Category: Contract

Offer and acceptance are two important creatures in a contract because they are the only two constituents of a valid contract that are action (or inaction) based and generally objective – consideration and intent are very abstract while capacity is defined clearly in legalese. Therefore, it is important to have a good understanding of the two.

According to my understanding, the most important ingredient of the two is the intention behind the action or inaction – not the words. That said, the wording is still important as it can show intent.

Offer
An offer can only be made if the other party knows about it – whether through an advertisement, direct communication, etc. So, an offer uttered in the privacy of a bedroom without being made known to anyone else, is not an offer. For most start-ups, this may not be a problem as they tend to market themselves heavily these days, via social networks.

The next thing is that an offer needs to be clear. Now, some start-ups may struggle with this as they may still be trying to find out what it is that they’re selling. But besides that, it is not generally an issue to clearly communicate the intent of selling a product or service in exchange for certain amount of money.

The only critical thing is to differentiate an offer from an ITT. It is done based on intent – whether the person issuing the offer intends for someone to enter into a contract upon accepting the offer. So, if we clearly communicate that the quoted price is negotiable, this constitutes an ITT as we’re soliciting offers to buy.

Acceptance
An acceptance must also be communicated to the party making the offer – whether through a written letter, phone call, etc. The catch here is that a posted acceptance is legal on the date it is sent while it can be retracted any time before it is received. So, someone can legally mail an acceptance while still reserving the legal right to cancel it via a phone call any time before the letter arrives. This is the reason why getting something receive-stamped and signed-for is critical.

Also, an acceptance must be clearly differentiated from a request for more information, and a counter-offer. The only difference between them seems to be the wording of the intent – whether the party issuing the acceptance wishes to be bound into a contract upon the communication.

If someone issues a PO changing the terms of payment, that would generally constitute a counter-offer and it would require the party making the offer to accept the new payment terms. If someone sends a letter asking if they could make payment in instalments instead, that would generally constitute a request for information.

There is one thing to be careful about offer and acceptance is that the final terms must be agreed upon by both parties without change. If any party makes unilateral changes, that constitutes a counter-offer.

Contracts
A contract does not generally need to be written down as a verbal contract is still a contract. Unfortunately, verbal contracts are more difficult to prove and that is why a written contract is generally preferred, even if it is just written down on a single sheet of paper with very little legalese.

Depending on how close a business relationship is, one can also enter into a legal contract verbally followed up by a written contract merely for formalisation. If this is not the intent, it must be clearly communicated during the verbal exchange that things are subject to contract i.e. things only take effect from the date of signing the contract.

However, even written contracts must be worded carefully as a wrongly worded contract may render the contract void. An example is if the contract contains terms that explicitly bar a party from suing the other party in case of a breach, etc. Those kind of terms would not be accepted even if both parties signed off on it.

The good thing about studying contract law is that there is a lot of case law to support it. I have just made a list of cases that I need to read for Contract and it is a really long list. Also, there are plenty of illustrations in the statute as well, which serves to clarify some of the legal points.

PS: The only criticism that I have of Pn Izura’s teaching is that she’s teaching Contract as a really dry subject that is just exam focused. However, this may just be because we’re still at the early stages of Contract and things may get more exciting later, when we handle breaches and remedies.

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.

I just read in the news that the former Selangor Menteri Besar has been sentenced to 12 months jail. According to the article, “Former Selangor menteri besar Dr Mohamad Khir Toyo was found guilty by the High Court here today on a charge of obtaining for himself and his wife a valuable property at a consideration he knew was insufficient, four years ago. He was sentenced to one year in jail from today. The court also ordered Khir’s land and bungalow be forfeited.”

With all due respect, I personally find this decision a little worrying.

If we are going to start forfeiting and jailing people for buying cheap properties in Malaysia, we’re going to get into trouble because as Malaysians, we all like to strike a good bargain. I personally know many people who have bought properties well below the market price because we like a good bargain.

We love our discounts, and our haggling and I would defend that as our cultural right!

If he had gotten it for free, that would be a totally different problem. The fact that he had paid a cool RM3.5 million for it (while it was supposedly worth RM6.5 million), that is a different issue. I don’t see what’s the problem with buying it cheap if it was done in a legal manner.

If the issue is that of insufficient consideration, then shouldn’t the peppercorn rule apply in this case? At most, the transaction could be considered void and the property returned to the seller. Forfeiture and jail time seems a little excessive to me.

I’m confused.

Criminal laws must work very differently from civil laws.

PS: Also, does this mean that he is disqualified to contest under Article 48 of the Consti since the law clearly states that someone can be disqualified from being an MP for a jail sentence that is no less than one year. I guess that a similar restriction applies to state’s assembly person.