When we think of contract, a paper document comprises of terms and conditions which have been agreed and signed by two or more parties comes to mind.
This is because most people think that all contracts must be made in writing before they can be said to be valid.
Our contract law however provides that oral promise given by a party to another can also form a valid contract as long as it is not required to be written by law.
The Law
Reference is made to the following sections of the Contracts Act 1950 (“the CA”):
Section 2(e) of the CA which states that “every promise and every set of promises, forming the consideration for each other, is an agreement” and
Section 10(2) of the CA which states that “Nothing herein contained shall affect any law by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.”
As provided for in the above Section 10 (2) of the CA, some contracts are required to be in writing for the contracts to be enforceable in court of law. For example, Section 26(c) of the CA states that a promise to pay a debt barred by limitation law should be in writing and signed by the debtor.
Section 26(c) of the CA:
“An agreement made without consideration is void, unless it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.”
In some situations, the law made it clear that the contract can either be made orally or in writing. For example, Section 2(a) of Employment Act 1955 states that ““contract of service” means any agreement, whether oral or in writing and whether express or implied, whereby one person agrees to employ another as an employee and that other agrees to serve his employer as an employee and includes an apprenticeship contract.”
The basic rule of a contract is that there must be an offer made by one party and accepted by another. This offer and acceptance can either be done orally or in writing.
In addition to the parties’ agreement, the contract is not valid unless there is an exchange of things in value (“consideration”) for the agreement. The other elements of a contract can be found in Section 10(1) of the CA which states:
“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”
Elements like competency and free consent can be found in Sections 11, 13 and 14 of the CA. Section 11 of the CA states that:
“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
This means that a promise, if it is made orally by one party being an adult of 18 years and above (as provided by in Section 2 of the Age of Majority Act 1971), having a sound mind or in other words not suffering from any mental illnesses at the time of contracting and is made for a lawful consideration, that contract is valid and enforceable.
Free consent as defined in Sections 13 and 14 of the CA is when parties to the contract agree to the same thing in the same way and that there are no other factors such as fraud or misrepresentation that could affect it.
Case Example
In the case of Achi A/P Suppiah v Devamurthy A/L Suppiah [2009] MLJU 1134, the facts were that the parties have entered into an agreement for a sale and purchase of a house (“the property”) at the price of RM300,000.00 on 14.9.2005 and have orally agreed to the following as the terms to the sale and purchase transaction:
- that the plaintiff to pay the defendant RM30,000.00 in cash;
- that the balance of RM270,000.00 is to be paid within three months with an extension of one-month period;
- the plaintiff informed the defendant that she would take a loan to pay the balance of purchase price and would engage PW1 (who were present during this oral discussion) as the plaintiff’s solicitor to assist her until completion of the sale and purchase transaction and these was agreed by the defendant;
- PW1 also explained that the terms and conditions of the of the sale and purchase would be the normal ones that were contained in a Sales & Purchase Agreement (“the SPA”) and that the SPA was a mere formality to enable the plaintiff to obtain the loan from the bank.
The defendant shook hands with the plaintiff’s husband indicating his agreement to the sale and this was witnessed by two other people. The plaintiff then paid the defendant RM30,000.00 in cash on 15.9.2005 as part payment towards the purchase price of the said property in which the defendant has agreed to hand over the relevant documents of the said property to the solicitor to enable the solicitor to prepare the SPA.
On 29.9.2005, the defendant informed the plaintiff that he would only give the documents if the plaintiff agreed to increase the purchase price to RM400,000.00 which the plaintiff’s husband did not agree relying on the initial agreement reached on 14.9.2005. The defendant returned RM30,000.00 to the plaintiff on 30.9.2005 and informed the plaintiff that the agreement has ended.
The defendant claimed that there was a conditional contract made between the defendant and the plaintiff’s husband on 15.9.2005 whereby the defendant had accepted RM30,000.00 as part payment and would sell the said property to the plaintiff only if the balance sum of RM270.000.00 can be paid on the following day which was subsequently extended to two weeks.
The court in its findings said that it is trite that an oral valid agreement is enforceable in law. In the absence of a written contract, the court is to determine whether the evidence adduced is sufficient to establish the existence of a binding agreement between both parties in that the parties are no longer in the negotiation stage but have in fact concluded a binding agreement.
The Decision
The court held that since the defendant denied the existence of an oral contract on 14.9.2005, whatever alleged agreement on the 15.9.2005 between the defendant and the plaintiff’s husband and not with the plaintiff would have no bearing to the oral agreement on 14.9.2005 and cannot be construed as a new term to negate or vary the oral agreement on 14.9.2005 as defendant is bound by his pleadings. It would be against the defendant’s pleaded case if the court were to construe the incident on 15.9.2005 as an additional term or varied term to the oral agreement on 14.9.2005 which defendant had never agreed to its existence. In conclusion, the Court finds that the plaintiff had proved her case against the defendant on a balance of probabilities.
Conclusion
Based on the above case, although the law allows for a contract to be made orally, the issue with oral contract lies on the difficulties of proving the terms of the contract when there is a dispute since parties normally have different recollection of what have been agreed between them. It is therefore strongly recommended for an oral contract be immediately set in writing so that the express terms of the agreement can be outlined in the contract, to avoid future misunderstanding or dispute between the parties.
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