Identify a Contract

It turns out that Pn Izura is less boring than I had imagined. Today’s class on Contract turned out to be fairly interesting and I learned quite a lot of things. Our lesson today focused on the most fundamental issue with contracts, which is – what exactly is a contract.

A friend of mine asked me to try to blog about the law as it applies to start-ups and this topic is probably as good a place to begin as any. So here goes. But before I begin to define what is a contract, I must preface this with a few disclaimers.

As Pn Izura says – there are general rules, exceptions and the reasonable man. I’ll just focus on the general rules here as they apply to start-ups and ignore most of the exceptions, which are what is likely to bite a person in the arse if we’re not careful.

Also, she noted that Malaysian Contract Law is a rather unique creature, being distinctly different from other Common Law countries. While the words and definitions may be the same, the interpretations can be wildly opposite.

To keep things simple – a contract is any agreement enforceable by law and must generally consist of the following five elements: offer, acceptance, consideration, intention, and capacity.

Offer
This may sound simple but an offer isn’t necessarily always an offer. An offer must be certain and must be legal. An offer must also be communicated to the other party.

In terms of general business communication, as a general rule, when a party asks for a price quote – that’s a request for information. When a quotation is issued to that party – that constitutes an offer. So for most intents and purposes, the quotation can become a legally binding document.

An offer must be differentiated from an invitation to treat (ITT). As a classic example – all goods displayed on a shelf are considered an ITT. An offer to buy is made when the customer brings the item to the cashier for payment.

An advertisement in a paper could also constitute an offer, depending on situation. If the advert is from a manufacturer for suppliers, distributors etc, it is generally considered an offer while an advert from the resellers are generally considered an ITT.

While I have not actually read the Electronic Commerce Act, which spells this out clearly, I’m guessing that a similar analogy can be drawn for items on display in a web-store.

Acceptance
As before, an acceptance is not always an acceptance. It is important to know what is an acceptance because an offer becomes legally binding upon acceptance. An acceptance must be communicated. An acceptance must be complete i.e. with no modifications to the offer. Otherwise, it becomes a counter-offer, which is a whole other can of worms.

As a general rule, since the quotation constitutes an offer, the purchase order becomes a clear communication of acceptance. Now, the key issue of contention then typically revolves around when an acceptance is communicated.

In a clear case, if the acceptance is a document such as the PO, the date of acceptance is when the document is posted out (even if it was never received by the party making the offer). A verbal acceptance is made when the party making the offer ‘hears’ of it. It is less clear when an acceptance is in the form of a conduct. It can also be in a very narrow form of silence.

Like I said, it’s complicated.

Consideration
Consideration, in layman terms can be considered ‘win-win’ i.e. I get something, you get something. Of course, both of these ‘something’ must be perfectly legal.

It’s very clearly stated under S.26 of the law that if there is no consideration in the contract, it is void. There are very narrow instances where consideration is not needed to constitute a contract but these situations are less likely to occur in normal business situations.

Now, one major quirk with Malaysian Law is the different position we take with regards to ‘past consideration’. An example of this would be making an offer of payment for work done voluntarily by some good samaritan. In other countries, it’s not a contract but in Malaysia, a contract is entered into the moment the offer is made because the acceptance has already be performed in advance.

Talk about quirky – we can accept an offer before it is even made. I attribute this to your cultural situation in the country, where people are just very ‘nice and helpful’ in general.

Intent
This one is easy. As a general rule, all commercial contracts are presumed to be with intent. Therefore, if someone wants to wriggle their way out of a commercial contract, they would need to prove that there was no intent.

The general rule has evolved from interpreting the words in the contract to the intent behind the contract. What this means is that simply printing something like, “this contract is not legally binding” or “this is not a contract” will no longer fly with the courts.

Capacity
This is even easier. As a general rule, any adult of sane mind has the capacity to enter freely into a contract. The only catch when it comes to start-ups might be when the person is a minor under the law (under 18). So, care must be taken when dealing with start-ups run by teenagers but otherwise, things are simple.

In summary, an offer is made when a quotation is given and an acceptance occurs when a PO is sent out. As long as both parties get something, a contract is entered into because intention is presumed in business contracts. Care needs to be taken when dealing with kids.

That’s about as simple as it gets.

PS: Of course, there are plenty of exceptions and case-by-case basis considerations. That’s why we need lawyers.

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Shawn Tan

Chip Doctor, Chartered Engineer, Entrepreneur, Law Graduate.

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