Authored By: NUR AMIRA FARHANA BINTI ISMAIL
ISLAMIC SCIENCE UNIVERSITY OF MALAYSIA
Abstract
This paper explores the fundamental principles of contract law in Malaysia with particular emphasis on the legal distinctions between fraud and mistake, as codified under the Contracts Act 1950. A valid contract requires essential elements such as offer, acceptance, intention to create legal relations, consideration, capacity, and a lawful object. These elements ensure that agreements are enforceable and reflect the true consent of the parties involved. Fraud, as defined under Section 17 of the Act, involves intentional deception with the aim of inducing a party into a contract, thereby rendering the contract voidable at the option of the aggrieved party. In contrast, a mistake, especially one that is mutual and concerns an essential fact, can render a contract void ab initio under Section 21, as no genuine consent exists from the outset. The paper distinguishes between different types of mistakes which are unilateral and bilateral and examines how each affects the validity of a contract. Remedies also differ significantly: while fraud may lead to rescission, damages, or refusal to perform, mistakes may result in restitution, rectification, or the contract being declared void. Through the discussion of relevant case law, this paper highlights how Malaysian courts interpret and apply these principles, underscoring the legal significance of intention, knowledge, and consent in contractual obligations.
Introduction
Contracts are the cornerstone of modern commerce and interpersonal agreements, providing a legal framework that ensures promises are kept and obligations enforced. In Malaysia, the Contracts Act 1950 governs the formation, interpretation, and enforcement of contractual relationships. Central to this legal framework is the principle of free consent, which ensures that parties enter into agreements willingly and with full understanding. However, situations often arise where consent is undermined either through intentional deception or through genuine misunderstanding. This paper delves into two critical vitiating factors that challenge the validity of contracts: fraud and mistake. While fraud involves deliberate intent to mislead, a mistake may stem from an honest but erroneous belief. Both concepts raise fundamental questions about intention, knowledge, and consent, and their presence can significantly affect the enforceability of a contract. By examining the legal definitions, elements, judicial interpretations, and statutory provisions particularly Sections 17, 18, 19, and 21 of the Contracts Act 1950. This study aims to illuminate the boundaries between fraud and mistake and explore how Malaysian courts address these issues in pursuit of justice and contractual fairness .
Background of Basic Principles of Contract Law
In the context of Malaysian contract law, the formation of a valid and legally enforceable contract necessitates the presence of several fundamental elements: offer, acceptance, intention to create legal relations, consideration, capacity, and a lawful object. An offer constitutes a clear proposal by one party, while acceptance involves the unequivocal and unconditional agreement by the other party to the stated terms. The parties must also demonstrate an intention to enter into a legally binding agreement. Consideration refers to something of value exchanged between the parties, which may include a promise to perform or refrain from performing a particular act. Furthermore, the contracting parties must possess the legal capacity to enter into a contract, meaning they are of sound mind and not subjected to undue influence, coercion, or incapacity. Additionally, the object of the contract must be lawful and not contrary to public policy.
Beyond these essential elements, additional factors contribute to the enforceability of a contract. The terms of the contract must be expressed with sufficient clarity and certainty to permit a definite interpretation. Equally important is the requirement of free consent, whereby both parties must willingly agree to the contract without any form of coercion, undue influence, misrepresentation, or fraud. As stipulated under Section 10 of the Contracts Act 1950, agreements are deemed to be contracts only when made with the free consent of the parties involved. Section 14(c) of the Act further provides that consent is considered free when it is not induced by fraud, thereby reinforcing the principle that genuine agreement is fundamental to the validity of contractual obligations.
Fraud according to Contract Act 1950
Definition and Elements of Fraud
Section 17 of the Contracts Act 1950 provides an expansive definition of fraud, which goes beyond the scope recognized under common law. According to the Act, fraud includes acts committed by a party to a contract, or with his connivance, or by his agent, with the intent to deceive another party or his agent, or to induce him to enter into a contract. A key characteristic of fraud under this provision is that the person making the false statement does not believe in its truth and acts with the deliberate intention to mislead and induce the other party into a contractual relationship. The Act categorizes fraud into several types, including misrepresentation of fact, active concealment, promises made without the intention to perform, deceptive acts, and acts or omissions declared fraudulent by law. Under Section 18 of the Act, in the case of misrepresentation, there must be a false representation of fact made to the misled party, and the person making the statement must not believe in its truth.
Generally, silence does not constitute fraud. This principle was affirmed in Lau Hee Teah v Hargill Engineering Sdn Bhd, where the court held that mere silence regarding a fact is not fraudulent, and a contracting party is under no obligation to disclose all information to the other party. This reflects the principle of caveat emptor, which is let the buyer beware, where the buyer bears the responsibility to examine and inquire about the goods before purchasing. If the buyer fails to do so, any defects discovered after the sale cannot be grounds for complaint. However, silence may amount to fraud when there is a duty to speak, such as in fiduciary relationships characterized by trust and confidence. In Lim Kim Hua v Ho Chui Lan, the court found that a granddaughter’s failure to disclose the existence of a previous will while transferring her grandmother’s property, who was elderly and mentally weak, amounted to fraud. The court ruled that the concealment, in a relationship of trust, constituted a breach of duty and fraudulent conduct through silence. Moreover, in the Federal Court case of ALW Car Workshop Sdn Bhd v AXA Affin General Insurance Bhd stated that fraud or fraudulent intent can either be proved by direct evidence or by an inference based on the facts and surrounding circumstances of the case.
The effect of fraud in contractual agreements is addressed under Section 19 of the Contracts Act 1950, which provides that when consent to an agreement is obtained through misrepresentation or fraud, the resulting contract is voidable at the option of the misled party. This means that the aggrieved party has the legal right to rescind the contract if they so choose. The remedies available to the misled party include refusing to perform the contract, opposing any attempt at specific performance, or seeking to have the contract set aside entirely. Additionally, the injured party may claim damages for any losses suffered because of the fraudulent conduct. This provision serves to protect parties from being unfairly bound to agreements formed through deceit and reinforces the importance of honest and voluntary consent in the formation of legally binding contracts.
There is defence in fraud. For instance, the contact is not voidable where fraud did not affect the misled party’s consent to enter into the contract. For instance, he never knew of the existence of the false representation as in the case of Horsfall v Thomas the plaintiff inserted a metal plug into a weak spot in the gun to conceal a defect. This amounted to an active concealment. The defendant, however, never inspected the gun. He accepted it and upon using it, the gun burst. He refused to pay for the gun and the plaintiff sued him for payment. The High Court held that since the defendant had not inspected the gun, he never knew of the plaintiff’s attempted active concealment. Thus, insertion of the metal plug did not affect his mind or consent in entering into the contract. He would have entered into the contract even if the plug was not there. The contract was valid, and the defendant must pay for the price of the gun.
Mistake according to Contract Act 1950
Definition and Types of Mistakes
According to Section 21 of the Contract Act 1950 provides that “when both the parties to an agreement are under mistake as to a matter of fact essential to the agreement, the agreement is void.” The law will not enforce a void agreement as there was no consent between both parties. Both parties to the agreement must be under a mistake of fact. If the mistake is a unilateral one, only one of the parties is under a misapprehension, the contract remains valid.
There are two types of mistakes, firstly, unilateral mistake when only one party to the agreement makes a mistake, it is called a unilateral mistake. A mistake made by one party is not an operative mistake under the Act. The contract is considered valid as Section 23 of the Act provides that “ 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. For instance, in the case of Ho Weng On v Bindev Sdn Bhd the plaintiffs purchased from the defendant developer one unit of a double storey semi-detached house to be built in a project at Bukit Istana, Kuantan. Unknown to the defendant, its agents or employees had a year earlier, sold the said unit to another party. The plaintiffs sued the defendant for specific performance of the contract. The defendant contended that agreement was void on the ground of common mistake as both parties were mistaken as to availability of the said property for sale at the time of contract. The High Court rejected the said argument. The court held that only the defendant developer made the mistake. It was the only party who had the exclusive knowledge that the property had already been sold to a third party. The plaintiff purchasers must be taken to have no knowledge of this fact for it they had; they would not have purchased the property in the first place. There was a mistake made by one party as to the existence of the subject matter. The contract remains valid.
Secondly mutual or bilateral mistake. According to Section 21 of the Contract Act 1950 provides that “ when both parties to an agreement are under mistake as to a matter of fact essential to the agreement is void. The law will not enforces a void agreement. Under Section 21 of the Act, a mistake renders an agreement void if it is made by both parties, as to a matter of fact and the said fact is essential to the agreement. It is also necessary that the fact regarding which the mistake is made should be essential to the agreement. Thus, a mistake of fact made by both parties to the agreement may occur in four conditions. Firstly, mistake as to the existence of the subject matter of the agreement. Secondly, mistake as to the identity of the subject matter. Thirdly, mistake as to the quality of the subject matter. Lastly, mistake as to the possibility of performing the agreement.
In a common mistake under mistake as to the existence of the subject matter, there is a meeting of the minds or consent between the parties but there was nothing for them to agree on. Their erroneous belief or mistake about the existence of the subject matter nullifies their consent. The agreement is void. In Galloway v Galloway, A and B, being under the mistake and common assumption that they were legally married to each other, wanted to separate and entered a separation deed. In fact, they were not legally married. Since the fact of the marriage was non-existence, the deed was held void. Furthermore, in mistake as to the identity of the subject matter, such mistakes usually arise where one party intends to deal with one thing and the other with a different one. For instance, A intends to offer his BMW 2.0 Sedan for a sale to B, but B believes that A’s offer relates to the Mercedes 2.0 Sedan also owned by A.
Key Differences Between Fraud and Mistake
The key difference between fraud and mistake lies in the intention which fraud involves deliberate deception making the contract voidable, while a mistake is a genuine misunderstanding that renders the contract void ab initio due to the absence of true consent.
Remedies and Legal Consequences
In cases of mistake, remedies typically include restitution, rectification, or pleading the mistake, whereas in cases of fraud, the affected party may refuse performance, resist specific performance claims, rescind the contract, and seek restitution, among other legal remedies.
Conclusion
In the realm of Malaysian contract law, distinguishing between fraud and mistake is essential to preserving the integrity and enforceability of contractual relationships. Fraud is rooted in intentional misrepresentation, aiming to manipulate another party into entering a contract. As such, it undermines free consent and renders the contract voidable at the discretion of the deceived party. Conversely, a mistake particularly one shared by both parties concerning a fundamental fact reflects an absence of mutual understanding and consent, resulting in a contract that is void ab initio. These differences not only influence the legal status of a contract but also determine the nature of remedies available to aggrieved parties. Fraud invites rescission, damages, and other equitable remedies, while a mistake may lead to restitution or rectification, depending on the circumstances. Through a careful examination of statutory provisions and judicial interpretations, it becomes clear that intention whether deceitful or mistaken plays a pivotal role in evaluating the validity of contracts and the protection of parties’ rights under the law. Ultimately, upholding the principles of good faith, clarity, and informed consent remains central to the proper functioning of contract law.
Reference(S)
Legislation
Contract Act 1950 (Act 136)
Cases
ALW Car Workshop Sdn Bhd v AXA Affin General Insurance Bhd [2019] 7 CLJ 667 (FC). Galloway v Galloway (1914) 30 TLR 531.
Horsfall v Thomas (1862) 168 ER 813.
Ho Weng On v Bindev Sdn Bhd [2007] 7 MLJ 607.
Book
Dr Ahmad Syed Alsagoff, Principle of the Law of Contract in Malaysia (5 edn, Lexis Nexis 2023)
