We often hear about the term “Contract”, but do you know how is a contract formed?
A contract can be made either orally or in writing. According to the Malaysian law, a valid contract must contain four crucial elements, namely:-
(1) Offer / Proposal;
(2) Acceptance of the offer;
(3) Consideration; and
(4) An intention to create legal relation.
An offer is made when the offeror (the one who makes offer) signifies to the offeree (the one whom the offer is made to) his willingness “to do” or “to abstain from doing something”.
An offer may be made to an individual, a group of people, a company, or the entire world.
Example: In a supermarket. When a customer takes the goods from the shelves to the cashier’s counter to check out, such action is considered as an offer made to the supermarket to buy said goods.
After Party A has made an offer to Party B, Party B must accept such offer to form a contract. In which event, Party B’s acceptance MUST BE COMMUNICATED to Party A (such communication can be done by a simple gesture or by a formal written response), and such acceptance must be unconditional.
Example: In a supermarket, the cashier’s action in collecting money from the customer is an indication that the supermarket has accepted the offer made by the customer to buy the goods.
However, if Party B changes the term of Party A’s offer before the acceptance, there is no acceptance made here. Situation of such is usually known as the “Counter-Offer”. Once the counter-offer is made by Party B to Party A, Party A’s original offer no longer stands, in which event, Party B can no longer accept Party A’s original offer, and the position of the parties would switch, whereby it is now up to Party A to decide whether to accept Party B’s counter-offer.
Example: The cashier in the supermarket discovered that an incorrect price tag was labelled on certain goods, the action in telling the customer that the goods are actually RM10.00 instead of RM8.00 is a counter-offer made to the customer, at which point, it is up to the customer to decide whether he wants to accept such item, which is to pay more money for it.
The Consideration, to put in plain and simple term, is the promise made by the contracting parties to one another.
Example: In a sale and purchase transaction in the supermarket, the customer’s consideration is the money that he is paying, while the supermarket’s consideration is the goods that it is selling to the customer.
Both contracting parties must provide Consideration to each other, otherwise a contract without Consideration is not a binding contract and is void in law.
In addition, the Consideration given by both contracting parties may not have to have equal value, an inadequate Consideration is sufficient to form a Contract.
Example: The purchase price of RM1.00 to buy a car is a good Consideration as long as the seller of the car agrees to it.
INTENTION TO CREATE LEGAL RELATION
If the contracting parties have no legal intent to make a contract, the contract will be non-binding.
Under normal circumstances, when promises are being made within family members, it is generally understood that the family members do not have any legal intention to make a contract.
Example: A brother promised his sister for a scrumptious dinner, but at the end, the brother broke his promise, now the sister may not be able to pursue in law to enforce her brother’s promises.
However, if there is indeed intention to create legal relation within the family, they are at liberty to do so by expressing such intention before the contract is formed.
As a conclusion, the formation and configuration of the contract is ever-changing, depending on each unique situation. Therefore, if you want to ensure that your interests are legally protected, we would advise that consultation be sought to ensure that a valid and enforceable contract is entered between the parties concerned.
Written By: Stanley Phang Weng Lam, LLB(hons) Cardiff, CLP, Adjudicator
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