1_2009 eup 222 - contract law (ho)

8/8/2019 1_2009 EUP 222 - Contract Law (HO)

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Company

LOGO

THE LAW OF CONTRACT


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Case Study:

Clean and Clear Company (3C), a manufacturing process-designcompany, signed into an equipment-supply contract with HybridMaterial Factory (HMF).

3C agreed to design, supply, and install a cleaning system at HMFfor a contract price of RM 200 000.

This system was invented by 3C based on the technologyinnovation using tiny organisms alongside the very latest membranefiltration techniques to improve liquid or water cleaning technology.

The specifications for the cleaning system stated that theequipment must eliminate ninety-five percent of the particular

chemical waste from the mill's sewage system in order to complywith the requirements of the environmental authority in the area inwhich the mill was located.

However, the contract clearly stated that 3C accepted no

responsibility whatsoever for any indirect of significant damage,such as lost profits, arising as a result of the contract.


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The cleaning system installed by 3C did not meet the requiredspecifications, but this condition was not determined until after 3Chad been paid RM 180 000 by HMF.

In fact, only seventy percent of the stated chemicals weresuccessfully eliminated from that factorys sewage.

As a result, HMF was fined RM 10 000 and was shut down by theenvironmental authority.

3C made several efforts to overcome the problem by altering theprocess and cleaning equipment, but without success.

HMF finally contracted with another equipment supplier.

With an additional cost of RM 250 000, the second suppliersuccessfully redesigned and installed treatment process equipmentthat cleaned the sewage to fulfill the environmental authoritiesstandards, in accordance with the original contract specifications

between 3C and HMF.


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Initially, relationship between 2 parties is created

more on mutual basis.


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Self-respect is the reason for individuals to keeptheir promises.


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During this period, most agreements are made betweenparties who are familiar and know his/her counterpart.


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1. Introduction

A contract intends to formalize anagreement between two or moreparties, in relation to a particularsubject.

Contracts can cover an extremelybroad range of matters:

a) The sale of goods or real property,

b) The terms of employment or of anindependent contractor relationship,

c) The settlement of a dispute, andownership of intellectual propertydeveloped as part of a work for hire.


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Contract Act 1950.

What is it exactly that you do

when you sign a 'contract' ?. The term 'contract' means a

promise or a set of promises

made by one person toanother, which the Courts willenforce.

A contract can contain anumber of promises or 'terms'to be performed by either

party.


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Blacks Law Dictionary defines a contractas [a]n agreement between two or more

parties creating obligations that areenforceable or otherwise recognizable at

law.


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You should be concerned about contractlaw because it determines how parties to

the contract will need to keep the promisesthey make.

Although very few contracts ever end up incourt, if the parties to a contract disagree

on something and are unable to resolvethe disagreement, they may have to resortto the judicial process.


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Self-directed reading

There is an old joke that "an oralcontract isn't worth the paper it's

written on".. Please note that, although

sometimes an oral contract is

referred to as a "verbalcontract", the term "oral" means"spoken" while the term "verbal"

can also mean" in words". Under that definition, all

contracts are technically

"verbal".


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Agreement

Agreement

The manifestation by

two or more personsof the substance of acontract

Parties

Offeror

Person who makes anoffer

Offeree

Person to whom anoffer has been made


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The Objective of Contracts

A theory that says the intent to contract is judged by thereasonable person standard and not by the subjective intent ofthe parties.

As soon as complex trading and commercial transactions start totake place in a society, it is necessary to have some mechanismto make these transactions work.

In any long-term commercial relationship, contract attempts to fix

the future. Contract also serves to concentrate the minds of the parties in

deciding a number of important things:1. such as who bears a particular risk,

2. who should insure against that risk,3. who should perform some tasks and4. who should do other tasks,5. when the tasks should be done,6. when they should be paid for, and so on. Negotiating a contract very much focuses attention on the future.

2 The Elements of a


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2. The Elements of aContract

a) Offer.

b) Acceptance.

c) Legal Intent.

d) Consideration

e) Capacity.

f) Legal Object.

g) Genuine Consent.


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a) Offer

An offer is the promise made by one

party to another.

an offer must be made in clear and

definite terms. An offer is not made forever. Offers can

either be finalized, when all mutualpromises are fulfilled.

Or they can expire, if not timely accepted.


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2 types of offer:

i) General offer open to all/ public.

ii) Specific offer

specificindividual/party.


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An offer (and contract) must contain thefollowing terms Identification of the parties Identification of the subject matter and

quantity

Consideration to be paid

Time of performance

The communication of a proposal iscomplete when it comes to the knowledgeof a person to whom it is made.


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For an offer to be effective:

The offeror must objectivelyintend to be bound by theoffer.

The terms of the offer mustbe definite or reasonablycertain.

The offer must becommunicated to the

offeree.

2 The Elements of a


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2. The Elements of aContract

a) Offer.

b) Acceptance.

c) Legal Intent.

d) Consideration

e) Capacity.

f) Legal Object.

g) Genuine Consent.


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The contract involves an offer (or morethan one offer) to another party, who

accepts the offer.

For example, in a contract for the sale of a

computer, the seller may offer thecomputer to the buyer for RM1,000.00.

The buyer's acceptance of that offer is anecessary part of creating a bindingcontract for the sale of the computer.

CASE / PROBLEM TO


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CASE / PROBLEM TOSOLVE:

Syarikat Kejuruteraan Mekanikal Virgo, a machineryproducer has agreed to sell a processing machine toAries Corporation Berhad.

The design of this machine was produced by AriesCorporation. Aries Corporation Berhad has also given a guideline that

the processing machine would have a production

capacity of not less than 30 units per hour. Syarikat Kejuruteraan Mekanikal Virgo delivered the

machine to Aries Corporation but the specification wasnot fulfilled.

The design was followed exactly but the capacity couldonly reach a capacity of 28 units per hour.

According to Syarikat Kejuruteraan Mekanikal Virgo, if

the required design is produced then the productioncapacity may be affected, vice versa. Give guidance to Aries Corporation Berhad.


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b) Acceptance

When the person to whom the proposal is

made and he/she agree to the proposal,the proposal is said to have beenaccepted.

The person accepting the proposal thepromisee.

Acceptance of any promise is made inwords, the acceptance is said to beexpressed.

A t


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Acceptance

The acceptance, like the offer, must begiven in clear terms.

It must be a positive act.

For instance, an offer cannot state "If I

don't hear from you, I will assume youhave accepted".

Doing nothing will never be consideredlegal acceptance.

M d f A t


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Mode of Acceptance

An offeree must accept an offer by anauthorized means of communication

Express authorization

Acceptance must be by a specified means ofcommunication

Implied authorization

Mode of acceptance is implied from what is

customary in similar transactions, usage of trade,or prior dealings between the parties


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c) Legal Intend

An agreement is not a contract in the strict

sense unless it is common intention of theparties that it shall be legally enforceable.

For a person to be bound to a contract, he

must seriously intend to create legalobligations.

However, there are cases where theagreements represent family arrangements.

In commercial arrangements, the presumption is

that legal relationships are intended.


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However, there are caseswhere the agreements

represent familyarrangements.

there is no intention to be sobound .

In commercial

arrangements, thepresumption is that legalrelationships are intended.


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d) Consideration

Consideration is defined as 'some right,benefit or profit accruing to the promisor.

the party trying to enforce the contract

must have 'paid' something in exchangefor the promise of the other party.

Consideration must be of real value, but itdoes not have to be money.


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In order to be valid,the parties to a

contract mustexchange

something of value. Something of legal

value must be given,

e.g., either a legalbenefit must bereceived or a legal loss

suffered.


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Contracts Lacking Consideration

Consideration (The mutual exchange of

something of value) In order to be valid, the parties to a

contract must exchange something ofvalue. In the case of the sale of acomputer, the buyer receives something of

value in the form of the computer, and theseller receives money.


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e) Capacity

Competent parties

Three questions must be first answered beforethe contract can be enforceable:

1) whether the corporation does in fact existand

2) whether it has the capacity to enter into the

contract and3) whether the person signing on behalf of thecorporation is, in fact, the authorized signatory.


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2. The Elements of a


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Contract

a) Offer.

b) Acceptance.

c) Legal Intent.

d) Consideration

e) Capacity.

f) Legal Object.

g) Genuine Consent.


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There are two classes of natural persons whoare limited in their capacity to make a contract.They are:

1. Those not possessing mental capacity, and2.Those possessing mental capacity but lacking

legal capacity such as infants or minors.

Contracts provide that the agreement must beentered between competent parties,

All persons are presumable to be competent to

contract without restriction. The power of corporations and other creations of

government to contract are limited by its charter.


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Can an infant/ a baby enter into acontract?

2. The Elements of a


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Contract

a) Offer.

b) Acceptance.

c) Legal Intent.

d) Consideration

e) Capacity.

f) Legal Object.

g) Genuine Consent.


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f) Legal Object

The object and purpose must be legal fora contract to be legal.

If its purpose is illegal because of statue ofcommon law, the contract may be void.

If the formation or the performance of a

contract is illegal, resulting in a crimeand/or tort, or opposing public policy orinterest, the contract is usually considered

void. For example, any contract that involves

purchasing a stolen item or an illegal drug,or involves fraud or harming someonewould be considered void.


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A legal subject matter: A court will notuphold a contract requiring anyone to

do something illegal.


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g) Genuine Consent. The parties to the contract

have a mutual understandingof what the contract covers.

When two parties have a"meeting of the minds," an

agreement can said to havebeen made.

Both parties must

understand the agreement,making sure nomisunderstanding ormistakes exists betweenthem.

Case Study:


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Case Study:

Miss Cancer, an expert in electronic documentation system agreedto transfer Mr. Geminis works from a manual work to an electronicand computerized form.

A contract was signed. Payment for that task amounting RM 20 000

will only be made based on the work performance of Miss Cancer. Last week Miss Cancer completed Mr. Geminis electronic

documents contained some very important items including thedesign and specification of a new processing machine invented byMr. Gemini.

Miss Cancer delivered the electronic document to Mr. Geminiyesterday, a month earlier than the expected completion date.

Mr. Gemini was so grateful that he promised to pay Miss Cancer anextra of RM 7 000 today for her excellent work.

Mr. Gemini changes his mind today that he decides not to pay anyextra money to Miss Cancer.

Can Mr. Gemini claim that there was no consideration for thepromise as Miss Cancer had already completed the electronicdocument before the promise on RM 7 000 was made?

Give reasons or justifications for your answer.

Void, voidable andf bl t t


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unenforceable contracts:

In general, there are threeclassifications of contracts thatare not binding:

1. Void If a contract is held to be void, the

contract has never come intoexistence.

It is not enforceable by law. For example, a contract is voidif

it is based on an illegal purpose

or contrary to public policy. The classic example is a contractwith a bankcrupt company. Sucha contract will not be recognized

by a court, and cannot beenforced by either party.


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2. Voidable

A contract is voidableif one of the parties

has the option to terminate the contract.

At first the contract is valid, then it can be

cancelled. The other parties are not be able to

complete the contract.


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Caused by one of the following:

1.Coercion threats

2.Undue influence domination, pressure

3.Fraud untrue, false

4.Misrepresentation - parody

5.Mistake error, inaccuracy


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3. Unenforceable

If a contract is unenforceable, neither party may

enforce the other's obligations. This kind of contract cannot be performed.

For example, in the Malaysia, a contract isunenforceable if it violates any laws.

E.g: changes in government policy which do not

allow such contract to be performed. Forceable the contract can be continued.

Unenforceable the contract


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cannot be continuedBecause:1.Natural disaster earthquake, heavy

flood, land slide etc

2. Accidents road accidents, fire etc.

3. Death

o


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Discharge of contract can be based on:

a) Frustrationb) Performance

c) Breach


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a) Frustration

A contract is frustrated when there is achange in the circumstances whichrenders a contract legally.

Physically impossible of performanceby one reason of some event which thepromisor could not prevent.


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b) Performance

Performance of a contract must beexact and precise and should be inaccordance with what the parties had

promised. Completion of all terms agreed in a

contract.

Satisfying all contracting parties.

D


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c) Breach

One of the contracting party intend not to go

on with the contract. Refusal to perform a contract which occur

before the time for performance is due.

A party may end to the contract if the otherparty has disabled him/herself from

performing during the contract duration.


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The innocent party must restorebenefits which he/she may be receivedfrom the other party.

6. Breach of Contract


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When a party fails to perform the statedobligation in a contract, the party is said to

be in breach of contract. The injured party has several resources.

The injured party may withdraw thecontract or release the other party from theobligations stated in the contract.

Also, the parties may agree on novation. Any of these three resolutions may be

enacted without litigation.


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The injured party may sue the other party formoney damages or for specific performance.

When someone sues for lost profits or for courtcosts, for example, it is said that a party hassued for money damages.

Specific performance may be ordered if the partybelieves money damages are an unfair form ofcompensation.

When someone seeks the remedy of specificperformance, the party is asking the court for theequitable remedy of compelling performance of

the contract.


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An alternate action for theinjured party is to sue for

injunctive relief, whichprohibits the other party fromperforming some specific act.

In other words, the injured partymay prevent the other partyfrom performing any relatedtransactions until the agreementis settled.

Types and Measures of Contract Damages:Case Study:


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FACTS: Barbara agrees to pay Sam $20,000 if he will renovate

her office.

She gives him a deposit of $10,000 and, in reliance ontheir contract, pays an architect $5,000 for plans andpermits.

Before he begins work, Sam denies the contract. Barbara discovers that no one will accept less than

$22,000 to do what Sam had promised to do.

She has to give up her renovation plans as beyond herbudget.

She might elect to sue under any one of the three

following theories of recovery:


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Twelve rules toconsider when entering into a contract.


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g

1. Remember the first rule of contracts whoever wrote the contract took care

of himself.

2. Read and understand any contract

before signing it.3. Know that complying with contract

terms is required before you haveperformed under the contract.


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4. Never assume your failure to perform acontract will be excused.

5. Know the other partys financialsituation and performance history.

6. Weigh the advantages of the contractin terms of higher prices against any

increased costs or risks.7. Remember proposed contracts are

always subject to negotiations.


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8. Make sure any changes to the contractare made in writing.

9. Do not rely on oral communicationsmade by the buyer, either before the

contract is signed or during thecontract performance.

10. Keep good records of yourperformance.


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11. Do not hesitate to ask questionswhen you do not understand what is

happening.

12. Stay in touch with the other party to

the contract.


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1_2009 eup 222 - contract law (ho)

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