QUESTION:

Azul agreed to sell a piece of land to Zuli and the transaction was completed through an exchange of letters culminating in the letter from Azul stating that he was delighted that Zuli was buying the land and that he would leave the ‘technical details’ to the lawyers to work out. Azul subsequently refused to sell the land to Zuli who commenced proceedings for an order of specific performance. Azul said that there was no valid binding contract between them until ‘the technical details’ had been incorporated into a written agreement and was duly signed by both parties.
Decide whether there is a valid contract or not between them.

ANSWER:

The issue in this case is whether there is a valid contract or not between the Azul and Zuli.
A contract in a Nutshell meaning an agreement between two or more parties that is binding in law. This means that the agreement generates rights and obligations that may be enforced in the court. With regard to Treitel, a contract is an agreement giving rise to obligations which are enforced or recognized by law. There are three elements must be presents in order to create a contract. First, an intention to contarct where the parties must intends that their promises create legally enforceable obligations. Second, agreement between the parties where an offer by a party and acceptance by other party. Then, consideration where something of value passing from one party to another in return for the promise to do something.

Sec.2(a) of the Contract Act 1950 (CA) provides that, an offer signifies a person’s willingness to another to do or abstain from doing anything. According to Chitty, the offer is an expression of willingness to contract made with the intention that it is to become binding on the person to whom it is addressed. Sec. 2(c) of CA provides that, a contract must be involved two parties at least, which are promisor and promise. The proposal may be in the form of express or implied, refer to Sec 9 of CA.

An acceptance is the final expression of the assent to the terms of a proposal. Sec 2(b) of CA provides:

When a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted; a proposal, when acceptance becomes a promise. The person accepting the proposal is called the ‘promisee’ or the ‘acceptor’.

The Supreme Court in Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprise Sdn Bhd held that the existence of an agreement depends upon the intention of the parties and there must be consensus between them. The court may infer this from the language used the parties’ conduct in the surrounding circumstances and the subject of the contract.

Sec 7(a) of CA provides that in order to convert a proposal into a promise, the acceptance must be absolute and unqualified.

In this case, Azul agreed to sell a piece of land to Zuli and the transaction was completed through an exchange of letters culminating in the letter from Azul stating that he would leave the ‘technical details’ to the lawyers to work out. The issue arises whether there is valid contract between them. General rule, acceptance ‘subject to contract’ creates a strong inference that the parties do not intend to be bound until the execution of a formal contract. Acceptance ‘subject to contract’ prima facie, is not binding. It does not create a contract for two reasons; where it negatives the intention to create legal relation and it is an acceptance which does not correspond with the terms of the proposal because it implies a further condition. In the case of Commercial Bank Of Australia Ltd v GH Dean & Co. Pty Ltd ; it was held that if an agreement is made ‘subject to contract’, a presumption will arise that no contract then exists, merely an agreement upon matters that may subsequently be embodied in contract.

The Supreme Court in Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprise Sdn Bhd, stated that when an arrangement is made ‘subject to contract’ or subject to the preparation and approval of a formal contract, the court will generally construe it to mean that the parties are still negotiating and do not intend to be bound until the exchange of a formal contract.

In Chillingworth v Esche ; the parties agreed on the sale of certain property, ‘subject to proper contract to be prepared by the vendor’s solicitors. It was held that there was no contract between the parties.

In Winn v Bull, the Defendant agreed in writing with that Plaintiff take a lease for certain terms at a certain rent ‘subject to the preparation and approval of a formal contract’. No formal contract was ever entered into between the parties and the Plaintiff brought an action for specific for specific performance. Held: there was no binding contract.

The leading case in the area of ‘subject to contract’ is Low Kar Yit v Mohd Isa ; the Defendant gave an option to the agent of the Plaintiffs to purchase a parcel of land subject among others, a formal contract being drawn up and agreed upon by the parties and the approval of the sale and of the said contract by the High Court Kuala Lumpur. The Plaintiff’s agent exercised the option but the Defendant failed to sign the sale agreement. The Plaintiff then commenced legal proceedings for breach of contract. It was held that that there was no concluded contract between the parties.
Gill J:-
“The option on the face of it was clearly conditional upon and subject to a formal contract to be drawn up and agreed upon between the parties, so that the exercise of the option amounted to nothing more than an agreement which of course, has no legal effects”
According to the cases given above, I agreed that general rule, ‘subject to contract’ become no concluded contract and amounted to nothing more than an agreement which of course has no legal effect i.e; there was no valid binding contract between the parties entered into. Thus, in interpreting the words ‘subject to contract’, the paramount consideration should be the intention of the parties. The court should interpret the contract determine whether the parties intended to suspends their rights and obligations until the entry into a formal contractor that they had already entered into a legally binding contract of which the execution of the written contract was merely a formality.

But, there are cases where there is a contract between the parties and the execution of a formal contract was a mere expression of the desire of the parties as to the manner in which the contract already agreed to will in fact go through.
In the leading case is the case of Diamond Peak Sdn Bhd v DR Tweedie, where the Defendant agreed to sell a piece of land to the Plaintiff and the transaction was completed through an exchange of letters culminating in the letter from the Defendant stating that he was delighted that the Plaintiff was buying the land and that he would leave the ‘technical details’ to the lawyers to work out. The Defendant subsequently refused to sell the land to the Plaintiff who commenced proceedings for an order of specific performance. The Defendant’s main defence was that there was no binding contract between the parties until ‘the technical details’ had been incorporated into a written agreement and was duly signed by both parties. Gun Chit Tuan J held that the parties had been intended and concluded an oral agreement for the sale of the land. The use of the words ‘the technical details I leave to my lawyers’ did not make the contract binding only when the solicitors had drawn up a formal agreement. There was already a binding oral agreement.

In Voo Mui v Yap Mooi Mooi,The former Federal Court dismissed the appeal and Syed Agil Barakbah FJ (Salleh Abas Ag LP and Abdul Hamid FJ with him) held that it was the intention of the parties to come to a definite and complete agreement on the subject of the sale. The mere fact that it was subject to an agreement to be signed did not necessarily mean that there was no legal binding and enforceable contract.

Azul and Zuli’s case, Azul already agreed to sell a piece of land to Zuli. The transaction was completed through an exchange letters culminating in the letter from Azul stating that he was delighted that Zuli was buying the land. In this case the execution of a formal contract was a mere expression of the desire of the parties as to the manner in which the contract already agreed to be proceed or binding each other. The parties contemplated the preparation of a formal contract, that by itself will not prevent a binding contract from coming into existence before the signing of the formal contract.

As the conclusion, it seems that the parties that had intended and concluded an oral agreement for the sale of the land. The word use ‘the technical details I leave to my lawyers’ did not make the contract binding only when their solicitors had drawn up a formal agreement. There was already a binding oral agreement. Thus, the contract was valid.