e-business law chptr 1

BAEB 301 : BASIC LAW FOR E-BUSINESSCHAPTER 1:ONLINE CONTRACT

© 2010 Cosmopoint

Chapter 1: Online Contract

Topic Outlines

1.1 Electronic Contract 1.1.1 Definition of a contract under S. 2 (h) Contracts Act 1950

1. 1.2 Offer

1.2.1 Invitation To Treat 1.2.2 Types of Offer 1.2.3 Communication of Offer 1.2.4 Revocation of Offer 1.2.5 Ways to Revoke an Offer 1.3 Acceptance

1.3.1 Rules of Acceptance 1.3.2 Exception to the General rule of Communication 1.3.3 Revocation of Acceptance


Topic Outlines

1.4 Consideration 1.4.1 Exceptional Valid Contracts without Consideration 1.4.2 Types of Consideration 1.4.3 Examples of Consideration 1.4.4 Rules of Consideration 1.5 Intention to Create Legal Relations 1.5.1 Legal Presumptions of Intention in Business Agreements 1.5.2 Legal Presumptions of Intention in Social Agreements

1.6 Capacity To Enter into a Contract


Learning Outcomes

At the end of this chapter, students should be able to: Understand that through the Internet a contract can be formed through a

website or through email and that prior to the establishment of a contract, fundamentals of a contract must be fulfilled.

Understand that the most common purpose for a contract over the Internet is the trade of a product for payment through offer and acceptance; whereas, one party will offer a product of information, service, or a tangible item and the party accepting the offer will return a payment for the product.

Understand that electronic transactions separate e-business from traditional types of businesses and Malaysian Government encourages e-business by passing the Electronic Commerce Act 2006 (ECA 2006) which enables contractual dealings, such as offers, acceptances and invitations, to be conducted electronically, and also allows people to use an electronic signature to satisfy any legal requirement.

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1.1 Electronic Contract

An internet contract refers to a contract which is made through a website (such as ‘Click Wrap’ contracts) or through email stating offer and acceptance of terms and conditions of a particular transaction. For example, selling and buying a product over the internet for a price.

An internet contract must fulfill the traditional fundamentals of a contract, namely offer, acceptance, consideration and intention to create legal relations.

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In Malaysia the ELECTRONIC COMMERCE ACT 2006 (ECA 2006) legalises contractual dealings, such as offers, acceptances and invitations, to be conducted electronically, and also allows people to use an electronic signature to satisfy any legal requirement.

Clause 2(1) of the ECA 2006 states that, “Subject to section 3, this Act shall apply to any commercial transaction conducted through electronic means…”

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A contract is defined under s.2(h) of the Contracts Act, as ‘an agreement enforceable by law.’

In other words where there has been a breach i.e. one party does not do his part of the contract the other party can sue the him in court

1.1.1 Definition of a Contract under S. 2 (h) Contracts Act 1950

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1.1 Electronic Contract 1.1.2 Types of Electronic Contracts

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Two types of Electronic Contract (i) email contracts (ii) web contracts. In the email contracts, the sender of offer or acceptance

will have to type the offer or acceptance, and then sends it to the recipient. The assistant of a third party called the Internet Service Provider (ISP) is required in an email contract to store any message sent until it is downloaded by the recipient.

A web contract on the other hand is concluded by a mouse click.


1.1 Electronic Contract 1.1.3 Formation of Electronic Contracts

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Electronic contract can be formed either by email communication only or by a mixture of web offer and email acceptance.

s.10 of the Contracts Act 1950 and the common law provide offer, acceptance, consideration, intention to create legal relations and capacity to contract must be present for a valid and enforceable contract.


1.2 Offer

Offer – s. 2 (a) Contracts Act 1950

‘Where one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a [offer].’

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e.g. - A tells B that he will buy B’s car for RM35,000. This is called an offer. Maker of the offer: OfferorRecipient of the offer: Offeree.


1.2 Offer

An Invitation To Treat is not an offer; it is a preliminary communication that passes between the parties at the stage of negotiation.

Unlike an offer, an invitation to treat cannot be accepted or rejected.

1.2.1 Invitation To Treat

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1.2 Offer

e.g webtisements


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1.2 Offer

e.g web price list.


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1.2 Offer

(i) Specific/bilateral offer : an offer that is made to particular person;

(ii) General/Unilateral offer : an offer that is made to the general public in a form of advertisement. Carlill v Carbolic Smoke Ball

1.2.2 Types of Offer

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1.2 Offer1.2.2 Types of Offer

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• In the internet, webtisements whereby a positive action by a buyer is required such as providing a credit card number and once provided, the transaction is confirmed may be considered as an offer capable of being turned into a contract if a buyer assents to the advertisement by clicking ‘I agree’.


1.2 Offer

The offer has to be communicated to the offeree by the offeror. Mere coincidence is not sufficient. R v Clarke; S. 4 (1) Contracts Act 1950

1.2.3 Communication of Offer

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e.g. Siti returned Ali’s missing cat without realising that Ali had offered to pay a reward to anyone who could find and returns the cat to him. Later Siti was informed about the reward. Siti is not entitled to claim the reward since she returned the cat to Ali without knowing about Ali’s offer.


1.2 Offer

Under s.5(1) ‘A [offer] may be revoked at any time before the communication of its acceptance is complete as against the [offeror], but not afterwards.’

1.2.4 Revocation of Offer

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1.2 Offer

1. Before the offeree clicks on the mouse to send the email acceptance the offeror can revoke the offer.

2. But once the offeree clicks on the mouse to send, since communication of acceptance is instantaneous (unless failure of delivery) the offeror cannot revoke the offer.

1.2.4.1 Revocation of Offer in an Online transaction via email

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1.2 Offer

1. Before the offeree clicks on the ‘accept’ icon at the bottom of the webadvertisement, the offeror can revoke the offer.

2. But once the offeree clicks on the “accept” icon on the web page and communication is instantaneous, the offeror cannot revoke the offer.

1.2.4.2 Revocation of Offer in an Online transaction via click-wrap

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1.2 Offer

1. By a notice of revocation.

2. Lapse of time

3. Failure of acceptor to fulfill a condition

4. Death or Mental disorder of the proposer

5. If the Offeree makes a counter-offer. (Hyde v Wrench)

1.2.5 Ways of Revoking an Offer

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Case Study for Class Discussion

Ali wants to sell his car to Bob. He calls Bob on Bob’s mobile phone and says,

‘I want to sell my car to you at RM45,000.’ Bob says he will think about it. The next day Ali gets a buyer who offers Ali RM50,000

for his car. Ali immediately accepts. Does Ali have to revoke his offer to Bob?

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Steps in Answering a Case Study

1. Consider the legal effect of Ali’s statement to Bob whether it is an offer or an invitation to treat.

2. Consider the legal effect of Bob’s reply that he would think about it. Does it amount to an acceptance?

3. Consider whether Ali is free to sell his car to another while Bob is considering about it.

4. Consider whether there is a need for Ali to revoke his offer to Bob before he sold the car to the new buyer.

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1.3 Acceptance

Section 2(b) of the Contracts Act provides that when the person to whom the [offer] is made signifies his assent thereto, the offer is said to be accepted.

Upon acceptance an agreement is formed between the parties.

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1.3 Acceptance1.3.1 Acceptance for an electronic transaction

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For an electronic transaction, a buyer who wishes to buy an item or service may make the acceptance through:-

(a) email; or

(b) the web page itself (click wrap contracts)


1.3 Acceptance

1. The acceptance must be absolute and unqualified.

2. An acceptance must be made within a reasonable period.

3. Acceptance must be made in the manner prescribed by the offer.

4. Silence is not acceptance.

5. Acceptance must be actually communicated.

1.3.2 Rules of Acceptance

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1.3 Acceptance1.3.3 Rules of Acceptance For Electronic Transaction

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The general rule is the acceptance must be communicated to the offeror.

Whether the mode of acceptance is through email or click wrap contract, the question that needs to be answered is where and when the contract is formed


1.3 Acceptance1.3.3.1 Communication Acceptance via Email

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The sending of an acceptance by the offeree via email depends on a third party, the Internet Service Provider (ISP)

The offeree’s ISP will then send that message of acceptance to the offeror and upon the offeror’s request to his ISP to download the message that he has received.

The message can be said to have reached the offeror once the download is completed in the offeror’s inbox (the digital equivalent of the recipient’s letter-box).


1.3 Acceptance1.3.3.2 Communication Acceptance via Click Wrap

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In the click wrap method of contracting, click wrap contracts are formed using the linkages between the web site operators’ servers and the customers’ computers during electronic data exchanges on the web.

On the web page where webtisements are advertised, there is normally an order form which a customer has to fill out. At the bottom of the form normally one can find a button with the words, “Submit” or “I accept”.

When this button is clicked by a customer, the order is submitted to the web site operator.


1.3 Acceptance

1. Exception to the General Rule: POSTAL RULE OF ACCEPTANCE: If acceptance of the offer is by normal post, the communication of the acceptance takes place at the time of posting. It is irrelevant that the letter of acceptance never arrives or is lost in the postal system. S. 4 (2) (a) Contracts Act 1950;

1.3.4 Exception to the General Rule of Acceptance

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1.3 Acceptance

1. Emails communications are instantaneous.

2. Emails senders are able to know immediately if the emails are not delivered to their destinations and immediate steps can be taken to overcome the problem

1.3.4.1 Postal Rule of Acceptance does not apply to email communication

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1.3 Acceptance

1. Click wrap communications over the web between buyers and sellers are considered instantaneous.

2. The buyer and the seller are constantly in touch with each side knowing if the other has lost communication with the other.

1.3.4.2 Postal Rule of Acceptance does not apply to click-wrap communication

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1.3 Acceptance

1.3.3 Revocation of Acceptance

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1.3 Acceptance

1.3.3.1 Revocation of Acceptance in Email Transaction

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1. Before the offeree sends out the acceptance by email by clicking on the ‘send’ icon he can always revoke his acceptance.

2. The offeree has the right to revoke the acceptance if for some reasons, after clicking on the ‘send’ icon, the email fails to reach the intended offeror and the offeror take advantage of the failure to change his mind by NOT resending the message.


1.3 Acceptance

1.3.3.2 Revocation of Acceptance in Click-WrapTransaction

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1. Before the offeree clicks on the ‘agree’ icon on the web page he can always change his mind and revoke the acceptance.

2. However if the offeree has already clicked the “accept” icon on the web page, he cannot change his mind since communication of acceptance to the offeror is instantaneous unless the server goes off-line unexpectedly and the communication of the acceptance by click-wrap is not successful.


Class Discussion

Beatrice bought a ‘HB’ Desktop computer in February 2003. However, she decided to sell the computer, as she wanted to buy another more powerful computer. So, on 18-3-2003, Beatrice wrote to Charles, “I offer to sell to you my HB desktop computer for RM2000/-.”On 20-3-2003, Charles posted a letter accepting Beatrice’s offer. However, that afternoon, Charles telephoned Beatrice to tell her he no longer wished to buy the computer. Beatrice received Charles’ letter only on 25-3-2003. Advise Beatrice and Charles.

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Steps in Answering A Case Study

1. First: Discover the legal Issue. Ask yourself what is the legal effect of B’s statement on 18 March to Charles i.e. whether it is an offer or an invitation to treat.

2. Secondly: Provides the legal definitions of an offer and an invitation to treat and support the definitions with cases and relevant provisions in the Contracts Act 1950.

3. Thirdly: (Putting yourself in the shoes of a judge) Apply the legal definitions to the facts of the question to B’s statement of 18 March and justify your answer whether it is an offer or an invitation to treat.

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4. Conclude whether the 18 March statement by Betrice is likely to be an offer or an invitation to treat based on you have earlier discussed in paragraph 3 above.

5. Next discover the next issue namely what is the legal effect of Charles’ letter of acceptance by post? When does communication of a postal acceptance take place?

6. Discuss the importance of communicating acceptance to the offeror. Explain that acceptance once communicated results in a contract. Explain the exceptional Postal Rule of acceptance. Apply both the general rule and the exception to Charles’ reply and conclude whether there is a contract

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7. The next issue: Can Charles change his mind after posting the acceptance?

8. Discuss the rule about revoking an acceptance.

9. Apply the rule to the facts of the question and conclude whether Charles is allowed to change his mind.

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1.4 Consideration

1. An agreement made WITHOUT consideration is a VOID contract.

2. Consideration is legally known as the PRICE of the contract; the PRICE of the bargain. E.g. money, an act.

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1.4 Consideration

a) If the contract is in writing and registered and is made on account of natural love and affection between contracting parties; OR

b) it is a promise to compensate a person who has voluntarily done something for the promisor; OR

1.4.1 Exceptional Valid Contracts without Consideration

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1.4 Consideration

c) IF it is a promise to compensate a person for something which the promisor was legally compellable to do; OR

d) IF it is a promise to pay a debt barred by limitation of law.

1.4.1 Exceptional Valid Contracts without Consideration

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1.4 Consideration

3 types of valid consideration:

1. Executory: a promise made in exchange for another person’s promise

2. Executed: A promise made in exchange for another person’s completed act.

3. Past : A promise is made SUBSEQUENT to and in exchange for an act that has already been performed.

1.4.2 Types of Valid Consideration

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1.4 Consideration

E.g. Executory Consideration:

‘A promise to sell B his car and B promises to pay A RM20000 for it. See also Illustration (a) in S. 24

E.g Executed consideration: A offers to reward/pay RM200 to anyone who can find

and returns his cat which has gone missing. If X can find the cat and also returns the cat to A, X’s act is consideration of A’s promise to pay the reward.

E.g. Past Consideration C washes D’s car without refering to D first. Later when

D knows about it, in gratitude D promises to reward/pay C with RM10.00.

1.4.3 Examples of Consideration

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1.4 Consideration

1. Consideration does not have to be adequate so long as it is sufficient. Adequacy means in monetary sense.

2. Past consideration is good and valid consideration.

3. Consideration can move from the Promisee or from ‘any other person

4. Payment of a smaller sum is able to satisfy the obligation to pay a larger sum

1.4.4 Rules of Consideration

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Class Discussion

Lucy, aged 30; is a nurse. She agrees to pay RM500/- a month to her brother, Ray, who is unemployed. Their 78 year old father, John, then transfers his double-story bungalow house to Lucy and he stipulates that Lucy must pay the RM500/- to Ray every month. It is now the second month and Lucy has not given any money to Ray. Can Ray sue Lucy on her promise?

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Steps in Answering a Case Study

1. What is the meaning of consideration?

2. What are the relevant rules of consideration?

3. Can John provides the consideration for the contract between Lucy and John?

4. Conclude whether Ray enforce Lucy’s promise to pay him?

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1.5 Intention to Create Legal Relations

1. The general rule an agreement which is not supported by an intention to create legal relations by both parties DOES not make a contract.

2. Courts develops two Legal presumptions to determine intention.

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In business agreements, there is a presumption that the parties intend legal consequences to follow unless the parties specify otherwise. Winn v Bull Low Kar Yit & Ors v Mohd Isa & Anor.

1.5.1 Legal Presumptions of Intention in Business Agreements

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In social, domestic or family agreements, it is implied NO legal relations are contemplated.

BUT such presumption may be rebuttable if both are not on friendly terms. Balfour v Balfour compare Merritt v Merritt

1.5.2 Legal Presumptions of Intention in Social Agreements

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1.6 Capacity to Contract

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Section 11 of the Contracts provides 2 types of ‘people’ are not competent to enter into a contract:

(a) Persons who are not of the age of majority. The age of majority is 18 years old.

(b) People of unsound mind



1.6.1 Contracts with Minors

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1. The general rule is that contracts with minors are void.2. The purpose of the general rule is to protect minors

against consequences of his own actions and presumed lack of judgment in such matters.



1.6.2 Contracts with Persons of Unsound Mind

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1. The general rule is that contracts with persons of unsound mind are void.

2. The purpose of the general rule is to protect persons of unsound mind against consequences of his own actions and presumed lack of judgment in such matters.



1.6.3 Capacity To make Online Contracts

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1. The general rule relating to minors can be fulfilled if parties intending to contract online are required to key in IC numbers. This will help the other party to identify whether he will doing an online contract with a minor.

2. The general rule relating to persons of unsound mind is not possible to fulfil in online transactions since parties to a transactions do not have the advantage of a face to face transactions and further they may be hundreds of miles apart.

e-business law chptr 1

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