bankrupt or an insolvent. (i) Termination of agency, where agent has an interest in subject matter. Section 155 of the Contracts Act 1950 states: Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. For example, A gives authority to B to sell As land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his unsoundness of mind or death.
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(ii)
When principal may revoke agents authority. Section 156 of the Contracts Act 1950 states: The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal.
(iii) Revocation where authority has been partly exercised. Section 157 of the Contracts Act 1950 stipulates: The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from acts already done in the agency. For example, A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it out of As money remaining in Bs hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke Bs authority so far as regards payment for the cotton. (iv) Compensation for revocation by principal or renunciation by agent. Section 158 of the Contracts Act 1950 stipulates: Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause. (v) Notice of revocation or renunciation. Section 159 of the Contracts Act 1950 states: Reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other.
(vi) Revocation and renunciation may be expressed or implied. Section 160 of the Contracts Act 1950 states: Revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent, respectively. For example, A empowers B to let As house. Afterwards, A lets it himself. This is an implied revocation of Bs authority.
9.4.2
Termination by operation of law is also provided in Section 154 of the Contracts Act 1950, an agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated or declared a bankrupt or an insolvent. Thus, termination by operation of law may be made in the following ways: (a) (b) (c) (d) (e) (f) By the performance of the contract of agency; By the expiration of the period fixed in the contract of agency; By the death of the principal or agent; By the insanity of the principal or agent; By the principal becoming insolvent or being made a bankrupt; or By the happening of an event which renders the agency unlawful (for example, in cases of frustration).
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SELF-CHECK 9.2
1. 2. 3. 4. 5. What is the effect of contract made by an agent who named his principal to the third party? Under what circumstance will an agent be personally liable for a contract? How can an agency contract be terminated? Is there any situation under which a principal cannot revoke the authority of his agent? Describe the ways of termination of agency by way of operation of law.
An agency contract confers rights and duties to the principal and agent. An agent is bound to conduct the business of his principal according to the principals instruction. An agent must act according to the customs prevailent in the absence of instruction from the principal. An agent must exercise care and diligence, and use his skill in carrying out his work. An agents duty is to render proper accounts to his principal. An agent must communicate with his principal to get further instructions. It is an agents duty not to let his personal interest conflict with his own duty. An agent must not make any secret profit out of the performance of his duty. An agent must not disclose confidential information or documents entrusted to him by his principal. An agent cannot delegate his authority to another person without permission or approval from the principal. A principals duty is to pay the agent his commission or remuneration. A principal must not wilfully prevent his agent from earning his commission. A principal is bound to indemnify his agent for acts done within his scope of authority.
An agent is not liable for contracts done for a named principal. An agency contract may be terminated by the act of the parties or by operation of law.
Text Books Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu. M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases
Andrews v Ramsay & Co [1903] 2 KB 635. Boardman v. Phipps [1966] 3 All ER 721. Davison v. Fernandes (1889) 6 TLR 73. Keppel v Wheeler [1927] 1 KB 577. L.S Harris Trustee Ltd v. Power Packing Services (Hermit Road) Ltd (1970) 2 Lloyds Rep 65. Mahesan v. Malaysia Govt. Officers Co-operative Housing Society Ltd. [1978] 1 MLJ 149. Pernas Trading Sdn Bhd v. Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124. Solloway and Anor. v. McLaughlin [1938] MLJ 23. Turpin v. Bilton (1843) 5 Man & G 455.
Topic
10
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. Define the meaning of partnership; Explain the important characteristics of partnership; Discuss the rules on formation of partnership; Describe the relations of partners to outsiders; and Describe the liabilities of partners to third parties.
INTRODUCTION
There are various types of business that are widely being carried out in Malaysia. The most common types of business are: Sole Proprietorship, Partnership; and Company.
In Malaysia, the law that governs partnership is the Partnership Act 1961. The Act is similar to the English Partnership Act 1890 and Section 47(1) of the Partnership Act 1961 provides for the application of rules of equity and common law in partnership so long as they are not inconsistent with the express provisions of the Act.
10.1
It is important to establish a partnership between parties since the formation of it entails certain obligations and liabilities for the partners. Section 3(1) of the Partnership Act 1961 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". Partnership, however, does not include clubs, societies, mutual benefit organisations and building societies (see Figure 10.1). (a) The relation between parties In order to form a partnership, there must be a minimum of two persons. Therefore, there is usually an agreement to be made by the parties which lay down certain terms and conditions relating to the partnership business, and duties and responsibilities of the partners involved. This agreement will be binding upon every partner and enforceable in law. The agreement is for business purpose Section 2 of the Partnership Act 1961 defines business as includes every trade, occupation or profession. Thus, the persons must have an agreement to have a business in common. The business is for purpose of gaining profit This means the partners agree to carry on business for profit. Thus, if a person is excluded from sharing any profit in a partnership, then he is not a partner. Similarly, the relationship between persons to do voluntary or welfare works is not a partnership.
(b)
(c)
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Section 3(2) of the Partnership Act 1961 therefore excludes the following list from the definition of partnership: The relation between members of a company or association which is registered as a company under the Companies Act 1965 or a co-operative society under any written law relating to co-operative societies; or The relation between members of a company or association which is formed or incorporated by or in pursuance of any other law having effect in Malaysia or letters patent, Royal Charter or Act of Parliament of the UK.
Section 4(b)
Section 4(c)
Section 4(a)
Partnership does not exist between tenants regardless whether they share or not the profit gained through the use of the land. In the case of jointly owned property, it does not of itself form a partnership between the owners. In Davis v. Davis (1894) 70 LT 265, a father gave his business and three houses to be shared together by his two sons. Two of the houses were rented out. The sons used part of the money earned from the rental of the house to improve the business and shared the other remaining portion equally. The Court held that the business was a partnership between the sons but the joint ownership of the houses and equal share on the earnings did not make them partners.
Section 4(b)
In Cox v. Coulson (1916) 114 LT 599, the defendant, a manager of a theatre entered into an agreement with Mill whereby Mill would prepare and pay for the theatre show while the defendant would prepare and pay for the rent of the stage and lighting services for the show. It was agreed that the defendant would receive 60% from the gross returns and Mill would receive the remaining 40%. The plaintiff suffered injury during the show and he sued the defendant for liability as a partner of Mill. The Court decided that even though the defendant and Mill shared the gross returns from the business, it did not make the defendant and Mill partners. Both had separate responsibility and liability. The defendant was liable to pay for the rent of the stage and lighting services from the 60% returns he received. Mill, on the other hand, would settle the journey expenses, salaries of the actors and the cost incurred during the show from the 40% returns he received. This showed that no partnership was formed between the defendant and Mill. Thus, the defendant was not liable to the plaintiff.
Section 4(c)(i)
Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business. For instance, A lends B a sum of RM15,000 and A receives a sum RM1,000 per month from the business as
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repayment of the loan. Though the payment of RM1,000 per month to A comes from the profit of the business, A is not a partner to B in the business. In Badeley v. Consolidated Bank (1888) 38 ChD 238, X intended to build a railway transportation and borrowed money from Y to finance the project. As security for the loan, X charged his machineries and agreed to pay an interest of 10% of the loan amount and 10% from the profit of the project to Y. The Court held that the advance given by Y to X creates a lender-borrower relationship. Y is not a partner to X though he received the payment from the profit of the business. Section 4(c)(ii) Remuneration to a servant or an agent of the business from the profit of their employer's business. Any form of payment to a servant or an agent which comes from the employers business profit constitutes salary or wages. Therefore, a servant or an agent is not a partner in the employers business and has no partnership liability. In Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19, the plaintiff was a despatch clerk in the defendants firm. He was then appointed as a manager in one of the firms branch office. One of the firms documents stated that the profit from the firm would be divided into 79.4 parts and would be shared between the plaintiff, the defendant and others partners. The plaintiff contended that he was a partner but the defendant argued that the relationship was a mere employer-employee relationship. The Court held that the receipt of salary from the profit did not make the plaintiff a partner of the firm.
Section 4(c)(iii)
Payment of an annuity or a portion of the profits to a widow or child of a deceased partner in the business. Some partnership agreements provide a term on payment of annuity to the dependants of a deceased partner. The annuity comes from the profit of the partnership. In this situation, although the widow or the child receives payment from the profit of the partnership, it did not make them partners in the business.
In Commissioners of Inland Revenue v. Lebuss Trustees [1964] 1 All ER 475, A, a partner in a firm bequeathed that his right to profit would be given to his wife upon his death. However, the partner did not perform the bequest and thereafter, the Inland Revenue imposed certain tax for the amount which the widow was supposed to receive. The Court held that As widow is not a partner of the firm. Therefore, her portion of money must not be taxable.
Section 4(c)(iv)
Payment of interest which varies with the profits on a loan advanced for use in the business under a written contract. A person who gives advance payment by way of a loan and receives a payment of interest which varies according to the profit of the business is not a partner in the business. In the case of Re Young Ex p Jones (1896) 75 LT 278, Y and J entered into an agreement whereby J advanced 500 to Y and in consideration, J would receive 1 a week out of the profit gained from Ys business. J also helped in the management of the business and was given certain power to manage. The Court held that the receipt of the payment from the profit in Ys business does not make J a partner although J was authorised to deal with the business.
Section 4(c)(v)
Payment to a seller of the goodwill of a business in the form of a share of the profits of the business. For example, A, a solicitor agreed to sell his firm to B and agreed to introduce his clients to B. In consideration, B agreed to give A 10% out of the profit of the business for the period of three years. In this case, although A receives payment out of the profit of the business, it does not make him a partner to B in the business. In Rawlinson v. Clarke (1860) 15 M&M 292, a doctor sold his business and introduced his clients to the buyer. In consideration, he received certain payment and shares from the profit made in the first year of the business. The Court held that he was not a partner to the buyer.
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10.2.3
Capacity
In William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ 105, Jacks claimed a sum of RM12,734.91 being the payment of the goods sold to the defendant who were partners in a firm. Yong, who was a minor partner at the time of the purchase of the goods, did not defend his case but Chan denied that the goods were for Yongs personal use. Therefore, other partners were not liable for the claim. The Court held that even though the goods were bought for Yongs personal use, it did not mean that the firm and other partners were not liable and since Yong did not take any action to terminate his partnership upon attaining majority age, he was also liable as a partner.
The partners must have the capacity to enter into contract. A partner is competent to contract if he is an adult, of sound mind and has not lost capacity to enter into contracts under any laws. In partnership, a minor can become a partner. However, a minor partner is not liable for all the firms debt and contractual liabilities. When a minor partner reaches his age of majority, he can exonerate himself from liability by withdrawing himself from the firm. But if he remains in the firm, he will be liable with other partners.
10.2.4
Partnership Agreement
Partnership agreement may be in the form of oral or written agreement. The partners may have partnership agreements in writing, usually known as Articles of Partnership which provides for particulars of the firm and the terms of the partnership. In absence of a partnership agreement, the provisions of the Partnership Act 1961 will be applicable to the partners. For mutual rights and duties of partners, they may be varied by the partner's consent as provided under Section 21 of the Partnership Act 1961.
10.2.5
Registration of Partnership
A partnership must be registered under the Registration of Businesses Act 1956 (in Peninsular Malaysia); Sarawak Cap.64 (Business Names) and Cap.33 (Business, Professions and Trade Licensing)(in Sarawak); Trades Licensing Ordinance, No. 16, 1948 (in Sabah). Particulars as to the date of operation of business, name of business, name of partners, registered address of business, type and nature of the business, shall be submitted to the Registrar of Business for
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registration. Any changes to the above particulars are to be reported to the Registry Department. In the event of dissolution of partnership or death or retirement of a partner, a report on the same shall be made to avoid liability to third party after the occurrence of any of the above.
SELF-CHECK 10.1
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. What is the meaning of partnership? How do you determine the existence of partnership in absence of a partnership agreement? Does joint tenancy and tenancy in common create a partnership between the tenants? Does sharing of gross returns in a business between two persons establish a partnership? Sharing of business profit by a person is prima facie evidence of partnership. Is the presumption rebuttable? Is partnership a legal persona? What is the effect of a partnership formed for unlawful purposes? Can a minor become partner in a partnership business? What is the importance of a partnership agreement? Must a partnership be registered? Why?
ACTIVITY 10.1
Discuss the following questions: (a) The partnership business plans to engage Niza to manage the business and one of the terms is that Niza will receive remuneration from the profit of the business. Is Niza a partner? Discuss. S lends a sum of RM5,000 to firm Y and receives repayment by 12 monthly instalments of RM500 per repayment from the profits of the firm. Does that make S a partner of firm Y? Discuss. T and H has entered into an agreement whereby H would lend a sum of RM1,000 to T and as a consideration, H would receive RM50 a week from the profit of T's business. H would also assist in the administration of the firm and was given certain authority to manage the business of the firm. Is H a partner of T? Discuss. R and F are partners of a restaurant business. They intend to expand their business and make a loan from G. G will receive 20% from the nett profit of the business. Is G a partner of R and F? Discuss.
(b)
(c)
(d)
10.3.1
A partner has an authority to bind the firm if he carries out the partnership business within his scope of authority. Section 7 of the Partnership Act 1961 provides that every partner is an agent for the firm and other partners for the purpose of the business of partnership. This means any act done by a partner in the course of the partneship business binds the firm and other partners; unless the partner has no authority or is unauthorised to act for the firm; and the third party
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knows that the partner has no authority or does not know or believe him to be a partner. Therefore, for a partner to bind the firm and other partners, his act must have been carried out within his scope of authority and in the usual way of the partnership business. Consequently, outsiders or third parties dealing with the partner may assume that the partner has the authority to do such acts usually done by partners in that particular kind of business. This is an implied authority of a partner as an agent for the firm, as illustrated in the following cases: In Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103, P and G were partners in a garage business. One of the terms of their partnership agreement prohibited the partners from buying and selling cars. Without the knowledge of G, P sold a car to Mercantile Credit for a sum of 700 and the money was deposited into the firms account. When Mercantile Credit initiated a suit to claim the money back, the Court held that G was liable to the plaintiff. Even though P was prohibited by the partnership agreement to engage in buying and selling cars, the act of P was usually done by those who engaged in a garage business.
In another case, Chan King Yue v. Lee & Wong [1962] 28 MLJ 379, the plaintiff lent RM35,000 to her husband who was a partner in a firm. The husband issued a receipt under the firms name and used the money to pay the firms debt. The plaintiff took an action to recover her money but other partners refused to pay on the grounds that the plaintiffs husband had no authority to borrow money. The Court held that the act of borrowing money by the plaintiffs husband was important for the firms continuous business. Therefore, the firm was liable.
Section 7 also provides that the partner who has no authority or is unauthorised to act for the firm will not bind the firm if the third party knows that the partner has no authority or does not know or believe him to be a partner. For example, A has been informed about B's limited authority and B was unauthorised to order goods exceeding RM15,000. A made a contract with B for the supply of electrical goods worth of RM17,000 to the firm. The firm was not bound by the contract. According to Section 8 of the Partnership Act 1961, an act or instrument relating to the business of the firm and done or executed in the firms 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. In the case of Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223, H gave a loan to one of the partners in a firm. As a security, a bill of sale was issued bearing the signature and seal by Ng Teng Tuan, a partner to Wan Lee Chan, for and on behalf of Wan Lee Chan. The issue that arose was whether the bill of sale issued by the firm was valid and binding on the firm. The Court held that a partner in a firm had an implied authority to issue a bill of sale on behalf of other partners. Therefore, the bill of sale was valid and binding on the firm.
According to Section 9 of the Partnership Act 1961, where 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. However, this section does not affect any personal liability incurred by an individual partner. This means, a partner cannot misuse the trust given to him by the firm to make debt which is not connected with the firm's business. The partner who misuses the trust shall be personally liable unless he has been given the express authority to do as such. For instance, A and B are partners carrying on the business of printing and selling batik. A, without the knowledge of B bought a dishwasher under the firms name. The supplier requested payment from the firm. In this case, B may deny liability under Section 9 and A would be personally liable. In other words, A cannot bind the firm because his act was not carried out within the usual course of the partnership business. Another example where a firm will not be liable is where a partner issues the firm's cheque for the purpose of settling personal debt.
10.3.2
Liability of Partners
As far as liability of partners is concerned, under the Partnership Act 1961, there are several types of liabilities (see Figure 10.2) namely contractual liability, tortious liability, liability for improper use of trust property and for holding out, criminal liability and liability of incoming and retiring partners.
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Figure 10.2: Types of partnership liabilities (a) Contractual Liability According to Section 11 of the Partnership Act 1961, every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death, his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts. In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292, a partnership has been formed by six partners including the appellant. Three of the partners borrowed RM10,000 from a third party by effecting a promissory note. The loan was guaranteed by the respondent (Chan Kang Swi). Later, the firm failed to pay the debt and Chan was called to pay for the debt on his own account. He then initiated action against the six partners for recovery of his money and five partners accepted their liability, except the appellant. The Court decided that the debt was a firms debt and was obtained for the purpose of partnership. The partners who signed the promissory note had acted for the firm and they were authorised to do so. Therefore, the firm or the six partners were liable.
Section 11 provides joint liability of partners in matters concerning contracts entered into by the firm with third parties. The joint liability under this section means that every partner is liable for all debts and obligations of the firm. If A, B and C who are partners in a printing business bought a printing machine worth RM15,000 by credit, A, B and C shall be jointly liable for the payment of the sum. Section 11 also provides the liability of a deceased partner. Under the provision, the deceased partner is jointly liable for the firms debt incurred during his term as a partner of the firm. This means if a creditor sues the firm for the firms debt but fails to recover full satisfaction of his claim, he can recover from the administrator of the estates of the deceased partner. However, payment to the creditor is subject to the settlement of the deceased partners personal debt, if any. (b) Tortious Liability Section 12 of the Partnership Act 1961 provides for liability of firm for wrongs or tortious liability of partners:
Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the firm or with the authority of his copartners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act. Tort is a civil wrong. The examples of tortious acts are nuisance, defamation, trespass and negligence. In partnership, tort may occur in the following situation. For instance A, B and C are partners carrying out business of repairing electrical equipment. C repaired a washing machine for a customer but due to his negligence, the customer was electrocuted when using the washing machine. In this case, C was negligent in performing his work and therefore, the firm and other partners were liable to the customer. In Hamlyn v. Houston & Co [1903] 2 KB 82, H and S were partners in a firm. H bribed a clerk of another firm to get secret information on contracts and tenders of the said firm. The Court held that H, as the partner, had done illegitimately that which was part of his business to do legitimately. Hence, the firm was liable for his act.
TOPIC 10
173
In the above case, the firm was liable because the bribe was part of the firms money and such information was for the purpose of the partnership business and would have been legitimate if obtained by proper means. (c) Liability for improper use of trust property Liability for improper employment of trust property for partnership purposes is provided under Section 15 of the Partnership Act 1961. It provides that: If a partner, being a trustee, improperly employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein: Provided as follows: (i) (ii) this section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and nothing in this section shall prevent trust money from being followed and recovered from the firm, if still in its possession or under its control.
For example, A, B and C are partners of a firm. A who has been appointed as a trustee, improperly uses the trust property in the business. Other partners, B and C are not liable for the trust property. However, if B and C have notice of a breach of trust, they cannot avoid liability and the trust money may be recovered from the firm if it is still in possession and under the control of the firm. In Ex parte Heaton (1819) Buck 386, a father and sons were partners in a firm. The sons used the trust property for the purpose of the firms business. When the firm became bankrupt, the Court held that the money which had been misappropriated could not be recovered from the partnership property because the father had no knowledge of the breach of trust committed by his sons.
(d)
Liability for holding out A person who is not a partner of a firm may become liable for the firms debt if he represents himself or allow himself to be represented as a partner in the firm. He will therefore be liable like a partner to the persons who give credit to the firm. Section 16 of the Partnership Act 1961 provides:
Everyone who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented as a partner in a particular firm, is liable as a partner to any one who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made: Provided that where, after a partner's death, the partnership business is continued in the old firms name, the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executor's or administrator's estate or effects liable for any partnership debts contracted after his death. The liability is based on the principle of estoppel. When a person makes a representation that induces third party to believe and rely on such representation that he is a partner, the person is estopped from denying or contradicting the statement. For instance, A and B are partners of a saloon business. A is entrusted to look after the account of the firm while B is in charge of the administration of the firm. During the course of the business, they employ C as the customer relations officer. One day, D, a salesman, came to the saloon, and introduced a slimming product. C, who was at the saloon introduced himself as a partner and expressed his interest in the product. Relying on Cs representation, D agreed to sell the product on credit to C. In such situation, C was a partner by holding out and is liable for the payment of the product supplied to the firm. Whether A and B are jointly liable with C depends on their knowledge of the transaction. If the firm or the partners knew about Cs contract on behalf of the firm and did not deny it in due course, then the firm or partners would be jointly liable for the payment of the product to D. But if they have no knowledge about the contract, then C would be personally liable as a partner for holding out. In the case of Re Buchanan & Co. (1876) 4 QSCR 202, if the holding out or representation is made without the knowledge or consent from the real partner, only the person holding out as a partner shall be liable to the third party acting in reliance of the representation.
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175
Section 16 of the Partnership Act 1961 further states that, where, after a partner's death, the partnership business is continued in the old firm-name, the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executor's or administrator's estate or effects liable for any partnership debts contracted after his death. This means the use of the deceased partners name for the partnership business does not constitute holding out. (e) Liability for criminal offences Any partner who commits criminal offences shall be personally liable. Other partners shall not be liable unless there is evidence to prove their participation in the commission of the crime.
In the case of Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246, two partners in a firm had used a trade name (Texwood) that belonged to another company on their products. There was no evidence to prove that the second appellant was involved in the crime, except as to become a partner in the business. Thus, the appeal of the second appellant was allowed. (f) Liability of incoming and outgoing (retiring) partners A person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner. According to Section 19(1) of the Partnership Act 1961, a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner. For a person retiring from the firm, he is not free from liabilities before his retirement. He remains liable for the partnership debts incurred before his retirement, as provided under Section 19(2) of the Act, a partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before retirement. A retiring partner may only be discharged from liabilities by a novation agreement between himself, the new firm and the creditors. In the case of Duke v. Brewer (1848) 2 Car. & Ker. 828, it was held that for a new incoming partner, if the liability was for a continuous contract (which was made before he became a partner and continue to exist after he became a partner), then he shall be liable for the same.
SELF-CHECK 10.2
1. 2. 3. 4. 5. 6. 7. How can a partner bind the firm for his act? What is the liability of a partner in contracts? Are partners jointly liable in tortious liability? What is the liability of a partner in the case of improper use of trust property in a firm? What is the effect of holding out by a person who is not a partner? What are the liabilities of incoming and outgoing partners? Will a partner be liable for the criminal offence committed by other partners?
ACTIVITY 10.2
Discuss the following problems: (a) Chandra and Dewi are partners in a garage business. Chandra provided the capital and only visits the garage twice a month whereas Dewi works full time for the firm. The terms of the partnership agreement provide that no partner shall incur any debt exceeding RM10,000 without the consent of the other partner; partners must purchase oil only from RushOil Company; and partners must not involve in trading of secondhand goods. In the course of running the firm, Dewi has bought oil amounting to RM15,000 from RiverinOil Company and has also bought a second-hand car on his own account but in the name of the firm. Advise Chandra on his liability as a partner.
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177
(b)
Malik and Noor were partners in a firm operating a Cyber Caf business. Malik made a friendly loan amounting to RM8,000 from Aiman as capital for the business. The said loan was guaranteed by Azmin. The firm failed to pay the loan and Azmin had to pay instead. Then, Azmin took a civil action against both partners, Malik and Noor, to recover his money. However, Noor did not admit the said liability and decided to walk away from the partnership. After Noor withdrew from the partnership, Malik invited Jefri as a new partner to replace Noor. In helping to settle the debt, Jefri intended to get a bank loan for the firm. In dealing with the bank, he brought along his brother, Mr Zuki, a well-known businessman and introduced his brother as one of the partners in the firm. Believing the representation made by Jefri, the bank agreed to approve the loan amounting to RM50,000. However, the firm failed to pay the loan. Discuss the liabilities of all parties involved by referring to the Partnership Act 1961 and the relevant case-laws.
Formation of partnership entails certain obligations and liabilities for the partners. A partnership is the relation which subsists between persons carrying on a business in common with a view of profit. Joint tenancy, tenancy in common, joint property, or part ownership does not, of itself, form a partnership. The sharing of gross returns from a business does not, of itself, establish a partnership. Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business. Remuneration to a servant or an agent of the business from the profit of their employer's business does not make the servant or the agent a partner. Payment of an annuity to a widow or child of a deceased partner does not make the widow or the child a partner in the business. Payment to a seller of the goodwill of a business in the form of a share of the profits of the business does not make the seller a partner. A partnership is not a legal persona but a label used by a number of individuals trading under that particular name.
A partnership must be formed for a lawful purpose. A partner is competent to contract if he is an adult, of sound mind and has not lost capacity to enter into contracts under any laws. Partnership agreement may be in the form of oral or written agreement. A partner has an authority to bind the firm if he carries out the partnership business within his scope of authority. Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. A person who is not a partner of a firm may become liable for the firms debt if he represents himself or allow himself to be represented as a partner in the firm. Any partner who commits criminal offences shall be personally liable. A person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner.
Articles of partnership Business in common Contractual liability Criminal liability Incoming and outgoing partner
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.
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179
Cases:
Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19. Badeley v. Consolidated Bank (1888) 38 ChD 238. Chan King Yue v. Lee & Wong [1962] 28 MLJ 379. Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246. Commissioners of Inland Revenue v. Lebuss Trustees [1964] 1 All ER 475. Cox v. Coulson (1916) 114 LT 599. Davis v. Davis (1894) 70 LT 265. Duke v. Brewer (1848) 2 Car. & Ker. 828. Ex parte Heaton (1819) Buck 386. Hamlyn v. Houston & Co [1903] 2 KB 82. Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223. Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103. Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292. Rawlinson v. Clarke (1860) 15 M&M 292. Re Buchanan & Co. (1876) 4 QSCR 202. Re Young Ex p Jones (1896) 75 LT 278. William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ 105.
Topic
11
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 4. 5. 3. Explain the rights, duties and liabilities of partners; List the obligations of partners to one another; Discuss the rules on partnership property; Describe the grounds for dissolution of partnership; and Explain the consequences of dissolution of partnership.
INTRODUCTION
The previous topic discusses and explains the meaning of partnership, the important characteristics of partnership, the rules on formation of partnership, the relations of partners to outsiders and the liabilities of partners to third parties. As a continuation, this topic focuses on: the relation of partners to one another; the mutual rights and duties of the partners; the liabilities of incoming and outgoing partners; the assignment of a partner's share in the partnership property; and the dissolution of partnership.
TOPIC 11
181
11.1
The relationship between partners may be regulated by a partnership agreement made by the partners which outlines the rights and duties and other terms relating to business management, division of capital and profits of each partner, etc. The provisions contained in Part IV (Sections 21 to 33) of the Partnership Act 1961 will only apply where partners did not provide the terms of partnership in their partnership agreement. Section 21 of the Partnership Act 1961 provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing. Above all, the principle of utmost good faith towards each other is implicit in the partnership agreement.
11.1.1
In the absence of a specific partnership agreement between the partners, the following provisions relating to rights and duties of partners are found in Section 26 of the Partnership Act 1961, whereby: (a) Every partner is entitled to equal share of capital and profits of the business, and must contribute equally to losses; and Every partner who made any payment and incurred personal liabilities in the course of the firms business is entitled to be indemnified by the firm. In the case of Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 MLJ 87, the appellant and respondent were partners in a firm which has been sued for breach of contract and ordered to pay for damages of RM4,246.50. The respondent engaged a solicitor and managed to reduce the payment of damages in the legal suit. When the partnership was dissolved, the court ordered the legal fees incurred by the respondent to be paid out of the partnership assets. The appellant refused to pay and went for appeal. The Court rejected the appeal on the ground that the respondents action in the defence was an act to protect the firms assets. Therefore, he was entitled to be indemnified from the firm's assets.
(b)
(c)
Every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed, is entitled to 8% interest per annum from the date of the payment of the advance. No partner is entitled to interest on capital before the ascertainment of profits.
(d)
In Rishton v. Grissell (1868) LR 5 Eq 326, the Court held that a principal in a business was not entitled to the interest on capital until the employees and the agents remuneration has been ascertained.
(e) Every partner may participate in the management of the firm. In Kelly v. Tucker (1907) 5 CLR 1, K and T had entered into a partnership agreement verbally whereby they agreed to involve in the business of buying horses from Australia, to be sold in South Africa. By the said agreement, T would provide the capital while K was entrusted to manage the business. In this case, Ts participation in the management of the partnership was denied by the agreement of both parties. (f) No partner is entitled to remuneration for acting in the partnership business. Reason being is the existence of the fiduciary relationship between partners. Thus, any partner who is assigned to manage the business is duty bound to exercise such duty for the interest of the partnership. The partners are not entitled to any salary or wages because they are performing their duties as partners in the course of the partnership business. (g) No partner may introduce another (new) partner without the consent of other existing partners.
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183
In Wong Peng Yuen v. Senanayake [1962] 1 MLJ 204, the defendant and Goh were partners in a share-brokerage firm. On 26 March 1959, they signed a partnership agreement whereby Goh transferred part of his interests in the partnership to his two children who were minors. On 3 April 1959, Tan joined the partnership as a new partner and on 30 April 1959 the plaintiff paid the defendant a sum of RM20,000 in consideration of the firm taking him as a partner. The plaintiff then acted as if he was a partner in the firm. Later, the firm suffered unexpected losses and when the firm was dissolved, the plaintiff claimed for the return of RM20,000 he had paid on the ground that he was not a partner because Tan and the children of Goh had never agreed to take him as a partner in the firm. The Court held that there was evidence to show that Tan's consent had been obtained and that consent from Gohs children was not necessary. The agreement signed on 26 March 1959 was only a transfer of Gohs interests in the partnership but not his right as a partner in the firm. Therefore, the plaintiff had no right to claim his money back. (h) The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all the existing partners. In Highley v. Walker (1910) 26 TLR 685, there were three partners in a firm, carrying on business in worsted clothes. Two of the partners agreed to train one of the partner's son in the business. The plaintiff opposed to the agreement and applied to the court for an injunction to prevent the two partners from proceeding with their plan. The court dismissed the application on the ground that the dispute or disagreement between partners is usual in a partnership business. Thus, majority agreement is sufficient to resolve the dispute.
However, in the case of Tham Kok Cheong & Ors v. Low Pui Heng [1966] 2 MLJ 52, the Court held that the act of the first, second and third partners who sold the partnership business to a company without informing the fourth partner was invalid.
(i)
The partnership books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business. In Gan Khuan v. Tan Jin Luan [1939] MLJ 286, the Court held that the right to examine and make copies of the partnership books is not limited to partners. The right can be exercised through an authorised agent appointed by the partners.
It is important to note that Section 26 of the Partnership Act 1961 is only applicable in the absence of the partnership agreement between the partners. In the existence of the partnership agreement, the above provisions are not applicable.
11.1.2
Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). Further obligations of partners in a firm are provided in the following provisions: Section 30, 31 and 32 of the Partnership Act 1961. (a) Under Section 30, every partner is obliged to render true accounts and full information on all things affecting the partnership. In Law v. Law (1904) All ER 526, a partner transferred part of his shares to another partner for 21,000. The partner who bought the shares knew that the partnership assets comprised securities and charges but concealed the facts from the partner's knowledge. The Court held that the partner who had the information must disclose it; otherwise the sale of the shares may be set aside.
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185
(b)
According to Section 31, every partner who uses the partnership property, name or business connection, or involve in any transaction concerning the partnership, without the consent of other partners, must account to the firm for any secret profit or benefit derived by him. In Pathirana v. Ariya Pathirana [1967] 1 AC 233, a dispute arose between two partners who were the marketing agents for Caltex Ceylon company. The defendant gave three months notice to terminate the partnership. However, before the period of the notice ended, the defendant entered into a new agency contract with Caltex under his own name. The Court held that the profit gained by the defendant from the agency contract belonged to the firm because the defendant had used the firms goodwill to obtain the new contract before the partnership was dissolved.
(c)
Section 32 covers the obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. Thus, if a partner opens a competing business without the consent of other partners, he must account for and render all profits made by him to the firm.
In Ass v. Benham [1891] 2 Ch 244, a partner in a ship-brokerage firm assisted in the incorporation of a ship building company using information he obtained from the firm's business. He was then appointed a director in the said company and received a salary in consideration for the services he rendered. Other partners claimed for the benefit to be given to the firm. The Court held that other partners had no right to claim for the benefit since the ship building business was of a different nature from the ship-brokerage business.
11.2
A partner takes up the liability as a partner upon joining an existing firm. However, he will not be liable before he became a partner, as provided under Section 19(1) of the Partnership Act 1961 whereby "a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner". The incoming partner will only be liable to the creditors of the firm under a contract of novation whereby the creditors agree to accept the liability of the incoming partners. On the other hand, a partner who retires from the firm continues to be liable for the partnership debt incurred before he retires, as provided under Section 19(2) of the Partnership Act 1961, whereby: "A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement." (Also refer to Topic 10, sub-topic 10.3.2). After a partner retires, he is still liable to any person who deals with the firm after a change in its constitution unless he has given express notice to the person that he is no longer a partner. According to Section 38(1) of the Partnership Act 1961, "where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change". Further in Section 38(2), "an advertisement as to a firm in the Federal Gazette, Sabah Gazette or Sarawak Gazette shall be notice to persons who had no dealings with the firm before the date of dissolution or changed so advertised".
TOPIC 11
187
In the case of Re Siew Inn Steamship Co. [1934] MLJ 180, a retired partner had inserted a notice of his retirement in several issues of a newspaper to which certain old customers were proved to be regular subscribers. After his retirement, these old customers lent money to the firm on the security of promissory notes executed by the remaining partners. One of the lenders later sued the retired partner on these notes, denying having actually seen notice of his retirement in the papers. The Court held that the retired partner was liable on the notes, actual notice being necessary so far as old customers were concerned.
In relation to dismissal under Section 27, the majority partners cannot expel any partner unless the power to do so has been conferred by express agreement between the partners.
11.3
ASSIGNMENT OF SHARE
Under Section 33(1) of the Partnership Act, 1961, a partner may assign his share if there is no agreement among the partners prohibiting the assignment. However, the assignee is not entitled to interfere in the management of the partnership business or to require any accounts of the partnership transactions or to inspect the partnership books. The assignee is only entitled to receive the share of profits to which the assigning partner would be entitled. In Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315, Ong contended that he was a partner in the defendant's firm after taking over all his mother's shares in the partnership. Thus, he had the right to interfere in the administration of the partnerships business. The defendant denied it on the ground that Ong was only an assignee of his mothers shares and he had no locus standi to contend as such. The Court decided that Section 33(1) of the Partnership Act 1961 was applicable in this case. Ong was only an assignee to the share of his mother in the firm. Therefore, he had no right to interfere in the administration of the partnership including the right to inspect the partnership books.
SELF-CHECK 11.1
1. 2. 3. 4. 5. 6. What is the important underlying principle inherent in all partnership agreements? What is the distribution of share of each partner in the capital, profits and losses in the business? Is a partner entitled to be indemnified by the firm for his personal liabilities? What is the right of a partner who gives advance to the firm for its business? Can a partner participate in the management of the business and receive wages or salary? What is the consequence of a partner who uses the partnership property, name or business connection to make secret profit for himself? What is the liability of a partner who competes with the firm in business of the same nature without the consent of other partners? Can a partner assign his share to other persons?
7.
8.
TOPIC 11
189
ACTIVITY 11.1
Discuss the following problem by applying the principle of law on partnership: Car Universal Partners (CUP) was registered in 2004 to carry out the business of the trading of national cars. The partners of the firm are Mark, Cathy and Sarah. The firm managed to acquire a handsome profit due to the national campaign which encouraged people to buy national cars. In the year 2006, the firm agreed to sell their branch at Beruntung since the business was not doing well. Sarah offered to purchase the business in Beruntung as she has knowledge that the state government intended to develop the place as a mass housing project and there was the opportunity to have a good market for cartrading. Sarah purchased the branch and withdrew from being the partner of CUP. The fact that Sarah has been very successful in Beruntung and with the development in Beruntung itself, has come to the knowledge of all other partners in CUP. The partners claimed that Sarah has not disclosed the information to the firm with the intention to get the sole profit for herself. Advise Mark and Cathy.
11.4
PARTNERSHIP PROPERTY
It is important to determine whether the property used in the course of the firm's business is the property of partnership or the individual partners property. Section 22 and 23 of the Partnership Act, 1961 provide the rules on this issue. Section 22(1) states that, "all property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act as partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement....". According to Section 23, unless the contrary intention appears, property bought using firms money is deemed to have been bought on account of the firm.
From the statutory provisions and the decided case-laws, the following conclusions may be made: (a) Whether the property brought into the firm is a partnership property or property of an individual partner depends on the partnership agreement between the partners. In Miles v. Clark [1953] 1WLR 537, a photographer who carried out his own business brought in a new partner who had many business contacts. There was no clear agreement between the partners. Later, a dispute arose between them and the partnership was dissolved. The Court decided that since there was no clear agreement pertaining to the use of the assets in the partnership, the assets were not partnership properties but owned individually by the partners who brought them into the firm. (b) If there is no agreement provided for the partnership property, the partners must have the intention to regard the property as a partnership property. The property is intended to be a partnership property when it is purchased using the partnership money, even though it was purchased under a partners name. The property remains as a partnership property even though it is not used for the partnership business.
In the case of Murtagh v. Castello (1881) T LR Ir 428, it was held that a property bought using partnership asset, although not used in the business, was regarded as a partnership property.
If the property is obtained using an individual partner's money, the property will remain the individual partner's property.
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191
In Ponnukon v. Jebaratnam [1980] 1 MLJ 283, the appellant had formed a partnership with the respondent to develop a land into a housing area. However, efforts to get the bank to purchase the land failed and the respondent decided to purchase the land using his money. The appellant applied for a court declaration that the respondent held the land as a trustee to the partnership. The court, however, dismissed the application on the following grounds: there was no agreement between the parties that the land was purchased or owned as a partnership property; the intention of the firm was to develop the land and not necessarily the land must be owned by the firm to carry out its business; and the respondent personally financed the purchase of the land and did not use any partnership money.
Therefore, the said land was owned by the respondent as his personal property and was not regarded as a partnership property. (c) If certain asset is acquired for the firm, such asset is regarded as partnership property. In the absence of specific provisions or proof to show that the property is intended for the partnership, then the property is regarded as the property of an individual partner. The facts of every case will be considered in ascertaining whether the property is a partnership property or property of an individual partner.
(d)
(e)
Consequently, in the execution of judgement, a creditor who has obtained judgement against a firm may seize partnership property. But if a creditor obtains judgement against an individual partner only, he cannot seize all the partnership property. However, the creditor is entitled to obtain an order of court charging that partner's interest in the partnership property (Section 25(1)(2)).
11.5
DISSOLUTION OF PARTNERSHIP
A firm ceases to exist when it is dissolved. This means all the firm's business cease to operate upon dissolution of a partnership, except the obligations of the partners to continue to do the necessaries for purpose of dissolution and completing the incomplete activities. There are several ways in which a partnership may be terminated as shown in the Table 11.1 below:
Table 11.1: Dissolution of Partnership
By expiration of term or notice Section 34 Subject to any agreement between the partners, a partnership is dissolved by the expiration of the term fixed, or by the termination of an adventure or undertaking, or by any partner giving notice to the other of his intention to dissolve the partnership. Section 35 Subject to any agreement between the partners, every partnership is dissolved by the death or bankruptcy of any partner. A partnership may also be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt. By supervening illegality Section 36 A partnership is dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. Section 37(a) When a partner is lunatic, or of permanently unsound mind. Section 37(b) When a partner becomes permanently incapable of performing his part in the partnership contract. Section 37(c) When a partner has been guilty of any conduct which affect prejudicially the carrying on of the business. Section 37(d) When a partner wilfully or persistently commits a breach of the partnership agreement, or conducts himself in a manner that is not reasonably practicable for the other partner/s to carry on the business in partnership with him. Section 37(e) When the partnership business can only be carried on at a loss. Section 37(f) Whenever any circumstance arises that renders it just and equitable (in the opinion of the court) for the partnership to be dissolved.
By court order
TOPIC 11
193
To be applied in:
1. 2.
3.
4.
SELF-CHECK 11.2
1. 2. 3. 4. 5. 6. What is meant by a partnership property? If a certain asset is acquired for the firm, is the property regarded as a partnership property? If a property is obtained using an individual partners money, is the property regarded as a partnership property? What are the ways of termination of a partnership? What is the effect of dissolution of partnership? What are the rules for the settlement of a partnership account after dissolution, in absence of a specific agreement between partners?
ACTIVITY 11.2
Discuss the following problems by applying the principle of law on partnership: (a) Gemilang & Co. is a trading firm comprising four partners; Joyce, Wan, Mulan and Sam. The partnership was established under Wan's name. In the year 2000, Wan died and his widow took his position as a partner. In 2005, the partners bought a shop-house using partnership money. Mulan signed the transaction with the consent of the other partners. When Mulan died, the three surviving partners applied for a court declaration that the shophouse belonged to them, having still carried on the business under the name of Wan. Decide whether the shop-house is a partnership property. Why? M and D were partners in a law firm. The partnership agreement provided that on the death of a partner during the partnership period, the business and goodwill of the partnership should become an exclusive right of the surviving partner. On 23 March 1927, M served a notice of dissolution to D on the stated date. The notice only arrived and was received by D on 10am. of 24 March 1927. Meanwhile M died at 3.15am on 24 March 1927. Decide whether the partnership dissolved due to the notice or the death of M.
(b)
Every partner is entitled to equal share of capital and profits of the business, and must contribute equally to losses. Every partner who made any payment and incurred personal liabilities in the course of the firms business is entitled to be indemnified by the firm. Every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed, is entitled to 8% interest per annum from the date of the payment of the advance.
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No partner is entitled to interest on capital before the ascertainment of profits. Every partner may participate in the management of the firm. No partner is entitled to remuneration for acting in the partnership business. No partner may introduce another (new) partner without the consent of other existing partners. The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all existing partners. The partnership books are to be kept at the place of partnership business or at the principal place if there is more than one place of business. Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). A partner may assign his share if there is no agreement among the partners prohibiting the assignment. Whether a property brought into a firm is a partnership property depends on the partnership agreement between the partners. All the partnership businesses cease to operate upon dissolution of a partnership. A partnership may be dissolved by expiration of a partnership term or notice; death, bankruptcy and charge; supervening illegality or court order.
Uberrimae fidei
Utmost good faith
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases: Ass v. Benham [1891] 2 Ch 244. Gan Khuan v. Tan Jin Luan [1939] MLJ 286. Highley v. Walker (1910) 26 TLR 685. Kelly v. Tucker (1907) 5 CLR 1. Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 MLJ 87. Law v. Law (1904) All ER 526. Miles v. Clark [1953] 1WLR 537. Murtagh v. Castello (1881) T LR Ir 428. Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315. Pathirana v. Ariya Pathirana [1967] 1 AC 233. Ponnukon v. Jebaratnam [1980] 1 MLJ 283. Re Siew Inn Steamship Co. [1934] MLJ 180. Rishton v. Grissell (1868) LR 5 Eq 326. Tham Kok Cheong & Ors v. Low Pui Heng [1966] 2 MLJ 52. Wong Peng Yuen v. Senanayake [1962] 1 MLJ 204.
Topic
12
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. Define the meaning of goods; Describe the classification of goods; Differentiate a contract of sale and an agreement to sell; Explain the implied terms in a contract of sale of goods; and Identify the importance of transfer of property in the goods.
INTRODUCTION
The Sale of Goods Act 1957 (Revised 1989) is the statute applicable to sale of goods in Peninsular Malaysia. For Sabah and Sarawak, the law of sale of goods is governed by Section 5(2) of the Civil Law Act 1956. It provides that: The law to be administered shall be the same as would be administered in England in the like case at the corresponding period. In effect, Sabah and Sarawak continue to apply principles of English law relating to the sale of goods. The Sale of Goods Act 1957 was enacted based on the English Sale of Goods Act 1893 (which was replaced by the Sale of Goods Act 1979). The Sale of Goods Act 1957 applies to contracts for the sale of all types of goods including second-hand goods, and to commercial and private sales, wholesale and retail. The general law of contract will continue to apply to contracts for the sale of goods as Section 3 of the Sale of Goods Act 1957 expressly provides for the continual application to contracts for the sale of goods of the
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provisions of the Contracts Act 1950 in so far as they are not inconsistent with the express provision of this Act.
12.1
DEFINITION OF GOODS
Goods under Section 2 of the Sale of Goods Act, 1957 means every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land which agreed to be severed before sale or under the contract of sale. In Section 6 of the Sale of Goods Act 1957, goods which form the subject of a contract of sale may be either existing goods or future goods. Existing goods are goods already owned or possessed by the seller and may comprise specific or unascertained goods. Goods are specific if they are identified and agreed upon at the time a contract of sale is made. Unascertained goods are goods not identified and agreed upon at the time a contract of sale is made. Ascertained goods are those unascertained goods which have been identified and appropriated to the contract after the contract has been made. Future goods consist of goods to be manufactured or produced or acquired by the seller after the making of the contract of sale.
12.2
CONTRACT OF SALE
A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. Section 4(1) of the Sale of Goods Act 1957 defines a contract of sale of goods as: A contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. A contract of sale includes a sale and an agreement to sell. What is the difference between a sale and an agreement to sell? According to Section 4(3) of the Sale of Goods Act 1957: Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the
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property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. Under Section 4(4): An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. The above provisions distinguished a sale from an agreement to sell in terms of ownership or the property in the goods. A contract is a sale when the ownership or the property in the goods passes to the buyer and it is an agreement to sell where the transfer of the property in the goods is to take place at a future time or subject to some condition to be fulfilled. An ownership must also be distinguished from possession. A person who possesses certain goods may not be the owner of the goods. Alternately, an owner of certain goods may not have the goods in his possession. In an agreement to sell, the goods still belong to the seller. Consequently, if the buyer breaches an agreement to sell, the seller may sue for unliquidated damages. If the seller breaches an agreement to sell, the buyer has only a personal remedy for damages against the seller. Whereas in a sale, if the buyer fails to pay, the seller can sue for the contract price because ownership has passed to the buyer.
12.3
TERM OF CONTRACT
The conditions and warranties in contract of sale of goods are provided in Section 12 of the Sale of Goods Act 1957. A condition under Section 12(2) is: A stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
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A warranty under Section 12(3) is: A stipulation collateral to the main purpose of the contract, the breach of which give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. According to Section 12(4): Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. The stipulation may be a condition, though called a warranty in the contract. There are circumstances which permit the buyer to treat a breach of condition as a breach of warranty, as provided in Section 13(1) of the Sale of Goods Act 1957. It provides that: Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. However, under Section 13(2), where a contract is not severable and the buyer has accepted the goods or part thereof, the breach of condition must be treated as a breach of warranty. Similarly, in a case where the contract is for specific goods and the property has passed to the buyer. Therefore, the buyer cannot reject the goods and repudiate the contract.
12.4
IMPLIED TERMS
Implied terms are those conditions and warranties implied by the statute into particular contracts. The terms, though not expressly found in the contract, are generally accepted incidents of the contract and therefore imported by the courts. The kind of terms implied by statute for the contract of sale of goods are the conditions and warranties provided under the Sale of Goods Act 1957. These conditions and warranties implied in a contract of sale of goods bind the contracting parties, the buyer and the seller. However, according to Section 62 of the Sale of Goods Act 1957: This right, duty or liability that would arise under a contract of sale by implication of law may be negatived or varied by express agreement or by the course of dealings between the parties, or by usage, if the usage is to bind both parties to the contract. This means the parties to a contract of sale may exclude the implied terms by the express agreement or by previous dealings or by usage.
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12.4.1
Title
Section 14 of the Sale of Goods Act 1957 provides the implied undertaking as to title in a contract of sale. According to the provision, unless the circumstances of the contract indicate a different intention, there is: (a) An implied condition on the part of the seller that in the case of a sale, he has a right to sell the goods, and in the case of an agreement to sell, he will have a right to sell the goods at the time when the property or ownership is to pass. An implied warranty that the buyer shall have and enjoy quiet possession of the goods. An implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contact is made.
(b)
(c)
A breach of condition entitles the buyer to treat the contract as repudiated and recover the price in full even though he has used the goods. This is because the buyer pays the price of the goods in order to enjoy the ownership as well as the use of the goods. In the case of Rowland v Divall [1923] 2 KB 500, the plaintiff bought a car from the defendant. After using the car for four months, the plaintiff discovered that it was a stolen car and he had to return it to the true owner. The Court of Appeal held that the defendant had breached the condition as to title and the plaintiff could recover the full price because of total failure of consideration.
12.4.2
The rule relating to sale of goods by description is provided in Section 15 of the Sale of Goods Act 1957. It provides that: Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description.
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In addition, If the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. Sale of goods by description covers all cases where the buyer has not seen the goods but is relying on the description alone, for example, goods ordered from a catalogue or if ordered over the counter, by a trade name. Thus, it includes all contracts for the sale of unascertained goods and sale of specific goods which the buyer has not seen prior to the contract.
In the case of Nagurdas Purshotumdas & Co. v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR 67, previous contracts between the parties for the sale of flour had been sold in bags bearing a well-known trade mark. Further flour was ordered, described as the same as our previous contract. Flour identical in quality was delivered but it did not bear the same well-known trade mark. It was held that it did not comply with the description.
In another case of Beale v. Taylor [1967] 1 WLR 1193, the seller advertised a car as Herald Convertible, white, 1961, twin carb. The buyer saw the car before he agreed to buy. Later, he discovered that the rear of the car was part of a 1961 Herald Convertible while the front half was part of an earlier model. It was held that he was entitled to claim damages for breach of the condition.
In the case of Moore & Co v. Landauer & Co [1921] 2 KB 519, the buyers were entitled to reject the goods because half of the cases contained only 24 tins, even though the total quantity was met. The contract was for 3100 cases of Australian canned fruit packed 30 tins to case.
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(a)
Goods must be reasonably fit for the purpose for which the buyer wants them (Section 16(1)(a)); or Goods must be of merchantable quality (Section 16(1)(b)). Goods must be reasonably fit for the buyers purpose. Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the sellers skill or judgement, and the goods are of a description which is in the course of the sellers business to supply (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be reasonably fit for such purpose. But in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose. The buyer may invoke Section 16(1)(a) if he makes known to the seller the particular purpose for which he acquires the goods and the buyer is relying on the sellers skill and judgement. The goods must also be a description which is in the course of the sellers business to supply and if the goods are specific, they must be bought under their trade name or patent. The above requirements are explained in the following cases: In Griffiths v. Peter Conway Ltd. [1939] 1 All ER 685, a woman with an abnormally sensitive skin bought a Harris Tweed coat without disclosing to the seller about her abnormality. She could not claim under this section because the coat would not harm a normal person.
Thus, the buyer must clearly indicate the special purpose for which the goods are to be used. Otherwise, there is no breach of the implied condition if the goods are suitable for their general and normal purpose. If the description of the goods is only for one purpose, then it requires no further indication. For example, a hot water bottle is meant to contain hot boiling water; if it breaks upon filling of hot water, then it is not fit for its purpose.
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In the case of Cammell Laird & Co v. Manganese Bronz and Brass Co Ltd [1934] AC 402, there was a contract by A to build a propeller for B in accordance with Bs specification and to fit a particular ship and its engine. The propeller supplied complied with the specification and design but did not suit the ships engine. A was held liable for breach of an implied condition since the buyer had informed the seller of the purpose for which he needed the goods and relied on the sellers skill and judgement to provide them.
In Baldry v. Marshall [1925] 1 KB 260, the buyer asked the dealer for a car suitable for touring and the dealer recommended a Bugatti car. A contract for the sale of the car was made. Later, the buyer found that the car was unsuitable for touring. The Court of Appeal held that the dealer was liable because the buyer had relied on the dealers judgement in selecting a suitable car for the specific purpose stated by the buyer (even though the car was bought under its trade name). Hence, if the buyer purchases goods under its trade name but at the same time relies on the sellers recommendation, it means the buyer is still relying on the sellers skill. But if the buyer purchases specific goods under a trade name and gives the impression that he is not relying on the sellers skill, then he cannot claim under this section. (b) Goods must be of merchantable quality Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality. However, If the buyer has examined the goods, there shall be no implied condition as regards defects, which such examination ought to have revealed. Merchantable quality means the goods are fit for the particular use in which they were sold. Therefore, if they are defective for their purpose, they are considered unmerchantable.
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For implied condition as to merchantable quality, the buyer need not make known to the seller the particular purpose for which he requires the goods. The section only requires the goods to be bought by description and bought from a seller dealing with the goods of that description. Where goods are sold under their trade name, the implied condition as to merchantable quality is applicable although the implied condition as to fitness is excluded. In Wilson v. Ricket, Cockerall & Co. Ltd [1954] 1 All ER 868, fuel by its trade name Coalite was ordered from a fuel merchant. The consignment was contaminated in that a detonator was embedded in the coal, resulting in an explosion in the fire-place when used. The Court held that the consignment as a whole was unmerchantable, having defects making it unfit for burning.
In the proviso to Section 16(1)(b), the implied condition does not apply where the buyer has examined the goods as regards defects which such examination ought to have revealed. This means if the buyer has conducted some examination before or at the time of the contract, the buyer cannot later complain about the defects which would be revealed by a proper examination. In the case of Thornett & Fehr v. Beers & Sons [1913] 1 KB 486, the buyer had conducted a superficial look at the outside of some barrel of glue. It was held that there was an examination and thus the implied condition as to merchantable quality did not apply.
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(c)
That the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.
The three conditions above are independent of one another. If the bulk corresponds with the sample but there is a latent defect rendering the goods unmerchantable, the buyer is still entitled to reject them. In the case of Drummond v. Van Ingen (1887) 12 App. Cas. 284, the cloth supplied by the seller was equal to sample previously examined but because of a latent defect not discoverable by a reasonable examination, the Court found the seller in breach of the condition.
SELF-CHECK 12.1
1. What is the meaning of existing goods, future goods, specific goods and unascertained goods? Provide examples in your explanation. What is the difference between a sale and an agreement to sell? What are the kind of implied conditions and warranties incorporated in a contract of sale of goods? What is the effect of breach of implied condition and warranty in a contract of sale of goods? Can the party to the contract of sale of goods exclude the implied terms?
2. 3. 4. 5.
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ACTIVITY 12.1
Discuss the following questions: (a) Michael and his wife Betty, were busy shopping for new furniture for their new house. Three days before moving, they visited a furniture shop Antique Design. Betty was very interested in a sofa set from Italy worth RM15,000. The set was made from soft leather, brown in colour and consist of one coffee table, and they agreed to buy the set. Both the husband and wife also agreed to buy a double bed for their daughters. Michael informed the seller that he wanted a double bed made from good quality wood. The seller assured Michael that he would meet Michaels request, as he was an expert and experienced in selling furniture. After payment, the seller promised to deliver the furniture on the day that they were supposed to move into their new house. Michael and Betty also went to Cool Air-Cond, a shop selling air conditioners. The seller managed to attract Michael to buy a portable air-conditioner at the price of RM2,000, with a guarantee that the air conditioner could be used for the next five years without any problem. After checking the goods and satisfied with their condition, Michael made a payment. The seller promised to deliver the air conditioner on the day they move to the new house. On the day of moving, all of the goods ordered by Michael and Betty were delivered. Nevertheless, they were disappointed to see that the sofa set that was delivered was not brown and did not include the coffee table and that the double bed ordered was not of good quality wood. Meanwhile, the portable air conditioner that Michael bought produced a strong noise when it was switched on. Michael and Betty were very disappointed with what had happened and seek your legal advice on what action can be taken on the sellers of the goods. B placed an advertisement in a local newspaper offering for sale, a second-hand car at RM40,000 o.n.o. The car was described as Toyota, late 2000 model. Q responded by offering to buy the car at RM37,000. The offer was accepted by B. After driving the car for almost three months, Q discovered that only the body of the car was of late 2000 model while the engine was from a much earlier model. Q now wishes to rescind the contract and seeks your advice on the matter. Advise Q on her rights under the Sale of Goods Act 1957.
(b)
(c)
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(d)
Sally, a contestant in one of the top reality shows in TVReality was preparing for the final contest to become the winner for the new season 2008. Sally engaged a professional tailor to sew the dress suitable for the contest. Sally consulted Robin, a well-known fashion designer in town, on the choice of fabric for the dress because she had sensitive skin and was allergic to certain types of fabric. Sally paid RM3,000 for the cost of the dress. After the contest, Sally discovered red spots on her skin. She went to see the doctor and was told that her skin was sensitive to the fabric used for the dress that she had worn for the contest. Sally went to see Robin and returned the dress because the fabric used for the dress was not fit for the purpose she made known to Robin and caused her skin complaint. Sally also claimed for the refund of the cost of the dress from Robin and the medical expenses incurred by her. Decide whether Sally could claim for the refund of her money from Robin as well as the cost for her medical expenses.
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This means, if delivery has been delayed through the fault of either party, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault.
12.5.1
Since the risk passes when the property in the goods passes, is it essential to know when the title passes. Under the Sale of Goods Act 1957, Section 18 to 23 provide certain rules that determine the time when property in the goods passes to the buyer. (a) Sale of unascertained goods Under Section 18 of the Sale of Goods Act 1957, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. Sale of specific or ascertained goods Under Section 19 of the Sale of Goods Act 1957, where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Thus, the general rule is that title passes when the parties to a contract of sale intend it to pass. Unless a different intention appears, the following rules are the rules for ascertaining the intention of the parties as to the time of passing of property in the goods. (c) Specific goods in a deliverable state Under Section 20 of the Sale of Goods Act 1957, where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made. It is immaterial whether the time of payment of the price or the time of delivery of the goods is postponed. For example, A agrees to buy a specific book entitled Business Law on credit. The title in the book passes to A on the sale even though the payment is postponed. (d) Specific goods to be put into a deliverable state Under Section 21 of the Sale of Goods Act 1957, where there is a contract for the sale of specific goods and the seller is bound to do something to the
(b)
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goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. For example, A agrees to sell a specific computer to B and promises to install the specific software in the disk. The ownership in the computer does not pass to B until A installs the specific software as promised and B must know about the fact that A has done the installation. (e) Specific goods in a deliverable state when the seller has to do anything thereto in order to ascertain price Under Section 22 of the Sale of Goods Act 1957, where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test, or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof. For example, A agrees to sell to B all the flour contained in a specific sack for RM3 per kilogram. The title does not pass to B until A weighs the flour and B knows that the flour has been weighed. (f) Sale of unascertained goods and appropriation Under Section 23 of the Sale of Goods Act 1957, where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. The assent may be expressed or implied and may be given either before or after the appropriation is made. A contract for the sale of unascertained goods is an agreement to sell and not a sale. Future goods mean goods to be manufactured or produced or acquired by the seller after the making of the contract of sale. Unconditionally appropriated to the contract in the provision above means a clear act showing the intention to identify certain goods as attached to the contract and without any condition. The duty to appropriate may be placed on the buyer or the seller. Appropriation may involve the act of selecting, separating or weighing from a bulk by the buyer or the seller, and it must be approved by the other party. The appropriation must be unconditional and it should pass property in the goods without further requirements (such as payment or price). Further, Section 23(2) of the Sale of Goods Act 1957 provides that where (in pursuance of the contract) the seller delivers the goods to the buyer or to a
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carrier or other bailee for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. The effect is that property in the goods passes to the buyer at the time when the goods are handed over to a carrier (for example, a transportation company such as shipping, trucking or railway). The carrier is the buyers agent for the purpose of delivery. But if the carrier is the agent of the seller, then property in the goods will not pass until the goods are actually delivered to the buyer. (g) Goods sent on approval or on sale or return Under Section 24 of the Sale of Goods Act 1957, when goods are delivered to the buyer on approval or on sale or return, or other similar terms, the property in the goods passes to the buyer: (i) when the buyer signifies his approval or acceptance to the seller or does any other act adopting the transaction; or if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of goods, on the expiration of such time, and if no time has been fixed, on the expiration of a reasonable time.
(ii)
Under the second situation above, if a time is fixed for the return of the goods, then property in the goods passes upon the expiration of the time. But if no time is fixed, property in the goods passes upon the expiration of a reasonable time.
SELF-CHECK 12.2
1. 2. 3. 4. 5. 6. What is the meaning of property in the goods? What is the significance of the transfer of title or ownership in the goods? When does the risk pass to the buyer in a contract of sale of goods? How would you determine the time when the property in the goods passes to the buyer? When is the property in the goods transferred to the buyer in a contract for sale of unascertained goods? When is the title or ownership transferred to the buyer in a contract for sale of a specific or ascertained goods?
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ACTIVITY 12.2
Discuss the following question: 500 tonne metric of flour belonging to a vendor were stored in a godown belonging to Mr. Isaac. The vendor sold 200 tonne metric of the flour to Mr Hans and gave him a delivery order addressed to Mr Isaac. When Mr Hans carrier arrived at the godown, Mr Isaac had already set aside the 200 tonne metric of the flour. The carrier handed the delivery order to Mr Isaac who gave instructions for loading to commence. Before the loading could commence, Mr Isaacs godown caught by fire and it destroyed the whole stock of the flour. Discuss when did the property in the goods pass and who shall bear the loss.
A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. Where the property in the goods is transferred from the seller to the buyer, the contract is called a sale. Where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. What distinguishes a sale from an agreement to sell is in terms of ownership or the property in the goods. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. A warranty is a stipulation collateral to the main purpose of the contract, the breach of which give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. The conditions and warranties implied in a contract of sale of goods bind the contracting parties, the buyer and the seller. The parties to a contract of sale may exclude the implied terms by the express agreement or by previous dealings or by usage.
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In a contract of sale of goods, there are implied conditions as regards to title, description, sample, fitness for particular purpose and merchantable quality. Unless the circumstances of the contract indicate a different intention, there is an implied condition on the part of the seller that in the case of a sale, he has a right to sell the goods, and in the case of an agreement to sell, he will have a right to sell the goods at the time when the property or ownership is to pass. There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods and that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contact is made. The risk passes when the property in the goods passes, thus the goods will remain at the sellers risk until the property in the goods is transferred to the buyer.
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M. A. & Vohrah B. (2000). The Commercial Law of Malaysia (2nd Ed.). Selangor: Pearson and Longman. Cases: Baldry v. Marshall [1925] 1 KB 260.
Beale v. Taylor [1967] 1 WLR 1193. Cammell Laird & Co v. Manganese Bronz and Brass Co Ltd [1934] AC 402. Drummond v. Van Ingen (1887) 12 App. Cas. 284.
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Griffiths v. Peter Conway Ltd. [1939] 1 All ER 685. Moore & Co v. Landauer & Co [1921] 2 KB 519. Nagurdas Purshotumdas & Co. v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR 67. Rowland v Divall [1923] 2 KB 500. Thornett & Fehr v. Beers & Sons [1913] 1 KB 486. Wilson v. Ricket, Cockerall & Co. Ltd [1954] 1 All ER 868.
Topic
13
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. 2. 3. 4. 5.
Describe the rule of nemo dat quod non habet; Explain the effect of sale by a person other than the owner; Identify the exceptions to the rule of nemo dat quod non habet; Explain the rules relating to the performance of contract of sale; and Discuss the remedies available to the seller and buyer for breach of contract of sale of goods.
INTRODUCTION
This topic is a continuation of the previous topic on the law of sale of goods. It focuses on the transfer of title, the rule of nemo dat quod non habet and the exceptions, the performance of the contract of sale of goods and the remedies available to the seller and buyer for breach of contract. The rule relating to the transfer of title protects the right of ownership whereby the right of the original owner is preserved. However, there are certain circumstances provided by the law in which a sale by a person other than the owner may confer a good title in the goods to a bona fide purchaser. Subsequently, the rules relating to the performance of contract of sale of goods are important in determining the rights of the seller and buyer in cases of breach by either party to the contract.
13.1
TRANSFER OF TITLE BY SELLER WHO IS NOT THE OWNER AND ITS EXCEPTIONS
For the purpose of the transfer of title in the contract of sale of goods, Section 27 provides the rule that no one can transfer a better title than the seller himself. The maxim is nemo dat quod non habet. This means the buyer can only acquire a good title in the goods if he purchases from the owner of the goods. Consequently, if the buyer purchases the goods from a person who is not the owner of the goods or a person who does not sell the goods under the owners authority, the buyer will not acquire a title in the goods he purchases. The wordings of Section 27 are as follows: Subject to this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had.... This rule protects the right of ownership. The right of the original owner is preserved and the suit for the tort of conversion can be taken against an unauthorised seller and an innocent purchaser. In the case of Lim Chui Lai v. Zeno Ltd [1964] 30 MLJ 314, Zeno Ltd entered into an agreement with a contractor named Ahmad who had secured contracts from the Petaling Jaya Authority for construction of culverts. Under the contract, Zeno Ltd would provide Ahmad with all the materials for the culverts construction. They brought the materials for the projects and delivered them to the construction site. Later, Ahmads contracts with Petaling Jaya Authority were cancelled whereupon Zeno Ltd informed the authority that the materials on the site belonged to them. When they attempted to sell the materials, they discovered that the materials had been sold by Ahmad to Lim Chui Lai, the appellant in this action. In an action for conversion, the Federal Court held that Ahmad was merely the bailee and not the owner of the goods at the time he sold them to the appellant. Since Ahmad had no title to the goods or authority to sell them, he therefore could not transfer any title to the appellant.
However, there are a few exceptions to the rule of nemo dat quod non habet (refer to Figure 13.1. The exceptions are provided in the following provisions under the Sale of Goods Act 1957.
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Figure 13.1: Exceptions to the rule of nemo dat quad non habet
13.1.1
Estoppel
The provision for estoppel can be found under Section 27 of the Sale of Goods Act 1957 which states that .....unless the owner of the goods is by his conduct precluded from denying the sellers authority to sell. This means if the owner of the goods through his conduct makes the buyer believes that the person who sells the goods has the authority to sell, then the buyer will acquire a good title of the goods. The following case illustrates the estoppel principle.
N.Z. Securities & Finance Ltd v. Wrightcars Ltd [1925] 1 NZLR 77.
A agreed to sell a car to B. B tendered a cheque as payment and was given possession of the car. The parties agreed that the ownership of the car was not to pass until A received the price. Later, B sold the car to C. Before the sale to C was finalised, C contacted As office and C was informed by As employee that B had paid for the car. However, the cheque given to A by B was dishonoured and A repossessed the car. C then sued A for conversion and was successful in claiming that A was precluded by his conduct from denying Bs authority to sell. The title had passed to C.
13.1.2
An agent under the agency contract may pass a good title when selling his principals goods provided he is acting within his actual or usual (apparent) authority. A merchantile agent is an agent having in the customary course of business authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. A broker, an auctioneer or a dealer of goods for commission are the examples of merchantile agents. The relevant provision is found in the Proviso to Section 27 of the Sale of Goods Act 1957: Provided that where a merchantile agent is, with the consent of the owner, in possession of the goods or of a document of title to the goods, any sale made by him when acting in the ordinary course of business of a merchantile agent shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the buyer acts in good faith and has not, at the time of the contract of sale, notice that the seller has no authority to sell. It is important that the merchantile agent must be in possession of the goods or the documents of title to goods at the time of disposition and the possession must be with the consent of the owner. Also, the disposition must be made when acting in the ordinary course of business of a merchantile agent and the buyer must not have notice of the agents lack of authority to sell.
13.1.3
The provision for this exception is found in Section 28 of the Sale of Goods Act 1957. According to Section 28: If one of several joint-owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to any person who buys them in good faith and has no notice at the time of the contract that the seller has no authority to sell. For example, Sheila and Tracey are joint-owners of one refrigerator which they bought a year ago. Sheila has just moved out from the house that they both rented from the landlord, Mr Justin. Sheila agreed at the time when she moved out that the refrigerator is to be kept and used by Tracey who will still occupy the house. Later, Tracey sold the refrigerator to a friend of hers (Dewi) who bought it in good faith and did not know that the refrigerator was jointly owned by Tracey and Sheila. The ownership of the refrigerator is transferred to Dewi.
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13.1.4
Sale by a person in possession of goods under a voidable contract is provided in Section 29 of the Sale of Goods Act 1957. It provides that: Where the seller of goods has obtained possession under a contract voidable under Section 19 or Section 20 of the Contracts Act 1950, but the contract has not been rescinded at the time of the sale, the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the seller's defect of title. Where the seller of goods has obtained possession under a voidable contract, but the contract has not been avoided at the time of the sale, the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the sellers defect of title. This provision applies to contracts which are voidable, when the consent of the original owner is caused by coercion, fraud, misrepresentation or undue influence. The seller must have sold the goods to the buyer before the original owner rescinded the voidable contract.
13.1.5
The exception is provided in Section 30(1) of the Sale of Goods Act 1957, which states that: Where a person, having sold goods, continues or is in possession of the goods or of the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same. Under this exception, a seller who remains in possession of the goods or of the documents of title for the goods which he had sold can pass a good title to a bona fide purchaser. Thus, the second buyer gets a good title while the original buyer loses his.
13.1.6
The exception is provided in Section 30(2) of the Sale of Goods Act 1957, whereby:
Where a person, having bought or agreed to buy goods, obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him of the goods or documents of title under any sale, pledge, or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods shall have effect as if such lien or right did not exist. This means if a buyer having bought or agreed to buy goods, obtains possession of the goods or the documents of title with the consent of the seller, he can pass a good title to a subsequent bona fide purchaser. In the case of Newtons of Wembley Ltd v. Williams [1965] 1 QB 560, the plaintiffs sold a car to A who paid by cheque. Although he was given possession of the car, it was agreed that the property would not pass until the cheque was honoured. The cheque was dishonoured and the plaintiffs rescinded the contract but A had sold the car to B who bought it without knowledge of the fact. B then resold the car to the defendant. The plaintiffs attempted to recover the car from the defendant. The Court of Appeal held that A, the original buyer was in possession with consent of the plaintiffs. Hence, he could pass a good title to B who then transferred it to the defendant.
Duties of seller and buyer (Section 31) It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale.
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Payment and delivery are concurrent conditions (Section 32) Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. Delivery (Section 33) Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf. Buyer to apply for delivery (Section 35) Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery. Rules as to delivery (Section 36) (a) Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, goods sold are to be delivered at the place at which they are at the time of the sale, and goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell, or, if not then in existence, at the place at which they are manufactured or produced. Where under the contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. Where the goods at the time of sale are in the possession of a third person, there is no delivery by seller to buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf: Provided that nothing in this section shall affect the operation of the issue or transfer of any document of title to goods. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact. Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state shall be borne by the seller.
(b)
(c)
(d)
(e)
(f)
Delivery of wrong quantity (Section 37) (a) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so delivered, he shall pay for them at the contract rate. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest, or he may reject the whole. If the buyer accepts the whole of the goods so delivered, he shall pay for them at the contract rate. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest, or may reject the whole. This section is subject to any usage of trade, special agreement or course of dealing between the parties.
(b)
(c)
(d)
Instalment deliveries (Section 38) (a) Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by instalments. Where there is a contract for the sale of goods to be delivered by stated instalments which are to be separately paid for, and the seller makes no delivery or defective delivery in respect of one or more instalments, or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case, whether the breach of contract is a repudiation of the whole contract, or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated.
(b)
Delivery to carrier or wharfingers (Section 39) (a) Where in pursuance of a contract of sale, the seller is authorised or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to wharfinger for safe custody, is prima facie deemed to be a delivery of the goods to the buyer.
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(b)
Unless otherwise authorised by the buyer, the seller shall make such contract with the carrier or wharfinger on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case. If the seller omits to do so, and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger, the buyer may decline to treat the delivery to the carrier or wharfinger as a delivery to himself, or may hold the seller responsible in damages. Unless otherwise agreed, where goods are sent by the seller to the buyer by a route involving sea transit, in circumstances in which it is usual to insure, the seller shall give such notice to the buyer as may enable him to insure them during sea transit, and if the seller fails to do so, the goods shall be deemed to be at his risk during such sea transit.
(c)
Buyer's right of examining the goods (Section 41) (a) Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract.
(b)
Acceptance (Section 42) The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.
Breach of contract of sale of goods by the buyer includes the buyers failure to take delivery, to accept goods and to pay for the goods.
Liability of buyer for neglecting or refusing delivery of goods (Section 44) When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not, within a reasonable time after such request, take delivery of the goods, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods: Provided that nothing in this section shall affect the rights of the seller where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract. Suit for price (Section 55) (a) Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods. Where under a contract of sale the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.
(b)
Damages for non-acceptance (Section 56) Where the buyer wrongfully neglects or refuses to accept and pay for the goods the seller may sue him for damages for non-acceptance.
13.3.2
The Sale of Goods Act 1957 provides remedies to the seller who can sue the buyer for the price of the goods or damages for non-acceptance of the goods. A seller of goods is deemed to be an unpaid seller within the meaning of the Act and the rights of the unpaid seller are detailed out in the following provisions of the Act, as follows: Unpaid seller defined (Section 45) (a) The seller of goods is deemed to be an "unpaid seller" within the meaning of this Act: (i) when the whole of the price has not been paid or tendered;
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(ii)
when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.
(b)
In this topic, the term "seller" includes any person who is in the position of a seller, for instance, an agent of the seller to whom the bill of lading has been endorsed or a consignor or agent who has himself paid, or is directly responsible for the price.
Unpaid seller's rights (Section 46) (a) Subject to this Act and of any law for the time being in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods, as such, has, by implication of law: (i) (ii) a lien on the goods for the price while he is in possession of them; in case of the insolvency of the buyer, a right of stopping the goods in transit after he has parted with the possession of them; and/or
(iii) a right of resale as limited by this Act. (b) Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer.
I. LIEN Seller's lien (Section 47) (a) Subject to this Act, the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely: (i) (ii) where the goods have been sold without any stipulation as to credit; where the goods have been sold on credit, but the term of credit has expired; or
(iii) where the buyer becomes insolvent. (b) The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer.
Part delivery (Section 48) Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an agreement to waive the lien. Termination of lien (Section 49) (a) The unpaid seller of goods loses his lien thereon: (i) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods; when the buyer or his agent lawfully obtains possession of the goods; or
(ii)
(iii) by waiver thereof. (b) The unpaid seller of goods, having a lien thereon, does not lose his lien by the only reason that he has obtained a decree for the price of the goods.
II. STOPPAGE IN TRANSIT Right of stoppage in transit (Section 50) Subject to this Act when the buyer of goods becomes insolvent the unpaid seller who has parted with the possession of the goods has the right of stopping them in transit, that is to say, he may resume possession of the goods as long as they are in the course of transit, and may retain them until payment or tender of the price. Duration of transit (Section 51) (a) Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination, the transit is at an end. If after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent, the transit is at an end and it is immaterial that a further destination for the goods may have been indicated by the buyer.
(b)
(c)
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(d)
If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them, the transit is not deemed to be at an end, even if the seller has refused to receive them back. When the goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the master as a carrier or as agent of the buyer. Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf, the transit is deemed to be at an end. Where part delivery of the goods has been made to the buyer or his agent in that behalf, the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods.
(e)
(f)
(g)
How stoppage in transit is effected (Section 52) (a) The unpaid seller may exercise his right of stoppage in transit either by taking actual possession of the goods, or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case, the notice, to be effectual, shall be given at such time and in such circumstances that the principal, by the exercise of reasonable diligence, may communicate it to his servant or agent in time to prevent a delivery to the buyer. When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he shall redeliver the goods to or according to the directions of the seller. The expenses of such redelivery shall be borne by the seller.
(b)
Effect of sub-sale or pledge by buyer (Section 53) (a) Subject to this Act, the unpaid seller's right of lien or stoppage in transit is not affected by any sale or other disposition of the goods which the buyer may have made unless the seller has assented thereto: Provided that where a document of title to goods has been issued or lawfully transferred to any person as buyer or owner of the goods and that person transfers the document to a person who takes the document in good faith and for consideration, then, if such last-mentioned transfer was by way of sale, the unpaid seller's right of lien or stoppage in transit is
(b)
defeated, and, if such last-mentioned transfer was by way of pledge or other disposition for value, the unpaid seller's right of lien or stoppage in transit can only be exercised subject to the rights of the transferee. (c) Where the transfer is by way of pledge, the unpaid seller may require the pledgee to have the amount secured by the pledge satisfied in the first instance, as far as possible, out of any other goods or securities of the buyer in the hands of the pledgee and available against the buyer.
III. RESALE Sale not generally rescinded by lien or stoppage in transit (Section 54) (a) Subject to this section, a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of lien or stoppage in transit. Where the goods are of a perishable nature, or where the unpaid seller who has exercised his right of lien or stoppage in transit gives notice to the buyer of his intention to resell, the unpaid seller may, if the buyer does not within a reasonable time pay or tender the price, resell the goods within a reasonable time and recover from the original buyer damages for any loss occasioned by his breach of contract; but the buyer shall not be entitled to any profit which may occur on the resale. If such notice is not given, the unpaid seller shall not be entitled to recover such damages and the buyer shall be entitled to the profit, if any, on the resale. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title thereto as against the original buyer, notwithstanding that no notice of the resale has been given to the original buyer. Where the seller expressly reserves a right of resale in case the buyer should make default and, on the buyer making default, resells the goods, the original contract of sale is thereby rescinded, but without prejudice to any claim which the seller may have for damages.
(b)
(c)
(d)
13.3.3
The Sale of Goods Act 1957 provides certain remedies to the buyer when the seller breaches the contract of sale of goods, as follows:
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Damages for non-delivery (Section 57) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery. Specific performance (Section 58) Subject to Chapter II of the Specific Relief Act 1950, in any suit for breach of contract to deliver specific or ascertained goods, the court may, if it thinks fit, on the application of the plaintiff, by its decree direct that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages. The decree may be unconditional, or upon such terms and conditions as to damages, payment of the price or otherwise, as the court may deem just, and the application of the plaintiff may be made at any time before the decree. Remedy for breach of warranty (Section 59) (a) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may: (i) (ii) (b) set up against the seller the breach of warranty in diminution or extinction of the price; or sue the seller for damages for breach of warranty.
The fact that a buyer has set up a breach of warranty in diminution of the price does not prevent him suing for the same breach of warranty if he has suffered further damage.
SELF-CHECK 13.1
1. 2. 3. 4. 5. 6. 7. 8. What is the meaning of the maxim nemo dat quod non habet? Can a seller other than the owner transfer an ownership in the goods to a purchaser? What is the effect of a transfer of property in the goods by a seller who is not the owner? Are there any exceptions to the rule of nemo dat quod non habet? Can a buyer acquire a good title to the goods from a seller under a voidable contract? What is meant by a bona fide purchaser? What are the rights of an unpaid seller under the statute? What are the remedies available to the buyer when the seller breaches the contract of sale of goods?
ACTIVITY 13.1
Discuss the following questions: (a) Che Wan has just started her food catering business and served some common Malaysian specialties. She entered into a contract with Cik Jah, a seller specialising in the supply of coconut milk and fresh vegetables. Under the contract, Cik Jah agreed to supply Che Wan (on daily basis) with 40 kg of coconut milk, 15 kg of cucumbers and 10 kg of vegetables. Che Wan had agreed to this arrangement after being shown samples of the items by an agent of Cik Jah. On the sixth day of his business, 30 kg of coconut milk, 10 kg of cucumbers and 8 kg of vegetables were delivered in bad condition and could not be used. Later the same day, the remaining 10 kg of coconut milk, 5 kg of cucumbers and 2 kg of vegetables were completely destroyed when the van used to deliver them skidded into a river. Che Wan refused to pay for all the items to Cik Jah. Advise Che Wan and Cik Jah on their legal rights under the contract of sale of goods.
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(b)
Last August, Rafique sold a car that he possessed as joint-owner with his wife (Sarah) to Samuel at the price of RM30,000. The sale was made without the knowledge of Sarah, which disappointed her very much. Sarah wished to obtain the car and went to see Samuel for such purpose. However, Samuel refused to allow Sarah to take the car for the reason that the payment for the car had been given to Rafique and he had no knowledge about Sarah not consenting to the sale. Advise Samuel on his right to retain the car.
Nemo dat quod non habet means no one can transfer a better title than he has
himself. Purchaser can only acquire a good title in the goods if he purchases from the owner of the goods. Purchaser will acquire a good title of the goods if the owner of the goods makes the buyer believe that the person who sells the goods has the authority to sell. A merchantile agent is an agent having in the customary course of business authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. If a seller of goods obtained possession under a voidable contract, the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the sellers defect of title. A seller who remains in possession of the goods or of the documents of title of the goods can pass a good title to a bona fide purchaser. A buyer who obtains possession of the goods or the documents of title with the consent of the seller can pass a good title to a subsequent bona fide purchaser. The performance of contract of sale of goods covers the rules relating to delivery of goods, place and time of delivery and quantity of goods delivered. Breach of contract of sale of goods by the buyer includes the buyers failure to take delivery, to accept goods and to pay for the goods. Remedies available to the seller include a suit against the buyer for the price of the goods or damages for non-acceptance of the goods.
Payment
Unpaid seller
Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases: Lim Chui Lai v. Zeno Ltd [1964] 30 MLJ 314. Newtons of Wembley Ltd v. Williams [1965] 1 QB 560. N.Z. Securities & Finance Ltd v. Wrightcars Ltd [1925] 1 NZLR 77.
Topic Law of
14 14
Hire-Purchase
LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. 5. 6. Define the meaning of hire-purchase; Describe the formation and nature of hire-purchase agreement; Describe the parties involved in hire-purchase; Understand the important terms in hire-purchase agreement; Identify the rights and liabilities of owner and hirer; and Explain the procedure for repossession of goods under hire-purchase agreement.
INTRODUCTION
Hire-purchase is part of consumer credits. Consumer credits in Malaysia are governed by various statutes depending on the types of goods involved. For instance, the Moneylenders Act 1957, Pawn Brokers Act 1974, Banking and Financial Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1963, Takaful Act 1963 and Cooperative Societies Act 1948. Hire-purchase is basically a purchase through credit in which the hirer purchases by way of instalment. The owner (for instance, a financial institution) will hire the goods to the hirer (purchaser) and the hirer has an option to return the goods and terminate the contract or buy the goods upon completion of the agreed period. In Malaysia, the hire-purchase transaction is governed by the Hire-Purchase Act 1967. The HirePurchase Act provides for standard form of agreement for hire-purchase, regulates the rights and liabilities of the owner and hirer and procedures for repossession of the goods.
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(b)
The above provision explains that hire-purchase is: (a) (b) Letting of goods with an option to purchase; and An agreement for the purchase of goods by instalments.
In hire-purchase, property in the goods does not pass at the time of the agreement, before delivery of the goods or at the time of delivery. In hirepurchase agreement, there would be a seller or dealer who offers the goods for sale to a purchaser. However, this seller does not offer payment by instalment to the purchaser. Thus, the seller will sell the goods to a finance company which will subsequently hire the goods to the purchaser under the hire-purchase terms. Therefore, there will be an original sale between a seller and and a finance company and a hire-purchase agreement between a purchaser and a finance company.
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Can a purchaser purchase the goods according to the hire-purchase agreement under the Act even though the said goods do not fall within the above schedule? The answer is in the affirmative, provided that both the owner and the hirer agreed to be bound by the Hire-Purchase Act 1967. On the other hand, if they do not agree, the hire-purchase agreement shall be governed by the common law principles. This is due to the fact that the purchase of any other goods which do not fall within the ambit of the First Schedule is controlled by the common law principles. Under common law, the hire-purchase transaction is a form of contract in which the owner releases the goods to the buyer for hire-purchase with the option given to the buyer whether he wants to return the goods and terminate the contract or opt to purchase upon completion of payment of the said goods. In the case of Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn.Bhd. [1979] 1 MLJ 129, the appellant and the respondent had entered into an agreement to purchase a tractor. According to the agreement, the appellant agreed to hire the said tractor to the respondent subject to terms and conditions of the agreement and the Hire-Purchase Act 1967. The respondent had paid the deposit but it had defaulted in making instalment payments. Consequently, the appellant took possession of the tractor. The respondent then paid all the instalments due and other incidental costs, but the respondent had again defaulted in making payments. The appellant claimed for the balance of the amount the respondent had to pay including costs and damages. The respondent paid all the amount claimed by the appellant and the ownership of the tractor had been transferred to the respondents name. The respondent contended that the agreement between the respondent and the appellant was not a hire-purchase but an ordinary sale of goods. Therefore, the appellants action in taking possession of the tractor when the respondent defaulted in making instalment payments was against the law. The Court held that: On a proper construction of the agreement, it was clearly the intention of the parties that the property in the tractor was not to pass until full payment is made. Thus, it was not a sale on instalment terms but rather in the nature of a hire-purchase. The appellant therefore had the right to repossess the tractor on breach of the terms of the agreement by the respondent.
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14.3.1
Pre-contractual Obligations
Section 4(1) of the Hire-Purchase Act 1967 requires an owner to give a prospective hirer a written statement in accordance with the form set out in the Second Schedule of the 1967 Act. In the case of a dealer, the schedule requires information on the description of goods and a summary of the financial obligations of the prospective hirer. Under Section 4(3), he is not obliged to enter into a transaction and therefore is not bound to make any payment for the preparation or service of such statement. According to Section 4(4), failure to observe the obligations shall render the hire-purchase agreement void.
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14.3.2
Section 4A(1) of the Hire-Purchase Act 1967 states that any hire-purchase agreement must be in writing. Hence, failure to observe this requirement would render the agreement void and the owner will be guilty of an offence. Section 4B(1) of the Hire-Purchase Act 1967 requires a hire-purchase agreement to be signed by, or on behalf of all parties, to the agreement. It is important that the hirer must not sign a blank form as the requirement under Section 4B(1) provides that No owner, dealer, agent or person acting on behalf of the owner shall require or cause any intending hirer or his agent to sign a hire-purchase agreement or any other form or document relating to a hire-purchase agreement unless such hire-purchase agreement, form or document has been duly completed. According to Section 4B(3) of the Hire-Purchase Act 1967, failure to comply with the above requirements shall render the agreement void. Section 4C(1)(c) of the Hire-Purchase Act 1967 further provides that the following information shall be included in the hire-purchase agreement and failure to comply with this provision will render the agreement void: (a) (b) (c) (d) (e) (f) Date of the commencement of hiring; Number of instalments to be paid by the hirer; Amount of each instalment; Time for payment for each instalment; Description of the goods; and Address where the goods are kept.
According to Section 4C(1)(b), if any part of the consideration is in the form of other than cash money, the description of such consideration shall be stated in the agreement. Additionally, the hire-purchase agreement must include a table with the following particulars: (a) (b) (c) (d) (e) Cash price of the goods; Amount of deposit paid in cash and other type of consideration given (other than cash); Delivery cost; Payment for vehicle (if any); Insurance;
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Total amount in (a) to (e) above, less the deposit; Term charges; Annual percentage rate for term charges; Total amount in (f) and (g), (the balance originally payable under the agreement); and Total amount payable.
If there are more than one goods, Section 4D(1) of the Hire-Purchase Act 1967 requires a separate hire-purchase agreement to be prepared for every item. Failure to observe the requirement will render the agreement void under Section 4D(2).
14.3.3
Post-Contractual Obligations
Section 5(1) of the Hire-Purchase Act 1967 requires a copy of the hire-purchase agreement to be sent to the hirer and guarantors (if any) within 14 days after it is made. Otherwise, according to Section 5(1A), such agreement will be unenforceable by the owner. As required under Section 5(3), if any part of the total amount payable consists of an amount paid or to be paid under a policy of insurance, the owner must serve on the hirer a copy of the insurance payment receipt. The owner must also serve a copy of the policy within seven days of its receipt.
SELF-CHECK 14.1
1. 2. 3. 4. 5. 6. What is the meaning of hire-purchase? How is a hire purchase agreement different from an ordinary contract of sale of goods? How do you describe the relationship between all parties involved in the hire purchase agreement? What is the importance of hire purchase as one of the consumer credits in Malaysia? What are the types of goods that fall within the First Schedule of the Hire Purchase Act 1967? What are the important requirements for the formation of a hirepurchase agreement?
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14.4.1
Implied Conditions
Under the Hire-Purchase Act 1967, the following implied conditions shall be observed in a hire-purchase agreement: (a) The owner has the right to sell the goods at the time when the property is to pass (Section 7(1)(b)). The goods sold to the hirer must be of merchantable quality (Section 7(2)). There is no definition of merchantable quality under the Hire-Purchase Act 1967 but it means the same as Section 16 of the Sale of Goods Act 1957. However, the condition of merchantable quality shall not be implied under the following situations: (i) (ii) Where the hirer has examined the goods or a sample and the examination ought to have revealed the defects; If the goods are used items (second-hand goods) and the agreement contains a statement that the goods are second-hand and all conditions and warranties as to quality are expressly negated; and The owner proves that the hirer has acknowledged in writing that the statement was brought to his notice.
(b)
(iii)
(c)
The goods must be fit for the hirers purpose (Section 7(3)). The implied condition as to fitness shall not apply to second-hand goods and where exclusion of the implied conditions and warranties as to fitness is expressly spelt out in the agreement.
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14.4.2
Implied Warranties
The implied warranties to be observed in a hire-purchase agreement are as follows: (a) The hirer must enjoy quiet possession of the goods (Section 7(1)(a)). Similar to Section 14(b) of the Sale of Goods Act 1957, quiet possession includes interference by the seller and interference arising from lawful acts of third parties. The goods are free from any charge or encumbrance created by the owner in favour of any third party (Section 7(1)(c)).
(b)
14.5
Apart from the above rights and protections, a hirer is also entitled to claim against the owner or any person making misrepresentation in the negotiations leading to the hire-purchase agreement. This is provided in Section 8 of the HirePurchase Act 1967. This right of hirer cannot be excluded or limited by any contractual term. The remedies which the hirer may claim are the right to sue for damages against the dealer or its agent, and against the owner, the right to rescind the hire-purchase agreement. The owner is, however, entitled to be indemnified by the agent or dealer responsible for a misrepresentation.
14.6
Sections 9 to 15 of the Hire-Purchase Act 1967 laid down statutory rights of a hirer under the hire-purchase agreement. The rights are summarised in Table 14.1:
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Section 10
Section 11
Section 12
Section 13
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Section 14
Right to early completion of agreement A hirer has a right to make early settlement of the full purchase price under the hire-purchase agreement provided that the hirer: (a) (b) Gives a written notice to the owner of his intention; and Pays the owner the net balance due under the agreement. The net balance due refers to the balance payable under the agreement less: (i) the total amount already paid; (ii) the statutory rebate for term charges; and (iii) the statutory rebate for insurance (if any).
Section 15
Right to terminate the agreement If the hirer cannot afford to proceed with the instalment payment, he may terminate the hire-purchase agreement by returning the goods to the owner: (a) at the owners usual place of business; or (b) at any other place specified for that purpose in the agreement; or (c) at a place mutually agreed by the parties; or (d) at a place fixed by the court (upon application by the hirer to the Magistrate). Upon termination of the agreement, the hirer may: (a) Introduce a buyer who will pay in cash at a price agreeable to the owner; or (b) Recover part of his payments where the value of the goods is more than the balance outstanding under the agreement; or (c) Must pay the owner the difference in sum, if the value of the goods is less than the balance outstanding under the agreement.
The Act lays down certain procedures that require mandatory compliance. Failure to observe such procedures gives the right to the hirer to challenge the validity of the repossession by the owner.
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14.7.1
Even though the owner has the right to repossess the goods upon occurrence of any of the above situations, the owner has to comply with certain procedures as clearly provided by the Hire-Purchase Act 1967, as follows: (a) Service of Fourth Schedule notice (Section 16(1)). Before the owner proceeds with the repossession, the owner must serve a Fourth Schedule notice to the hirer. The notice period must not be less than 21 days after the service of the said notice. If the hirer fails to act within the period, the owner will have the right to repossess. Section 43 of the HirePurchase Act 1967 stipulates that the service may be done by way of personal service or registered post to the last written address or by substituted service. Exception to the requirement of Fourth Schedule notice. According to Section 16(2) of the Hire-Purchase Act 1967, the service of the Fourth Schedule notice is not necessary if the owner has reasonable ground to believe that the hirer will conceal or remove the goods to another place unknown to the owner. In the case of death of the hirer, under Section 16(1A), the owner can repossess the goods after there have been four consecutive defaults of payment.
In Public Prosecutor v. Mohamed Nor (1988), the accused was a hirer under the hire-purchase agreement with the Finance Company of KUBB. The hirer defaulted in making monthly instalments and the KUBB had assigned its agent to repossess the car from the hirer without issuing any 4th Schedule Notice to him. The agent introduced himself to the hirer and informed the hirer of his intention but the agent had been forced to leave the house of the hirer. At that time, the hirer was holding a sword and another weapon in his hands.
Held: The act of KUBB to repossess the car without giving any 4th Schedule Notice was considered as invalid procedure under section 16(1) of the Hire-Purchase Act 1967.
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In United Manufacturers Sdn Bhd v. Sulaiman bin Ahmad &Anor [1989] 1 MLJ 482, the hirer contended that the 4th Schedule Notice under Section 16(1) has ceased to have effect. This was due to the repossession that has been effected only after 2 years after the service of notice to the hirer. Held: The Hire-Purchase Act 1967 did not specify any time limit within which an owner must repossess goods after the service of the notice.
(b)
Notice under Rule 3 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976.
In Pang Brothers Motors Sdn Bhd v. Lee Aik Seng [1978] 1 MLJ 179, the appellant repossessed the car purchased by the respondent through hirepurchase. The notice of repossession has been served two days less of the required notice period under section 16(1) of the Hire-Purchase Act 1967. The court held that: The notice which was served less than 21 days before repossession was invalid.
After 14 days of the service of the Fourth Schedule notice, a notice under Rule 3 of the Regulation shall be served on the hirer. This notice is intended to inform the intention of the owner to take possession of the goods. Failure to issue this notice is an offence under Rule 9 of the Regulation. (c) Compliance or non-compliance of the hirer to the notice (Section 16A). If the hirer returns the goods or voluntarily surrenders the goods within 21 days of the Fourth Schedule notice, the hirer shall not be liable for the cost of repossession, cost incidental to repossession and cost of storage.
14.7.2
There are certain procedures that the owner must comply with, whenever approaching the hirer for repossession, as follows: (a) Personal service of a document acknowledging receipt of the goods (Section 16(4)).
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After the goods had been repossessed by the owner, he must prepare a short description of the goods and the date, time and place where the repossession of the goods had taken place. (b) Rule 4 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976. Rule 4 lays down the following procedures to be observed by the owner: (i) If the repossession is being carried out by the owner personally, he must produce and show his identity card and provide the name and address of the company, firm, body or organisation to which he belongs, to the hirer, his servant or agent or occupant or person who is in possession of the goods; or If the repossession is being carried out by the owners agent or servant, such an agent or servant must likewise produce and show his identity card and also his authority card to the hirer, his servant or agent or person who is in possession of the goods.
(ii)
14.7.3
The following are the rights of the hirer after repossession (refer to Figure 14.2): (a) The service of Fifth Schedule notice (Section 16(3)). Within 21 days after repossession, the owner is required to serve the Fifth Schedule notice on the hirer and every guarantor (if any). The purpose of this notice is to inform the hirer of his rights after repossession. Recovery of goods by the hirer (Section 18(1)(a)(i)). Within 21 days of the service of the Fifth Schedule notice, the hirer may give a written notice to the owner to request the owner to redeliver the goods that have been repossessed. The goods may be redelivered to the hirer upon payment of the amount due by the hirer to the owner or when the hirer had remedied any breach of the agreement or had paid the owner the costs and expenses incurred by the owner in remedying the breach. Restriction of selling or disposal of goods on the owner (Section 17). Without the consent of the hirer, the owner cannot sell or dispose the goods until the expiration of the 21 days notice in the Fifth Schedule.
(b)
(c)
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(d)
Introduction of cash buyer (Section 18(1)(a)(ii)). The hirer can require the owner to sell the goods to a cash buyer introduced by the hirer by giving written notice to the owner. Recovery of part of hirers payment (Section18(b)). The hirer has the right to recover the difference in sum where the value of the goods repossessed exceeds the money owed. Notice of auction (Section 18(4)(a)). A notice must be given to the hirer if the owner intends to sell the goods repossessed through public auction. Option to purchase (Section 18(4)(b)). The hirer shall be given an option to purchase where the owner intends to sell the goods repossessed otherwise than by public auction, at a price less than the owners estimated value.
(e)
(f)
(g)
14.8 INSURANCE
According to Section 26(1) of the Hire-Purchase Act 1967, the owner has to take the insurance cover in the name of the hirer for the goods under the hirepurchase agreement. For motor vehicles, the obligation of the owner to take insurance cover is for the first year of the agreement. For the following years, the hirer is under the duty to insure (Section 26(2)). For other goods, the cover is taken out throughout the duration of the goods remain under hire-purchase. For renewal of motor vehicle insurance, a hirer must inform the owner that he has renewed the policy not less than 14 days before its expiry (Section 26(5)). If the
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hirer fails to renew the policy, the owner may proceed to insure the motor vehicle and the hirer must bear the cost (Section 26(6)).
SELF-CHECK 14.2
1. 2. 3. 4. 5. 6. 7. 8. 9. What are the implied terms contained in a hire-purchase agreement? Under what situation is a condition of merchantable quality not implied in hire-purchase? What are the rights of a hirer against a dealer or an owner who makes a misrepresentation? What are the statutory rights of a hirer under the hire-purchase agreement? What are the situations that give the right to the owner to repossess goods under hire-purchase? Can the owner repossess goods from the hirer without giving notice? Why? Is the service of notice of repossession under the Fourth and Fifth Schedule mandatory? What are the rights of a hirer after repossession? What is the effect of non-compliance of the repossession procedures laid down under the Hire-Purchase Act 1967?
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ACTIVITY 14.1
Discuss the following questions: (a) Explain the procedures for the repossession of goods under a hire purchase agreement as provided in the Hire-Purchase Act 1967. Ashraf has just started working with a new company after his employment was terminated from the previous company for reason of retrenchment. Three months before he was terminated, he bought a car from Citra Merdeka Cycle & Carriage and for the purpose of financing, Ashraf obtained a loan from Jimat Kira Finance Berhad. Ashraf had no problem paying the instalment of the car until the end of February 2007, when he was retrenched. Due to his financial difficulty, Ashraf has defaulted in making two monthly instalments for the car. As a result of the default in payment, without any notice, JJ was sent by Jimat Kira Finance to Ashrafs house to repossess his car. Ashraf, in upholding his right, showed JJ his parang and said, Get out or youll die. Discuss whether Ashraf has the right to evict JJ. Zakri, a clerk was terminated from his company two months ago. Since then, Zakri had no other financial means and was unable to pay the monthly instalments for his Myvi car. One day, while Zakri was driving his car, three men stopped him. They claimed that they were instructed by Zakris financier to repossess the car due to his failure to pay the monthly instalments. Zakri was shocked and immediately surrendered the keys of the car to the three men. The three men told Zakri that if he wanted to claim his car, he had to settle the instalment arrears with the financier. Zakri managed to borrow money from his friend for the settlement of the arrears. Unfortunately, he was informed by the financier that his car had already been sold to Ali. Discuss the legality of the repossession and the sale of the car to Ali.
(b)
(c)
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The hire-purchase transaction in Malaysia is governed by the Hire-Purchase Act 1967. Not all types of goods fall under a hire-purchase agreement. There are certain formalities and procedures to be observed in constructing a valid hire-purchase agreement. There are conditions and warranties implied in a hire-purchase agreement. A hire-purchase agreement must be in writing. A copy of the hire-purchase agreement must be served on the hirer and guarantor within 14 days after it is made. The owner must have right to sell the hire-purchase goods at the time when the property is to pass. The hire-purchase goods sold to the hirer must be of merchantable quality. The hire-purchase goods must be fit for the hirers purpose. The hirer must enjoy quiet possesssion of the hire-purchase goods. The hire-purchase goods must be free from any charge or encumbrance. A hirer can sue for damages and rescind the hire-purchase agreement in cases of misrepresentation by the owner and dealer. A hirer is entitled to the statutory rights under the Hire-Purchase Act 1967 once a hire-purchase agreement is concluded. Default in payment of instalment by the hirer gives the owner the right to repossess the goods. Repossession of goods in hire-purchase requires certain procedures to be followed by the owner.
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Text Books: Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.
Cases:
Pang Brothers Motors Sdn Bhd, v Lee Aik Seng [1978] 1 MLJ 179 Public Prosecutor v Mohamed Nor [1988] 3 MLJ 119 Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn.Bhd. [1979] 1 MLJ 129 United Manufacturers Sdn. Bhd. v Sulaiman bin Ahmad & Anor [1989]