2. CONTRACT LAW2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Introduction
Making a contract Capacity of parties Terms of the contract
Exemption/exclusion clauses Vitiating factors Discharge of contract
Remedies
2.1 IntroductionModel: 2 parties : may be extended to 3
partiesetc. Relationship of the parties: rights & duties
Context : different needs & environment requires different
adaptation of the model Enforcement of rights Negotiation different
stages
2.1 Introduction
A
Relationship
B
2.1 Introduction
A
Relationship
B
2.1 IntroductionNegotiationno
OfferAcceptance
Contract
2.1 IntroductionDefinition of contract: A contract is an
agreement between 2 or more parties which is enforceable at
law.
2.1 IntroductionFormat: May be in writing, by word of mouth
(orally) by conduct, or by any combination of such.
2.1 IntroductionContract law = foundation of all commercial
activities
Wide range of contracts: e.g. simple consumer contracts to
construction contracts, sale and purchase agreements in
conveyancing transactions
2.1 IntroductionGeneral principle: Freedom of contract everyone
is free to enter into any contract
2.1 IntroductionExceptions: (1) Those against public morality
(2) Those against national security (3) Those against public
interests (4) Those regulated by statutes for protection of
consumers (e.g. Sale of Goods Ordinance, Control of Exemption
Clauses Ordinance) and employees (e.g. Employment Ordinance)
2.1 Introduction(5) Those provide for regulating certain
relationships Landlord and Tenants (Consolidation) Ordinance Those
require specific formalities - Conveyancing transactions (e.g.
Conveyancing and Properties Ordinance) (6) Domestic agreements with
no intention to create legal relationships e.g. pre-marital
arrangements, separation agreements
2.2 Making a Contract2.2.1Unilateral and Bilateral Contracts
2.2.2Essential elements of a contract
2.2.1
Unilateral and Bilateral Contracts
Unilateral contract the performance remains outstanding on 1
party only (i.e. the offeror), while the other party (i.e. the
offeree/acceptor) having already performed what is required of
it.
2.2.1
Unilateral and Bilateral Contracts
Example: Ad Anyone who found my puppy, Buggie which has a name
tag on its collar and return it to me shall be rewarded HK$100. Mr
A Mr B found the puppy and returned it to Mr A. Mr A refused to pay
Mr B HK$100 but only agreeing to pay him HK$50. Can B sue A ? If
so, for how much ?
2.2.1Example:
Unilateral and Bilateral Contracts
Anyone who found my puppy, Buggie which has a name tag on its
collar and return it to me shall be rewarded. Mr A Mr B found the
puppy and returned it to Mr A. Mr A is only willing to pay $1 to Mr
B. Can Mr B sue him ? If so, for how much ?
2.2.1Example:
Unilateral and Bilateral Contracts
Anyone who found my puppy, Buggie which has a name tag on its
collar, please return him to me. Mr A Mr B found the puppy and
returned it to Mr A. Mr A thanked Mr B but refusing to pay him a
single cent. Can Mr B sue him ? If so, for how much ?
2.2.1Example:
Unilateral and Bilateral Contracts
Anyone who jumps into Victoria Harbour off Queens Pier and swims
to Tsimshatsui Ferry Pier shall be rewarded with HK$100,000. Mr A
Mr Tung did so. Mr A refused to pay. Can Mr Tung sue Mr A ? If so,
for how much ? Would it make any difference if Mr Tung did not
reach Tsimshatsui Ferry Pier ?
2.2.1
Unilateral and Bilateral Contracts
Jump into Victoria Harbour. I will give you HK$100. Jump into
Victoria Harbour and I will give you HK$100.
Is there any difference between the 2 ads ?
2.2.2 Essential1. 2. 3. 4. 5.
elements of a contract
Offer Acceptance Consideration Privity Intention to create legal
relationship
When a definite offer made by 1 party is unconditionally
accepted by another party, an agreement comes into existence.
Offer (def)An offer a definite promise or proposal made by the
offeror to the offeree (NB: not necessarily the performer) with the
intention to be bound by such promise or proposal without further
negotiation. e.g. I give you $100 for [your] doing some work. e.g.
I give you $100 for [your] not suing me. e.g. I will not sue you if
you repay me $100.
Offer (def)Offer must be distinguish from invitation to
offer/invitation to treat Starting point: Is there a
contract/agreement ? (check the definition of a contact/agreement)
- Ask: Is there any acceptance (check the definition of acceptance)
- The step before acceptance is an offer. - The step before an
offer is invitation to offer.
Acceptance (def)Acceptance comes into existence after the
offeree unconditionally accepts the offer. When 1 party introduces
variations/conditions to the terms of the latest proposal, there is
no acceptance (i.e. conditional acceptance is not acceptance). Such
variations/conditions amount to a counter-proposal/offer. No
agreement.
Consideration (def) Something of value in the eyes of the law
(need not be of market value). Hence, the saying :Consideration
must be sufficient but not adequate. Price to be paid for the
promise May consists of money, goods, promise, suffering some
detriment (e.g. forbearance to sue) Consideration must flow from
the proposee in respect of any promise.
Privity (def)General rule: A person who is not a party to a
contract cannot sue upon it (i.e. right) or be sued upon it
(i.e.duty). Exceptions: 1. Statutory exceptions: Married Person
Status Ordinance Cap 182 2. Contract made by an agent for his
principal 3. Rights/Benefits assigned/transferred (e.g. Deed of
Mutual Covenants)
Intention to create legal relationship (def)Both parties must
intend that the agreement is to be binding on them (i.e. they have
agreed to bear the duties under the contract). Objective test :
reasonable mans test
Offer (details)Invitation to treat/offer - The proposal before
the actual offer e.g. goods catalogue, mail order catalogue,
advertisements in newspaper, display of goods in the shelves of a
supermarket Fisher v Bell [1961] 1 QB 394 : Restriction of
Offensive Weapons Act 1959 (UK) offer for sale offensive weapons is
illegal self-service window displaying a flick knife with a price
tag an invitation to treat
Offer (details)Fisher v Bell was followed in HKSAR v Wan Hon Sik
[2001] 3 HKLRD 283 display of pirated videos discs was an
invitation to treat Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd [1953] 1 QB 401 Display of drugs
invitation
Offer (details)Tenders: Invitation for tenders = invitation to
treat A bidder = an offeror See City Polytechnic v Blue Cross
[1995] 2 HKLR 103 CP through an insurance broker invited tenders
from insurance companies to cover its employees medical & life
insurance
Offer (details)An advertisement may sometimes be an offer and
sometimes be an invitation to treat the crucial point definite
intention to be bound Carlill v Carbolic Smoke Ball [1893] 1 QB 256
Partridge v Crittenden [1968] 2 All ER 421
Offer (details)Auction sales ads to sell goods by auctions =
invitation to offer bidder = offeror A person incurring expenses in
going to the place of auction cannot sue the auctioneer if the
auction were not held because auctioneer is not bound to hold the
auction (Harris v Nickerson (1872-73) LR 8 QB 286)
Offer (details)Offer must be communicated. See R v Clarke (
1927) 40 CLR 227 Western Australian government offered a reward for
capturing some murderers Clarke was an accomplice, saw the ad but
never addressed his mind to it and informed the government held: no
reward to Clark
Offer (details)Termination of offer 1. By acceptance 2. By
rejection a counter-offer is a rejection ; a request for
information is not a rejection 3. By revocation 4. By lapse of
reasonable time 5. By death of the offeror ? Of the offeree ? After
termination, the offer is no longer a valid offer and cannot be
accepted.
Offer (details)Revocation of offer General Rule: an offer can be
revoked at any time before acceptance (Routledge v Grant (1828) 130
ER 920) Exception: when the offeror undertakes a contractual
obligation or the offeror receives consideration to keep the offer
open
Offer (details)Revocation of offer General Rule: Revocation of
an offer becomes binding only when it has come to the knowledge of
the offeree Exceptions: (1) Letter of revocation sent to a
commercial organisation (Eaglebill Ltd v J Needham Builders Ltd
[1973] AC 992, 1011 (2) Offer to the public revocation takes place
when the offeror had taken reasonable steps to bring it to the
notice of the public
Offer (details)Knowledge of revocation may be actual or implied
Dickinson v Dodds (1875-76) LR 2 Ch D 463: Date 1: D gave P a
written offer to sell the house and that the offer will open until
9:00 am on Date 3. Date 2: D sold the house to a 3/p and a 4/p
informed P of the sale. Date 3: P wrote to P accepting his offer
before 9:00 am. Held: 1. Ps acceptance was too late he knew the
property had been sold. 2. D had effectively withdrawn his
offer
Offer (details)Lapse of offer An offer lapses if it is not
accepted within: (1) A stipulated time; or (2) Reasonable time a
question of fact depending on the circumstances of the case (see
S.90)
Offer (details)Death of a party (1) Death of the offeror : when
the offeree accepts the offer unaware of the offerors death, and
the deceaseds contractual obligations can still be performed by his
estate, a valid contract exists. If the offeree knows of the
offerors death, the offer cannot be accepted. (2) Death of the
offeree: depends on the intention of the parties. If the offeree
dies after accepting the offer, check the initial proposal.
AcceptanceAcceptance comes into existence upon the offeree
unconditionally accepts the offer e.g. The offeree says, OK, I
accept. Contrast with e.g. The offeree says, I accept subject to
conditions. e.g. The offeree says, I accept but..
AcceptanceCross offers
I promise to do XParty A I promise to do YThere are 2
independent offers: Tinn v Hoffman & Co (1873) 29 LT 271:
Crossing in post ignorance of the others offer no contract
Party B
AcceptanceCommunication of acceptanceGeneral rule: Acceptance
must be communicated Exceptions: 1. Offeror waives the necessity to
communicate acceptance 2. Certain conditions (like conduct of the
offeree) can be deemed to be acceptance (see Carlill) 3. Offeror
may be estopped to deny his failure to receive acceptance because
of his own conduct (e.g. he did not read the message) 4. Acceptance
received by the offerors agent 5. Postal acceptance rule:
acceptance by posting (see later notes)
AcceptanceSilence Silence is no acceptance. Felthouse vBindley
(1862) 11 DBNS 869 : Uncle said, I heard no more from my nephew, I
shall consider the horse is mine.Horse sold by mistake. Nephew
never communicated acceptance to his uncle. Held: No acceptance.
Contrast: Brodgen v Metropolitan Railway Co (1877) 2 App Cas 666: P
sent a draft contract to D offering to sell coal. D did not
expressly accept the offer but used the coal when they were
supplied. Held: Implied acceptance.
AcceptanceAcceptance must be communicated by the offeree or his
authorised agent. Power v Lee (1908) 99 LT 284: P applied to be a
headmaster. Management board agreed to accept his offer but the
decision was communicated by a member who was not authorised. Held:
No acceptance.
AcceptanceMethods of acceptance: 1. When method is prescribed by
the offer, it must be accepted by the prescribed method. 2. When
methods are prescribed by the offer, acceptance by any such method.
3. When no method is prescribed by the offer, acceptance by an
equally or more efficacious or faster method is OK. Tin v Hoffman:
Reply by return of post not reply by return of post only.
AcceptanceWhen parties are not face to face (1) By post and
telegram Postal Rule (2) Other instantaneous means of
communication
Acceptance: Postal RuleConditions of application: (1) Where post
is the prescribed method of acceptance; or (2) It is reasonable to
use post to send an acceptance; Then, acceptance is deemed to be
completed when the acceptance, properly stamped and addressed
letter of acceptance is posted (Adams v Lindsell (1818) 1 B &
Ald 681: Date 1: D offered to sell goods to P Date 2: letter
reached P and P accepted by post Date 3: D sold the goods to a 3/p
Date 4: D received the acceptance Held: accptance) The receipt of
acceptance by D is irrelevant.
Acceptance: Postal RuleAlso applies to telegrams (Cowan v
OConnor (1888) 20 QBD 640) Not applied: When offeror requires
actual receipt of acceptance by him(Holwell Securites Ltd v Hughes
[1974] 1 WLR 155 When it is unreasonable to accept by post; When
offer was made by email or fax; When the transaction involves large
sums of money; When other methods are contemplated. *Intention of
the parties most crucial
Acceptance: Postal RulePostal rule does not apply to a
revocation by post Byrne v Van Tienhoven (1880) 5 CPD 344: The
offeree cannot be bound by a revocation when he is not aware of at
the moment of acceptance, I.e. offeror sets up the rules,he is
bound his own rules.
Acceptance: instantaneous communicationsContracts concluded by
instantaneous means of communication like email, telex, telephone,
fax, etc. acceptance must be received by the offeror Entores Ltd v
Miles Far East Corporation [1955] 2 QB 327: P in London sent a
telex to D in Amsterdam offering to buy goods from D. D sent a
telex in return to P accepting the offer. Held: acceptance must be
received. HK : Contracts by email is governed by Electronic
Transactions Ordinance (Cap. 553 Laws of Hong Kong).
ConsiderationConsideration = price of the offer = may be
service, goods, another promise Consideration must be sufficient
but not adequate = of some value but need not be of market
value
ConsiderationConsideration must be sufficient but not adequate:
Chappell & Co. Ltd v Nestle & Co. Ltd [1960] AC 87: D
advertised for sale to the public records of the tune Rockin Shoes
for 1s 6d and 3 chocolate wrappers. Held: the 3 chocolate wrappers
are consideration Consideration must be executed or executory but
not past: Executed consideration : Consideration of the offeree is
the performance of the required act Executory consideration :
Consideration = offerees promise
ConsiderationPast consideration is no consideration: Roscorla v
Thomas (1842) 3 QB 234: P agreed with D to purchase a horse. D
later guaranteed that the horse was free of lice (in fact, not).
Held: Ps agreement is past consideration for the guarantee. This
rule is sometimes relaxed in favour of the offeree who had suffered
some loss: Pao On v Lau Yiu Long [1986] AC 614 conditions: 1. act
was done at the promisors request; 2. parties understood that the
act was to re remunerated by payment or conferment of some other
benefits; and 3. Payment or conferment of the benefits are
enforceable if it had been promised in advance.
ConsiderationPao On principles were followed in L&D
Associates v Chan Man Chon Civ App No.80 of 1987, [1987] HKLY 138:
P sued D for agency fees. Q: whether introduction is past
consideration re signing of inspection record (contract) ? Held:
Yes + violation of principles of agency (see later notes)
ConsiderationConsideration must move from the promisee: McEvoy v
Belfast Banking Co Ltd [1935] AC 24: Father deposited $ in a bank
and the receipt indicated that the bank received money from him and
his son. Father died. Held: bank contacted with father and son.
ConsiderationNo consideration if: 1. Performance of a public
duty 2. Performance of a personal legal duty 3. Performance of an
existing duty owed to the same promisor gist: find extra bit of
consideration
ConsiderationPerformance of an existing contracting duty owed to
a 3/p is good consideration : Shadwell v Shadwell (1860) I CBNS
159: promisor obtains direct benefit from the contract and has an
independent irght o enforce the promise. New Zealand Shipping Co.
Ltd v AM Satterthwaite & Co Ltd, The Eurymedon [1975] AC 154: A
contacted with B to unload Cs goods. C contracted with A if A
unloads the goods, C will not sue A. Held: A is protected.
ConsiderationPart payment of a debt (payment of a lesser sum) on
the due date is no consideration for the satisfaction of a larger
debt (The Rule in Pinnels case (1602) 5 Co Rep 117) Applied in
Foakes v Beer (1884) 9 App Cas 605: B sued F. Both signed a
settlement agreement that F could pay principal by instalments.
Later, B sued for interests due. Held: F did not provide any
consideration for the nonpayment of interests.
ConsiderationExceptions to the Pinnels case: 1. Goods of lesser
value are given; 2. Lesser sum is paid and other goods are given;
3. Lesser sum is paid by a 3/p; 4. Creditors claim is disputed in
good faith; 5. Composition agreement; 6. Doctrine of promissory
estoppel or equitable estoppel applies.
ConsiderationDoctrine of equitable estoppel (promissory
estoppel): 1. Parties by their own act or own consent enter upon an
agreement; 2. The agreement provides that the strict rights under
another contract will not be enforced or suspended; and 3. It would
be inquitable to enforce it the other party cannot enforce Hughes v
Metropolitan Railway Co (1877) 2 App Cas 439 Applied in Central
London Property Trust v High Trees House [1947] 1 KB 130
ConsiderationOnly applies only when: 1. Equitable 2. The is real
accord 3. As a defence : Combe v Combe [1951] 2 KB 215 promise just
a gift 4. The promise is definite and precise. Ambiguity ruins the
application. 5. To suspend the creditors legal rights 6. Debtor had
acted on the promise and had suffered detriment or change his
position
ConsiderationForbearance to sue is good consideration in return
for promisors promise but is not good consideration if the promisee
knows, that he does not have any ground/cause of action against the
promisor. (Cook v Wright (1861)). If the promisor honestly believes
or has reasonable ground for believing he has a cause of action,
such forbearance is still good consideration.
Consideration and privityA person who is not a party to a
contact cannot sue upon it or be sued upon it. Dunlop Pneumatic
Tyre Co v Selfridge & Co [1915] AC 847: D contracted with its
buyer with a bottom price clause. Its buyer contracted with S with
a similar clause. S in breach of this clause. Held: D cannot sue S
as D is not a party to the contract between the buyer and S.
Consideration and privityExceptions: 1. Statutes allowed such
enforcement: - Married Person Status Ordinance (Cap 182)
beneficiaries can sue on policies providing for them. - Motor
Vehicles Insurance (Third Party Risks) Ordinance (Cap 272) a person
driving a vehicle can claim under the insurance policy taken out by
the car owner 2. Contract made by agent binds the principal 3.
Rights or benefits assigned under contract or other instruments
(NB: Duties cannot be assigned; NB: DMCs)
Intention to create legal relationshipsGeneral Rule: An
agreement is enforceable only if both parties intend to have legal
consequences intention: objective test a reasonable persons test
Presumptions: 1. Commercial agreements have such intention: Edwards
v Skyways [1964] 1 WLR 349: ex gratia payment (Contra: subject to
contract clauses, honourable pledge clause, letter of intent, etc.)
2. Social and domestic agreements do not have such intention:
Belfour v Belfour [1919] 2 KB 571: agreement to pay maintenance
domestic agreement- followed in Sun Er Jo v Lo Ching [1996] 1 HKC
1
The capacity of the partiesThere are 2 typical situations: 1.
Minors 2. Mentally disordered, drunk or drugged persons 3.
Companies
MinorsPersons under 18 are minors,with limited contractual
capacities. 3 typical situations: 1. Contracts for necessaries 2.
Contracts which are binding unless repudicated by the minor 3.
Contracts which are enforceable against a minor unless ratified by
the minor
Contracts for necessariesThese includes contracts to provide the
following to a minor: 1. Goods 2. Beneficial
education/training/services In the light of the minors status of
life and the environment
Contracts for necessariesSection 4(1) of the Sales of Goods
Ordinance (SOGO): where necessaries are sold and delivered to a
minor or infant, he or she must pay a reasonable price I.e. only
such contracts are binding on a minor
Section 4(2) SOGO: Necessaries means good suitable to the
condition in life of an infant or minor and to his or her actual
requirements at the time of the sale and delivery. Questions: 1. Is
a tailor-made suit worthing HK$10,000 necessaries ? See Roberts v
Gray [1913] 1 KB 520
Contracts binding unless repudicated by the minorBoth the
contracting party and the minor are bound if making a contract: 1.
Relating to an interests in land (Davies V BeynonHarris (1931) 47
TLR 424 2. For the acquisition of shares in a company (Cappers case
(1868) LR 3 Ch App 458 3. To enter into a partnership agreement
(Lovell & Christmas v Beauchamp [1894] AC 360
Unforceable contracts unless affirmed by minorCategory 1
contracts are not enforceable unless and until being affirmed by
minor upon his coming of age.
Contracts made by mentally handicapped, drunk, druggedMental
capacity of understanding the transaction is crucial. The same
rules in minors apply to this class. Mental Health Ordinance (Cap
136): All patients under Cap 136 have no contractual capacity
(s.11).
Contracts by companyContracts entered into by an officer who has
authority to do so binds the company. Authority may be actual,
apparent or usual.
Terms of a contractMere representation and contractual terms
Intention of the parties Contractual liability in respect of any
particular statement ? Consider: 1. Statements made in preliminary
negotiations 2. Statements made at the conclusion time 3.
Statements made by persons with special skill & knowledge 4.
Statements made by persons without such skill & knowledge
Expressed and implied termsExpressed terms Terms that are
expressed agreed by the parties orally, in writing or partly
orally, party in writing. Implied terms Terms that work on the
presumed intention of the parties to give effect to the business
efficacies of the contract.
Implied termsTerms can be implied: 1. By custom and usage of a
trade : e.g. a manufacturer will remedy any defects in the garments
manufactured, whether they are attributable to supplied materials,
etc. (Crocodile Garments Ltd v Law Kwai Yuk [1998] HKCU 1988) 2. To
give effect to business efficacy: implied to be fit for the purpose
used (The Moorcock (1889) 14 PD 64) 3. For necessity: Wong Mee Wan
v Kwan Kin Travel Services Ltd [1995] 2 HKLR 541: sub-contracting
does not absolve the supplier from its contractual obligations
Implied terms4. By legislation: SOGO Every contract of sale
goods implied terms: (1) seller has the right to sell; (2) goods
are of mercantable quality; (3) goods are fit for the purpose; (4)
goods correspond with the description.
Expressed terms (Conditions & warranties)Differences between
conditions and warranties: 1. Even a minor breach of a condition
entitles the other party to terminate the contract and sue for
damages. Breach of a warranty (that excludes repudiation) does not
entitle the other party to terminate the contract; he can only sue
for damages. 2. Breach of a condition can be waived by the innocent
party. The innocent party may also lose the right to terminate the
contract. SOGO, s.13(1) and (3) How to distinguish conditions and
warranties: intention of the parties reasonable man test
Expressed terms (Innominate terms)The courts look into the
effects of the breach rather than the pre-fixed dicotomy of
conditions/warranties. If the breach goes to the root of contract,
the innocent party can terminate the contract and/or sue for
damages(like condition). If it does not, he can only sue for
damages (like warranty). Hong Kong Fir Shipping Co. Ltd v Kawasaki
Kisen Kaisha Ltd [1962] 2 QB 26: seaworthiness in question
commercial purpose not frustrated innominate term
Interpretation and construction of termsParol evidence No
extrinsic evidence, oral or written, relating to matters outside
the contract can be given to contradict, vary or add to the written
terms of the contract.
Interpretation and construction of termsExceptions to the Parol
evidence rule: 1. Only parts of the contract are in writing: Lam
Tun Ming v Hu Chun Leung [1991] HKLY 552 purchase of shares bought
and sold notes produced acceptable. 2. Where it is necessary to
allow extrinsic evidence to prove that the contract had not come
into operation: Pym v Campbell (1856) 6 E & B 370 condition not
satisfied no contract 3. Where there are causes affecting the
validity of the contract (I.e. no consideration, identity of the
subject matter (Raffles v Wichelhaus (1864) 2 H & C 906 id of
the ship)
Interpretation and construction of terms4. 5. Where the law
permits implying of certain terms into the contract : SOGO Where
there is a collateral contract: De Lassale v Guildford [1901] 2 KB
215 Conveyancing transaction vendor gave assurance that the drains
are in good order a collateral contract implied term
Exemption/Exclusion clausesSuch clauses aim to exempt / exclude
liability of the relying party (usually big commercial enterprises)
and are often used in standard form contracts. Courts do not favour
such clauses and will interpret them strictly against the relying
party (Contra Proferendum Rule). HK legislature enacted the Control
of Exemption Clauses Ordinance (Cap 71) (CECO) to curb the use of
such clauses.
Exemption/Exclusion clausesTo be effective, such clauses must
pass a 3 stage test: 1. Incorporation into contract ? 2. Clear and
wide enough to protect the relying party ? 3. No contravention of
the CECO
Exemption/Exclusion clausesIncorporation By: (1) Signature:
LEstrange v F Graucob Ltd [1934] Signature without looking bound
NB: comm (2) Reasonable notice: Olley v Marlborough Court [1949]
followed by Seapower Resources v Assure Co Ltd [2001] HKEC 1517 (3)
Consistent cause of dealings: J Spurling Ltd v Bradshaw [1956] 2
All ER 121 similar documents read into the current contract
Control of Exemption ClausesControl of Exemption Clauses
Ordinance (Cap.314) - restricts business liability - business is
widely defined; includes profit-making commercial activities,
activity which a person carries on as a means of living,
profession, professonal, governmental and semi-governmental bodies
- Does not include educational and recreational places
Control of Exemption ClausesE clauses become ineffective: (1)
When they attempt to exempt liability for death or personal
injuries (s.7(1)); (2) When they attempt to exempt liability in
respect of sellers implied undertaking as to title (s.11(1)) (3)
When they attempt to exempt liability in respect of sellers
obligations in respect of quality under sections 15, 16, 17 of the
SOGO. (s.11(2))
General test of reasonableness: objective test all the
circumstances which the parties knew or should have known at the
time of contracting.
Vitiating FactorsA contract may be tainted by defects that could
affect its validity making it void, voidable, illegal or
unenforceable. Vitiating factors include: Mistake Misrepresentation
Duress Undue influence Unconscionable contracts Illegality
Restraint of trade
1. 2. 3. 4. 5. 6. 7.
Mistakes3 types: 1. Common mistakes 2. Mutual mistakes 3.
Unilateral mistakes
Common mistakesCommon mistakes as to the existence of the
subject matter: Couturier v Hastie (1852) 8 Exch 40: contract for
the sale of corn unknown to the parties, corn went bad Held : no
contract
Common mistakes as to ownership of the subject matter: Cooper v
Phibbs (1867) 2 LR 2 HL 149: contract for sale of a fishery-
mistake as to ownership Held: void Common mistakes as to quality of
the subject matter: Oscar Chess v Williams [1957] 1 All ER 325:
unless of some fundamental nature, contract not void.
Mutual mistakesNo meeting of minds no contract Scriven Bros v
Hindley [1913] 3 KB 564: mistake as to the lots of goods Held: no
contract
Unilateral MistakesMistake by one party while the other party
knows the truth. Mainly on identity of the parties. Normally 3
parties are involved: The innocent party who mistakens The rogue
The innocent party who was being mistakened 2 situations: Contracts
made by correspondence Contracts made face to face
1. 2. 3.
a. b.
Contracts made by correspondenceEffect: Contract void Cundy v
Lindsay (1876) 1 QBD 348 A ordered some handherchiefs from B and
sold them to C (being absolutely innocent) Held: A does not have a
good title, cannot therefore transfer a good title to C.
Contracts made face to faceContract may be voidable. Phillips v
Brooks Ltd [1919] 2 KB 243 A pretended to be a rich and famous
person, bought a diamond ring from B. He sold the ring to C,
dishonoured the cheque and then disappeared. Held: valid contract
and was bound. B cannot claim the ring from C. Levis v Averay
[1972] 1 198 similar result voidable Gist:(1) what the innocent
contracting party thought he was contracting with? (2) is the
identity vital influence his decision to contract or not ?
MisrepresentationMisrepresentation = a false representation of
fact made orally or in writing or by conduct.
MisrepresentationRepresentation must be: 1. On existing facts 2.
On false existing factsShum Kong 3. On false material existing
facts 4. Induce the innocent contracting party to enter into the
contract 5. the innocent party has suffered loss as a result of
such inducement See Shum Kong v Chu Ting Lin [2001] HKEC 651 sale
of a village house (own property, 700 sq.ft) with garden (leased)
under misrepresentation
MisrepresentationDistinguish from: 1. Future facts 2. Intention
of future conduct 3. Opinion
Misrepresentation2 types of misrepresentations: (1) Fraudulent
(2) Innocent (3) Negligent
Fraudulent misrepresentation= a false statement made by a person
with a dishonest (fraud) intent Fraud is proved if the misrep is
made by the maker: 1.Knowingly 2.Without belief in its truth, or
3.Recklessly (dont care if it is true or not) An honest belief at
the material time is a good defence: Derry v Peek (1889) 14 App Cas
337: DIR rep that the company could run trams by steam or
mechanical power reality: it could not do so DIR held an honest
belief- Held: good defence Smith New Court Securities Ltd v
Scrimgeour Vickers (Asset Management) Ltd [1992] BCLC 1104 : D said
that there were interested parties to buy the shares and led P to
purchase them reality: no interested buyer and D knew that at the
time of making rep Held: fraud
Fraudulent misrepresentationRemedies: depends on whether
fraudulent misrep had become a term of the contract : a. Become a
term the other party may:(1) rescind the contract, or (2) affirm
the contract and claim damages for breach of contract, (3) affirm
the contract and claim damages under the tort of deceit b. Not
become a term the other party may: (1) rescind the contract, and/or
(2) claim damages under the tort of deceit
Innocent misrepresentation= false statement honestly believing
to be true and has reasonable grounds to believe so up to the
moment of contracting Remedies: Rescission (not plus damages)
Misrepresentation Ordinance s. 3(2) : Damages in lieu of rescission
if equitable
Negligent misrepresentationElements to be proved: 1.a duty on
the representor to refrain from making a false statement; and 2.The
representor is in breach of this duty Duty exists with special
relationships between representor and representee, e.g.
professionals in their areas of expertise Remedies: rescission,
damages and/or indemnity MO s.3(2): court has a wide discretion to
affirm the contract and award damages in lieu of rescission
DuressDuress = actual or threatened violence, or unlawful
restraint or threats, directed towards the contracting party or a
member of his closed family. Effect : contract voidable Barton v
Armstrong [1975] 2 All ER 465: former chairman threatened to kill
the MD unless company bought back his shares co did so held:
voidable Rationale: no free choice ; negate consent no genuine
intention to contract
Economic duressEconomic duress = Apparent consent is induced by
illegitimate economic pressure from the other party Pau On v Lau
Yiu Long [1980] A C 614: consent is revocable contract is voidable
Remedy: voidable Right to avoid may be lost if the innocent party
chooses to affirm (The Atlantic Baron [1979] QB 705))
Undue InfluenceConditions: (1) A relationship between the
parties; (2) One party acquired over another a measure of influence
or ascendancy; and (3) The ascendant person takes unfair advantage.
(see Royal Bank of Scotland plc v Etridge (No.2) [2001] 3 WLR 1021,
1029; Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKLRD
358)
Undue Influence2 types of undue influence: 1. Actual undue
influence 2. Presumed undue influence
Actual Undue InfluenceConditions: 1. The wrongdoer had the
capacity to influence the complainant; 2. Influence was in fact
exerted; 3. Influence was undue; 4. The effect: the complainant
enter into the contract sufficient: the influence was a significant
reason for causing no need to prove manifestly disadvantage Effect:
Contract voidable
Actual Undue InfluenceWilliams v Bayley (1866) LR 1 HL200;
Diners Club v Ng Chi Sing [1987] 1 HKC 78: father compelled to
guarantee sons debt guarantee: voidable
Presumed undue influenceConditions: 1. A relationship of trust
and confidence between the wrongdoer and the innocent party; 2. The
nature of the relationship is of a nature that it is fair to
presume that the wrongdoer had abused that relationship a
rebuttable presumption 3. Procuring the innocent party to enter
into contract; and 4. The contract was manifestly disadvantageous
to the innocent party. Undue influence can be rebutted by: a. The
complainant had exercise free and independent will; or b. The
complainant had full knowledge and could not have been misled; or
c. The complainant had competent and independent advice from
another.
Unconscionable contractsThe law takes a further step in
protecting the innocent under the doctrine of unconscionable
contracts. Commercial Bank of Australia v Amedio (1983) 151 CLR 447
per Mason J: Undue influence: the will of innocent party was not
independent Unconscionable contract: disadvantage position (e.g.
poverty, sickness, age, sex, infirmity of body and mind,
drunkeness, illiteracy, lack of education, lack of assistance or
explanation where assistance is necessary) vis--vis the other party
[and the other party knew it]
Unconscionable contractsThe Unconscionable Contract Ordinance
(Cap. 458) - A consumer protection legislation (others being: SOGO,
Control of Exemption Clauses Ordinance, MO) - Applies only in
consumer sales - The court may refuse to enforce, enforce the
remainder of the contract, limit/revise/alter the unconscionable
part of the contract - The court may take the initiative to examine
the unconscionble provisions - List of matters the court will
consider: relative bargaining positions of the parties, etc. See
Hang Seng Credit Card Ltd v Tsang Nga Lee & Others [2000] 3 HKC
269 : credit card debt plus costs on indemnity basis falls under
Cap 458 greedy bank case unconscionable contract
IllegalityContracts are not enforceable
Restraint of tradeApplicable situation: one party agrees to
restrict its freedom in the future to carry on trade with other
parties who are not parties to this contract (via restrictive
covenants). General rule: Restrictive covenants are acceptable only
if they are reasonable with reference to time and space and must
not deprive the livelihood of the party being restrained. If
restraint of trade is found, the contract is void.
Restraint of tradeTypical situations:
(1) Employment contracts (2) Sale of business (3) Solus
agreement (e.g. sole agent agreement)
Discharge of a contractA contract coming to an end by: 1.
Performance/defective performance 2. Agreement (Accord and
satisfaction) 3. Breach 4. Frustration
Performance/Defective PerformanceA contract may be discharged by
full performance. The traditional view as expressed by Cutter v
Powell (1795) 6 Term Rep 320, may be watered down by the doctrines
of : (1)Divisible contract (2)Substantial performance - and be paid
on a quantum meruit basis (i.e. pro rata basis). The contract in
Cutter v Powell is regarded as a whole contract and must be
performed in full. Hoenig v Issacs [1952] 2 Al ER 176,
demonstrating the modern approach, used doctrines (1) and (2)
above.
Discharge by agreementAccord and satisfaction: Accord agreement
Satisfaction consideration
Discharge by breach2 types of breach: (1) Repudiatory breach (2)
Anticipatory breach
Repudiatory breach= No performance by the contracted time, place
and conditions Effects: (1) Condition or innominate term (with
serious consequences) innocent party can treat the contract as
discharged. (2) Warranty or innominate term (with less serious
consequences) innocent party can only sue for damages
Anticipatory breach(1) A party express its intention not to
perform, (2) A party acts in such a way as to sow its intention not
to perform Remedies: (1) The innocent party may accept the breach
and treat the contract as discharged then, and sue for damages (2)
The innocent party may wait until the due date and sue for loss
incurred by him as a result of such a breach (i.e. damages) or may
seek specific performance
Discharge by frustrationWithout fault of either party, a
contractual obligation has become incapable of being performed
because circumstances in which performance is called for would
render it a thing radically different from that which was
undertaken.. per Lord Radcliffe in Davis Contractors v Fareham UDC
[1956] ACC 696 - Extraneous change of circumstances which makes
performance impossible examine : the subject matter of the contract
and ask: what are such circumstances ? Effect: Both parties need
not perform contract discharge
Discharge by frustrationExamine: (1) Subject matter destroyed:
Taylor v Caldwell (1863) 3 B&S 826 Hall destroyed by fire
contract discharged. (2) Expected event does not occur : Coronation
cases : Krell v Henry [1903] 2 KB 740: King George VI sicked rented
premises not served its purpose contract discharged. (3) Person to
perform dies or falls ill: Robison v Davison (1871) LR Ex 269:
performer sicked on performance day contract discharged (4) Change
in law making it impossible to perform: Baily v DeeCrespigny (1869)
LR 4 QBB 180: no blockade clause turns impossible because of change
of law contract discharged
Discharge by frustration(5)Change in law makes performance
illegal: Czarniko Ltd v Rolimpex [1979] AC 351: export of goods
impossible because of change in law discharged (6) Performance
become radically different: Wong Lai Ying v Chinachem [1980] HKLR
1: landslide stopped construction work for 3.5 years discharged. No
frustration under: (a) Performance more expensive (b) Self-induced
frustration: failure to apply for a licence (Maritime National Fish
Ltd v Ocean Trawlers Ltd [1935] AC 524)
Money paid lies where it falls except when there is a total
failure of consideration (Fibrosa case [1943] AC 32)
Remedies1. 2. 3. Damages (compensation for loss) Specific
performance Injunction
Remoteness of damages reasonable foreseeable lossDuty to
mitigate-innocent party must mitigate (minimise) its loss
Q & A sessionPlease examine the sample tenancy agreement in
some details. Discuss: 1. Is there any offer, acceptance,
consideration, or binding intention in it ? 2. What are the
condition and warranties ? 3.What is the subject matter ? 4.What
does party A provide ? 5.What does party B provide ? 6.Any
guarantee by party A and/or party B? 7.What are the rights of party
A ? 8.What are the duties of party A ? 9.How long is the tenancy ?
10.If you were party B, would you accept this tenancy agreement ?
What amendments would you like to make ?
Q & A sessionExamine your own employment contract. 1. What
is the subject matter ? 2. What are the terms ? 3. Do you think
such terms are fair to you ? 4. Can you find terms in the
employment contract that are illegal under the Employment Ordinance
? 5. What can you get if you were dismissed by your employer who
gives you one months notice ? Do you have to attend office after
receiving the notice ? 6. If you had accumulated 40 days of annual
leave and your employment contract provides that annual leave
cannot be accumulated, can such annual leave be set off against
your notice period ? What should your employer do in respect of
such annual leave ?