CH Businesslaw 2 Contract

Academic Year 2016/17
Term One
CHU HAI COLLEGE OF HIGHER EDUCATION

Department of Business and Management
BBA 211 Business Law

LAW OF CONTRACT
PART I FORMATION OF CONTRACT

1. THE NATURE OF CONTRACT
A contract is an agreement or promises. However not all promises or
agreements give rise to a binding contract. Contracts are legally enforceable
agreements or promises. Breach of contract is, therefore, failure to keep to the
terms of such agreement.
e.g. If I promise to give you an apple but you have to pay me $2 in return. Say
I refuse to give my apple after you have paid me $2, then I have failed to keep
my promise to you. Therefore I have breach of a contract made between you
and me.
A legally enforceable contract is usually created by one of the following two

ways:
a) Deed ()
It must be signed, sealed (by wax) and delivered. A seal is now nothing more
than a red adhesive label appended next to the signature on the document.
Deeds are usually used in: (1) assignment deed ( ) (transfer to title)
(compulsory by law), (2) power of attorney ( ) (transfer of power)
(because no consideration required), (3) Deed Poll ( ) (change of
name) (because no consideration required) and (4) Deed of Gift ( )
(because no consideration is required)..
b) Simple contract
The vast majority of legal obligations are informally created by oral promise
or by writing. Contract may also be created by way of parties conduct. Here
are some examples in our daily lives that involve the concept of contract:
making a purchase, taking public transport such as taking a bus and coming
to a post-secondary college to earn a degree like what you are doing.
All simple contracts are required to be supported by the presence of
consideration ( ); otherwise they will be unenforceable. If an
individual wishes to bind himself by a gratuitous promise, he can do so
Term One
by executing the agreement in the form of a deed. The agreement will

then be enforceable.
Under section 4 of the Limitation Ordinance (), actions founded on
simple contract shall not be bought to court after the expiry of 6 years from the
date on which the breach of contract occurred, while specialty contract after
the expiry of 12 years from the breach of contract.
Acceptance ()
Offer() consideration () (exception: deed, Promissory
estoppel)
Intention to create legal
Relationships ()
Formation of contract
()
1. Misrepresentation () (voidable)
Terms: condition & warranties 2. Mistake () (void) ()
(1) express() 3. Frustration () (unenforceable)
:exemption clauses ()
(2) implied() 4. Duress () (voidable)
:SOGO 5. Undue influence () (voidable)
6. Illegality () (unenforceable)
7. Capacity () (voidable) or
(unenforceable)
Destruction of Contract
Breach of Common law

contract remedies:
(1)Damages ( )
Equitable remedies:
Specific
performance( )
Injunction( )
Rescission( )
Rectification( )
2 All rights reserved

Term One
2. THE ELEMENTS OF A BINDING CONTRACT

(A) An offer
This is an undertaking by the offeror (i.e. the party making the offer)
( ) to be contractually bound in the event of a proper
acceptance by the offeree (the party to whom the offer is made) (
). An offer is not an offer when it does not contain a genuine
promise by the person making the offer.
Mere puff () is an exaggerated slogan or comment which is not an

offer at all (usually in advertisement: e.g. My products are the no.1
best in the world!, You will get a pair of wings after drinking this
beer!). Mere puff is also not an invitation to treat.
In Chan Yeuk Yu v Church Body of the Hong Kong Sheng Kung Hui [2001] 1
HKC 621, the Court of First Instance held that the phrase regal surroundings
for the select few () contained in a brochure advertising a
property development (Deer Hill Bay) was mere puff and did not amount to
any representation that the property would be constructed to a high standard
of luxury.
Test for mere puff: Is the offer so far-fetched ( ) that no

reasonable person would believe it?
The offer must be accepted within a reasonable time or it will

automatically lapse and will then be incapable of being accepted.
In Ramsgate Victoria Hotel Co. v. Montefiore, the defendant applied for shares in a
company. The plaintiff allotted the shares to him five months later. The court held
that in the circumstances it was unreasonable to expect an offer of this nature to
remain open for such a period of time.
The offeror may revoke the offer at any time before acceptance by
either words or conduct.
Byne v Van Tienholven (1880)
Facts:

Term One
1- Oct D posted a letter of offer from Cardiff to NY

8 Oct D posted letter of revocation from Cardiff to NY
11- Oct Offer letter received by C in NY.
15- Oct Letter of acceptance was posted from NY to Cardiff
20-Oct Letter of revocation received in NY
The offeree sold the subject matter of the contract in the meanwhile.
Issued: Whether the revocation was effective or not?
Held: The acceptance was made before the revocation was communicated.
Thus, the revocation was not effective.
Revocation of offer by a reliable informant (third person) is sufficient

An offer is not seen to be made until it has been communicated to the
person for whom the offer is intended (i.e. offeree). Thus a person
cannot accept an offer if he or she is not aware that it has been made to
him or her. (Taylor v. Laird (1856))
Taylor v. Laird (1856)

P was employed to be the captain to Ds ship. During the voyage, P
gave up command of the ship but continued to be part of the crew. P
sued for payment for these crewing services. It was held that as D had
not known of the offer of the crewing service from P, thus D had no
chance to accept or reject P offer. So P lost the case.
An offer should be distinguished from An Invitation to Treat (

) which is only an indication that a person is willing to
enter into negotiation only, but not that he is willing to be bound by the
terms mentioned.
Fisher v. Bell [1961]

This is a criminal case. The shopkeeper displayed a flick-knife in the
shop window. He was charged with offering an offensive weapon for
sale.
Held: The shopkeeper was acquitted because the display was only an
invitation to treat. If displaying goods is an offer to sell then the shop

Term One
would be bound to sell the goods to everyone who come to the shop and
ask for the goods. What if the goods is out of stock ???
Would a mere display of pirate VCDs is not a criminal offence of
offering for sale ?!
HKSAR v. Wan Hon Sik [2001] 3 HKLRD 283

The appellant () is the keeper inside a shop in the Sino Centre in
Mongkok for selling pirated Japanese drama VCD. The officers noticed
suspected pirated compact discs displayed on the walls of the shop.
The appellant was only the keeper of the shop responsible for looking at
and selling discs in the shop.
HELD: Appeal allowed. Following Fisher v Bell, there is only
invitation to treat, no offer exists.
But:
HKSAR v. Yu Wai Chuen [2002] 2 HKLRD 347, CFI
s. 118 of the Copyright Ordinance creates an offence of offering for
sale of pirate VCD. D was in charge of a shop displaying infringing
copies of CDs. D was heard to say to customers, Feel free to look, feel
free to choose, buy while stocks last. D was convicted by the
magistrate. He appealed against conviction on the ground that he had
not offered the CDs for sale.
HELD: Dismissing the appeal. Although the window display of the CDs
was not itself an offer, the additional evidence of the words spoken by
D was sufficient to find that D had made an offer to sell the infringing
CDs.
Pharmaceutical Society of Great Britain v. Boots Cash [1953]

The Defendant operated a supermarket. Certain drugs were on open
shelves around the store. Qualified pharmacists were standing at the
cashier counter. According to the law, drugs could only be sold in the
presence of a qualified pharmacist. When the customers took the drugs
from the open shelf, was the contract formed? If yes, there was no
pharmacist at the open shelf and the Defendant may breach the law.
Held: the display on the shelves was a mere invitation to treat. The
customer made the offer when he took the goods to the cashier, who
could always refuse to sell. Thus, the contract was formed in front of a
pharmacist.

Term One
An offer should also be distinguished from merely giving information

without intention to be bound.
Harvey v. Facey [1893]

Harvey telegraphed: Will you sell us Bumper Hall Pen? Telegraph
what is lowest price?
Facey reply: Lowest price for Bumper Hall Pen 900 pounds
Harvey then replied in the following words: "We agree to buy Bumper
Hall Pen for the sum of nine hundred pounds asked by you. Please send
us your title deed in order that we may get early possession."
Facey, however refused to sell at that price, at which Harvey sued.
Held: It was merely an answer to request for information, and not an

offer which could be accepted.
(Note: Bumper Hall Pen is a building in Jamaica.)
Counter offer is a final rejection of original offer. It extinguishes the
offer, and the counter-offer then becomes the offer
Hyde v. Wrench [1840]

6 June, D offered to sell an estate to the P for 1,000 pounds
8 June, P made an offer of 950 pounds which was refused by D
In the meantime, D sold the estate to a third party.
29 June, P wrote that he was now prepared to pay 1,000 pounds
D could not sell the estate to P and P sued D for breach of contract.
Held: no contract existed. By his letter on 8 June, P had rejected the
original offer and therefore he cannot subsequently change his mind.
Dickinson v Dodds (1876)

Term One
D signed and delivered a memo to P that said that he agreed to sell

some property to P for 800 pounds. The offer was to be good until
Friday at 9 A.M. P heard that D was selling the property to someone
else, so he went to D's current residence and left his acceptance of the
offer with D's mother in law. She failed to ever give D the acceptance.
The next morning (Friday), P found D and gave him the acceptance
before 9 A.M. D replied that it was too late; the property had already
been sold. P sued D for performance and damages. HELD: When
there is an open offer that has not yet been accepted by the offeree,
there is no binding contract, and the offeror is able to make the same
offer to other parties. An offer to sell real property is revoked when
the offeree learns facts inconsistent with the continued existence of the
offer.
An offer can be revoked i.e. cancelled by the offeror at any time before
it has been accepted, but this is only effective if and when the offeree
learns about it. Knowledge of the offeree is therefore important.
test = whether there is a communication to the offeree, either by
the offeror or by a third party
An offer must be clear and certain. Attempts to reach agreement will not
amount to contracts if there is uncertainty as to whether the parties have
reached a final agreement or as to the precise nature of its terms.
Gunthing v Lynn (1831)
The offer offered to pay a further sum for a horse if it was lucky. It was held
that the offer was too vague and no contract could be formed.
In Koo Ming Kown v Next Media Ltd & Ors [2009] 2 HKC 214, the defendant
offered a 50% discount to any person who placed an advertisement in Apple
Daily with the intention of arousing the democratic consciousness (
) of Hong Kong people. After reading the newspaper, the plaintiff
placed an advertisement in Apple Daily to support the Government Reform
Package and then requested 50% cost from the defendant. The defendant
refused to pay. Held: the defendants offer was not clear or certain enough to
constitute a legally binding offer. The phase democratic consciousness was
the term influenced by the political view of each individual. The usage of

Term One
such terms resulted in it being vague and ambiguous

Unilateral offer is an offer open to the whole world and invites
whoever may perform to accept it. One of the examples is an
advertisement of missing items or an advertisement of wanted person
by the police. We will come to this when I mentioned the concept of
Acceptance by conduct.
Tender (with reserve price), auction (with reserve price), catalogues and
price lists (e.g. a wine merchants catalogues and price lists) are other
examples of invitations to treat (Grainger & Son v Gough (1896)).
Cross-offers are 2 identical offers made to each other by 2 parties.
They are 2 independent offers. One is not the acceptance of the other.
A contract cannot come into existence without correspondence between
offer and acceptance. Cross-offers, therefore, do not create a
contract (R v Clarke (1927)).
The subsequent offer to the recipient would supersede the previous
offer before acceptance (Pickfords Ltd v Celestica Ltd (2003)). The
recipient is unable to choose to accept the previous offer.
Offer in advertisements
Nature Test Case law

Mere puff () Is the statement so far- Walker v Milner (1866)
fetched () that
no reasonable person
would believe it?
Invitation to treat No promise made in Partridge v Crittenden
the advertisement, e.g. (1968)
sale of goods, big sale
(No guarantee that the
goods must be sold to
the buyer) [sold until
stock lasts]
Unilateral offer (offer Promise made in the Carlill v Carbolic
to the whole world) advertisement Smoke Ball (1893)
exchanged for
performance done by
the acceptor
Generally an auction may be seen as an invitation to treat, with the

Term One
property owner asking for offers of a certain amount and then selecting
which to accept: Payne v Cave (1789) 3 TR 148
Auction without reserve price is offer
Barry v Davies (Trading as Heathcote Ball & Co) [2000] 1 WLR 1962
A seller put up two engine analysers for sale by auction, with no reserve price.
The price of the machines would have been 14,521 each if they had been new.
The claimant was a bidder at the auction. He bid 200 for each machine, and
was the highest bidder. The auctioneer refused to sell the machines to the
claimant for such a low price, despite the no reserve' sale. The claimant
brought an action against the auctioneer for breach of contract.
It was held by the Court of Appeal that there was a collateral contract between
the auctioneer and the highest bidder. The offer was made by the auctioneer to
sell to the highest bidder, and this was accepted when the bid was made.
(B) An acceptance
Once the existence of an offer had been proved, the court must
satisfied that the offeree has accepted the offer otherwise there is no
contract.
The offer must still be open.
The acceptance must be absolute, unqualified and in the precise terms

of the offer. e.g. The wordings must reflect an intention to accept.
Different means of acceptance

(i) By conduct
If the offeror indicate that the
offeree should, if he wishes to
accept, simply carry out his
side of the bargain without
bothering to inform the offeror.
Advertisement for missing

property is a typical example of

Term One
this kind.
Offer = a unilateral offer asking for help by way of Ad in

newspaper or broadcast. The offer will also include the
description of the property and the award to be paid. Those are
the important contractual terms.
Acceptance = anyone who found the right property as described
in the advertisement
Consequence = The offeror must pay the award to anyone who
found the property. It would be a breach of contract if he refused
to do so.
Carlill v. Carbolic Smoke Ball [1893]

D advertised that they would pay 100 pounds to anyone who
caught influenza after using their smoke balls and that, as
evidence of their sincerity, they had deposited 1000 pounds with
a named bank. Mrs. Carlill followed their instructions, but still
caught influenza. She claimed the 100 pounds, but D refused to
pay.
Held: This was not an advertisement puff. D had made an offer
to the whole world as D was so serious to put sufficient fund to a
bank. They would be liable to anyone who came forward and
performed the required conditions because their performance
constituted acceptance of the offer. Mrs. Carlill entitled to 100
pounds
But Compared with the following case:

In Partridge v Crittenden (1968), an advertisement in a magazine
offering to sell some kind of protected birds was not offering for
sale, but was invitation to treat.
(ii) By communication
As a general rule, acceptance must be communicated to
the offeror. There is no contract until the offeror knows that
his offer has been accepted.
The acceptance must be communicated by the offeree himself

or his authorized agent.

Term One
Unlike revocation, acceptance cannot be communicated

by a third party, however reliable.
EXCEPTIONS
Postal Rule: a letter of acceptance properly addressed and
stamped and specially requested by the offeror is effective
from the moment of posting for the acceptor ()
even if it never arrives (evidence = postage stamp from the
post office) (Adams v. Lindsell (1818)). However the Rule
only applies to written letter and telegram but not Fax,
Telephone, telex, voicemail or e-mail.
The postal rule does not apply if (1) the offeror requires
actual communication, (2) the letter is wrongly addressed or
insufficiently stamped. The postal rule can be ousted if
acceptance by post would lead to manifest inconvenience
and absurdity or if an equally expedient means of
communication of acceptance was required (Quenerduaine v
Cole (1883)).
Holwell Securities Ltd v Hughes (1974)

Facts: The defendant issued a grant to sell a property to the plaintiff. It
contained a clause stipulating that the option must be exercised by notice in
writing to the Intending Vendor within six months. The plaintiff sent a letter
exercising the option, within the time limit. However, it was lost in the post and
never received by the defendant.
Issue: Did the postal rule apply?
Held: The postal rule did not apply despite post being a suitable method of
acceptance because language of the offer implied the defendant required receipt
of written acceptance.
Quenerduaine v Cole (1883)

Facts: The defendant made an offer by telegram which the plaintiff purported
to accept by letter.
Issue: Was it reasonable to accept by letter when the offer was made by
telegram?
Held: The postal rule did not apply. The court found that an offer which was
made by telegram (instantaneous), implied that an equally quick acceptance

Term One
was required.
Receipt Rule: acceptance is deemed to be made at the time

the fax message/voice message is received even if the
offeror to whom it is sent does not in fact read the fax or hear
the voice message (see Thornton v Shoe Lane Parking Ltd
[1971] 2 QB 163 and The Brimnes [1975] QB 929 [the
offeror received it in office hours] but compared with Entores
Ltd v Miles Far East Corp. [1955] 2 QB 327).
(applicable to fax, telephone voice mail, telex, e-mail)
Example 1:
Day 1: A makes an offer to B.
Day 2: A decides to revoke the offer and puts a letter in the mail to B revoking the
offer.
Day 3: B puts a letter accepting the offer in the mail.
Day 4: B receives A's revocation letter.
The letter of revocation can be effective only when received, that is Day 4.
However, a contract was formed on Day 3 when the letter of acceptance was posted.
It is too late for A to revoke the offer.
Example 2:
Day 1: A makes an offer to B.
Day 2: B intends to reject the offer by putting a letter in the mail to A rejecting the
offer.
Day 3: B changes his mind and sends a fax to A accepting the offer.
In this situation, whichever communication A receives first will govern.
Example 3:
Day 1: A makes an offer to sell a parcel of land to B.
Day 2: B mails her acceptance.
Day 3: Before A receives B's acceptance, B telephones A and states she wishes to
reject the offer.
Day 4: B's original letter of acceptance arrives, A then records the contract as a sale.
B's acceptance of the offer means there is a binding contract -- she is obliged to pay
for the land or be liable for damages.

Term One
Mere silence is not an acceptance

Felthouse v. Bindley (1863)
Negotiation regarding the price of a horse. P wrote: If I hear no
more from you, I consider the horse is mine. D did not reply.
Held: Ds silence did not constitute an acceptance to the offer by P.
One cannot accept an offer which one has no knowledge (R v Clarke
(1927))
(C) Consideration
In order for a contract to be enforceable, there must be mutual
exchange between the parties.
If I ask you to sell your pen to me in $5, then there is a contract with the
existence of a consideration of $5. However no contract will be existed
if I simply ask you to give me your pen. This is simply an agreement of
gift that is unenforceable in law.
In Currie v. Misa (1875), the court defined consideration as some right

(), interest (), profit () or benefit () accruing to one
party, or some forbearance ( ), detriment ( ), loss ( ) or
responsibility ( ) given, suffered or undertaken
by the other.
Exception: Equitys Doctrine of Promissory Estoppel (also

known as High Tree Principle) (Exception to existence of
consideration for a valid contract)
Remember what youve learnt in Lecture One, Equity will step in whenever the
application of common law creates injustice.
In 1947, Lord Denning, the most respectable judge in English legal history
invented the doctrine of promissory estoppel () in Central
Property v. High Tree House Limited (1947). The doctrine has the effect to
prevent a representor () from going back his promise earlier made
and to impose the necessary legal intention and consideration so that a contract
would subsist.

Term One
In the High Tree case, the plaintiff (P) leased a block of flats to the defendants at an
annual rent of 2500 - but, because the defendants were unable to find enough tenants
while London was being bombed during the Second World War, P agreed to accept a
reduction in rent to 1250. There was no consideration for this promise to accept a
lower rent. On reliance to this promise, D offered lower for the tenants to attract
customers. At the end of the war the flats were again fully let, and P claimed the full
rent, plus arrears for the period during the war. Denning J held that, in good
conscience, P was only entitled to the full rent from the end of the war and that they
were estopped from going back on their promise.
In order for the doctrine to operate, there must be:-

a) a legal relationship between the parties
An agreement pre-existed.
b) there must be an irrevocable representation made by a representor

The promise must be clear and unambiguous
c) the representee () relied upon the promise to act and made some
detriment
By relying upon someones promise, you have incurred expenses or
other forms of detriment.
Consideration must be sufficient but need not be adequate

The consideration must be real, tangible, in some value and be measurable
in economic terms. The court will not compare the value of the
consideration as against the promise exchanged. Even $1 is an adequate
consideration
Midland Bank v. Green (1981)

A farm worth 40,000 pounds was purchase for 500 pounds only
Held: good consideration

Term One
Exception: Unconscionability () (Equitable principle)

Unconscionability is a term used to describe an excuse not to enforce a
contract since some terms in the contract is unfair to one party. Typically, such
a contract is held to be unenforceable (subject to courts discretionary power)
because the consideration offered is lacking or is so obviously inadequate that
to enforce the contract would be unfair to the innocent party. To exercise this
discretionary power, the court needs to consider evidence that one party to the
contract took advantage of its superior bargaining power to add terms that
make the agreement overwhelmingly favour the interests of that party.
Love and affection is not good consideration

Consideration must be legal
Past consideration () is not an valid consideration

If you promised to give me your pen yesterday but neither said anything
about payment. Today I meet you again and I insist to pay you $5.
According to common law this is past consideration which is unenforceable
save to certain exceptions. The reason is any bargaining of contractual
terms, including the consideration, must be a process of two-way exchange
within parties. A promise made today for an act done in the past is certainly
of no value.
Another example is that A voluntarily promises to decorate Bs home and

when A finished, B promises to pay for the materials A used, there is no
contract between A and B because As act of decorating was not performed
in exchange for the promise made by B to pay for the materials.
Eastwood v. Kenyon & Anor (1840)

D is a young girl and P is her guardian. P took a loan from the bank to pay
for Ds living expenses and education fees. Once D got married, Ds
husband promised to pay the money back to P. However, Ds husband
failed to do so and P sued D and her husband. The court held that there was
no contract since the consideration was past consideration (Ps act of paying
Ds living and education expenses was not performed in exchange for the
promise made by D and her husband).

Term One
Exception: Quantum meruit (as much as he has earned) ()

If at the time when an act is done by A for B, it is understood by both
parties that B will pay for it, but no price is fixed, B will be bound to pay
a reasonable price, on the basis of what the law calls quantum meruit. If
B then agrees with A to pay A $5,000 for the job, there is sufficient
consideration (Pao On v. Lau Yiu-long [1980] AC 614.)
Part payment of debt is not an adequate consideration

If A owes B $100 and B agrees to take $70, the part payment by A is not a
good consideration. Therefore no valid contract existed and B may still sue
for the remaining $30 (e.g. This is the rule formulated in Pinnel's Case
(1602) 5 Co Rep 117a, affirmed in Foakes v. Beer [1884] 9 A.C. 605)
However if such promise to accept lesser amount is support ed by fresh

consideration (earlier repayment, or avoidance of lawsuit) , then it would be
a valid contract. This is said to be an accord and satisfaction of the debt.
e.g. if A make the request of settlement by a lesser amount and promise the
payment would be made earlier than the original due date. It would
constitute fresh consideration since B obtains a benefit of earlier payment
and therefore cannot sue for the balance
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

The defendant building contractors entered into a contract with the plaintiff
carpenter. The plaintiff was to carry out work in 27 flats. The price was
20,000. The plaintiff fell into financial difficulties, partly because the contract
price was too low. The defendants were subject to a penalty clause' under the
main contract on the flats. The defendants therefore agreed to pay the plaintiff
an extra 575 per flat. The defendant failed to pay the extra money.
The question for the Court of Appeal was whether the plaintiff's performance of
its existing contractual duty to complete the work on the flats could amount to
sufficient consideration for the promise of the additional payment.
The Court of Appeal held that consideration was present in the form of
practical benefits' which would be obtained by the defendants, in the form of
their avoidance of the penalty clause.

Term One
(D) Intention to be bound (to create legal relation)

Rebuttable Presumptions in Domestic / Social Agreement
Any agreement made between relatives or friends or spouses is presumed
not intended to be legally binding (Balfour v. Balfour (1919)) unless the
contrary to be proved (Merritt v. Merritt (1970)).
The burden of proof rests on the person who wishes to rely on the contract.
Failure to prove:
Balfour v Balfour (1919)

A husband and wife went to England from Sri Lanka. H then returned to
Sri Lanka but promised to pay W (the plaintiff) a sum of 30 per month as
maintenance. H failed to do so and W sued H. HELD: the onus was on the
plaintiff (W) in a domestic situation to show an intention to create legal
relations and that had not been achieved.
Jones v Padavatton (1969)
In 1962, Mrs Jones offered a monthly allowance to her daughter if she would
give up her job in America and come to England and study to become a
barrister. Because of accommodation problems Mrs Jones bought a house in
London where the daughter lived and received rents from other tenants. In
1967 they fell out and Mrs Jones claimed the house even though the daughter
had not even passed half of her exams.
It was held that the first agreement to study was a family arrangement and
not intended to be binding. The second agreement was only a family
agreement and there was no intention to create legal relations. Therefore, the
mother was not liable on the maintenance agreement and could also claim
the house.
Success to prove:
Simpkins v Pays (1955)

Term One
The defendant, her granddaughter, and the plaintiff, a paying lodger shared
a house. They all contributed one-third of the stake in entering a
competition in the defendant's name. One week a prize of 750 was won but
on the defendant's refusal to share the prize, the plaintiff sued for a third.
It was held that the presence of the outsider rebutted the presumption that it
was a family agreement and not intended to be binding. The mutual
arrangement was a joint enterprise to which cash was contributed in the
expectation of sharing any prize.
Parker v Clarke (1960)
Mrs Parker was the niece of Mrs Clarke. An agreement was made that the
Parkers would sell their house and live with the Clarkes. They would share
the bills and the Clarkes would then leave the house to the Parkers. Mrs
Clarke wrote to the Parkers giving them the details of expenses and
confirming the agreement. The Parkers sold their house and moved in. Mr
Clarke changed his will leaving the house to the Parkers. Later the couples
fell out and the Parkers were asked to leave. They claimed damages for
breach of contract.
It was held that the exchange of letters showed the two couples were serious
and the agreement was intended to be legally binding because (1) the Parkers
had sold their own home, and (2) Mr Clarke changed his will. Therefore the
Parkers were entitled to damages.
Rebuttable Presumptions in Commercial Agreement

The law presumed any contract made in the course of business and
according to standard commercial arrangement, to be legally binding unless
proved to be contrary. Those who alleged the contract is not binding bears
the burden of proof to rebut the presumption (e.g. expressed intention of no
binding).
Edwards v. Skyways Ltd (1964)

A bonus payment, described as 'ex gratia', was promised to an
employee, this was found to be legally binding. He had relied upon the
promise in accepting a redundancy package, and his employer could not
adequately prove that they had not intended their promise to become a

Term One
contractual term.
Rose & Frank Co v JR Crompton & Bros Ltd (1924)

Rose and Frank Co was the sole US distributor of JR Crompton's carbon
paper products. In 1913, the parties signed a new document which
included this clause: This arrangement is not entered into as a formal
or legal agreement and shall not be subject to legal jurisdiction in the
law courts. The relationship between the two parties broke down as JR
Crompton refused to supply some of the orders of the plaintiff. Rose &
Frank Co sued on enforcement of the agreement.
Held: the arrangement of 1913 was not a legally binding contract
(Note: JR Crompton & Bros Ltd started business in 1852 in Manchester and went out of
business in 2009. JR Crompton & Bros Ltd produces tea bag and coffee filter papers. The
company specializes in filter papers for hot beverage applications. It also offers wet laid fiber
used for wall paper, adhesive tapes, and battery components.)
But: Walford v Miles (1992)

Comfort letters* on the proposed sale and purchase of a company
have also been held as unenforceable.
*A Comfort Letter is a document prepared by an accounting firm assuring the financial soundness
or backing of a company.
The intention is still presumed even if the terms of the agreements are
yet to be discussed.
New World Development v Sun Hung Kai Securities (2006)
P had a joint venture business. D showed interest in that and signed an
agreement to share the cost and interests in that joint venture, without
detailed terms. Later, D wanted to cancel the co-operation agreement
and argued that no certainty of terms in the agreement rebutted its
intention. Held: Intention exists since the contract is clearly
commercial in nature and D failed to rebut the presumption.
What about free gifts?

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER
117
Facts:

Term One
E conducted a trade promotion.

E produced coins depicting the members of Englands 1970
World Cup soccer team.
Each motorist who purchased four gallons of Esso petrol received
a free coin.
CCE argued that E should pay tax on the coins as they were
produced for sale.
In other words, CCE argued that the coins were supplied by E as
part of a contract with motorists.
E, on the other hand, argued that the coins were not sold as part
of any contract, but rather were given away.
Issue:
Is there a commercial contract? Is there a relationship that is
binding?
Decision:
A contract for the supply of the coins existed.
Everyone who purchased 4 gallons of Esso petrol had a
contractual right to claim a free coin.
That is, E and the motorist who bought 4 gallons intended to
create legal relations.
Although the coins had little intrinsic value and E used words
such as free and gift, this was not sufficient to rebut the
presumption of enforceability.
Agreement neither of social nor commercial in nature

Cable and Wireless Staff Association v. Cable and Wireless [2001] 2
HKLRD 809, CFI
Held: Collective Agreement on Negotiation is not legally binding since the
social atmosphere in 1970s did not intended this sort of agreement to be
legally binding.
We usually refer this kind of agreement as Gentleman Agreement

which is binding in honour. i.e. only a mere moral obligation to
enforce.
3. TERMS OF CONTRACTS
(A) Conditions and Warranties
A condition is a vital term which goes to the root of the contract. It is an

Term One
obligation which goes to the substance () of the contract, or is so essential

to this very nature that its non-performance may be considered by the other
party as a substantial failure to perform the contract at all. The injured party
may either choose to (1) cancel the contract or (2) elect to go ahead with the
contract but sue for damages.
A warranty is subsidiary to the main purpose. It may be said to be an

obligation which, though it must be performed, is not so vital that a failure to
perform it would not go to the substance of the contract. A breach of warranty
does not allow cancellation of the contract and the injured party must go on
with the contract and sue for damages.
(B) Express Terms ()

Express terms are those specifically mentioned and agreed by the parties at the
time of contracting whether this is one in writing or word of mouth (Couchman
v Hill (1974)) e.g. contractual terms in an application form of credit card.
(C) Implied Terms ()

In addition to the express terms inserted, a contract may contain and subject to
implied terms.
(i) Implied by court
It can be done by asking the court to grant a declaration, e.g. trade practice.
The court will look into the intention of the parties to see if the term is left
to be implied and need not be expressed.
The principle is officious bystander test: something so obvious that it
goes without saying. () (Shirlaw v Southern Foundries)
For example, although there is no expressed term in the application form
and student handbook to state that there are tables and chairs in the
classroom, it goes without saying that these must be provided in class!
(ii) Implied by common law (including equity) ( )

For example:
Employment fiduciary duties owed by the employee to the employer
Banking bankers owed implied duty of care to their customers.
Equitable concept of unconscionability ( ) in all other
contracts
(iii) Implied by statute

Term One
For example, Sale of Goods Ordinance contains most of the implied terms for
the purpose of sale of goods transaction; Employment Ordinance contains
implied terms and duties owed by employees and employers respectively.
We shall use the following statutes for illustrations:

a) Sale of Goods Ordinance Cap. 26
b) Supply of Service (Implied Terms) Ordinance Cap. 457
c) Unconscionable Contracts Ordinance Cap. 71
a) Sale of Goods Ordinance (SOGO)

The legislation governs all contracts for the sale of goods in business. It
provides a legal framework for the relationship between the buyer and the
seller of goods, implies certain rights and duties on the part of the buyer and the
seller, and provides remedies in the event of either the buyer or the seller
breaching the contract.
Goods () includes all chattels personal other than things in action and
money ( ) (s.2 of the
SOGO)
Goods must also be distinguished from services, which involve the

exercising of skill and work.
Sale of Goods contract

- the seller transfers or agrees to transfer the property in goods to the buyer
for a money consideration: s3(1)
- the contract may be made in written or in oral or partly by either of them: s5
- does not apply to hire purchase agreement since it is not a sale.
- does not apply to barter or exchange since there is no price in money.
Terms implied by SOGO

(i) Time (s 12)
Unless a different intention appears from the contract, time of payment are not
deemed to be of the essence of a contract of sale.
(ii) Right to sell (s 14)

In case of a sale, the seller has a right to sell the goods, and in case of an
agreement to sell, he will have such a right at the time when the property is

Term One
transferred: s 14(1)(a)
If the seller has no right to sell (e.g. he had stolen them, or only held them on
hire or hire-purchase), then he will be liable to the buyer for breach of
condition. The buyer can recover the full price.
(iii) Description (s 15)

The goods shall correspond with the description: s 15(1)
Goods ordered through a catalogue, or a new car ordered from the
manufacturers through a dealer, will always be sold by description.
Even in the case that the buyer himself select the goods, it is still a sale by
description: s 15(2)
(iv) Merchantable quality (s 16(2))

- pre-condition: the seller sells the goods in the course of business (ie. Not
apply to private / private sale)
- goods sold are of merchantable quality and fit for (a common) purpose
- merchantable quality means that fit for the purpose for which goods of
that kind are commonly brought (common purpose); that it is of such
standard of appearance and finish; that it is free from defects; that it is safe;
and it is durable: s 2(5)
- EXCEPTIONS
The defects has been specifically drawn to the buyers attention
BEFORE the contact is made; or
The buyer examines the goods BEFORE the contract is made and
OUGHT TO reveal such defects
Wong Ng Kai Fung v. Yau Lai Chu [2005] 4 HKLRD 134
Seller (D), a pet shop owner in Homantin, sold a 3-month-old Schnauzer dog to
Buyer (P). Before the purchase, D said that the dog may have the possibility of

Term One
suffering latent disease. The night after the purchase, P saw the dog coughing
and it died from distemper within a month of the sale. P claimed the dog is not
of merchantable quality and D failed to draw special attention to her. HELD:
dogs are goods within SOGO. A general reference by the seller to the
possibility or risk of the existence of a latent defect, without stating that it did
exist, would not enough. The seller must have pointed to the very defect that
the buyer complained of before the purchase. The seller is responsible even
though the seller has no knowledge of the defects (disease) at the time of sale.
Grant v. Australian Knitting Mills (1936)

A customer developed a skin rash after purchasing a pair of woollen underpants
from a shop.
HELD: the under pants were not of merchantable quality. It is not a defence to
show that the defect could easily be repaired.
(v) Fitness for (a particular) Purpose (s 16(3))

Pre-condition: the buyer makes know to the seller, in the course of business,
any particular purpose for which the goods are being bought
- the goods supplied shall reasonably be fit for that purpose
- The buyer must make it known to the seller the particular purpose for
which he was buying the goods (Baldry v. Marshall (1925))
- If the buyer buys goods which have more than one common use or if the
buyer wants goods for an abnormal purpose, he will not benefit from
s.16(3) unless the seller was expressly informed of the particular purpose,
for which they were required (Griffiths v. Peter Conway (1939))
- If the buyer has made it known to the seller the purpose of the goods, then
the seller will still be liable for breach of the condition even though the
purpose for the goods was not a usual or common purpose.
- The goods must be fit for their purpose at the time the contract is made. If
the defect appears after the sale has taken place, then there will be no
breach of s. 16(3). But the goods must be reasonably fit for the purpose
for which the buyer indicated he wanted them and must continue to be so
for a reasonable time after delivery (Lambert v. Lewis (1982)).
- Liability is strict, there is no need for the buyer to prove negligence on the
sellers part. Once the goods are not fit for purpose, there is a breach of
condition (Frost v. Aylesbury Dairy Co. (1905))

Term One
(vi) Sale by Sample (s 17)

- applies to both business and private sale
- applicable only if there is a term in the contract that it is a contract of sale
by sample.
- Sample is exhibited during negotiation is not enough
- The goods must match the sample shown to buyer (s.17(2)(a)). It is no
defence the bulk can easily be made to correspond with the sample (E & S
Ruben v. Faire Bros (1949)).
- The buyer must be given the opportunity to compare the bulk with the
sample (s.17(2)(b)). If the buyer accepts the goods after comparing, he
cannot then reject the goods.
- The buyer cannot complain of defects which he could reasonably have
discovered on an examination of the sample. The goods should be free
from any latent defects (s.17(2)(c)).
b)Supply of Service (Implied Terms) Ordinance

Apply to contract of supplying of service where the supplier is acting IN
THE COURSE OF A BUSINESS.
The supplier will carry out the service with reasonable care and skill: s 5
The supplier will carry out the service within a reasonable time: s 6
The customer will pay a reasonable charge: s 7
c) Unconscionable Contracts Ordinance (UCO)

To empower courts to give relief in certain contracts found to be
unconscionable.
Jurisdiction (s 5)
Any SALE OF GOODS or SUPPLY OF SERVICES contracts.
Effect (s 5)
The court may refuse to enforce the contract or limit the application of the
contract without the unconscionable part.
Matters to be considered by the court (s 6)

- bargaining powers of the consumer
- whether the consumer understands the documents
- whether any undue influence exerted on the consumer
- whether the consumer could have acquired identical service or goods

Term One
Hang Seng Credit Card v. Tsang Nga Lee [2001] 3 HKLRD 33, CFI
Ps were a credit card company, a bank and a finance company. The D owed P
about HK$18,000 and P asks for about $7,000 as debt collection charges
(around 30% of the owed amount). The credit card agreements were standard
form agreements with full indemnity costs provisions. The provisions provided
that Ds would be responsible for all costs and expenses, including legal costs,
incurred in enforcing the agreement and/or recovering any sum owed. The
court refused to enforce the provisions. Ps appealed against the cost order,
arguing that the provisions were binding. At issue was whether the provisions
were unconscionable and thus unenforceable under the Unconscionable
Contracts Ordinance (Cap.458) (UCO).
HELD In this case, the relevant matters in s.6 were: the relative strengths of
the bargaining positions of the parties; whether Ds could have acquired the
identical service from a person other than Ps; and whether Ds were able to
understand the provisions. Taking, inter alia, these matters into account, the
provisions were unconscionable:
a) Ps were in a much stronger bargaining position than Ds

b) There was a lack of choice in acquiring identical services.
c) Ds were not a position to understand the provisions.
d) d) The provisions were extremely wide and extended to all costs and
expenses even those unreasonably incurred.
After the Hang Send Credit Card case, most banks in Hong Kong re-drafted the terms
and conditions for the enforcement expenses section.
E.g.
(D) Interpretation and construction of terms

Term One
Parol evidence rule ()

The final written terms in the contract is supreme. No other evidence,
including oral or written evidence, before or after the contract is made, can be
accepted by the court to contradict, vary or add to the written terms of the
contract (LCC v Henry Boot & Sons Ltd (1959)).
Contra proferentem rule ()
For interpretation for exemption clause only
Purpose: consider whether the wording of the exemption clause is clear
and wide enough to protect the party relying on it.
The court will construe the meaning of an exemption clause against the
party relying on it and resolves the loopholes in favour of the other party
(non-drafting party).
4. EXEMPTION CLAUSE
A contract may contain expressed terms to exclude or limit liability for
breach of contract or negligence. Although such clauses are permissible,
however the court took a jealous and reluctant attitude to apply such
clause.
An exemption clause, or sometimes known as exclusion clause, is a clause
commonly found in commercial contracts.
It uses to exclude either in full liability or in part liability for certain
breaches of contract or the consequence of certain events.
For example, the clause will seek to exempt a party from liability if there
are delays in the delivery of its products or delay in payments.
Usually, exemption clauses are imposed by the contracting parties with
stronger bargaining power. They are sometimes open to considerable
abuse.
The exemption clauses are governed by the Control of Exemption Clauses
Ordinance and common law rules to protect the weaker parties by
determining whether the specific exemption clause is valid or not.
Step 1: Was the clause part of the contract?

Anyone who wishes to rely on such term must prove that the other party agreed
to it AT or BEFORE THE CONTRACT WAS MADE.
(i) Incorporation by way of signature

LEstrange v. Craucob (1934)
HELD: Once you sign a contract, you will in general be bound by everything

Term One
which the document contains even if you have not read it.
(compared with : Non est factum)
Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515 at 533,
Litton NPJ acknowledged:
......the fundamental principle that, generally speaking, when a person signs a legal
document, he or she is bound by the act of signature : As a matter of general law, it is
no defence to say that he or she did not understand the contents of a legal document;
that person takes the chance of being bound by its terms, as he or she can take the
simple precaution of not signing until its contents have been fully explained and
understood.
(ii) Incorporation by way of reasonable notice
Any attempt to introduce an exclusion clause after the contract has been
made will be ineffective because any consideration for such a clause
would then be past.
The party relying on the exemption clause must prove that it has taken
reasonable steps to bring the notice of the clause to the other contracting
party before the contract is concluded.
Olley v. Marlborough Court (1949)

Property was stolen from P during her stay at a hotel. There was a notice in the
bedroom that the hotel accepted no responsibility for articles stolen.
HELD: ineffective terms since P only saw it after the contract had been made
at the reception desk.
e..g When you drive into a car park, there is always a notice at the entrance
which stated the hourly charge. If you agreed to the term (charge) then you
accept the offer by pressing the button to get your ticket. A contract is made.
Therefore the charge would not effective if the notice of the charge rate is put
at the exit of the car park where you finished the contract and left.
(iii) Incorporation by prior course of dealing

Where there is a prior and consistent course of dealing between the parties,
exemption clauses applied to earlier contracts may be read into the
subsequent contracts (J Spurling Ltd v Bradshaw (1956))

Term One
Step 2: Contra proferentem rule

See above 3 (D)
Step 3: Control of Exemption Clauses Ordinance

a) Personal injury or death caused by negligence [s. 7(1)]
No exemption clauses can try to exclude liability for personal injury or death
caused by negligence if used by someone in business.
b)Other forms of liability (eg. financial loss and damage) caused by

negligence [s. 7(2)]
Only when such term or notice satisfies the requirement of reasonableness
i.e. was it a reasonable clause in all the circumstances?
For your studying purpose, you may assume s 7 apply generally to ALL kind
of contracts.
c) Liability of breach of contract (s. 8)

Pre-condition: When one of the parties deals as consumer OR the contract
is a pre-printed standard form
You are deemed to deals as consumer if you make the contract neither for
business purpose nor in the course of business but the other party does
make the contract in the course of a business. (s. 4)
No exemption clause can exclude any liability from breach of contract
d)Liability for breach of sale of goods contract (s 11)

No exemption clause to exclude liability on the owners title under s 14
SOGO (This applies to both consumer and business sale)
In case of dealing with a consumer, no exemption clause to exclude
liability on the goods description and its quality under s 15, s 16 and s 17
SOGO
Exemption clause can be upheld for the sale of goods contracts in case of a
business-to-business sale provided that such exemption or exclusion is
reasonable.
e) Test of Reasonableness (Schedule 2)

Strength of bargaining positions

Term One
Whether there is an inducement

Whether the customer know or ought to know the existence of such
exclusion clause
Whether the clause excludes liability for a term of the contract which is
likely to be broken
Whether the goods were manufactured, processed, or adapted to the special
order of the buyer
PART II DEFECTIVE CONTRACTS

1.Misrepresentation
A party to a contract is entitled to remedies if the other party has made
a misrepresentation prior to the contract.
Those who want to rely on misrepresentation must prove:

1.1 The statement, which they claim they relied on, was a statement of
existing fact, not an expression of opinion or a statement of law; and
1.2 The statement was made before, or at the time, the contract was
entered into; and
1.3 The statement was made to induce them to enter into the contract (the
representee must have relied on the statement e.g. actually heard the
statement or his judgment affected by the statement); and
1.4 They in fact relied on the statement although there may be other
factors on which they also relied; and
1.5 The statement was untrue; and
1.6 The representee has no knowledge that the statement is untrue.
A representation once made is likely to have continuing effect. So if made

for the purpose of an intended transaction it will continue until the
transaction is completed or abandoned or the representation ceases to be
operative on the mind of the representee: With v OFlanagan [1936] 1
Ch. 575, 585
Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15

Term One
The claimants, the Spice Girls, entered into a contract

with the defendant motorcycle manufacturer under
which the defendant agreed to sponsor the Spice Girls'
tour in return for promotional work (for Spice Sonic
Scooters) up to March 1999. The contract was
signed on 6 May 1998. Geri Halliwell left the band on
27 May that year. The defendant discovered that
Halliwell informed the other members of the
group of her decision to leave prior to the
signing of the contract (i.e. 25th April 1998). The
defendants claimed they had been induced to enter
the contract by a fraudulent misrepresentation.
The claimants denied misrepresentation.
It was held by the Court of Appeal that the Spice

Girls had made a misrepresentation by conduct in that all of the members
participated in a commercial photo shoot, at considerable cost to the
defendants, at a time when they knew that one member was to leave. They also
engaged in other conduct, such as the supply of logos, images and designs,
which included the five Spice Girls, which also amounted to misrepresentation.
Type of misrepresentation:
A) Fraudulent misrepresentation
Derry v. Peek (1889)
If statement made with knowledge it is false, or with no belief that it is true
or if made recklessly not caring whether it is true or false
Therefore the representee must prove a dishonesty intention which is

rather difficult.
It would be a defence if the representor honestly believed that the
statement he made is a true one.
B) Negligent misrepresentation
A false statement which a person had no reasonable grounds for believing the
statement to be true. It would a defence the person who made the statement can
prove that the statement was not made negligently: s. 3(1) of the
Misrepresentation Ordinance

Term One
Example: A real estate broker tries to sell a house to a buyer, who stresses his need for peace and quiet.
The broker promises that the house is very quiet. In reality, the house next door is undergoing a very
noisy reconstruction. Although the broker did not know this, her promise that the house was quiet was
made without her having any reason to believe that that was the case. She simply assumed it. This
would be a negligent misrepresentation (had she known about the construction and lied about it,
however, that would be a much more serious fraudulent misrepresentation).
Esso Petroleum v. Mardon (1976)

Esso built a new gas station. Under the previous estimation, the annual sales
would be 200,000 gallons of petrol. After the station had been built, Esso
discovered the cars could only gain access from a side street. Without
notification on this fact and revise its previous sale estimate, Esso signed a
lease with Mardon. It turned out that Mardon failed to make the business
because of the limited access by the cars.
HELD: Esso did negligently made misrepresentation to Mardon. Lord
Denning said that a man who professes to have special knowledge and skill
will be liable in damages if he negligently gives unsound advice or misleading
information or expresses an erroneous opinion and thereby induces the other
side to enter into a contract with him.
(C) Innocent misrepresentation

The statement maker can show that he had reasonable ground to believe and
did believe his statement was true.
Silence generally not misrepresentation unless a person is under a duty to

disclose information and he fails to do so. e.g. the person applying for the
insurance policy is duty bound to disclose everything that the insurer would
need to know.
Silent can be a misrepresentation if a person makes a representation by

conduct.
If the statement made is only a half-truth (omitted to say something which is

very relevant) and the silence distorts a fact then it would also be a
misrepresentation.
Remedies under common law & Misrepresentation Ordinance

a) Remedies under Fraudulent Misrepresentation

Term One
The injured party may rescind the contract (cancellation and putting the parties
back to where they were before the contract was made) AND may also sue for
foreseeable (direct) damages AND unforeseeable (indirect) damages.
Example: You sell someone a stereo for $50 telling them that it is fully functional, when you know
that it is actually totally broken. The buyer, who is a professional DJ, now cannot perform his job, and
is fired. Because you knew the stereo was broken, the court can require you to pay back the DJ for the
loss of his job.
b) Remedies under Negligent Misrepresentation

back to where they were before the contract was made) AND may also sue for
foreseeable (direct) damages.
c) Remedies under Innocent Misrepresentation

back to where they were before the contract was made) OR may sue for
foreseeable (direct) damages.
2 Mistake
A mistake recognised by law may render a party to a contract able to discharge
himself from the contractual obligations.
2.1 Common Mistake

Both parties make the same mistake. Each knows the intention of the other and
accepts it, but each is mistaken about some underlying and fundamental fact
(e.g. existence of subject matter (Couturier v Hastle), ownership of subject
matter (Cooper v Phibbs)). E.g. both are unaware that the subject matter or the
quality of their contract has already perished.
Effect & Remedies

The whole contract is void both at common law and equity.
2.2 Mutual Mistake

The parties misunderstand each other and are at cross-purposes. E.g. A intends
to offer his Honda car for sale, but B believes that the offer relates to the Toyota
also owned by B.

Term One
Effect & Remedies

The whole contract is void from the start if the contract cannot bind both
parties. The test = whether a reasonable man would infer the existence of a
contract in a given sense.
Great Peace Shipping v. Tsavliris Salvage Intl [2002] 3 WLR 1617, C.A.
2.3 Unilateral Mistakes
A unilateral mistake occurs when one party knows of the mistake.
Mistake as to terms of the contract
Void (see Non est Factum)
Mistake of identity
For example A, pretending to be X, makes an offer to B. B accepts in the belief
that A is in fact X.
B must prove that:-

(a) B intends to deal with X or some other person but not A; and
(b) A did aware of the mistake; and
(c) The identity of A is crucial importance to the contract; and
(d) B took reasonable steps to verify the identity of the alleged X
Shogun Finance Ltd v Hudson [2003] UKHL 62

A rogue went to buy a Mitsubishi Shogun on hire purchase. The rogue told
Shogun Finance Ltd that his name was Mr Patel and produced Mr Patels
driving licence. The finance company did a credit check on Mr Patel, finding
no problems, and the rogue drove away. Then, the rogue sold the car to Mr
Norman Hudson. A non-trade buyer (i.e. consumer) of a car who buys in good
faith from a hirer under a hire purchase agreement becomes the owner, so Mr
Hudson would have been the owner if the hire purchase agreement were valid.
Shogun Finance argued that it was not on the basis that there was a mistake as
to identity. They therefore claimed against Mr Hudson for conversion.
HELD: The majority of the House of Lords held there was no contract
(rescission) of hire purchase between Shogun Finance and the rogue, so that
the car was not Mr Hudson's. This followed the principle established in
Cundy v Lindsay, that written agreements do not infer a presumption to sell to
the immediate purchaser, where identity is of key importance to contracting.

Term One
Plead of Non est Factum (not my deed)

Where those who signed the document argues that the document is different
from the document which they thought they were signing, and that they were
not negligent in signing the document. Moreover the person who was
deceived must be of reasonable intelligence. e.g. a person who is illiterate in
English is most likely succeed to set aside a contract by pleading Non est
Factum.
(by courtesy of Oriental Daily, 1st November 2005)
Effect & Remedies

The contract is void at common law and equity.
3 Frustration
A contract can be said to be frustrated when an
event occurs between formation and
performance which
(a) is not the fault of either party; and

Term One
(b) can be regarded as striking at the substance of the contract; and

(c) is beyond what the parties contemplation (control).
The burning down of the Surrey music hall in Taylor v

Here are some examples:- Caldwell deemed a contract for its hire frustrated
- Supervening destruction of a specific thing on which the contract depended
Taylor v. Caldwell (1863)

A music hall which was let for the purpose of giving concert was burnt down
before any of the concerts could be held
- Supervening illegality of performance e.g. A contract, legal when made,

may subsequently become illegal by a change in the law.
Metropolitan Water Board v. Dick, Kerr & Co (1918)

A building contract suspended by order of the government was held
frustration
- Supervening personal incapacity in a contract e.g. death of one of the
parties or seriously incapacitated.
Condor v. Barron Knights (1966)
A contract by a drummer to play 7 nights a week was frustrated when he
became ill and was only able to play on 3 nights
1. More examples on frustration:
An expected event which is the foundation of the

contract fails to take place. In Krell v. Henry [1903] 2
KB 740, premises were let to view a coronation
procession which was later cancelled (Note: King
Edward VII, Edward died on May 6, 1910, after a series
of heart attacks). However, in Herne Bay Steam Co v.
Picture of King Edward
Hutton [1903] 2 KB 683, a contract was made to use a VII (1901-1910)
boat for viewing a royal naval review and for a days
cruise. The contract was held not to be frustrated when
the review was cancelled because of the kings illness since the cruise around
the fleet was still possible. The contract was not completed undermined.

Term One
Performance of a contract is so inordinately

delayed that fulfillment would involve
something fundamentally or commercially
different from that contemplated in the
contract. In Wong Lai Ying & Others v.
Chinachem Investment Co Ltd [1979]
HKLR 1, the contract provided that flats in
a building yet to be constructed would be
sold to P. During construction, a major
landslide caused destruction of the work
already done and prevented further work on the site (University Heights (
) at 12 Babington Path ( , )). The flats were
completed 2 1/2 years later. The Privy Council held that the contract was
frustrated by the long delay.
2. Limits to frustration
Events which simply makes the contract more difficult, expensive or more
onerous to perform do not lead to a frustration.
Tsakiroglou & Co Ltd v. Noble and Thorl GmbH [1961] 2 ALL ER 179
A cargo of groundnuts (
) was to be transported
from Port Sudan ( )
in the Republic of Sudan
(in Africa) to Hamburg (in
Germany) via the Suez
Canal (near Red Sea).
However due to the closure
of the Suez Canal (due to
the Hundred Days War and
the Suez War of 1956), the
seller of the nuts failed to

Term One
deliver the cargo pleading frustration of the contract. The court held that there
was no frustration as there was still a valid route of transportation via the Cape
of Good Hope. The fact that this route made the contract more difficult and
expensive to perform did not in itself amount to a frustration.
Port Sudan Cape of Good Hope

Frustration cannot be self-induced.
Maritime National Fish Ltd v. Ocean Trawlers Ltd [1935] AC 524
P chartered Ds boat which required a license to operate. They had 4 boats of

their own and applied for 5 licenses but were given only 3 which P gave to
their own boats. The charter contract was held not frustrated since it was a
deliberate act which deprived the boat of a license.
-
Effect & Remedies
3. LARCO (Law Amendment and Reform (Consolidation) Ordinance, Cap. 23)

(())
LARCO provides that:
Any money paid before the frustrating event is recoverable (i.e. Money
paid before frustration must be repaid)
Any money payable before the frustrating event is no longer payable (i.e.
If it was due and payable but not paid, it need not be paid)
The court had discretion to allow a party who has incurred expenses before
the frustrating event to retain or recover money to cover them, and
Where prior to frustration one party has received a valuable benefit, the
court may order the payment of a just sum for it

Term One
The LARCO does not apply to: charterparty, contract of insurance, contract to
which the SOGO applies.
4 Duress
If someone signs a contract as a result of being threatened, this is common law
duress and the contract is voidable and of no effect.
This is a common law factor but it renders a contract voidable, showing the
court reluctance to upset third party rights.
4.1 Physical duress

The party must prove that the contract was induced by violence or unlawful
restraint, or threats thereof, to the contracting party or a member of that
persons family.
Barton v. Armstrong [1976] AC 104

D threatened to kill P unless P signed a contract. The Privy Council HELD
that made the contract voidable.
4.2 Economic duress

A contract may also be avoided where a person enters into a contract as a result
of threats or pressure that does not involve threats of bodily harm, and is
recognised that there are improper forms of pressure to apply in commercial
transactions. The threat must be coercive to the extent that the pressure is
unlawful, and caused a serious threat to the economic interests of the party
suffering the duress.
North Ocean Shipping v. Hyundai Construction : The Atlantic Baron [1979]

QB 705
The defendants agreed to build a ship for the claimants for a certain price
specified in US dollars. After entering the contract the US dollar was devalued
by 10%. The defendants threatened not to complete unless the claimants paid
an additional 10% on the contractually agreed price. The claimants had a
valuable charter lined up so agreed to pay the additional sums and did pay them
without protest. 8 months after delivery of the ship the claimants brought an

Term One
action to recover the additional sums paid.
The court HELD that there was economic duress. The renegotiation was
prompted by coercion by the D. (In this case, P failed to protest for the unfair
treatment promptly so P lost the right to claim back the money)
5 Undue Influence
Undue influence arises where the parties to a contract have unequal bargaining
power. The stronger party will be able to dominate the weaker party and may
insist on the inclusion of terms which are very unfair. For example, the weaker
party may agree to transfer property to the stronger party for a consideration
which is grossly inadequate. This is why the law of equity recognises undue
influence. There are 2 kinds of undue influence: presumed undue influence and
non-presumed undue influence.
Undue influence is presumed when a contract is made between the following

parties.
Doctor and patient

Solicitor and client
Parent and child
If there is no presumption of undue influence, the weaker party will have to

prove that he has entered into a contract whilst being unduly influenced. For
example, a customer wants to prove that he entered into a contract with the
bank out of his free will. This is often occurred in case of mortgage or
guarantee contract. The court has ruled that a fiduciary relationship (trust and
confidence) shall exist in order for one to rely on undue influence.
Lloyds Bank v. Bundy (1975)

HELD: a relationship of trust and confidence found between the customer and
the bank manager. The farmer (the customer) relied on the bank managers
advice to sign on the mortgage agreement. It was clearly in the banks interest
that the customer provided the security, and the bank failed to advise the
customer to gain some independent advice. The mortgage was set aside.
Bank of China (Hong Kong) Ltd v. Wong King Fu [2002] 1 HKLRD 358, CFI

Term One
FACTS: D and X were brothers. X obtained a loan from P and as security, D agreed
to execute a charge in Ps favour. X later defaulted and P sued D to recover the loan
sum. D sought to set aside the charge. The issue was whether there was a
presumption of undue influence.
HELD: Presumption of undue influence does not arise here. Looking at the nature
of the transaction and the characters of both D and X, there was no evidence that D
had been manifestly disadvantaged. D was an educated person with good commercial
sense, it could not be said that he had placed trust and confidence in X or that X had
acquired an ascendancy or domination over D. Nor could the transaction be readily
explicable by the relationship between them.
Re Lai Yin Shan [2002] 3 HKLRD 500, C.A.

FACTS: The wife is appointed by her husband as director of a company. In June
1997, her husband again visited her and the daughter in Canada and asked her to sign
another similar page, again saying that it was a "bank credit re-arranging document"
and repeating that there was no risk at all. She said "as I trusted my husband, I signed
as requested without further inquiry." The wife (debtor) returned to Hong Kong with
her daughter and her husband in late June 1997. She was unaware that the documents
which she had signed were personal guarantee documents and that if she had been
aware of the matter she would not have signed the documents. The company owed
HK$20,269,802.95 plus interest to HSBC. HSBC applied for the wifes bankruptcy.
HELD: the bankruptcy application was dismissed. The bank should take
reasonable steps to satisfy itself that the wife actually understood the nature and
effects of the transaction, so she should enter into the transaction with her eyes wide
open. In this case, the bank failed to do that.
Hongkong Chinese Bank Ltd v. Onlink Investments Ltd, CACV 223/2002

(CA), unrep., Rogers JA, Le Pichon JA and Yuen JA, 30th July 2003
M and D were mother and daughter and M granted D a general power of
attorney and asked her to find a property. M purchased a property in HK and D
later caused the property to be assigned to M and D as joint tenants and D
signed the assignment as attorney for M. 5 years later, D applied to charge the
property to another person as security for the repayment of loans granted to a
company of which D and her husband were shareholders and directors. Ds
husband assured to the mortgagee banks solicitors that M was aware of this
mortgage and this led the mortgagee banks solicitors to prepare the relevant

Term One
letter of confirmation. Ds husband procured M to sign the letter and later

returned it to the mortgagee banks solicitors. The question is whether the
mortgage was voidable on the ground of D and her husbands under influence
over M.
HELD: The bank (P) could not rely to the Power of Attorney (PoA) to indicate
the knowledge of M over this transaction and the risk involved. Secondly, P
know that M and D were mother and daughter and this was the relationship
which the law irrebutably presumed the trust and confidence. P should take
reasonable steps to contact M and inform her of the risk of that mortgage and
advise her to take independent legal advice. So the mortgage was voidable.
The bank appealed to the Court of Appeal but dismissed by the 3 judges on the
same grounds
Dao Heng Bank Limited v. Ho Yin Yuk [2003] 1 HKLRD 28

D1 is an old and illiterate woman. D2 called D1 his godmother (). D2
told lies to cheat D1 that D1 owed a large sum of money to a third party in
order to get her to mortgage D1s property for the mortgaged money. P was
suspicious of the reasons given by D2 for the loan, but nothing was said to D1
when D1 signed the loan agreement. Later D1 argued that the loan agreement
was of no effect since she signed under undue influence.
HELD: Judgement for D1. Where a victim entered into a transaction

voluntarily and willingly but did so because of lies or wrong information in
relation to the transaction supplied to him by the wrongdoer which he believed
as true based on trust and confidence, it is open to the victim to plead undue
influence. P failed to take necessary steps by making the requisite inquiries to
D1 independently to eliminate the undue influence.
6 Illegality
Even if all the requirements for forming a contract are met and a legally
binding contract is apparently formed, the courts will not uphold a contract
which is illegal or contrary to public policy.
The basic maxim: ex turpi causa non oritur action (no action can arise from
a wrongful cause).
A contract which is against public policy and declared illegal by the court is

Term One
unenforceable.
6.1 Illegal at common law

Contracts to commit a crime or tort (civil wrong) (e.g. bogus marriage)
Contracts that are sexually immoral (e.g. a contract of prostitution)
(But for morality, different societies have different attitudes on tolerance
level on morality. Even on the same society, the attitude may also be
changed from time to time.
e.g. in Pearce v Brooks (1866) cohabitation agreement is not enforceable
since it promotes immorality.
But in 1996, the case Armhouse Lee Ltd v Chappell (1966) the UK Court
of Appeal did not find any generally accepted moral code that condemned
the telephone sex lines and did not even consider advertisements relating to
prostitution and obscenity illegal.
Contracts to pervert the course of justice

Contracts with an enemy in wartime
6.2 Illegal by statute

Unauthorized lending (i.e. interest rate higher than 60% p.a.!) contrary to
Money Lenders Ordinance
6.3 Contrary to public policy

A contract states that the courts have no jurisdiction over that contract
A contract to prevent a person form marrying at all, or to marry one
particular person and no one else.
A contract to adopt a child
A contract restricts the future liberty of a person to carry on his business,
trade or profession in any way he chooses. (we may come to this again in
Employment contracts)
7 Capacity to contract
The following do not have the ability (capacity) to enter into
a contract:-
(a) minors (persons under the age of 18) and those
defined under Age of Majority Ordinance
(b) lunatics, the mentally disordered or

Term One
intoxicated (drunken) persons
Minors
Effect: For (a), the contract will be generally voidable but not void. The
contracts bind the adult party but not the minor party. The minor has the
option to avoid the contract or affirm the contract.
Consequence: (1) If the minor avoid the contract rescission-the
minor needs to refund the money received or return the goods to the owner
if the minor chooses to avoid the contract. (2) If the minor affirm the
contract, the minor is only required to pay the reasonable price for the
goods or service, which may not be the original contract price.
Exception 1: contract for necessaries: subjective elements and objective
elements.
Definition: For objective element, it means things necessary are those
without which an individual cannot reasonably exist (Chapple v Cooper
(1844)), such as food, clothing and accommodation. For subjective
element, it asks whether the particular thing supplied is appropriate to the
particular minor who has received it, even if the thing itself is classified as
necessaries in general sense. Necessaries defined by section 4(2) of
SOGO as goods suitable for the minors status and position in life and to
his requirement at the time of sale and delivery. Such contract can be
enforced by the adult party provided the adult party can prove that the
necessaries were in fact essential to this particular minor.
Nash v Inman (1908)

A contract for the purchase of 11 waistcoats by a university student was not
held to be for necessaries. This was because although the waistcoats could be
proved to be suitable for the minors position in life, the minor had already
been supplied with several waistcoats and thus they were not needed at the time
of the purchase.
Exception 2: contract beneficial to the minor, e.g. contract of

apprenticeship, employment, and education, which taken as a whole are for
his benefit.
Lunatics, the mentally disordered or intoxicated

Term One
persons.
Effect: For (b), the contract will be generally unenforceable but not void.
The contract is unenforceable if he or she was aware of the lack of capacity
(i.e. mentally disabled or drunken) on the other side. If the contract is
made in ignorance of the mentally disabled or drunken conditions, it will
be fully enforceable.
8 Discharge of contract ( )
8.1 Discharge by completion of contract
Parties will be released from primary obligations once they have completed all
that they were bound to do by the contract.
The general rule is that performance of a contract must be precise and exact.
Explanation: If someone asks you to paint a wall for him and pay you HK$500.
You can get this money only if you paint the wall for him. Failure to paint the
whole will result in getting nothing. By the same token, if he paints the whole
wall for you, you cannot just pay HK$499! You have to pay the amount as
promised (i.e. HK$500).
This means that both parties must do precisely and exactly what they promised.
By using the above example, if he only paints half of the wall, is he entitled to
get the payment of HK$250 from you?
Answer: If the contract is an entire contract (,,
), NO!
If the contract is a divisible contract ( ) (i.e. the contract can be
split into many stages), then YES!
If divisibility () is not expressed in writing in the contract, there is a
presumption against divisibility.
The party wishing to get payment in pro rata basis on percentage of completion

Term One
of work, he has to prove that divisibility was intended when the contract was
made.
A contract which provides for payment by instalments is evidence that the parties
intends to create a divisible contract.
Exception to general rule in entire contract: (1) Substantial performance (
) and (2) Acceptance of partial performance ()
If the contract is substantially performed, the party who was innocent cannot
treat himself as discharged from his liability to pay.
The default party is entitled to recover the contract price less the value of the
work not performed.
Hoenig v Isaacs (1952)

Isaacs is an interior and furniture designer. He agreed to decorate Hoenigs house,
designed a tailor-made bookshelf and wardrobe for the price of 750. After
completion, Hoenig only paid 400 because he complained the poor workmanship
and refused to pay the final balance of 350.
HELD: the contract had been substantially performed. Isaacs was entitled to the
outstanding 350 less the cost to remedy the poor workmanship and the defects which
valued 55. [Note: Isaacs finally got 350 - 55 = 295]
If one of the parties only partly carries out his side of the contract, but the other
party, exercising a genuine choice, accepts the relevant goods or services, the
court will imply a promise and a new contract to pay for what he has received.
The term used to describe a claim for the work done is quantum meruit (a
Latin phase means as much as he has earned ().
The acceptance of partial performance is a variation of contract.
It is valid if the variation is accepted by both parties.
Variation of contract should in general be supported by consideration.
Otherwise, there must be promissory estoppel ().

Term One
8.2 Discharge by frustration

(refer to frustration) (p.29)
8.3 Discharge by breach

Only repudiatory breaches (i.e. fundamental breach of contract) will lead to
discharge.
A breach of contract occurs (1) where a party does not perform or (2)
shows an intention not to perform his obligation under the contract
Where before the date of performance, a party repudiates the contract the
contract by explicitly declaring that he prepares not to perform his part of
obligations under the contract. This is called anticipatory breach.
For anticipatory breach, the innocent party has an election (1) & (2).
(1) He may accept the breach, treat the contract as discharged and sue at
once for the breach. Where the innocent party accepts the repudiation, it is
sufficient that the communication or conduct clearly and unequivocally
communicates to the repudiating party that the innocent party is treating
the contract as discharged.
The innocent party need not personally or by agent notify the repudiating
party of his choice to treat the contract as discharged (Vitol SA v Norelf
(1996))
(2) Alternatively, the innocent party may treat the contract as alive and
wait and see if the other does in fact perform at the time of performance
(White & Carter (Councils) Ltd v McGregor (1961)).
If he does so, he is at risk of losing his right to sue because the contract
becomes frustrated before the date of performance of the contract (Avery v
Bowden (1855)).
9. Remedies in Common law and Equity

9.1 Common law remedies: Damages
The purpose of damages is not punishment but to restore the plaintiff to the
position he or she would have been in had the contract been performed
satisfactorily. Damages are divided into 2 areas: liquidated and
unliquidated.
Liquidated Damages ( )
Damages which may be pre-estimated and quantified into monetary terms.
Usually it would be the contract price, the expense incurred and the actual

Term One
loss due to the breach.

Instead of agreeing on a figure, the contracting parties may include in the
contract a formula for determining the damages payable for breach.
However, the court will not accept the figure as the damages payable or
enforce the formula unless the figure or the formula is a genuine attempt to
establish the likely loss of the breach (Dunlop Pneumatic Tyre Co
Ltd v. New Garage & Motor Co Ltd (1915))
Where any term of a contract relating to damages payable or for breach
does not represent a genuine attempt to estimate the likely loss for breach,
and where the term is designed for discouraging breach of the contract, the
term will be regarded by the court as a penalty clause. A penalty clause (
) is void and unenforceable (Polyset Ltd v Panhandat Ltd
[2002] 5 HKCFAR234).
Where a term providing that a sum is payable as damages for a range of

possible breaches or of different kinds of loss, such a term is likely to be
regarded as a penalty by the court (Philips HK Ltd v AG of HK (1993))
Unliquidated Damages ( )
Damages which may not be ascertained and quantified.
Damages are based on actual loss suffered by the innocent party.
Usually it would be the interest calculated from the date of breach which
has to be assessed by the court.
Duty to mitigate ( )
Once a breach of contract has occurred, the innocent party is under a duty
to mitigate or minimize his loss. He cannot stand back and allow the loss
to get worse. Failure to do so would result in a refusal by the court to
cover damages for that part of loss.
For example:
Property sale of 8 Waterloo at the price of HK$3M on Apr 2004

Term One
HK$2.4M (July 2004) HK$2M (Sept 2004)

Purchaser breached contract Vendor sued purchaser for $1M
Whether Vendor could successfully sue for $1M ($3M-$2M)? No!

Once vendor was notified of purchasers breach, vendor had the duty to mitigate the
loss (i.e. sold the property in July at $2.4M), so vendor could only claim $0.6M ($3M-
$2.4M)
Remoteness ( ) of damages
Even if someone has performed his duty to mitigate the loss he suffered,
the loss could still not be recoverable if it is too remote.
The rules behind remoteness of damages were laid down in Hadley v
Baxendale (1854).
Under the rules, damages are not too remote, and therefore recoverable,
when the damages:
- may fairly and reasonably be considered arising naturally from any
breach of contract; or
- may reasonably be supposed to have been in the contemplation of the
parties when the contract was made
9.1.1 Nominal damages ()

The primary function of nominal damages for breach of contract is declaration
of rights. Where the plaintiff has not suffered any damage, he is still entitled to
damages known as nominal damages for the defendants breach of contract.
Such damages comprise a trivial sum of money. Their function is merely to
declare that the plaintiffs rights have been infringed. This is a common law
remedy.
9.2 Equitable remedies

Pre-requisites:
By discretion of the court.
Only when the mere award of damages is insufficient to remedy the
innocent party.
a) Specific Performance: to order the defaulting party to carry out the

contractual obligations. Failure to comply with the order amounts to a

Term One
contempt of court which is a criminal offence.

b) Injunctions: to stop the defaulting party from the commission of further
breach. An injunction is useful in that it is applicable even though when the
party at fault has not actually breached but has threatened to breach the
contract.
c) Rescission: The purpose is to restore the contracting parties to their pre-
contractual positions. If an order of rescission is granted by the court, the
contract is cancelled and the parties are put back to their respective pre-
contractual conditions in the manner as if the contract had never been made.
Limitation on rescission
Rescission is impossible if any one of the following events happened:
The subject matter in the contract could no longer be restored in the
same condition as when it was purchased.
Innocent third party has acquired it before rescission.
the non-defaulting party in the contract does not require rescission
promptly after being aware of the misrepresentation.
The non-defaulting party in the contract affirmed the contract even if
known of the misrepresentation.
d) Rectification: The court can rectify a contract for the parties where they
have both failed to express in writing what they have agreed upon.
These are remedies ordered by the court. Any refusal to comply with a
court order would render the defaulting party criminally liable for
contempt of court.
10. Contracts to Restraint of Trade

Common to employment contracts
A covenant (i.e. a term) in an employment contract is an undertaking or
promise to do something or not to do something
If the promise is broken, the other party can claim for damages or an
injunction.
A restrictive covenant is a term of the employment contract which may or
may not be enforceable. It is a promise by the employees not to harm
employers business.
There are 4 main types of restrictive covenants:
(1) Not to disclose or use confidential information, trade secrets or
confidential technology belonging to the employers business.

Term One
(2) Not to solicit other employees to leave the employer within a

specified period after leaving the employment.
(3) Not to solicit customers of the employer within a specified period
after leaving the employment.
(4) Not to compete with the employers business for a specified period
after leaving the employment.
(1) & (2) is usually enforceable as part of employees duty of good faith
towards employer
(3) & (4) is generally unenforceable as being in restraint of trade unless
reasonable
Reasonableness:
(1) length of time
Ho Wing-cheong t/a Hong Leong Securities) v. Graham Margot [1991] 1
HKLR 245
D worked as stockbroker for P. There is a covenant that D could not seek
employment with any other securities firms within 3 years after leaving this
employment. Held: 3 years is too long to protect Ps legitimate interests.
(2) scope of limitation (geographical area)

Kao Lee & Yip v. Edwards [1994] 1 HKLR 282
E worked with P solicitors firm as salaried partner. The agreement contained a
clause that if E left P, E could not work as solicitor for 5 years in the whole
world. Held: the firm (P) must satisfy the court that the covenant was no wider
than was reasonably necessary to protect Ps interests. The covenant was too
wide in terms of both scope and duration and was void.
11. Privity of contract ( )

The principle: A person can neither sue nor be sued according to the terms of a
contract to which he or she is not a party. (
)
Price v. Easton (1833)
A contract was made for work to be done in exchange for payment to a third
party. When the third party attempted to sue for the payment, he was held to be
not privy to the contract, and so his claim failed.

Term One
You bought a blow dryer from a shop. One week later, your father
suffered injury on a explosion caused by the defective parts whilst he
attempted to use it. He cannot sue for contract under common law or
SOGO (even though the shop sold it for business purpose).
This is because common law of contract and SOGO only govern
contractual relationship. Since you paid for the blow dryer therefore the
contract was concluded between you and the shop. You may still sue for
contract to get the money back. However your father is an outsider to the
contract. Thus neither you nor he can sue for the injuries suffered.
Perhaps the only way for your father to obtain remedies is to sue for tort,
which is a civil liability not restricted by contractual relationship.
However there may be some changes since the operation of the
Contract (Rights of Third Parties) Ordinance.
Contract (Rights of Third Parties) Ordinance ( )

(Cap. 623) (effective from 5th December 2014)
The principle of privity, first formalised in Dunlop v Selfridge [1915]
UKHL 1, operates on the premise that a third party, who is not a signatory
to a contract has not:
1. provided any consideration or value for the rights which are allegedly
conferred on it under the contract; or
2. evidenced its intention to be bound to the terms of the contract,
through signature of the contract.
However, complications arise where the parties have clearly intended to
grant third party rights under a bilateral contract but the third party has
been unable to exercise them under a strict interpretation of privity.
The Ordinance varies the common law rule of privity of contract by
enabling a third party to enforce a term of a contract where the contracting
parties intend to create a legal obligation enforceable by a third party.
A third party who is not a party to a contract will be able to enforce it if:
1. The contract contains an express term to that effect; or
2. The contract contains a term which purports to confer a benefit (
) on the third party UNLESS on proper
construction of the contract, the parties to the contract do not intend
that the third party have a right to enforce it.
The third party may be non-existent when the contract was entered into.
(section 4(6))
The third party is not required to provide any consideration (section 4(5))

Term One
Both common law remedies and equitable remedies are available to the
third party for any breach of contract. (section 5)
Points to note:
1. Opting-out ()
Contracting parties may expressly exclude the application of the Ordinance and
maintain the common law position if they choose (section 4(3)).
2. Identity of the third party

The third party must be expressly identified by name, class or as answering a
particular description (section 4(2)).
3. Contract Rescission and Variation

In order to preserve the rights of third parties, the contracting parties
cannot rescind or vary the contract by agreement without consent of the
third party (section 6(1)).
This restriction can be overridden by an express term to the contrary or an
express term specifying circumstances in which the third partys consent
is required. For such an express term to have effect, the third party must
be aware of it or, in the absence of awareness, reasonable steps have been
taken to notify the third party of the express term before the third partys
rights are crystallised (section 6(4)(a) and (b)).
The Court has discretion and power (under section 7) to rescind or vary a
contract without the consent of the third party if it thinks it is just and
practicable to do so. In making an order to dispense with the third partys
consent, the Court may impose conditions which include payment of
compensation to the third party.
4. Protection against Double Liability (section 11)

Where a promisor has performed his obligations (wholly or partly) to the
third party, the promisor will be discharged from his or her obligations to
the promisee to the same extent of having performed the same obligation
to the third party.

Term One
If the promisee has recovered from the promisor a sum in respect of the
third partys loss or the promisees expense in making good the
promisors default, the court (or arbitral tribunal) must reduce any award
to the third party to an appropriate to the extent to which it considers
appropriate to take account of the sum.
5. Arbitration Agreement
A third party will be treated as a party to an arbitration agreement for the
purpose of the Arbitration Ordinance (Cap. 609) provided that the third
partys right to enforce a term of the contract is subject to an arbitration
agreement. This ensures that the third party is not only entitled to
arbitration, but is also bound by arbitration (section 12).
However, a significant limitation of the this arbitration provision is where
a third party wishes to enforce an award other than a Hong Kong domestic
arbitration award in Hong Kong.
This is because under the New York Convention, which concerns
enforcement of foreign arbitral awards, only signatories to the arbitration
agreement, i.e. the contracting parties, may enforce an award. This lacuna
has been aired in cases brought before the courts in several jurisdictions
including Canada, Germany and Spain, but remains unresolved.
6. Assignment of third party right () (section 14)

A third party may assign to another person a right under a term of a
contract enforceable by the third party in the same way as a party to the
contract may assign a right under the contract UNLESS the contract
expressly prohibits assignment or, on the proper construction of the
contract, the right is personal to the third party and is not assignable.
EXCLUSIONS
This Ordinance is not applicable to the following contracts:
Bill of exchange
Deed or Mutual Covenant
Contracts of carriage (Ship and Air)
Letter of credits
Companys articles having effect as a contract under section 86 of the
Companies Ordinance (Cap 622)

Term One
Contract of employment against an employee
Identity of third party case study (section 4(2))

Avraamides v Colwill & Martin [2006] EWCA Civ 1533
Mr Avraamides and his wife had hired Bathroom Trading Company (the
Company) to refurbish two bathrooms. The Company's assets and liabilities
were subsequently transferred to the two defendants, Mr Colwill and Mr Martin
(Ds), as partners. As part of the transfer agreement between the shareholders of
the Company and the partnership, Ds agreed to "complete outstanding
customer orders taking into account any deposits paid by customers, and to
pay any liabilities properly incurred by the company".
The Avraamides were unhappy with the refurbishment work and sought to hold
the Ds personally liable. The issue for determination by the court was whether
the Avraamides could enforce their rights against the defendants under the Act.
Ds argument was that, whilst the first part of the relevant clause in the contract
expressly identified 'customers' as a class of third parties upon whom the
contract conferred a benefit, the latter part of the clause upon which the
Avraamides were seeking to rely did not: the requirement that the partnership
must pay "any liabilities properly incurred by the company" did not expressly
identify any third party or class of third parties.
The judgement was in Ds favour.
The words "liabilities properly incurred" could not be construed to mean

"liabilities properly incurred to customers", as it could equally well apply to
suppliers, for example. The use of the word "express" in section 4 meant that it
was not possible to apply a process of construction or implication such that the
reference to customers in the first sentence of the clause could be inferred into
the second half of it. Accordingly, the agreement had failed to expressly
identify any third party or class of third parties with the consequence that it
could not be enforced by Mr and Mrs Avraamides.
Prudential Assurance Co Ltd v Ayres (2007)

It was held that the 1999 Act [i.e. Contract (Rights of Third Parties) Ordinance]
could still apply even if the ultimate beneficiary of the promise would be
someone other than the third party identified for the purpose of section 1(3)
[i.e. section 4(2)]

Term One
Purport to confer a benefit case study

Nisshin Shipping v Cleaves (2003)
The contract between the shipowners and the charterers provided that the
brokers would be entitled to 1% commission of the contract price for the work
done in negotiating the contracts. Once it had been established that the contract
did purport to confer a benefit, there was a rebuttable presumption that the
parties intended the term to be enforceable by the brokers (even if the contract
was silent on this point). There was no evidence to rebut this presumption and
therefore the brokers could enforce that term.
12. Reading
Stott, An Introduction to Hong Kong Business Law, Longman, pp. 67-111 &
pp. 117-124
Carver, Hong Kong Business Law (6th Ed.), Longman, pp.471-480
Antony Sin
Assistant Professor
APPENDIX
How to answer a legal question in the
examination?
1. Identification of the legal issues hidden in the cases.
2. Findings of material facts relevant to the legal issues.
3. Explanation of the legal principles relating to the issues and quotation of court
cases, if any.
4. Application of the statute law and/or the court cases to the specific facts in this

Term One
case.
5. Conclusion and/or your advice to solve the problems.
Sample Question
Beckham bought a picture from Owen. Previously Owen was erroneously told
by an expert that the picture was painted by Picasso, a famous artist. Owen
told Beckham the same incorrect information before he sold the picture to
Beckham. Beckham discovered the truth 2 years later.
Could Beckham return the picture and get a refund of his money from Owen?
Suggested answer plan
First paragraph
-misrepresentation
-what is a misrepresentation?
Second paragraph
-what remedy Beckham wants to get ? rescission in legal term
-what is rescission? Common law remedies or equitable remedies
-what is the limit of rescission? Under what circumstances rescission would not be
granted by court?
-Whether 2 year is a long time to dissuade the court to grant rescission
Third paragraph
-what other remedies available to Beckham? Claim for damages
-what law governing claims for damages on misrepresentation? Section 3 of MO
-Is there any good defence to s.3 of MO?
Fourth paragraph
-what is your conclusion? I.e. whether Beckham can claim rescission or damages
from Owen
Suggested answer
Beckham has to establish that there is a misrepresentation on the part of Owen.

Term One
A misrepresentation is a false statement of fact made by one party to a contract

to the other party to the contract, at or before the time the contract was made,
which induces the other to enter into the contract from the misstatement. The
statement made by Owen is obviously is a false statement of fact, and
misrepresentation can be established without difficulty.
It seems that Beckham is now asking for rescission. Rescission is an equitable

remedy made by the court formally avoiding the contract and putting the contracting
parties back into the positions as though the contract had never been made.
However, rescission is granted at the courts discretion. The right to rescind may be
lost under certain circumstances. For example, restitution is impossible because the
goods have been altered; the misled party had affirmed the contract; a third party has
acquired the right to the goods or there was a lapse of time. In Leaf v. International
Galleries (1950), the court held that the plaintiff had lost his right of rescission
because he discovered the truth 5 years after the contract. It is not clear how the court
will decide in Beckhams case but Beckham shall have verified the identity of the
painter within a reasonable time after he got the painting. 2 year may be too long and
Beckham may lose his right to rescind.
If Beckham sues for damages, he will have to rely on section 3 of the

Misrepresentation Ordinance (MO). Section 3 of the MO states that the
misrepresentator is liable if he cannot prove that he had reasonable grounds to believe
and did believe up to the time the contract was made that the facts represented were
true. However, Owen could have a good defence here as he was told by an expert that
the picture was painted by Picasso.
In this case, Beckham would not be entitled to damages as well as rescission.

Case Example (2)
Brown knows that Wright has been keen to buy his car. On Monday, he tells
Wright that he has decided to sell at a price of 2,000. Wright says that he is
very interested, but would like to think about it. Brown says: I will assume that
you want it, unless you tell me otherwise by Saturday.
On Friday, Wright meets Green who tells him that Brown has just agreed to sell
the car to Smith for 2,250. Wright, who has decided he wants the car,
immediately puts a letter in the post accepting Browns offer. Later that day,
however, he has a change of mind, and calls on Brown to tell him to ignore the

Term One
letter. Brown tells him that his deal with Smith has fallen through, and that he is
still keen to sell to Wright.
Advise Brown and Wright.

Identification of the
legal issues
Suggested Answer:
There are three main issues to consider here: silence as acceptance; revocation of an
offer via a third party; and recall of a posted acceptance. Findings of
Silence as acceptance material facts
Looking first at the question of silence as acceptance, can Browns statement I will
assume that you want it, unless you tell me otherwise lead to a contract without some
response from Wright? If so, it could be argued that there is a contract as soon as
Wright has definitely decided that he wants the car. There are two problems with this,
however. The first is that it would be difficult to say that a contract had come into
existence before Saturday, unless Wright takes some action to commit himself to it,
since he has until then to change his mind. If Saturday had passed without anything
else happening then it might be arguable that there was a contract.
Explanation of the legal
principles
There is a more general problem with this which arises from Felthouse v Bindley
(1862). An uncle and nephew had been negotiating for the sale of a horse. The uncle
made an offer, saying, in effect: If I do not hear from you, I shall assume that the
horse is mine. It was held that there was no contract, because it was not permissible
for one side to impose an agreement on the other in this way.
Revocation of an offer via a third party
Although the House of Lords has suggested, in Vitol SA v Norelf Ltd (1996), that in
certain circumstances silence might be treated as an acceptance, provided that it is
clear and unequivocal, that does not seem to be the case here, so we must look for
some positive acceptance by Wright, if there is to be a contract between him and
Brown.
There is the possibility of such an acceptance in Wrights letter. Again, however,
there are difficulties with this. We must first look at the effect of Wrights
conversation with Green. Green tells Wright that Brown has agreed to sell the car to
someone else. It might be argued that this amounts to a revocation of Browns offer.
Explanation
In Dickinson v Dodds (1876), the defendant had offered to sell a house to the plaintiff, of the legal
principles
Term One
and to leave the offer open for 3 days. In the meantime, however, the plaintiff learnt
from a reliable third party that the defendant was selling the property to someone else.
It was held that this amounted to a communication of the revocation of the
defendants offer, so that the plaintiff could no longer accept it.
Application of the statute law and/or

the court cases to the specific facts
Therefore, it may well be the case that Wright is unable to accept Browns offer. If
this is so, then his letter itself becomes an offer to buy, which will only be effective on
communication to Brown.
Recall of a posted acceptance

Before Brown receives it, Wright arrives in person to say that he does not want to buy.
Conclusion and/or your advice to

solve the problems
This amounts to an effective revocation of his offer, so the conclusion will be that
there is no contract between Brown and Wright for the sale of the car.

CH Businesslaw 2 Contract

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH Businesslaw 2 Contract

Uploaded by

Copyright:

Available Formats

Academic Year 2016/17

CHU HAI COLLEGE OF HIGHER EDUCATION

BBA 211 Business Law

PART I FORMATION OF CONTRACT

A legally enforceable contract is usually created by one of the following two

by executing the agreement in the form of a deed. The agreement will

Breach of Common law

2 All rights reserved

2. THE ELEMENTS OF A BINDING CONTRACT

Mere puff () is an exaggerated slogan or comment which is not an

Test for mere puff: Is the offer so far-fetched ( ) that no

The offer must be accepted within a reasonable time or it will

Byne v Van Tienholven (1880)

3 All rights reserved

1- Oct D posted a letter of offer from Cardiff to NY

Issued: Whether the revocation was effective or not?

Revocation of offer by a reliable informant (third person) is sufficient

Taylor v. Laird (1856)

An offer should be distinguished from An Invitation to Treat (

Fisher v. Bell [1961]

4 All rights reserved

HKSAR v. Wan Hon Sik [2001] 3 HKLRD 283

Pharmaceutical Society of Great Britain v. Boots Cash [1953]

5 All rights reserved

An offer should also be distinguished from merely giving information

Harvey v. Facey [1893]

Facey, however refused to sell at that price, at which Harvey sued.

Held: It was merely an answer to request for information, and not an

Hyde v. Wrench [1840]

Dickinson v Dodds (1876)

6 All rights reserved

D signed and delivered a memo to P that said that he agreed to sell

Gunthing v Lynn (1831)

7 All rights reserved

such terms resulted in it being vague and ambiguous

Nature Test Case law

8 All rights reserved

The offer must still be open.

The acceptance must be absolute, unqualified and in the precise terms

Different means of acceptance

Advertisement for missing

9 All rights reserved

Offer = a unilateral offer asking for help by way of Ad in

Carlill v. Carbolic Smoke Ball [1893]

But Compared with the following case:

The acceptance must be communicated by the offeree himself

10 All rights reserved

Unlike revocation, acceptance cannot be communicated

Holwell Securities Ltd v Hughes (1974)

Quenerduaine v Cole (1883)

11 All rights reserved

Receipt Rule: acceptance is deemed to be made at the time

12 All rights reserved

Mere silence is not an acceptance

In Currie v. Misa (1875), the court defined consideration as some right

Exception: Equitys Doctrine of Promissory Estoppel (also

13 All rights reserved

In order for the doctrine to operate, there must be:-

b) there must be an irrevocable representation made by a representor

Consideration must be sufficient but need not be adequate

Midland Bank v. Green (1981)

14 All rights reserved

Exception: Unconscionability () (Equitable principle)

Love and affection is not good consideration