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Business Laws

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A contract is a legal agreement entered into by two parties, and is enforceable by law. Such an agreement is made when one party indicates the willingness to engage in or desist from engaging in any activity with a view of getting the approval of the other party (Koffman & Macdonald, 2007).The party making the offer is known as the promisor, while the party accepting the offer the promisee. In this case, all the promises forming the consideration for the two parties becomes the agreement. Any agreement that is not enforceable by law is known as void agreement (Koffman & Macdonald, 2007). Contract Law in Malaysia is governed by the Contracts Act 1950 and for an agreement to qualify to be a contract, there must be (1) an agreement between the parties involved, (2) created responsibilities between the parties, and (3) it must be legally enforceable. There are three categories of contract according to Malaysian Contracts Act 1950 (Contracts Act 1950). These are; written contracts that require written evidence, oral and simple contracts.

Elements of a Contract

For any agreement to be considered a valid contract, the following elements need to be considered by the two parties involved:

1. There must be an Offer

A contact can only exist when a specific offer has been unconditionally proposed and accepted. The offer can be issued in writing, orally, or impliedly through actions as long as the mode of offer or acceptance is in line with the statutory requirements (Sinnadurai & Sinnadurai, 2003). For example, contract involving sale of land need to be written to have title deed. The communication of the offer, acceptance, or revocation should be made known to the party to whom it is made for it to be complete. An offer according to the Contract Act 1950 is an expression of willingness by the promisor to contract on a particular set of terms with legal intention that if accepted, will be bounding. It must involve the promisor and the promisee and be legally enforceable (Dass, 2005). Offers can be unilateral where only one party makes the proposal and the other party is not obligated to make a proposal. It can also be bilateral where the two parties makes a promise such as in a case of sale of a house where one offers a house and the other party promises some amount of money.

2. Acceptance

For a contract to be valid there must be an expression of unequivocal and unconditional agreement by the two parties to all the terms contained in the offer (Sinnadurai & Sinnadurai, 2003). Acceptance can be done orally or in writing and is legally binding if done by the party to whom the offer is made, if express by word spoken or written, or if implied by actions showing compliance. Acceptance must also be absolute, using the prescribed mode such as by fax, for the offer communicated only, done within the given time frame before the offer period lapses and done with an intent to fulfill the contract. Contract Act 1950 also provides that a revocation of acceptance done any time before the communication of approval is complete (Law of Contract in Malaysia, 2009).

3. Intention to Create a Legal Relationship

There must be an intention between the two parties to create legal relations for the agreement to be a contract; otherwise, the arrangement is considered an informal social agreement (Dass, 2005). For example, if student A offers student B lift to Kuala Lumpur city, then B considers reciprocating the cost of fuel but fails, there is no obligatory contract under which A can B, since the offer to fuel the car was not made with the intention of being legally binding. However, commercial arrangements are usually perceived to be intended to be binding contracts (Arjunan, K. (2008).

4. Lawful Consideration

Consideration denotes something of value that parties agree to exchange when signing a contract and must not be a tangible or monetary item, but can include desisting taking an action that a party has the legal right to do. The presence of a consideration in the undertaking indicates the commitment of parties to make a legal relationship (Dass, 2005: Richards, 2006). This is because the law does not recognize agreements without something in return.

5. Capacity to Contract

      Capacity to contract refers to a party’s capability to enter into a contract. Inability to contract may be as a result of the person’s lack of authority to contract, mental incompetence, and the party being an infant. A contract is not binding if a mentally impaired party enters into an agreement without understanding the nature and consequences of the transaction (Arjunan, 2008: Richards, 2006). Mental incapacity may be because of developmental disability, insanity, senility, and drug or alcohol intoxication. In case one is acting on behalf of another party, the person must be fully authorized to reach agreements and sign the contracts; otherwise, the contract will be invalid.

6. Legal purpose

The purpose of the contract must be in itself legal, not conflicting with the public policy for it to be binding. This means that a contract that obligates a party to engage in an illegal activity or has illegal objective is not binding to either party (Arjunan, 2008). For example, a contract that requires a party to damage the property of another individual is illegal and criminal and cannot be enforced.

Three Factors in Section 14 and Effects of each Contract

According to Contract Act 1955 section 14, consent on a particular issue is considered free when not achieved by coercion, falsification, undue influence, mistake, or fraud. There should be no force or coercion to make the contract. The three factors to be discussed in this case are coercion and duress, use of undue influence and misrepresentation (Sinnadurai & Koh, 1979).

1. Coercion and Duress

Coercion is the compulsion of a party to enter into a contract through threatening to commit or committing any act prohibited by the Penal Code. This intimidation may include illegitimate detaining or threatening to detain the person or property with the purpose of making the party to enter into an agreement. Exposing a person under duress through either physical confinement or psychological torture and threats is part of coercive conduct to induce the victim party to accept the offer. There should also be freedom in contract formulation, which entail positive beginning that encompasses liberty of either parties to make own choices, freedom to determine possible exchange, bargaining terms, and to enter a contract on mutual approval. It also involves freedom from governmental restrictions or intrusion while engaging in these agreements and freedom of a party assess the ability of the government to implement the agreements. An example of in which individuals are forced to enter contracts is the software agreements where the customer is not given room to negotiate the terms when installing the software in their personal computers. Failure to acknowledge (click wrap) simply means no installation (Rafiei1 & Manap, 2011)

Effects of Coercion and Duress

The effects of using coercion and duress to enter into a contract is that the law does not recognize such contracts, since the victim has been unwillingly compelled by the stronger party to enter into the contract (Cheong, 2010). The coercing party is bound to lose the presumed benefits of the contract. In the absence of the free consent by either party, the contract is considered void or voidable. However, the coerced, pressured, or forced party needs to seek legal relief based on the conditions under which the consent was inappropriately obtained. The relief is granted by court grounds that it was under duress, undue influence, or was unconscionable. Section 14 of Malaysian Contract Act 1950, states that a contract is voidable if entered into through coercion. Consent is presumed not to have been given in the presence of coercion, undue influence, fraud, or misrepresentation.

2. Undue Influence

A contract is considered a product of undue influence in a scenario where one of the parties holds dominant position over the other party, and uses that power to gain prejudiced benefit over the other (Cheong, 2010). A person is considered to be in a position to dominate the other if holding ostensible authority economically, physically, and socially over the other, or when there is an existing fiduciary relation between the two parties. In this case, the powerful party uses the advantage to influence the other into a contract.

Undue influence also occurs when contract is signed with a person whose mental capacity is incapacitated temporarily or permanently, either by age, illness, or by mental or bodily distress (Cheong, 2010).The effect of such contracts is that they are considered void. Equally, if a party in a dominant position enters into a contract with another because of the influence and the transaction appears biased and unconscionable, the cost of determining whether undue influence took place will be upon the dominant party.

3. Misrepresentation

Contract can also be misrepresented when there is a positive assertion into the contract in a way not intended or contained by the information from the person making it. It also occurs when there is unintentional breach of duty, which gives an undue advantage to the party committing it, or any person claiming under him by deceiving another to his prejudice, or to the prejudice of a party claiming under him. Misrepresentation also takes place when a party innocently makes a mistake on an item that is the focus of the agreement. Such contracts are declared voidable if the misrepresentation let to the consent of the party (Cheong, 2010).

Recommendation for amendment of Malaysian law

Contracts Act 1950 of Malaysia unfortunately has no provision for the online environment. Currently, more online operation has taken root all over the world where many people transact business via the internet, thus need to be recognized by law, though with caution and particular exceptions to determine whether there was undue influence when entering the contract.

In the case of software online installation in a personal computer, a person who enters into a contract through the internet and makes a click wrap is considered not under coercion, duress, or force according to the Contract Act 1955 Ss14, 15 and the contract is legally enforceable (Rafiei1 & Manap, 2011). However, the Act 1955 should be amended to safeguard commercial contracts via the internet that are presumed to be biased in favor of one party. This is because one can be coerced to crick wrap a deal in case of fraud giving the other party advantage or because of undue influence.  


A contract is a legal agreement that involves two parties, the promisor and the promise, and is enforceable by law. Contracts are made when one party indicates the willingness to engage in or desist from engaging in any activity with a view of getting the approval of the other party (Richards, 2006). In Malaysia, the law of contract is governed by the Contract Act 1950, which stipulates that contracts needs to have an agreement between the parties involved, create responsibilities between the parties and must be legally enforceable. The elements that validate a contract that must be considered by the two parties include; the presence of an offer, acceptance, the intention by the parties to create a legal relationship, presence of lawful consideration, capacity of either party to contract and must have legal purpose. Free consent is an important element of a contract according to Contract Act 1955 section 14 that requires that there be no use of force to compel any party to enter into an agreement. The three factors discussed include coercion, misrepresentation, and undue influence. The paper also gives recommendations on the amendments to be considered regarding contracts that are made via the internet.

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