CHAPTER 10 – LAW OF CONTRACT (PART III)

10.1 Voidable Contracts

We have discussed in Chapter 8 that section 2(i) of the Contracts Act 1950 provides that voidable contracts
are contracts which are enforceable by one party to the contract but not the other. So, the innocent party is
given the option whether to rescind the contract or to continue with the performance of the contract but the
wrongdoer is not given that option. The contract is valid and binding until the innocent party opts to do so.
In this case, rights and duties exist before a contract is avoided shall remain valid and enforceable.

10.2 When are contracts voidable?

Contracts are voidable where they are entered into without the free consent of either party. Section 10 of the
Contracts Act 1950 provides that agreements are contracts where they are entered into, inter alia, with the
free consent of the parties. “Consent” as defined in section 13 to mean where two or more persons agree
upon the same thing in the same sense. Section 14 provides that consent is ‘free’ when it is not caused by
coercion, undue influence, fraud, misrepresentation or mistake.

Therefore, where one of the parties to the contract entered into the contract because of coercion,
misrepresentation or fraud, free consent would not exist and section 19(1) provides that such agreements
are voidable at the option of the innocent party. Further, section 20 provides that such free consent would
not exist where the consent was caused by undue influence. Where an agreement was entered into
because of undue influence, that agreement is voidable at the option of the innocent party.

10.3 Coercion
10.3.1 What amounts to coercion?
10.3.1.1 Coercion as defined in CA 1950
Coercion is defined in s 15 of the Contracts Act 1950 as “committing, or threatening to commit any act
forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice
of any person whatever, with the intention of causing any person to enter into any agreement”.

Therefore, the above definition limits to any criminal act forbidden by the Penal Code and does not include
any civil wrongs or tortious wrong such as economic duress or duress of goods. This limited definition has
been criticized by some academicians to be outdated and obsolete. In Teck Guan Trading Sdn Bhd v
Hydrotek Engineering (M) Sdn Bhd (1996) 1 MLJ 231, the court held that there are only two ways of
committing ‘coercion’ under s15. One of which is the committing of any criminal act forbidden by Penal Code
while the other is the unlawful detention of any property.

10.3.1.2 Economic duress

Economic duress arises where one party uses his superior economic power in an ‘illegitimate’ way so as to
coerce the other contracting party to agree to a particular set of terms. It refers to pressure of an economic,
commercial or financial nature that is similarly effective in procuring contractual assent.

The existence of this doctrine was first recognized in England in The Siboen and The Sibotre [1976] 1
Lloyd’s Rep 293 and its existence has been affirmed in cases such as Universe Tankship of Monrovia v
International Transport Workers Federation [1983] AC 366 and R v AG for England and Wales [2003] UKPC
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22. In the latter case, Lord Hoffman stated that there were two elements to the ‘wrong of duress’, the first
was ‘pressure amounting to compulsion of the will of the victim and the second was the illegitimacy of the
pressure’.

The first element of the compulsion of the will is also known as doctrine of ‘coercion of the will’ and this
approach was criticized subsequently and the courts are slowly moving away from it. The courts now put
greater emphasis on the illegitimate pressure being applied. In determining whether there has been
illegitimate pressure the court takes into account a range of factors. Dyson J in DSND Subsea Ltd v
Petroleum Geo-Services ASA [2000] BLR 530 laid down factors that need to be considered:

1. Whether there has been an actual or threatened breach of contract;

2. Whether the person allegedly exerting the pressure has acted in good or bad faith;
3. Whether the victim has any realistic practical alternative but to submit to the pressure;
4. Whether the victim protested at the time; and
5. Whether he affirmed and sought to rely on the contract

Privy Council in R v AG for England and Wales [2003] UKPC 22 envisaged a two-stage approach to
illegitimacy. First, if the threat is unlawful, it will generally amount to duress. Secondly, where the threat is
lawful but is used to support a demand which is unlawful, it may constitute duress. Thus a lawful demand
may constitute illegitimate pressure where the demand is not justified. An example is the case of blackmail,
where the threat is lawful but it is used to attain a goal which is unlawful. However in practice it is very
difficult to differentiate a legitimate commercial pressure from an illegitimate economic duress. In CTN Cash
and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714 the Court of Appeal held that a threat to refuse to provide
urgently needed credit in future transactions did not constitute duress.

Malaysia
From the definition of coercion under s 15, it appears that the concept of economic duress is not
encompassed within the section. However, as the Contracts Act 1950 is not an exhaustive code, the
common law will in all probability continue to apply in Malaysia. The concept of economic duress is now
recognized in Malaysia and it has been applied in the Malaysian case of Chin Nam Bee Development Sdn
Bhd v Tai Kim Choo (1988) 2 MLJ 117.

In this case, the plaintiff agreed to purchase a house constructed by the defendant at RM29,500.
Subsequently, the plaintiff was made to pay an additional sum of RM4,000. It was held that coercion as
defined in s 15 should only apply for the purpose contained in s 14 as s 14 specifically says so. On the other
hand, the word ‘coercion’ in the context of s 73 of the Act should be given its ‘ordinary and general’ meaning
since there is nothing in s 15 which says that the word ‘coercion’ should apply throughout the Act. Therefore,
the extra sum provided by the defendant was ordered to be refunded to him under s 73. Illustration (b) of s
73 also illustrates the applicability of economic duress under Contracts Act 1950.

10.3.2 Relief
If a contract is entered into by coercion, pursuant to s 19(1), the contract is voidable at the option of the
plaintiff who alleges existence of coercion. If the plaintiff elects to rescind the contract, then by virtue of s 65
and s 66, both the plaintiff and defendant have to restore any benefits obtained. However, if the plaintiff
decides to affirm the contract, then he may claim under s76, any damages suffered.

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10.4 Undue Influence
10.4.1 When does Undue Influence arise?
Undue Influence arises where one contracting party was pressured and prevented from exercising an
independent judgment when entering into a contract.

S 16(1) of the Contracts Act 1950 provides that “a contract is said to be induced by ‘undue influence’ where
the relations subsisting between the parties are such that one of the parties is in a position to dominate the
will of the other and uses that position to obtain an unfair advantage over the other”.

Therefore, to establish undue influence, the plaintiff has to establish 2 things:

a) There is a relationship between the parties and one party is in a position to dominate the will of the
other; and
b) The dominant party uses that position to obtain an unfair advantage over the other.

It is generally accepted that the scope of undue influence under s 16 is similar to the position under English
law. In Polygram Records Sdn Bhd v The Search (1994) 3 MLJ 127, the High Court held that ‘the doctrine of
undue influence as embodied in s 16 of the Act is in substance based on the English position.”

10.4.2 Position under English Law

The House of Lords in Barclays Bank v O’Brien (1993) 4 All ER 417 approved the following classification and
effect of undue influence:

a) Class 1: actual undue influence

In this case, it is necessary for the plaintiff to prove affirmatively that the wrongdoer exerted undue
influence on the complainant to enter into the particular transaction which is impugned.

b) Class 2: presumed undue influence

The complainant only has to show, in the first instance, that there was a relationship of trust and
confidence between the complainant and wrongdoer of such a nature that it is fair to presume that the
wrong doer abused the relationship in procuring the complainant to enter into the impugned transaction.
Therefore, in class 2 cases, there is no need to produce evidence that actual undue influence was
exerted; once a confidential relationship has been proved, the burden then shifts to the wrongdoer to
prove that the complainant entered into the impugned transaction freely, for example by showing that the
complainant had independent advice.

The above classifications were also referred to by the court in the Malaysian case of Polygram Records Sdn
Bhd v The Search (1994) 3 MLJ 127.

10.4.2.1 Actual Undue Influence

Here it is necessary for the complainant to prove affirmatively that the wrongdoer did exert undue influence
on the complainant to enter into the particular transaction.

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S 16(1) lays down the principle in general terms and provides the two elements necessary to establish
undue influence:
a) a dominant position; and
b) the use of that dominant position to obtain unfair advantage.

The above tests were applied in the case of Malaysian French Bank Bhd v Abdullah bin Mohd Yusoff (1991)
2 MLJ 475.

10.4.2.2 Presumed Undue Influence

In this situation, there must exist a special relationship of confidence between the parties.

To establish presumed undue influence, the complainant has to prove:

a) there was a relationship of trust and confidence between the parties
b) the relationship is of such a nature that it is fair to presume that the wrongdoer abused that
relationship in procuring the complainant to enter into the transaction.

There are two ways in which a confidential relationship can be established:

a) Class 2A – certain relationship as a matter of law raise the presumption that undue influence has
been established, for example solicitor and client, doctor and patient
b) Class 2B – Even if there is no relationship falling within class 2A, if the complainant proves the de
facto existence of a relationship under which the complainant generally reposed trust and confidence
in the wrongdoer, the existence of such relationship raises the presumption of undue influence.
Therefore, the complainant merely needs to prove that he has reposed trust and confidence in the
wrongdoer without having to prove that the wrongdoer exerted actual undue influence.

10.4.3 Under Contracts Act 1950

To raise a presumption of undue influence against the wrongdoer under s 16 Contracts Act 1950, it is
necessary to prove domination and unconscionability of the contract as one party has obtained unfair
advantage.

In most cases, it may be difficult for the complainant to show that his will had been dominated by the
wrongdoer. Section 16(2) thus provides for situations, which are not exhaustive, where a person is deemed
to be in a position to dominate the will of another. These situations are:
a) Where the wrongdoer holds a real or apparent authority over the other; or where he stands in a
fiduciary relation to the other; or
b) Where the wrongdoer makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.

As for the unconscionability, s 16(3) provides that if the transaction appears on the face of it to be
unconscionable, then the dominating party has to prove that the contract was not induced by undue
influence. The Privy Council in Raghunath Prasad v Sarju Prasad (1924) AIR P 60 summarized the position
under s 16(3) and held that three matters are to be dealt with:

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 a) The relationship must be such that one is dominating the will of another
b) Whether the contract has been induced by undue influence
c) If so, the wrongdoer has to prove that the contract was not induced by undue influence

10.4.4 Remedies
Section 20 provides that where consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the complainant. Any such contract may be set aside either absolutely or,
if the party who was entitled to avoid it has received any benefit thereunder, upon such terms as to the court
may seem just.

If the complainant elects to rescind the contract and to set aside the agreement absolutely, the court will
restore the parties to the position they were in before the contract. The remedy is thus restitutionary.

10.5 Fraud
10.5.1 What is Fraud?
Fraud is defined in s 17 as to include following situations:
a) The suggestion, as to a fact, of that which is not true by one who does not believe it to be true;
b) The active concealment of a fact by one having knowledge of the fact;
c) A promise made without any intention to perform it;
d) Any other act fitted to deceive, and
e) Any such act or omission as the law specifically declares to be fraudulent

The above definition covers the common law definition of false representation as formulated by the House of
Lords in Derry v Peek (1889) 14 App Cas 337. In that case, Lord Herschell stated that ‘fraud’ is proved if the
false representation has been made:
o Knowingly;
o Without belief in its truth; or
o Recklessly, without caring whether it be true or false

10.5.2 Silence
It is generally accepted that silence does not constitute fraud. The explanation to s 17 provides that mere
silence as to facts likely to affect willingness of a person to enter into a contract is not fraud. However the
general rule is subjected to following qualifications whereby one will be guilty of fraud if:
a) He keeps silence where there is a duty to speak [see illustration (b)]; or
b) The silence itself is, in effect, equivalent to speech. [see illustration (c)]

10.5.3 Duty to exercise ordinary diligence

If a contract is entered into by fraud due to silence as defined in s 17, then the contract is valid and not
voidable if there are means to discover the truth and the complainant fails to exercise ordinary diligence to
discover the truth. This is provided under Exception to s 19. It must be noted that the duty to exercise
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ordinary diligence under this Exception applies to situation of fraud by silence only and does not apply to all
other cases of fraud.

In Weber v Brown (1908) 1 FMSLR 12, the court held that this Exception could not be relied upon by the
defendant who had made a false and fraudulent misrepresentation. In Thakkar v Gujarat Housing Board AIR
1973 Guj 34, the court held that the Exception does not apply to the cases wherein there is a positive case of
active fraudulent misrepresentation. Thus where a misrepresentation is made deliberately to mislead or
deceive another person, this would amount to fraud under s 17 as held by the court in Tay Tho Bok v Segar
Oil Palm Estate Sdn Bhd (1996) 3 MLJ 161.

10. 6 Mi srepresentati on
10.6.1 What is a misrepresentation?
During negotiations leading to a contract, the parties may make many material statements. These
statements may or may not form part of the contract later. If the statements form the express terms of the
contract and if these statements are subsequently found to be untrue, the untruth will constitute a breach of
contract. On the other hand, if the statements do not form part of the contract but which helped to induce the
contract, such statements are called ‘mere representations’ and if untrue, they are misrepresentations. The
innocent party may have remedies for such misrepresentation.

A misrepresentation may be defined as an untrue statement of fact made by one party to the contract
(representor) to the other (representee) which induces the other to enter into the contract. Therefore, in
order to establish misrepresentation, three conditions need to be satisfied:
a) It must be a statement of fact
b) It must be addressed to the party misled
c) It must have been a material inducement

10.6.2 Statement of Facts

The first requirement is that the misrepresentation must be an unambiguous false statement of existing fact.

It has been held that following statements are not statement of facts and no remedy is available to the
innocent party even if the statements are found to be untrue later:

a) Mere puff

These are statements which are so vague that they have no effect at law or in equity. To describe land
as ‘fertile and improvable’ is mere sales talk, which affords no ground for relief. Similarly describing a
house as a ‘desirable residence’ has been held to be a mere puff.

But there is a liability for more precise claims, for example, that use of a carbolic smoke-ball will give
immunity from influenza. The distinction is between indiscriminate praise, and specific promises or
assertions of verifiable facts.

b) Statement of opinion or belief

A statement of opinion or belief which proves to be untrue is not a false statement of fact. In this case
the representor has no personal knowledge of facts on which it was based and it was understood that he

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 could only state his belief. In Bisset v Wilkinson (1927) AC 177, the vendor of a farm which had never
been used as a sheep farm stated that in his judgment the farm would support 2000 sheep. It was held
to be a statement of opinion.

However, a statement expressed as an opinion may be treated as a statement of fact if the person
making the statement was in a position to know the true facts. In Smith v Land & House Properties Corp
(1884) 28 Ch D7, the vendor of a hotel described it as ‘let to most desirable tenant’ when the tenant had
for a long time been in arrears with the rent. The Court of Appeal held there was a misrepresentation of
fact. In Esso Petroleum Ltd v Mardon (1976) QB 801, Esso informed the prospective tenant of a petrol
station that the throughput in the station would be approximately 200,000 gallons a year. However the
actual throughput was only 78,000 gallons due to difficult access. Esso argued that this was a statement
of opinion.

The court disagreed and held that this statement amounts to misrepresentation as Esso had special
knowledge and skill in forecasting of throughputs. The statement was thus made by an expert with the
intention that it should be relied on.

c) Statement of future intentions

A person who fails to carry out his stated future intention does not thereby make a misrepresentation.

But a person who misrepresents his present intention does make a false statement of fact because the
state of his intention is a matter of fact. In Edgington v Fitzmaurice (1885) 29 ChD 459, the directors
issued a prospectus claiming that the money raised was to be used to improve the company’s buildings
and to expand its business. Their real intention was to pay off the company’s debts. This was held to be
fraudulent misrepresentation.

d) Promise

A promise or a representation as to the future does not, of itself, give rise to any cause of action. Thus if
A induces B to lend him money by representing that he will not borrow from anybody else, and then does
borrow elsewhere, he is not liable to B. However, if the representation made amounted to a binding
contract, then the promise is actionable.

e) Statement of law

The traditional view is that a misrepresentation of law does not give rise to any actionable relief at
common law.
However, the distinction between representation of fact and of law is sometimes hard to draw and its
effect is hard to justify. For example, the content of a document is a fact, the meaning of a document is
a law; but the content and meaning of a document is a law. Thus a statement may contain a
misrepresentation of law and fact, in which case, it seems that the availability of relief will depend on
which part of the statement provided the major inducement to contract.

10.6.3 Addressed to the Representee

It must be shown that the representations are addressed to the party misled. There are two ways to do this.
The first and most obvious method is by the direct communication of the misrepresentation to the
representee. Alternatively, the misrepresentations may be addressed to a third party with the intention that it
be passed on to the representee.

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10.6.4 Material Inducement
The representation must be an inducement to enter into the contract and it must be material. For instance, it
must be on a matter which would affect the decision of a reasonable man as to whether or not what terms he
would be prepared to enter into the contract. In short, it must be one which would affect the judgment of a
reasonable person in deciding whether to enter into the contract.

In Edgington v Fitzmaurice (1885) 29 ChD 459, it was held that the misrepresentation need not be the sole
inducement; it is sufficient that it was an inducement which was actively present to the representee’s mind.

There are at least three situations in which a plaintiff will be unable to show that the representation induced
the contract:
a) Where the plaintiff is unaware of the representation
b) Where the plaintiff know that the representation was untrue
c) Where the plaintiff did not allow the representation to affect his judgment, for example, the
representation is not important to him

10.6.5 Types of Misrepresentation

There are three types of misrepresentation. It is important to distinguish between them because they may
give rise to different remedial consequences.

10.6.5.1 Fraudulent Misrepresentation

Fraudulent statements made which has induced the representee to enter into a contract give rise to
fraudulent misrepresentation. At common law a person who suffers loss as a result of acting in reliance on a
fraudulent statement can recover damages in an action of tort of deceit.

In Derry and Peek (1889) 14 App CAS 337, the court provided three propositions to determine whether fraud
is proved (See section 10.5.1 above).

10.6.5.2 Negligent Misrepresentation

A misrepresentation is negligent if it is made carelessly and in breach of a duty owed by the representor to
the representee to take reasonable care that the representation is accurate.

In Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465, the plaintiff suffered loss as a result of
having been given credit to a firm, in reliance on a reference carelessly given by the firm’s bank, who knew
of the purpose for which the reference was made. The House of Lords held obiter that had there been a no
disclaimer given, the bank would be liable for negligent misrepresentation.

10.6.5.3 Innocent Misrepresentation

An innocent misrepresentation is a misrepresentation which is neither fraudulent nor negligent. The untrue
representation was made by the representor innocently without negligence or fraud.

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10.6.6 UK – the Misrepresentation Act 1967
In UK, the law on misrepresentation is rather complex; it went through three stages of development. The law
in misrepresentation is now governed by common law and statutorily by the Misrepresentation Act 1967.
The representee therefore, can now seek relief under the Act or to rely on the common law.

10.6.7 Malaysia – Contracts Act 1950

In Malaysia, there is no Misrepresentation Act or other similar provisions. However, s 18 of the Contracts
Act 1950 provides for misrepresentation which is substantially similar to the English common law on the
doctrine of misrepresentation. It must be noted that s 18 merely provides for examples of situations which
may constitute misrepresentation and the list is not exhaustive.

S 18 provides that “misrepresentation” includes (i.e. not exhaustive):

a) Any positive assertion which is not true, though he believes to be true;
b) Any breach of duty which, without an intent to deceive, gives an advantage to the person committing
it
c) Causing, however innocently, a party to make a mistake as to the subject matter of the agreement.

S 18(a) appears to cover the subject of negligent misrepresentation whereas (b) is akin to the doctrine of
innocent misrepresentation. Fraudulent misrepresentation, as we have seen earlier, is covered under s 17
for fraud.

The main difference between fraud and misrepresentation is that, in fraud cases, the maker does not believe
in the truth of the statement made. Whereas in misrepresentation, the maker believes that the statement is
true.

10.6.8 Remedy for Misrepresentation

S 19 provides that when the consent to an agreement is caused by misrepresentation, the agreement is a
contract voidable at the option of the party whose consent was so caused. Hence, he has a choice whether
to rescind the contract or to affirm it and claim for compensation. If he elects to rescind the contract,
pursuant to s 65 and s 66, both parties have to restore any benefits received. If he elects to affirm the
contract, then he may sue the other party for any loss suffered as if the representation made had been true
[section 19(2)].

10.7 Relief under Voidable Contracts

Where a contract is found to be voidable, the innocent party has a choice of either to continue with the
performance of the contract or to avoid the contract by ending it. Where the innocent party elects to end the
contract, s 65 provides that the other party (the wrongdoer) is released from further performance of the
obligation under the contract. It further provides that the party who rescinds the contract (the innocent party)
has to restore any benefit which he has received.

It was held in Yong Mok Hin v United Malay States Sugar Industries Ltd (1967) 2 MLJ 9 that s 66 would also
be applicable for a voidable contract which becomes void. Under s 66, when a contract becomes void, any
person who has received any advantage under the contract is bound to restore it. Thus the wrongdoer has
to restore any benefits it has obtained from the innocent party.
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If the innocent party chooses to affirm the contract, he may claim compensation from the wrongdoer if he can
prove any losses. This is provided for under s 76.

10.8 Void Contract

10.8.1 What is a void contract?

Section 2(g) of the Contracts Act 1950 defines ‘void contract’ as agreement not enforceable by law. Section
2(j) provides that a contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable. Therefore, as opposed to voidable agreements, in the case of a void agreement, neither party
would have the choice of enforcing the agreement. The contract is basically void ab initio.

10.8.2 When are contracts void?

The Contracts Act 1950 provides for various situations where an agreement could become void:
a) There is a mistake of fact (s 21)
b) The consideration or object is unlawful (s 24)
c) The consideration and objects are unlawful in part (s 25)
d) There is no consideration (s 26) – note that the section goes on to provide for certain exceptions
e) There is a restraint of marriage (s 27)
f) There is a restraint of trade (s 28)
g) There is a restraint of legal proceeding ( s 29)
h) There is uncertainty in the agreement (s 30)
i) They are made by way of wager ( s 31)
j) There is a contract by minors ( s 11)

10. 9 Mi st ake
10.9.1 Mistake at Common Law
Parties occasionally enter into a contract on the basis of a common assumption which they later discover
was false. In some cases, one party assumes the subject matter to be A while the other party thinks that it is
B. In all these cases, the consent is either nullified or negatived by the mistake and it will prevent the parties
from reaching agreement. Traditionally, the English law classified mistake into 3 categories:
o Common Mistake
o Mutual Mistake
o Unilateral Mistake

10.9.2 Common Mistake

Common mistake arises where both parties to a contract make the same mistake as to a fact which is
fundamental to the agreement, for example, a contract which is made to paint a portrait of someone who,
unknown to either party, has just died. Therefore where the mistake is common to both parties, the parties
have actually reached an agreement, but that agreement is based upon a fundamental mistaken assumption.
In such a case, the court may nullify the consent of the parties and set aside the contract which they
concluded. The contract is void ab initio and has no legal effect whatsoever.

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In Bell v Lever Bros Ltd (1932) AC 161, Lever Bros agreed to pay two directors a substantial sum of money
in compensation for loss of office, while unaware of the fact that they had engaged in irregular conduct which
would have allowed them to be dismissed without pays. The directors themselves had forgotten the
incidents and were also unaware that they could be dismissed. There was, therefore, a common mistake as
to the validity of the compensation agreement. When Lever Bros discovered the breaches of service
contracts, they asked the court to order the return of the compensation. The House of Lords held that the
common mistake concerning the validity of the compensation agreement was not sufficiently fundamental to
render the contract void.

Thus for a mistaken contract to be void, the mistake must be ‘fundamental’ to the agreement. The following
types of mistake have been held by the court to be either ‘fundamental’ or ‘not fundamental’ for this purpose.

 Mistake as to the existence of subject matter

Consent is nullified where both parties are mistaken as to the existence of the subject matter. In
Galloway v Galloway (1914) 30 TLR 531, the parties, believing they were married, entered into a
separation agreement. Later they discovered that they were not validly married. It was held that the
separation agreement was void for common mistake.

 Mistake as to the possibility of performing the contract

Consent may be nullified if both parties believe that the contract is capable of being performed when this
is not the case. The impossibility may arise either physically or legally or commercially.
In Sheikh Bros v Ochsner (1957) AC 136, a contract was void for physical impossibility as the land was
not capable of producing the amount of crops that the parties believed.

Legal impossibility arises where the contract provides for something to be done which cannot, as a
matter of law, be done. For example, a person cannot acquire property which he already owns.

 Mistake as to the quality of subject matter

There are two possible scenarios when this problem arises. If the quality forms part of the contractual
description of the subject matter, then one can argue that the goods supplied does not comply with the
terms of the contract. The contract is not void but the promisor has breached the contract by supplying
goods that do not comply with the terms of the contract. In this case the promisee may claim for any
losses due to the breaches by the promisor.

If there is no contractual description, mistake as to quality generally does not nullify consent and the
contract is not void. Generally the courts are extremely reluctant to conclude that a mistake as to quality
is so fundamental that it renders a contract void.

In Leaf v International Galleries (1950) 2 KB 86, the Court of Appeal stated that a contract for the sale of
a picture would not be set aside on the ground of mistake if both parties entered into the contract
erroneously believing the picture to be a Constable. In Oscar Chess Ltd v Williams (1957) 1 WLR 370,
both parties entered into a contract for the sale of a car under the belief that it was a 1939 model. The
court held that the mistake was not sufficiently fundamental to avoid the contract.

However, there are cases in which a mistake as to quality has been held to be sufficiently fundamental to
avoid the contract. In Scott v Coulson (1903) 2 Ch 249, a contract for the sale of a life assurance policy
was held to be void when unknown to both parties, the assured had died.

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10.9.3 Mutual Mistake
Mutual mistake arises where the parties are at cross-purpose that they do not reach an agreement. The
consent has been negatived by the mistake and the contract is void.

This may happen where one party is mistaken about the identity of the other; where one party intends to deal
with one thing and the other with a different one; or where one party intends to deal on one set of terms and
the other on a different set of terms. However a mistake as to the other contracting party or as to the subject
matter generally has no effect on the contract unless it is fundamental and there must have been some
ambiguity in the situation before the court will declare that contract is void.

In Raffles v Wichelhause (1864) 2 H&C 906, a consignment of cotton was bought to arrive ‘ex Peerless from
Bombay’. There were, unknown to both parties, two ships called ‘Peerless’ and both sailed from Bombay.
One party referred to the Peerless sailed in October while the other meant the Peerless sailed in December.
It was held that the contract is void.

But in Smith v Hughes (1871) LR 6 QB 597, the court refused to declare void an agreement whereby the
buyer had thought he was buying old oats when in fact they were new oats, since the contract was for the
sale of ‘oats’ without specifying whether it is new or old. Although this mistake is known to the seller, he is
not under an obligation to inform the buyer that he has made a mistake. The responsibility lies with the buyer
to ensure that the oats are as he believed them to be; he cannot escape from what is a bad bargain for him
by arguing that it is the responsibility of the seller to inform him of his error.

10.9.4 Unilateral Mistake

This is a difficult area of law as the cases are difficult to be reconciled. As a general rule, a contract will not
be avoided automatically when one party alleges that he has mistaken over the subject matter or the person
while the other party has not made any mistake on it. The court will adopt the objective test to determine
whether an agreement has been reached, it is not enough for one party to allege that he was mistaken.

 Mistake as to the identity of a person

A mistake is fundamental if one party is mistaken as to the identity of the other. The mistake arises
where:
(a) A thinks he has agreed with C because he believes B ,with whom he is negotiating, is C, and
(b) if B is aware that A did not intend to make any agreement with him, and
(c) if A has established that the identity of C was a matter of crucial importance, then the contract will be
void.

In Cundy v Lindsay (1878) 3 App Cas 458, a dishonest person named Blenkarn ordered handkerchiefs
from the plaintiff and signed the order that looks like Blenkiron & Co which is a reputable company. The
court held that the contract is void as the plaintiff did not intend to deal with Blenkarn but Blenkiron & Co.

But a mistake by one party as to an attribute such as creditworthiness and not the identity of the other
will not, as a general rule, void a contract. See Phillips v Brooks Ltd (1919) 2 KB 243. This normally
occurs where the parties deal face-to-face and the vendors meet the rogue and contracts with him. In

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 Lewis v Avery (1972) 1 QB 198, Lewis advertised his car for sale and a rogue called himself Richard
Green agreed to buy his car and paid by a cheque. The rogue proved his identity by showing a special
pass of admission to Pinewood Studios. The cheque was not honoured and the rogue sold the car to
Avery later. Lord Denning held that the contract can be avoided only if the plaintiff can show that at the
time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere
mistaken belief as to the credibility of the other party is not sufficient. The contract is therefore held to be
valid as there was no mistake as to the identity but of creditworthiness of the other party.

In Shogun Finance v Hudson (2003) UKHL 62, a rogue entered into a written contract of hire purchase
with Shogun Finance to purchase a vehicle on credit. The rogue fraudulently assumed the identity of
another person (Patel) by providing his driving license. The finance company did a credit check on Patel
and found no problem. The rogue later sold the car to Hudson. The House of Lords, followed Cundy v
Lindsay, held that the contract is void as the written contract explicitly named Patel and was described
as an offer by Patel to the finance company. Therefore, the finance company’s acceptance related to
that offer made by Patel and no others. Only the finance company and Patel could be parties to the
agreement. The court opined that a written agreement do not infer a presumption to sell to the immediate
purchaser where the identity is of key importance to contracting.

Therefore the law in mistake as to the identity is now settled as follows:

(1) If the parties deal through a written agreement, there is a presumption that the parties wish to deal
with the persons named in the agreement.
(2) If the parties deal face-to-face, there is a presumption that the owner intends to contract with the
person physically present before him, and only in extreme cases would the presumption be rebutted.

 Mistake as to subject matter

If one party is unilaterally mistaken as to the subject matter, then the contract is generally not void. The
doctrine of caveat emptor (let the buyer beware) will be invoked.

10.9.5 Mistake under Contracts Act 1950

The doctrine of mistake is codified under s 21 to s 23 of the Contracts Act 1950. S 21 provides that “where
both the parties to an agreement are under a mistake of fact essential to the agreement, the agreement is
void”. Thus s 21 appears to deal with common and mutual mistake under the common law although the
illustrations only deal with narrower categories of res extincta (non-existence of subject matter) [see
illustration (a) and (b)] and res sua [see illustration (c)] respectively.

It has been submitted in some Indian cases that, notwithstanding the nature of these illustrations, there is no
reason why a broader doctrine of common mistake at common law cannot exist. See the judgment of Privy
Council in Sheikh Brothers Ltd v Arnold Julius Ochsner (1957) AC 136.

For a mistake to be operative under s 21, it must be one ‘essential to the agreement’. The Act does not
define this. It is generally accepted that the Malaysian courts, in the absence of any clear authority on this
point in interpreting the phrase ‘a matter of fact essential to the agreement’, will tend to follow the common
law position dealing with mutual mistake. This was observed by the Privy Council in Sheikh Bros Ltd.

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Common mistake as to the quality of the subject matter is dealt with under Explanation to s 21 where it is
stated that “an erroneous opinion as to the value of the thing which forms the subject matter of the
agreement is not to be deemed a mistake as to a matter of fact.”

S 23 deals with unilateral mistake which provides “a contract is not voidable merely because it was caused
by one of the parties to it being under a mistake as to a matter of fact”. It is submitted that s 23 merely
covers cases where the mistake is one that is not ‘a matter of fact essential to the agreement’, as in s 21.
Where the mistake is one that relates to the terms of the contract, or one that relates to the identity of a
person, the Malaysian courts may be inclined to follow the common law approach adopted by the English
Courts. In Tunku Hamman Bin Tunku Sulong v City Plaza Sdn Bhd (1992) 1 LNS 63, the plaintiff agreed with
the defendant to purchase a Lotus Esprit Turbo ST car for RM 330,000. The sales note indicated that the
sale price shall include custom & excise duty. The defendant later alleged that there was a mutual mistake
and the price did not include custom duty of RM 440,000. The court held that this is a unilateral mistake by
the defendant that falls under s 23 and therefore the contract is valid.

10.9.6 Remedies for Mistake

Section 21 of the Contracts Act 1950, which encompasses common and mutual mistake, provides that when
both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the
agreement is void. A void agreement is not enforceable by law. Section 66 provides that when an agreement
is discovered to be void, any person who has received any advantage under the agreement is bound to
restore it, or to make compensation for it, to the person from whom he received it.

Section 73 further provides that a person to whom money has been paid, or anything delivered by mistake,
must repay or return it. See Lee Fu Sdn Bhd v Unique Progress Sdn Bhd (2003) 2 CLJ 171.

10.10 Agreements in Restraint of Trade

An agreement in restraint of trade is an undertaking where one party agrees not to trade or conduct his
profession or business in a particular area for a specified period in the future.

In English law, contracts in restraint of trade are contrary to public policy and hence is prima facie void.
However this presumption may be rebutted by showing that the restraint is reasonable and not contrary to
public interest and the interest of the parties. In Nordenfelt v Maxim Nordenfelt (1894) AC 535, the House of
Lords held that the reasonableness of a clause in restraint of trade depends on all the facts of each case. In
this case, the court upheld a worldwide restraint because the number of manufacturers in that particular
business of manufacturing guns and ammunitions as limited and also based on the fact that the plaintiff had
sold the gun manufacturing business for a large sum of money.

In Malaysia, S 28 provides that “every agreement by which anyone is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void”. The position under the Act is different from
the common law position. Under s 28, all contracts in restraint of trade are void unless it comes within one of
the three exceptions. In the Indian case of Superintendence Co. of India v Krishna Murgai AIR 1980 SC
1717, the court held that in order for a clause in restraint of trade to be valid, it must fall within one of the
three exceptions stipulated in the Contract Act (Indian Act). The common law test of reasonableness is not
applicable here.

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The three exceptions to the general rule that an agreement in restraint of trade is void are:
a) An agreement not to carry on business of which goodwill is sold
b) An agreement between partners prior to dissolution
c) An agreement during continuance of partnership

In Polygram Records Sdn Bhd v The Search (1994) 3 MLJ 127, the clause prohibiting the rock group the
Search from making any records for a period of two years after the expiry of the contract with the plaintiff
was held to be void as being restraint of trade and therefore unenforceable.

In order to determine whether a clause in a contract which seeks to prevent a party to the contract from
carrying out any specified act would fall foul of s 28, i.e. it amounts to restraint of trade, is to consider
whether the restraint of trade would affect the livelihood of the person. If the restraint affects his livelihood,
then the court may hold that the clause to be void; but if it does not, then the clause may be valid and
enforceable. In Stamford College Group Sdn Bhd v Raja Abdullah bin Raja Othman (1991) 2 CLJ 1135,
the contract prohibiting the lecturer from lecturing in any other colleges for two years if he leaves the
employment was held to be void as it restricts his livelihood.

10.11 Relief under Void Contracts

When an agreement is void, a plaintiff’s claim cannot be based on contract because the agreement is not
enforceable by law. The remedy is provided in s 66 requiring the person who has received any advantage
from the agreement, to restore the advantage or to make compensation for it, to the person from whom he
received it. Both parties are also discharged from further performance of the contract.

In Lori Malaysia Bhd v Arab-Malaysian Finance Bhd (1999) 3 MLJ 81, the plaintiff granted a loan to the
defendant which was found later to be in contravention to s 67 of the Companies Act 1967, being in the
nature of financial assistance in the purchase of its own shares and thus was void under s 24 of the
Contracts Act 1950. The Supreme Court held that the financier could recover the loan under s 66.

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