Contracts in Daily Life
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 (formed through the parties’ conduct) and oral contracts.
But, when asked to define a contract, most people will refer to a physical agreement, such as those papers signed by them when starting a new job, purchasing a house, or signing a lease. While it is true that many of these physical 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 to be enforceable and legally binding, but it does not necessarily have to be in writing. This article will examine the legal position of oral contracts in Malaysia.
Basic components 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 the basic components of a contract.
A valid contract must contain all the following four elements, namely:
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. Depending on the nature of the contract, an offer could be verbal or written.
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.
2) Intention to be legally bound by the contract
The third ingredient of a valid contract is the parties’ intention to create legal relations between them. Sometimes, people enter into agreements without the intention to resort to lawsuits should the promises not be 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, legal duties are only formed if they were intended. If the contract is commercial, it is presumed that there was the intent. Informal arrangements with family and friends are presumed not to create intention and should not involve lawyers or the courts.
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. Contracts are only enforceable if the subject matters of the contracts are legal.
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. Both parties provide consideration (cash and the shirt) in this situation. Without some form of consideration, a contract cannot be legally binding.
Validity of oral contracts under the Malaysian Contract Act
Most of us picture a signed, written document when we hear “contract” or “agreement,” as explained above. What about the agreements we established verbally or implied by our conduct? Should they also be treated the same as written contracts?
Section 10 (1) of the Contract Act 1950 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.”
Therefore, as long as the oral contract contains all the basic components listed above and the subject matter that forms the contract is legal, it is deemed valid even if it is not written.
When a handshake contract is not enough
Even though the law stipulates that oral contracts are enforceable, certain contracts must be in writing. Those contracts are contracts that involved the following subject matters:
- 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 Contact Act.
- Employment contractsmay be made orally or in writing under Section 2 (a) of the Employment Act 1955.
Difficulty in proving the existence of an oral contract
(1) Lack of evidence and difficulty in enforcing the contract.
One of the potential drawbacks of relying on an oral contract is the difficulty in enforcing the contract. Without a written contract, it can be difficult to prove its terms and conditions, which later can lead to disputes and time-consuming legal battles.
For example, if you enter into an oral contract with a supplier to purchase goods at a certain price, and the supplier later denies the agreement, it can be challenging to prove the terms of the contract without any written evidence.
Suppose parties to a verbal contract come to court over a dispute; 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.
(2) Misunderstandings and Ambiguities
Oral contracts are often prone to misunderstandings and ambiguities. The contract terms are unclear and cannot be proven in writing.
For example, if you enter into an oral contract with a contractor to renovate your house and the contractor later claims that certain work was not included, it can be difficult to prove what was not included in the contract without a written and tangible agreement. This can lead to disputes and delays in completing the project.
(3) Limited Legal Remedies
When it comes to oral contracts, the legal remedies available to the parties are often limited. This is because, with a written agreement, it can be easier to prove the terms of the contract and the party’s obligations.
As a result, the parties may be unable to recover damages or other legal remedies in the event of a breach of contract. For example, if you enter into an oral contract with a vendor to deliver goods by a certain date, and the vendor fails to deliver the goods on time, it can be challenging to recover damages without a written agreement.
Cases law
(1) Harcharan Singh s/o Sohan Singh v Ranjit Kaur d/o S Gean Singh [2004] 1 MLJ 339
- Plaintiff and his elder brother purchased a property registered in both names.
- 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.
- 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.
- Plaintiff applied for a declaration that he is the beneficial owner of the deceased’s half-undivided share in the said property.
- 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.
- 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.
- 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.
(2) Melaka Farm Resorts (M) Sdn Bhd v Hong Wei Seng [2004] 6 MLJ
- 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.
- 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.
- 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. The agreement indicates that the parties can depend on these conditions to establish their rights and responsibilities.
- 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.
- 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.
- 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.
Key points
- Oral contract, the terms and conditions are discussed and agreed upon through spoken words rather than being recorded in writing.
- It is enforceable by law, just like a written contract, as long as it meets all the requirements for a valid contract.
- . Although difficult to prove without written evidence, oral contracts can be just as valid as written contracts if all the essential elements of a contract are present.
- It is always advisable to have a written contract, even if an oral agreement has been made, to avoid misunderstandings or disputes.
