Introduction
Contracts are fundamental to govern relationships, from renting an apartment to launching a new business. A solid grasp of the fundamentals of contract law can help you steer clear of legal pitfalls and their potentially severe repercussions. This guide serves to answer some common questions.
What are the Essential Elements Necessary to Form a Binding Contract?
The key elements include:
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- Offer and Acceptance: A clear offer by one party and its unconditional acceptance by the other party. Acceptance must be clearly communicated. If instead of an acceptance, a counter-proposal is made, no concluded contract comes into existence unless the counter-proposal is accepted. Silence is generally not considered acceptance unless it is coupled with some overt or positive act that may constitute acceptance.
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- Consideration: Something of value exchanged between the parties. This doesn’t necessarily mean money. It can be a promise to do something or abstain from doing something. Consideration may not necessarily be of equal value but must be of some value.
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- Intention to Create Legal Relations: Both parties must intend for the agreement to be legally binding. Intention can be derived from the objective facts. Contemporaneous documents and the parties’ conduct will be examined.
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- Certainty of Terms: The contract terms must be clear and unambiguous. The subject matter, the contracting parties, and the price must at least be identified. Hence, even if parties intended to create a formal, written contract later, the Court might find that an “open contract” already existed if the essential terms were already agreed upon. This is true even if there were phrases like “subject to a formal agreement” being included in the correspondence between parties (see Charles Grenier Sdn Bhd v Lau Wing Hong [1996]3 MLJ 327).
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- Capacity to Contract: The contracting parties must possess the requisite legal capacity. Individuals must be of the age of majority (18 years old) and possess the mental capacity to understand the contract’s terms. Minors or those who are deemed mentally incapacitated cannot enter into legally binding contracts. As for legal entities (companies, associations, or societies, etc.), the authorised representatives must be vested with the powers under the Constitution to enter into the contract. The specific procedures outlined in the Constitution or any other governing document must also be complied with.
Do Contracts Have to Be in Writing in Malaysia?
As a matter of prudence, a written contract is highly recommended. But it is not a mandatory requirement in Malaysia. Verbal agreements can also form a legally binding contract. However, it is risky to rely on verbal agreements. Proving its existence and what was actually agreed upon can be incredibly difficult. It is often a “he said, she said” scenario. Memories fade, and the recollections of events can differ (even unintentionally).
Conversely, a written contract offers crucial advantages. It provides clear evidence of the agreement and its terms. A well-drafted written contract spells out the parties’ respective obligations, the payment terms and timeline (if any), and what happens if there’s a breach.
For example, without a written agreement, these questions are difficult to answer:
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- What was the agreed-upon price, and when was payment due? (e.g., Was there a deposit? What payment methods were accepted? Were there late fees?)
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- What was the timeline for performance? (e.g., When was the work supposed to start and finish? Were there any agreed-upon milestones?)
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- What constitutes a breach of contract, and what are the remedies? (e.g., What happens if the work is substandard? Can the contract be terminated? Are there penalties?)
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- How will disputes be resolved? (e.g., Is there an arbitration clause? Will disputes go straight to litigation?)
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- Who is responsible for specific costs or expenses? (e.g., Who pays for materials? Who is responsible for obtaining permits? Who bears the legal costs?)
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- What are the specific obligations of each party in unforeseen circumstances? (e.g., What happens if there’s a delay due to bad weather? What if business operations are disrupted because of certain orders by the local authorities?)
What Happens to Illegal Contracts?
Contracts that are prohibited by law are generally considered void ab initio. This Latin phrase means “void from the beginning.” Essentially, it’s as if the contract never existed. Neither party can enforce it, and courts will not recognise it. Some examples of illegal contracts: unlicensed moneylending agreements, agreements for rental of real estate license, and illegal gambling. Hence, if an unlicensed moneylender loans money at an interests, he may not even recover the principal loan (see Triple Zest Trading & Supplies & Ors v Applies Business Technologies Sdn Bhd [2023] 1 LNS 2061).
Can you backdate an agreement?
Generally, backdating an agreement is not unlawful unless it was calculated to deceive or defraud third parties, or for any other improper purposes (see Inter Heritage (M) Sdn Bhd v Asa Sports Sdn Bhd [2009] 2 CLJ 221). If there are legitimate reasons, such as formalising a pre-existing verbal agreement, then backdating may be permissible.
Seeking Legal Advice
This guide provides general information. It is not a substitute for professional legal advice. Before entering into any contract, it’s highly recommended to consult with a lawyer specialising in contract law in Malaysia. They can review the contract, explain its implications, and protect your interests. This proactive approach can save you time, money, and stress in the long run.
