This segment specially caters to the average layperson, tackling pertinent issues within today's society, and offering comprehensive legal information in simple, concise language.
Written by Bo Chi Chian, a first-year law student of the Faculty of Law, University of Malaya.
Edited by Toh Zhee Qi.
Contracts are often deemed as sophisticated documents involving complicated commercial transactions. The public holds a preconceived notion that the formation of contracts cannot be easily explained as several legal principles are involved. In fact, a contract is a product of the ‘meeting of the minds’ between the parties and have long been part and parcel of our daily lives.
Thousand-dollar bills, hundred acres of land, and spectacular buildings with splendid designs — for most people, these items pop into mind when they think of the word ‘contracts’. However, the use of contracts extends far beyond these luxurious dealings. Contracts are everywhere. Here are three examples to illustrate contracts in everyday life. You saunter by a street and an advertisement catches your eye — it pledges to pay one thousand dollars to customers who fall sick after consuming their medical products. Convinced by the guarantee, you purchase the products and follow the prescribed instructions. Next, you grab a parking ticket from the automatic ticket machine before leaving your vehicle at the car park. Lastly, you look into the eyes of your most beloved who gets down on one knee, and without hesitation, you say, ‘Yes, I do.’ All these acts result in ‘you’ entering into a contract with another party. The pertinent questions which arise are: What is a contract? Can ‘contracts’ be explained in a simple, direct, and one-sentence way? The doctrine of consensus ad idem may be the answer to these questions. This article seeks to illustrate ‘meeting of the minds’ in a contract through various examples.
Consensus ad idem, or meeting of the minds, is a common law concept that requires both parties, entering into a contract, to have a common intention to accept and comply with the terms outlined in the contract. It has been adopted into Malaysian law, as seen in Section 13 of the Contracts Act 1950. The section provides that parties are said to consent to something ‘when they agree upon the same thing in the same sense.’ In other words, the meeting of minds takes place when both contracting parties fully understand and freely consent to undertake all contractual obligations upon entering a contract.
The simplest form of consensus ad idem can be shown through the formation of an agreement between two parties. An agreement is made up of two elements, namely offer and acceptance. Section 2(a) of the Contracts Act 1950 provides that ‘when one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal.’ Hence, an offer is a promise made by a party to do or refrain from doing something in exchange for specific performances from the other party. Once the other party accepts the offer, an agreement is formed. Although other elements have to be fulfilled before a valid contract can be concluded, the doctrine of consensus ad idem serves as the basis which leverages the existence of a contract.
III. BARRIERS TO ‘MEETING OF THE MINDS’
A. Unsound Mind
Only a person of sound mind is competent to enter into a contract. The test of the soundness of mind is laid down in Section 12 of the Contracts Act 1950. The section suggests that a person is of sound mind if he or she is capable of understanding the contract and forming a rational judgement upon contractual interests when entering a contract. Unsoundness of mind does not necessarily imply mental disability or lunacy; it may even refer to the mental state of a person signing a contract while being drunk or delirious. If a person capable of comprehending and analysing the terms of the contract under normal circumstances enters into a contract under a state of drunkenness, the person is said to be incompetent to contract. In such circumstances, the meeting of minds cannot be achieved as the drunken party is unaware of his or her actions and the consequences. In court, the burden of proof falls on the person claiming to have entered into a contract when he was ‘unsound’.
However, practically, it is difficult to escape contractual obligations relying on ‘unsound mind’. A contract cannot be simply avoided because of such allegations; it will affect the fairness of a contractual relationship. Imperial Loan Company Ltd v Stone further narrowed the applicability of unsoundness of mind in determining the voidability of a contract. The court held that when an allegation of unsoundness of mind surfaces, the contract remains binding upon the parties unless it can be proven that the other party was aware of the ‘unsoundness’ during the formation of the contract. Such a decision meant that if a person enters into a contract under a state of delirium but appears to be sane before the other party, the contract remains legally effective upon both parties. This also means that if a mentally-ill person enters into an agreement during lucid intervals, the contract is binding unless the illness was known to the other party during the formation of the contract.
This principle laid down in Imperial was later applied in Malaysian cases. In brief, the doctrine of consensus ad idem is not solely limited to the common intention of contracting parties to accept and comply with terms stipulated in a contract. It also includes the common consensus that both parties are capable of understanding the contract and making rational decisions.
B. Fraud and Misrepresentation
Fraud and misrepresentation hinder the meeting of the minds between contracting parties at different degrees, depending on their seriousness. Generally, fraud is defined as an act to deceive by falsely representing inaccurate information. In other words, if a person presents a piece of false information to the other person to induce him into a contract, he is committing fraud. However, fraud has a broader meaning under Section 17 of the Contracts Act 1950. It includes fraudulent misrepresentation, active concealment of facts, a promise made without the intention of performing and any act or omission declared to be fraudulent by the law.
The concept of misrepresentation is slightly more complex than fraud. It includes fraudulent misrepresentation, negligent misrepresentation, and innocent misrepresentation. Fraudulent misrepresentation refers to a false statement made by a person who is aware of the inaccuracy of the statement, while innocent misrepresentation refers to a false statement made by a person who honestly believes it to be true. The test to differentiate both is to ascertain whether the person honestly believes that the false statement he made is true. This was laid down in the English case of Baron Akerheilm v Rolf De Marc, and later upheld in the recent Malaysian case of ALW Carworkshop Sdn Bhd v AXA Affin General Insurance Bhd.
However, be it fraudulent or innocent, both misrepresentations will render a contract voidable at the option of the innocent party. On a side note, if the contract is made voidable, the deceived party can choose to call off the contract or to continue with it. In circumstances where fraud or misrepresentation takes place, the innocent party will be deprived of the right to consider contractual terms with full exposure to the facts. Hence, it is impossible for the innocent party to fully understand and freely consent to undertake all contractual obligations upon entering the contract. There will never be a meeting of minds between the contracting parties as the contract entered into was built on misunderstandings, omissions to essential facts or false representation of terms.
The main difference between both misrepresentations is that fraudulent misrepresentation may result in tortious claims and contractual damages. Innocent misrepresentation only gives the innocent party a right to rescind the contract but not to claim damages, as the sincere intention of the defaulting party is taken into consideration. Apart from claiming damages, the innocent party may insist on being put into a position in which both parties would have been if the representation made were true. This will warrant the continuance of the contract. Here, the meeting of minds will be achieved when innocent parties elect to affirm the contract after being fully exposed to the truth and make their decisions based on their free will.
On the other hand, negligent misrepresentation refers to the breach of duty by a person who does not have an intention to deceive but obtains certain benefits from the breach. Though the parties at fault honestly believed that the statement said was true, they are still liable to tortious claims (tort of negligence) due to the duty imposed upon them.
Linguistically, mistake carries the meaning of inaccuracy, misguided judgement or any other incorrect figures. Under common law, mistakes are classified into common mistake, mutual mistake and unilateral mistake. Both common mistake and mutual mistake refer to a situation whereby contracting parties are mistaken about certain facts regarding their agreement.
A. Common Mistake
Common mistake occurs when both parties are mistaken about the same facts or underlying conditions to the agreement. As illustrated in Ng Chun Lin & Anor v Foo Lai Sin & Anor, A wanted to buy shop No. 9 from B, but B claimed that he would only sell shop No. 9 to A if C refused to buy the shop. After negotiations, A decided to buy shop No. 11 from B whilst B would sell shop No. 9 to C. However, the conveyancing process erred — shop No. 9 was registered to A while shop No. 11 was registered to C. In this case, the intentions of A and B are ad idem as they have agreed upon the same thing in the same sense. However, the agreement was rendered void due to mutual mistake by both parties. Examples of common mistake include: the conveyance of a mortgaged property by the mortgagee which was executed under a forged power of the attorney unknown to the mortgagee; transference of an additional piece of land which was not intended to be transferred and accepted by both parties; and a contractual clause which failed in addressing the real intention of the contracting parties.
When both parties made a mistake on the essential facts, the agreement is said to be void. Nevertheless, the parties may resort to rectification under Section 30 of the Specific Relief Act 1950. Rectification is a process where the court orders for the rewording of the agreement to suit the original intention of the contracting parties. This way, consensus ad idem can still be achieved by both parties. However, for rectification to be granted by the court, the contracting parties must have an antecedent agreement; the parties can only rectify the agreement to conform with terms initially agreed upon during the formation of the contract.
B. Mutual Mistake
Mutual mistake refers to a condition in which both contracting parties believe that they are contracting to something different from what has been contracted. For instance, A offers to sell his bike, whereas B believes that A is offering to sell his motorbike. In this situation, there is no consensus ad idem between the contracting parties as they are on a different track of mind.
The agreement is said to be void if there is a mutual mistake within the agreement. The parties may resort to rectification, but the court will ascertain whether there was a common intention between the parties. The test adopted by the court is objective; the court will enquire into the intention of both parties to determine whether there is an antecedent agreement between the parties. Subjective allegations by the parties will not be taken into consideration. Nevertheless, rectification is arguably difficult to attain between parties who committed a mutual mistake as the parties originally intended to achieve different purposes.
C. Unilateral Mistake
Unilateral mistake refers to a situation where only one of the contracting parties has mistaken beliefs towards essential facts of the agreement. For instance, A agrees to purchase a painting from B, thinking that the painting is a masterpiece of C. B agrees to sell the painting to A, knowing that the painting was actually created by D, but unaware of the fact that A mistook the painting to be a work of C’s. A unilateral mistake does not render an agreement void unless the non-mistaken party manipulates the mistake to gain an advantage while being fully aware of it.
Be that as it may, rectification is not an option when there is a unilateral mistake in a contract. Doing so would be unfair as the non-mistaken party would have to bear contractual consequences due to the mistake of the other party. In such circumstances, the contract is still legally binding on both parties though there has not been a meeting of the minds; this is to ensure fairness within the contractual relationship. Otherwise, a unilateral mistake might be used as an excuse by the mistaken party to avoid the contract.
IV. SPOTTING CONSENSUS AD IDEM IN DAMAGES
Damages is a legal remedy to compensate the innocent party when there is a breach of contract. It preserves the value of consensus ad idem as it draws up restrictions on the consequences of the breach. Damages are usually restitutionary in nature. It aims to restore innocent parties to a position in which they would have been if there was no breach. Besides, damages can also be a form of punishment if the conduct of the defaulting party was oppressive, arbitrary or when the profit gained through unlawful conduct exceeded the compensation payable to the innocent party.
A. Remoteness of Damage
Remoteness of damage is a standard used by courts to assess the amount of compensation that should be granted to the innocent party. The assessment of damages is based on ‘imputed knowledge’ and ‘actual knowledge’. Imputed knowledge is the first limb of Section 74 of the Contracts Act 1950, where damages are awarded for losses within the contemplation of both parties as to the probable result from the breach. To claim damages under ‘imputed knowledge’, the party must prove that the loss sustained is a predictable consequence following a breach of the contract. For instance, the expenditure incurred by monthly rentals due to late delivery of vacant houses in a sale and purchase agreement, loss of profits due to defective goods supplied, and loss of profits due to delayed delivery of apparatus.
On the other hand, actual knowledge refers to the second limb of Section 74, where damages are only awarded to compensate losses incurred by special circumstances which have been readily communicated at the time of contract. This means that both parties are of the knowledge that should there be a breach of contract, certain exceptional losses are likely to result. Clearly, the party must inform the other party on probable losses if a breach were to occur as these losses are not direct and foreseeable from the breach. For instance, A intends to resell purchased goods from B and sell it to C on a particular date. Unfortunately, B failed to deliver goods on time to A, causing A to lose his sale to C. Since A did not communicate such probable loss to B, the court refused to grant damages for the loss of sub-sales.
Thus, it can be observed that the standard applied in assessing the remoteness of damage is largely based on the doctrine of consensus ad idem. Damages are only granted for losses within the contemplation of both parties; in other words, foreseeable losses. A foreseeable loss should be reasonably foreseen by the defaulting party.
B. Liquidated Damages
Liquidated damages are sums agreed by the contracting parties to be payable upon a breach of contract by the defaulting party. The principles governing liquidated damages in the Contracts Act 1950 are somewhat different from those laid down by the common law. Under Section 75, if there is an agreed sum stipulated in the contract payable upon the breach by one party, the court will grant an amount to be paid to the innocent party by the defaulting party. However, note that the payable amount will not exceed the stipulated sum in the contract. This means that courts do not differentiate between liquidated damages and penalty; instead, they will assess a reasonable compensation payable to the innocent party based on the stipulated sum. Under common law, there is also no difference between liquidated damages and penalty. As a result, when a breach occurred, the court would not consider the agreed sum stated. Instead, the court will assess a reasonable sum to be compensated to the innocent party based on actual loss suffered and proven.
Such an approach was later adopted in the Malaysian case of Selva Kumar a/l Murugiah v Thiagarajah a/l Reynasamy. The Federal Court held that the award of damages to the innocent party should be based on actual damage proven by the party regardless of the agreed sum stated in the contract. This was backed up by Section 75 of Contracts Act 1950 which provides that when there is a breach of contract, the innocent party will be awarded a sum of compensation from the defaulting party not exceeding the stipulated sum in the contract regardless of whether the actual loss is proven. Clearly, consensus ad idem matters little here — the courts will not look at the sum mutually agreed between the parties.
Recently, there have been developments in the principles governing the assessment of liquidated damages, as shown in the English case of Cavendish Square Holding BV v Talal El Makdessi and the Malaysian case of Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd. The role of the ‘meeting of the minds’ became prominent. In Cavendish Square, the court adopted the ‘legitimate commercial interest’ test to determine whether the agreed sum amounted to penalties or liquidated damages. The court evaluated the proportionality of the sum provided by the damages clause to the interest identified. This approach successfully reinstated the doctrine of consensus ad idem within a contractual relationship. The contracting parties shall enjoy contractual freedom where they comply with terms previously agreed. The interference by the court shall only be necessary when the agreed sum is extravagantly high.
Similarly, in Cubic Electronics, the court allowed reasonable compensation to be awarded under Section 75 irrespective of whether the actual loss was proven. Concepts of legitimate interest and proportionality were also applied to determine whether the agreed sum is ‘reasonable compensation’. This shows that the court placed importance on agreed-upon clauses, which include liquidated damages clauses. The court shall only interfere where there are compelling reasons. Again, we observe the role of the meeting of minds between the parties.
Now, let us retrace our steps and look at the examples in the introduction; can you spot consensus ad idem? In the first example, the meeting of minds took place when you and the advertiser came to the consensus that if you were to fall sick after consuming the product, the advertiser would pay the promised amount to you. Next, the ticket from the automatic machine constituted an offer, and when you picked the ticket from the machine — you accepted the offer. An agreement was formed between you and the car park owner. There is a meeting of the minds between you and the car park owner; you can now leave your car in the car park in exchange for a parking fee. Lastly, when you accepted the proposal by your most beloved, an agreement to marry was formed between you and your fiancé. The meeting of the minds is even clearer — you are going to marry each other!
Undeniably, there are other elements to be satisfied before an agreement can be formally declared a contract, such as consideration, intention to create legal relations, and capacity. However, meeting of the minds is still the most fundamental requirement which underlines the existence of a contract. Without consensus ad idem, a contract is likely to be held voidable or void, as parties to the contract did not wholly accept what was agreed upon. As to the assessment of damages, recent legal developments granted more contractual freedom to the parties following the reinstatement of the legal effect of liquidated damages.
Last but not least, referring to the rudimentary question to be answered in the beginning, can the word ‘contracts’ be explained in a one-sentence manner? The author believes that ‘meeting of the minds’ might be the answer.
Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect the views of the University of Malaya Law Review, and the institution it is affiliated with.
 Carlill v Carbolic Smoke Ball Co  2 QB 484;  1 QB 256.
 Thornton v Shoe Lane Parking Co Ltd  2 QB 163.
 Nik Ahmad Kamal Nik Mahmod. (2017). An Analysis of Consensus Ad Idem: The Malaysian Contract Law and Shari’ah Perspective. Pertanika Journals, 25, 73, 73. Retrieved from <http://www.pertanika.upm.edu.my/Pertanika%20PAPERS/JSSH%20Vol.%2025%20(S)%20Oct.%202017/JSSH(S)-0537-2017.pdf>. Site accessed 20 Sept 2020.
 Contracts Act 1950 (Act 136) (Malaysia) s 13.
 See footnote 4 above.
 See footnote 4 above, s 2(a).
 Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216.
 See footnote 4 above, s 11.
 See footnote 4 above, s 12.
 See footnote 4 above, s 12(1).
 See footnote 4 above, s 12(3).
 Imperial Loan Company Ltd v Stone  1 QB 599.
 See footnote 14 above.
 Chemsource (M) Sdn Bhd v Udanis bin Mohammad Nor  6 MLJ 273.
 Asia Commercial Finance (M) Bhd v Yap Bee Lee  1 CLJ 271; see also Che Som Binte Yip Alias Mrs Som Ismail & 2 Ors v Maha Private Limited & 2 Ors  2 CLJ 893.
 Cambridge Dictionary. (2020). Fraud. Cambridge Dictionary. Retrieved from <https://dictionary.cambridge.org/dictionary/english/fraud>. Site accessed on 20 Sept 2020.
 See footnote 4 above, s 17.
 Abdul Razak bin Datuk Abu Samah v Shah Alam Properties Sdn Bhd & Anor Appeal  2 MLJ 500.
 See footnote 4 above, s 17(a).
 See footnote 4 above, s 18(a).
 Baron Akerheilm v Rolf De Marc  AC 789 PC.
 ALW Carworkshop Sdn Bhd v AXA Affin General Insurance Bhd  4 MLJ 561.
 See footnote 4 above, s 19(1).
 See footnote 4 above, s 14.
 See footnote 20 above.
 See footnote 4 above, s 19(2).
 Farnworth Finance Facilities v Attryde  2 All ER 774.
 Lexico. (2020). Mistake. Lexico. Retrieved from <https://www.lexico.com/definition/mistake>. Site accessed on 20 Sept 2020.
 A Revisit to the Doctrine of Mistake in the Formation of Contract under Common Law and Shariah Law  1 ShLR i.
 Ng Chun Lin & Anor v Foo Lai Sin & Anor  6 MLJ 81.
 Robin & Anor v Goh Boon Choo  2 MLJ 215.
 Oh Hiam & Ors v Tham Kong  1 MLJ 65.
 Menta Construction Sdn Bhd v Lestari Puchong Sdn Bhd  6 MLJ 633.
 See footnote 4 above, s 21.
 Specific Relief Act 1950 (Act 137 Rev. 1974) (Malaysia).
 Southwind Development Sdn Bhd v Hass Plantations Sdn Bhd  5 MLJ 85.
 See footnote 32 above.
 See footnote 32 above.
 See footnote 36 above.
 Leaf v International Galleries  2 KB 86.
 See footnote 32 above.
 Rookes v Barnard  AC 1129.
 Victorian Laundry (Windsor Ltd) v Newman Industries Ltd  2 KB 528.
 See footnote 4 above, s 74(1).
 Bee Chuan Rubber Factory Sdn Bhd v Loo Sam Moi  2 MLJ 14.
 Tham Cheow Toh v Associated Metal Smelters Ltd  1 MLJ 271.
 See footnote 49 above.
 See footnote 4 above, s 74(1).
 Ekobina (M) Sdn Bhd v Mensa Mercantile (Far East) Pte Ltd  1 MLJ 553.
 See footnote 4 above, s 75.
 SS Maniam v State of Perak  MLJ 75.
 Selva Kumar a/l Murugiah v Thiagarajah a/l Reynasamy  1 MLJ 817.
 See footnote 4 above, s 75.
 Cavendish Square Holding BV v Talal El Makdessi  UKSC 67.
 Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd  6 MLJ 15.