BUSINESS LAW HANDBOOK by PolisasLib3

BUSINESS LAW HANDBOOK SUHANA MOHD JAMIL AZLIN SUZANA HUSSAIN NORAZAH ABDUL AZIZ PUBLISHED BY: POLITEKNIK SULTAN HAJI AHMAD SHAH SEMAMBU 25350 KUANTAN, PAHANG DARUL MAKMUR ISBN : 978-967-0778-62-4 Perpustakaan Negara Malaysia

Cataloguing-in-Publication Data

Suhana Mohd Jamil, 1983BUSINESS LAW HANDBOOK / SUHANA MOHD JAMIL, AZLIN SUZANA HUSSAIN, NORAZAH ABDUL AZIZ. ISBN 978-967-0778-62-4 1. Commercial law—Malaysia—Handbooks, manuals, etc. 2. Law merchant—Malaysia—Handbooks, manuals, etc. 3. Government publications—Malaysia. I. Azlin Suzana Hussain, 1979-. II. Norazah Abdul Aziz, 1976III. Title. 346.0709595

COPYRIGHT©2020, Politeknik Sultan Haji Ahmad Shah Materials published in this book is under the copyright of the Politeknik Sultan Haji Ahmad Shah. All rights reserved. No part of this publication may be reproduced or distributed in any form of by means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publisher. While every effort has been made to trace the original source of copyright material contained in this book, these might be omissions. For this we sincerely tender our apologies. PRINTED BY: Perkasa Ummah Enterprise B60, Tingkat Bawah, Jalan Im 7/1, Bandar Indera Mahkota, 25200 Kuantan Pahang Darul Makmur.

TABLE OF CONTENTS No. i. Preface

Topic

Page i

1.0 INTRODUCTION TO MALAYSIAN LEGAL PRINCIPLES 1.1 Introduction to the Malaysian Legal Principles 1.2 Definition of Law 1.3 Law and Ethics 1.4 Law, The State And The Constitution 1.5 Function of Law 1.6 Classification of Law 1.7 Sources of Malaysian Law 1.8 Malaysian Judicial System 1.9 Assessment Questions

1 2 2 2 3 4 4 7 10 18

2.0 LAW OF CONTRACT 2.1 Introduction to Law of Contract 2.2 Definition of Contract 2.3 Elements of A Valid Contract 2.4 Effects of Contract 2.5 Terms of Contract 2.6 Discharges of Contract 2.7 Remedies of Contract 2.8 Assessment Questions

20 21 21 21 35 39 41 43 47

3.0 LEGAL ASPECTS OF BUSINESS ENTITIES 3.1 Introduction to Legal Aspects of Business Entities 3.2 Types of Business Entities 3.3 Differences Between Sole Proprietorship, Partnership and Company 3.4 Assessment Questions

50 51 51 56 58

4.0 AGENCY 4.1 Introduction to Agency 4.2 Definition of Agency 4.3 Formation of Agency 4.4 Types of Agent 4.5 Types of Agent By Authority 4.6 Duties and Rights of A Principal 4.7 Duties and Rights of An Agent 4.8 Termination of Agency 4.9 Assessment Questions

61 62 62 63 69 70 71 72 75 79

5.0 SALES OF GOODS 5.1 Introduction to Sales of Goods 5.2 Definition of Goods 5.3 Terms of Contract 5.4 Privity of Contract 5.5 Transfer of Property and Title 5.6 Remedies for Breach of Contract 5.7 Assessment Questions

82 83 83 86 91 92 95 98

References

102

PREFACE BUSINESS LAW HANDBOOK thoroughly cater for Polytechnics students. The topic coverage adheres closely to the latest requirements of the Malaysian Polytechnics syllabus. It is hoped that this handbook can help students to understand the course and bring full benefit to students in gaining excellent results in the examination.

CHAPTER

Introduction to Malaysian Legal Principles

Learning Objectives At the end of this chapter, students should be able to:  

Explain the nature of Malaysian legal principles Outline Malaysian judicial system

Chapter 1 : Introduction to Malaysian Legal Principles

1.1

INTRODUCTION

 Law can be describes as a set of rules, developed over a long period of time that regulates interactions that people have with each other, and sets standards of conduct between individuals and between individuals and the government.  Law are enforceable through sanction.

1.2

DEFINITION OF LAW

WHAT IS LAW?

To the layman, law is understood as being a general rule of conduct

 In the Oxford Dictionary, law is defined as; ‘the body of enacted of customary rules recognised by a community a binding’  According to Sir John Salmond, he defines law as; ‘the body of principles recognised and applied by the state in the administration of justice… In other words, law consists of the rules recognised and acted on by courts of justice’ In short, law may be defined as a body of rules which are enforced by the state.  John Austin describes law as; ‘a command set by superior being to an inferior being and enforced by sanctions (punishments)’. The superior being is the state and the inferior being is the individual. The sanctions are wide and include imprisonment, fines, damages, injunctions and decrees of specific performance.  The term ‘law’ is defined both by Article 160(2) of the Federal Constitution 1957 and Item 43C of Section 2(1) of the Interpretation and General Clauses Ordinance 1948 to include: a) The written law; b) Common law in so far as it is in operation in the Federation or any part thereof; c) Any custom or usage having the force of law in the Federation or in any part-thereof.

1.3

LAW AND ETHICS

 Ethics is about what is right and what ought to be, and not simply accepting what is.  The purpose of law is to govern the conduct if all members of society, both natural and artificial (such as businesses and companies) whilst ethics guides 2

Chapter 1 : Introduction to Malaysian Legal Principles

individuals in ascertaining the soundness of rules, and their impact upon relationships. 1.4

LAW, THE STATE AND THE CONSTITUTION

LAW IN MALAYSIA

 

Malaysia, which consists of Peninsular Malaysia, Sabah and Sarawak, is one political unit but it is not governed by the same set of laws. There are, two important link which unite the two parts of Malaysia – the Parliament and the Federal Court.

WHAT IS A ‘STATE’?

 Legal systems are administered almost entirely on the basis of the political unit known as the state.  For international purposes, Malaysia is one state. Within Malaysia, however, there are thirteen states altogether, namely, Kedah, Perlis, Kelantan, Terengganu, Penang and Province Wellesley, Perak, Pahang, Selangor, Negeri Sembilan, Johore, Malacca, Sabah and Sarawak, the Federal Territories of Kuala Lumpur, Labuan and Putrajaya.  Each state has a government and has rules which lay down who shall govern and how. Malaysia has a written constitution.  This written constitution is called the Federal Constitution. The Federal Constitution declares itself to be the supreme law of the Federation – Article 4(1) of the Federal Constitution. R Rethana v The Government of Malaysia & Anor [1988] 1MLJ133 Facts: The plaintiff sought declaration to the effect that sections 31 and 42 of the Employees’ Social Security Act 1969 (SOCSO) were ultra vires the Federal Constitution. The plaintiff’s contention was that these sections violated Article 8(1) of the Federal Constitution which provided for equal protection of the law for all persons and for equality of all persons before the law. The two section of SOCSO were discriminatory because employees, in industries covered by SOCSO, were precluded from suing their employers under the common law for damages arising from injuries sustained in the course of employment. Held: The court dismissed the plaintiff’s claim as the classification by SOCSO was fair and reasonable and therefore did not offend Article 8(1) and therefore was not void under Article 4(1).

Chapter 1 : Introduction to Malaysian Legal Principles

 However, in another case – Repco Holdings Bhd. v Public Prosecutor, certain provisions of two Acts of Parliament were declared to be unconstitutional, null and void as it was law which was inconsistent with the Federal Constitution. Repco Holdings Bhd v Public Prosecutor [1997] 3 MLJ 681

Facts: The applicant, Repco Holdings Bhd, was charged by the Securities Commission for infringing section 86 of the Securities Industry Act 1983. The prosecution was to be conducted by two officers pursuant to section 126(2) of the Securities Industry Act 1983 and section 39(2) of the Securities Commission Act 1993. At the hearing, a preliminary objection was raised on the locus standi of the two officers as the stated provisions were ultra vires Article 145(3) of the Federal Constitution and were void to that extent. The Sessions Court referred to the High Court for the question to be determined. Held: Declaring both section 126(2) of the Securities Industry Act and section 39(2) of the Securities Commission Act to be unconstitutional, null and void, for the following reasons: 1.

Section 126(2) of the Securities Industry Act and section 39(2) of the Securities Commission Act are ultra vires and wholly contravene Articles 145(3) Federal Constitution. By reason of Article 4(1) of the Federal Constitution law which is inconsistent with the Constitution is void and unconstitutional.

The Federal Constitution confers legislative power to the Federal Parliament and the State legislatures – Article 73 Article 74 of the Federal Constitution further provides that Parliament may make laws with respect to any of the matters enumerated in the Federal List or the Concurrent List Cases on the legislative powers of Parliament and State Legislatures.

1.5

FUNCTION OF LAW

There are six (6) functions of law in a country: i. ii. iii. iv. v. vi.

1.6

They are to keep the peace in a country Shaping moral standards Promoting social justice Facilitating orderly change Providing a basis for compromise To help in facilitating a plan

CLASSIFICATION OF LAW

 In general, the legal systems of the world are today basically classified into three main types; that is, civil law, common law, and socialist law. 4

Chapter 1 : Introduction to Malaysian Legal Principles

 The Malaysian legal system is a common law system where legal principles are developed by judges through case law.  Under the common law system, as practised in Malaysia, law has been classified into three broad divisions; namely, public law, international law, and private law.

Classification of Law

1.6.1 Public Law  

Public law basically governs the relationship between individuals and the state. Public law may be divided into two categories – constitutional law and criminal law. Constitutional Law

Criminal Law

 Lays down the rights of individuals in state.

 Codifies the various offences committed by individuals as against the stat.

 It deals with questions such as supremacy of Parliament, rights of citizens and the powers of state and federal.

 A crime is a wrong against the state for which punishment is inflicted by the state and the proceedings being brought by the Public Prosecutor.

Chapter 1 : Introduction to Malaysian Legal Principles

1.6.2 Private Law (Civil Law)  



Private law concerned with matters that affect the rights and duties of individuals amongst themselves. Private law is intended to give compensation to persons injured, to enable property to be recovered from wrongdoers, and to enforce obligations (contract and trusts). This law is divided into three categories – contract law, tort law, and trust law

Contract Law

Tort Law

Trust Law

 Contracts are based on agreement.

 Based on obligation imposed by law.

 Determines when a promise or set of promises is legally enforceable

 A tort is a civil wrong. It is the breach of general duty which is imposed by the law & not agreed between the parties.

 A trust is an equitable binding a person (trustee) for the deal with property over which he has control (trust property) for the benefit of a person (beneficiaries).

1.6.3 International Law 



International law may be defined as that body of law which is composed for its greater part of the principles and rules of conduct which states feel themselves bound to observe, and consequently commonly do observe, in their relations with each other. It may be divided into two categories – public international law and private international law. Public Law

 Deals with relationship between states.  E.g. border, territorial water etc.

Private Law  Is a part of municipal law, as a result of which every country has a different version of it  Concerned with the application of various national laws of the facts of a particular case involving 2 or more countries  It consists of the rules that guide a judge when the laws of more than one country affect a case. 6

Chapter 1 : Introduction to Malaysian Legal Principles

1.7 SOURCES OF MALAYSIAN LAW  The term “Sources of Malaysian Law’ means the legal sources, i.e. the legal rules that make up the law in Malaysia.  The main sources of Malaysian law comprise: written law and unwritten law.  Written law comprises statute law and subsidiary legislation; whilst unwritten law comprises case law or common law; judge-made law, i.e. common law and equity. International treaties are another source of law.  Islamic law also one of the main sources in Malaysian Legal system.

Written Law

Unwritten Law

Islamic Law

1.7.1 Written Law 

 



Written law is also referred to as statute law. This is law made by Parliament and any subordinate bodies to whim Parliament has delegated power to legislate. Once an Act of Parliament comes into existence, it remains law until it is repealed by a later Act of Parliament. Whenever there are doubts or disputes about the meaning of a word or phrase in a statute which arise or where there are ambiguities or any other matter that requires the courts to interpret statutes, courts play an important role in interpreting statutes. Written law in Malaysia may be found in the following:

The Federal Constitution

State Constitutions

Legislation

Subsidiary Legislation

The Federal Constitution    

Malaysia is a Federation of thirteen states with a written constitution, the Federal Constitution, which is the supreme law of the country. Besides laying down the powers of the Federal and State Governments, the Federal Constitution enshrines the basic fundamental rights of the individual. The rights written into the Constitution can only be changed by a two-thirds majority of the total number of members of the legislature. The Federal Constitution comprises Articles which provide some of the following: 1) The name, states and territories of the Federation 2) Religion of the Federation 3) Supreme law of the Federation 4) Fundamentals liberties 7

Chapter 1 : Introduction to Malaysian Legal Principles

5) Citizenship 6) The Federation – the Yang di-Pertuan Agong, Rulers, the Executive, Federal Legislature, legislative procedure 7) The states – Rulers and Yang di-Pertuan Negeri, Legislative Assembly 8) Relations between the Federation and the States 9) Financial Provisions 10) Elections 11) The Judiciary 12) Public Services 13) Special powers against subversion, emergency powers 14) General and miscellaneous, e.g. National Language, Federal Capital, Commonwealth reciprocity, amendment of Constitutions, etc. 15) Additional protection for states of Sabah and Sarawak 16) Temporary and transitional provisions 17) Saving for Rulers’ sovereignty, etc.

State Constitutions 

 

Besides the Federal Constitution, which applies to all States within the Federation, each state also possesses its own constitution regulating the government of that state. The State Constitution contains provisions which are enumerated in the Eighth Schedule to the Federal Constitution. Some of these provisions include matters concerning the Ruler, the Executive Council, the Legislature, the Legislative Assembly, financial provisions, state employees, and amendments to the Constitution. If such essential provisions are missing, or if any provision is inconsistent with them, Parliament may make provisions to give effect to them or to remove any inconsistencies.

Legislation (Parliament) 



Legislation refers to law enacted by a body constituted for this purpose. In Malaysia, laws are legislated by Parliament at Federal level and by any various State Legislative Assemblies at state level. Law that are enacted by Parliament after 1946 but before Malaysia’s Independence in 1957 are called Ordinances, but those made after 1957 are called Acts. But in the other hand, law made by the State Legislative Assemblies (except in Sarawak) are called Enactments. The law in Sarawak are called Ordinances. Parliament and the state legislature are not supreme and they have to enact laws subject to the provisions set out in the Federal and State Constitutions.

Chapter 1 : Introduction to Malaysian Legal Principles

Subsidiary Legislation 



The Interpretation Act 1967 defines subsidiary legislation as ‘any proclamation, rule, regulation, order, notification, by-law, or other instrument made under any Ordinance, Enactment or other lawful authority and having legislative effect’. Subsidiary legislation is very important as legislation by Parliament and the state legislatures is insufficient to provide the laws required to govern everyday matters. Subsidiary legislation deals with the details about which the legislature has neither the time nor the technical knowledge to enact. Legislature merely lays down the basic and main law, leaving the details to persons or bodies to whom they delegate their legislative powers. Such persons, or bodies include the Yang di-Pertuan Agong, Ministers and local authorities etc.

1.7.2 Unwritten Law 

Unwritten law is mainly comprised of:

English Law

Judicial Decisions

Customs

English Law  

English law form part of the laws of Malaysia. English law can be found inter alia in the English common law and rules of equity. However, the application of the law of England throughout Malaysia is subject to two limitations: i. It is applied only in the absence of local statues on the particular subject ii. Only that part of the English law that is suited to local circumstances will be applied

Judicial Decisions 

 

Malaysian law can also be found in the judicial decision of the High Court, Court of Appeal and the Federal Court, the then Supreme Court and the Judicial Committee of the Privy Council. The decisions of these courts were made and are still being made by what is called the ‘doctrine of binding precedent’. This doctrine means that a question should be resolved in a certain way today because a similar question has been so decided before.

Chapter 1 : Introduction to Malaysian Legal Principles

Customs 

 

Customs of the local inhabitants in Malaysia are also a source of law. Generally, customs relating to family law, i.e. marriage, divorce and inheritance, are given legal force by the courts in Malaysia. ‘Adat’ applies to Malays; Hindu and Chinese customary law applied to the Hindus and Chinese respectively. In Sabah and Sarawak, native customary laws apply in land dealings over native customary lands and family matters where natives subject themselves to native customary laws.

1.7.3 Islamic Law   

   

Islamic law is currently increasing in prominence in Malaysia and is now an important source of law in commerce not only in Malaysia but internationally. The Federal Constitution provides that states have the power to administer Muslim or Islamic Law. The primary sources of Islamic law are the Holy Book (The Quran), The Sunnah (the traditions or known practices of the Prophet Muhammad), Ijma' (Consensus), and Qiyas (Analogy). The head of the Muslim religion in a state (except for Penang, Malacca, Sabah, Sarawak and the Federal Territories) is the Sultan. In Penang, Malacca, Sabah, Sarawak and the Federal Territories, the Yang diPertuan Negeri is the head of Muslim religion. The court which enforce Islamic law in the country are the Syariah Courts. Islamic law applies to Muslims only and does not apply to non-Muslims.

1.8 MALAYSIAN JUDICIAL SYSTEM  The jurisdiction and power of the courts as well as doctrine of separation of powers that exist between the legislative, the executive and the judiciary, were well pronounced by the Federal Court.

1.8.1 Doctrine of Separation of Powers  

 

The Federal Government adopts the doctrine separation of powers under Article 127 of Federal Constitution. The doctrine of separation of powers is a political doctrine under which the legislative, executive and judicial branches of government are kept distinct, to prevent abuse of power. The state government in Malaysia also have their respective executive and legislative bodies. The Federal Constitution provides that power is exercised by the legislative, the executive and the judiciary.

Chapter 1 : Introduction to Malaysian Legal Principles

Yang di-Pertuan Agong

Executive

Prime Minister Cabinet

Legislative

Parliament Dewan Negara Dewan Rakyat

Judiciary

Chief Justice Courts of Law

Doctrine of Separation of Powers

Legislative    

Legislation refers to laws legislated by the special body responsible from the aspect of the Constitution. The primary function of the legislative is to legislate, amend or repel laws in accordance with the wishes of the body. The legislative power in Malaysia is determined in the Constitution of the Federation of Malaysia. Legislative matters are divided among Dewan Negara and Dewan Rakyat. Whereas, the Parliament of Malaysia creates laws.

Executive    

The executive body is led by the Prime Minister who is appointed by the Yang di-Pertuan Agong. The Prime Minister leads the government (Cabinet) and also the party that holds the majority in Parliament. The executive power is vested in the Yang di-Pertuan Agong. This means all government matters are carried out in the name of His Highness. Cabinet is headed by the Prime Minister and consists of Ministers with certain portfolios.

Judiciary 

The judiciary is a body of judges in a constitutional system. Judges are given the power to interpret and execute the law with the authority vested in them. 11

Chapter 1 : Introduction to Malaysian Legal Principles

  

The judiciary is the third branch of the government in the balance of power. The judicial power is vested in Federal Court, Court of Appeal, High Courts and Subordinate Courts. Courts wield great power in the executive and legislative bodies because they: i. Have the power to interpret the constitution of the country; ii. Interpret a certain law; iii. Declare a written law of the Federation or of a state; and iv. Declare the actions of the government to be illegal

1.8.2 Hierarchy of Courts    



The roles of the court are more concerned with the administration of the law. The courts have both criminal and civil jurisdictions. Jurisdiction refers to the cases or matters that a court can hear and is established by statue. Courts that are higher in the hierarchy of courts will hear and decide in the more serious cases or matters. A crime, which is an act or conduct by a person that is against the interests of the community as set down by statute and established by case law, will result in criminal proceedings being instituted against the wrongdoer by the public prosecutor or other state enforcement authority. On the other hand, a civil case is brought before the courts (i.e. within their civil jurisdiction) when an individual or organization commences an action against another individual or organization. The person who brought the case is called plaintiff and the person who is being charged or sue known as defendant.

Hierarchy of Courts in Malaysia

Chapter 1 : Introduction to Malaysian Legal Principles

SUBORDINATES COURTS Magistrates’ Court     



The Magistrates’ Court deals with minor and civil criminal cases. This court hears all civil matters of which the claim does not exceed RM100,000 – Section 11, Subordinate Courts (Amendment) Act 2010. The court is presided over a magistrate. Magistrates’ Court divided into two which is First Class Magistrates and Second Class Magistrates. First Class Magistrate: i. The monetary jurisdiction is RM100,000 ii. A First Class Magistrate possesses jurisdiction to try all offences for which the maximum term of punishment provided by law does not exceed ten years’ imprisonment, or all offences punishable by fines only iii. As regards civil matters, the First Class Magistrate has authority to try all actions suits where the amount in dispute or value of the subjectmatter does not exceed RM100,000 iv. It may also exercise jurisdiction in actions for the recovery of immovable property and for recovery of rent Second Class Magistrate: i. The monetary jurisdiction is RM10,000 ii. A second class magistrate has jurisdiction to try offences for which the maximum term of imprisonment provided by law does not exceed twelve months’ imprisonment or offences punishable with by fines only. iii. A second class magistrate shall only have jurisdiction to try original actions or suits of a civil nature where the plaintiff seeks to recover a debt or liquidated demand on money payable by the defendant, with or without interest, not exceeding RM10,000

Sessions Court   



The Sessions Court is the highest of the subordinate or inferior courts. It is under the charge of the Sessions Court Judge. Its criminal jurisdiction extends to all offences other than offences punishable with death. In civil matters, it has jurisdiction to try all actions and suits of a civil nature where the amount in dispute or value of the subject matter does not exceed RM1 million. Matters relating to land, specific performance or recession of contracts, injunction, probate and administration of estate, divorce, bankruptcy, trusts, and accounts are excluded from its jurisdiction.

Chapter 1 : Introduction to Malaysian Legal Principles

Native Court 

 



The Native Court is peculiar only to Sabah and Sarawak. It exercises jurisdiction over matters affecting ‘native customs’ where the parties are natives. In relation to Sarawak, a native is a person who is a citizen and is of a race indigenous to Sarawak (Iban, Bidayuh, Kayan, Penan ect). In relation to Sabah, a native is a person (such as the Kadazan and Dusun), and was born either in Sabah or to a father domiciles in Sabah at the time of birth. Native Courts are empowered to try civil and criminal matters including the following: i. Cases arising from breach of native law or custom, e.g. those relating to religious or matrimonial matters, ii. Cases involving land where there is no title issue by the Land Office iii. Civil cases (excluding land) where the value of the subject matter does not exceed RM50

Court for Children 

 

The Court for Children, previously known as the Juvenile Court, hears cases involving minors except cases carrying the death penalty, which are heard in High Courts instead. Cases for children are governed by the Child Act 2001. A child is defined as any person below the age of eighteen. Court for Children are courts constituted in accordance with the Child Act 2001 and sitting for the purpose of: i. Hearing, determining or disposing of any charge against a child; ii. Exercising any other jurisdiction conferred or to be conferred on Courts for Children by or under the Child Act 2001 or by any other written law.

SUPERIOR COURTS Syariah Court     

Syariah Courts in Islamic religious law deals with exclusively Islamic laws, having jurisdiction upon every Muslim in Malaysia. There is a parallel system of state Syariah Courts, which has limited jurisdiction over matters of state Islamic law. Unlike the civil courts in Malaysia, which is a federalised court system, the Syariah Court is primarily established out of state law. Similarly syariah or Islamic law is a matter of state law, with the exception of the Federal Territories of Malaysia, as provided in Article 3 of the Constitution. Thus syariah law in one state might differ to that of another state. There are 13 state syariah law departments and 1 syariah law department for the Federal Territories. 14

Chapter 1 : Introduction to Malaysian Legal Principles



The Syariah Courts have jurisdiction only over Muslim in the matters of family law and religious observances, and can generally only pass sentences of not more than three years imprisonment, a fine of up to RM5,000, and/or up to six strokes of the cane.

High Court   



 

The jurisdiction of the High Court is original, appellate and supervisory. It has unlimited criminal and civil powers. Any civil matter which cannot be determined in the subordinate courts is heard before the High Court. The High Court has the jurisdiction to try all civil proceedings where: i. The cause of action arose within Malaysia, or ii. The defendant(s) resides or has his place of business within Malaysia, or iii. The facts on which the proceedings are based, exist or are alleged to have occurred within Malaysia, or iv. Any land the ownership of which is disputed is situated within Malaysia The High Court’s civil jurisdiction includes: i. Most land matters ii. Enforcement of trusts iii. Accounts iv. Declaratory decrees except interpleader proceedings v. Legitimacy vi. Guardianship or custody of infants vii. Validity or dissolution of marriage In the exercise of its appellate jurisdiction, the High Court hears civil and criminal appeals from the Magistrates’ and Sessions Courts. Under Section 35(1) of the Courts of Judicature Act 1964, the High Court has been conferred general supervisory and revisionary jurisdiction over all subordinate courts.

Court of Appeal   



Court of Appeal hears all civil appeals against decisions of the High Court except appeals against judgement or orders made by consent. The Court of Appeal also hears criminal appeals against decision of the High Court. The Court of Appeal has jurisdiction to hear and determine civil appeal generally for cases where the amount or value of the subject matter of the claim is at least RM250,000. Where an appeal has been heard and disposed of by the Court of Appeal, the Court of Appeal has no power to review the case. That is, the said Court has neither power to re-open, re-hear nor re-examine its decision for whatever purpose.

Chapter 1 : Introduction to Malaysian Legal Principles

Federal Court  



The Federal Court is the highest court in Malaysia. The Federal Court consists of the Chief Justice, the President of the Court of Appeal, the Chief Judge of Malaya and Chief Judge of Sabah and Sarawak, and seven Federal Court Judges. Every proceeding in the Federal Court shall be heard and disposed of by three judges or such greater uneven number of judges as the Chief Justice may in any particular case determine. The Federal Court has jurisdiction in matters including the following: i. To hear civil and criminal appeals from the Court of Appeal ii. To exercise exclusive original jurisdiction on those matters conferred on it under Article 128(1) and (2) of the Federal Constitution. It can hear dispute between any State and the Federal Government. iii. To determine constitutional questions which have arisen in the proceedings of the High Court but referred to the Federal Court for decision. iv. To give its opinion on any question referred to it by the Yang di-Pertuan Agong

1.8.3 Roles of Judges in Interpretation of Statutes 

 



Parliament makes the law but is the roles of judges to interpret parliament’s words. They have a measure of discretion and creative power in the manner in which they interpret legislation. Judges interpret the law, assess the evidence presented, and control how hearings and trials unfold in their courtrooms. Like many other form of communication, legislation can include words that have more than one meaning, or words whose meaning changes depending on its context. Judges in such circumstances need to provide legislation with effective meaning. There are two contrasting views as to how judges should go about determining the meaning of a statute – literal approach and purposive approach.

Literal Approach  This view of judicial interpretation holds that the judges should look primarily to the words of the legislation in order to construe its meaning and, except in very limited circumstances, should not look outside of, or behind, the legislation in an attempt to find its meaning.  The literal approach is dominant in the English legal system

Chapter 1 : Introduction to Malaysian Legal Principles

Purposive Approach  This approach rejects the limitation of the judges’ search for the meaning to a literal construction of words of legislation itself.  This purposive approach is typical of civil law systems, where legislation sets out general principles and judges fill in the finer detail.

Chapter 1 : Introduction to Malaysian Legal Principles

1.9 ASSESSMENT QUESTIONS

The highest court in Malaysia is the ______________. A. B. C. D.

Unwritten law is mainly comprised of ______________. A. B. C. D.

Court of Appeal Federal court High court Sessions court

Muslim law, judicial decisions and subsidiary legislation English law, Muslim law and subsidiary legislation English law, judicial decisions and customs Muslim law, English law and customs

The Court of Appeal has power to ________________. A. Reveal cases which has been heard and disposed off by the Court of Appeal B. Hear appeal from any High Court decision on criminal law C. Hear appeal from federal Court D. Hear civil and criminal appeals from the Magistrates’ and Session Court

Which of following is the main source of Malaysia law? A. B. C. D.

An action for recovery of RM20,000 claim for breach of contract can best be brought in the? A. B. C. D.

Federal constitution Subsidiaries legislation State constitution State legislation

Appeal Court Second Class Magistrate Court High Court First Class Magistrate Court

Select the INCORRECT statement in reference to sources of Malaysian Law. A. B. C. D.

Subsidiary legislation is categorized under common law Federal Constitution is the supreme law of the land Equity is considered as a source of law under English law Islamic law was the law of the land before the colonization

Chapter 1 : Introduction to Malaysian Legal Principles

Elaborate the jurisdiction the following court in Malaysia. A. B. C. D. E.

Magistrate Court Sessions Court High Court Court Of Appeal Federal Court

Define ‘law’ according to Article 160(2) of the Federal Constitution 1957.

State the THREE (3) functions of law.

10.

Elaborate the hierarchy of Courts in Malaysia and its jurisdiction.

11.

Differentiate the classification of law.

12.

Fill in the box with CORRECT categorization of sources of Malaysian law WRITTEN LAW

UNWRITTEN LAW

ISLAMIC LAW

CHAPTER

Law of Contract

Learning Objectives At the end of this chapter, students should be able to:     

Explain contract Apply elements that form a valid contract and terms in contract Ascertain effects of contract Explain discharge of contract Ascertain remedies for breach of contract

Chapter 2 : Law of Contract

2.1

INTRODUCTION

 Knowledge of the basic principles of the law of contract is useful to students not only for examinations but also in their everyday lives. Most of us have entered into contracts at some point of time – we enter into contracts when we board a bus, go shopping or go to work.  Contracts are an integral part of our daily lives. They are constantly being entered into by individuals with other individuals or businesses, as well as businesses with other businesses, to sell or transfer property, to provide and receive services and other rights and obligations created.  The sale and purchase of goods is based on sales contracts, the hiring employees is based on employment contract; the lease of a property or house is based on a rental or lease contract; and so the list goes on.  Business cannot exist without enforceable contracts.

2.2

DEFINITION OF CONTRACT

CONTRACT

Section 2(h) Contract Act 1950 - ‘an agreement enforceable by law’

 A contract is an agreement which is legally binding between the parties.  The legislation that governs contract in Malaysia is the Contracts Act 1950 (Act 136) (Revised 1974). By application of the Civil Law Act 1956, English law also applies.  However, if there was a conflict of provisions between the two acts, Contract Act 1950 would prevail.  Contractual relations are between individuals, and therefore contract law is a form of civil law.  Contract law aims to provide an effective legal framework for contracting parties to resolve their disputes and regulate their contractual obligations.

2.3

ELEMENTS OF A VALID CONTRACT

 There o o o o o o o

are several elements of a valid contract which are; Offer Acceptance of the offer Consideration Intention to create legal relations Certainty Legal capacity Free consent

Chapter 2 : Law of Contract

2.3.1 Offer 

Offer is the first core requirement of the formation of a contract. An offer or proposal is necessary for the formation of an agreement.

Section 2 (a) of Contract Act 1950 “when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make proposal” 

The promisor (offeror) must have declared his readiness to undertake an obligation upon certain terms, leaving the option of its acceptance or refusal to the offeree (the person to whom the offer is made).

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If offeror & offeree are absent, then the agreement is void.

Case: Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui [1984] Fact: Where there was a lack of offer and acceptance, the purported hirepurchase agreement was declared void from the beginning.

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An offer must be communicated. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made – Section 4(1) of the Contract Act 1950. A proposal made in words (oral or written) is said to be expressed. If a proposal is made other than in words, (e.g. by conduct) it is said to be implied – Section 9 of the Contract Act 1950.

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General / Unilateral •

Specific / Bilateral

The offer is addressed generally to anyone who may satisfy all the terms or condition of the offer stipulated by the offeror.

•

Anyone who meets or satisfies all the terms of the offer is considered as making the acceptance to such offer.

•

Case: Carlill v Carbolic Smoke Ball Co [1893]

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The offer is address to a specific or particular person.

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Only the addressee may accept the offer.

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Any other person, who is not the addressee cannot make the acceptance to such offer.

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Case: Boulton v Jones [1857]

Carlill v Carbolic Smoke Ball Co [1983] Facts: Carbolic Smoke Ball Co. Ltd. advertised that they would offer $1000 to anyone who still succumbed to influenza after using a certain remedy for a fixed period. The plaintiff duly used it but nevertheless, contracted influenza. The plaintiff then sued for the money.

Held: The plaintiff was entitled to the $1000 as she had accepted the offer made to the world at large.

Boulton v Jones [1857] Facts: Jones used to have business dealings with Brockle Hurst. He sent an order (offer) to Brockle Hurst for the purchase of certain goods. By the time the order reached Brockle Hurst, he had sold his business to Boulton. Boulton receiving the order sent all the goods to Jones as per the order without informing Jones of the changing of the hand of the business. When Jones learnt that the goods were not supplied by Brockle Hurst, he refused to pay for the goods. His contention was that he had never placed an order to Boulton, the offer being made to Brockle Hurst, and therefore had no intention to make a contract with Boulton. Held:

Jones was not liable to pay for the goods.

Chapter 2 : Law of Contract

Offer v Invitation to Treat   

An offer should be distinguished from an invitation to treat. An invitation to treat is not an offer, but rather is an offer to consider offers. It can be demonstrated through advertisement, display of goods, tenders, catalogue, price lists and auctions. It merely an invitation from one party to another party to make an offer.

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953] Facts: The defendants were charged under the Pharmacy and Poisons Act, which made it unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist. Payment was to be made at the exit, where a cashier was stationed and, in every case involving drugs, a pharmacist supervised the transaction and was authorized to prevent a sale.

Held: The goods display was only an invitation to treat. A proposal to buy was made when the customer put the goods in the basket. Hence, the contract would only be made at the cashier’s desk. As such, the shop owners had not make an unlawful sale.

Revocation of Offer 

A proposal may be withdrawn in any of the following ways:

S6(a) CA 1950 Communicating the notice of revocation by the proposer to the party to whom the proposal was made

S6(b) CA 1950 The time prescribed in the proposal for its acceptance elapses, or if no time is prescribed for acceptance, by the lapse of a reasonable time 24

S6(c) CA 1950 The failure of the acceptor to fulfil a condition precedent to acceptance

S6(d) CA 1950 The death or mental disorder of the proposer if the fact of the proposer’s death or mental disorder comes to the knowledge of the acceptor before acceptance

Chapter 2 : Law of Contract

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S5(1) CA 1950 – “A proposal may be revoked at any time before the communication of the acceptance is complete as against the acceptor (offeree), but not afterwards.” An offer made by post/letter is not effective until received by the offeree. For revocation to be effective, it must be received by the offeree before offeree post their letter of acceptance.

2.3.2 Acceptance 

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Acceptance represents the meeting of the minds of the parties to the contract – both agree to exchange something for the other (payment, services, goods, etc.). It is important that you are able to distinguish between the different rules and principles governing acceptance, and under which circumstances each rule will apply.

Section 2 (b) of Contract Act 1950 “when the person to whom the proposal is made signified his assent thereto, the proposal has been accepted; a proposal, when accepted, becomes promise”

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A proposal, when accepted, becomes promise. Section 2(c) of the Contract Act 1950 refers to the person accepting the proposal as the ‘promisee’. Section 9 of the Contract Act 1950 provides that there is an expressed acceptance if the acceptance of any promise is made in words and an implied acceptance if the acceptance is made other than in words.

Elements of Acceptance

Absolute & Unqualified

Reasonable Period

Expression of Acceptance

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Absolute and unqualified i. In order for the proposal to be converted into promise, the acceptance of that proposal must be absolute and unqualified – Section 7 of the Contract Act 1950. ii. In the case of Lau Brothers & Co. v China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1 – if the parties are still negotiating, an agreement is not yet formed.

Chapter 2 : Law of Contract

iii.

iv.

If acceptance is not absolute or unconditional, it does not comply with the conditions-if any-stated by the offeror, it will amount to a counteroffer. Counter-offer is not an acceptance and will destroys the original offer.

Hyde v Wrench

Facts: The defendant offered to sell his estate to the plaintiff on 6 June for £1000. On 8 June, in reply, the plaintiff made a counter-proposal to purchase at £950. When the defendant refused to accept this offer on 27 June, the plaintiff wrote again that he was prepared to pay the original sum demanded.

Held: The court held that no contract existed between them. The plaintiff had rejected the original proposal on 8 June, so that he was no longer capable of accepting it later.

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Reasonable period i. An acceptable must be made within a reasonable period – Section 6(b) of the Contract Act 1950. ii. What amounts to be reasonable time is a question of fact depending in the circumstances of each case.

Ramsgate Victoria Hotel Co Ltd v Montefiore [1866]

Facts: Montefiore applied for shares on 8 Jun but he was not told until 23 November that his offer had been accepted and that the shares had been allotted to him and that the balance owing on the shares was now due. Montefiore refused to pay and the company threatened to sue, alleging breach of contract.

Held: The offer to purchase shares had not been accepted within a reasonable time and the offer had therefore lapsed. There was no contract created.

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Expression of acceptance i. S7(b) Contract Act 1950 – acceptance must be expressed in some usual & reasonable manner, unless the proposer prescribes the manner in which it is to be accepted. 26

Chapter 2 : Law of Contract

ii.

The proposer cannot prescribe silence as a manner of acceptance.

Felthouse v Bindley [1862] Facts: Felthouse wrote to his nephew offering to buy his horse, adding “if I hear no more about him, I shall consider the horse mine at $40”. His nephew intended to sell the horse to his uncle but did not reply to the letter. He told Bindley, who was auctioning his farm, not to include the horse in the auction as it was already sold. Bindley sold the horse by mistake and Felthouse tried to sue Bindley for conversion of his property. Held: The nephew’s acceptance had not been communicated to the uncle. As such, the horse did not belong to him.

Communication of Acceptance  

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Acceptance is only effective when it has been communicated (e.g.: by telephone, by letter, telex, facsimile, or by recorded by message). S4(2)(a) Contract Act 1950 – provide the communication of acceptance is complete as against the proposer when it is put in a course of transmission to him. S4(2)(b) Contract Act 1950 – provide the communication of acceptance is complete as against the acceptor when it comes to the knowledge of the proposer.

Communication of Acceptance by Post 

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Acceptance through post is complete when the letter of acceptance is posted, even though it has not come to the actual knowledge/received by the offeror – S4(2)(a) Contract Act 1950. In other words, one can generally say that in cases of acceptance through the post, acceptance is complete upon posting. The offeror is bound to the contract when the offeree posts the letter of acceptance, even though the offeror has no knowledge of acceptance. The contract is binding on the offeror, irrespective of any delay or disappearance of the letter of acceptance. However, in normal cases where there are instantaneous circumstances, for example telephone, telex and telefax; postal rule does not apply.

Chapter 2 : Law of Contract

Ignatius v Bell [1913]

Facts: Both parties have agreed to use portal services as a communication medium. Defendant made an offer to sell his land to the plaintiff where the offer was open until 20 August. Plaintiff accepted the offer and sent a notice of receipt by post on 16 August. However, the notice only reached the defendant on 25 August.

Held: Communication is complete when the notice is posted on 16 August although the defendant does not know about the receipt.

Revocation of Acceptance 

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S4(3)(a) Contracts Act 1950 – “The communication of revocation is complete when it is put in the course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it”. S4(3)(b) Contracts Act 1950 – “The communication of revocation is complete as against the person to whom it is made only when it comes to his knowledge”. S5(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”. E.g.: Xandra proposes, by a letter sent by post, to sell his house to Zack. Zack accepts the proposal by a letter sent by post. Zack may revoke his acceptance at any time before or at the moment when the letter communicating it reaches Xandra, but not afterwards.

2.3.3 Consideration  

Section 26 of the Contracts Act 1950 provides that, an agreement without consideration is void. A simple definition of consideration is as follows – an exchange between the parties which results in a benefit to one party, and a detriment to the other.

Section 26 (d) of Contract Act 1950 “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 promise to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise” 

Consideration also be defined as a price for which a promise is bought or the reason for the promise.

Chapter 2 : Law of Contract

Types of Consideration

Executory

Executed

Past



Executory i. This is the kind of consideration which is formed by an exchange of promises by the parties. Most commonly found in a bilateral contract. ii. E.g.: Fong agreed to renovate Ahmad’s house. After the house has been renovated, Fong will be paid for his services.

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Executed i. This type of consideration is found in unilateral contracts, where one party makes a promise in exchange for an act by the other party ii. Therefore, when the act is completed, the consideration is executed. iii. E.g.: Janna offers RM100 to anyone who finds and returns her camera which she has earlier lost. Nick finds and returns the camera in response to the offer. Nick’s consideration for Janna’s promise is executed, and Janna’s must pay the RM100 to Nick.

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Past i.

ii.

A past consideration is something that is wholly done by the promise even before making of the agreement. It is always supported by the future promise. E.g.: Tom had lost his wallet. Fortunately, Cindy found it and return the wallet to Tom. Tom made a promise to pay Cindy RM50 for her generous action.

Rules for Consideration

Consideration Need Not Be Adequate

Past Consideration is a Good Consideration

Accord and Satisfaction – Part Payment

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Natural Love and Affection is Valid Consideration

Consideration Need Not Move from the Promisee

Consideration need not be adequate i. Consideration need not be adequate. The agreement is a contract notwithstanding the inadequacy of the consideration. 29

Chapter 2 : Law of Contract

ii.

E.g.: “B agrees to sell a horse worth RM1,000 for only RM100”… The agreement is a contract.

Chappel & C Ltd v Nestle Co Ltd [1960] AC 87 Facts: To promote the sales of their chocolate bars, Nestle offered a record for one shilling and six pence plus three wrappers from six penny bars of chocolate. Chappell & Co. brought proceedings for infringement of copyright and Nestle offered to pay a statutory royalty based on the one shilling and six pence. They did not include the value of the wrappers. Held: The wrappers formed part of the consideration because the one shilling and six pence alone was not enough to obtain a record. Thus, Nestle had to pay a royalty based on three shillings.

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Past consideration is a good consideration i. English law does not recognize past consideration. However, one exceptions to this rule is laid down in English case.

Lampleigh v Brathwait [1615] Facts: The defendant killed a man. He asked the plaintiff to secure him a pardon from the king. The plaintiff spent many days doing this, riding and journeying at his own cost across the country to where the King was and back again. Afterwards, the defendant promised to pay the plaintiff £100 in gratitude. He later failed to pay the money. The plaintiff sued. Held: The Court found favour of the plaintiff. The Court considered the promise as past consideration it was sufficient to create a valid contract.

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Natural love and affection is a valid consideration i. English law does not recognize it. However, Malaysia does recognize this exception under S26(a) Contracts Act 1950. ii. Thus, an agreement made on account of natural love and affection would be held to be binding in Malaysia. iii. If the requirement under Section 26(a) of the Contracts Act 1950 are present, the following condition must be fulfilled:  It is expressed in writing  It is registered (if applicable)  The parties stand in near relation to each other

Chapter 2 : Law of Contract

Re Tan Soh Sim [1951]

Facts: A woman on her deathbed expressed her intention to leave all her properties to her four adopted children.

Held: The court held that the claims of the adopted children were not effective as it was contrary to S26(a) – that is was not in writing, and there was no natural love and affection between parties standing in near relation to each other, since the four children were adopted and did not have natural relations (blood ties) to that woman.

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Accord and satisfaction – part payment may discharge an obligation i. It is a general rule that payment of a smaller sum is not a satisfaction of an obligation to pay a large sum. ii. However, the court noted certain exceptions.

Kerpa Singh v Bariam Singh [1966] Facts: The appellant obtained judgment against the respondent for about RM8,650. On 30 July 1963, the respondent’s son offered to pay RM4,000 as payment in full in order to discharge his father from liability and that if the appellant did not agree to the said settlement, the money should be returned to him. The cheque was cashed and the money retained by the appellant’s solicitors. On 6 February 1964, the appellant took out a bankruptcy notice against the respondent. Held: As the creditor had accepted the tender by cashing the cheque and retaining the money he must be taken to have agreed to discharge the debtor from any further liability.

iii.

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The court stated that payment of a lesser sum can discharge a full debt if it was given in other ways than money, even though the “other form” may be less of a value. The fact that the person accepted it shows that he is satisfied with it.

Consideration need not move from the promisee i. Sec 2(d) of the Contracts Act 1950 – A party to an agreement can enforce the promise even if he himself has given no consideration as long as somebody has done so.

Chapter 2 : Law of Contract

Venkata Chinnaya v Verikatara Ma’ya [1881]

Facts: A sister agreed to pay an annuity of Rs653 to her brothers who provided no consideration for the promise. But on the same day their mother had given the sister some land, stipulating that she must pay the annuity to her brothers. The sister subsequently failed to pay the annuity and was sued by her brothers.

Held: She was liable to pay the annuity. There was a good consideration for the promise even though it did not move from her brothers.

2.3.4 Intention to Create Legal Relations  

There is no provision under the Contracts Act 1950. However, case law exists in this area. Intention to create legal relations is classified into: o Social and domestic agreements – parties do not intend legal relations. o Business or commercial agreements – parties do intend to create legal relations.

Social and domestic agreements  

Courts presume that agreements between friends and/or family members are not intended to be legally enforceable. This is based on a policy reason in that the courts are unwilling to interfere with domestic disputes as far as possible.

Balfour v Balfour (1919)

Facts: Mr. Balfour worked overseas and leave his wife, Mrs. Balfour in England. Mr. Balfour agreed to send $30 maintenance payments to his wife. The relationship later soured and the husband stopped making the payments. The wife sought to enforce the agreement.

Held: The agreement was a purely social and domestic agreement and therefore it was presumed that the parties did not intend to be legally bound.

Chapter 2 : Law of Contract

Business or commercial agreements   

The presumption is that there is an intention to create legal relations. This is based on the reason that intention to create legal relations should not be a hurdle if a party is seeking to enforce a commercial contract. Case: Esso Petroleum Co Ltd v Customs & Exercise Commissioner [1976].

2.3.5 Capacity 

The parties entering into a contract should be competent to contract, i.e. must have the legal capacity to do so.

Section 11 of Contracts Act 1950 “every person is competent to contract who is of age of majority according to the law to which he is subject. And who is of sound of mind and is not disqualified from contracting by any law to which he is subject”

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Age of Majority Act 1971 states that the age of majority in Malaysia is 18 years old.

Mohori Bibee v Dharmodas [1903] Held:

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An infant cannot make any valid contracts. The contract will be void.

There are exceptions to the rule. An infant’s contract can be valid contract if it falls in the following circumstances: o Contract for necessaries  Malaysian Contracts Act does not define necessary. However, Section 3 of the Sale of Goods Act 1979 defines it as “suitable to the condition in life of the minor and their actual requirements at the time of sale”. Nash v Inman [1908]

Held: The contract was not a contract for necessaries even though the tailor had supplied the minor clothes, including 11 fancy clothes which were suitable according to the minor’s station in life, because he had sufficient clothing.

Chapter 2 : Law of Contract

Scarborough v Sturzaker [1905]

Facts: Sturzaker, a minor, periodically rode his bike to work for a distance of about 15 km. He bought a new bike and traded in his old one as part payment before the delivery of the new one. He then attempted to avoid the contract.

Held: The bike was a class of goods that could be classified as a necessary. In this case, it was in fact necessary.

Contract for scholarship  A minor may involve in a contract relates to scholarship.

Government of Malaysia v Gurcharan Singh & Ors [1971] Held: a scholarship agreement entered into by an infant is valid when the scholarship, award, bursary, loan or sponsorship is granted by the government, a statutory authority, or an educational institution. This is by virtue of the Contracts (Amendments) Act 1976. o

Contract of insurance  An infant over the edge of 10 may enter into a contract of insurance. However, if he is below 16, the written consent of his parents or guardian is needed.  This is by virtue of the Insurance Act 1963 (Revised 1972).

2.3.6 Certainty   

The terms of a contract must be certain and not vague. Agreement, the meaning of which is not certain or capable of being made certain, are void under Section 30 of the Contracts Act 1950. E.g.: Ming Electrical Sdn. Bhd. agrees to sell a television to Mary without specifying the brand and the size of the television. Such agreement is void on the grounds of uncertainty. Similarly, if Ming Electrical Sdn. Bhd. agrees to sell a television to Mary without specifying the price of the television, the agreement is void on the grounds of uncertainty.

Chapter 2 : Law of Contract

Karuppan Chetty v Suah Thian [1916]

Held: The court held that the requirement of certainty was not met when the parties agreed upon the granting of a lease ‘at RM35.00 per month for as long as he likes’.

2.4

EFFECTS OF CONTRACT

2.4.1 Valid Contract   

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A valid contract is a written or expressed agreement between two parties to provide a product or service. There are essentially six elements of a contract that make it a legal and binding document. A contract is enforceable when both parties agree to something, back the promise up with money or something of value, both are in sound mind and intend to carry out their promise and what they promise to do is within the law. Failure to comply with the terms and conditions stated in the contract will enable the injured party to discharge the contract.

Privity of Contract  

   

Only the person who are parties to the contract can acquire right and incur liabilities under it. The issue of whether there was privity of contract between the appellant and third party arose in Andrew Christopher Chuah v Choong Eng Chuan (2007) 2 CLJ 405. Apart from special circumstances a person who is not a part to a contract has no right to sue on the contract. The position of third party is that obligations under a contract generally cannot transferred unless all the parties consent (novation). If all the parties consent, liability may be transferred by way of novation. This is a tripartite agreement where the original parties agree to rescind their contract in consideration of a new contract being entered into on the same terms between one of the original parties and third party.

2.4.2 Voidable Contract  

Section 10 of the Contracts Act 1950 provides inter alia that all agreements are contracts if they are made by the free consent of parties. By virtue of Section 14, consent is said to be free when it is not caused by one or more of the following: o Coercion o Undue influence 35

Chapter 2 : Law of Contract

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o Fraud o Misrepresentation o Mistake Section 19 of the Contracts Act 1950 stated that “when consent to an agreement is caused by coercion, undue influence, fraud, misrepresentation, or mistake, the agreement is a contract voidable at the option of the party whose consent was so caused”. The effect of the contract is valid but the party, whose consent was caused by fraud or misrepresentation, may choose to performed the contract or terminate the contract.

Coercion 

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The word ‘coercion’ is defined in Section 15 of the Contracts Act 1950 which refers to “the unlawful act done with intention of causing the person to enter into an agreement”. It is the committing, or threatening to commit any act forbidden by the Penal Code, 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.

Kesarmal s/o Letchman Das v Valiappa Chettiar [1954]

Facts: A transfer executed under the orders of the Sultan, issued in the ominous presence of two Japanese officers during the Japanese Occupation of Malaya, was invalid.

Held: The court held consent was not freely given and the agreement voidable at the will or option of the party whose consent was so caused.

Undue Influence 

Section 16 of the Contracts Act 1950 provides three matters to be dealt with undue influence: i. The relations between parties to each other must be such that one is in a position to dominate the will of the other; (Doctor and his patient) ii. Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; (Parents and children) or iii. Where he makes a contract with person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.

Chapter 2 : Law of Contract

Kesarmal s/o Letchman Das v Valiappa Chettiar [1954] Facts: An old and illiterate Malay woman executed a deed of gift of landed property in Singapore in favor of her nephew who had been managing her affairs. Before executing the deed the donor had independent advice from a lawyer who acted in good faith. However, he was unaware that the gift constituted practically the whole of her property and did not impress upon her that she could prudently, and equally effectively, have benefited the donee by bestowing the property upon him by a will. Held: The gift should be set aside as the presumption of undue influence, which is raised by the relationship proved to have been in existence between the parties, was not rebutted.

Fraud 

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Fraud is defined in Section 17 of the Contracts Act 1950, to include certain acts which are committed with intent to induce another party to enter into a contract. As general rule, wherever a person causes another to act on false representation which the maker himself does not believe to be true, he is said to have committed a fraud. E.g.: Tom told Jerry that his coat is made of pure wool, though he knows that it is untrue. Jerry purchased the coat believing Tom’s statement to be true. This is a fraud by Tom and therefore contract is voidable at Jerry’s option.

Misrepresentation   

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Section 18 of the Contracts Act 1950 defines misrepresentation as to ‘innocent misrepresentation’. Innocent misrepresentation is an untrue statement that the speaker believes is accurate. The basic difference between fraud and misrepresentation is that, in fraud, the person making the statement does not himself believe in its truth, whereas in cases of misrepresentation, the speaker may believe the statement to be true. E.g.: Fred bought a mountain bike from Matt, an acquaintance at school. Matt said he believed the bike did not need any repairs. After a weekend ride, Fred discovered the back wheel was severely misaligned. Fred could cancel the deal and ask for his money back. He is not entitled to damages because Matt genuinely believed the bike was in good shape.

Chapter 2 : Law of Contract

Mistake   

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Various mistakes may occur in the negotiations leading to the formation of a contract and they are not all treated as the same. Section 21 of the Contracts Act 1950 provides for cases where there is a mistake of fact. The basis for rendering agreement void under Section 21 is that there has been no free consent between the parties. For a mistake to be operative under Section 21, it must be a mistake ‘essential to the agreement’. Section 22 provides for cases where there is a mistake as to law. It states that a contract is not voidable because it was caused by a mistake as to any law in force in Malaysia. An agreement is valid as the mistake is made by only one of the parties. But if the mistake is made by both the parties, then the agreement is void. E.g.: B agree to sell his car to Z for RM5000. But neither of them knows that the car was stolen last night. Therefore, the contracts can be voided by either party.

Chan Yoke Lain v Pacific & Orient Insurance Co Sdn Bhd [1997] Facts: The plaintiff, as administrator of the estate of the decease, sued defendant (insurer) for the sum of money covered under the Personal Accident policy of the deceased. The defendant had rejected the plaintiff’s claim because the signature on the proposal form did not belong to the deceased as it had differed from the deceased’s signature on his motor insurance policy.

Held: The defendant alleged that the contract was void because the signature on the proposal form was not signed by the deceased.

2.4.3 Void Contract   

According to Section 2(g) of the Contracts Act 1950, a void contract is an agreement that is not enforceable by law. Section 24 of the act provides that the consideration or object of an agreement is unlawful if it falls within any of the subsections of the section. According to Section 24 of the Contracts Act 1950, the consideration or object of an agreement is lawful unless: o It is forbidden by law, o It is of such a nature that, if permitted, it would defeat any law, o It is fraudulent, o It involves or implies injury to the person or property of another, or o The court regards it is immoral, or opposed to public policy.

Chapter 2 : Law of Contract

Forbidden by law Manang Lim Native Sdn Bhd v Manang Selaman [1986] Facts: A non-native sought to deal in native land; and this was against the Sarawak Land Code. Held: An agreement made in contravention of a statue (Sarawak Land Code) and therefore a void agreement exist within the meaning of Sec 2(g) of the CA 1950. The contact is valid if the dealing was authorized by the Yang di-Pertua Negeri, Sarawak.

If permitted, it would defeat any law Re Sebastian, ex p Metroplex Leasing & Credit Corporation Sdn. Bhd. Held: The High Court held that the contract and transactions made in contravention of the Radioactive Substances Act 1968 were illegal and, therefore, void under Section 24 of the Contracts Act 1950.

2.5 

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TERMS OF CONTRACT Parties are normally bound to perform what they have contracted to do. However, it is important to establish the promises to be included in the contract. Term is a statement which creates contractual obligations between the parties, breach of which will result in the injured party being able to sue. In addition to it express terms, a contract may contain a number of terms that the parties or the courts may ‘read’ into the contract. These are called ‘implied terms’ Implied Terms

Express Terms

2.5.1 Express Terms  

It is essential requirement for a contract to be legally binding that the parties have reached the agreement. These term of the agreement which they have set out, in writing, verbally or a mixture of the two are known as express terms.

Chapter 2 : Law of Contract

2.5.2 Implied Terms  



Certain terms of contract are so obvious that it goes without saying that they form part of a contract. These are called as implied terms. Terms may be implied by: i. Custom and usage pertaining to a particular type of transaction, ii. Statutory provisions, and iii. The courts, based on the intention of the parties E.g.: A reasonable person would argue that it is implied that when a customer books a room in a hotel, he or she is entitled to be provided with a bed as part of the price, although there is no express term as such stated by the hotel.

Pelly v Royal Exchange Assurance [1757] Facts: Pelly had insured his ship and tackle during a voyage. On arrival, the tackle, according to the usage of shipmasters, was removed and put into a warehouse where it was accidently lost as a result of fire. The insurers claimed that as the loss had occurred on shore, it was not covered by them because it was not within the scope of the voyage.

Held: The insurer’s claim was rejected on the basis that the placing of the ship’s tackle in a warehouse was normal practice; that is, it was understood to be referred to in every policy.

2.5.3 Classification of Terms 

Terms can be classified into two types, as follows:

Conditions

Warranties

Conditions  

This terms that is vital to the contract. It goes to the root of the contract. Failure to comply the terms, the injured party may repudiate the contract or sue for damages.

Warranties  

Terms that is less importance to the main purpose of the contract. It does not go to the root of the contract. If it is breached, the injured party may sue for damages only.

Chapter 2 : Law of Contract

2.6   

DISCHARGES OF CONTRACT Discharges of contract refers to the release of the contract. It means that the contracting parties are free from the obligations arising thereafter. It results in the contracting parties do not have to run away from their responsibilities as agreed on the contract before. There are four ways to discharged a contract, which are; Performance

Impossibility (frustration)

Breach

Agreement

Performance  



As general rule, performance of a contract must be exact and precise and should be in accordance with what the parties has promised. Section 38(1) of the Contracts Act 1950 provides that “parties to a contract must either perform or offer to perform their respective promises, unless such performance has been dispensed with by any law”. E.g.: Peter agrees to sell his cycle to John an amount of RM250 to be paid by John on the delivery of the cycle. As soon as it is delivered, John pays the promised amount.

Cutter v Powell Facts: Cutter enter a contract which he will be paid if he performed his duty in a vessel sailing from Jamaica to Liverpool. However, he died when the ship was 19 days short. His widow could not claim the proportion wages as the court held that the contract requires entire performance by Cutter as promised.

Impossibility (Frustration) 

 

If a party promises to carry out a particular act, the law will hold them to their promise. This principle is commonly known as the doctrine of absolute liability. There are 2 instances of frustration, i.e. when a contract to do an act become impossible or unlawful. For frustration to apply, the impossibility of performing the contract must arise without the fault of either party.

Chapter 2 : Law of Contract

H A Berney v Tronoh Mines Ltd [1949] Facts: Plaintiff sued for breach of contract of service. On the invasion of Malaya by the Japanese forces, the European staff of the defendant company was evacuated from Tronoh, Tanjung Tuallang and other places, but the plaintiff elected to remain at Tanjong Tuallang. The defendants contended that on the Japanese occupation of Perak, the contract of employment between them and the plaintiff was discharged by frustration. Held: That the invasion of Malaya by the Japanese frustrated the performance of the contract and therefore there was no breach of contract by the defendants. Claim dismissed.



Frustration can only arise where: i. An unforeseen event outside the control of the contracting parties (a supervening event) has significantly or radically changed the obligations of the parties from their original intentions; ii. Neither party caused the supervening event; iii. Neither party contemplated the supervening event, so there was no provision in the contract for it, and iv. The new circumstances would make it unjust to hold the parties to their original contract.

Breach  

Where party fails to perform their obligations as agreed, they are in breach of contract. A breach can occur in some ways including: i. A failure to comply with a term of the contract; ii. By a party announcing to the other party that they are no longer interested in carrying out their obligations prior to the time for performance; and iii. A delay in the performance where times is of the essence in the contract.

Agreement 



If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement. E.g.: Peter owes RM5000 to John and agrees to repay it within one year. They document the debt under a contract. Subsequently, Peter loses his job and request John to accept RM3000 as a final settlement of the loan. John agrees and they make a contract to that effect.

Chapter 2 : Law of Contract

2.7     

REMEDIES OF CONTRACT Remedies is the method by which an injured party enforces a right or corrects a loss due to the other party has breach a contract. The remedies available to the injured party will depend on the nature of the breach and the results will differ between the parties. The usual remedy for a breach of contract is an award of damages, which is a common law remedy. However, if a monetary remedy is not satisfactory, the court may exercise its discretion and order any one of several equitable remedies. The remedies available for breach of contract are: o Damages o Rescission of contract o Restitution o Specific performance o Injunction o Quantum Meruit o Anton Piller Order

Damages   



Damages in contract law can be defined as a sum of money paid to the innocent party in compensation for a breach of contract. The main purpose of damages is to enable the innocent party to receive monetary compensation from the party responsible for the breach of contract. Section 74 of the Contracts Act 1950 provides that “damages are granted to a party as compensation for the damage, loss injury he has suffered through a breach of contract”. The party may recover damages as follow: i. Expenses incurred as a result of the breach, ii. Loss of profits arising as a result of the breach; and iii. Difference between the price of goods as contracted for and the actual price the goods were sold as a result of the breach.

Hadley v. Baxendale Facts: Plaintiff operated a mill, which they were forced to shut down when their steam engine broke. Then, plaintiff makes a contract with defendant to replace the broken engine. Due to defendant’s neglect, the delivery of the new engine was delayed, and plaintiff had to suffer losses. Held: The court held that the defendant is liable for damages suffered by plaintiff due to loss of profits.

Chapter 2 : Law of Contract

Rescission of Contract  

If a contract is rescinded, then it is as if it had never existed, and the parties are restored to their original positions. A party discovering a relevant mistake, or the victim of a misrepresentation, may affirm or rescind the contract, explicitly or by his conduct, but this decision one made irrevocable.

Restitution   

Restitution (or restoration) is sometimes referred to as quasi-contract. It is not contractual and does not rely on the plaintiff suffering loss or damage. Its basis is unjust enrichment: those situations where it would be very unfair if the defendant was to be allowed to retain the money, or the goods or services, without payment.

Specific Performance     

Specific performance is a discretionary order granted by the courts directing a person to carry out their obligations under the contract. It is not generally used in breach of contract actions unless damages prove to be inadequate or damages cannot be ascertained. Where the court cannot supervise the implementation of a contract, it will not generally grant specific performance. The court will also refuse to grant specific performance where the contract would require constant supervision by the court. The court has a discretion to refuse specific performance where the granting of it would cause undue hardship to the defendant.

Ryan v Mutual Tontine Westminster Chambers Association [1893] Facts: The lessor of a block of flats agreed to provide a porter who would be ‘constantly in attendance’ and would perform certain specified duties. The person appointed by the lessor also worked as a chef in a nearby club, and in his absence while he worked as a chef, other person were employed to perform his duties. The issues was whether a tenant could seek an order for specific performance against the porter that he carries out his obligations. Held: The court was not prepared to order specific performance because it would have to constantly supervise the porter’s attendance.

Injunction 

An injunction is a discretionary court order.

Chapter 2 : Law of Contract



Unlike specific performance, this is a court order restraining a party from breaking their contract or from committing a wrongful act (an order prohibiting performance) and will not be awarded if damages are an adequate remedy. An injunction may be: i. Prohibitory – preventing the breach of contract;  E.g.: When a contractor had decided to sign a contract with hotel A, but on the other hand, the same contractor also wants to sign a contract with hotel B. As a result, hotel A can request to apply prohibitory injunction to the contractor from signing contract with hotel B. ii. Mandatory – requiring a person to perform some contractual obligation;  E.g.: When a contractor refuses to finish building a new bungalow on the date given, the owner of the bungalow can request the court to apply mandatory injunction to the contractor to finish the work. iii. Interlocutory – it freezes the status quo between the parties until the dispute can be heard by the court.  E.g.: When there is two people are fighting for the ownership of a land, interlocutory injunction is applied to this case. It means, neither party cannot do anything to the land.

Neoh Siew Eng & Anor Vs Too Chee Kwang [1963]

Facts:

The landlord had cut the water supply for his house rented by the tenant.

Held: The court held that injunction was granted requiring the landlord to keep all communication pipes in proper repair so that water supply to the premises would not be disconnected.

Quantum Meruit  



Quantum meruit means ‘as much as he has earned’ and only arises in cases of part performance. Quantum meruit can arise where: i. A defendant has prevented a plaintiff from carrying out the remainder of the contractual duties; ii. The parties cannot agree on payment; and iii. The parties agree on payment for partial performance but not the actual amount. If a person sues for payment for services in such circumstances, the court will calculate the amount due based on time and usual rate of pay or the customary charge, based on quantum meruit by implying a contract existed.

Chapter 2 : Law of Contract

Sumpter v Hedges [1898] Facts: The plaintiff, a builder, entered into a contract to build 2 houses on the defendant’s land. After the plaintiff had done a little more than half of the work, he ran out of money and told the defendant that he could not complete the job. The defendant then completed the houses himself. Held: The contract was entire, not divisible; and so the plaintiff could not recover under it. Furthermore, the fact that the plaintiff was unable to complete the job was not the fault of the defendant and so there was no entitlement to a quantum meruit. While the defendant obtained a benefit, it did not constitute acceptance of partial performance in this case.

Anton Piller Order 



A court order which requires the defendant in proceedings to permit the plaintiff or his or her legal representatives to enter the defendant's premises in order to obtain evidence essential to the plaintiff's case. It is a court order that provides the right to search premises and seize evidence without prior warning. This is intended to prevent the destruction of relevant evidence, particularly in cases of alleged trademark, copyright or patent infringements.

Anton Piller v Manufacturing Processes Ltd. [1976] Facts: The Anton Piller company was under the belief that one of its agent was supplying confidential information to one of its competitors. They believed that the agent had documentation in their possession that would prove their breach. However, they are concerned that a subpoena would give the agent advance warning of their intentions and that any relevant documents would then be destroyed. The issue was whether the company could obtain an order enabling them to enter the agent’s premises to inspect the documents and remove or copy the relevant ones.

Held: As there was a strong prima facie case of infringement which could cause damage to the applicant, and clear evidence that the defendants had incriminating material in their possession which they would destroy, the order is granted.

Chapter 2 : Law of Contract

2.8 ASSESSMENT QUESTIONS 1.

The word contract is defined under _______________. A. B. C. D.

Executed Past consideration Accessory Executory

The leading case “Balfour v. Balfour” is related to ________________. A. B. C. D.

Age of majority Sound of mind Insane Qualified by law

There are THREE (3) types of consideration EXCEPT A. B. C. D.

Acceptance Consideration Invitation to treat Capacity

Following statement shows a person who is competence to enter a contract EXCEPT A. B. C. D.

2(a) of Contract Act 1950 2(c) of Contract Act 1950 2(e) of Contract Act 1950 2(h) of Contract Act 1950

The main elements of contract include all the following EXCEPT A. B. C. D.

Section Section Section Section

The The The The

intention to create legal relation possibility of performance lawful object legal formality

Any modification of the offer is named as _____________ and it is a rejection of the original offer. A. B. C. D.

Acceptance Invitation to treat Counter offer Counter acceptance

Chapter 2 : Law of Contract

John is 12 years old. His father passed away two years ago and his father left him a piece of land. John entered into a contract to sell the land to his aunt. Is there a valid contract in this case? A. The contract is a voidable contract. B. It depends. If John wants to continue with the contract, he is able to do so. C. No. John cannot enter into the contract, he is a minor. D. The contract is a valid contract.

X applied for remedy from the court since Y could not complete the job as mentioned in the contract made between X and Y. What is the remedy available for X? A. B. C. D.

A horse is put on auction by Ally, a licensed auctioneer. The reserved price has been fixed at RM45,000. Under the law of contract, Ally is making ________________. A. B. C. D.

10.

Damages Consideration Intention Ownership

an acceptance an offer an invitation to treat a counter-offer

A counter offer destroys the original offer based on the decided case of ____________. A. B. C. D.

Carlill v Carbolic Smoke Ball Co. Ltd [1893] Harrison v Nickerson [1873] Felthouse v Bindley [1862] Hyde v Wrench [1840]

11.

Aaron Aziz is a high school senior; is 17 years old. He operates a business that runs printing and photostat. He made a contract with Kedai Buku Mesra Sdn Bhd to supply the paper. He later on did not pay for the paper provided by Kedai Buku Mesra Sdn Bhd. Decide whether Kedai Buku Mesra Sdn Bhd can take legal action on Aaron Aziz.

12.

En. Kamal Adli owns Seri Mawar Florist Sdn Bhd in Kuantan. En. Kamal Adli intends to sell his firm to En. Fizo Omar and had entered into a contract of sale with him. Advise En. Kamal Adli as to the three remedies available to En. Fizo Omar in the event En. Kamal Adli breaches the contract of sale. 48

Chapter 2 : Law of Contract

13.

14.

Cik Mya Husna had contracted to supply fifty pieces of puddings to Sweety Cake House on every Friday. On one Friday, Cik Mya Husna did not send any pudding to the cake house. The manager of the cake house called up Cik Mya Husna and was informed that she had left for her hometown on Thursday. The manager was furious as Cik Mya Husna left without informing him about it. a)

State the offence that has been committed by Cik Mya Husna.

The manager comes to you for advice. Advise him as to the possible remedy.

Madam Wong wants to give a piece of land to her daughter, Amelia, on her 21st birthday. Since Amelia will not be paying any money to her mother, Madam Wong is worried about the transfer of her land to Amelia, will be void under the virtue of Section 26 of the Contracts Act 1950. Based on the situation given, you are required to:

15.

Identify an issue arises on the situation.

Explain the relevant provision of the Contract Act 1950 on the issue.

Briefly discuss ONE (1) relevant case to support your answer.

Conclude the issue.

On 1st January 2017, Linda offered to sell her set of jewelleries to Preety for RM10,000. On 4th January 2017, in reply, Preety made a counter-proposal to purchase at RM9,000. However, on 14th January 2017, when Linda refused to accepts this offer, Preety wrote to Linda saying that she was prepared to pay the original sum demanded. Based on the above situation, you are required to: a)

State an issue to the situation above.

Discuss the relevant provisions of the Contracts Act 1950.

Explain a relevant case to support your answer.

Conclude your answer.

CHAPTER

Legal Aspects of Business Entities

Learning Objectives At the end of this chapter, students should be able to:   

Categorize types of business entities in Malaysia Compare the characteristics of sole proprietorship, partnership and company Ascertain rights and duties of partners and dissolution of partnership based on Partnership Act 1961

Chapter 3 : Legal Aspects of Business Entities

3.1

INTRODUCTION

 There are many types of business entities operating in Malaysia. There are commonly three different types of business entities which are: o Sole proprietorship (known as sole trader) o Partnership o Company (Private limited company or public company)  Other types of business entities available in Malaysia: o Foreign company o Limited liability partnership (LLP)  Laws that governing business activities are:

3.2

Sole Proprietorships Partnerships

Registration of Businesses Act 1956

Companies

Companies Act 2016

Limited Liability Partnerships

Limited Liability Partnerships Act 2012

TYPES OF BUSINESS ENTITIES

3.2.1 Sole Proprietorship  Sole Proprietorship registration is the most common and simplest legal business structure option in Malaysia.  Sole Proprietorship is governed by Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) and Registration of Businesses Act 1956.  Unique features of a Sole Proprietorship such as fast and easy registration, no corporate tax payments, less formal business requirements, winding up easily and lowest annual maintenance (compare to other business entity such as Private Limited Company (Sdn. Bhd.) or Limited Liability Partnership).  It is suitable for newly start up business owners to try their new business strategy or explore into new market. Business owners may subsequently transform their business into Private Limited Company (Sdn. Bhd.) if they feel their businesses are stable/ aim to do bigger business. Sole Proprietorship will transform to Partnership if there are additional partners joined the Sole Proprietorship.  Characteristics of sole proprietorship:

Owned by one person

Small and family based business

Have no separate legal existence

Requires a small amount of capital to start

Bear unlimited liability

Chapter 3 : Legal Aspects of Business Entities

3.2.2 Partnership  The law of partnership is governed by the Partnership Act, 1961 (Revised 1974).  A partnership business is also incorporated under the Business Registration Act 1956 (Amendment 1978).  Section 3(1) of the Partnership of Act provides the meaning of partnership as: “Partnership is the relation which subsists between persons carrying on business in common with the view of profit.”  From the provision given above, it can be seen that there are 5 main elements that are involved in the creation of the partnership: a) Relation  The relationship, which subsists, is a contract.  A partnership agreement is a contract. However, it is not enough just to agree to be partners; partner must also be in a business. b) A business  The word business has been defined in Sec 2 of the Partnership Act as “including every trade, occupation or profession”. c) Between person  There must be at least two or more persons to form a partnership.  A partnership is carried out by more than one person but not exceeding 20 persons.  For professional firm, the number can up to unlimited number of members. d) Carried on in common  The business must be carried on by or on-behalf of all the partners.  In other words, it means there must be one person or more carry on the business for himself and on behalf of the others. e) With a view of profit  If the activity of a business is not being carried on with an intention to make profit (even if that profit is not actually realised) then that business cannot be a partnership. This would exclude, for example, clubs and societies which, by and large, are not formed with a view to making a profit.  Section 4 of the Partnership Act 1961 lays down the circumstances in which there are no prima facie partnership: a) Joint tenancy, tenancy in common, common property, or part ownership; 52

Chapter 3 : Legal Aspects of Business Entities

b) The sharing of gross returns; c) The receipt of share of profits does not qualify a person to be a partner.

Types of Partners

NOMINAL ACTIVE QUASI-PARTNER a person SLEEPING a partner who a person who is in fact not does not a partner who takes no a partner but who is liable actively participate have real active part in the in the for the debts of the interes in management but is management of partnership consequence the business nevertheless liable as a the business and is of "holding out” that is but lends his partner known to the causing people to believe name to the world as a partner he is a partner. firm

Rights and Duties of Partners  



The relations between partners to one another are determined by their partnership agreement. The partnership agreement normally provides for the rights and duties of the partners, the conduct and management of the firm, the firm and their profit sharing arrangement. The interests and duties of partners in the absence of agreement to the contrary are provided for in Section 26 of the Partnership Act 1961. This rules apply in the absence of an agreement to the contrary. Section 26 of the Act provides that:

Sec 26 (a)

All partners are entitled to share equally in the capital and profits of the business and must contribute equally to losses whether of capital or otherwise.

Sec 26 (b)

The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him. i) In the ordinary and proper conduct of the business of the firm or, ii) In or about anything necessarily done for the preservation of the business or property of the firm.

Sec 26 (c)

A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of eight per cent per annum from the date of the payment of the advance.

Chapter 3 : Legal Aspects of Business Entities

Sec 26 (d)

No partner is entitled to interest on capital before the ascertainment of profit.

Sec 26 (e)

Every partner may take part in the management of the business.

Sec 26 (f)

No partner is entitled to remuneration for acting in the partnership business (even if the partners have worked unequally)

Sec 26 (g)

No person may be introduced as a partner without the consent of all existing partners.

Sec 26 (h)

Any differences arising as to ordinary matter connected with the partnership business may be decided by a majority of the partnership, but no change may be made in the nature of the partnership business without consent of all existing members.

Sec 26 (i)

The partnership books are to be kept at the place of business of the partnership, or the principle place, if there is more than one place of business and every partners may, when he thinks fit, have access to and inspect and any copy any of them. In this regard, a partner may employ an accountant another agent to examine the books.

Dissolution of Partnership 



Dissolution of partnership may happen in various circumstances and its consequences not only affect the partners themselves, but also third parties dealing with them. A partnership may be terminated or dissolved as follows: i. By agreement ii. Operation of law iii. By death or bankruptcy iv. Charging in shares v. By supervening illegality vi. By court order

By agreement 

Partnership can be dissolved if: i. Duration of the partnership has been specified in the partnership agreement, the partnership is terminated on the expiry of that period. ii. The partners mutually agree to dissolve the partnership.

Operation of law 

Partnership can be dissolved as followed: i. Section 34(1)(a) of the Partnership Act 1961 – if the partnership was entered into for a fixed term expires,

Chapter 3 : Legal Aspects of Business Entities

ii.

iii.

Section 34(1)(b) of the Partnership Act 1961 – if the partnership was entered into for a single adventure or undertaking and that adventure or undertaking terminates, Section 34(1)(c) of the Partnership Act 1961 – if the partnership was entered into for an undefined time, by any partner giving notice to the other partner(s) of his intention to determine (or end) the partnership.

By death or bankruptcy 

Section 35(1) of Partnership Act 1961 states that partnership may be dissolved by death or bankruptcy of any partner(s).

By charging on shares 

According to Section 35(2) of Partnership Act 1961 states that when it comes to charge, a partnership may, at the option of the other partners, 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 

S36 PA 1961 states that a partnership can be dissolved by the occurrence of any event which makes it unlawful for the business of the firm to be carried.

By court order

3.2.3 Company  The law relating to companies in Malaysia is contained in Companies Act 2016 which was formerly known as Companies Act 1965 (Revised 1973).  The aim of the Company Act 2016 replacing the 1965 Act was to develop a dynamic and conducive regulatory environment for businesses in Malaysia.

Chapter 3 : Legal Aspects of Business Entities

 This act of Parliament applies to all companies though types of companies are exempted from specific provisions. Definition 

Under Section 2 Companies Act 2016: ‘A company incorporated under this Act or under any corresponding previous written law’



Therefore, a company for the purpose of the Companies Act 2016 means a company incorporated in Malaysia.

Effect of Incorporation 

 

The effect of incorporation of a company is that the company is vested with a corporate personality. It means that in the eyes of law, a company is treated as a legal person. A company is a legal person by itself separate and distinct from its shareholder and directors. The incorporation of a company brings the following effects:

The company as a separate legal entity

3.3

Liability of member is limited

A company has perpetual succession

A company has contractual capacity

A company may hold property

A company may sue and be sued

THE DIFFERENCES BETWEEN SOLE-PROPRIETORSHIP, PARTNERSHIP & COMPANY Sole-Proprietorship

Structure

The owner and its business is the same entity

Formation

No need to be formed in writing

Partnership 2 or more persons carrying on business with a view of profit Can be formed orally or in writing

Company A company is a person separate from its members Must be formed in writing, through a Memorandum and Articles of Association.

Chapter 3 : Legal Aspects of Business Entities

Sole-Proprietorship Management The owner manages the business himself or can hire employees to manage the firm for him

Partnership

Company

Partners are agents of the firm for carrying on its business and generally entitled to manage the firm. Needs to register their business with CCM under the Registration of Businesses Act 1956 Maximum is twenty. No limit of members for professional firms.

Members of a company as such are neither its managers nor its agents.

A company must be constituted in writing, i.e. by Articles of Association and Memorandum of Association Members are not liable for the company’s debts

Registration

Needs to register his business with the CCM under the Registration of Businesses Act 1956

Number of Members

Only one person.

Constitution

No agreement is necessary since there is only 1 person by himself

A partnership must have an agreement, either orally or in writing

Liability

Liability for the business’s debts is unlimited

Liability for the firm debts is unlimited (unless it is a limited liability partnership)

Dissolution

A sole proprietorship may be dissolved informally by the owner himself

A partnership may be dissolved informally by agreement of partners

Need to be registered with the CCM and as a company under the Companies Act 2016 There is no maximum number of members excepts for a private company which the maximum is 50

A company is dissolved by winding up and liquidation, which are formal procedures

Chapter 3 : Legal Aspects of Business Entities

3.4 ASSESSMENT QUESTIONS 1.

A partnership can be terminated in the following ways EXCEPT: A. B. C. D.

2(1) 3(1) 4(1) 5(1)

The company enjoys perpetual succession. The company can sue and be sued on its own name. The company may own properties in the form of land only. Limited liability on the part of the members for debts of the company.

Maximum number of partner in legal firm is? A. B. C. D.

Section Section Section Section

The following are an effect of incorporation EXCEPT: A. B. C. D.

agreement frustration operation of law death or bankruptcy

Definition of partnership can be found in _____________________ of the Partnership Act 1961. A. B. C. D.

By By By By

20 30 50 No limit

Which of following statements are NOT TRUE regarding rights and duties of partners in the absence of agreement? A. Every partner may take part in the management of the business. B. All partners are entitled to interest on capital before the ascertainment of profit. C. No person may be introduced as a partner without the consent of all existing partners. D. All partners are entitled to share equally in the capital and profits of the business and must contribute equally to losses.

Choose one statement which BEST describes the rights of partners in a partnership. A. Every partner may take part in the management of the business. B. In the absence of agreement, the rights of the partners are not being protected 58

Chapter 3 : Legal Aspects of Business Entities

C. A person may be introduced as a partner without the consent of all existing partners D. Section 26 Partnership Act, 1961 provides the rights and duties of partners only in situations where is in absence of agreements. 7.

Which of the following is NOT a characteristic of a partnership? A. B. C. D.

Partnership is terminated by _____________ when the partners mutually agree to dissolve the partnership. A. B. C. D.

The firm is treated as a separate legal entity The purpose of a partnership is to gain profit Partners agree to carry on business in common Every partner is an agent of the firm and his other partners for the purpose of the partnership business.

agreement operation of law death or bankruptcy supervening illegality

Partnership, as defined in Section 3(1) of the Partnership Act is: A. The relationship which subsists between persons carrying on a business on common with a view of profit. B. The relationship formed between parties for the purpose of leisure. C. The relationship between members of any company or association with common view of profit. D. The relationship formed by cooperatives carrying on a business common with a view of profit.

10.

Choose the CORRECT rights and duties of partners according to Partnership Act 1961 i. ii. iii. iv. A. B. C. D.

All partners are entitled to share equally in the capital and profits. A partner is entitled to interest at the rate of 8% per annum from the date of the payment or advance. Every partner may take part in the management of the partnership business. A person may be introduced as a partner by majority

I, II and III I, II and IV I, III and IV II, III and IV

Chapter 3 : Legal Aspects of Business Entities

11.

Partnership can be dissolute by court order under section 37 of the Partnership Act 1961. Explain FIVE (5) of the circumstances. (10 marks)

12.

List any THREE (3) differentiation among sole proprietorship, partnership and company. (6 marks)

13.

State FOUR (4) duties of partners according to Partnership Act 1961. (8 marks)

14.

Azman and Faizal are partners in a registered business of Kedai Aksesori Komputer. After 1 year carrying out the business in selling computer, Azman would like to change the nature of business into handphone accessories and has introduce Fauziah as the new partner. Faizal disagree with Azman’s decision and would like to seek your advice on this matter. Adapt the situation by referring to Partnership Act 1961. (6 marks)

CHAPTER

Agency

Learning Objectives At the end of this chapter, students should be able to:    

Ascertain nature of agency Discuss types of agency Demonstrate the relationship between principals and agents Outline termination of agency

Chapter 4 : Agency

4.1

INTRODUCTION

 The law of agency in Malaysia is governed by Part X of the Contracts Act 1950.  Agency is a triangular relationship that constructs the creation of a legal relationship between a person (principal) and a third party via the intervention of the agent.  Agency is a legal relationship which exist in employment law, partnership law, corporate law, buying and selling of properties, land and goods etc.

4.2

DEFINITION OF AGENCY

Section 135 of the Contract Act 1950

“the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal’s legal position in respect of strangers to the relationship by the making of contracts or disposition of property”

Section 135 Contract Act 1950 defines agent as: “a person employed to do any act for another or to represent another in dealings with third party”

Section 136 Contract Act 1950 defines principal as: “the person for whom such an act is done, or who is so represented”

Chapter 4 : Agency

 In agency, there are in effect two contracts: a) The first contract made between the principal and the agent which the agent derives his authority to act and on behalf of the principal; and b) The second contract made between the principal and the third party through the work of the agent. Who can become a principal? A person who is:  S136 CA 1950 – any person who is 18 years old and above and who is of sound of mind.

Who can become an agent? A person who is:  S137 CA 1950 – an agent need to be a major or sound mind.  If he/she is a minor or unsound mind, he/she would not be liable towards his/her principal for acts done as agent.

4.3

FORMATION OF AGENCY

 Like any other contract, a contract of agency can be expressed or implied from the circumstances and the conduct of the parties. In other words, the authority of an agent may be expressed (i.e. given by words spoken or written) or implied (i.e. inferred from things spoken or written or from the ordinary course of dealings).  Section 130 Contract Act 1950 states ‘no consideration is necessary in order to form a contract of agency’.  Generally, an agency may arise in the following ways: o By express appointment by the principal o By implied appointment by the principal o Ratification by the principal o By necessity o By the doctrine of estoppel 4.3.1 By Express Appointment by the Principal  

An agent may be appointed expressly either in written or oral form. According to Section 140 Contract Act 1950, an authority is said to be express when it is given by words spoken or written. The provision also states that,

Chapter 4 : Agency



‘even a letter or written words spoken may be effective in appointing an agent ‘. Example: Ali said “Abu, I want you to be my agent”.

Garnac Grain Co. Inc v HMF Faure & Fairclough Ltd Facts:

Express appointment may be in a written or oral form.

4.3.2 By Implied Appointment by the Principal 



Actual implied authority is by way of the implied consent of the principal and the agent. This derived from the words and conduct of the parties in the way they have acted in connection to one another. Section 140 Contract Act 1950 infer the creation of an agency by implication when a person ‘by his words or conduct holds another person as having authority to act for him’. This appointment happens under three situations; i. When a person by his words or conduct holds out another person as having authority to act for him.  E.g.: Ali lives in Shah Alam and owns a shop in Tanjung Malim. The shop is managed by Siti who normally orders goods from Abu in Ali’s name for the purpose of the shop. Siti then pays the goods out of Ali’s fund. Now, as impliedly Siti become Ali’s agent. ii.

Relationship between husband and wife  It is implied that the wife has authority to pledge the husband’s credit in a contracts that are necessaries and suited to their condition and style of living.  The husband as the principal, is liable upon such contracts that are necessaries and suited to their condition and style of living.  However, the husband can rebut by proving that:  husband expressly forbade wife to pledge credit;  husband expressly warned tradesman not to supply wife with goods or credit;  wife was sufficiently provided for with goods;  wife given sufficient allowance;  the order for necessaries was unreasonable because of husband’s income

iii.

Relationship between partners  Section 7 Partnership Act 1961 – each partner in a partnership is an agent to the firm or other partners in the firm, when contracting the course of the partnership’s business.

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

Each partner become implied agent to the firm. On another hand, the firm or other partners are the implied principal to any one of the partners. The firm or the other partners are liable to whatever contract which has been entered into by any of the partners.

Chan Yin Tee v William Jacks & Co. Facts: The appellant and Yong, a minor were registered as partners. At a meeting with representative of the respondent company, the appellant held himself out to be Yong’s partner. Goods were supplied to Yong but not paid for. The respondent company obtained judgement against the appellant and Yong. The appellant appealed to the Federal Court. Held: The court held that since the appellant had held Yong out as his agent who had the authority to do things on his behalf, the appellant was liable for Yong’s acts.

4.3.3 By Ratification 



 



Agency by ratification can take in either of these two situations: i. An agent who was duly appointed has exceeded his authority, or ii. A person who has no authority to act for the principal has acted as if he has the authority When any one of the above-mentioned situations arise, the principal can either reject the contract or accept the contract so made – Section 149 Contracts Act 1950. When the principal accepts and confirms such a contract, the acceptance is called ‘ratification’. However, if the principal does not agree, no contract exists and the principal would not be liable upon the act done by the agent. According to Section 150 Contracts Act 1950, ratification may be expressed or implied. The effect of ratification is to render the contract as binding on the principal as if the agent had been properly authorized beforehand – Section 149 Contracts Act 1950. Ratification is retrospective; it dates back to the time when the original contract was made by the agent and not from the date of the principal’s ratification.

Chapter 4 : Agency

Bolton Partners v Lambert (1889) Facts: Bolton Partners owned a factory, which Lambert offered to buy. This offer was accepted by the Managing Director, though in fact he had no authority to do this. On 13th January, there was a disagreement, and Lambert withdrew his offer. On 17th January, Bolton Partners started proceedings for breach of contract. On 28th January, the BOD of Bolton Partners ratified the action of the Managing Director. Lambert argued that this ratification came too late. Held: The Court of Appeal held that it had retrospectively validated the original contract, and that Lambert’s attempt to withdraw was therefore ineffective. Lambert has breached the contract when he attempts to withdrew the offer to buy the factory.



The following nine conditions must be fulfilled in order for the creation of an agency by ratification to arise: i. The act or contract must be unauthorized. ii. The unauthorized act is lawful

Brook v Hook Held: The principal may not ratify a contract in which his signature had been forged by the unauthorized agent

iii.

The agent must, at the time of the contract, expressly act as an agent for the principal. He must not allow the third party to think that he is the principal.

Keighly Maxted & Co v Durant

Facts: An agent was authorized by the appellant (principal) to buy wheat at a certain price. The agent exceeded his authority & bought it at a higher price. However, the agent contracted in his own name.

Held: The appellant was not liable to Durrant (3rd party) because the appellant could not ratify the contract because the contract was made in the agent’s own name.

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iv.

The agent must have a principal, who is in actual existence or capable of being ascertained, when the contract is made.

Kelner v Baxter Held: A contract to buy a hotel made by an agent on behalf of a company which was not registered/formed could not be ratified by the company, because the company (principal) did not exist at that time. v. vi.

The principal must have contractual capacity at the time when the contract is being made and at the time of ratification. The principal must, at the time of ratification, have full knowledge of all material facts.

March v Joseph Held: A principal had ratified a contract without the full knowledge of all material facts. The Court held that the principal was not bound to such contract

vii. viii.

The principal must ratify the whole act or contract. Ratification must be made within a reasonable time

Metropolitan Asylum Board v Kingham & Sons Held: The agent contracted to buy eggs without the authority. The principal tried to ratify the contract 1 week after it was made. The Court held that ratification was too late. ix.

The ratification must not injure a third party, i.e., it must not subject the third party to damages or terminate his right or interest under Section 153 Contracts Act 1950.

Example: Mr. Malek appointed Hassan as his agent to buy a lorry for his business which does not exceed RM200,000. Later, Hassan went to Bob’s Motors Sdn Bhd and ordered a lorry costs of RM350,000. He told the salesman that he is buying the lorry on behalf of Mr. Malek. A day later, Bob’s Motor Sdn Bhd delivered the lorry to Mr. Malek. If Mr. Malek confirms and adopted the contract on that day, Hassan is said to be his agent through ratification.

Chapter 4 : Agency

4.3.4 By Necessity   

Under certain circumstances a person may become the agent of another without having been appointed as such. An agent can be appointed during an emergency even in the very beginning the agent is not appointed by the principal to act on his behalf. An agency by necessity may be created if the following three conditions are met: i. It is impossible for the agent to get the principal’s instruction – Section 142 Contracts Act 1950. ii. The agent’s action is in order to prevent loss to the principal. iii. The agent of necessity must have acted in good faith.

Example: Mary is leading a group for XYZ Travel Agency when their bus is involved in an attempted hijacking. Several passengers are injured and emergency medical treatment is required. In this situation, Mary would have the authority to use local doctors to treat the injured passengers. Her actions would be binding XYZ Travel Agency even though she had no actual authority to act.

Great Northern Railway v Swaffield

Facts: D has put his horse on the P’s train to be sent to a destination which has been agreed by both parties. Upon arrivals at the destination, there was no one to take the horse. The station master didn’t know the D’s address and thus directed that horse to be put in stable. The railway company later claimed from the D for the charges of the stable. Held:

P has acted as an agent by necessity.

Springer v Great Western Railway Company Facts: The agent (D) agreed to carry principal’s (P) tomatoes from Jersey to Covent Garden Market. Owing to bad weather, the ship arrived late at Weymouth. Some of the tomatoes were found to be bad. D decided to sell the tomatoes locally as they felt the tomatoes could not arrive Garden Market in a saleable condition. But D did not communicate with P. Held: P was awarded with damages as D failed to communicate with P as he could have done so. 68

Chapter 4 : Agency

4.3.5 By Estoppel  

A person cannot be bound by a contract made on his behalf without his authority. However, if he, by his words or conduct allows a third party to believe that a person is his agent even when he is not, and the third party relies on it, he will be estopped from denying the existence of that person’s authority to act on his behalf.

Example: If Mike tells Sam in the presence of Tom that Mike is Tom’s agent and Tom does not contradict this statement, Tom cannot later deny that Mike is his agent if Sam provided a room to Mike in his hotel, believing that Mike is Tom’s agent and booked the room for the business purposes, and later demanded Tom for the payment of the bill.

Freeman & Lockyer v Buckhurst Park Properties Ltd Facts: There were 4 directors in a company. One of them, ‘A’ contracted on behalf of the company with ‘T’ (3rd party) without any authority. The other directors knew about the contract, but not inform ‘T’ that ‘A’ actually had no authority to act. This induced ‘T’ to believe that ‘A’ had the authority to enter into a contract on behalf of the company. Held: The company is estopped from denying that ‘A’ is the company’s agent and from denying that ‘A’ had the authority to act on behalf of the company.

4.4

TYPES OF AGENT

 The evolution of commercial practice, couple with the need for various functional classifications of agents, has resulted in the recognition of a number of different kinds of agents. Some of the common types of agents are: a) A broker b) A factor c) A commission agent d) A del credere agent e) Power of attorney 4.4.1 A Broker 

Is an agent who is engaged to make contracts between two principals (as counter parties) engaged in trade, commerce or navigation. A partnership

Chapter 4 : Agency

business is also incorporated under the Business Registration Act 1956 (Amendment 1978). 4.4.2 A Factor 

A factor (mercantile agent) is an agent for sale who is entrusted with possession of goods belonging to the principal for sale & who sells the goods in the name of agent without disclosing the name of the principal.

4.4.3 A Commission Agent / Commission Merchant  

It is an agent appointed by a principal to sell goods (more commonly) or to buy goods (less commonly) on behalf of the principal. The reference ‘commission’ is not to the method of remuneration, but to the function, mandate or commission with which that the agent is charged.

4.4.4 A Del Credere Agent   

Is an agent who assume a super added duty to ensure the principal is paid by the third party. This super added duty is compensated for by the payment of a del credere commission by the principal. The del credere agent promises to pay the principal the price of the goods of the third party defaults.

4.4.5 A Powers of attorney 

 

4.5

Powers of attorney are legal instruments under which principals (donors) confer authority on agents (attorneys or donees) to perform certain acts for the principal. Unlike most other agency relationships, powers of attorney are governed by statute viz the Powers of Attorney Act 1949. When a person gives another a power of attorney, it means that the person authorizes another to act on his or her behalf. TYPES OF AGENT BY AUTHORITY

 An agent’s acts are binding on the principal if they are done within the agent’s authority. If an agent does an act which exceeds that authority given, the principal is not bound unless he adopts and ratifies the unauthorized act.  An agent’s authority may be actual or apparent.

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ACTUAL

APPARENT / OSTENSIBLE

Authority is expressly given by the principal (orally or in writing), or implied from the express authority given, from the circumstances of the case, custom or usage of trade, and the conduct of parties.

Authority that is not expressly given by the principal but which the law regards the agent as possessing although the principal has not consented to his exercising such authority.

4.6

DUTIES AND RIGHTS OF A PRINCIPAL

 There a several rights which would become the duties of the principal.

4.6.1 To pay commission or remuneration as agreed in the contract  

The principal is only obliged to pay the agent if the agent complied with the terms of the agency agreement and when the agent has earned the payment. If agent is guilty or misconduct, Sec. 173 CA → agent losses his right to remuneration.

4.6.2 Not to Wilfully Prevent or Hinder the Agent from Earning His Commission 



The agent’s right to commission is not affected even of the transaction has not been beneficial to the principal or if the transaction has subsequently fallen through no fault of the agent. E.g.: A principal cannot employ a 2nd agent to do the same act as the first agent. This is to protect the 1st agent from not getting the commission that has been promised to him by the principal.

4.6.3 To Indemnify & Reimburse The Agent for Acts Done in The Exercise of His Duties  

The principal is obliged to indemnify or reimburse the agent for costs incurred in carrying out the agency relationship. The agent only has a right to be indemnified for authorized transactions.

Solloway & Anor v Mclaughlin Facts: The Privy Council held that agents who engaged in a fraudulent scheme to defraud the principal would not be entitled to be given indemnity, in regards of transaction which was formed out of the fraud.

Chapter 4 : Agency

4.7

DUTIES AND RIGHTS OF AN AGENT

 The duties of an agent are summarized as follows:

1 2 3 4 5

6 7 8 9 10

• To obey the principal's instructions. • To act according to custom when instructions are not given. • To exercise care, skills and diligence. • To render proper accounts when required by the principal.

• To pay to his principal all sums received on behalf of the principal. • To communicate with the principal. • Agent must not let his own interest to conflict with his duty. • Not to make any secret profit out of the performance of his duty. • Not to disclose confidentail information or duments entrusted to him by his principal. • Not to delegate his auhority.

4.7.1 Section 164 CA 1950 - To Obey the Principal’s Instruction  

An agent must follow the instruction of the principal. If agent does not follow, it is a breach of contract. An agent only has to follow the instruction if it lawful.

Turpin v Bilton

Facts: The agent has been instructed by the principal to get the insurance for his vessel. The vessel lost and as result the principal has to bear some loss.

Held: The agent is liable for breach of duty. Due his failure to obey the principal’s instruction. The agent is liable to pay compensation for the loss.

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4.7.2 Section 164 CA 1950 - To Act According to Custom When Instructions Are Not Given 

In the absence of instruction from the principal, the agent must act according to the customs (normal), in doing business, at the place where he carries on his work.

4.7.3 Section 165 CA 1950 - To Exercise Care, Skills and Diligence 

An agent must exercise care, skills and diligence in carrying out his work and to use such skills as he possesses.

Keppel v Wheler Facts: D (agent) was employed to sell the Principal’s house. An offer was received & accepted by the Principal’s subject to contract. Later, higher offer for the same house was made by X but this offer was not communicated to the Principal by D. Contract been made with 1st offer. Held:

D was liable to P for differences of 2 offers.

4.7.4 Section 166 CA 1950 - To Render Proper Accounts When Required by the Principal 

An agent is under a duty to account for all monies and property handled by him as agent for the principal and to produce such accounts when demanded by the principal.

Lyell v Kennedy Facts: An agent who has been entrusted with the principal’s money/property is bound to keep the money/property separately from his own property.

4.7.5 Section 171 CA 1950 - To Pay to His Principal All Sums Received On Behalf of the Principal  

Agent must give the principal the money that he received on behalf of the principal. Agent however, before giving all the monies, may deduct the followings; i. Advances paid by the agent ii. Agent’s commission 73

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iii.

Agent’s remuneration.

4.7.6 Section 167 CA 1950 - To Communicate with the Principal  

Agent must try his best to communicate with the principal. In the situation when this is not possible, e.g. in cases of emergencies, the agent must use his discretion to the best interest of the principal.

4.7.7 Section 169 CA 1950 - Agent Must Not Let His Own Interest to Conflict with His Duty 

The duty of an agent is to act solely for the benefit of the principal and he cannot allow his own personal interest to conflict with this duty.

Wong Mun Wai v Wong Tham Fatt Held:

Defendant has breached his duty as agent to the Principal on 2 reasons; i. He sold the P’s share of land below the market price ii. He failed to inform the P that he had sold it to his wife

Agent couldn’t use his position to gain profit at the Principal’s expenses

4.7.8 Section 168 CA 1950 - Not to Make Any Secret Profit Out Of the Performance of His Duty 

 

Secret profit means a bribe or payment of a secret commission or any financial advantage which an agent receives and above the commission or other remuneration agreed by the parties. If the principal knows about the secret profit and consents to it, the agent is entitled to keep the profit he makes since the profit is no longer secret. However, if the profits are secret, then the principal may do the following: Actions That Could Be Taken By the Principal

1. Sec. 168 - Repudiate the contract 2. Principal may dismiss the agent on the ground of breach of duty 3. Recover the amount from the agent Case: Tan Kiong Hwa Vs. Andrew S.H Chong P bought a flat from a company. D (agent) was a director of that company. P ordered D to resell the flat house at the price of RM45,000. However, D managed to sell it at RM54,000 and the extra of RM9,000 was credited into D’s company account. Held: P was entitled to claim the extra RM9,000 from D (breach of duty)

Chapter 4 : Agency

Actions That Could Be Taken By the Principal 4. The principal may refuse to pay commission or remuneration to the agent 5. Principal may sue the agent & 3rd party for damages, for any loss he suffered due to entering the contract 4.7.9 Not to Disclose Confidential Information Or Documents Entrusted To Him By His Principal 

An agent must not disclose any confidential information or documents entrusted to him by the principal to other party. The agent is bound to keep the information to himself only.

4.7.10 Not to Delegate His Authority   

4.8   

The maxim delegatus non potest delegare (a delegate cannot delegate) applies in the relationship of agency. An agent is not permitted to delegate to another person any duties or powers which have been entrusted to the agent personally. However, there are exceptions to this general rule: i. Where the principal approves or consents to the delegation of the authority. ii. Where it is presumed from the conduct of the parties that the agent has power to delegate his authority. iii. Where the customs of the trade or business permits the delegation. iv. In case of necessity or unforeseen emergency. E.g. illness of agent. v. Where the act to be done purely ministerial or clerical and does not involve the exercise of discretion.

TERMINATION OF AGENCY An agency that have been existed can be terminate in a different of ways. Termination means the ending of the contract of agency between principal and agent. Agency can be terminated in one of the following ways:

By agreement

By the principal revoking the agent's authority

By the agent's renunciation

By performance

By operation of law

By frustration

Chapter 4 : Agency

4.8.1 By Agreement    

When both parties desire and agree that the agency shall terminated, the agency is terminated. In this method, both the principal and agent can agree that the agency is to come to an end. If the agency is evidenced by a contract, then any provisions regarding the termination should be observed by the party wishing to terminate the agency. Reasonable notice must be given depends on the facts and circumstances.

Sohrabji v Oriental Security Assurance

Held: 3½ months’ notice was not adequate to terminate an agency which had lasted to 50 years. In this circumstances, two years’ notice would have been reasonable notice.

4.8.2 By The Principal Revoking the Agent’s Authority  



The principal may revoke the authority of the agent at any time before it has been exercised to bind the principal. The principal can revoke the agent’s authority where; i. The principal gives notices to agent ii. The agent is in default under the agency However, the power to revoke the agency by principal is limited to: i. Section 155 – the agent has an interest in subject-matter

Smart v Sanders

Facts: A factor (an agent) was sent with goods to be sold on behalf of the principal. The factor had loaned money to the principal for the security of the goods.

Held: The agency cannot be terminated by the principal because the agent has an interest in the goods by paying the security of the goods.

ii.

Section 157 – the principal cannot revoke the authority given to his agent after the authority has been partly exercised.

Chapter 4 : Agency

Read v Anderson Held: A principal could not revoke the turf commission agent’s authority after losing the bet. The principal would have to indemnify the agent for the amount which the agent had paid to the person with whom he made the bet.

4.8.3 By the Agent’s Renunciation   



An agency may be terminated when the agent surrenders his or her authority and by doing so ends the mandate given to him as agent. The agent can terminate the agency by giving reasonable notice of termination to the principal – Section 159. If the notice is given, the agent will no longer be liable to the principal and he can claim reimbursement for all his services and expenses up to the date of the termination of his agency. According to Section 158, if the agent failed to give reasonable notice, agent is liable for any damages suffered by the principal.

4.8.4 By Performance  

According to Section 154, the contract of agency is brought to an end when the agent has performed the contract. This can happen when an agency is created for a single specific transaction and the transaction is completed.

4.8.5 By Operation of Law 

An agency may be revoked by operation of law in any of the following circumstances: i. Upon the death of the principal or the agent  The agency comes to an end when the principal or the agent dies. This provision has been stress in the case of Blades v Free.  According to Section 161, an agency which is terminated by the death of the principal is effective only when the agent has notice of the principal’s death ii. When the principal or agent becomes insane  Since insane people is not capable of entering a valid contract, the agency is terminated by such insanity. iii. When the principal or agent becomes insolvent or is made a bankrupt  Upon insolvency, a person’s right and liabilities are vested in the Director General of Insolvency and, therefore, the agency relationship ceases.

Chapter 4 : Agency

4.8.6 By Frustration  

Upon the happening of an event which renders the agency unlawful, the agency may be terminated. An agency contract, like any other contract, may be discharged by frustration.

Stevenson v Aktiengesellschaf Fur Cartonnagen

Held: An outbreak of war made the principal an enemy alien, it was held that the agency was terminated.

Chapter 4 : Agency

4.9 ASSESSMENT QUESTIONS 1.

“The approval by act, word or conduct of that which was attempt of accomplishment, but was improperly or unauthorized performed in the first instance”. The statement above indicate an agency is created by ________. A. B. C. D.

the doctrine of estoppels ratification by the principal implied appointment by the principal express appointment by the principal

Which one of the following is NOT the condition of an agency by necessity may be created. A. B. C. D.

By By By By

The agent of necessity must have acted in good faith. The agent of necessity must have acted in good will. It is impossible for the agent to get the principal’s instruction. The agent’s action is necessary in circumstances, in order to prevent loss to the principal with respect to the interest committed to his charge.

Choose the BEST statements below describes the difference between express appointment and implied appointment. A. Express appointment involves the actual consent of principal, while implied appointment involves the implied consent of principal. B. Express appointment refers as the principal appoints the agent expressly either in written or in oral form, while implied appointment refers when a person by his word or conduct holds another person having authority to act for him. C. Express appointment may be in a written or oral form, while implied appointment derived from the words and conduct of parties. D. Express appointment refers as the principal appoints the agent expressly either in written or in oral form, while implied appointment refers each partner is an implied agent to the firm.

Sam asked Jaya to deliver to Kedah a quantity of tomatoes from Cameron Highlands. Jaya was late in delivering the tomatoes as the lorry was trapped in a flood in Pahang. Most of the tomatoes become unfit for human consumption before reaching Kedah. In order to save what was left, Jaya sold the remaining tomatoes in Perak without communicating to Sam. Decide. A. Jaya has the authority to sell the tomatoes as agent of necessity because he tried to avoid loss to his principal. B. Jaya has no authority to sell the tomatoes as he could not prove that it was practically impossible to obtain Sam’s prior instructions. C. Jaya has authority to sell the tomatoes as agent by ratification.

Chapter 4 : Agency

D. Jaya has authority to sell the tomatoes as an agent who has implied authority. 5.

The agency can be terminated by _________________ when the principal is dead. A. B. C. D.

The agency is contract between which subsist between _______________. A. B. C. D.

Obey principal instructions Not to delegate his authority Render proper accounts when required Pay to the principal all sums received on his behalf

An agent’s authority may be classified into TWO (2) categories: A. B. C. D.

10.

Necessity Express appointment Ratification Undue influence

The maxim ‘delegates non potest delegare’ due to duties of an agent is A. B. C. D.

Principal and worker Agent and principal Principal and third party Agent and third party

An agency can be created by all the following ways EXCEPT A. B. C. D.

Operation of law Mutual agreement Renunciation by agent Revocation by principal

Actual and good authority Special and implied authority Actual and apparent authority Ratification and special authority

Agency by ratification exists in the following cases EXCEPT: A. Person who enter into partnership business B. An agent who was duly appointed has exceeded his authority C. Principal later accepts and confirms a contract made by his agent without authority D. An agent who has no authority to act for the principal has acted as if has the authority

Chapter 4 : Agency

11.

En. Akim is planning to set up a job agency firm in Shah Alam. He would like to know how an agency may rise or be created in Malaysia. Explain to En. Akim about agency by ratification.

12.

En. Faizal Hussin just has been appointed to be agent for En. Rosyam. Briefly explain to him FIVE (5) the duties of agent to his principal.

13.

Advise to En. Aiman the differences between express appointment and implied appointment.

14.

List down THREE (3) conditions that should apply in creation of agency by necessity.

15.

Mr Leong was instructed by his principal, Mr Ragu to find a double storey house in Seremban for a price not more than RM500,000. Mr Leong found a single storey bungalow of RM700,000 in Nilai and without informing Mr Ragu, Mr Leong agreed to buy the bungalow from Mr Chin. Mr Leong had pay a deposit of RM1,000. i. ii. iii. iv.

List an issue arises in the situation. Explain the relevant provision of the Contract Act 1950. Illustrate Mr Ramu’s rights to the contract in the above situation. Interpret your conclusion of the above issue.

CHAPTER

Sale of Goods

Learning Objectives At the end of this chapter, students should be able to:     

Discuss the nature of sale of goods Applied terms relating to sale of goods contract Discuss transfer of property and title under sale of goods Ascertain protections to buyers and owners Outline breach of contract and remedies of contract of sale

Chapter 5 : Sale of Goods

5.1

INTRODUCTION

 The Sale of Good Act 1957 (SOGA) was enacted in 1957 and the statue was applicable to sale of goods in peninsular Malaysia (East Malaysia), excluding the states of Penang and Malacca. The Act was later revised in 1990 and it includes both states.  Section 3 of the Sale of Goods Act 1957 provides that the provisions of the Contract Act 1950 will apply to all contracts for the sale of goods unless they are inconsistent with the express provisions of the Sale of Goods Act.  The sale of goods legislation only applies to contracts involving the sale of goods.  The sale of goods legislation is aimed at offering protection to the consumer and; the main purpose of a contract involving goods is the transfer of ownership.

5.2

DEFINITION OF GOODS

Section 2, Sale of Goods Act 1957 (SOGA 1957)

“goods” refer to – ‘every kind of moveable property other than actionable claim and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale’

 In other words, ‘goods’ are broadly defined and include all chattels personal other than things in action and money. This generally only includes physical and moveable things.  It does not include: o Land or things attached to land (building, houses and etc.), o Choses in action or rights (negotiable instrument and patents), or o Services (labour, repair and etc.) 5.2.1 Types of Goods 

Goods that are the subject of a contract of sale can be classified in a number of ways under the sale of goods legislation. Types of goods are as follow:

Chapter 5 : Sale of Goods

Types of Goods

Description

Existing

Goods already owned by the seller, & may be either specific goods that are agreed upon at the time a contract of sale is made.

Future

Goods to be manufactured or produced or acquired by the seller after making of the contract of sale.

Specific

Goods identified & agreed upon at the time a contract of sale is made.

Unascertained

Goods that are identified by description only.

Ascertained

Goods which in a contract for the sale of unascertained goods, have become identified & agreed upon the parties.

5.2.2 Contract of Sale

Section 4(1), Sale of Goods Act 1957 (SOGA 1957): ‘A contract of sale is a contract whereby the seller transfers or agrees to transfer the property in goods (the ownership) to the buyer for a price’

 

A sale occurs when the ownership or property in goods transfer from the seller to the buyer. This means that there must be: o Goods; o Price; (money consideration) o Transfer of property.

5.2.3 Formation of the Contract 

Formation: o According to Section 5(1) SOGA 1957, a contract of sale is made by an offer to buy or sell goods at a price and by the acceptance of such an offer. o The contract may provide for the immediate delivery of the goods or the immediate payment of the price or both. o Delivery or payment may even be by instalments – Section 5(1) SOGA 1957.

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

Formalities: o According to Section 5(2) SOGA 1957, a contract of sale may be made in:  writing; or  by word of mouth; or  partly in writing and partly by word of mouth.



Price: o ‘Price’ means the money consideration for the sale of goods. o Price may be fixed in the following manner:  It may be fixed by the contract.  It may be left to be fixed in a manner agreed in the contract.  It may be determined by the course of dealing between the parties.  Where the price is not determined in any one of the aforesaid ways, the buyer must pay a reasonable price. (What is a reasonable price is a question of fact dependent on the circumstances of each particular case – Section 9 SOGA 1957).



Capacity o The legal principles and the law on contract governing capacity in ordinary contract law apply to contract for the sale of goods.

5.2.4 Agreement to Sell 

A sale must be distinguished from an agreement to sell. Section 4(3), Sale of Goods Act 1957 (SOGA 1957): ‘an agreement to sell is a contract under which the transfer of the property in goods is to take place at a future time or subject to some condition thereafter to be fulfilled’

Section 4(4), Sale of Goods Act 1957 (SOGA 1957): ‘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’

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5.3

TERMS OF CONTRACT

5.3.1 Conditions and Warranties    

The Sale of Goods Act (SOGA) implies a number of terms into contracts as either conditions or warranties. The distinction between conditions and warranties under the law of contract is preserved by the sale of goods legislation. Whether a stipulation is a condition or warranty depends in each case on the construction of the contract. According to Section 12(4) SOGA 1957, the stipulation may be condition, though called a warranty in the contract.

Conditions Section 12(2), Sale of Goods Act 1957 (SOGA 1957): A condition is ‘a stipulation essential to the main purpose of the contract’

 

A breach of condition entitles the innocent party to repudiate the contract and to claim for damages. However, in the following circumstances under Section 12(2) SOGA 1957, the innocent party cannot repudiate the contract: o Where the buyer waives the condition; o Where the buyer elects to treat the breach of condition as a breach of warranty and claim damages only; o Where the contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition must be accepted as a breach of warranty unless otherwise provided in the contract; and o Where the contract is for specific goods and the property in which has passed to the buyer, the breach of any condition must be accepted as a breach of warranty unless otherwise provided in the contract.

Warranties Section 12(3), Sale of Goods Act 1957 (SOGA 1957): A warranty is ‘a stipulation collateral to the main purpose of the contract’



A breach of warranty give rise to the innocent party to claim for damages but not a right to reject the goods and treat the contract as repudiated.

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

According to Section 12(4) of the Act – whether a stipulation is a condition or warranty depends on each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract.

Stipulation as to Time 



Under Section 11 SOGA 1957, unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be essence with respect to the contract of sale. This means that unless the contract specifically specifies that the time of payment shall be essence of the contract, if a buyer fails to pay by an agreed date, it does not entitle the seller to repudiate the contract. Under the same section, whether any other stipulation as to time, (for example, time of delivery) is of essence of the contract or not depends on the terms of the contract.

5.3.2 Implied Terms    

Implied terms are terms not stated but understood from parties’ conduct, circumstances and prevailing practice. The Sale of Goods Act 1957 implies a number of stipulations in every contract of sale of goods. However, these implied terms apply only when the parties to the contract of sale have not excluded or implied them. These implied terms, laid down in Section 14 to 17 of the Sales of Goods Act are as follows:

Title

Sale goods by description

Sale goods by sample

Goods must be of merchantable quality

Fitness for purposes

Implied Conditions

Quiet possession of the goods

Goods are unemcumbered

Implied Warranties

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Implied Condition as to Title – Section 14(a) SOGA 1957  

According to the Act, a seller must have the right to sell the goods and when to pass the property when it is time to do so. A breach of this condition entitles the buyer to repudiate the contract, i.e. to treat the contract as an end and recover the price in full even though the buyer has used the goods.

Rowland v Divall [1923] Facts: Plaintiff bought a car from defendant and used it for several months. He then realized that defendant has no title to the car and the plaintiff is bound to return it back to the rightful owner. Plaintiff then sued defendant to recover the money paid to the defendant. Held: Although Rowland had use of the car for some time, he was entitled to recover the full price he had paid because Divall had no right to sell the car. Divall had breached the contract and it give Rowland right to repudiate the contract and claim the money from Divall.

Implied Condition as to Sale Goods by Description – Section 15 SOGA 1957  



Sale of goods by description covers all cases where the buyer has not seen the goods but is relying on the description alone. According to Section 15 SOGA 1957, 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. Breach of this implied condition entitled the innocent party to repudiate the contract and treat the contract as an end.

Varley v Whipp [1900] Facts: The buyer purchased a second hand reaping machine without ever having seen it. The seller had described it as new the previous year and used it to cut only 50 or 60 acres. In fact, the machine was very old. Held: This was a sale by description and since the machine did not correspond to its description, the seller was in breach.

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Implied Condition as to Sale Goods by Sample – Section 17 SOGA 1957  



According to Section 17 SOGA 1957, a contract is a contract of sale by sample where there is an express or implied term to that effect in the contract. In addition to the earlier implied condition that the sale is by sample as well as description (the bulk of the goods must correspond with both sample and description), there are three implied conditions in contracts of sale by sample: o The bulk shall correspond with the sample in quality; o If the differences are only of a minor nature and the quality of the goods is still the same, this condition will not be breached; and o The buyer shall have a reasonable opportunity of comparing the bulk with the sample. The buyer has a reasonable time to compare the bulk with the sample. Once this has been done, acceptance is deemed to have taken place. The right to reject the goods is then lost, although the buyer may still sue for damages for breach of warranty if the bulk does not correspond with the sample. Breach of this implied condition entitled the innocent party to repudiate the contract and treat the contract as an end.

Godley v Perry [1960] 1 WLR 9 Facts: A boy bought a catapult. While using it, the catapult broke and he lost the sight of an eye. The shopkeeper had bought it from a wholesaler by sample and tested it by pulling out back of the elastic. The shopkeeper was sued and the court held that the catapult was not fit for the purpose for which the buyer wanted it and that it was of unmerchantable quality. The shopkeeper then filed an action against the wholesaler. Held: Although the shopkeeper had made reasonable examination, the defect was not one which was apparent on such examination. Thus, he had an action against the wholesaler.

Implied Condition as to Fitness for the Purposes – Section 16 SOGA 1957 



Where the buyer, expressly or impliedly, makes known to the seller the particular purpose for which the goods are required so as to show that he relies on the seller’s skill or judgement, and the goods are of a description which is in the course of the seller’s business to supply, there is an implied condition that the goods shall be reasonably fit for the purpose. There are implied conditions as to fitness of the goods: o A disclosure of purpose. o Reliance on seller’s skills and judgement. o The goods supplied are of the description of the seller’s business to supply. o Not bought under patent or tradename.

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

Breach of this implied condition entitled the innocent party to repudiate the contract and treat the contract as an end.

Griffiths v Peter Conway Ltd Facts: A woman with abnormally sensitive skin bought a coat without telling the salesman that she had sensitive skin. She subsequently contracted dermatitis from wearing the coat. Held: She was unable to recover for breach of fitness for purpose because there was nothing in the cloth that would have affected the skin of a normal person. She had failed to disclose that she suffered from skin problems.

Implied Condition as to Goods Must Be of Merchantable Quality – Section 16(1)(a) SOGA 1957 

Where the goods are brought by description from a seller who deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality provided that of the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to reveal.

David Jones Ltd. v Willis [1934] Facts: Willis went to the shoe department of David Jones and told the saleswoman that she wanted a comfortable pair of walking shoes because she had a bunion on her foot. After trying on a number of pairs, she bought a pair which was recommended by the saleswoman. The third time that she wore the shoes the hell broke off one of them, causing her to fall and break her leg. The evidence showed that the shoes were not well made and that the heels had not been properly attached to the shoes.

Held: As the shoes had been bought by description, there had been a breach of the implied condition of merchantable quality.

Implied Warranty as to Quiet Possession of the Goods – Section 14(b) SOGA 1957 

There is an implied warranty that the buyer shall have and enjoy quiet (undisturbed) possession of the goods.

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  

Buyer have exclusive privacy and enjoyment with the goods. Seller cannot interfere in any manner unless with express consent from buyer. The breach of this stipulation will not entitle the innocent party to repudiate the contract. E.g.: Ali Baba is the owner of Ali Baba Carpets Sdn. Bhd. He needs a van for the business purposes. Ali Baba bought a van from his friend, Karim. Karim loves the van very much, he often persuaded Ali Baba to lend him the van. Karim had a set of keys to the van and he used the van whenever he liked regardless of whether Ali Baba needed the van or not. Karim has breached the implied warranty that Mr. Ali Baba should have enjoy the quiet possession of the van.

Implied Warranty as to Goods Are Unencumbered – Section 14(c) SOGA 1957 



5.4

There is an implied warranty that the goods are free from any charge or encumbrance in favour of a third party who is unknown to the buyer; for example, storage charges which have to be paid before the goods can be collected. E.g.: XYZ Enterprise sold a machine to Meng Electrical. But Meng Electrical did not know that XYZ Enterprise had charged the machine to Bank Kerjasama. XYZ Enterprise has breached the warranty. However, if Meng Electrical knew about the charged and still decided to go ahead with the sale, there would be no breach. PRIVITY OF CONTRACT

 As any type of contract, the general rule is that terms of a contract are only binding on the parties to such a contract.  The terms implied in a contract of sale are only between the contracting parties, which is buyer and seller  If a third party uses goods purchased by another and is injured as a result of some defects in the goods, he cannot sue the seller in an action under contract.  His remedy would be to sue the manufacturer under tort – Donoghue v Stevenson.

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Donoghue v Stevenson [1932] Facts: A manufacturer of ginger beer had sold to a retailer ginger bear in a opaque bottle. The retailer resold it to Donoghue who treated her friend to its contents. The ginger beer bottle also contained the decomposed remains of a snail which had found its way into the bottle at the factory. Donoghue alleged that she became seriously ill in consequence and sued the manufacturer for negligence. Issue: Plaintiff was entitled to claim damages against the manufacturer in negligence. Any person who manufactures products in such a way that there is no reasonable possibility of intermediate examination before they reach the ultimate consumer, and who knows that the absence of reasonable care on their part will result in an injury to the customer’s life or property, owes a duty to the consumer to take reasonable care.

5.4.1 Doctrine of Caveat Emptor     

5.5

The doctrine of Caveat Emptor is an integral part of sale of goods. It translates to “let the buyer beware”. Caveat Emptor is the principle that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made. Buyers have only themselves to blame if they fail to make careful inspection of the goods before they purchase them. The buyer could not recover damages from the seller for defects on the property that rendered the property unfit for ordinary purposes. There are a few exceptions in the application of the Caveat Emptor: o When there is no reasonable opportunity for inspection; and o When the buyer has to rely on the special knowledge or expert judgement of the seller.

TRANSFER OF PROPERTY AND TITLE

 As general rule, when a person takes goods (e.g. a buyer), he or she gets only the same rights to the goods as the person from whom he or she took them (e.g. seller)  This rule is expressed in the Latin maxim nemo dat quod non habet. The rule is set out in Section 27 SOGA 1957.  This provision means that if goods are bought from a person who is not the owner, and who does not sell them under the owner’s authority, the buyer does not acquire any title.  Thus the rightful owner of goods is entitled to recover his or her goods from those who have no title to them.  But there are exceptions to the nemo dat quod non habet rule. They are as follows: 92

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Estoppels

Sale by mercantile agent

Sale by 1 of joint owners

Sale under a voidable title

Sale by a seller in possession after sale

Sale by a buyer in possession

5.5.1 Estoppels 



Where the owner by his conduct, makes it appear to the buyer that the person who sells the goods has authority to do so, and then buyer relies on that conduct, the buyer obtains a good title because the owner is precluded by his conduct from denying the seller’s authority to sell under Section 267 SOGA 1957. E.g.: Amir tells Vishnu in the presence of Rowland (the actual owner of the laptop) the he (Amir) is the owner of the laptop. Upon hearing the statement, Rowland kept silent. Later on, Amir sells the laptop to Vishnu. Vishnu will get good title to the laptop, as Rowland will be stopped from denying the position the he projected to Vishnu by his conduct of keeping silent.

5.5.2 Sale by A Mercantile Agent 



A Mercantile agent is a person whose ordinary business is to sell goods, or consign them for sale, or to buy goods, or to raise money on the security of goods. According to Section 27 SOGA 1957, where a mercantile agent is, with consent of the owner, in possession of the goods or of a document of title to the goods, any sale by him when acting in the ordinary course of business of a mercantile agent shall be valid as if he were expressly authorized by the owner of the goods to make the same. However, buyer must have acted in good faith and, at the time of the contract of sale, would have had no notice that the seller had no authority to sell.

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Folkes v King [1923] Facts: Folkes left his car with a mercantile agent and told him not to sell it below a certain price. The agent sold the car for less than the minimum price to King who purchased the car in good faith and for valuable consideration, without any notice of any fraud. The agent then disappeared with the money. Folks sued to recover his car from King. Held: As the mercantile agent was in possession of the car with the consent of the owner for the purpose of sale, and as the sale had been in the ordinary course of the agent’s business, the purchaser received good title. Folks therefore could not recover the car from King.

5.5.3 Sale by One of Joint Owner  



Goods may be owned by one or more than one person. Section 28 SOGA 1957 provides that if one of the owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to the buyer who buy with good faith and has no notice that the seller has no authority to sell. E.g.: Mira and Aini jointly purchased a laptop. The laptop then was kept by Aini with the consent of Mira. After several months, Aini sell the laptop to Sofea who bought with good faith and have no knowledge that Aini did not have the authority to sell the laptop. According to Section 28 SOGA 1957, Sofea will get a good title of the laptop.

5.5.4 Sale under a Voidable Title 



According to Section 29 SOGA 1957, where the seller of goods has obtained possession thereof under a contract of sale voidable under Section 19 or 20 Contract 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. A contract is voidable under Section 19 or 20 Contract 1950 when consent of the original owner is caused by coercion, fraud, misrepresentation or undue influence. E.g.: Vick purchases a motorcycle from Ruben by fraud. Hence, in this situation, Vick is holding the possession under a voidable contract. Before the contract is put to an end by Ruben, Vick sold the motorcycle to Sammy, who bought it in good faith and without any notice of Vick’s defective title. In this case, Sammy gets a better title to the motorcycle even if Vick was holding it under a voidable contract.

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5.5.5 Sale by a Seller in Possession after Sale 

 

Under Section 30(1) SOGA 1957, if a seller resells to a second buyer the goods sold by him previously to the first buyer, the second buyer will obtain good title to the goods if he has received the goods in good faith and without notice of the previous sale. The first buyer will lose the title but he/she can take legal action against the seller who would be liable to him. E.g.: Azira Furniture sold a set of sofa to Sasha and promises to deliver the sofa the next day. Before the delivery, Azira Furniture sold the same set of sofa to Vishanti, who buys the sofa in good faith and without the notice of the prior sale. Vishanti gets a good title to the sofa.

5.5.6 Sale by a Buyer in Possession 

Under Section 30(2) SOGA 1957, 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 buyer acting in good faith, even if under the first transaction, he has not obtained a good title.

Newtons of Wimbley Ltd v Williams [1965] Facts: The plaintiffs sold a car to A who paid by cheque. Although he was given possession, it was agreed that the property would not pass until the cheque was honoured. The cheque was dishonoured but A had resold the car to B who bought it without knowledge of the position. B resold it to defendant. The plaintiffs tried to recover the car from him.

Held: A, the original buyer, was in possession with the consent of the owner. Hence, he could pass a good title to B, who in turn transferred it the defendant. The defendant was, therefore, entitled to keep the car.

5.6

REMEDIES FOR BREACH OF CONTRACT

 Chapters V and VI of the Sale of Goods Act 1957 deal with the following situation: o Rights to sue unpaid seller against the goods; o Rights to sue for breach of contract; o Rights of the buyer to sue for damages for non-delivery; o Rights of the buyer to commence an action for specific performance; o Remedies available to the buyer for breach of warranty; and o Buyer’s action in tort.

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5.6.1 Rights of The Unpaid Seller Against the Goods 

Section 45(1) SOGA 1957, states that unpaid seller is a seller whom: o The whole of the price has not been paid or tendered or o Where a bill of exchange or other negotiable instruments has been received as conditional payment, and the condition on which it was received has not been fulfilled due to the instrument being dishonoured or for some other reason.

Lien  



It is a right of seller to keep possession of the goods until the buyer settle the payment. If the seller has made part delivery of the goods, he may exercise his right of lien on the remainder unless the part delivery has been made under such circumstances which indicate that the seller waived the lien under Section 48 of SOGA 1957. The unpaid seller loses his lien in the following circumstances by virtue of Section 49(1) SOGA 1957: o When he delivers the goods to a carrier or other bailee in order that the goods to be transmitted to the buyer without reserving the right of disposal of the goods; o The buyer or his agent lawfully obtains possession of the goods; o When the seller waives his lien.

Stoppage in transit  

It is a right of seller of stopping the goods in transit in the case of buyer’s insolvency. When the seller gives notice of stoppage in transit to the carrier or the bailee who is in possession of the goods, the carrier or bailee shall redeliver the goods to or according to the directions of the seller at the seller’s expense.

Resale 

Seller has authority to resale the goods with regards with Section 54(2) SOGA 1957: o The goods are of a perishable nature; or o He gives notice to the buyer of his intention to resell and buyer does not within reasonable time pay the price; or o The seller expressly reserves a right of resale in case the buyer should make default and the buyer makes such default.

5.6.2 Rights of The Seller to Sue for Breach of Contract 

The seller can sue for the price of the goods under Section 55(2) SOGA 1957 where: 96

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o o

The property in the goods has passes to the buyer and the buyer wrongfully neglects or refuses to pay for the goods; and Where it is contracted that the price be paid on a certain date irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price even though the property in the goods has not passed and the goods have not been appropriated to the contract.

5.6.3 Rights of Buyer in a Situation Where the Seller Breaches the Contract

Rights of buyer to sue for non-delivery 

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 under Section 57 SOGA 1957.

Rights of buyer to bring action for specific performance  

The buyer may bring an action for the specific performance of the contract by the delivery of specific or ascertained goods. But this remedy is only available at the discretion of the courts. Usually specific performance is ordered by the court only when goods are of special or peculiar kind.

Remedies available to buyer for breach 

Where the seller commits a breach of warranty or where the buyer elects or is compelled to treat a breach of condition by the seller as a breach of warranty, the buyer cannot reject the goods, but may; o Set up against the seller the breach of warranty in diminution or extinction of the price; or o Sue the seller for damages for breach of warranty. Even if the buyer has set up a breach of warranty in order to lower the price, he can still sue the seller for damages due to the same breach of warranty.

Buyer’s action in tort  

The buyer can sue the seller in tort by bringing an action in detinue and conversion. Detinue is the wrongful detention of chattels belonging to the plaintiff after their return has been demanded, whereas conversion is the dealing with goods in a manner inconsistent with the ownership of the buyer.

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5.7 ASSESSMENT QUESTIONS 1.

The terms implied in the contract of sale of good are bound between? A. B. C. D.

The breach of implied warranty entitled the innocent party to _______________. A. B. C. D.

reject the goods only claim for damage only repudiate the contract only repudiate the contract and reject the good

Which of the following in NOT include in the contract of sale of goods? A. B. C. D.

Partners Buyer and seller Hirer and owner Principal and third parties

Property Money Goods Service

Contract of sale of goods is a contract _______________. A. wherein the seller B. wherein the seller for price C. wherein the seller buyer for free D. wherein the seller buyer for price

transfers and agree to transfer the property in goods to transfers and agree to transfer the property in goods to

Choose the following item that is NOT considered as goods. A. B. C. D.

lends the property in goods to buyer for free hires and agree to hire the property in goods to buyer

Timber Money Watch Chair

Which of the following considered as contract sale of good. A. B. C. D.

Anis Anis Anis Anis

agreed agreed agreed agreed

to to to to

sell her book to Lia for a price RM30 rent her house to Lia for a price RM300 sell her land to Lia for a price RM300,000 exchange her old car with Lia for new motorcycle

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Choose item that can be categorized as goods under the Sale of Goods Act 1957. A. B. C. D.

Which of the following is NOT an exemption of the transfer of ownership of goods on ‘Nemo dat quod non habet’ A. B. C. D.

Milk, bread, chair and desk Tree, grass, house and building Money, book, printer and dress Dress, house, computer and ring

Estoppel Direct sales Sales by joint owner Sales by mercantile agents

A contract of sale is basically an offer to buy or sell goods for a price and the acceptance of such an offer. Price is a monetary consideration for the sale of goods. Price may be fixed in the following manner: i. ii. iii. iv.

A. B. C. D. 10.

i, ii, and iii ii, iii and iv i, iii and iv i, ii, iii and iv

Which of the following situations entitle the buyer to repudiate the contract of sale? i. ii. iii. iv. A. B. C. D.

11.

It may be fixed by the contract It may be left to be fixed in manner agreed in the contract It may be determined by the course of dealing between the parties Where the price is not determined in any one of the aforesaid ways, the buyer must pay a reasonable price

The The The The

goods do not correspond with the description seller does not have title of the goods goods are not in merchantable quality goods are unencumbered

i, ii and iii i, iii and iv ii, iii and iv All of the above

Siew Min bought fried rice from Café Matahari. After eating the fried rice, she was hospitalized for food poisoning. There was a breach of implied term here as ____________.

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A. B. C. D. 12.

be of merchantable quality be fit for particular purpose correspond with the sample correspond with the description

the the the the

price of the goods qualities of the goods to be supplied quantities of the goods to be supplied time when the property in goods is transferred to the buyer

10 tons of bricks 10 packs of nasi lemak 100 pieces of RM1 notes 1,000 sacks of tea leaves

“Caveat emptor” in relation to sale of goods means A. B. C. D.

15.

must must must must

Which of the following is NOT ‘goods’ under Sale of Goods Act 1957? A. B. C. D.

14.

goods goods goods goods

The difference between a ‘sale’ and ‘agreement to sell’ is A. B. C. D.

13.

The The The The

let the seller beware let the buyer beware the seller is entitled to sell the goods the seller must be the owner of the goods

Which of the following is a sale of goods contract? A. B. C. D.

Ina agrees to sell her house to Jia Sellina agrees to sell her apartment to Noria Elisa bought a printer from Jonash for RM300 Rumi and Raysha agreed to exchange a bag for an umbrella

16.

Section 27 of the Sale of Goods Act 1957 provide the Nemo Dat Quad Habet rule, which means ‘no one can give a better title than he has himself’. This means that if goods are bought from a person who is not the owner, and who does not sell them under the owner’s authority, the buyer does not acquire any title. However, this rule is subject to some exceptions. Briefly explain FOUR (4) exceptions to the Nemo Dat Quad Non Habet rule.

17.

Jamal bought a car, Honda City from Zainal and has been using it for several months. Jamal was later discovered that Zainal did not have the legal rights to the car. The car is still property of Shahrul. Jamal had to give the car to Shahrul and claim the money that has been paid. Zainal refused to hand the money to Jamal. i. ii.

Identify an issue arises on the situation. Explain the relevant provision of the Sale of Goods Act 1957. 100

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iii. iv. 18.

Explain ONE (1) relevant case to support your answer briefly. Conclude the issue.

Mimi bought a pair of jeans from Lady Jeans Sdn. Bhd. so that she can wear it for her birthday party. She wore the jeans and unfortunately, her skin becomes red and itchy. Mimi has to seek medical treatment. Advise Mimi whether she could commence a legal action against Lady Jeans Sdn. Bhd. Based on the situation above, you are required to: i. ii. iii. iv.

State an issue. Explain the relevant provision of the Sale of Goods Act 1957. Explain ONE (1) relevant case to support your answer. Conclude the issue.

101

REFERENCES Aiman Nariman Mohd Sulaiman. Zuhairah Ariff Abd Ghadas and Mushera Ambaras Khan (2011). Corporations and Partnership in Malaysia. The Netherlands: Kluwer Law International BV. Lee M. P. and Ivan J. D. (2013). Commercial Law. 2nd Edition. Oxford Fajar Sdn. Bhd. Lee M. P. and Ivan J. D. (2017). Commercial Law. 3rd Edition. Oxford Fajar Sdn. Bhd. Lee M. P. and Ivan J. D. (2018). Business Law. 3rd Edition. Oxford University Press Civil Law Act 1956 Companies Act 2016 Contract Act 1950 (Revised 1974) Partnership Act 1961 (Revised 1974) Sale of Goods Act 1957

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BUSINESS LAW HANDBOOK

Articles inside

5.7 Assessment Questions

5.6 Remedies for Breach of Contract

5.5 Transfer of Property and Title

5.4 Privity of Contract

5.3 Terms of Contract

4.9 Assessment Questions

5.0 SALES OF GOODS

4.8 Termination of Agency

4.7 Duties and Rights of An Agent

4.5 Types of Agent By Authority

4.6 Duties and Rights of A Principal

4.3 Formation of Agency

4.4 Types of Agent

4.0 AGENCY

3.3 Differences Between Sole Proprietorship, Partnership and Company

3.0 LEGAL ASPECTS OF BUSINESS ENTITIES

2.8 Assessment Questions

2.7 Remedies of Contract

2.5 Terms of Contract

2.4 Effects of Contract

2.6 Discharges of Contract

1.8 Malaysian Judicial System

1.9 Assessment Questions

2.0 LAW OF CONTRACT

1.4 Law, The State And The Constitution

1.7 Sources of Malaysian Law