2.

CONTRACT LAW
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Introduction Making a contract Capacity of parties Terms of the contract Exemption/exclusion clauses Vitiating factors Discharge of contract Remedies

2.1 Introduction
Model: • 2 parties : may be extended to 3 parties…etc. • Relationship of the parties: rights & duties • Context : different needs & environment requires different adaptation of the model • Enforcement of rights • Negotiation – different stages

2.1 Introduction

A

Relationship

B

2.1 Introduction

A

Relationship

B

2.1 Introduction
Negotiation
no

Offer
Acceptance

Contract

2.1 Introduction
Definition of “contract”: A contract is an agreement between 2 or more parties which is enforceable at law.

2.1 Introduction
Format: May be in writing, by word of mouth (orally) by conduct, or by any combination of such.

2.1 Introduction
Contract law = foundation of all commercial activities

Wide range of contracts: e.g. simple consumer contracts to construction contracts, sale and purchase agreements in conveyancing transactions

2.1 Introduction
General principle: Freedom of contract – everyone is free to enter into any contract

2.1 Introduction
Exceptions: (1) Those against public morality (2) Those against national security (3) Those against public interests (4) Those regulated by statutes for protection of consumers (e.g. Sale of Goods Ordinance, Control of Exemption Clauses Ordinance) and employees (e.g. Employment Ordinance)

2.1 Introduction
(5) Those provide for regulating certain relationships – Landlord and Tenants (Consolidation) Ordinance Those require specific formalities - Conveyancing transactions (e.g. Conveyancing and Properties Ordinance) (6) Domestic agreements with no intention to create legal relationships – e.g. pre-marital arrangements, separation agreements

2.2 Making a Contract
2.2.1Unilateral and Bilateral Contracts 2.2.2Essential elements of a contract

2.2.1

Unilateral and Bilateral Contracts

Unilateral contract – the performance remains outstanding on 1 party only (i.e. the offeror), while the other party (i.e. the offeree/acceptor) having already performed what is required of it.

2.2.1

Unilateral and Bilateral Contracts

Example: Ad Anyone who found my puppy, Buggie which has a name tag on its collar and return it to me shall be rewarded HK$100. Mr A Mr B found the puppy and returned it to Mr A. Mr A refused to pay Mr B HK$100 but only agreeing to pay him HK$50. Can B sue A ? If so, for how much ?

2.2.1
Example:

Unilateral and Bilateral Contracts

Anyone who found my puppy, Buggie which has a name tag on its collar and return it to me shall be rewarded. Mr A Mr B found the puppy and returned it to Mr A. Mr A is only willing to pay $1 to Mr B. Can Mr B sue him ? If so, for how much ?

2.2.1
Example:

Unilateral and Bilateral Contracts

Anyone who found my puppy, Buggie which has a name tag on its collar, please return him to me. Mr A Mr B found the puppy and returned it to Mr A. Mr A thanked Mr B but refusing to pay him a single cent. Can Mr B sue him ? If so, for how much ?

2.2.1
Example:

Unilateral and Bilateral Contracts

Anyone who jumps into Victoria Harbour off Queen’s Pier and swims to Tsimshatsui Ferry Pier shall be rewarded with HK$100,000. Mr A Mr Tung did so. Mr A refused to pay. Can Mr Tung sue Mr A ? If so, for how much ? Would it make any difference if Mr Tung did not reach Tsimshatsui Ferry Pier ?

2.2.1

Unilateral and Bilateral Contracts

Jump into Victoria Harbour. I will give you HK$100. Jump into Victoria Harbour and I will give you HK$100.

Is there any difference between the 2 ads ?

2.2.2 Essential
1. 2. 3. 4. 5.

elements of a contract

Offer Acceptance Consideration Privity Intention to create legal relationship

When a definite offer made by 1 party is unconditionally accepted by another party, an agreement comes into existence.

Offer (def)
An offer – a definite promise or proposal made by the offeror to the offeree (NB: not necessarily the performer) with the intention to be bound by such promise or proposal without further negotiation. e.g. “I give you $100 for [your] doing some work.” e.g. “I give you $100 for [your] not suing me.“ e.g. “I will not sue you if you repay me $100.”

Offer (def)
Offer must be distinguish from “invitation to offer”/”invitation to treat” Starting point: Is there a contract/agreement ? (check the definition of a contact/agreement) - Ask: Is there any acceptance (check the definition of acceptance) - The step before acceptance is an offer. - The step before an offer is invitation to offer.

Acceptance (def)
Acceptance – comes into existence after the offeree unconditionally accepts the offer. When 1 party introduces variations/conditions to the terms of the latest proposal, there is no acceptance (i.e. conditional acceptance is not acceptance). Such variations/conditions amount to a counter-proposal/offer. No agreement.

Consideration (def)
• Something of value in the eyes of the law (need not be of market value). Hence, the saying :”Consideration must be sufficient but not adequate.” • Price to be paid for the promise • May consists of money, goods, promise, suffering some detriment (e.g. forbearance to sue) • Consideration must flow from the proposee in respect of any promise.

Privity (def)
General rule: A person who is not a party to a contract cannot sue upon it (i.e. right) or be sued upon it (i.e.duty). Exceptions: 1. Statutory exceptions: Married Person Status Ordinance Cap 182 2. Contract made by an agent for his principal 3. Rights/Benefits assigned/transferred (e.g. Deed of Mutual Covenants)

Intention to create legal relationship (def)
Both parties must intend that the agreement is to be binding on them (i.e. they have agreed to bear the duties under the contract). • Objective test : reasonable man’s test

Offer (details)
Invitation to treat/offer - The proposal before the actual “offer” e.g. goods catalogue, mail order catalogue, advertisements in newspaper, display of goods in the shelves of a supermarket Fisher v Bell [1961] 1 QB 394 : Restriction of Offensive Weapons Act 1959 (UK) – “offer for sale” offensive weapons is illegal – self-service window displaying a flick knife with a price tag – an invitation to treat

Offer (details)
Fisher v Bell was followed in HKSAR v Wan Hon Sik [2001] 3 HKLRD 283 – display of pirated videos discs was an invitation to treat Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 – Display of drugs invitation

Offer (details)
Tenders: Invitation for tenders = invitation to treat A bidder = an offeror See City Polytechnic v Blue Cross [1995] 2 HKLR 103 – CP through an insurance broker invited tenders from insurance companies to cover its employees’ medical & life insurance

Offer (details)
An advertisement may sometimes be an offer and sometimes be an invitation to treat – the crucial point – definite intention to be bound Carlill v Carbolic Smoke Ball [1893] 1 QB 256 Partridge v Crittenden [1968] 2 All ER 421

Offer (details)
Auction sales – ads to sell goods by auctions = invitation to offer bidder = offeror A person incurring expenses in going to the place of auction cannot sue the auctioneer if the auction were not held – because – auctioneer is not bound to hold the auction (Harris v Nickerson (1872-73) LR 8 QB 286)

Offer (details)
Offer must be communicated. See R v Clarke ( 1927) 40 CLR 227 – Western Australian government offered a reward for capturing some murderers – Clarke was an accomplice, saw the ad but never addressed his mind to it and informed the government – held: no reward to Clark

Offer (details)
Termination of offer 1. By acceptance 2. By rejection – a counter-offer is a rejection ; a request for information is not a rejection 3. By revocation 4. By lapse of reasonable time 5. By death of the offeror ? Of the offeree ? After termination, the offer is no longer a valid offer and cannot be accepted.

Offer (details)
Revocation of offer General Rule: an offer can be revoked at any time before acceptance (Routledge v Grant (1828) 130 ER 920) Exception: when the offeror undertakes a contractual obligation or the offeror “receives consideration” to keep the offer open

Offer (details)
Revocation of offer General Rule: Revocation of an offer becomes binding only when it has come to the knowledge of the offeree Exceptions: (1) Letter of revocation sent to a commercial organisation (Eaglebill Ltd v J Needham Builders Ltd [1973] AC 992, 1011 (2) Offer to the public – revocation takes place when the offeror had taken reasonable steps to bring it to the notice of the public

Offer (details)
Knowledge of revocation may be actual or implied Dickinson v Dodds (1875-76) LR 2 Ch D 463: Date 1: D gave P a written offer to sell the house and that the offer will open until 9:00 am on Date 3. Date 2: D sold the house to a 3/p and a 4/p informed P of the sale. Date 3: P wrote to P “accepting his offer” before 9:00 am. Held: 1. P’s acceptance was too late – he knew the property had been sold. 2. D had effectively withdrawn his offer

Offer (details)
Lapse of offer An offer lapses if it is not accepted within: (1) A stipulated time; or (2) Reasonable time – a question of fact depending on the circumstances of the case (see S.90)

Offer (details)
Death of a party (1) Death of the offeror : when the offeree accepts the offer unaware of the offeror’s death, and the deceased’s contractual obligations can still be performed by his estate, a valid contract exists. If the offeree knows of the offeror’s death, the offer cannot be accepted. (2) Death of the offeree: depends on the intention of the parties. If the offeree dies after accepting the offer, check the initial proposal.

Acceptance
Acceptance – comes into existence upon the offeree unconditionally accepts the offer e.g. The offeree says, “OK, I accept.” Contrast with e.g. The offeree says, “I accept subject to conditions….” e.g. The offeree says, “I accept but…..”

Acceptance
Cross offers

I promise to do X
Party A I promise to do Y
There are 2 independent offers: Tinn v Hoffman & Co (1873) 29 LT 271: Crossing in post – ignorance of the other’s offer – no contract

Party B

Acceptance
Communication of acceptance
General rule: Acceptance must be communicated Exceptions: 1. Offeror waives the necessity to communicate acceptance 2. Certain conditions (like conduct of the offeree) can be deemed to be acceptance (see Carlill) 3. Offeror may be estopped to deny his failure to receive acceptance because of his own conduct (e.g. he did not read the message) 4. Acceptance received by the offeror’s agent 5. Postal acceptance rule: acceptance by posting (see later notes)

Acceptance
Silence Silence is no acceptance. Felthouse v
Bindley (1862) 11 DBNS 869 : Uncle said, “I heard no more from my nephew, I shall consider the horse is mine.”Horse sold by mistake. Nephew never communicated acceptance to his uncle. Held: No acceptance. Contrast: Brodgen v Metropolitan Railway Co (1877) 2 App Cas 666: P sent a draft contract to D offering to sell coal. D did not expressly accept the offer but used the coal when they were supplied. Held: Implied acceptance.

Acceptance
Acceptance must be communicated by the offeree or his authorised agent. Power v Lee (1908) 99 LT 284: P applied to be a headmaster. Management board agreed to accept his offer but the decision was communicated by a member who was not authorised. Held: No acceptance.

Acceptance
Methods of acceptance: 1. When method is prescribed by the offer, it must be accepted by the prescribed method. 2. When methods are prescribed by the offer, acceptance by any such method. 3. When no method is prescribed by the offer, acceptance by an equally or more efficacious or faster method is OK. Tin v Hoffman: “Reply by return of post” not “reply by return of post only”.

Acceptance
When parties are not face to face (1) By post and telegram – Postal Rule (2) Other instantaneous means of communication

Acceptance: Postal Rule
Conditions of application: (1) Where post is the prescribed method of acceptance; or (2) It is reasonable to use post to send an acceptance; Then, acceptance is deemed to be completed when the acceptance, properly stamped and addressed letter of acceptance is posted (Adams v Lindsell (1818) 1 B & Ald 681: Date 1: D offered to sell goods to P Date 2: letter reached P and P accepted by post Date 3: D sold the goods to a 3/p Date 4: D received the acceptance Held: accptance) The receipt of acceptance by D is irrelevant.

Acceptance: Postal Rule
Also applies to telegrams (Cowan v O’Connor (1888) 20 QBD 640) Not applied: • When offeror requires actual receipt of acceptance by him(Holwell Securites Ltd v Hughes [1974] 1 WLR 155 • When it is unreasonable to accept by post; • When offer was made by email or fax; • When the transaction involves large sums of money; • When other methods are contemplated. *Intention of the parties – most crucial

Acceptance: Postal Rule
Postal rule does not apply to a revocation by post – Byrne v Van Tienhoven (1880) 5 CPD 344: The offeree cannot be bound by a revocation when he is not aware of at the moment of acceptance, I.e. offeror sets up the rules,he is bound his own rules.

Acceptance: instantaneous communications
Contracts concluded by instantaneous means of communication like email, telex, telephone, fax, etc. – acceptance must be received by the offeror Entores Ltd v Miles Far East Corporation [1955] 2 QB 327: P in London sent a telex to D in Amsterdam offering to buy goods from D. D sent a telex in return to P accepting the offer. Held: acceptance must be received. HK : Contracts by email is governed by Electronic Transactions Ordinance (Cap. 553 Laws of Hong Kong).

Consideration
Consideration = price of the offer = may be service, goods, another promise Consideration must be sufficient but not adequate = of some value but need not be of market value

Consideration
Consideration must be sufficient but not adequate: Chappell & Co. Ltd v Nestle & Co. Ltd [1960] AC 87: D advertised for sale to the public records of the tune “Rockin Shoes” for 1s 6d and 3 chocolate wrappers. Held: the 3 chocolate wrappers are consideration Consideration must be executed or executory but not past: Executed consideration : Consideration of the offeree is the performance of the required act Executory consideration : Consideration = offeree’s promise

Consideration
Past consideration is no consideration: Roscorla v Thomas (1842) 3 QB 234: P agreed with D to purchase a horse. D later guaranteed that the horse was free of lice (in fact, not). Held: P’s agreement is past consideration for the guarantee. This rule is sometimes relaxed in favour of the offeree who had suffered some loss: Pao On v Lau Yiu Long [1986] AC 614 – conditions: 1. act was done at the promisor’s request; 2. parties understood that the act was to re remunerated by payment or conferment of some other benefits; and 3. Payment or conferment of the benefits are enforceable if it had been promised in advance.

Consideration
Pao On principles were followed in L&D Associates v Chan Man Chon Civ App No.80 of 1987, [1987] HKLY 138: P sued D for agency fees. Q: whether introduction is past consideration re signing of inspection record (contract) ? Held: Yes + violation of principles of agency (see later notes)

Consideration
Consideration must move from the promisee: McEvoy v Belfast Banking Co Ltd [1935] AC 24: Father deposited $ in a bank and the receipt indicated that the bank received money from him and his son. Father died. Held: bank contacted with father and son.

Consideration
No consideration if: 1. Performance of a public duty 2. Performance of a personal legal duty 3. Performance of an existing duty owed to the same promisor gist: find extra bit of consideration

Consideration
Performance of an existing contracting duty owed to a 3/p is good consideration : Shadwell v Shadwell (1860) I CBNS 159: promisor obtains direct benefit from the contract and has an independent irght o enforce the promise. New Zealand Shipping Co. Ltd v AM Satterthwaite & Co Ltd, The Eurymedon [1975] AC 154: A contacted with B to unload C’s goods. C contracted with A – if A unloads the goods, C will not sue A. Held: A is protected.

Consideration
Part payment of a debt (“payment of a lesser sum”) on the due date is no consideration for the satisfaction of a larger debt (The Rule in Pinnel’s case (1602) 5 Co Rep 117) Applied in Foakes v Beer (1884) 9 App Cas 605: B sued F. Both signed a settlement agreement that F could pay principal by instalments. Later, B sued for interests due. Held: F did not provide any consideration for the nonpayment of interests.

Consideration
Exceptions to the Pinnel’s case: 1. Goods of lesser value are given; 2. Lesser sum is paid and other goods are given; 3. Lesser sum is paid by a 3/p; 4. Creditor’s claim is disputed in good faith; 5. Composition agreement; 6. Doctrine of promissory estoppel or equitable estoppel applies.

Consideration
Doctrine of equitable estoppel (promissory estoppel): 1. Parties by their own act or own consent enter upon an agreement; 2. The agreement provides that the strict rights under another contract will not be enforced or suspended; and 3. It would be inquitable to enforce it the other party cannot enforce Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 Applied in Central London Property Trust v High Trees House [1947] 1 KB 130

Consideration
Only applies only when: 1. Equitable 2. The is real accord 3. As a defence : Combe v Combe [1951] 2 KB 215 – promise just a gift 4. The promise is definite and precise. Ambiguity ruins the application. 5. To suspend the creditor’s legal rights 6. Debtor had acted on the promise and had suffered detriment or change his position

Consideration
Forbearance to sue is good consideration in return for promisor’s promise but is not good consideration if the promisee knows, that he does not have any ground/cause of action against the promisor. (Cook v Wright (1861)). If the promisor honestly believes or has reasonable ground for believing he has a cause of action, such forbearance is still good consideration.

Consideration and privity
A person who is not a party to a contact cannot sue upon it or be sued upon it. Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847: D contracted with its buyer with a bottom price clause. Its buyer contracted with S with a similar clause. S in breach of this clause. Held: D cannot sue S as D is not a party to the contract between the buyer and S.

Consideration and privity
Exceptions: 1. Statutes allowed such enforcement: - Married Person Status Ordinance (Cap 182) – beneficiaries can sue on policies providing for them. - Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap 272) – a person driving a vehicle can claim under the insurance policy taken out by the car owner 2. Contract made by agent binds the principal 3. Rights or benefits assigned under contract or other instruments (NB: Duties cannot be assigned; NB: DMCs)

Intention to create legal relationships
General Rule: An agreement is enforceable only if both parties intend to have legal consequences – intention: objective test – a reasonable persons’ test Presumptions: 1. Commercial agreements have such intention: Edwards v Skyways [1964] 1 WLR 349: ex gratia payment (Contra: “subject to contract” clauses, “honourable pledge clause”, “letter of intent”, etc.) 2. Social and domestic agreements do not have such intention: Belfour v Belfour [1919] 2 KB 571: agreement to pay maintenance – domestic agreement- followed in Sun Er Jo v Lo Ching [1996] 1 HKC 1

The capacity of the parties
There are 2 typical situations: 1. Minors 2. Mentally disordered, drunk or drugged persons 3. Companies

Minors
Persons under 18 are minors,with limited contractual capacities. 3 typical situations: 1. Contracts for necessaries 2. Contracts which are binding unless repudicated by the minor 3. Contracts which are enforceable against a minor unless ratified by the minor

Contracts for necessaries
These includes contracts to provide the following to a minor: 1. Goods 2. Beneficial education/training/services In the light of the minor’s status of life and the environment

Contracts for necessaries
Section 4(1) of the Sales of Goods Ordinance (“SOGO”): …where necessaries are sold and delivered to a minor or infant, he or she must pay a reasonable price – I.e. only such contracts are binding on a minor

Section 4(2) SOGO: “Necessaries” means good suitable to the condition in life of an infant or minor and to his or her actual requirements at the time of the sale and delivery. Questions: 1. Is a tailor-made suit worthing HK$10,000 necessaries ? See Roberts v Gray [1913] 1 KB 520

Contracts binding unless repudicated by the minor
Both the contracting party and the minor are bound if making a contract: 1. Relating to an interests in land (Davies V BeynonHarris (1931) 47 TLR 424 2. For the acquisition of shares in a company (Capper’s case (1868) LR 3 Ch App 458 3. To enter into a partnership agreement (Lovell & Christmas v Beauchamp [1894] AC 360

Unforceable contracts unless affirmed by minor
Category 1 contracts are not enforceable unless and until being affirmed by minor upon his coming of age.

Contracts made by mentally handicapped, drunk, drugged
Mental capacity of understanding the transaction is crucial. The same rules in minors apply to this class. Mental Health Ordinance (Cap 136): All patients under Cap 136 have no contractual capacity (s.11).

Contracts by company
Contracts entered into by an officer who has authority to do so binds the company. Authority may be actual, apparent or usual.

Terms of a contract
Mere representation and contractual terms Intention of the parties – Contractual liability in respect of any particular statement ? Consider: 1. Statements made in preliminary negotiations 2. Statements made at the conclusion time 3. Statements made by persons with special skill & knowledge 4. Statements made by persons without such skill & knowledge

Expressed and implied terms
Expressed terms Terms that are expressed agreed by the parties orally, in writing or partly orally, party in writing. Implied terms Terms that work on the presumed intention of the parties to give effect to the business efficacies of the contract.

Implied terms
Terms can be implied: 1. By custom and usage of a trade : e.g. a manufacturer will remedy any defects in the garments manufactured, whether they are attributable to supplied materials, etc. (Crocodile Garments Ltd v Law Kwai Yuk [1998] HKCU 1988) 2. To give effect to business efficacy: implied to be fit for the purpose used (The Moorcock (1889) 14 PD 64) 3. For necessity: Wong Mee Wan v Kwan Kin Travel Services Ltd [1995] 2 HKLR 541: sub-contracting does not absolve the supplier from its contractual obligations

Implied terms
4. By legislation: SOGO – Every contract of sale goods – implied terms: (1) seller has the right to sell; (2) goods are of mercantable quality; (3) goods are fit for the purpose; (4) goods correspond with the description.

Expressed terms (Conditions & warranties)
Differences between conditions and warranties: 1. Even a minor breach of a condition entitles the other party to terminate the contract and sue for damages. Breach of a warranty (that excludes repudiation) does not entitle the other party to terminate the contract; he can only sue for damages. 2. Breach of a condition can be waived by the innocent party. The innocent party may also lose the right to terminate the contract. SOGO, s.13(1) and (3) How to distinguish conditions and warranties: intention of the parties – reasonable man test

Expressed terms (Innominate terms)
The courts look into the effects of the breach rather than the pre-fixed dicotomy of conditions/warranties. If the breach goes to the root of contract, the innocent party can terminate the contract and/or sue for damages(like condition). If it does not, he can only sue for damages (like warranty). Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26: seaworthiness in question – commercial purpose not frustrated – innominate term

Interpretation and construction of terms
Parol evidence No extrinsic evidence, oral or written, relating to matters outside the contract can be given to contradict, vary or add to the written terms of the contract.

Interpretation and construction of terms
Exceptions to the Parol evidence rule: 1. Only parts of the contract are in writing: Lam Tun Ming v Hu Chun Leung [1991] HKLY 552 – purchase of shares – bought and sold notes produced – acceptable. 2. Where it is necessary to allow extrinsic evidence to prove that the contract had not come into operation: Pym v Campbell (1856) 6 E & B 370 – condition not satisfied – no contract 3. Where there are causes affecting the validity of the contract (I.e. no consideration, identity of the subject matter (Raffles v Wichelhaus (1864) 2 H & C 906 – id of the ship)

Interpretation and construction of terms
4. 5. Where the law permits implying of certain terms into the contract : SOGO Where there is a collateral contract: De Lassale v Guildford [1901] 2 KB 215 – Conveyancing transaction – vendor gave assurance that the drains are in good order – a collateral contract – implied term

Exemption/Exclusion clauses
Such clauses aim to exempt / exclude liability of the relying party (usually big commercial enterprises) and are often used in standard form contracts. Courts do not favour such clauses and will interpret them strictly against the relying party (Contra Proferendum Rule). HK legislature enacted the Control of Exemption Clauses Ordinance (Cap 71) (“CECO”) to curb the use of such clauses.

Exemption/Exclusion clauses
To be effective, such clauses must pass a 3 stage test: 1. Incorporation into contract ? 2. Clear and wide enough to protect the relying party ? 3. No contravention of the CECO

Exemption/Exclusion clauses
Incorporation By: (1) Signature: L’Estrange v F Graucob Ltd [1934] – Signature without looking – bound – NB: comm (2) Reasonable notice: Olley v Marlborough Court [1949] followed by Seapower Resources v Assure Co Ltd [2001] HKEC 1517 (3) Consistent cause of dealings: J Spurling Ltd v Bradshaw [1956] 2 All ER 121 – similar documents read into the current contract

Control of Exemption Clauses
Control of Exemption Clauses Ordinance (Cap.314) - restricts “business liability” - “business” is widely defined; includes profit-making commercial activities, activity which a person carries on as a means of living, profession, professonal, governmental and semi-governmental bodies - Does not include educational and recreational places

Control of Exemption Clauses
E clauses become ineffective: (1) When they attempt to exempt liability for death or personal injuries (s.7(1)); (2) When they attempt to exempt liability in respect of seller’s implied undertaking as to title (s.11(1)) (3) When they attempt to exempt liability in respect of seller’s obligations in respect of quality under sections 15, 16, 17 of the SOGO. (s.11(2))

General test of reasonableness: objective test – all the circumstances which the parties knew or should have known at the time of contracting.

Vitiating Factors
A contract may be tainted by defects that could affect its validity making it void, voidable, illegal or unenforceable. Vitiating factors include: Mistake Misrepresentation Duress Undue influence Unconscionable contracts Illegality Restraint of trade

1. 2. 3. 4. 5. 6. 7.

Mistakes
3 types: 1. Common mistakes 2. Mutual mistakes 3. Unilateral mistakes

Common mistakes
Common mistakes as to the existence of the subject matter: Couturier v Hastie (1852) 8 Exch 40: contract for the sale of corn – unknown to the parties, corn went bad – Held : no contract

Common mistakes as to ownership of the subject matter: Cooper v Phibbs (1867) 2 LR 2 HL 149: contract for sale of a fishery- mistake as to ownership – Held: void Common mistakes as to quality of the subject matter: Oscar Chess v Williams [1957] 1 All ER 325: unless of some fundamental nature, contract not void.

Mutual mistakes
No meeting of minds – no contract Scriven Bros v Hindley [1913] 3 KB 564: mistake as to the lots of goods – Held: no contract

Unilateral Mistakes
Mistake by one party while the other party knows the truth. Mainly on identity of the parties. Normally 3 parties are involved: The innocent party who mistakens The rogue The innocent party who was being mistakened 2 situations: Contracts made by correspondence Contracts made face to face

1. 2. 3.

a. b.

Contracts made by correspondence
Effect: Contract void Cundy v Lindsay (1876) 1 QBD 348 A ordered some handherchiefs from B and sold them to C (being absolutely innocent) Held: A does not have a good title, cannot therefore transfer a good title to C.

Contracts made face to face
Contract may be voidable. Phillips v Brooks Ltd [1919] 2 KB 243 A pretended to be a rich and famous person, bought a diamond ring from B. He sold the ring to C, dishonoured the cheque and then disappeared. Held: valid contract and was bound. B cannot claim the ring from C. Levis v Averay [1972] 1 198 – similar result – voidable Gist:(1) what the innocent contracting party thought he was contracting with? (2) is the identity vital influence his decision to contract or not ?

Misrepresentation
Misrepresentation = a false representation of fact made orally or in writing or by conduct.

Misrepresentation
Representation must be: 1. On existing facts 2. On false existing factsShum Kong 3. On false material existing facts 4. Induce the innocent contracting party to enter into the contract 5. the innocent party has suffered loss as a result of such inducement See Shum Kong v Chu Ting Lin [2001] HKEC 651 – sale of a village house (own property, 700 sq.ft) with garden (leased) under misrepresentation

Misrepresentation
Distinguish from: 1. Future facts 2. Intention of future conduct 3. Opinion

Misrepresentation
2 types of misrepresentations: (1) Fraudulent (2) Innocent (3) Negligent

Fraudulent misrepresentation
= a false statement made by a person with a dishonest (“fraud”) intent Fraud is proved if the misrep is made by the maker: 1.Knowingly 2.Without belief in its truth, or 3.Recklessly (don’t care if it is true or not) An honest belief at the material time is a good defence: Derry v Peek (1889) 14 App Cas 337: DIR rep that the company could run trams by steam or mechanical power – reality: it could not do so – DIR held an honest belief- Held: good defence Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1992] BCLC 1104 : D said that there were interested parties to buy the shares and led P to purchase them – reality: no interested buyer and D knew that at the time of making rep Held: fraud

Fraudulent misrepresentation
Remedies: depends on whether fraudulent misrep had become a term of the contract : a. Become a term  the other party may:
(1) rescind the contract, or (2) affirm the contract and claim damages for breach of contract, (3) affirm the contract and claim damages under the tort of deceit b. Not become a term  the other party may: (1) rescind the contract, and/or (2) claim damages under the tort of deceit

Innocent misrepresentation
= false statement honestly believing to be true and has reasonable grounds to believe so up to the moment of contracting Remedies: Rescission (not plus damages) Misrepresentation Ordinance s. 3(2) : Damages in lieu of rescission if equitable

Negligent misrepresentation
Elements to be proved: 1.a duty on the representor to refrain from making a false statement; and 2.The representor is in breach of this duty Duty exists with special relationships between representor and representee, e.g. professionals in their areas of expertise Remedies: rescission, damages and/or indemnity MO s.3(2): court has a wide discretion to affirm the contract and award damages in lieu of rescission

Duress
Duress = actual or threatened violence, or unlawful restraint or threats, directed towards the contracting party or a member of his closed family. Effect : contract voidable Barton v Armstrong [1975] 2 All ER 465: former chairman threatened to kill the MD unless company bought back his shares – co did so – held: voidable Rationale: no free choice ; negate consent no genuine intention to contract

Economic duress
Economic duress = Apparent consent is induced by illegitimate economic pressure from the other party Pau On v Lau Yiu Long [1980] A C 614: consent is revocable  contract is voidable Remedy: voidable Right to avoid may be lost if the innocent party chooses to affirm (The Atlantic Baron [1979] QB 705))

Undue Influence
Conditions: (1) A relationship between the parties; (2) One party acquired over another a measure of influence or ascendancy; and (3) The ascendant person takes unfair advantage. (see Royal Bank of Scotland plc v Etridge (No.2) [2001] 3 WLR 1021, 1029; Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKLRD 358)

Undue Influence
2 types of undue influence: 1. Actual undue influence 2. Presumed undue influence

Actual Undue Influence
Conditions: 1. The wrongdoer had the capacity to influence the complainant; 2. Influence was in fact exerted; 3. Influence was undue; 4. The effect: the complainant enter into the contract sufficient: the influence was a significant reason for causing no need to prove manifestly disadvantage Effect: Contract voidable

Actual Undue Influence
Williams v Bayley (1866) LR 1 HL200; Diners Club v Ng Chi Sing [1987] 1 HKC 78: father compelled to guarantee son’s debt – guarantee: voidable

Presumed undue influence
Conditions: 1. A relationship of trust and confidence between the wrongdoer and the innocent party; 2. The nature of the relationship is of a nature that it is fair to presume that the wrongdoer had abused that relationship – a rebuttable presumption 3. Procuring the innocent party to enter into contract; and 4. The contract was manifestly disadvantageous to the innocent party. Undue influence can be rebutted by: a. The complainant had exercise free and independent will; or b. The complainant had full knowledge and could not have been misled; or c. The complainant had competent and independent advice from another.

Unconscionable contracts
The law takes a further step in protecting the innocent under the doctrine of “unconscionable contracts”. Commercial Bank of Australia v Amedio (1983) 151 CLR 447 per Mason J: Undue influence: the will of innocent party was not independent Unconscionable contract: disadvantage position (e.g. poverty, sickness, age, sex, infirmity of body and mind, drunkeness, illiteracy, lack of education, lack of assistance or explanation where assistance is necessary) vis-à-vis the other party [and the other party knew it]

Unconscionable contracts
The Unconscionable Contract Ordinance (Cap. 458) - A consumer protection legislation (others being: SOGO, Control of Exemption Clauses Ordinance, MO) - Applies only in consumer sales - The court may refuse to enforce, enforce the remainder of the contract, limit/revise/alter the unconscionable part of the contract - The court may take the initiative to examine the unconscionble provisions - List of matters the court will consider: relative bargaining positions of the parties, etc. See Hang Seng Credit Card Ltd v Tsang Nga Lee & Others [2000] 3 HKC 269 : credit card debt plus costs on indemnity basis – falls under Cap 458 – “greedy bank” case – unconscionable contract

Illegality
Contracts are not enforceable

Restraint of trade
Applicable situation: one party agrees to restrict its freedom in the future to carry on trade with other parties who are not parties to this contract (via “restrictive covenants”). General rule: Restrictive covenants are acceptable only if they are reasonable with reference to time and space and must not deprive the livelihood of the party being restrained. If restraint of trade is found, the contract is void.

Restraint of trade
Typical situations:

(1) Employment contracts (2) Sale of business (3) Solus agreement (e.g. sole agent agreement)

Discharge of a contract
A contract coming to an end by: 1. Performance/defective performance 2. Agreement (“Accord and satisfaction”) 3. Breach 4. Frustration

Performance/Defective Performance
A contract may be discharged by full performance. The traditional view as expressed by Cutter v Powell (1795) 6 Term Rep 320, may be watered down by the doctrines of : (1)Divisible contract (2)Substantial performance - and be paid on a quantum meruit basis (i.e. pro rata basis). The contract in Cutter v Powell is regarded as a “whole” contract and must be performed in full. Hoenig v Issacs [1952] 2 Al ER 176, demonstrating the modern approach, used doctrines (1) and (2) above.

Discharge by agreement
Accord and satisfaction: “Accord” – agreement “Satisfaction” – consideration

Discharge by breach
2 types of breach: (1) Repudiatory breach (2) Anticipatory breach

Repudiatory breach
= No performance by the contracted time, place and conditions Effects: (1) Condition or innominate term (with serious consequences)  innocent party can treat the contract as discharged. (2) Warranty or innominate term (with less serious consequences)  innocent party can only sue for damages

Anticipatory breach
(1) A party express its intention not to perform, (2) A party acts in such a way as to sow its intention not to perform Remedies: (1) The innocent party may accept the breach and treat the contract as discharged then, and sue for damages (2) The innocent party may wait until the due date and sue for loss incurred by him as a result of such a breach (i.e. damages) or may seek specific performance

Discharge by frustration
“…Without fault of either party, a contractual obligation has become incapable of being performed because circumstances in which performance is called for would render it a thing radically different from that which was undertaken..” per Lord Radcliffe in Davis Contractors v Fareham UDC [1956] ACC 696 - Extraneous change of circumstances which makes performance impossible – examine : the subject matter of the contract – and ask: what are such circumstances ? Effect: Both parties need not perform – contract discharge

Discharge by frustration
Examine: (1) Subject matter destroyed: Taylor v Caldwell (1863) 3 B&S 826 – Hall destroyed by fire – contract discharged. (2) Expected event does not occur : Coronation cases : Krell v Henry [1903] 2 KB 740: King George VI sicked – rented premises not served its purpose – contract discharged. (3) Person to perform dies or falls ill: Robison v Davison (1871) LR Ex 269: performer sicked on performance day – contract discharged (4) Change in law making it impossible to perform: Baily v DeeCrespigny (1869) LR 4 QBB 180: no blockade clause turns impossible because of change of law – contract discharged

Discharge by frustration
(5)Change in law makes performance illegal: Czarniko Ltd v Rolimpex [1979] AC 351: export of goods impossible because of change in law – discharged (6) Performance become radically different: Wong Lai Ying v Chinachem [1980] HKLR 1: landslide stopped construction work for 3.5 years – discharged. No frustration under: (a) Performance more expensive (b) Self-induced frustration: failure to apply for a licence (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524)

Money paid lies where it falls except when there is a total failure of consideration (Fibrosa case [1943] AC 32)

Remedies
1. 2. 3. Damages (compensation for loss) Specific performance Injunction

Remoteness of damages –reasonable foreseeable loss
Duty to mitigate-innocent party must mitigate (minimise) its loss

Q & A session
Please examine the sample tenancy agreement in some details. Discuss: 1. Is there any offer, acceptance, consideration, or binding intention in it ? 2. What are the condition and warranties ? 3.What is the subject matter ? 4.What does party A provide ? 5.What does party B provide ? 6.Any guarantee by party A and/or party B? 7.What are the rights of party A ? 8.What are the duties of party A ? 9.How long is the tenancy ? 10.If you were party B, would you accept this tenancy agreement ? What amendments would you like to make ?

Q & A session
Examine your own employment contract. 1. What is the subject matter ? 2. What are the terms ? 3. Do you think such terms are fair to you ? 4. Can you find terms in the employment contract that are illegal under the Employment Ordinance ? 5. What can you get if you were dismissed by your employer who gives you one month’s notice ? Do you have to attend office after receiving the notice ? 6. If you had accumulated 40 days of annual leave and your employment contract provides that annual leave cannot be accumulated, can such annual leave be set off against your notice period ? What should your employer do in respect of such annual leave ?

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