2. CONTRACT LAW

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2. CONTRACT LAW

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

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2.1 Introduction

• Model
• 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

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2.1 Introduction

• A Relationship B

Right
Duty
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2.1 Introduction

• A Relationship B

Right
Consideration
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2.1 Introduction

• Negotiation
• no
• Offer
  
• Acceptance Contract

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2.1 Introduction

• Definition of contract
• A contract is an agreement between 2 or more
  parties which is enforceable at law.

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2.1 Introduction

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

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2.1 Introduction

• Contract law foundation of all commercial
• activities
• Wide range of contracts
• e.g. simple consumer contracts to construction
  contracts, sale and purchase agreements in
  conveyancing transactions

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2.1 Introduction

• General principle Freedom of contract everyone
  is free to enter into any contract

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2.1 Introduction

• Exceptions
• Those against public morality
• Those against national security
• Those against public interests
• 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)

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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

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2.2 Making a Contract

• 2.2.1 Unilateral and Bilateral Contracts
• 2.2.2 Essential elements of a contract

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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.

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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 HK100.
• Mr A
• Mr B found the puppy and returned it to Mr A. Mr
  A refused to pay Mr B HK100 but only agreeing to
  pay him HK50. Can B sue A ? If so, for how much
  ?

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2.2.1 Unilateral and Bilateral Contracts

• Example
• 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 ?

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2.2.1 Unilateral and Bilateral Contracts

• Example
• 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 ?

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2.2.1 Unilateral and Bilateral Contracts

• Example
• Anyone who jumps into Victoria Harbour off
  Queens Pier and swims to Tsimshatsui Ferry Pier
  shall be rewarded with HK100,000. 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 ?

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2.2.1 Unilateral and Bilateral Contracts

• Jump into Victoria Harbour. I will give you
  HK100.
• Jump into Victoria Harbour and I will give you
  HK100.
• Is there any difference between the 2
  ads ?

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2.2.2 Essential 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.

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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.

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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.

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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.

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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.

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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
• Statutory exceptions Married Person Status
  Ordinance Cap 182
• Contract made by an agent for his principal
• Rights/Benefits assigned/transferred (e.g. Deed
  of Mutual Covenants)

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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

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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

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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

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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

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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

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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)

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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

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Offer (details)

• Termination of offer
• By acceptance
• By rejection a counter-offer is a rejection a
  request for information is not a rejection
• By revocation
• By lapse of reasonable time
• By death of the offeror ? Of the offeree ?
• After termination, the offer is no longer a valid
  offer and cannot be accepted.

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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

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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
• Letter of revocation sent to a commercial
  organisation (Eaglebill Ltd v J Needham Builders
  Ltd 1973 AC 992, 1011
• Offer to the public revocation takes place when
  the offeror had taken reasonable steps to bring
  it to the notice of the public

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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 900 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 900 am.
• Held
• Ps acceptance was too late he knew the
  property had been sold.
• D had effectively withdrawn his offer

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Offer (details)

• Lapse of offer
• An offer lapses if it is not accepted within
• A stipulated time or
• Reasonable time a question of fact depending on
  the circumstances of the case (see S.90)

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Offer (details)

• Death of a party
• 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.
• Death of the offeree depends on the intention of
  the parties. If the offeree dies after accepting
  the offer, check the initial proposal.

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Acceptance

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

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Acceptance

• Cross offers
• I promise to do X
• Party A Party B
• I promise to do Y
• There are 2 independent offers
• Tinn v Hoffman Co (1873) 29 LT 271 Crossing in
  post ignorance of the others offer no
  contract

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Acceptance

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

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Acceptance

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

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Acceptance

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

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Acceptance

• Methods of acceptance
• When method is prescribed by the offer, it must
  be accepted by the prescribed method.
• When methods are prescribed by the offer,
  acceptance by any such method.
• 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.

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Acceptance

• When parties are not face to face
• By post and telegram Postal Rule
• Other instantaneous means of communication

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Acceptance Postal Rule

• Conditions of application
• Where post is the prescribed method of
  acceptance or
• 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.

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Acceptance Postal Rule

• Also 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

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Acceptance Postal Rule

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

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Acceptance instantaneous communications

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

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Consideration

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

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Consideration

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

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Consideration

• Past consideration is no consideration Roscorla
  v Thomas (1842) 3 QB 234 P agreed with D to
  purchase a horse. D later guaranteed that the
  horse was free of lice (in fact, not). Held 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
• act was done at the promisors request
• parties understood that the act was to re
  remunerated by payment or conferment of some
  other benefits and
• Payment or conferment of the benefits are
  enforceable if it had been promised in advance.

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Consideration

• Pao On principles were followed in LD 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)

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Consideration

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

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Consideration

• No consideration if
• Performance of a public duty
• Performance of a personal legal duty
• Performance of an existing duty owed to the same
  promisor
• gist find extra bit of consideration

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Consideration

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

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Consideration

• Part payment of a debt (payment of a lesser
  sum) on the due date is no consideration for the
  satisfaction of a larger debt (The Rule in
  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 non-payment of interests.

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Consideration

• Exceptions to the Pinnels case
• Goods of lesser value are given
• Lesser sum is paid and other goods are given
• Lesser sum is paid by a 3/p
• Creditors claim is disputed in good faith
• Composition agreement
• Doctrine of promissory estoppel or equitable
  estoppel applies.

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Consideration

• Doctrine of equitable estoppel (promissory
  estoppel)
• Parties by their own act or own consent enter
  upon an agreement
• The agreement provides that the strict rights
  under another contract will not be enforced or
  suspended and
• 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

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Consideration

• Only applies only when
• Equitable
• The is real accord
• As a defence Combe v Combe 1951 2 KB 215
  promise just a gift
• The promise is definite and precise. Ambiguity
  ruins the application.
• To suspend the creditors legal rights
• Debtor had acted on the promise and had suffered
  detriment or change his position

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Consideration

• Forbearance 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.

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Consideration and privity

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

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Consideration and privity

• Exceptions
• 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
• Contract made by agent binds the principal
• Rights or benefits assigned under contract or
  other instruments (NB Duties cannot be assigned
  NB DMCs)

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Intention to create legal relationships

• General Rule An agreement is enforceable only if
  both parties intend to have legal consequences
  intention objective test a reasonable persons
  test
• Presumptions
• 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.)
• 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

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The capacity of the parties

• There are 2 typical situations
• Minors
• Mentally disordered, drunk or drugged persons
• Companies

65
Minors

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

66
Contracts for necessaries

• These includes contracts to provide the following
  to a minor
• Goods
• Beneficial education/training/services
• In the light of the minors status of life and
  the environment

67
Contracts for necessaries

• Section 4(1) of the Sales of Goods Ordinance
  (SOGO) where necessaries are sold and
  delivered to a minor or infant, he or she must
  pay a reasonable price I.e. only such contracts
  are binding on a minor
• Section 4(2) SOGO Necessaries means good
  suitable to the condition in life of an infant or
  minor and to his or her actual requirements at
  the time of the sale and delivery.
• Questions
• Is a tailor-made suit worthing HK10,000
  necessaries ? See Roberts v Gray 1913 1 KB 520

68
Contracts binding unless repudicated by the minor

• Both the contracting party and the minor are
  bound if making a contract
• Relating to an interests in land (Davies V
  Beynon-Harris (1931) 47 TLR 424
• For the acquisition of shares in a company
  (Cappers case (1868) LR 3 Ch App 458
• To enter into a partnership agreement (Lovell
  Christmas v Beauchamp 1894 AC 360

69
Unforceable contracts unless affirmed by minor

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

70
Contracts made by mentally handicapped, drunk,
drugged

• Mental capacity of understanding the transaction
  is crucial. The same rules in minors apply to
  this class.
• Mental Health Ordinance (Cap 136) All patients
  under Cap 136 have no contractual capacity
  (s.11).

71
Contracts by company

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

72
Terms of a contract

• Mere representation and contractual terms
• Intention of the parties Contractual liability
  in respect of any particular statement ?
• Consider
• Statements made in preliminary negotiations
• Statements made at the conclusion time
• Statements made by persons with special skill
  knowledge
• Statements made by persons without such skill
  knowledge

73
Expressed and implied terms

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

74
Implied terms

• Terms can be implied
• 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)
• To give effect to business efficacy implied to
  be fit for the purpose used (The Moorcock (1889)
  14 PD 64)
• 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

75
Implied terms

• 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.

76
Expressed terms (Conditions warranties)

• Differences between conditions and warranties
• 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.
• 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

77
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

78
Interpretation and construction of terms

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

79
Interpretation and construction of terms

• Exceptions to the Parol evidence rule
• 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.
• 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
• 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)

80
Interpretation and construction of terms

1. Where the law permits implying of certain terms
   into the contract SOGO
2. 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

81
Exemption/Exclusion clauses

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

82
Exemption/Exclusion clauses

• To be effective, such clauses must pass a 3 stage
  test
• Incorporation into contract ?
• Clear and wide enough to protect the relying
  party ?
• No contravention of the CECO

83
Exemption/Exclusion clauses

• Incorporation
• 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

84
Control of Exemption Clauses

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

85
Control of Exemption Clauses

• E clauses become ineffective
• When they attempt to exempt liability for death
  or personal injuries (s.7(1))
• When they attempt to exempt liability in respect
  of sellers implied undertaking as to title
  (s.11(1))
• 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.

86
Vitiating Factors

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

87
Mistakes

• 3 types
• Common mistakes
• Mutual mistakes
• Unilateral mistakes

88
Common mistakes

• Common mistakes as to the existence of the
  subject matter
• Couturier v Hastie (1852) 8 Exch 40 contract
  for the sale of corn unknown to the parties,
  corn went bad Held no contract
• Common mistakes as to ownership of the subject
  matter Cooper v Phibbs (1867) 2 LR 2 HL 149
  contract for sale of a fishery- mistake as to
  ownership Held void
• Common mistakes as to quality of the subject
  matter
• Oscar Chess v Williams 1957 1 All ER 325
  unless of some fundamental nature, contract not
  void.

89
Mutual mistakes

• No meeting of minds no contract
• Scriven Bros v Hindley 1913 3 KB 564 mistake
  as to the lots of goods Held no contract

90
Unilateral Mistakes

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

91
Contracts made by correspondence

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

92
Contracts made face to face

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

93
Misrepresentation

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

94
Misrepresentation

• Representation must be
• On existing facts
• On false existing factsShum Kong
• On false material existing facts
• Induce the innocent contracting party to enter
  into the contract
• 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

95
Misrepresentation

• Distinguish from
• Future facts
• Intention of future conduct
• Opinion

96
Misrepresentation

• 2 types of misrepresentations
• Fraudulent
• Innocent
• Negligent

97
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
• Knowingly
• Without belief in its truth, or
• 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

98
Fraudulent misrepresentation

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

99
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

100
Negligent misrepresentation

• Elements to be proved
• a duty on the representor to refrain from making
  a false statement and
• 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

101
Duress

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

102
Economic duress

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

103
Undue Influence

• Conditions
• (1) A relationship between the parties
• One party acquired over another a measure of
  influence or ascendancy and
• 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)

104
Undue Influence

• 2 types of undue influence
• Actual undue influence
• Presumed undue influence

105
Actual Undue Influence

• Conditions
• The wrongdoer had the capacity to influence the
  complainant
• Influence was in fact exerted
• Influence was undue
• 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

106
Actual Undue Influence

• Williams v Bayley (1866) LR 1 HL200 Diners Club
  v Ng Chi Sing 1987 1 HKC 78 father compelled
  to guarantee sons debt guarantee voidable

107
Presumed undue influence

• Conditions
• A relationship of trust and confidence between
  the wrongdoer and the innocent party
• 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
• Procuring the innocent party to enter into
  contract and
• The contract was manifestly disadvantageous to
  the innocent party.
• Undue influence can be rebutted by
• The complainant had exercise free and independent
  will or
• The complainant had full knowledge and could not
  have been misled or
• The complainant had competent and independent
  advice from another.

108
Unconscionable contracts

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

109
Unconscionable contracts

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

110
Illegality

• Contracts are not enforceable

111
Restraint of trade

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

112
Restraint of trade

• Typical situations
• Employment contracts
• Sale of business
• Solus agreement (e.g. sole agent agreement)

113
Discharge of a contract

• A contract coming to an end by
• Performance/defective performance
• Agreement (Accord and satisfaction)
• Breach
• Frustration

114
Performance/Defective Performance

• A contract may be discharged by full performance.
  The traditional view as expressed by Cutter v
  Powell (1795) 6 Term Rep 320, may be watered
  down by the doctrines of
• Divisible contract
• 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.

115
Discharge by agreement

• Accord and satisfaction
• Accord agreement
• Satisfaction consideration

116
Discharge by breach

• 2 types of breach
• (1) Repudiatory breach
• (2) Anticipatory breach

117
Repudiatory breach

• No performance by the contracted time, place
  and conditions
• Effects
• Condition or innominate term (with serious
  consequences) ? innocent party can treat the
  contract as discharged.
• Warranty or innominate term (with less serious
  consequences) ? innocent party can only sue for
  damages

118
Anticipatory breach

• A party express its intention not to perform,
• A party acts in such a way as to sow its
  intention not to perform
• Remedies
• The innocent party may accept the breach and
  treat the contract as discharged then, and sue
  for damages
• 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

119
Discharge by frustration

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

120
Discharge by frustration

• Examine
• (1) Subject matter destroyed Taylor v Caldwell
  (1863) 3 BS 826 Hall destroyed by fire
  contract discharged.
• 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.
• Person to perform dies or falls ill Robison v
  Davison (1871) LR Ex 269 performer sicked on
  performance day contract discharged
• 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

121
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
• Performance more expensive
• 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)

122
Remedies

• Damages (compensation for loss)
• Specific performance
• Injunction
• Remoteness of damages reasonable foreseeable
  loss
• Duty to mitigate-innocent party must mitigate
  (minimise) its loss

123
Q A session

• Please examine the sample tenancy agreement in
  some details. Discuss
• Is there any offer, acceptance, consideration,
  or binding intention in it ?
• What are the condition and warranties ?
• What is the subject matter ?
• What does party A provide ?
• What does party B provide ?
• Any guarantee by party A and/or party B?
• What are the rights of party A ?
• What are the duties of party A ?
• How long is the tenancy ?
• If you were party B, would you accept this
  tenancy agreement ? What amendments would you
  like to make ?

124
Q A session

• Examine your own employment contract.
• What is the subject matter ?
• What are the terms ?
• Do you think such terms are fair to you ?
• Can you find terms in the employment contract
  that are illegal under the Employment Ordinance ?
• 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 ?
• 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 ?