Capacity to Contract in Malaysia

This article discusses the capacity to contract in Malaysia, including the definition of a competent person and the limitations on contracting for vulnerable individuals. It explores the effects of incompetency on contracts and the exceptions to the rules of capacity. The article also provides relevant case examples and references to Malaysian contract law.

Capacity to Contract
CAPACITY TO CONTRACT IN MALAYSIA
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Capacity to Contract 1
Introduction
In Malaysia, the law identifies a contract as an agreement that is legally enforceable
between the contracting parties. For there to be a contract, certain elements must be available.
Firstly, there must be an offer and acceptance. Section 2(a) states that a person makes an offer by
signifying to the other party his or her willingness to take an action or refrain from it with an
intention of acquiring something of similar value from the other party (Contracts (Amendment)
Act, 1976, sec. 2(a)). Section 2 (b) provides for contractual acceptance as a assenting to the offer
made under the provisions of section 2(a). A contract must have consideration. The law regards a
consideration as a benefit or detriment that one party undergoes to secure the promise of the
other. In addition to the consideration, parties must have an intention to form legally binding
arrangements. The law also requires the parties to have the legal capacity or be competent to
form a contract, and there must be the free will of the contracting parties. This ensures that no
party entered into the contract involuntarily. This paper intends to cover the issue of competency
and its effect on the contract.
Who is a competent person?
In Malaysian contract law, every competent is has permission to contract so long as other
elements of a contract exist. However, the law places a few limitations upon when certain
people’s right to contract can be limited. These are vulnerable persons that the law declares that
they do not have the capacity to contract. These people include people with mental disabilities,
minors, and people under bankruptcy. The law under section 11 provides that only contracts
made by competent persons can be enforceable in law (Contracts Act, 1950, sec. 11). In respect
of competency, the law limits contractual ability to three groups of persons which are; (i) persons
who are under the majority age, which age below 18 years; (ii) people with mental disabilities or

Capacity to Contract 2
of unsound mind; (iii) people who have been disqualified by the law from making contracts, the
law which the person is subject to (Contracts Act, 1950, sec. 11).
(i) Minors or People Below 18 Years.
The sec 2 of the Age of Majority Act dictates that minors are persons below the age of 18
years (Age of Majority Act, 1971). These people are considered as lacking the legal competence
to contract in that the lack the capacity to decipher the liability and obligations of a contract.
(ii) People of Unsound
Under section 12, the Contract law provides for circumstances when people with mental
disabilities may be exempted from making the contract. However, there are circumstances when
persons with unsound mind may be considered to have made a valid agreement. These are times
when the law finds that the person was of full soundness at the time of contract formation.
Secondly, a person of unsound mind may be considered to have made an enforceable agreement
if he makes the contract during the times when he is free from a mental disorder. Under mental
capacity, the Malaysian law provides that a person in a mental hospital may enter into a contract
at the intervals when he is not suffering from mental disorder. Drunkness and delirious fever are
also considered as mental incapacitation capable of making the contract void if the person does
not comprehend both rights and obligations under the contract.
(iii) Persons Disqualified by Law
Malaysian law requires those who want to contract to be persons whose contractual rights
have not been limited by the law applicable to them. In most cases, a person would be
disqualified by the (Bankruptcy Act, 1967). Under section 109(1)(m)(ii), that a person declared
bankrupt will not either by himself or jointly with somebody else engage in any action of
business or trade or even form any contract for the pursuit of a business act or trade. The law

Capacity to Contract 3
states that in cases where a person declared bankrupt want to form a contract, he must ensure the
other party is aware of his status of the bankruptcy.
Effect of Incompetency on the Contract
The Contracts Act of Malaysia does not have provisions for the outcome of a contract
made with incompetent persons. However, considering the provision of the Civil Act, Section 3
allows the Court to apply the principles of common law in Malaysia (Civil Law Act, 1956, sec.
3). According to Mohamad and Trakic (2015), Section 3 allows the Malaysian Courts to apply
common law principles such as habeas corpus, orders of mandamus, prohibitions, certiorari, and
precedents. For instance, in dealing with cases of contracts that have been concluded with
minors, the principal authority that the Malaysian court applies is comes from the Indian case of
(Mohori Bibee v Dhurmodas Ghose, 1903). In the case, the defendant Brahmo Dutt lent INR
20,000 with an interest of 12% to a minor. The defendant alleged that the minor secured the
disputed loan through a mortgage which was an immovable property. On behalf of the minor, the
mother brought case against the defendant to recover the mortgage on the fact that the mortgagor
was a minor.
In the ruling, the Privy Council analyzed a combination of the effects of the provisions of
the Indian CA 1872 under s9 and s10 (Indian Contract Act [CA], 1872, secs 9 & 10). While
considering the effects of these provisions, the court concluded that such contracts made with
minors are void due to the minor’s contractual incompetence (Mohori Bibee v Dhurmodas
Ghose, 1903). The rationale for the contractual limitation of minors on the grounds of
incompetence is derived from the fact that minors need protection from the consequences of their
actions due to the presumed limited capacity to judge situations.

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The rationale in Mohori Bibees’s case has been a fundamental source of principles in
cases involving minor’s contracts in Malaysia. While considering the effects of the principles in
Mohori Bibees’s case, the Malaysian Court has found them pari materia to the provisions of
Malaysian contract law under s10 and 11 (Contracts Act, 1950, secs 10 & 11). For instance, in
the case of (Tan Hee Juan v Teh Boon Keat, 1934), the High Court applied the Privy Council
principles that were established while ruling on the case of Mohori. In the case, the plaintiff was
an infant who had concluded a contract for thus transferring land to the defendant. The parties
completed the transfer through their witnesses, and the land was registered under the defendant’s
names. Later, the plaintiff asked the Court to grant an order for cancellation of the contract and
reverse the transfer. While ruling the case, the Court made the order to reverse the registration
made on the plaintiff's name citing that the contract was void due the law prohibiting contracts
with minors.
Notably, the Contracts Act under section 66 requires the party that had received the
benefit to return the benefits or compensate the other party in a case where a court sets aside the
contract. However, in cases involving a minor, the courts do not order minors to provide any
compensation. These principles were seen in the case of (Mohori Bibee v Dhurmodas Ghose,
1903). Similar effects were seen in the case of (Tan Hee Juan v Teh Boon Keat, 1934) as the
court declined to make an order directing the minor to return the money provided by the
defendant in the purchase of the land. The High Court interpreted the provisions of Section 40
(Specific Relief Act (Revised 1974), 1950) which allows it to use its discretion in deciding
whether to order the minor to return the benefits of the canceled contract or not. In the case, the
minor, plaintiff had canceled a contract where he had transferred land into the defendant’s names.

Capacity to Contract 5
The Court reversed the transaction ordering the defendant to return the land but did not order the
minor to return the money.
Section 11 and 12 of Malaysian contract law sets provisions for the law governing
contract made with people of unsound mind (Contracts Act, 1950, secs 11 & 12). The law under
these sections provides for test for soundness. It also sets difference between a person who has
regular unsoundness but has some moments of soundness. The law also differentiates between a
sound minded person who sometimes goes insane. The effects of these provisions have been
different on contracts based on the applications of the Act and the common law. For instance, the
English law principles held in (Imperial Loan Company Ltd v Stone, 1892) were used in the
Malaysian case of (Che Som Binte Yip Alias Mrs. Som Ismail &2 Ors v Maha Private Limited &
2 Ors 72, 1989). In the case, the two plaintiffs were taking action on behalf of the third plaintiff
who was of unsound mind. The plaintiff requested the court to set aside a contract for a mortgage
that the third plaintiff had given the bank to secure the loan. Citing the principles in Imperial
Loan Co Ltd v Stone and Hart v O'Connor, the Court set aside the contract stating that there is a
general principle preventing people lacking the mental capacity to form agreements.
While this case provided a principle declaring contracts made with people with of
unsound mind as voidable, the case of decision of (Sim Kon Sang Peter (administrator of the
estate of Chong Yu Tai, decd) v Datin Shim Tok Keng, 1989) provided a conscious outcome
regarding the provisions governing the effects of mind unsoundness on the contract. The case
was a dispute where the plaintiff asserted that during the life-time of the deceased, she had
transferred some shares to the defendant. Under this claim, the plaintiff asserted that the contract
between the defendant and the deceased was void on the fact that the defendant was aware of the

Capacity to Contract 6
deceased insanity. The plaintiff sort to reverse the transaction. The court settled that the contract
made with people suffering from insanity are void but not just voidable.
Exceptions of the Rules
There are a few exceptions to rules of capacity. The first exception is the contracts made
by incompetent persons contracting for goods or items necessary to their survival. These are
called contracts of necessities. Where a person lacking competency of entering into a contract
enters in a contract of necessity depending on the conditions of that person’s life, the other party
can enforce the contract. The provisions for the contracts of necessity are found in section 69
(Contracts Act, 1950). The law under this section provides for necessary goods or items if they
are things like shelter, medical services food, clothing, and education. The law under this section
enforces contracts for such goods or services if they were provided at the time when necessary to
the infant. Whereas there no actual definition of necessity in relation to incompetence in contract,
Malaysian law seems to borrow from the English Sale of Goods Act 1893 under section 2 where
it provides that necessary goods are those items suitable for helping the person survive the
conditions of his or her life. For instance, in (Nash v Inman, 1908), the tailor was unable to
demonstrate that the clothes purchased by the minor were necessary. Thus, whatever items the
minor contracted for must qualify to be his or her actual requirements for the conditions that she
or he is at the time of the formation of the contract.
Holding the same principle set in (Nash v Inman, 1908), the Malaysian court in the case
of (Government of Malaysia v Gurcharan Singh and Ors, 1971) held that principles of
necessaries should be interpreted broadly. Chang Min Tat J then stated that it is worth
considering the facts of the case to rule out what is necessary and what is not. In the case, the
Malaysian government brought an action against Gurcharan Singh over scholarship the first

Capacity to Contract 7
defendant contracted to study at Malayan Teacher’s Training Institution. However, the first
defendant was an infant at the time of the contract. The Court found that the contract was
enforceable due to the necessity of education.
The second exception is the contract of marriage. These are contracts where minors
promise under a contract to marry their spouses. These contracts are valid, and a minor
contracting for marriage is capable of suing or being sued in case there is a breach. In addition to
an agreement to marry, agreements for divorce, payment of dowry, adoption of children,
religious ceremonies are also enforceable. Under the Age of Majority Act, Section 4 (a) states
that the capacity of a person in a contract of marriage would not have an effect on the
enforcement of the contract (Age of Majority Act, 1971). For instance, in (Rajeswary & Anor v
Balakrishnan & Ors, 1958), the first defendant was the son of the second defendant who agreed
to marry the daughter of the second plaintiff. However, the defendants did not honor their
agreement. The court found that the defendants broke the agreement, and they were liable for the
damages.
The insurance act provides that any agreement entered for the purchase of insurance
benefits will not be affected by the incompetence of the minor due to his or her age (Insurance
Act, 1993). However, minors below 16 years need consent from their parents or guardians
(Insurance Act, 1993). The exceptions made in this act are based on an assumption that the
minors are contracting to insure themselves or their property.
The (Contracts (Amendment) Act, 1976, sec. 4(a)) allows minors to enter into the
contracts of scholarship. Under the same act, section 2 defines scholarship agreement as
contractual arrangements made with appropriate authorities or persons. In this case, appropriate
authorities are those authorized by the Federal Government, Statutes, the State Government, or

Capacity to Contract 8
those approved to provide scholarships by the Malaysian educational institutions. This means
that any contract entered by a minor to secure a loan, assistance, prizes, or sponsorship for the
furtherance of education would be enforceable. In the case of (Government of Malaysia v
Gurcharan Singh and Ors, 1971) discussed above, the defendants were liable because the student
left the school before the completion of the term.
The last exception is the contracts of Apprenticeship. The provisions for this rationale are
contained under the (Children and Young Persons (Employment) Act, 1966). The allows children
below 14 years and those between 14 and 16 to contract for employment. Despite that, the work
of Fong (2010) states that even though the act allows child labor, the intervention of
Employment Act 1955 under section 13 protects children from liabilities for damages resulting
from employment contracts (Cheong, 2010).
Conclusion
The purpose of this paper was to discuss the position of the Malaysian law of contract on
situations where the contractual arrangements involve persons lacking the capacity to contract.
While the principles of capacity may seem harsh to the party contracting with an incompetent
person, such principles are necessary to prevent exploitations and unfair dealings. For instance, if
there were no such principle, people with insanity or children would be drawn to contracts in
which they surrender their properties without obtaining legal benefits sufficient to their needs.

Capacity to Contract 9
References
Age of Majority Act (1971).
Bankruptcy Act (1967). Available at:
http://www.commonlii.org/my/legis/consol_act/ba19671988217/.
Che Som Binte Yip Alias Mrs Som Ismail &2 Ors v Maha Private Limited & 2 Ors 72 (1989)
2CLJ 893.
Cheong, M. F. (2010) Contract law in Malaysia. Petaling Jaya, Selangor, Malaysia; St. Paul,
Minn.: Sweet & Maxwell Asia : Thomson Reuters ; West Group.
Children and Young Persons (Employment) Act (1966).
Civil Law Act (1956).
Contracts Act (1950). Available at:
http://www.commonlii.org/my/legis/consol_act/ca19501974200/.
Contracts (Amendment) Act (1976).
Government of Malaysia v Gurcharan Singh and Ors (1971) 1 MLJ 211.
Imperial Loan Company Ltd v Stone (1892) 1 QB 599.
Indian Contract Act [CA] (1872).
Insurance Act (1993).
Mohamad, T. A. H. and Trakic, A. (2015) ‘The reception of English law in Malaysia and
development of the Malaysian common law’, Common Law World Review, 44(2), pp. 123–144.
doi: 10.1177/1473779515584731.
Mohori Bibee v Dhurmodas Ghose (1903) ILR 30 Cal 536.
Nash v Inman (1908) 2 KB 1.
Rajeswary & Anor v Balakrishnan & Ors (1958) 3 MC 178 HC.
Sim Kon Sang Peter (administrator of the estate of Chong Yu Tai , decd) v Datin Shim Tok Keng
(1989) 2CLJ 893.
Specific Relief Act (Revised 1974) (1950).
Tan Hee Juan v Teh Boon Keat (1934) MLJ 96.