The Law of Contract

Subject

: Legal Environment Business

Module Code and Title: BM011-3-1 (Group Assignment) Submission Date

: 4th October 2010

Lecturer name

: SURESH NAIDU A/L SADASIVAN

Tutor name

: SURESH NAIDU A/L SADASIVAN

Group Member

:

QUESTION...................................................................................................................3 1

Introduction:-..................................................................................................................4 Contracts Act 1950:..........................................................................................................4 Arguments from both Parties:-.............................................................................................4 Plaintiff-.....................................................................................................................4 Defendant-..................................................................................................................6 Conclusion:-...................................................................................................................7 Referencing:-..................................................................................................................7 Appendix:-.....................................................................................................................8 1)

Contracts Act 1950:................................................................................................8

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Contracts Act 1950:QUESTION Alan is about to retire as a coal merchant, and he has a substantial quantity of coal for sale. One day, Charles another local coal merchant visited Alan. Charles inspects the coal quite rapidly and mistakenly forms the impression that it is high quality Grade A coal, which has a market price of $80 per ton. In fact, it is a Grade B coal and is worth only $50 per ton. Assuming that the coal is Grade A, Charles writes to Alan saying that he “will take the lot at $70 per ton”. Alan is pleasantly surprised and writes back to Charles “accepting the offer”. Charles has now discovered the true position and refuses to take delivery of the coal and pay the agreed price. You have been appointed to act for Alan (Plaintiff)/ Charles (Defendant)

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Introduction:A contract is a binding agreement between two or more parties for performing, or refraining from performing, some specified act(s) in exchange for lawful consideration. This case pertains to the Contracts Act 1950 involving two parties- Alan who is the Plaintiff and Charles who is the defendant. Charles does not inspect the goods properly makes a wrong judgment about their quality, and then makes an offer of purchase for a higher sum. After acceptance of the offer by Alan he finds his mistake and withdraws from the deal leading to a standoff between the two parties. Contracts Act 1950: For a contract or agreement to be considered as valid, apart from having at least two parties, it must satisfy the points of offer, acceptance, consideration, certainty, capacity to contract & contractual terms. For further information refer appendix.

Arguments from both Parties:Plaintiff▪ The defendant Mr. Charles himself inspected the goods and determined the price. He was not misled into believing the quality of coal by the plaintiff in any way. No coercion misrepresentation or fraudulent measures employed by the plaintiff. Proposal made on free consent. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake as stated below: Section 15 defines Coercion as, “Committing or threatening to commit any act forbidden by 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. Section 16- 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 Section 17 states -“Fraud” includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with the intent to deceive another party thereto or his agent, or to induce him to enter into a contract. Section 21 states mistake of fact as “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void” (Pheng, 2004). Section 22 states mistake as to law as “ 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 same effect as a mistake as to fact” (Pheng, 2004).

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▪ According to Section 2(b) of CA 1950, an offer once accepted becomes a promise. As the proposal was made with free consent and accepted by Alan which was conveyed to Charles, its binding on both parties to fulfill their part of the promise. ▪ Valid consideration for the contract, also as per Section 26 of CA 1950, an agreement cannot be void merely because the consideration is inadequate. The market value of the coal with Alan is less than the price offered by Charles. However this reason cannot make a contract null & void as Charles himself inspected the goods & determined the price before making the offer. A similar case was of Kedari Bin Ranu v Atmarambhat (1866) (Pheng, 2004). ‘Mere inadequacy of consideration, it is true, unless it be so great as to amount to evidence of fraud, is not sufficient ground for setting aside a contract, or refusing to decree a specific performance of it. Inadequacy of consideration, when found in conjunction with any other circumstances such as suppression of value of property, misrepresentation, fraud, surprise, oppression, urgent necessity for money, weakness of understanding, or even ignorance, is an ingredient which weighs powerfully with a Court of Equity in considering whether it should set aside contracts, or refuse to decree specific performance of them. ▪ According to Section 23 of CA 1950, an agreement is not voidable merely because it was caused by mistake of one of the parties to it being under a mistake as to a matter of fact. Hence the plaintiff Mr. Alan is not responsible for the unilateral mistake in judgment of the defendant. Mistake is defined under Section 21 of CA 1950 as, “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.” Which means; an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact. Here the contract can’t be termed as voidable merely because it was caused by one of the Parties to it being under a mistake as to a matter of fact (Pheng, 2004). ▪ Hence declining to carry out the promise should be considered as a breach of contract. The defendant should be charged for the legal expenses and any other damages caused to the plaintiff due to this breach of contract. Also as per Section 44, SOGA 1957, 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 the request, take delivery of the goods, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery. ▪ According to Section 20 of SOGA 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, and it is immaterial whether the time of payment or time of delivery or both is postponed”. A similar case is of Tarling v Baxter (1827). A haystack was sold but before the buyer had taken it away it was burned down. It was held that the buyer was still liable to pay because he became the owner of the haystack when the contract was made. It was immaterial that he had not yet taken delivery of the goods.

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Defendant▪ According to Section 5(2) of SOGA 1957, Subject to any law for the time being in force, a contract of sale may be made in writing. Contract not on legal document (Stamp paper) duly attested and signed by both parties as well as witnesses. Sales agreements cannot be binding legally unless made in writing. ▪ Offer made was specifically for “Grade A” quality coal hence the acceptor is unable to fulfill his promise to provide the desired quality of coal making the agreement null and void as per Section 6(c) of CA 1950. Also it was a crucial condition, ‘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’: Section 12(2) SOGA 1957 (Pheng & Detta, 2009). A similar case is of Associated Metal Smelters Ltd v Tham Cheow Toh [1971], it was held that the failure of defendants to supply a furnace which would have a temperature of at least 2600 degrees Fahrenheit constituted a breach of condition of the contract. In such cases, the innocent party cannot repudiate the contract if the buyer waives the condition, or elects to treat the breach of condition as a breach of warranty and claim damages only (Pheng, 2004). However here the buyer is unwilling to waive the condition & treats the breach as a breach of condition. ▪ The plaintiff knew that the market value of the coal he possessed was much lower than the offer made by the defendant. However he chose not to clarify with the defendant about the mistake of higher price being offered for the coal. As the case of fraud, silence in certain situations where there is a duty imposed to disclose, may amount to misrepresentation-Section 18(b) CA 1950 (Pheng, 2004).

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Conclusion:After careful analysis and arguments from both sides it seems that neither the plaintiff nor the defendant is innocent. Both sides are at fault to a certain extent. While the defendant did not inspect the goods carefully before making an offer, the plaintiff knew the market value of his coal was less than the offer price which meant the defendant was making a mistake but did not clarify about this with the defendant. Hence the original agreement needs to be scrapped and both sides need to re-negotiate. And this time ensure that it’s done properly.

Referencing:1- Pheng, L., Detta, I., 2009, Business Law, 5th edition, Malaysia, Oxford University Press. 2- Pheng, L., 2004, General Principles of Malaysian Law, 4th edition, Malaysia, Penerbit

Fajar Bakti Sdn Bhd. 3- Atiyah, P., Adams, J., & Macqueen, H., 2001, The Sales of Goods, 10th edition, United

Kingdom, Pearson Education Limited. 4- N/A, 2006, Act 136 CONTRACTS ACT 1950, [online], Available at: http://www.agc.gov.my/Akta/Vol.%203/Act%20136.pdf, [Accessed on 25th Sept 2010] 5- N/A, 2006, Act 382 SALE OF GOODS ACT, [online], Available at: http://www.agc.gov.my/Akta/Vol.%208/Act%20382.pdf, [Accessed on 25th Sept 2010]

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Appendix:1) Contracts Act 1950: For a contract or agreement to be considered as valid, apart from having at least two parties following points have to be satisfied. 1) Offer/Proposal- Section 2(a) Contracts Act 1950, offer or proposal is necessary for the formation of an agreement. Charles visited Alan viewed the coal for sale and made an offer to purchase it in writing; i.e. offer was communicated to the concerned party. 2)

Acceptance- Section 2(b) Contracts Act state that when the person to whom the offer was made gives his assent to the offer (agrees to it), the proposal is said to be accepted. Once accepted a proposal becomes a promise. Alan wrote back to Charles giving his consent to the offer made by Charles. Offer made by Charles was thus accepted by Alan and the acceptance communicated in writing to the Charles

3) Consideration- Section 26 Contracts Act states that as a general rule; an agreement without consideration is void. So each side has an obligation or promise to fulfill, failure of which can lead to breach of contract. Alan was supposed to provide coal to Charles for which Charles had offered to pay him at the rate of $70 per ton Consideration is defined as: When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstains from doing, something, such act or abstinence or promise is called a consideration for the promise as per Section 2(d) of Contracts Act. 4)

Certainty- Section 30 Contracts Acts 1950 states that agreements should be firm & certain. An agreement with vague terms is void. Charles stated in the letter he will purchase the coal lot at rate of $70 per ton, the offer was firm & certain.

5) Capacity to Contract- The parties entering into a contract should also be competent to contract i.e. they must have the legal capacity to do so. Neither of the two is bankrupt, Alan was the owner of the coal lot and Charles the buyer, so both parties are considered as legally competent to contract. 6) Contractual Terms- The contents of the contract which may be expressed and/or implied.

Terms are classified as either conditions or warranties. The term in this contract was that Charles will pay Alan for providing coal which Alan has at the rate of $70 per ton.

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