[2015] 1 LNS(A) lxxxi Legal Network Series 1

ADEQUACY OF CONTRACTS ACT 1950 IN GOVERNING THE

FORMATION OF E-CONTRACTS IN MALAYSIA: UNCITRAL
MODEL LAW IN E-COMMERCE AS BENCHMARK

by

NOORANEDA MUTALIP LAIDEY*

Abstract Under conventional Malaysian law, a binding contract arises

when there is an offer, an acceptance of that offer, some payment (or
consideration) passing and an intention to create legal relations between
parties having the capacity to do so. This does not change in cyberspace.
Technological advancement has given rise to business owners and
consumers using technology in their dealings and hence, the usage of the
Internet as a medium to communicate and to form a legally binding contract
is anticipated. This paper highlights the issues on formation of e-contracts
in Malaysia. Contracts Act 1950 and Electronic Commerce Act 2006 with
United Nations Commission on International Trade Law (UNCITRAL)
Model Law on Electronic Commerce was analysed and the current
protection available was examined. It is recommended that legislation
should be technologically advanced and at the same time flexible to ensure
a level of legal certainty in electronic transactions without the need to
constantly update laws related to e-commerce activity as having a
comprehensive law on e-commerce will ultimately benefit all parties
especially the e-consumers.

Keywords: Cyberspace, E-commerce, E-contracts, E-consumers

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1. Introduction

The notion that the Internet is a borderless world had been rejected in the
case of American Libraries Association v. Pataki [969 F Supp 160] which
stated that the internet is wholly insensitive to geographic distinctions. In
almost every case, users of the Internet neither know nor care about the
physical location of the Internet resources they access (Cranor and Shane,
2002). This simply means that electronic transactions reach many
jurisdictions and many boundaries. Boyle (1996) argued that if the shift
to an information society means anything, it means thinking about
information as one of the most important resources in the society . With
the unstoppable development of the information and communication
technology and the fact that the internet is borderless, electronic commerce
e-commerce is growing fast in every part of the world. In 2012, Internet
users in Malaysia totalled 65.8% of its total population of 29.24 million
people. (World Bank, 2014). This provides enormous benefits to the
society and consumers in terms of ease and cost of transactions as it is
available anywhere and has become an essential part of todays society.

The formation of an e-contract in Malaysia is governed by the traditional

Contracts Act 1950 Contracts Act which is to be read together with the
Digital Signature Act 1997 Digital Signature Act. Apart from that, E-
Commerce Act 2006 E-Commerce Act was also passed by the legislature
to supplement the Digital Signature Act 1997 in the making of electronic
transactions and to protect consumers in e-commerce transactions.
However, many legal issues are not addressed by the legislature in passing
of the act. Issues that could be anticipated from the formation of an e-
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contract includes the issue of offer and acceptance; applicability of law; as

well as jurisdiction issue (Amin and Nor, 2011; Dodd and Hernandez,
1998). Therefore, this paper analyses the development of e-contracts in
Malaysia by analysing the essential elements of formation of a valid
contract. The Model Law is used as a key measure in analysing the
adequacy of the existing legislation in protecting e-consumers.

2. Formation of a valid Contract

Electronic contracts may be said as legally enforceable promises or set

of promises that are concluded using electronic medium (Kidd, Donnie and
Daughtery, 2000). Here we can see that an e-contract is the interaction of
two or more electronic agents that are programmed to recognise the
presence of a contract or simply means a transaction using electronic
means. According to Werner (2000), the two ways of formation of an e-
contract are via the changing of e-mail and web contracts. E-contracting
can also take place through Electronic Data Interchange (EDI) ( Dodd and
Hernandez 1998; Jawahitha and Hamid 2000). In an e-mail transaction, an
offer and acceptance will take place via the changing of e-mails using the
technical assistance of a third party which is the Internet Service Provider
(ISP). A contract can be formed by way of e-mail transaction alone or a
combination of a web offer and e-mail acceptance. The second type of
contract, a web contract, can come in the form of shrink -wrap, click
through or browse-wrap agreements. Each version of these types of web
contracts has its different mechanisms and in order for a contract to be
formed, an e-consumer has to follow the mechanisms provided or else the
contract would not be valid or even formed. A web contract is normally
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concluded via the click of the mouse. The mechanism of these contracts
requires an e-consumer to read and scroll through the terms and conditions
of the agreement and complete the transaction by clicking the I Agree; I
Accept or Pay button. The third type of contract, EDI, is the electronic
communication between trading partners of structured business messages
to common standards from computer application to computer application"
(Dodd and Hernandez, 1998). There is a trading cycle of a transaction
virtually without any paperwork. The exchange of information in EDI is
made via the communication of a computer with another computer and not
between computer and human.

A study that has been done by Amin and Nor (2011) suggested that the
concept coined by Parsons (2002) bringing stores to shoppers not
shoppers to stores is alluring and had becoming a trend and an exp ression
of modern lifestyle. This paperless and borderless transaction on the other
hand, however, exposes an e-consumer to challenges and issues that are
not faced by consumers in offline transactions. One of the main concerns
is the applicability of the Contracts Act in governing an online transaction.
The Contracts Act may not be able to resolve disputes that may arise from
e-commerce transactions. Another major concern is the uncertainty of
when where and how a contract is concluded in electronic transa ctions
(Amin and Nor, 2011).

Neither the Model Law nor Contracts Act addressed the issue of the
formation of an e-contract. They only give legal recognition to offer and
acceptance by electronic means but failed to address the question of at what
stage of the exchanges of information a contract may be formed.
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UNCITRAL Model Law on Electronic Commerce is a Model Law that

provides a basis for jurisdictions to prepare legislation relating specifically
to electronic commerce. Article 5 and Article 11 recognise the validity of
a data message. Article 11 of the Model Law provides that In the context
of contract formation, unless otherwise agreed by the parties, an offer and
the acceptance of an offer may be expressed by means of data messages.
Where a data message is used in the formation of a contract, that contract
shall not be denied validity or enforceability on the sole ground that a data
message was used for that purpose.

2.1. Offer and Acceptance

Unlike the traditional paper based contract, the legal issues surrounding a
contract over the Internet starts from communicating the contract, offer
and acceptance including the localisation of law and the enforceability of
the contract. An offer or proposal is defined under Section 2 (a) of the
Contracts Act as the willingness to do or to abstain from doing something
and this offer should be definite intention from the offeror and not merely
an invitation to treat or to invite potential buyers. This is where an online
contract raises some interesting issues. Invitation to treat seems like an
offer however the common law case of Fisher v. Bell [1961] has
distinguished the difference between an invitation to treat and an offer. In
an offline environment, when goods are displayed in a shop with price tag
attached to it, the shop owner is not making an offer, but merely an
invitation to treat. Therefore when a consumer picks up an item, it is the
consumer who is making the offer and the shop owner may accept or reject
the transaction.
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In an online transaction, e-consumers should not conclude that such e-

commerce websites constitute an offer but mere invitation to treat and
when a response has been made via e-commerce systems by clicking the I
Agree button or via e-mail; that response constitutes an acceptance of an
offer that is legally binding to both parties. This definitely obviates several
risks and unintended consequences to a website owner as it allows a
website owner to select the basis for jurisdiction of his transaction, the
consumers he wants to serve and to avoid the risk of being sued for failure
of delivery. The difference between a web offer and an invitation to treat
is a thin line as we shall see in the Singapore case of Chwee Kin Keong v.
Digilandmall.com Pte Ltd [2004]. It was confirmed in this case that the
more specific the advertisement is, the more likely the court will interpret
it as an offer not an advertisement. A web advertisement will be regarded
as an offer and not an invitation to treat when an e-consumer provides his
credit card details and a confirmation of transaction is given at the end of
transaction. The transaction will be legally binding on both parties if a
consumer clicks the Pay or I Agree button signifying the assent to the
offer. Therefore, even if the Malaysian Contracts Act does not deal with
an online advertisement or auction, it is vital for the courts to consider that
in web offers, an advertisements or a display of goods by a website owner
would amount to an offer, not an invitation to treat. When the consumer
clicks the pay button, a contract will bind both parties.

As for the instantaneous communication over the Internet, the Contracts

Act in Malaysia may suffer severe consequences due to the absence of a
comprehensive definition of contract completion. When the acceptance is
communicated using electronic means, the receipt rule is applicable. In
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other words an acceptance must be communicated to the offeror using

digital means and is only effective and valid when the acceptance comes
to the knowledge of the offeror and this has been specifically mentioned in
the Model Law. Article 14 of the Model Law provides that when the data
message is used in an online transaction, it has to be acknowledged by the
recipient of the data. Therefore there are two issues that must be addressed.
The first issue arises since the current Contracts Act does not specifically
recognise or define the data message in e-commerce to validate the
contract. Secondly even if it does, how does one determine the time when
an acceptance comes to the knowledge of the offeror on the internet? If e-
mail is used as a medium of communication, once an acceptance e-mail is
sent to the offeror, the acceptance will be completed regardless of whether
the e-mail is read or not. An e-contract may be created without the
awareness of any or both parties. This is in contradiction with Article 15
of the Model Law which provides that unless otherwise agreed between
the originator and the addressee, the dispatch of a data message occurs
when it enters an information system outside the control of the originator
or of the person who sent the data message on behalf of the originator .
Article 15 imposes a greater degree of responsibility on the offeror to make
sure that the message had entered the system. As long as it entered the
system the contract is effective regardless whether the message was
downloaded or not (Jawahitha and Hamid, 2000).

2.2. Consideration

In order for a contract to be valid, each party to the contract must exchange
something to get the benefit of the other. This element of exchange is
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known as consideration (Section 2(d) Contracts Act). Section 26 of the

Contracts Act provides that an agreement without consideration is void. In
e-commerce, one of the possible concerns will be whether the downloading
of free software or access to a website will amount to a valid consideration.
This is due to the fact that there is no exchange element or better known as
consideration taking place. In a click-wrap agreement, a website will
usually require an e-consumer to agree to terms and conditions before
allowing the consumer to download the digitised service. This is in
contradiction to Section 26 of the Contracts Act as there is no exchange
element. On the side of e-consumers, obtaining services or goods without
having to pay even a single cent is a bonus. However the applicability of
this Section to decide on the availability of consideration to solve the issue
of free goods is not clear as no case thus far has been tried in court for the
validity of such matter.

2.3. Intention to create legal relations

The elements of an enforceable contract was judicially explained by VC

George in the case of Kajang Sri Rock Products Sdn Bhd v. Maybank
Finance Bhd & Ors [1992] is that To constitute a valid contract there must
be separate and definite parties thereto; those parties must be in agreement,
that there must be consensus ad idem, those parties must intend to create
legal relations in the sense that the promise to each side are to be
enforceable simply because they are contractual promises and the promises
of each party must be supported by consideration (Mahdi, Nik, et al.,
2013). The element of intention to create legal relations is not specifically
mentioned in the Contracts Act. Therefore in determining the existence of
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this element, the court will look at the statement of intent that is made by
both parties. The court is willing to hold that there is intention if the other
party has acted pursuant to that promise to the detriment, sacrific ice or
forbearance of that party to show that as in the cases of Merritt v. Merritt
[1970]; Simpkins v. Pays [1955]; and Parker v. Clark [1960], there really
was a common intention to contract.

In the context of an online contract, the existence of intention is normally

automatic. However, there is one possible exception, where an unclear or
deceptive web site deceives a consumer into making an unwanted contract;
it is safe to presume that the online merchant cannot demand payment
because of the customers absent intention to create legal relations. To
preserve the right of e-consumers, EU Council Directive on E-Commerce
requires that a contract has an offer, an acceptance to that offer and an
acknowledgement of receipt. This will signify consent of both parties and
represent an intention to create legal relations. There is requirement to take
measures like double clicks in the e-commerce website to ensure
complete consent. The first I Agree click will express an e-consumers
consent to purchase, followed by a second I Confirm button confirming
the purchase and after the acknowledgement of receipt, the order is sent by
the seller to e-consumer. The contract is formed with the second I
Confirm button (Vincent, 2000). This method is anticipated in Malaysia
to benefit both contracting parties in an e-commerce transaction.

2.4. Capacity
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As a general rule, Section 11 of the Contracts Act provides that every

person is competent to contract if he is of the age of majority, of sound
mind and not disqualified from contracting. The effect of a contract entered
into by a person lacking the element of capacity is void. The exceptions is
to protect these categories of people because of their inability to appreciate
their own actions. This means that if a minor entered into an e-contract
with his parents credit card, he would be able to recover any money paid,
even though the contract is discovered to be void (Government of Malaysia
v. Gurcharan Singh [1971]). In order to protect liability and to mitigate
losses for an unwanted transaction especially when a minor entered into an
e-contract with his parents credit card, the contract should be made in
written form and an authentication of a third party to verify the transaction
should be present. This can be done by the use of digital signatures which
are verified by a certification authority. Therefore, signature requirement
and choice of law will be analysed in the next part of this discussion.

3. Digital Signature

Digital Signatures in Malaysia are governed by the Digital Signature Act

1997. The Act came into force in October 1998 and it incorporates two
amendments that were made in 2002 and 2006. This act mainly provides
for the licensing and regulation of Certification Authorities. Certification
Authorities issue Digital Signatures and will certify the identity (within
certain limits) of a signor by issuing a certificate (Section 2 of Digital
Signature Act). The Act also makes a digital signature as legally valid and
enforceable as a traditional or manual signature.
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Digital signature uses special unintelligible code messages that only the
contracting parties can use. It uses cryptographic messages that generate
two different types of keys. The first type, the public key, is usually posted
on an organisations web page for anyone to access. The second key, called
a private key, verifies the digital signature and returns the message into its
original form. The documents recipient must have the corresponding
public key in order to verify that the digital signature is the signer s. For a
digital signature to be legally recognised by law, a digital signature has to
provide a means to verify the integrity of messages sent; verify the source
of an electronic message because only a senders public key will decrypt a
digital signature encrypted with the senders private key; prevent denial by
the sender once the authenticity and integrity of a communication ha s been
established; and satisfy the requirements of a signature under the Statute.
Writing requirement is not specified by the Contracts Act, however Article
6 of the Model Law provides that the writing requirement is met by the
data message if the information contained therein is accessible so as to be
usable for subsequent reference and this shall satisfy the writing
requirement.

4. Choice of Law

To ensure enforceability of a contract, e-consumers of one jurisdiction may

be subjected to law from another jurisdiction. This is due to the fact that
e-commerce is in a global sphere, therefore jurisdiction or a forum
selection clause is important to limit liability outside of ones country. In
situations where the jurisdiction was not chosen, should any issue arise,
the question to determine proper the legal system and court will become an
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issue. Even where the parties did choose a particular legal system and a
court to deal with any issues adequately, not everything may turn out as
they want, since limitation applies to both choice of law and jurisdictional
principles. Various countries work with legal provisions that have an extra-
territorial effect as a means to frustrate attempts by contracting parties to
circumvent the protection afforded by these provisions. Therefore it is
imperative for the parties to choose the jurisdiction or law that will be
applicable to both the contracting parties.

5. Construction of Web Agreement

The acceptance of an offer would create an agreement. The growing

practise of e-commerce is that usually a seller does not make the offer,
which would be accepted by the consumers acceptance, and this would
merely create an invitation to treat. How an e-contract is formed is very
important to avoid unnecessary lawsuits for failure of the web owner to
deliver as can be seen in kodak.com and Re Argos (Bates, 2002). This
practise was adopted by www.amazon.com looking at their terms and
conditions. The purpose of such provision is to protect a seller from being
bound by an agreement that is finalised outside its control. It guarantees
that failure to honour the sale transaction would not adversely affect the
seller and both parties are informed of the actual time of the conclusion of
the contract. A contract will then be only formed when there is an assent
to the offer signified by the mode required by the terms of the offer.

6. Conclusion and Recommendation

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The method of forming contracts may still occur through offer and
acceptance with the exchange of valid consideration. However, the
formation of an e-contract necessities an additional rule, such as digital
signature and perhaps the assistance of a few special rules, such as a
reversal of the mailbox rule and a clear line between an offer and an
invitation to treat. The issues of formation of an e-contract are not
properly dealt with by our existing legislations or UN Model Law.
Uncertainty continues to exist as to when an e-contract is formed, or
whether an advertisement on a website constitutes an offer or an invitation
to treat. On the whole, since online contracting is becoming commonplace,
current legislation needs to be amended to keep up with the technology as
the protection of e-consumers has to be properly addressed for an expedient
transaction and to increase confidence and trust in online business
dealings. Thus, the notion of having a comprehensive law on e-commerce
is paramount as it will ultimately benefit the e-consumers.

____________________________________________________________

* Faculty of Business and Management, Asia Pacific University of

Technology and Innovation (APU), Technology Park Malaysia, Bukit Jalil ,
57000, Kuala Lumpur, Malaysia. Corresponding Author: aneda@apu.
edu.my

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Legislations:

Contracts Act 1950 (Act 136)

Digital Signature Act 1997 (Act 562)

E-Commerce Act 2006 (Act 658)

EU Council Directive on E-Commerce (87/102/EC)

UNCITRAL Model Law on E-Commerce