Business Law. Law of Contract Chapter 6 - Consent of Parties, Unlawful and Void Contracts. Learning Outcome. When consent is said to be free? What is void, voidable and illegal contracts? What is fraud, misrepresentation, coercion, undue influence and mistake? What are the legal effects?.
Business Law Law of Contract Chapter 6 - Consent of Parties, Unlawful and Void Contracts
Learning Outcome • When consent is said to be free? • What is void, voidable and illegal contracts? • What is fraud, misrepresentation, coercion, undue influence and mistake? • What are the legal effects?
Free Consent • Free consent is the basis of a contractual relationship • There must be a meeting of minds as to the nature and scope of the contract, (a consensus ad idem) • S.10(1): ‘agreements are contracts if they are made by free consent of parties competent to contract …’ • Consent – parties agree upon the same thing in the same sense – s.13 • Consent must be free
Free Consent • S.14: if consent is caused by the following, then there is no free consent: - • Coercion, • Undue influence, • Fraud, • Misrepresentation, • Mistake. Query? What is the effect? – may be void or voidable
Void & Voidable Contracts • Valid contract – s.2(h) • English Law: void: agreement that is destitute of any legal effect ab initio so that no rights/obligations are created at all • S.2(g): agreement not enforceable by law is said to be void • S.2(i): Voidable contract – agreement enforceable at one party’s option but not the other: - • Can either rescind OR • Affirm the contract & seek damages
Example • Voidable contract: • A offers B to sell a land. All documents related to the land was taken fraudulently by A. If later on B realised that A was not the true owner as C claim that C is the real owner, B can terminate the contract or seek damages
Example • Void contract • If B contracts with A to sell his casino without license to A, A then resells it to C, C does not acquire any title to the goods simply because A cannot pass to C what he does not have. The contract is void ab initio
Fraud • Defined – s.17 – various acts committed by a party with intent to deceive the other contracting party • The state of representor’s mind is an integral part of fraud • Case: Weber v Brown  1 FMSLR 12
Fraud • Misrepresentation whether fraudulent or innocent is irrelevant if it has not induced the other party to enter into a contract: Explanation to s.19 • Five categories of actions which would constitute fraud: s.17 • False suggestion • ‘active concealment of a fact by one having knowledge of belief of the fact’ – Illustration c s.19 • Promise made without any intention of performing it • Any other act fitted to deceive • Any such act or omission specially declares to be faudulent
Fraud • Exception to s.19: Even though the consent caused by misrepresentation, or by silence, the contract is valid if the party whose consent was so caused had the means of discovering the truth with ordinary diligence • The person who claim that there is a fraud case must prove the existence of fraud • In DatukJaginder Singh & Ors v Tara Rajaratnam, it was held that the standard of proof of fraud in civil proceedings was the criminal standard of proof beyond reasonable doubt • Effect: voidable – s.19 – the injured party may terminate or if he or she wishes to continue, can claim for damages • If he terminates, must restore any benefit received – s.65
Fraud • Silence does not amount to fraud unless there is a duty to speak: Explanation s.17 • E.g.: Insurance contract, the nature of the contract is there is a legal duty on the insured to disclose material facts that is likely to influence a prudent insurer and the failure to do so may entitle the insurer to rescind the contract
Misrepresentation • Defined in s.18 • ‘Misrepresentation’: normally refers to certain false statement made by a representator and which induces the other party to enter into a contract but the representor does not intend to deceive • Effect – voidable – s.19 – the injured party may terminate or if he or she wishes to continue, can claim for damages • No misrepresentation if there is no reliance of false statement – explanation to s.19 • Silence does not amount to misrepresentation unless there is a duty to speak – explanation to s.17
Misrepresentation • There will be no case of misrepresentation if there is mean of discovering the truth with ordinary diligence – exception to s.19 • Affirm contract and sue for damages – s.19 • If rescind, must restore any benefit received – s.65
Coercion • Defined – s.15 • Coercion is the committing, or threatening to commit any act forbidden by the Penal Code or the unlawful detaining or threatening to detain, any property, to prejudice of any person whatever, with the intention of causing any person to enter the agreement • Effect – voidable • Example: Illustration of s.15 • Repay money paid or return property under coercion – s73
Coercion • Economic duress • Yayasan Melaka v Photran Corporation Sdn. Bhd. & Anor  7 CLJ 308 • To avoid the contract, one must show that his consent was caused by coercion as defined under s15 CA 1950 ie must be against the Penal Code • The court noted that in view of the definition of ‘coercion’ set out in s15 CA 1950, the English common law concept of economic duress was not applicable
Coercion • Economic duress • It is noted that the High Court in Yayasan Melaka’s case has adopted a restrictive view to the possible application of the English concept of economic duress within the context in s15 CA 1950 • There are however other Malaysian decisions that had approached the matter broadly by holding that economic duress can fall within Malaysian contract law, namely OCBC Securities (Melaka) Sdn. Bhd. v KohKeeHuat  2 MLJ 110
Undue Influence • Defined – s.16 • Two types: - • (1) actual undue influence – s.16(1) • Must prove 3 ingredients: - • (a) one party is in a dominant position • (b) uses that dominant position • (c) to take unfair advantages • Case: Morley v Loughnan
Undue Influence • (2) presumed undue influence – s16 (2) • 3 circumstances where presumption of dominating the will of another • a. real/apparent authority over another; • b. fiduciary relationship; • c. contracting with a person whose mental capacity affected by age, illness or mental/bodily distress • It is a rebuttable presumption
Undue Influence • Example: See Illustration a, b, c & d of s.16 • Case: DatukJaginder Singh v Tara Rajaratnam • Effect – voidable • Remedies: contract set aside or to be affirmed on terms determined by court – s.20
Mistake • Both parties make mistake as to essential fact, contract is void – s.21 • Remedies: • (1) Repay money paid or return property delivered under mistake – s.73 • (2) Restore any advantage received or compensate – s.66 • If it is a mistake of law in force in Malaysia, the contract is valid but if it is a mistake of law not being in force in Malaysia, the contract is void – s.22 • One party make mistake, contract still valid – s.23 • If due to misrepresentation of the other, s.18(c) applies
Mistake • Ho Weng On & Anor v Bindev Sdn Bhd  7 MLJ 607 • It was discovered that the property which formed the subject matter of the contract between the parties had actually been sold by D to a 3rd party prior to the time of the contract. D contended that the contract was void on the ground of common mistake, as both parties were mistaken about the availability of the property. The High Court rejected D’s contention and held that clearly, the mistake was a direct result of D’s own wrongdoing. It was impossible that D had no knowledge of the sale to the 3rd party, and in any event, it should have discovered any mistake while preparing the sale and purchase agreement. In this case, since the property had been sold to a 3rd party, the Court could not award specific performance and thus exercised its discretion under ss18(2) and 21 of the Specific Relief Act 1950 to grant damages for breach of contract.
Unlawful & Void Contracts • Must be for lawful consideration and object – s.10(1) • Unlawful consideration/object – s.24 • Consideration for one/more objects is unlawful – s.25 • Agreement without consideration – s.26 • Restraint of marriage unless minor – s.27
Unlawful & Void Contracts • Restraint of trade, profession/business unless exceptions apply – s.28 • Restraint of legal proceedings unless exceptions apply – s.29 • Uncertain agreements – s.30 • Agreement by wager unless exceptions apply – s.31
Agreements Which Contravenes the Law (Illegal Contracts) • The provision lists FIVE (5) categories of agreements which contravene the law and resulting in the contract being void. • Refer to section 24 of the CA 1950
Agreements Which Contravenes the Law (Illegal Contracts) • Consideration or Object of Agreement Forbidden by Law (s24(a) CA 1950) • This means that agreements agreed by the contracting parties clearly contravenes with the provision of any laws. • Such contravention will therefore result in the contract being void because it is forbidden by law. • In Govindji v. Soon Hin Huat (1982), an unlicensed purchaser signed a contract to buy copra in contravention rules made under the Federal Agricultural Marketing Authority Act 1965. It was held that the contract was void because it was done in contravention of the law.
Agreements Which Contravenes the Law (Illegal Contracts) • Consideration or Object of an Agreement if permitted would defeat any Law (s24(b) CA 1950) • It refers to a contract which was signed but not expressly contrary to any provisions of the law. • The law on the other hand only forbids such agreements or contract by implication, that is by imposing fines or penalty for any contravention. • Applied in Chung Khiaw Bank Ltd. V Hotel Rasa Sayang Sdn. Bhd. & Anor  1 MLJ 365 – giving financial assistance to buy shares
Agreements Which Contravenes the Law (Illegal Contracts) • Consideration or Object of the Agreement is a Fraud (s24(c) CA 1950) • An agreement where its consideration or object is fraudulent in nature, contravenes the law. • For example an agreement to divide a share of money obtained by deceit is void. • Refer to Illustration (e) and (g) of section 24 for a clearer picture.
Agreements Which Contravenes the Law (Illegal Contracts) • Consideration or Object of the Agreement Implies or Involves Injury To the Person or Property of another (s24(d) CA 1950) • Paragraph (d) applies to the person or property of another person. • Applying this principle, if two parties agreed to destroy a third party’s house for a sum of money which will be paid by another person, this agreement is void in accordance with paragraph (d). • In Syed Ahamed bin Mohamed Alhabshee v. Puteh binti Sabtu (1922),the defendant agreed to sell a property to the plaintiff in which an infant had an interest. This transaction is detrimental to the child and therefore held void by the court
Agreements Which Contravenes the Law (Illegal Contracts) • Consideration or Object of the Agreement Presumed by Court as Immoral or Against Public Policy (s24(e) CA 1950) • Divided into TWO(2) types of agreement: - • immoral agreement; • agreement which are opposed to public policy.
Immoral agreement • In Pearce v. Brooks (1866), the plaintiff agreed to hire a coach to the defendant, a prostitute, knowing that she shall use it for her trade. The defendant failed to pay the hire charges and the plaintiff claimed the sum due. The court held that the plaintiff failed in the claim for the hire charges because the agreement was illegal as it was immoral. • In Aroomogum Chitty v. Lim Ah Hang (1894), the plaintiff lent money to the defendant for the purpose of running a brothel. The court held that the plaintiff could not recover his money from the defendant because the agreement made was illegal as it was immoral.
Agreement which are opposed to public policy • Agreements for the sale of appointments, positions and public awards are unlawful as as it contributes towards corruption in public life (Parkinson v Royal College of Ambulance – bribe) • Contract which interferes with the proper workings of justice. Enforcement of criminal laws is considered to be of public interest. Therefore, any legal action if brought against criminal acts cannot be set aside through private contracts. Refer to Illustration (h) of section 24. • Contracts against the interest of the country
Restraint of Marriage • Contracts prejudicial to the freedom and stability of marriage. It is also connected to section 27 of CA 1950 which provides “Every agreement in restraint of the marriage of any person, other than a minor during his or her minority, is void” • Any agreement which might weaken or affect the stability of an existing marriage is void too. • An agreement made between a husband and wife still in marriage to specify conditions in the event of a future divorce is void. • But such agreement is valid if the agreement was made at the time when their marriage was in such an irrepairable state and they are already separated
Contracts in Restraint of Trade • General rule: agreement restraining lawful profession, trade or business is void (not in toto) – s.28 • Exception 1 – person selling goodwill of business agree with buyer to refrain from carrying on similar business within specified locality and reasonable limits
Contracts in Restraint of Trade • Exception 2 – partners of dissolved partnership agree to refrain from carrying on similar business within specified locality and reasonable limits • Exception 3 – partners will only carry on partnership business during its continuance
Restraint of Legal Proceedings • Void (not in toto) unless exceptions apply – s.29 • Applied in Corporation Royal Excahnge v Teck Guan (1912) 2 FMSLR 92 – claim within 3 months • Exception 1 & 2 – arbitration agreement • Exception 3 – exercise of governmental discretion for scholarship
Restraint of Legal Proceedings • MBF Insurans Sdn Bhd v Lembaga Penyatuan dan Pemulihan Tanah Persekutuan (FELCRA)  6 CLJ 639 • The respondent contracted with Haza Enterprise (the contractor) for agricultural works on an oil palm estate. The appellant insurance company agreed to provide a guarantee in the sum of RM22,017, payable on demand by the respondent, in respect of the contractor’s works. An endorsement on the guarantee provided that it would expire on 14 June 1991 and that all claims must be received on or before that date. Subsequently, the contractor failed to complete the works required under the contract. The respondent made a demand on the guarantee to the appellant via a letter dated 21 June 1991 which was rejected by the appellant on the ground that it was late. The respondent’s claim for the said sum was rejected by the magistrate’s court on the ground that it was out of time.
Restraint of Legal Proceedings • On appeal to the High Court, the decision of the magistrate’s court was reversed. The Court held that the endorsement on the guarantee was in restraint of legal proceedings and contravened s29 CA 1950. S29 CA 1950 provides that “Every contract, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent.” • On appeal by the appellant, the Court of Appeal upheld the decision of the High Court. Suriyadi Halim Omar JCA stated that s29 with its prohibitive and clear words, is an essential provision and was an indication of the intent that it is mandatory. Following this, the Court held that the endorsement was void in view of s29 and that as the claim was filed within the limitation period, it was still a good claim.
Remedies (not for s.28 & s.29) • General rule – no remedy since contract is unlawful and void • Based on the principle of ex turpi causa • Restore any advantage or compensate – s.66 • Provided party has no knowledge of illegality
Summary • Sometimes absence of certain elements render a contract voidable or void • Important to determine the effect since the rights and remedies may differ • Important to ensure that agreements are not unlawful