1. LAW OF CONTRACT
CHAPTER 4

2. DEFINITION
 Legally
enforceable or binding agreement
made between at least two parties.
– Agreements which are not legally enforceable are
not contracts.
– ‘Legally enforceable’ means that disputes relating to
the agreement may be referred to a court for
settlement.

3. ESSENTIAL OF A CONTRACT
 Intentionto create a legal relationship
 Offer and acceptance
 Consent
 Capacity
 Consideration
 Legality

4. OFFER AND ACCEPTANCE
 A contract is formed when both an offer and an acceptance are
capable of being inferred from the circumstances.
 An offer is a firm proposition put by one person (the offeror) to
another person (the offeree) coupled with an intention that it shall
become binding and it must be firm and capable of acceptance.
 Acceptance is the unconditional assent by one party to the terms
of the offer.
 Offer and acceptance must be voluntary and may be made
expressly in writing or orally, or may be implied from conduct.

5. OFFER AND ACCEPTANCE
 When purchasing insurance:
– When individuals completes an application form it acts as an
offer to purchase insurance
– In general insurance, a person usually makes an offer when
he proposes for insurance (submit a completed proposal to
insurer), the insurer concerned is deemed to accept the offer if
he agrees to provide the proposed insurance.
– Insurer may not accept the proposal but may offer to provide
insurance on a different term. This situation constitutes to a
counter-offer from the insurer.

6. CONSIDERATION
 The fair exchange of something of value to
include the other party to enter into a legally
binding contract.
 To be legally sufficient to support an
enforceable contract.
 In other words, the benefit which one party
gives to another or burden which he
undertakes is termed as consideration

7. CONSIDERATION
 In insurance contracts, the consideration of the
insured is “to pay or promise to pay the
premium”.
 This rule is not applicable for motor insurance
as this policy undertakes “cash before cover”
 The insurer’s consideration is the “promise to
pay if a covered loss occurs”

8. INTENTION TO CREATE A LEGAL
RELATIONSHIP
 The parties must intend their agreement to
have legal consequence.
 It is essential that parties to an agreement
intend to be legally bound otherwise there
cannot be a contract between them.
 Hence the agreement must legally bind.

9. CONSENT
 Refers to the requirement whereby all parties
to a contract must agree to exactly the same
terms.
 There must be “consensus ad idem” or
meeting of minds.

10. LEGAL CAPACITY TO CONTRACT
 Capacity is the legal ability for a party to enter into a binding
contract.
 In general law, the capacity to enter into a contract is upon
majority age or above 18 years old.
 In insurance, under Section 153, Insurance Act 1996 states:
– 0 – 10 – cannot enter into an insurance contract
– 10-16 – may enter into an insurance contract with written
consent of his/her parents/guardian
– 16 and above – may enter into insurance contract without
parental written consent
– 18 and above – can enter into other contracts as well.

11. LEGALITY
 Refers to the requirements whereby the
subject matter or transaction contracted for
must not violate any laws or public policy.
 A contract should be created for a legal
purpose.