Why Are Written Contracts Important? Is It Safe To Have Your Contract Drafted By Yourself? – Part 1

What is a Contract

We enter into contracts everyday. Almost everything that we do – from buying KFC and McDonald, to buying clothes in clothing retail store, to buying a property, is regulated by the law of contracts. A contract, in simple terms, is an agreement between two parties that is enforceable by law. However, how do we know if an agreement is a valid contract? The Law of Contract states that all agreements are contracts if they have the following five key elements:-

• Offer–when one party make a proposal to another for his willingness to do or abstain from doing certain act, and intends to obtain the other person’s assent to the act or abstinence. The person making the proposal is called promisor. For example, Ali offering to sell his Honda City to Abu for RM50,000.00. Ali is said to has signified his willingness to do an act, which is to sell his Honda City to Abu, with a view of obtaining Abu’s assent to the act.
• Acceptance –when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. The person receiving the proposal is called promisee. Acceptance must correspond to the exact terms of the proposal with no variation in order for the acceptance becomes valid and enforceable. So, when Abu signifies his acceptance to Ali’s proposal to purchase the Honda City for RM50,000.00, Abu is said to has accept Ali’s proposal.
• Consideration – the promise to do or abstain from doing something given in return for the promise made by the promisor. This means that a promisee cannot enforce a promise unless something has been promised or given in return. For example, money is usually the consideration given to a grocery shop when you buy some foods or drinks. Services such as professional services, hospitality, medicine are some other examples of the exchange of value between contractual parties. Hence, Abu’s promise to pay the sum of RM50,000.00 is the consideration for Ali’s promise to sell the Honda City, and Ali’s promise to sell the Honda City is the consideration for Abu’s promise to pay the RM50,000.00.
• Intention to create legal relationship– The parties must have had an intention to create legal relations in order to create a legally binding contract. An intention to create legal relations is presumed in commercial transactions. We often enter into a contract without the intention to be legally bound and this is commonly seen in social, family or other domestic relationship, for instance, with friends and family. In order to determine whether there is an intention to create legal relationship is by looking at what the parties involved appear to have agreed on, by looking at the language used, the parties’ conduct in the surrounding circumstances and the object of the contract. If all that Ali and Abu had was a casual conversation, it is difficult to infer that they intended to create a legal relationship, however the intention is more obvious if there was an agreement executed between them.
• Certainty of terms– 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. All essential terms must be agreed and the contract cannot otherwise be uncertain, vague or ambiguous.

Does it have to be in writing

A contract can be in writing or made orally as long as it is not required to be written by law.

Section 10(1) of the Contracts 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 hereby expressly declared to be void.”
Section 10(1) of the Contracts Act 1950 provides that all agreements are contracts if they are made by parties competent to contract, for a lawful consideration and with a lawful object. The section did not go on to state that all contracts must be made in writing before they can be said to be valid and enforceable.

As said by Gunn Chit Tuan J in Diamond Peak Sdn Bhd v. Dr Tweedie, an oral contract for the sale of immovable property is valid and enforceable under our law.

In Keongco Malaysia Sdn Bhd v Ng Seah Hai, Chew Soo Ho JC said that the law still recognises an oral contract provided that the party concerned will be able to prove the existence of such a contract and its validity.

However, the law also made it clear that in some situations, a contract must be made in writing. Section 10(2) of the Contract Act 1950 states that some contracts are required to be in writing for the contracts to be enforceable in court of law. For instance, a promise to pay a debt barred by limitation law should be in writing and signed by the debtor.

Based on the above cases, it is well established that the law allows for a contract to be made orally. Having said that, the issue with oral contracts is that oral contracts are very much difficult to prove and enforced as can be seen in the following case:-

In HARCHARAN SINGH S/O SOHAN SINGH v RANJIT KAUR D/O S GEAN SINGH, the plaintiff was the younger brother of the deceased while the defendant was the wife of the deceased. The property in question was purchased by the plaintiff and the deceased and was registered in both their names. The defendant became the administratrix 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 of the share in the land to the plaintiff. The plaintiff applied for a declaration that he is the beneficial owner of the deceased’s half undivided share in the said property and an order that the defendant as administratrix of the deceased’s estate transfer the half undivided share in the said property to the plaintiff. It was held that the plaintiff had failed to prove that there was an agreement between him and the deceased where he alleged that the latter had agreed to sell half of his share to the former. In fact, the plaintiff had not even attempted to transfer the half undivided share of the deceased during the lifetime of the deceased.

Thus, it would be wise to put a contract in writing to avoid future disputes as to the existence of the contract and the actual terms agreed by the parties. Below are several key points to take note of as to why a contract must be set in writing:-
1. Written contracts offer clarity and help to avoid ambiguity and uncertainty- The main reason many oral contracts fail is that memories fade, and one person’s version of events is often different than another’s and yes, people lie. Without a written contract, the court will have a hard time determining which version of events to believe.
2. Written contracts provide proof of details– A written contract provides proof of details on whatever terms you and the other parties have mutually agreed, such as the rights and duties of each parties, issues like time performance, price and payment terms, termination rights and remedies etc.
3. Written contracts make disputes easier to navigate– A written contract ensures that all of the terms you and the other parties have mutually agreed are documented. If a disagreement arises, there will be a document (written contract) that the parties can refer back.
4. Written contracts offer protection in relation to the ownership of intellectual property and confidentiality– A written contract can stipulate the ownership of the intellectual property and restriction on the disclosure of confidential information belonging to any parties to the public, hence protecting the ownership of the intellectual property and the confidentiality of the confidential information. The parties are legally bound to hold in secrecy the information shared among them.In view of the above, it is strongly recommended for an oral contract to be immediately put in writing to avoid future misunderstanding or dispute between the parties. If a contract is not in writing, it may well be difficult to prove that you have a contract at all. Having a written contract is like having an insurance policy. The hope is you never have to refer to them but you might be relieved if and when you do.

In the next issue we’ll be looking at the dangers of self-drafting a contract (To be continued in Part 2).