LXEB 1112 : Law of Contract

LXEB 1112 : Law of Contract 2012/2013

INTRODUCTIONAccording to Sir Frederick Pollock, a contract can be defined as:A promise or set of promises which the law will enforce.A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, and the terms of employment or of an independent contractor relationship[footnoteRef:1]. Since the law of contracts is at the heart of most business dealings, it is the vital areas of legal concern and can engage variations on situation and complexities. [1: Legal Dictionary, Thefreedictionay.com]

Terms in a contract set out legal duties of each party under that agreement. They can be either in express or implied terms. The terms of a contract may be wholly oral, wholly written, partly oral and partly written.If contract is put down in writing, the statement is regarded as the term of contract and any prior oral statement will usually be regarded as a representation as they are not included in the contract, on the assumption that they are less important.[footnoteRef:2] Besides, the existence of signature in the contract will regularly make it complicated for the signatory to successfully argue that the statements made do not represent the intention of the parties.[footnoteRef:3] [2: Emily M. Weitzenbeck. (2012). Norwegian Research Center for Computers & Law. University of Oslo.] [3: Ibid]

This was established in the case of L Estrange v F Graucob Ltd[footnoteRef:4] where the court held that he plaintiff was bound by her signature in the agreement even though she claimed that she does not read the term carefully. It means here that so long as the party signed the contract, total lack of awareness on the part of the plaintiff is irrelevant. [4: [1934] 2 KB 394.]

There comes the existence of parol evidence rule to support the above statement made that any extrinsic evidences cannot be brought into the court unless the document itself. Essentially, the rule aims to protect the original contents of the written contract which will contribute to maintaining certainty and stability; particularly in business dealings.[footnoteRef:5] The parol evidence rule is found under common law and in Malaysia is provided in Section 91 and 92 of the Evidence Act 1950.[footnoteRef:6] [5: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page 158.] [6: Act 56]

The general rule of Section 91 of the parol evidence rule is to prohibit any kind of oral evidences where the terms of the contract have been put into writing.[footnoteRef:7] It means, when there is written contract, any other evidences which are not stated in the document are not acceptable to be brought into the court if there are breach of terms of contract. [7: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page 159.]

On the other hand, Section 92 of Evidence Act 1950 provides that when the the terms have been prove as in Section 91, any oral agreement or statement shall not be admitted.[footnoteRef:8] Nevertheless, there are certain exceptions to the parol evidence rule in Section 92 which have reduced the usefulness of the rule. The main issue here is to which extent the oral evidences can invoke the parol evidence rule? [8: Visu Sinadhurai. (2003). Law of Contract. (3rd ed.). Butterworths (Canada) Limitedat page 190.]

Besides the exceptions provided in parol evidence rule, there is collateral contract, a device which has been used, to admit pre- contractual statements which had not been incorporated into the written agreement. [footnoteRef:9] Collateral contract is a separate oral promise, exists side by side of the written contract which induces the parties to enter into contract.[footnoteRef:10] Two general situations in which the courts may acknowledge the existence of a collateral contract are: [9: See Haji Mohamed Akram b Shair Mohd, Concept of Collateral Contract and s 92 Evidence Act 1950 [1984] 1 MLJ clxix. See generally Power-Smith, Vincent, Collateral Warranties and the Construction Industry [1991] MLJ xvii.] [10: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page 162]

a) Where a party has been able to show that it would have refused to enter into if it did not receive assurance on a particular point; andb) Where there was a promise not to enforce a particular term in the main contract.[footnoteRef:11] [11: Krishnan Arjunan and Abdul Majid Nabi Baksh. (2008). Contract Law in Malaysia. Malayan Law Journal Sdn. Bhd at page 196.]

The device of collateral contract does not offend the extrinsic evidence rule because the oral promise is not imported into the main agreement as it comes separately. [footnoteRef:12] It must be noted that collateral contract exist on the basis of the written contract itself. Thus, if the collateral contract contradicts with the written term in the main contract, then the collateral contract overrides the inconsistent written term. [footnoteRef:13] However, it cannot destroy the written one as it originally comes into existing because of the written contract.[footnoteRef:14] [12: Syed Ahmad S A Alsagoff. (1998). Principles of the law of Contract in Malaysia. (2nd ed.). Malayan Law journal Sdn. Bhd at page 179.] [13: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page163.] [14: Ibid, at page164.]

PAROL EVIDENCE RULEWhen a contract is reduced to writing, neither party can submit extrinsic evidence to the contractual document alleging terms agreed upon but not contained in the document. This is called as parol evidence rule.[footnoteRef:15] It means, when two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understanding and negotiations will not be admitted for the purpose of varying or contradicting the writing.[footnoteRef:16] [15: Emily M. Weitzenbeck. (2012). Norwegian Research Center for Computers & Law. University of Oslo.] [16: Arthur L. Corbin. (1944). The parol evidence Rule, 53. Yale Law Journal.]

However, under common law, there are several exceptions to the rule. For instance, the intention that agreement is only partially written. It means here, if written document was not intended to set out all the terms agreed between the parties, extrinsic evidence of the other term is admissible. Secondly, extrinsic evidence is also permissible to clarify uncertainty in express term.[footnoteRef:17] [17: Emily M. Weitzenbeck, 2012. Norwegian Research Center for Computers & Law. University of Oslo.]

In Malaysia, the parol evidence rule is provided under Section 91 and Section 92 of the Evidence Act 1950.[footnoteRef:18] Under these sections, when the terms of the contract have been reduced to writing, no other extrinsic evidence is admissible. [18: Act 56]

The general rule of Section 91 was clearly explained by P.B. Gajendragadkar J in Bai Hira devi v Official Assignee, Bombay[footnoteRef:19] when he stated as follows: [19: AIR 1958 SC 448 at p 450.]

the normal rule is that the contents of a document must be proved by primary evidence which is the document itself in original. Section 91 is based on what is sometimes described as the best evidence rule. The best evidence about the contents of a document is the document itself and it is the production of the document that is required by section 91 in proof of its content. In a sense, the rule enunciated by section 91 can be said to be an exclusive rule in as much as it excludes the admission of oral evidence for proving the contents of the document except in cases where secondary evidence is allowed to be led under the relevant provisions of the Evidence Act.

Thus, it can be deduced that Section 91 try to protect the original contents of the contract in a sense that the best evidence about the contents of a document is the document itself. Admission of oral evidence is not necessary as the document itself will speak through its contents.[footnoteRef:20] [20: Datuk Tan leng Teck v Sarjana Sdn Bhd & Ors [1997] 4 MLJ 239, 341 per Augustine Paul JC (as he then was).]

On the other hand, Section 92 of this act stated as follows:When the terms of any such contracthave been proved according to Section 91, no evidence of any oral agreement or statement shall be admitted as between the parties to any such instrument or their representatives in interest or the purpose of contradicting, varying, adding to or subtracting from its term.[footnoteRef:21] [21: See Section 92 Evidence Act 1950.]

Based on the above statement, it is clear that Section 92 excludes the admission of oral evidence for the purpose of contradicting, varying, adding to, or subtracting from the terms of a written agreement. Nevertheless there are exceptions provided under this section. For example, any fact which can nullify a document such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, want or failure of consideration and mistake in law and fact may be proved; see proviso (a) to Section 92. Besides, proviso (b) allows the access of parol evidence of the existence of any separate oral agreement as to any matter on which the document is silent.[footnoteRef:22] [22: For other exceptions, see the rest of provisos to Section 92.]

It can be seen here that exceptions provided under Section 92 actually reduce the effectiveness of parol evidence rule. However, this rule cannot be abolished because this is the only way to maintain the originality of the documents except few circumstances that allow such evidences to be proved. There are two important Federal Court decisions that have given different interpretations to Section 92 as to when parol evidence may be admissible.[footnoteRef:23] In Tindok Besar Estate Sdn Bhd v Tinjar Co,[footnoteRef:24] the appellant was a contractor for extraction of timber for a company. He later decided not to carry on with the work. An agreement was made between the appellant and the respondent where the respondent undertook the work of extracting timber. There was a dispute as to this agreement. Though the parties had entered into a written agreement, the respondents attempted to introduce other terms which they alleged had not been incorporated into the written agreement. [23: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page 160.] [24: [1979] 2 MLJ 229.]

In this case, the Federal Court judge disagreed with the approach made by the trial judge where the trial judge used the case of Coalfields of Burma Ltd v HH Johnson[footnoteRef:25] to be relied too without distinguished the facts that there was no written contract in that case whereas, in the instant case there was a written agreement. The Federal Court judge pointed out the exceptions provided in Section 92 Evidence Act 1950 to be examined carefully. However, at the same time, the Federal Court Judge also pointed out the risk of allowing oral evidence in case where there is written agreement, relying on the cases of Foo Tock Lim v Piong Liew[footnoteRef:26] and Siah v Tengku Nong:[footnoteRef:27] [25: AIR 1925 Rang 128.] [26: [1963] MLJ 67.] [27: [1964] MLJ 63.]

it would be open to any party to a litigation concerning an agreement to say that the agreement which is the subject matter of the dispute did not contain all the terms thereof and to seek to introduce such terms or even terms which might not even have been within the contemplation of the other party. No agreement would then be safe from being re-written by one party in a court of law.[footnoteRef:28] [28: Above note 51, at page 223.]

Thus, after considering all the facts, Chang Min Tat FJ made a statement that the correct view seems to be that Section 91 and 92 applies when the terms of the agreement (not necessarily all the terms) have been reduced in writing. In such a case, proof of the terms shall be by document itself or by secondary evidence. [footnoteRef:29] The court then considered in detailed whether the evidence brought in this case fall under the provisos to Section 92, which then the court held that it was not. [29: S. Santhana Dass. ( 2005). General principle of Contract Law in Malaysia. Akitiara Corporation Sdn Bhd at page 102.]

From this Tindok Besars case, we can see the court action on dealing with the matters contradict to parol evidence rule. The court have to examine these two sections in very detail and careful before came to the decision. From this case; it is very difficult for the party to contract to prove the existence of evidences that are not in writing. The oral evidences must fall under the exceptions provided if and only if the party wants to succeed, which is actually very hard to be established.The later decision made by the Federal Court contrasted the decided case above in Tan Chong & Sons Motor Co Sdn Bhd v Alan Mcknight.[footnoteRef:30] In this case, the respondent, an Australian national, wanted to buy a car to get the benefit of exemption from duty in Malaysia, if the car complied with the Australian design regulations. He signed a buyers order which contained a condition that no guarantee or warranty of any kind whatsoever was given by the company. The respondent maintained that he only agreed to buy the car on the representation of the appellants salesman that the car conformed to the Australian design regulations. The car which was subsequently delivered to the respondent did not comply with the regulations, and the respondent was successful in recovering his losses, including loss of the fiscal advantage of importing it duty-free into Australia. [30: [1979] 2 MLJ 229, FC.]

The issue rose whether the representations of the appellant were admissible under Section 92 Evidence Act. The court held that proviso (b) and (c) Section 92 applied.[footnoteRef:31] [31: Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia at page 161.]

These two cases seem to be different based on their decisions. However, what is matter now is that it is only when the original document has been tendered and admitted to prove its terms or contents under Section 91, that section 92 comes into play to exclude evidence of any oral agreement or statement for the purpose of contradicting, varying, adding or subtracting from its terms unless it comes within the exceptions contained in the provisos or illustrations. [footnoteRef:32] [32: S. Santhana Dass. ( 2005). General principle of Contract Law in Malaysia. Akitiara Corporation Sdn Bhd at page 106.]

There was another example of case which showed a strict application of parol evidence rule. In Ng Ee v PP,[footnoteRef:33] the prosecution had to prove the seating capacity of a vehicle. The seating capacity was required by law to be recorded in the license. The license was not tendered in court but instead a police constable gave oral evidence to the effect that the bus could carry 16 passengers. The court held that under Section 91, no evidence may be given in proof of the terms of such matter except the document. For example, the license or secondary evidence of its content when secondary evidence is admissible. [33: [1941] MLJ 180]

It means, this section only excludes oral evidence as to the terms of the contract not to the existence of the contract. Oral evidence can be admitted to prove the existence of the contract or where there is a plea denying the contract, oral evidence can be admitted in support of it.[footnoteRef:34] [34: Ng Kong Yue and Anor v R. [1962] MLJ 67,69; United Malayan banking Corp. Bhd v Tan Lian Keng and Ors [1990] 1 MLJ 281 HC; Ng Kong Yue & Anor v R [1962] MLJ 67 HC; Tyagaraja Mudaliar & Anor v Vadathanni [1936] MLJ 62 PC. ]

COLLATERAL CONTRACT.It is evident both on principle and on authority, said Lord Moulton in 1913.Collateral contract is a written or oral agreement associated as a second, or side contract made between the original parties, or between a third party and an original party.[footnoteRef:35]This typically occurs before or at the same time the first or main contract is made. This collateral contract is independent and separate from the primary contract. [35: Blacks Law Dictionary. thelawdictionary.org.]

If there is a negotiating statement and if it is made with the reason of inducing the other party to act on it, and it actually induces him to act on it by entering into the contract, that is prima facie ground for inferring that the representations was projected as a guarantee. That representation becomes part of collateral contract.[footnoteRef:36] This is best described by Lord Denning M.R. in Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd[footnoteRef:37], where the statements made to induce the party to act on it and actually induces him to act on it as being collateral. [36: Krishnan Arjunan. (2008). Contract Law in Malaysia. Malayan Law Journal Sdn Bhd.] [37: [1965] 2 All ER 65, 67: Approved by the FC in Tan Swee Hoe Co Ltd v Ali Hussein Bros. [1980] 2 MLJ 16.]

In Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd,[footnoteRef:38]Low Hop Bing J stated that a collateral contract comes into existence prior to or at the time of the conclusion of the main contract. The consideration for the collateral contract is the making of the main contract. This case cited above are strong authority for the propositions that collateral contract is a separate pre-contract statement on the basis of which the parties entered into a contract.[footnoteRef:39] [38: [1997] 1 CLJ Supp.488.] [39: Krishnan Arjunan and Abdul Majid Nabi Baksh. (2008). Contract Law in Malaysia. Malayan Law Journal Sdn. Bhd at page 121.]

Under the common law, there are test laid down by the High Court in Australia in the case of JJ savage & Sons Pty ltd v Blakney[footnoteRef:40] to determine whether the statement made at the time when the contract was entered constitute a collateral contract. It was held that three elements must be present: [40: (1970) 119 CLR 435 HC.]

a) The statement was intended to be relied on:b) There was reliance by the party alleging the existence of the contract; andc) There was an intention on the part of the maker of the statement to guarantee its truth.The question arose whether this test is applicable in Malaysia? This was best described in Kluang Wood products Sdn Bhd & Anor v Hong Leong Finance Berhad and Anor[footnoteRef:41] where the trial judge held that all the three elements discussed above must be established to prove the existence of collateral contract. [41: [1991] 1 MLJ 193, FC.]

The notion of a collateral contract has long been a part of the Malaysia law of contract as illustrated by the Federal Court decision in Tan Swee Hoe Co Ltd v Ali Hussain Bros.[footnoteRef:42] The leading authority in Malaysia is the judgment of Raja Azlan Shah CJ in this case. [42: [1980] 2 MLJ 16, FC.]

The appellant had orally agreed to allow the respondent to occupy certain premises for so long as they wished on payment of RM14,000 as tea money. Subsequently, the parties entered into two agreements. Both agreements made provisions for increase in rental. No mention was, however, made of the earlier oral assurance in either of these two agreements. Dispute subsequently arose between the parties, and the appellant served on the respondent a notice to quit the premises. Raja Azlan Shah CJ stated that an oral promise, given at the time of contracting which induces a party to enter into a contract overrides any inconsistent written agreement. The device of collateral contract does not offend the extrinsic evidence rule because the oral promise is not imported into the main agreement. Instead it constitutes a separate contract which exists side by side with the main agreement. Reference was made by the Chief Justice to Chitty on Contracts, 24th edition, para 674:In our view there is a growing body of authority that supports the proposition that a collateral agreement can exist side by side with the main agreement that it contradicts.The Chief Justice also relied upon the English decisions such as J Evans & Sons v Andrea Merzario,[footnoteRef:43]and Heilbut Symons & Co v Buckleton[footnoteRef:44] which also stated that the collateral contract constitute a separate contract that exists side by side with main agreement. [43: [1976] 2 All ER 930.] [44: [1913] AC 30.]

However, it must be taken into account that a collateral contract cannot destroy the main written contract as it can only exist on the basis of the main agreement. In Industrial Distribution Sdn Bhd v Golden Sands Construction Sdn Bhd,[footnoteRef:45] Visu Sinnadurai J reiterated the principle earlier stated by Raja Azlan Shah CJ in Tan Swee Hoe Co Ltd where the collateral contract exist aside the main contract. [45: [1993] 3 MLJ 433, HC.]

It has to be noted that collateral contract only exit if there is a written agreement made by parties to contract. It may overrides the main agreement, but not to the extent that may destroy the main contract.In the other hand, in order to show that oral agreement will prevail over written agreement when it contradicts, it was best illustrated y the Privy Council in Kandasami v Mustafa[footnoteRef:46] where the court held that there was in existence a collateral agreement under which the parties had agreed that the written agreement would have no legal effect.[footnoteRef:47] [46: [1983] 2 MLJ 85.] [47: Visu Sinadhurai. (2003). Law of Contract. (3rd ed.). Butterworths (Canada) LimitedPress at page 196.]

In a nutshell, laws applicable in Malaysia are not absurd or too rigid to be relied on. When a person promise to someone, he must by hook or by crook be responsible for what he said in order for justice to be upheld.

CONCLUSIONThe existence of parol evidence rule in Malaysia under Section 91 and 92 of the Evidence Act 1950 is fundamentally, to protect the original contents of the written contract which will contribute to maintaining certainty and stability; particularly in business dealings.Generally, evidence may not be admissible to vary or contradict a written agreement. However, the position is as was stated by Raja Azlan Shah (who was then CJ) in Tan Sween Hoe & Co Ltd v Ali Husain, as follows:Although it is trite law that parol evidence is not admissible to add, to vary or contradict a written agreement, a technical way of overcoming the rule is by invoking the doctrine of collateral contract warranty. There is a growing body of authority which supports the proposition that a collateral agreement can exist side by side with the main agreement which it contradicts.As numerous problems arising in Malaysia especially on the business matters to prove the existence of extrinsic evidences aside from the written contract, it would be more appropriate to be more careful when dealing with contractual matters. Put down everything that might subject to the contract or inducing the parties to act on it in writing form. It will be easier to prove printed materials than proving something which is orally agreed upon by the parties. It must be remembered that judge is also a human being and they can make a mistake too. So, if we can take precautions steps when entered into contracts by predicting all the consequences if there is a breach, it might be easy to prove the evidences.

BIBLIOGRAPHY1. Arthur L. Corbin. (1944). The parol evidence Rule, 53. Yale Law Journal.2. Bai Hira devi v Official Assignee, Bombay AIR 1958 SC 4483. Blacks Law Dictionary. thelawdictionary.org.4. Cheong, M. F. ( 2010). Contact Law in Malaysia. Sweet & Maxwell Asia5. Coalfields of Burma Ltd v HH Johnson AIR 1925 Rang 128.6. Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 2 All ER 65, 677. Emily M. Weitzenbeck. (2012). Norwegian Research Center for Computers & Law. University of Oslo.8. Foo Tock Lim v Piong Liew [1963] MLJ 67.9. Heilbut Symons & Co v Buckleton [1913] AC 30.10. Industrial Distribution Sdn Bhd v Golden Sands Construction Sdn Bhd [1993] 3 MLJ 433, HC.11. J Evans & Sons v Andrea Merzario[1976] 2 All ER 930.12. JJ Savage & Sons Pty ltd v Blakney (1970) 119 CLR 435 HC.13. Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd, [1997] 1 CLJ.14. Kandasami v Mustafa [1983] 2 MLJ 85.15. Kluang Wood products Sdn Bhd & Anor v Hong Leong Finance Berhad and Anor [1991] 1 MLJ 193, FC.16. Krishnan Arjunan and Abdul Majid Nabi Baksh. (2008). Contract Law in Malaysia. Malayan Law Journal Sdn. Bhd.17. L Estrange v F Graucob Ltd[1934] 2 KB 394.18. Ng Ee v PP [1941] MLJ 180.19. Ng Kong Yue and Anor v R. [1962] MLJ 67.20. Siah v Tengku Nong [1964] MLJ 63.21. Syed Ahmad S A Alsagoff. (1998). Principles of the law of Contract in Malaysia. (2nd ed.). Malayan Law Journal Sdn Bhd. 22. Tan Chong & Sons Motor Co Sdn Bhd v Alan Mcknight. [1979] 2 MLJ 229, FC.23. Tan leng Teck v Sarjana Sdn Bhd & Ors [1997] 4 MLJ 239.24. Tindok Besar Estate Sdn Bhd v Tinjar Co [1979] 2 MLJ 229.25. Tyagaraja Mudaliar & Anor v Vadathanni [1936] MLJ 62.26. United Malayan banking Corp. Bhd v Tan Lian Keng and Ors [1990] 1 MLJ 281 HC.27. Visu Sinadhurai. (2003). Law of Contract. (3rd ed.). Butterworths (Canada) Limited.28. S. Santhana Dass. ( 2005). General principle of Contract Law in Malaysia. Akitiara Corporation Sdn Bhd.

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