Friday, June 4, 2010

What Constitute a Contract?

There have been several articles provided in PAM Part 3 Exam Seminar notes on this subject. An extensive definition in Malaysian context is also available in the Contract Act 1950 itself. The key elements can be sourced from Section 10 (1) of the Act as follows:

“ All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”

Derived from the above section, it can be construed that a legally binding contract must consist of SIX of the following elements:

1) Offer
2) Acceptance
3) Concent
4) Competency
5) Consideration
6) Legality

Offer and Acceptance

The word ‘agreement’ means that there must be an offer by one side and an acceptance of the offer by the person to whom the offer was made. Without both an offer and an acceptance, there can be no consensus ad idem or a meeting of the minds which is essential to form a contract.

Consent

Another key element to a contract is consent as described above as ‘..made by the free consent of parties..’. Section 19 further elaborate on the Voidability of agreements without free consent as follows:

“ When consent to an agreement is caused by coercion, fraud,
or misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.”


Competency

‘..parties competent to contract..’ is further defined in Section 11 of the Act as follows:

“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”

I.e a person under 15 years and a mentally insane person cannot enter a legal contract

Consideration

Consideration as described as ‘..for a lawful consideration..’ in the Act is another essential element of any valid contract. Consideration consists of either a benefit to the promisor or a detriment to the promisee. It is a present exchange bargained for in return for a promise. It may consist of some right, interest, profit, or benefit that accrues to one party, or alternatively, of some forbearance, loss or responsibility that is undertaken or incurred by the other party. It is not necessary for a contract to be supported by a monetary consideration.


Legality

The Act also require a contract to be of ‘a lawful object’, which means that the objective of the contract must be for a legal purpose. For example, a contract for illegal distribution of drugs is not a binding contract because the purpose for which it exists is not legal.

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