Oral Contracts in Malaysia

Contracts are an integral aspect of modern society. Any agreement between two or more parties, whether written or oral, that creates legally binding responsibilities is called a contract. Some contracts are written, but there are also implied and oral contracts. But, when asked to define a contract, most people will refer to a physical agreement, such as those used when starting a new job, purchasing a house, or signing a lease.

While it is true that many of these documents serve as contracts, the legal definition of the contract includes any agreement with legal effect, whether written or unwritten. A contract must comply with particular requirements for it to be enforceable and legally binding, but the fact that it is in writing is not one of them. This article will examine the legal position of oral contracts in Malaysia.

Essential elements of a contract

When analysing the perspectives on the oral contract in Malaysia, it is vital to understand that for an agreement to be legally binding, it must contain all essential elements of a contract.

A valid contract must contain all the following elements, namely:

• Offer
• Acceptance
• Intention to create legal relations
• Consideration

1) Offer and Acceptance

A contract is created when one party makes an offer, and the other party accepts that offer. An offer is a promise made by one party (the offeror) to another (the offeree) that they will or will not take a particular action.

In contract law, acceptance is the unequivocal acceptance of the terms of an offer. For an acceptance to be valid, it must be made according to the offeror’s instructions. Depending on the nature of the contract, it could be verbal or written. The offeror must be informed of the acceptance. Just remaining silent does not constitute acceptance. This guarantees that the parties to the contract are on the same page and that both sides are aware of the offer being accepted.

2) Intention to be legally bound

The third ingredient of a valid contract is the parties’ intention to create legal relations between them. Contracts are only enforceable if the subject matters of the contracts are legal, and the parties intend to bind themselves legally.

In every aspect of personal and social life, people enter into agreements with no intention to resort to lawsuits should the promises are not honoured. For example, if two students agree to attend a football game, with A agreeing to provide transportation and B deciding to purchase tickets, there is an agreement. Still, no legal duties are formed simply because none were intended.

3) Consideration

A contract in Malaysia needs to be supported by consideration for the court to uphold it. The term “consideration” is used in contracts to describe the value each party receives in exchange for their commitments to the contract. It is crucial to have this in place so that the law can enforce the agreement. It refers to the exchange of something of worth for something else. Let’s say A sells B a shirt. As part of the deal, B will give A some cash, and A will give B the shirt. In this situation, both parties provide consideration. Without some form of consideration, a contract cannot be legally binding.

Validity of Oral Contracts

Most of us picture a signed, written document when we hear the words “contract” or “agreement,” as was explained above. What about the agreements we established verbally or implied by our behaviour? Should they also be treated as contracts?

Section 10 (1) of Contract Act 1950 (“the act”) states that:

“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 expressly declared to be void at this moment.”

A legally binding agreement is thus a contract. There is no legal requirement that a contract be made in writing, and if the previous conditions are met, a valid contract has been formed. Once an agreement satisfies all the elements under the act, it is a contract, regardless of whether it is written down.

Are all unwritten contracts valid and enforceable?

Even though the law stipulates that oral transactions are enforceable, certain contracts must be in writing. A promise to pay a debt that has expired due to the statute of limitations (unclaimed debt older than six years) must be in writing and witnessed by the debtor, as stated in Section 26 (c) of the act.

However, several legislations specify that certain contracts, such as employment contracts, may be made orally or in writing. This is stated as follows in Section 2 (a) of the Employment Act of 1955:

“contract of service” means any agreement, whether oral 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 all apprenticeship contract

Proving an Unwritten Contract

In most cases, written contracts are easier to prove than oral ones. How, then, would one argue for the existence of an informal oral contract? If parties to a verbal contract come to court over a dispute, the court will examine the transactional circumstances and any relevant witness testimony to ascertain the terms of the agreement.

The court will examine the circumstances surrounding the contract’s creation to determine if the four elements required to form a contract exist. They include the parties’ behaviour, correspondence, the nature of their contractual relationship, and the testimony of witnesses.

Whoever intends to prove the existence of an oral contract may use the communication made before, during, and after the formation of the contract – letters, emails, text messages, and proof of payment – as evidence. In addition, the rendering of services, acquisition of goods, and other similar actions may serve as evidence of the existence of such a contract.

Case examples

Harcharan Singh s/o Sohan Singh v Ranjit Kaur d/o S Gean Singh [2004] 1 MLJ 339

1. Plaintiff and his elder brother purchased a property registered in both names.
2. The elder brother died, and his estranged widow became their administratrix of the deceased’s estate. She claimed the deceased’s half-undivided share of the property as part of the deceased’s estate.
3. The plaintiff alleges that due to the deceased’s family and financial problems, the deceased, by an oral agreement, had sold his half share of the property to him.
4. Plaintiff applied for a declaration that he is the beneficial owner of the deceased’s half-undivided share in the said property.
5. The court held that he who alleges must prove. This is the basic tenet of the rule of law. Court’s finding was that Plaintiff had merely alleged but had not proven the allegations.
6. The fact showed that Plaintiff had not even attempted to transfer the half-undivided share of the deceased during the deceased’s lifetime, and no witness could testify to the truth of the allegations asserted by Plaintiff.
7. The court dismissed the Plaintiff’s claim and held that no contract was formed between the Plaintiff and his deceased’s brother to sell the deceased’s share of the property.

Melaka Farm Resorts (M) Sdn Bhd v Hong Wei Seng [2004] 6 MLJ

1. Without any formally written employment contract, the appellant, Melaka Farm Resorts(M) Sdn Bhd, verbally agreed to employ the respondent, Hong Wei Seng, as its general manager.
2. Then, the respondent resigned and demanded salary arrears from November 2021 to July 2022, which the appellant contested. The issues before the court were whether the parties had an employment contract and whether the appellant should pay the arrears in dispute.
3. The court rendered a verdict in favour of the respondent. It was held that an employment contract might be expressed and entered into by the parties by the execution of a written agreement, including explicit terms and conditions of service. This formal agreement will eliminate all concerns regarding the existence of a contract under Section 10 of the act. As indicated in the agreement, the parties can depend on these conditions to establish their rights and responsibilities.
4. Alternatively, the court stated that an employment contract could be made verbally. In this case, the parties did not execute a written contract; therefore, the court must assess whether an oral service contract has been formed.
5. According to Section 9 of the act, the proposal and acceptance of a promise made in words are considered as express, but the proposal or acceptance of a promise made in other means is said to be implied.
6. In this case, the court ruled that the parties entered into a verbal contract of service when the appellant authorised the defendant to work at his place of employment and then paid RM4,000 for two months in September and October 2021. Thus, the court ordered the appellant to pay the respondent the salary arrears.

In conclusion

Although the law recognises the validity of verbal contracts, the parties to such an agreement may have difficulty justifying its terms or even its existence in the case of a dispute. If there is sufficient evidence to substantiate a claim involving an oral contract, whether that proof is verbal or in the way of conduct, the claim still has the chance of success in court. The court will consider factors such as witness testimony, communication between the parties, and the facts of the case while deciding whether a verbal contract exists. To avoid the inconvenience of a heavier burden of proof to prove a handshake negotiation, the smart way to protect yourself is to have a credible witness present when making such an oral contract.