Formation of Contract

Under the formation of contract, there are few element to be considered as listed below :

• Offer
• Invitation to Treat
• Acceptance
• Considerations
• Intention to Create Legal Relations
• Exclusion Clause

Offer :

In the content of Malaysia Law, an offer in the context of the Contract Act 1950 is known as a ‘proposal’, which is defined in S. 2(a) of the Act and a contract is made when there is an acceptance, this had been stated in S. 2(b) the Act. When both offer and acceptance obtained, a promise had formed. The person making an offer is called the offeror, and the person to whom the offer is called the offeree. An offer is a definite promise to be bound provided that certain specified terms are accepted. 

For instance in the case of Gibson v Manchester City Council(1978), Lord Denning found that the contract was concluded between these two parties due to the agreement of the parties on all materials points although the precise formalities had not been completed. However, later in the House of Lords, it was held that there is no binding contract as the letter from the treasurer which stated that the council “may be” willing to sell was not an offer, it was simply a willingness to enter negotiations and not an offer that was capable of being accepted. Hence, the requirement for an offer to exist not only focuses the promise made but also the certainty of term here both parties will have to make their intention clear and precise.

For an offer to be valid, it must be communicated so that the offeree will have the choice to accept or reject the offer been made. The mode of the communication can be in written, orally or by conduct. As we discussed earlier, the offer may be made to a particular person which we known as bilateral offer and to a group of persons or to the whole world which described as unilateral offer. In Carlill v Carbolic Smokeball (1893), a variety of arguments were put forward to distinguish whether this case fall under an unilateral offer or either an invitation to treat. The Court of Appeal however held that where an offer takes the form of payment or reward in exchange for a particular act - in what is known as a unilateral offer and there is no need for notification of acceptance.

Invitation to Treat :

If an offer is not an offer then it is consider to be an invitation to treat. An invitation to treat is an indication that the party is willing to enter into negotiations but is not prepared to be bound immediately. The distinction between an offer and an invitation to treat depends on the reasonable expectations of the parties. The courts have establishes that there is no intention to be bound in the following elements :

(a) Display of goods for sale in a shop

In Pharmaceutical Society of GB v Boots Cash Chemist Ltd (1952), the Court of Appeal held that , in a self-service shop, the sale takes place when the assistant accepts the customer’s offer to buy the goods. Hence the display of goods is a mere invitation to treat. On the other hand, Lord denning in Thornton v Shoe Lane Parking (1971) said that vending machines and automatic machines are making offers, because, once the money had been inserted, the transaction is irrevocable. 

(b) Advertisement

In Partridge v Crittenden (1968), an advertisement which said ‘Bramble finch cocks and hens - 25s’ was held to be an invitation to treat. The court pointed out that, if the advertisement was treated as an offer, this could lead to many actions for breach of contract against the advertiser, as his stock of birds was limited. He could nott have intended the advertisement to be an offer. However, if the advertisement is unilateral in nature, and there is no problem of limited stock, then it may be an offer as demonstrated in Carlill v Carbolic Smokeball Co Ltd.

(c) Auctions

An auctioneer’s request for bids in Payne v Cave (1789) was held to be an invitation to treat as the offer was made by the bidder. In Harris v Nickerson (1873), it was held that a notice that an auction would be held on a certain date was not an offer which then could be accepted by turning up at the stated time. It was a statement of intention. If the auction is stated to be ‘without reserve’, then there is still no necessity to hold an auction, but, if the auction is held, lots must be sold to the highest bidder as shown Barry v Heathcote Ball (2001), which was later confirm in Warlow v Harrison (1859).

(d) Tenders

A request for tender is normally an invitation to treat. However, it was held in Harvela Ltd v Royal Trust of Canada (1985) that if the request is made to specified parties and it is stated that the contract will be awarded to the lowest or the highest bidder, then this will be binding as an implied unilateral offer. It was also held in Blackpool and Fylde Aero Club v Blackpool BC (1990) that, if the request is addressed to specified parties, this amounts to a unilateral offer that considerations will b given to each tender which is property submitted.

Acceptance :

An acceptance is a final an unqualified assent to all the terms of the offer. A valid acceptance must be made under four important conditions as below :

• Be made while he offer is still in force 
• Be made by the offeree
• Be written, oral or implied from conduct
• Exactly match the term of the offer - Lord Denning emphasized the ‘mirror image’ principle where the offer and acceptance must match precisely as discussed in the case of Hyde v Wrench (1840).

In Brogden v Metropolitan Railway (1877), the returned document was held to be a counter offer which the defendants then accepted either by ordering coal or by accepting delivery of the coal. Here we certainly must take note that counter offer ‘kills off’ the original offer because when the offeree introduce new terms in an agreement, then there is new elements included where it need an acceptance for the new agreement not the old one. However, the offeror may require the acceptance to be made in certain way:

• If the requirement is mandatory, it must be followed
• If the requirement is not mandatory, then another equally effective method will suffice.

Moreover, alike offer an acceptance must be communicated by the offeree or his agent to the offeror. In Powell v Lee (1908), an unauthorized communication by one f the managers had selected a particular candidate fro a headship was held not to be a valid acceptance. Besides that, silence as communication would not be considered to be an acceptance. However it been suggested that this doesn not mean that silence can never amount to acceptance, for example, in Felthouse v Bindley, the offeree had relied on the offeror’s statement that he need not communicate his acceptance, and wished to claim acceptance on that basis, the court could decide that the need for acceptance had ben waived by the offeror. 

Another element where it only applies for an acceptance is the postal rule. The rule is that where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties. Additionally, the acceptance is completed immediately the letter of acceptance is posted even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror as demonstrated in Adam v Lindsell (1818). However there are differences between acceptance and revocation of an offer by post which is acceptance of an offer takes place when a letter is poted while the revocation of an offer takes place when the letter is received. Adding with modern technologies, communication can even made through electronic means such as emails, telex, fax and many more. Here, however, acceptance takes place when and where the message is received. The rules on telephones and telex were laid down in Entores v Miles and then were confirmed in Brinkibon Ltd v Stahag Stahl (1983). 

Consideration :

In addition to offer and acceptance and contractual intent, consideration is an essential element in the formation of any contract not by deed. Consideration in it simple definition is the benefits to one party or a detriment to the other party. Mostly the legal system will only enforce promises when there is something to indicate that the promisor intended to b bound, that is, there are some forms, ‘badge of enforceability and reciprocity consideration which was suggested in Currie v Misa (1875). Hence, consideration is something of value that each party must give to support the promises that they made in the contract. 

Consideration can be categories into two category which is executory consideration and executed consideration. Executory consideration is a promise to do something in the future.  Other than that, there are rules in relation to considerations as below :

• Consideration must move from the promisee
• Consideration must not be past
• Consideration need not be adequate
• Consideration must be sufficient 
• Part payment of a debt is not consideration; and
• Promissory estoppel

Intention to Create Legal Relation (ITCLR) :

An agreement will not constitute a binding contract unless it is one which can reasonably be regarded as having been in contemplation of legal consequences. A mere statement of intention made in the course of conversation will not constitute binding promises, though acted upon the party to whom it was made. Basically, ITCLR can be divided into express statement an implied intention.

Express statement is where even though the agreement was made expressly, due to the surrounding circumstances, it is not necessary there is an ITCLR. This is because express statement is based on objective not based on subjective, meaning to say it is on how the majority of the society would perceive. The question here is would a reasonable man have done the same thing? On the other hand, implied intention is the indirect intention and usually it is hard to proof the party was actually intended into a legal relationship. Under the implied intention, there are two different elements which covers social and domestic agreements while the other one is commercial and business agreements.

In commercial and business agreements, there is a presumption that the parties intend to create legal relations. This presumption may be rebutted but the onus at proof is on the party seeking to exclude legal relations. The onus of rebutting contractual intent must be a heavy one as expressed in Edward v Skyways Ltd (1964) where a redundancy agreement providing for an ex gratia payment to be made to an employee was held to be a binding contract as the expression used was insufficient to rebut the contractual intention. However, collective agreements are declared not to be legally binding by the Trade Unions and Labour Relations (Consolidation) Act 1992 unless expressly stated in writing to be so. 

In social and domestic agreements, there is presumption against legal relations. This can be rebutted by evidence to the contrary, for example, agreements between family members as illustrated in Jones v Padavatton (1969). However, when members of family have a business relationship with each other, there will be contractual intention in relation to contracts of a business, as opposed to a domestic nature as demonstrated in Snelling v John G.Snelling. To summarized, an intention to be legally bound may be inferred where:

• One party has acted to his detriment on the agreement
• A business arrangement is involved 
• There is mutuality
• The agreement must be clear

An intention to be legally bound may not be inferred where:

• To offer a friend a meal is not to invite litigation
• An arrangement for a golf competition
• An arrangement for sharing petrol costs where a person is given a lift to work

Exclusion Clause :

It is common to find a party trying to limit or exclude their liability in certain situations by including an exception, exemption or exclusion clause (expressly or impliedly) in the contract. Such clauses are frequently found in ‘standard form’ contracts. An exclusion clause is generally defined as any term in a contract excluding, restricting or modifying wholly or in part a remedy or liability arises out of a breach of a contractual obligation. 

These are clauses, usually written down, that say that one party to the contract will not be responsible for certain happenings. For instance, if you got to gym, it is common for the contract to say that the gym owner will not be responsible if you are injured while exercising. Such limitation of or n exclusion from liability may be a perfectly reasonable business practice, but is subject to control, both by the courts and statute, to prevent abuses. Considering the fact that limitations imposed on the recipient by the contractual framework, the courts nevertheless endeavored to alleviate the position  of the recipient of the documents by requiring certain standard of notice in respect of onerous terms, and by construing the documents whenever possible in that person’s favour.

Basically, exclusion clauses can be valid if they are not contrary to law, the clauses had been properly incorporated in the contract and it must ne clear an unambiguous. Thus, the general principle when party seeking to rely on an exclusion clause or limitation clause must prov to the court that it was incorporated into the contract and that as a matter of construction it covers the loss of damage suffered. To determine the validity of exclusion clause, it can be done through incorporation to see whether the clause is part of the contract by previous course of dealing, with a reasonable notice and also signature. Also we can determine by interpretation where we follow the contra-preferentum rules. Lastly its by legal control, either trough statute or common law.