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What Makes A Contract Valid Under The Law In Malaysia

What Makes A Contract Valid Under The Law In Malaysia by TYH & Co. Business Lawyer KL Selangor Malaysia

What Makes A Contract Valid Under The Law In Malaysia

People enter into contracts every second of everyday. Almost everything that we do – from buying a packet of Nasi Lemak, to getting a haircut at the salon, to selling a house – is regulated by the law of contracts. You might be surprised at the number of contracts that you have actually formed throughout your lifetime.

The prevalence of contracts in modern everyday life is a result of numerous interactions in varying aspects. When one person assures another that he will do or not do something, that becomes a promise; when both parties agree with each other as to what they will do or not do, then they will reach an agreement. A contract, in simple terms, is an agreement between two parties that is enforceable by law. Furthermore, a contract need not be in writing – verbal contracts exist as well. So how do we know if an agreement is a valid contract? We can look for the combination of certain elements required under the law of contract.

i. Offer
Every contract starts off with an offer or a proposal. A person makes a proposal when he signifies his willingness to be bound by his promise, and intends to obtain the other person’s assent to that promise. The offer made must be legal, crystal clear and in certain terms, in that the subject matter of the contract must not be too vague to be enforced. During the build up to an agreement, parties often go through a period of negotiation, which differs from an offer, as negotiations are not certain and leaves room for further discussions.

ii. Acceptance
After an offer is made, it is the other person’s turn to accept the offer. When a person to whom an offer is made signifies his assent thereto, the offer is said to be accepted. Before the acceptance becomes valid and enforceable, it must correspond to the offer, assenting absolutely and unconditionally to all the terms set out in the offer. At this point, the accepting party should not have wavering thoughts and instead, should be able to express his final and unqualified consent to the offer.

iii. Consideration
While offer and acceptance may be a straightforward concept for the foundations of a contract, people may get confused over the idea of a “consideration”. A consideration is the price of a promise – to do or abstain from doing something, and this translates into something of value in the eyes of the law. For instance, money is usually the consideration you give a shop when you buy a piece of clothing. Services, material goods, rights and interests are some other examples of the exchange of value between contractual parties, and it can be seen as the deal struck between the parties.

iv. Intention to create legal relations
In commercial contracts, parties usually intend to become legally bound by a legal relationship. Yet, some people enter into a contract without realising so, and that is commonly seen in social and domestic relationships, meaning friends and family. We often have arrangements with people close to us without expecting any legal implications. The way to determine whether there is an intention to create legal relations is by looking at what the parties involved appear to have agreed on, rather than what the parties say they have agreed. If all that A and B had was a casual conversation, it is difficult to infer that they intended to create a legal relationship, but the intention is more obvious if they have reached an agreement and are ready to be bound immediately ─ even more so if there was a formal document to support it.

v. Capacity
Not everyone is competent to contract. A contract is only valid if the parties are of the legal age, which is 18 years old in Malaysia, and of sound mind. The law aims to safeguard the interests of minors so that they will not be taken advantage of due to their young age. Likewise, people of unsound mind such as mentality impaired and intoxicated people lack the capacity to contract because they cannot understand the terms of a contract nor form a rational judgment as to its effect, therefore the need to protect their interests.

Contracts can exist on different levels of complexity, and they facilitate the interplay of system and order to many transactions. By fulfilling the elements required, almost anyone can enter into a valid contract. It is best to make sure that your free consent remains a key ingredient in your contract to reflect your true intent and ensure its validity. However, it is not uncommon for some unscrupulous parties like big companies to take advantage of their contracting parties through coercion, misrepresentation or even fraud, which defies the purpose of a contract which is to protect interests involved in the contract. These contracts are voidable under the law, but you should always thoroughly understand the contents of your contract before signing it.

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