Law of Contract

The Nature of Contract

 Freedom of contract (the myth in business contract?)

 Parties are of full age
 They are of competent understanding
 They have entered into a contract of their own free will
 Contract and tort distinguished
 Consumer protection and business contract
 Electronic Transaction Ordinance

Classification of Contracts

 Formal and informal contracts

 Express and implied contracts
 Unilateral and bilateral contracts
 Void, voidable and unenforceable contracts

Section 25 – Sale of Goods Ordinance –when the seller of goods has a

voidable title thereto, but his title has not been avoided at the time of the
sale, the buyer acquires a good title to the goods, provided he buys them in
good faith and without notice of the seller’s defect of title. Philips v
Brooks Limited – man in the jewellery shop professing as Sir George
Bullough
Q: Is there a contract?
Q: What are the terms of the contract?
Q: How to discharge a congtract?

3 basic elements:

 Agreement
 Contractual intention
 Consideration

Agreement

An agreement is usually reached by a process of offer and acceptance in the form of a

promise.

Offer - An objective test approach is adopted to identify if a definite offer by one

party is made with an intention that it shall become binding on him as soon as the
person to whom it is addressed accepts it.

 Carlill v Carbolic Smoke Ball Co.

 Offer distinguished from invitation to treat – whether it is reasonable that the
statement by the alleged offeror should be capable of being converted into a
contract by a straight acceptance.
 Asking for information – Harvey v Facey
 Goods displayed – Partridge v Crittenden, Pharmaceutical Society
 The courts have ruled on what definitely constutes an offer, and what does not, in
some common commercial situations –
 Auction – an invitation to treat
 Shops – goods displayed is not an offer
 Advertisements – usually an invitation to treat
 Restaurant menus – by placing an order, the customer is accepting the price
(offer)
 Company prospectuses – must make clear in the documentation that it is an
invitation
 Website advertisement - retailer must make clear if it is an offer or an
invitation
Auctions

 The auctioneer’s request for bids is not an offer, in fact the bid constitutes an
offer, and the auctioneer may accept or reject. Section 60 of the Sales of Goods
Ordinance provides that an auction is completed by the fall of the hammer.
 Payne v Cave – D was the last bidder and retracted his bid before fall of hammer.
 Harris v Nickerson – position when an auction is withdrawn.

Acceptance

 Positive evidence includes words, writing or conduct, mere intention and mental
acceptance is not enough.
 Acceptance inferred from conduct - Carlill v Carbolic Smokeball Co
 Silence is not acceptance - Felthouse v Bindley
 Acceptance must be communicated to the offeror.
 Counters Offer – amounts to rejection and destroys the original offer - Hyde v
Wrench.
 Seeking of further information distinguished from counter offer – Stevenson v
MacLean.

Communication of Acceptance

 Acceptance must be communicated to and actually received by the offeror.

 Offeror may waive such communication in unilateral contract – Carlill v
Carbolic Smokeball Co.
 Silence is not acceptance – Felthouse v Bindley
 Postal rule – this rule holds that the acceptance is complete when the letter is
posted or the telegram handed in. – Adams v Lindsell.
 The receipt rule – When acceptance is sent by fax it is deemed to have been
accepted at the time the message is received on the fax machine, even if he
offeror to whom it is sent does not in fact read the fax for several hours or even
days.

When is the Electronic Contract Made?

This is an important question in the world of business contracts and the old-fashion
postal rule is still applied but in the cyberspace context – Section 18 and 19,
Electronic Transactions Ordinance.
Section 18 – Organization & Originator - Your business is deemed to have sent the
e-mail if it is sent from your e-mail system and your employees use it during the
course ofr their employment as your agent.

Section 19(1) – An electronic record is deemed to have been sent when accepted by
an information system outside the control of the originator or of the person who sent
the electronic record on behalf of the originator, unless the parties to the contract
agree otherwise.

Section 19(2) – Receipt of the Acceptance – Unless otherwise agreed, receipt of the
acceptance is deemed to have occurred at the time when the electronic record is
accepted by the designated information system if the addressee has designated an
information system for the purposes of receiving electronic records. If there is no
designated IS, the receipt is deemed to occur when the electronic record of the
acceptance comes to the knowledge of the addressee.

Termination of the Offer

 Revocation
 Lapse of time
 Death
 Rejection

Revocation

 Offer may be revoked anytime before acceptance – Routledge v Grant – D

offered to buy house and gave 6 weeks to P for an answer, D was free to
withdraw any time before acceptance.
 Revocation must be communicated to the offeree – Bryne v Van Tienhoven.
Consideration

Three principles

 Must move from the promisee but need not move to the promisor -
 Currie v Misa – benefit or detriment is a personal obligation, party A can
not compromise party C that Party B will confer a benefit or suffer a
detriment in return for a promise by party B.
 Carlill v Carbolic Smokeball Co.

 Must be sufficient but need not be adequate –

 Value in the eye of the law.

 Executory consideration is the promise to perform an action in some future time.

A contract can be made on the basis of an exchange of promises as to future
action. Thus if A promises to sell his car to B and B promises to pay $200,000
for it, a contract has been entered into. Both parties are bound by their
promises.

 Executed consideration on the other hand consists of an action already done by

one of the contracting parties. Thus in the foregoing example if A had delivered
the car to B he would have provided executed consideration for the contract and
B would be liable to fulfill his obligation and give A $200,000.

 Past consideration does not actually count as valid consideration and is not
sufficient to make any agreement based on it a binding contract. Normally
consideration is provided either at the time of the creation of a contract or at a
later date. In the case of past consideration, the action is performed before the
promise that it is supposed to be the consideration for. Such action is not
sufficient to support a promise as consideration cannot consist of any action
already wholly performed before the promise was made. Eastwood v Kenyon –
husband of young girl promised to repay guardian a loan for schooling – no
consideration.
Intention to create Legal Relations

Presumption in domestic, family or social arrangements and commercial agreements

 Merritt v Merritt
 Jones v Padavatton
 Simpkins v Pays
 Gould v Gould
 Balfour v Balfour
 Carlill v Carborlic Smoke Ball
 Esso Petroleum Ltd v Customs and Excise
Contractual Capacity

Infants – non-binding on the minor but binding on the other party.

 Voidable – until minor rectifies after or repudiates before 18

 Valid and enforceable if it is for necessary goods or services – Nash v Inman
 Necessaries are defined in the Sale of Goods Ordinance as goods suitable to the
condition in life of the minor and to his actual requirements at the time of the
sale and deliver
Terms of a Contract

Contents of a contract may be expressed orally or in writing, or by conduct. The terms

of a contract define the rights and duties arising under the contract. These terms are of
two kinds: (a) express and (b) implied.

(a) Express Terms - Where a contract has been put into writing the parties are
precluded from adducing evidence to add to vary or contradict its terms. Therefore,
oral evidence will not be admitted to prove that some other term (even thought agreed
to orally) has been omitted from the written instrument. However, this does not
prevent the rectification of a mistake in the written contract, provided that the
conditions for rectification are present. Further, if the written contract is not
complete and does not, in fact, represent the whole transaction, oral evidence will be
admitted by the court to prove a collateral agreement, i.e. one which is subsidiary to
the main purpose of the contract.

Couchman v. Hill - Plaintiff bought a heifer at an auction, and the catalogue,

described the animal as ‘unserved’. The printed condition of sale provided that
the auctioneer ‘gave no warranty what ever’ in respect of the condition or
description of any animal. Before he bid for the heifer, plaintiff asked the
auctioneer and the owner of the heifer to confirm that it was ‘unserved. Both
replied in the affirmative. The heifer died within eight weeks of the sale as a
result of carrying a calf at too young an age for breeding. The Court of Appeal
held that the verbal statements that the heifer was ‘unserved’ overrode the
conditions of sale; plaintiff was able to recover damages for breach of warranty.

Certainty of Terms - Unless the parties make their contract in terms which was certain,
their contract will fail.

Scammell and Nephew Limited v Ousten. The respondents (O) agreed to

purchase a motor-van from the appellants. O sent an order to appellants thus:
‘This order is given on the understanding that the balance of the purchase price
can be had on hire-purchase terms over a period of two years.’ A dispute arose
and the appellant’s defence was that there was no contract until ‘hire-purchase
terms’ had been ascertained. The court held that no precise meaning could be
given to the clause as to ‘hire-purchase terms’. They were too vague, and as
there was no previous trade practice between the parties to guide the court on
what was meant, the contract failed.
Moreover, there cannot be a contract to make a contract. The parties cannot, in other
words, make an agreement to agree in the future. The parties must agree on terms
which are definite or ‘capable of being made definite without further agreement of the
parties’.

Loftus v Roberts. L, an actress, was engaged for a provincial tour. The

contractual agreement provided that if the play came to London L would be
engaged at a salary ‘to be mutually arranged between us’. Held: that there was
no contract.

This case may be distinguished from the following, where although the parties
themselves had not agreed the terms, they nevertheless agreed on a form of
proceedings whereby the terms could be determined, as by conferring on a court of
law or an arbitrator the power to fill in a term or gap in their agreement.

Foley v Classiquie Coaches Ltd. F sold part of his land to a motor company on
condition that the company would buy all their petrol from him. The agreement
between F and the company laid down that petrol would be bought from F “at a
price to be agreed by the parties in writing and from time to time’. The
agreement also provided that in any dispute the agreement should be submitted
to arbitration. The price was never agreed and the company refused to purchase
the petrol. Held: that there was a binding contract, and a method was provided
by which the price could be ascertained, namely by arbitration. An injunction
was granted against the company restraining them from breach.

Meaningless terms are disregarded in law. If the whole contract is meaningless the
contract is void. Where the meaningless term is subsidiary, the contract may be held
valid although the meaningless terms are ignored.

Proof of terms – The extent of the agreement includes statements either made orally,
found as fact by judge, or in writing duly signed by the parties.

(b) Implied Terms

 Terms implied by statutory law – The Sale of Goods Ordinance implies certain
terms (sections 14 – 17) into contracts for the sale of goods which are for the
protection of the buyer. For example, section 15 makes it an implied condition
 that goods shall correspond with the description of them; and section 17 lays
down that in a sale by sample, the bulk shall correspond with the sample.

 Terms ascertained by the Court to give the contract business efficacy, having
regard to the parties’ intention and relationship.

One of the basic rules of contract is that the parties are free to make their own
terms. It is not the function of the courts to make the parties’ contract for them.
However, in the following exceptional cases the law may imply terms into the
contract. What is meant by ‘business efficacy’ can be seen from the remarks
of Lord Justice Bowen.

Moorcock - Appellants agreed with the respondent to use the

appellants’ jetty and wharf to load and store cargo from the Moorcock.
The river bed was owned by a third party. It was beyond the
appellants’ control and they had taken no steps to ascertain whether it
was safe for the ship to lie, as was inevitable at low water on each tide.
The ship grounded and suffered damage because of the uneven river
bed. Held: the appellants were liable as the jetty could not have been
used without the Moorcock grounding. In these circumstances the
appellants were deemed to have impliedly represented that they had
taken reasonable care to ascertain that the river bed adjoining the jetty
was in such a condition as not to cause damage to the vessel. “What
the law desires to effect by the implication is to give such business
efficacy to the transaction as must been intended at all events by both
parties who are businessmen.’

 Terms implied by Custom - Terms may be implied by custom of a locality or a

particular trade. The custom, or usage as it is sometimes called to distinguish
it from the general custom of the realm, must be certain, reasonable, and
well-known to all affected by it, and must not offend any statute.

Which terms are more important?

Conditions and Warranties – The terms of a contract are classified as being either
conditions or warranties. It is important to understand the difference between a
condition and a warranty in order to understand the basic principles of contract law
and the remedies available to a dissatisfied contracting party. A condition is a term
which is essential to the contract, while other terms which are subsidiary or collateral
are merely warranties. The breach of a condition entitles the innocent party either –
 to treat himself as discharged from contract or
 to treat the contract as still binding and to claim damages.

Innominate terms – it simply means not having a name that is to say, unclassified or
uncategorized. It could therefore be interpreted either as being a condition or a
warranty, depending on the particular circumstances of the case.

Terms or representations – Some statements made during negotiation may be

considered to be mere representations, other may be considered to be terms having
regard to the intention of the parties and the facts of the case with particular regard
to –

 the importance of the statement,

 the length of time between the statement and conclusion of the contract,
 the special knowledge of the parties.

Oscar v Williams; Schawel v Reade; Dick Bentley Productions v Harold; Routledge v

McKay;

Can a Mistake invalidate a contract?

Classification:

 Common - the parties reach an agreement but both make the same mistake on a
fundamental question of fact;
 Mutual - the parties are at cross-purposes
 Unilateral – one party knows of the mistake

Non est Factum (not my deed) is probably the most likely pleas, but in limited
circumstances, of (unilateral) mistake to succeed because the signatory is bound
regardless of whether he or she has a clear understanding of what has been
signed. L’Estrange v Graucob;

Effect of Mistake

At common law, mistake may operate to negative consent. The contract will then be
void ab initio. For example, in the case of common mistake where the subject matter
essentially and radically different from that which the parties believed to exist.

In equity, it may operate as a defence, as justification for rectification and afford a

ground for rescission of the contract. Equity operates where the merits of the case
require justice. For example, in the case of mutual mistake where the party was
under an honest, but mistaken, belief and the effect of specific performance would not
impose a burden not contemplated by the parties. However, once a third party has
acquired rights under the contract, the court cannot grant an equitable remedy.

An operative mistake must be one which exists at the moment the contract concluded.
Amalgamated Investment v John Walker (historical building listed after contract
date – not operative mistake)

Mistake – Cases for study

 Bell v Lever Bros Limited as compared to Raffles v Wichelhaus (Para 2.1 of

CPW HK Business Law)
 Avery v Lewis ;
 Phillips v Brooks ;
 Ingram v Little

Misrepresentation

 Misrepresentation is a false statement which causes the other party to enter into
the contract.
 A statement of fact is distinguished from a statement of opinion Bisset v
Wilkinson ; Smith v Land and House
 A misrepresentation of law cannot become misrepresentation

Types of Misrepresentation

 Fraudulent misrepresentation – Derry v Peek – It was decided that in order for

fraud to be established, it is necessary to prove the absence of an honest belief in
the truth of that which has been stated – fraud is proved when it is shown that a
false representation has been made (1) knowingly, or (2) without belief in its
truth, or (3) recklessly, careless whether it is true or false.
 Negligent misrepresentation - Hedley Byrne v Heller

 Innocent Misrepresentation – misrepresentation made without fault and with

reasonable grounds for believing that it was ture at the time when it was made
and contract entered.

Misrepresentation Ordinance requirements

Under the Misrepresentation Ordinance, parties to a contract who wishes to show that
they were induced to enter into the contract by a misrepresentation must prove one of
the following:

• That the statement, which they claim they relied on, was a statement of fact,
not an expression of opinion or a statement of law
• That the statement was made before, or at the time, the contract was entered
into
• That the statement was made to induce them to enter into the contract
• That they, in fact, relied on the statement, although there may be other factors
on which they also relied, such as price or availability; or
• That the statement was untrue

Exemption Clauses

Exemption clauses in signed documents are binding in common law. The signatory
is bound regardless of whether he or she has a clear understanding of what has been
signed - L’Estrange v Graucob; Photo Production v Securicor.

In unsigned document, the party relying on the particular document containing notice
of the excluding terms must prove the terms are in truth an integral part of the contract
and they have been brought adequately to the attention of the other party before the
contract is made. (See cases - Olley v Marlborough Court; Chapeltown v Barry
UDC; Parker v South Eastern Railway (see back); Thornton v Shoe Lane Parking;
Henry Kendall v William)

Control of Exemption Clauses Ordinance

The following is an extract from Charlesworth’s Mercantile Law 14th Edition –

“It follows from the doctrine of freedom of contract that the parties, in principle, may
agree that in certain contingencies one of the them shall be exempt from the liability
imposed by the law. This rule is, however, subject to qualifications required by
public policy or statute law. Thus a term exempting a party from liability in the
event of his committing a fraud against the other party to the contract is void because
it infringes public policy.”

The Control of Exemption Clauses Ordinance provides that any attempt by the
manufacturer to exclude or restrict the consumer’s contractual rights (a consumer is
someone who enters into a contract in a private capacity with someone who is
conducting business) and to limit the manufacturer’s liability in negligence is void.
Moreover, no exclusion is permitted to avoid liability for personal injury or death
resulting from negligence. Any clause, which attempts to exclude or restrict liability
for misrepresentation is ineffective unless it satisfies the reasonableness test.

The Reasonableness Test – Section 3 of the Ordinance provides that the term must be
fair and reasonable having regard to the circumstances which
 were known to the parties;
 ought reasonably to have been known to the parties; or
 in the contemplation of the parties,
at the time when the contract was made.

Guides for application of reasonableness test are stipulated under Schedule 2 in the
Ordinance as follows –
 The strength of the bargaining positions of the parties
 Whether the customer received an inducement to agree to the term
 Whether the customer knew or ought reasonably to have know of the
existence and extent of the term
 Whether the term excludes or restricts any relevant liability is some
condition is not complied with
 Whether the goods were manafctured processed or adapted to the special
order of the customer.

Consumer protection

What is a Consumer Sale - A consumer sale is a business to private person sale. The
person making the contract must not be doing so in the course of business, and the
person making the sale must be doing so in the course of business. The goods must
be of a type ordinarily supplied for private consumption – in order words, a consumer
sale is usually a sale by a retailer to a member of the consuming public. Two private
individuals who make a contract for the sole of goods, neither of whom does so in the
course of business, and two business people, both of whom act in the course of
business, are not making a consumer sale.

The Control of Exemption Clauses Ordinance 1990 (CECO) imposes restrictions to

exclude implied terms under the Sales of Goods Ordinance as to title, description,
merchantability, fitness for purpose, and sale by sample in contract for the supply of
goods by way of hire or exchange and for the supply of services, work, and materials.
It is intended to give complete protection to the consumer, as defined under the CECO
who buys goods from someone who sells the goods in the course of business.

As defined under the CECO, liability for breach of the condition and warranties in
implied under s 14 cannot be excluded in any sale whether consumer or commercial.
Liability for breach of the conditions in ss 15-17 cannot be excluded in consumer
contracts, but they can be excluded in commercial contracts subject to the provisions
in the Control of Exemption Clauses Ordinance.

SOGO – consumer sections 14 - 17

 Section 14 – that the seller has the right to sell the goods
 Section 15 – that the goods correspond with their description
 Section 16 – that the goods are of merchantable quality
 Section 17 – that in a sale by sample the bulk of the goods will correspond with
the sample, that the buyer will have a reasonable opportunity to compare the bulk
of the goods with the sample, and that the goods shall be free from any defects
rendering them unmerchantable.
Discharge of a Contract

By Performance
Divisible contracts – quantum meruit
Substantial performance
Tender by Performance

By Agreement
Accord and satisfaction
Rescission
Waiver

By frustration – unforeseen events, going to the root of the contract rendering

performance not possible

 Physical destruction of the subject mater – Taylor v Caldwell

 Expected event being the foundation of the contract fails to take place – Krell v
Henry; Herne Bay Steam v Hutton
 Performance inordinately delayed causing fulfillment fundamentally or
commercially different form contemplation – Wong Lai Ying v Chinachem
 Change of circumstance – Metropolitan v Dick Kerr
 The Test – The court will generally try to provide a solution by looking to see
whether there has been a radical change in the obligations under the contract.
Davis Contractor v Fareham – terms comparing to new circumstances if radical
change has taken place.

Limits to Frustration

 More onerous to perform is not frustration – Tsakiroglou v Noblee

 Self-induced frustration is not frustration – Maritime National Fish v Ocean
Trawlers
 Adjustment of rights and liabilities - Section 16 of Law Amendment and Reform
(Consolidation) Ordinance (LARCO)
Remedies for Breach

Damages – fairly and reasonably be considered as naturally arising from the breach or
in the contemplation of the parties. Three main issues –

 Try to placed the injured party in the same position prior to the breach
 Damages equivalent to the amount of loss that was reasonably foreseeable
 The knowledge held by the respective parties at the time of the contract will
determine what damages were reasonable foreseeable.

Causation – must prove damages claimed were caused by the proven breach.

Type of Damages

 Reliance loss
 Restitution – compensation for the benefits gained by the defendant
 Loss of bargain – put back to the situation as if the contract had been
performed – cost of curing the defect and the loss in value caused by the breach.

Mitigation – duty to mitigate losses – reasonable step

Liquidated Damages and penalty Clauses

Equitable remedies

 Specific performance
 Injunction
 Rectification
 Rescission

* * * * * * * * * * *