What Constitutes a Binding Contract?

Prishanth and Valer recently made an agreement where Prishant, would sell his limited-edition book for a total of RM 2,000.00. Unfortunately, on the date in which the deal should have taken place, Prishanth refused to sell the book.

Does Valer have a valid claim against Prishanth?

A) General Rules on Contract Formation

Offer

Before an agreement can be reached, there must be an offer being put forth by the promisor which serves as a definite promise to be bound provided that certain specified terms are accepted.

Section 2 (a) of the Contracts Act 1950 provides,

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal;”

Moreover, a valid offer must be meet several requirements. From the offset, an offer has to be made, either to a specific person or to the whole world. In the case Carlil v Carbolic Smoke Ball Co [1893] 1 QB 256, it was held that aside from offers being conveyed towards one particular person, an offer could also be open to anyone who comes forward and performs the conditions that have been set out.

An offer can be made expressly or impliedly as Section 9 of the Contracts Act 1950 clearly states,

“So far as the proposal or acceptance of any promise is made in words, the promise is said to be express. So far as the proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

It should also be relevant to note that an offer must be clear in its meaning. This is because any uncertainty with regards to such offer may be deemed invalid by courts. This was the case in Ahmed Meah & Anor v Nacodah Merican (1890) 4 Ky 583 where an agreement to build a “house which is a suitable building” was regarded as too vague and hence, unenforceable.

Acceptance

Now, assuming that a valid offer exists, there is a need for that offer to be completed by a valid acceptance.

Section 7 of the Contracts Act 1950, which governs the rule pertaining to acceptance.

This particular provision provides,

In order to convert a proposal into a promise the acceptance must— (a) be absolute and unqualified; (b) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in that manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance.

From the wordings of the said provision, there are a few conditions to be met.

The first is that an acceptance must be an unconditional assent in response to the offer. In The Ka Wah Bank Ltd v Nadinusa Sdn Bhd & Anor [1998] 2 MLJ 350, the Federal Court warned that where a reply from a party is of a qualified nature, or is framed in a way where it seems to represent a variation of the terms specified in the offer, then such a reply is not a communication of an acceptance. In contrast, that reply would be deemed a rejection accompanied by a counter-offer which the promisor can now accept or reject.

Next, an acceptance must also correspond to the offer. This means that an acceptance must be in response to an offer as opposed to being a mere statement or conduct which is isolated from the initial offer. It should be also relevant to note that unless a mode of acceptance has been stipulated by the promisor, there is no specific way of constituting a valid acceptance.

In the case of Manchester Diocesan Council for Education v Commercial & General Investments Ltd [1970] 2 ALL ER 531, there were several guidelines on this specific situation.

“If a promisor stipulates by the terms of his offer that it may, or that it shall, be accepted in a particular manner, the contract materialises as soon as the promise does that stipulated act. The promisor is also entitled to insist that he is not bound unless the acceptance is communicated through a manner that was already prescribed. If the promisor has prescribed a particular method of acceptance, but does not in terms insisting that only such mode of acceptance results in a binding contract, any acceptance communicated to the promisor by any other mode which is no less advantageous to him will result in a conclusion of the contract.