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

A Relationship
B
 2.1 Introduction

A Relationship
B
 2.1 Introduction

Negotiation
no
Offer

Acceptance Contract
 2.1 Introduction
Definition of “contract”:

A contract is an agreement between 2 or

more parties which is enforceable at law.
 2.1 Introduction
Format:

May be in writing, by word of mouth (orally)

by conduct, or by any combination of
such.
 2.1 Introduction
Contract law = foundation of all commercial
activities

Wide range of contracts:

e.g. simple consumer contracts to
construction contracts, sale and purchase
agreements in conveyancing transactions
 2.1 Introduction
General principle: Freedom of contract –
everyone is free to enter into any
contract
 2.1 Introduction
Exceptions:
(1) Those against public morality
(2) Those against national security
(3) Those against public interests
(4) Those regulated by statutes for protection of
consumers (e.g. Sale of Goods Ordinance,
Control of Exemption Clauses Ordinance) and
employees (e.g. Employment Ordinance)
 2.1 Introduction
(5) Those provide for regulating certain relationships
– Landlord and Tenants (Consolidation)
Ordinance Those require specific formalities -
Conveyancing transactions (e.g. Conveyancing
and Properties Ordinance)

(6) Domestic agreements with no intention to create

legal relationships – e.g. pre-marital
arrangements, separation agreements
 2.2 Making a Contract
2.2.1Unilateral and Bilateral Contracts

2.2.2Essential elements of a contract

 2.2.1 Unilateral and Bilateral
Contracts
Unilateral contract – the performance
remains outstanding on 1 party only (i.e.
the offeror), while the other party (i.e. the
offeree/acceptor) having already
performed what is required of it.
 2.2.1 Unilateral and Bilateral
Contracts
Example: Ad -

Anyone who found my puppy, Buggie which

has a name tag on its collar and return it to
me shall be rewarded HK$100.
Mr A
Mr B found the puppy and returned it to Mr A. Mr A
refused to pay Mr B HK$100 but only agreeing
to pay him HK$50. Can B sue A ? If so, for how
much ?
 2.2.1 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 ?
 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 ?
 2.2.1 Unilateral and Bilateral
Contracts
Example:

Anyone who jumps into Victoria Harbour off

Queen’s Pier and swims to Tsimshatsui Ferry
Pier shall be rewarded with HK$100,000. Mr
A

Mr Tung did so. Mr A refused to pay. Can Mr

Tung sue Mr A ? If so, for how much ? Would it
make any difference if Mr Tung did not reach
Tsimshatsui Ferry Pier ?
2.2.1 Unilateral and Bilateral
Contracts
Jump into Victoria Harbour. I will give you
HK$100.

Jump into Victoria Harbour and I will give

you HK$100.

Is there any difference

between the 2 ads ?
2.2.2 Essential elements of a
contract
1. Offer
2. Acceptance
3. Consideration
4. Privity
5. Intention to create legal relationship

When a definite offer made by 1 party is unconditionally accepted

by another party, an agreement comes into existence.
 Offer (def)
An offer – a definite promise or proposal made by
the offeror to the offeree (NB: not necessarily the
performer) with the intention to be bound by
such promise or proposal without further
negotiation.
e.g. “I give you $100 for [your] doing some work.”
e.g. “I give you $100 for [your] not suing me.“
e.g. “I will not sue you if you repay me $100.”
 Offer (def)
Offer must be distinguish from “invitation to
offer”/”invitation to treat”

Starting point: Is there a contract/agreement ?

(check the definition of a contact/agreement)
- Ask: Is there any acceptance (check the definition
of acceptance)
- The step before acceptance is an offer.
- The step before an offer is invitation to offer.
 Acceptance (def)
Acceptance – comes into existence after the offeree
unconditionally accepts the offer.

When 1 party introduces variations/conditions to

the terms of the latest proposal, there is no
acceptance (i.e. conditional acceptance is not
acceptance). Such variations/conditions amount
to a counter-proposal/offer. No agreement.
 Consideration (def)
• Something of value in the eyes of the law (need
not be of market value). Hence, the
saying :”Consideration must be sufficient but not
adequate.”
• Price to be paid for the promise
• May consists of money, goods, promise, suffering
some detriment (e.g. forbearance to sue)
• Consideration must flow from the proposee in
respect of any promise.
 Privity (def)
General rule: A person who is not a party to a contract
cannot sue upon it (i.e. right) or be sued upon it (i.e.duty).
Exceptions:
1. Statutory exceptions: Married Person Status Ordinance
Cap 182
2. Contract made by an agent for his principal
3. Rights/Benefits assigned/transferred (e.g. Deed of Mutual
Covenants)
 Intention to create legal
relationship (def)
Both parties must intend that the
agreement is to be binding on them (i.e.
they have agreed to bear the duties
under the contract).

• Objective test : reasonable man’s test

 Offer (details)
Invitation to treat/offer - The proposal before
the actual “offer”
e.g. goods catalogue, mail order catalogue,
advertisements in newspaper, display of goods in
the shelves of a supermarket

Fisher v Bell [1961] 1 QB 394 : Restriction of

Offensive Weapons Act 1959 (UK) – “offer for
sale” offensive weapons is illegal – self-service
window displaying a flick knife with a price tag –
an invitation to treat
 Offer (details)
Fisher v Bell was followed in HKSAR v Wan
Hon Sik [2001] 3 HKLRD 283 – display of
pirated videos discs was an invitation to
treat

Pharmaceutical Society of Great Britain v

Boots Cash Chemists (Southern) Ltd
[1953] 1 QB 401 – Display of drugs -
invitation
 Offer (details)
Tenders:
Invitation for tenders = invitation to treat
A bidder = an offeror
See City Polytechnic v Blue Cross [1995] 2 HKLR
103 – CP through an insurance broker invited
tenders from insurance companies to cover its
employees’ medical & life insurance
 Offer (details)
An advertisement may sometimes be
an offer and sometimes be an
invitation to treat – the crucial point –
definite intention to be bound
Carlill v Carbolic Smoke Ball [1893] 1
QB 256
Partridge v Crittenden [1968] 2 All ER
421
 Offer (details)
Auction sales – ads to sell goods by
auctions = invitation to offer
bidder = offeror
A person incurring expenses in going to
the place of auction cannot sue the
auctioneer if the auction were not held
– because – auctioneer is not bound to
hold the auction (Harris v Nickerson
(1872-73) LR 8 QB 286)
 Offer (details)
Offer must be communicated. See
R v Clarke ( 1927) 40 CLR 227 –
Western Australian government
offered a reward for capturing some
murderers – Clarke was an
accomplice, saw the ad but never
addressed his mind to it and
informed the government – held: no
reward to Clark
 Offer (details)
Termination of offer
1. By acceptance
2. By rejection – a counter-offer is a rejection ; a
request for information is not a rejection
3. By revocation
4. By lapse of reasonable time
5. By death of the offeror ? Of the offeree ?

After termination, the offer is no longer a valid

offer and cannot be accepted.
 Offer (details)
Revocation of offer
General Rule: an offer can be revoked
at any time before acceptance
(Routledge v Grant (1828) 130 ER 920)
Exception: when the offeror undertakes
a contractual obligation or the offeror
“receives consideration” to keep the
offer open
 Offer (details)
Revocation of offer
General Rule: Revocation of an offer becomes
binding only when it has come to the
knowledge of the offeree
Exceptions:
(1) Letter of revocation sent to a commercial
organisation (Eaglebill Ltd v J Needham
Builders Ltd [1973] AC 992, 1011
(2) Offer to the public – revocation takes place
when the offeror had taken reasonable steps to
bring it to the notice of the public
 Offer (details)
Knowledge of revocation may be actual or implied
Dickinson v Dodds (1875-76) LR 2 Ch D 463:
Date 1: D gave P a written offer to sell the house and that
the offer will open until 9:00 am on Date 3.
Date 2: D sold the house to a 3/p and a 4/p informed P of
the sale.
Date 3: P wrote to P “accepting his offer” before 9:00 am.
Held:
1. P’s acceptance was too late – he knew the property had
been sold.
2. D had effectively withdrawn his offer
 Offer (details)
Lapse of offer

An offer lapses if it is not accepted within:

(1) A stipulated time; or
(2) Reasonable time – a question of fact
depending on the circumstances of the
case (see S.90)
 Offer (details)
Death of a party
(1) Death of the offeror : when the offeree accepts
the offer unaware of the offeror’s death, and
the deceased’s contractual obligations can still
be performed by his estate, a valid contract
exists. If the offeree knows of the offeror’s
death, the offer cannot be accepted.
(2) Death of the offeree: depends on the intention
of the parties. If the offeree dies after
accepting the offer, check the initial proposal.
 Acceptance

Acceptance – comes into existence upon

the offeree unconditionally accepts the
offer
e.g. The offeree says, “OK, I accept.”
Contrast with
e.g. The offeree says, “I accept subject to
conditions….”
e.g. The offeree says, “I accept but…..”
 Acceptance
Cross offers
I promise to do X

Party A 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 other’s offer – no contract
 Acceptance
Communication of acceptance
General rule: Acceptance must be communicated
Exceptions:
1. Offeror waives the necessity to communicate acceptance
2. Certain conditions (like conduct of the offeree) can be deemed to
be acceptance (see Carlill)
3. Offeror may be estopped to deny his failure to receive acceptance
because of his own conduct (e.g. he did not read the message)
4. Acceptance received by the offeror’s agent
5. Postal acceptance rule: acceptance by posting (see later notes)
 Acceptance
Silence Silence is no acceptance. Felthouse v
Bindley (1862) 11 DBNS 869 : Uncle said, “I heard no more
from my nephew, I shall consider the horse is mine.”Horse
sold by mistake. Nephew never communicated acceptance to
his uncle. Held: No acceptance.
Contrast:
Brodgen v Metropolitan Railway Co (1877) 2 App Cas 666: P
sent a draft contract to D offering to sell coal. D did not
expressly accept the offer but used the coal when they were
supplied. Held: Implied acceptance.
 Acceptance

Acceptance must be communicated by the offeree or his

authorised agent. Power v Lee (1908) 99 LT 284: P
applied to be a headmaster. Management board agreed
to accept his offer but the decision was communicated
by a member who was not authorised. Held: No
acceptance.
 Acceptance
Methods of acceptance:
1. When method is prescribed by the offer, it must be
accepted by the prescribed method.
2. When methods are prescribed by the offer, acceptance
by any such method.
3. When no method is prescribed by the offer,
acceptance by an equally or more efficacious or faster
method is OK.
Tin v Hoffman: “Reply by return of post” not “reply by
return of post only”.
 Acceptance
When parties are not face to face
(1) By post and telegram – Postal Rule
(2) Other instantaneous means of communication
 Acceptance: Postal Rule
Conditions of application:
(1) Where post is the prescribed method of acceptance; or
(2) It is reasonable to use post to send an acceptance;
Then, acceptance is deemed to be completed when the acceptance,
properly stamped and addressed letter of acceptance is posted
(Adams v Lindsell (1818) 1 B & Ald 681:
Date 1: D offered to sell goods to P
Date 2: letter reached P and P accepted by post
Date 3: D sold the goods to a 3/p
Date 4: D received the acceptance
Held: accptance)
The receipt of acceptance by D is irrelevant.
 Acceptance: Postal Rule
Also applies to telegrams (Cowan v O’Connor (1888) 20 QBD 640)
Not applied:
• When offeror requires actual receipt of acceptance by
him(Holwell Securites Ltd v Hughes [1974] 1 WLR 155
• When it is unreasonable to accept by post;
• When offer was made by email or fax;
• When the transaction involves large sums of money;
• When other methods are contemplated.

*Intention of the parties – most crucial

 Acceptance: Postal Rule
Postal rule does not apply to a revocation by post – Byrne
v Van Tienhoven (1880) 5 CPD 344: The offeree cannot
be bound by a revocation when he is not aware of at the
moment of acceptance, I.e. offeror sets up the rules,he is
bound his own rules.
 Acceptance: instantaneous
communications
Contracts concluded by instantaneous means of
communication like email, telex, telephone, fax, etc. –
acceptance must be received by the offeror

Entores Ltd v Miles Far East Corporation [1955] 2 QB

327: P in London sent a telex to D in Amsterdam offering
to buy goods from D. D sent a telex in return to P
accepting the offer. Held: acceptance must be received.

HK : Contracts by email is governed by Electronic

Transactions Ordinance (Cap. 553 Laws of Hong Kong).
 Consideration
Consideration = price of the offer
= may be service, goods,
another promise
Consideration must
be sufficient but not
adequate = of some value but
need not be of
market value
 Consideration
Consideration must be sufficient but not adequate:
Chappell & Co. Ltd v Nestle & Co. Ltd [1960] AC 87: D
advertised for sale to the public records of the tune
“Rockin Shoes” for 1s 6d and 3 chocolate wrappers.
Held: the 3 chocolate wrappers are consideration

Consideration must be executed or executory but not past:

Executed consideration : Consideration of the offeree is the
performance of the required act
Executory consideration : Consideration = offeree’s promise
 Consideration
Past consideration is no consideration: Roscorla v Thomas (1842) 3
QB 234: P agreed with D to purchase a horse. D later guaranteed
that the horse was free of lice (in fact, not). Held: P’s agreement is
past consideration for the guarantee.

This rule is sometimes relaxed in favour of the offeree who had suffered
some loss: Pao On v Lau Yiu Long [1986] AC 614 – conditions:
1. act was done at the promisor’s request;
2. parties understood that the act was to re remunerated by payment
or conferment of some other benefits; and
3. Payment or conferment of the benefits are enforceable if it had
been promised in advance.
 Consideration
Pao On principles were followed in L&D Associates v Chan
Man Chon Civ App No.80 of 1987, [1987] HKLY 138: P
sued D for agency fees. Q: whether introduction is past
consideration re signing of inspection record (contract) ?
Held: Yes + violation of principles of agency (see later
notes)
 Consideration
Consideration must move from the promisee: McEvoy v
Belfast Banking Co Ltd [1935] AC 24: Father
deposited $ in a bank and the receipt indicated that the
bank received money from him and his son. Father died.
Held: bank contacted with father and son.
 Consideration
No consideration if:
1. Performance of a public duty
2. Performance of a personal legal duty
3. Performance of an existing duty owed to the same
promisor
- gist: find extra bit of consideration
 Consideration
Performance of an existing contracting duty owed to a 3/p
is good consideration : Shadwell v Shadwell (1860) I
CBNS 159: promisor obtains direct benefit from the
contract and has an independent irght o enforce the
promise.

New Zealand Shipping Co. Ltd v AM Satterthwaite & Co

Ltd, The Eurymedon [1975] AC 154: A contacted with B
to unload C’s goods. C contracted with A – if A unloads
the goods, C will not sue A. Held: A is protected.
 Consideration
Part payment of a debt (“payment of a lesser sum”) on the
due date is no consideration for the satisfaction of a
larger debt (The Rule in Pinnel’s case (1602) 5 Co Rep
117)
Applied in Foakes v Beer (1884) 9 App Cas 605: B sued
F. Both signed a settlement agreement that F could pay
principal by instalments. Later, B sued for interests due.
Held: F did not provide any consideration for the non-
payment of interests.
 Consideration
Exceptions to the Pinnel’s case:
1. Goods of lesser value are given;
2. Lesser sum is paid and other goods are given;
3. Lesser sum is paid by a 3/p;
4. Creditor’s claim is disputed in good faith;
5. Composition agreement;
6. Doctrine of promissory estoppel or equitable estoppel
applies.
 Consideration
Doctrine of equitable estoppel (promissory estoppel):
1. Parties by their own act or own consent enter upon an
agreement;
2. The agreement provides that the strict rights under another
contract will not be enforced or suspended; and
3. It would be inquitable to enforce it
- the other party cannot enforce
- Hughes v Metropolitan Railway Co (1877) 2 App Cas 439
- Applied in Central London Property Trust v High Trees
House [1947] 1 KB 130
 Consideration
Only applies only when:
1. Equitable
2. The is real accord
3. As a defence : Combe v Combe [1951] 2 KB 215 –
promise just a gift
4. The promise is definite and precise. Ambiguity ruins
the application.
5. To suspend the creditor’s legal rights
6. Debtor had acted on the promise and had suffered
detriment or change his position
 Consideration
Forbearance to sue is good consideration in return for
promisor’s promise but is not good consideration if the
promisee knows, that he does not have any
ground/cause of action against the promisor. (Cook v
Wright (1861)).

If the promisor honestly believes or has reasonable ground

for believing he has a cause of action, such forbearance
is still good consideration.
 Consideration and privity

A person who is not a party to a contact cannot sue upon it

or be sued upon it.
Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC
847: D contracted with its buyer with a bottom price
clause. Its buyer contracted with S with a similar
clause. S in breach of this clause. Held: D cannot sue
S as D is not a party to the contract between the buyer
and S.
 Consideration and privity
Exceptions:
1. Statutes allowed such enforcement:
- Married Person Status Ordinance (Cap 182) –
beneficiaries can sue on policies providing for them.
- Motor Vehicles Insurance (Third Party Risks)
Ordinance (Cap 272) – a person driving a vehicle can
claim under the insurance policy taken out by the car
owner
2. Contract made by agent binds the principal
3. Rights or benefits assigned under contract or other
instruments (NB: Duties cannot be assigned; NB:
DMCs)
 Intention to create legal
relationships
General Rule: An agreement is enforceable only if both parties intend to
have legal consequences – intention: objective test – a reasonable
persons’ test

Presumptions:
1. Commercial agreements have such intention: Edwards v Skyways
[1964] 1 WLR 349: ex gratia payment (Contra: “subject to contract”
clauses, “honourable pledge clause”, “letter of intent”, etc.)
2. Social and domestic agreements do not have such intention: Belfour
v Belfour [1919] 2 KB 571: agreement to pay maintenance –
domestic agreement- followed in Sun Er Jo v Lo Ching [1996] 1
HKC 1
 The capacity of the parties
There are 2 typical situations:
1. Minors
2. Mentally disordered, drunk or drugged persons
3. Companies
 Minors

Persons under 18 are minors,with limited contractual

capacities.

3 typical situations:
1. Contracts for necessaries
2. Contracts which are binding unless repudicated by the
minor
3. Contracts which are enforceable against a minor
unless ratified by the minor
 Contracts for necessaries
These includes contracts to provide the following to a
minor:
1. Goods
2. Beneficial education/training/services
In the light of the minor’s status of life and the environment
 Contracts for necessaries
Section 4(1) of the Sales of Goods Ordinance (“SOGO”): …
where necessaries are sold and delivered to a minor or
infant, he or she must pay a reasonable price – I.e. only
such contracts are binding on a minor

Section 4(2) SOGO: “Necessaries” means good suitable to the

condition in life of an infant or minor and to his or her
actual requirements at the time of the sale and delivery.
Questions:
1. Is a tailor-made suit worthing HK$10,000 necessaries ?
See Roberts v Gray [1913] 1 KB 520
Contracts binding unless repudicated by
the minor

Both the contracting party and the minor are bound if

making a contract:
1. Relating to an interests in land (Davies V Beynon-
Harris (1931) 47 TLR 424
2. For the acquisition of shares in a company (Capper’s
case (1868) LR 3 Ch App 458
3. To enter into a partnership agreement (Lovell &
Christmas v Beauchamp [1894] AC 360
 Unforceable contracts unless
affirmed by minor
Category 1 contracts are not enforceable unless and until
being affirmed by minor upon his coming of age.
 Contracts made by mentally
handicapped, drunk, drugged
Mental capacity of understanding the transaction is
crucial. The same rules in minors apply to this class.

Mental Health Ordinance (Cap 136): All patients under

Cap 136 have no contractual capacity (s.11).
Contracts by company
Contracts entered into by an officer who
has authority to do so binds the company.
Authority may be actual, apparent or
usual.
 Terms of a contract
Mere representation and contractual terms
Intention of the parties – Contractual liability in respect of
any particular statement ?

Consider:
1. Statements made in preliminary negotiations
2. Statements made at the conclusion time
3. Statements made by persons with special skill &
knowledge
4. Statements made by persons without such skill &
knowledge
 Expressed and implied terms
Expressed terms
Terms that are expressed agreed by the parties orally, in
writing or partly orally, party in writing.

Implied terms
Terms that work on the presumed intention of the parties to
give effect to the business efficacies of the contract.
 Implied terms
Terms can be implied:
1. By custom and usage of a trade : e.g. a manufacturer will remedy
any defects in the garments manufactured, whether they are
attributable to supplied materials, etc. (Crocodile Garments Ltd v
Law Kwai Yuk [1998] HKCU 1988)
2. To give effect to business efficacy: implied to be fit for the purpose
used (The Moorcock (1889) 14 PD 64)
3. For necessity: Wong Mee Wan v Kwan Kin Travel Services Ltd
[1995] 2 HKLR 541: sub-contracting does not absolve the supplier
from its contractual obligations
 Implied terms
4. By legislation: SOGO – Every contract of sale goods –
implied terms:
(1) seller has the right to sell;
(2) goods are of mercantable quality;
(3) goods are fit for the purpose;
(4) goods correspond with the description.
 Expressed terms (Conditions &
warranties)
Differences between conditions and warranties:
1. Even a minor breach of a condition entitles the other
party to terminate the contract and sue for damages.
Breach of a warranty (that excludes repudiation) does
not entitle the other party to terminate the contract; he
can only sue for damages.
2. Breach of a condition can be waived by the innocent
party. The innocent party may also lose the right to
terminate the contract. SOGO, s.13(1) and (3)

How to distinguish conditions and warranties: intention

of the parties – reasonable man test
 Expressed terms (Innominate terms)

The courts look into the effects of the breach rather than
the pre-fixed dicotomy of conditions/warranties. If the
breach goes to the root of contract, the innocent party
can terminate the contract and/or sue for damages(like
condition). If it does not, he can only sue for damages
(like warranty).

Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen

Kaisha Ltd [1962] 2 QB 26: seaworthiness in question –
commercial purpose not frustrated – innominate term
Interpretation and construction of terms

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

Exceptions to the Parol evidence rule:

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

4. Where the law permits implying of certain terms into

the contract : SOGO
5. Where there is a collateral contract: De Lassale v
Guildford [1901] 2 KB 215 – Conveyancing transaction
– vendor gave assurance that the drains are in good
order – a collateral contract – implied term
 Exemption/Exclusion clauses

Such clauses aim to exempt / exclude liability of the relying party

(usually big commercial enterprises) and are often used in standard
form contracts.

Courts do not favour such clauses and will interpret them strictly
against the relying party (Contra Proferendum Rule).

HK legislature enacted the Control of Exemption Clauses

Ordinance (Cap 71) (“CECO”) to curb the use of such clauses.
 Exemption/Exclusion clauses

To be effective, such clauses must pass a 3 stage test:

1. Incorporation into contract ?
2. Clear and wide enough to protect the relying party ?
3. No contravention of the CECO
 Exemption/Exclusion clauses

Incorporation

By: (1) Signature: L’Estrange v F Graucob Ltd [1934] –

Signature without looking – bound – NB: comm
(2) Reasonable notice: Olley v Marlborough Court [1949]
followed by Seapower Resources v Assure Co Ltd [2001]
HKEC 1517
(3) Consistent cause of dealings: J Spurling Ltd v
Bradshaw [1956] 2 All ER 121 – similar documents read
into the current contract
 Control of Exemption Clauses
Control of Exemption Clauses Ordinance (Cap.314)
- restricts “business liability”
- “business” is widely defined; includes profit-making
commercial activities, activity which a person carries on
as a means of living, profession, professonal,
governmental and semi-governmental bodies
- Does not include educational and recreational places
 Control of Exemption Clauses
E clauses become ineffective:
(1) When they attempt to exempt liability for death or personal
injuries (s.7(1));
(2) When they attempt to exempt liability in respect of seller’s
implied undertaking as to title (s.11(1))
(3) When they attempt to exempt liability in respect of seller’s
obligations in respect of quality under sections 15, 16, 17 of
the SOGO. (s.11(2))

General test of reasonableness: objective test – all the

circumstances which the parties knew or should have
known at the time of contracting.
 Vitiating Factors
A contract may be tainted by defects that could affect its validity making
it void, voidable, illegal or unenforceable. Vitiating factors include:
1. Mistake
2. Misrepresentation
3. Duress
4. Undue influence
5. Unconscionable contracts
6. Illegality
7. Restraint of trade
 Mistakes
3 types:
1. Common mistakes
2. Mutual mistakes
3. Unilateral mistakes
 Common mistakes
Common mistakes as to the existence of the subject matter:
Couturier v Hastie (1852) 8 Exch 40: contract for the sale of
corn – unknown to the parties, corn went bad – Held : no
contract

Common mistakes as to ownership of the subject matter:

Cooper v Phibbs (1867) 2 LR 2 HL 149: contract for sale of a
fishery- mistake as to ownership – Held: void

Common mistakes as to quality of the subject matter:

Oscar Chess v Williams [1957] 1 All ER 325: unless of some
fundamental nature, contract not void.
 Mutual mistakes
No meeting of minds – no contract
Scriven Bros v Hindley [1913] 3 KB 564: mistake as to the
lots of goods – Held: no contract
 Unilateral Mistakes
Mistake by one party while the other party knows the truth. Mainly on identity of the parties. Normally
3 parties are involved:
1. The innocent party who mistakens
2. The rogue
3. The innocent party who was being mistakened

2 situations:
a. Contracts made by correspondence
b. Contracts made face to face
 Contracts made by
correspondence
Effect: Contract void

Cundy v Lindsay (1876) 1 QBD 348

A ordered some handherchiefs from B and sold them to C
(being absolutely innocent)
Held: A does not have a good title, cannot therefore
transfer a good title to C.
 Contracts made face to face
Contract may be voidable.

Phillips v Brooks Ltd [1919] 2 KB 243

A pretended to be a rich and famous person, bought a diamond ring
from B. He sold the ring to C, dishonoured the cheque and then
disappeared. Held: valid contract and was bound. B cannot claim
the ring from C.

Levis v Averay [1972] 1 198 – similar result – voidable

Gist:(1) what the innocent contracting party thought he was

contracting with?
(2) is the identity vital influence his decision to contract or not ?
 Misrepresentation
Misrepresentation = a false representation
of fact made orally or in writing or by
conduct.
 Misrepresentation
Representation must be:
1. On existing facts
2. On false existing factsShum Kong
3. On false material existing facts
4. Induce the innocent contracting party to enter into the
contract
5. the innocent party has suffered loss as a result of such
inducement

See Shum Kong v Chu Ting Lin [2001] HKEC 651 – sale of a
village house (own property, 700 sq.ft) with garden (leased)
under misrepresentation
 Misrepresentation
Distinguish from:
1. Future facts
2. Intention of future conduct
3. Opinion
 Misrepresentation
2 types of misrepresentations:
(1) Fraudulent
(2) Innocent
(3) Negligent
Fraudulent misrepresentation
= a false statement made by a person with a dishonest (“fraud”) intent

Fraud is proved if the misrep is made by the maker:

1.Knowingly
2.Without belief in its truth, or
3.Recklessly (don’t care if it is true or not)
An honest belief at the material time is a good defence:
Derry v Peek (1889) 14 App Cas 337: DIR rep that the company could
run trams by steam or mechanical power – reality: it could not do so –
DIR held an honest belief- Held: good defence
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset
Management) Ltd [1992] BCLC 1104 : D said that there were
interested parties to buy the shares and led P to purchase them –
reality: no interested buyer and D knew that at the time of making rep
Held: fraud
Fraudulent misrepresentation
Remedies: depends on whether fraudulent misrep had
become a term of the contract :
a. Become a term  the other party may:
(1) rescind the contract, or
(2) affirm the contract and claim damages
for breach of contract,
(3) affirm the contract and claim damages
under the tort of deceit
b. Not become a term  the other party may:
(1) rescind the contract, and/or
(2) claim damages under the tort of deceit
 Innocent misrepresentation
= false statement honestly believing to be true and has
reasonable grounds to believe so up to the moment of
contracting

Remedies: Rescission (not plus damages)

Misrepresentation Ordinance s. 3(2) :
Damages in lieu of rescission if equitable
 Negligent misrepresentation
Elements to be proved:
1.a duty on the representor to refrain from making a false statement;
and
2.The representor is in breach of this duty

Duty exists with special relationships between representor and

representee, e.g. professionals in their areas of expertise

Remedies: rescission, damages and/or indemnity

MO s.3(2): court has a wide discretion to affirm the contract and award
damages in lieu of rescission
 Duress
Duress = actual or threatened violence, or unlawful restraint
or threats, directed towards the contracting party or a
member of his closed family.

Effect : contract voidable

Barton v Armstrong [1975] 2 All ER 465: former chairman

threatened to kill the MD unless company bought back his
shares – co did so – held: voidable

Rationale: no free choice ; negate consent no genuine

intention to contract
 Economic duress
Economic duress = Apparent consent is induced by
illegitimate economic pressure from the other party

Pau On v Lau Yiu Long [1980] A C 614: consent is

revocable  contract is voidable

Remedy: voidable
Right to avoid may be lost if the innocent party chooses to
affirm (The Atlantic Baron [1979] QB 705))
 Undue Influence
Conditions:
(1) A relationship between the parties;
(2) One party acquired over another a measure of
influence or ascendancy; and
(3) The ascendant person takes unfair advantage.
(see Royal Bank of Scotland plc v Etridge (No.2) [2001]
3 WLR 1021, 1029; Bank of China (Hong Kong) Ltd
v Wong King Sing [2002] 1 HKLRD 358)
 Undue Influence
2 types of undue influence:
1. Actual undue influence
2. Presumed undue influence
 Actual Undue Influence
Conditions:
1. The wrongdoer had the capacity to influence the
complainant;
2. Influence was in fact exerted;
3. Influence was undue;
4. The effect: the complainant enter into the contract
- sufficient: the influence was a significant reason for
causing
- no need to prove manifestly disadvantage

Effect: Contract voidable

 Actual Undue Influence
Williams v Bayley (1866) LR 1 HL200; Diners Club v Ng
Chi Sing [1987] 1 HKC 78: father compelled to
guarantee son’s debt – guarantee: voidable
 Presumed undue influence
Conditions:
1. A relationship of trust and confidence between the wrongdoer and the
innocent party;
2. The nature of the relationship is of a nature that it is fair to presume that
the wrongdoer had abused that relationship – a rebuttable presumption
3. Procuring the innocent party to enter into contract; and
4. The contract was manifestly disadvantageous to the innocent party.

Undue influence can be rebutted by:

a. The complainant had exercise free and independent will; or
b. The complainant had full knowledge and could not have been misled; or
c. The complainant had competent and independent advice from another.
 Unconscionable contracts
The law takes a further step in protecting the innocent under
the doctrine of “unconscionable contracts”.

Commercial Bank of Australia v Amedio (1983) 151 CLR

447 per Mason J:
Undue influence: the will of innocent party was not
independent
Unconscionable contract: disadvantage position (e.g.
poverty, sickness, age, sex, infirmity of body and mind,
drunkeness, illiteracy, lack of education, lack of assistance
or explanation where assistance is necessary) vis-à-vis the
other party [and the other party knew it]
 Unconscionable contracts
The Unconscionable Contract Ordinance (Cap. 458)
- A consumer protection legislation (others being: SOGO, Control of
Exemption Clauses Ordinance, MO)
- Applies only in consumer sales
- The court may refuse to enforce, enforce the remainder of the
contract, limit/revise/alter the unconscionable part of the contract
- The court may take the initiative to examine the unconscionble
provisions
- List of matters the court will consider: relative bargaining positions of
the parties, etc.
See Hang Seng Credit Card Ltd v Tsang Nga Lee & Others [2000] 3
HKC 269 : credit card debt plus costs on indemnity basis – falls
under Cap 458 – “greedy bank” case – unconscionable contract
 Illegality
Contracts are not enforceable
 Restraint of trade
Applicable situation: one party agrees to restrict its freedom
in the future to carry on trade with other parties who are
not parties to this contract (via “restrictive covenants”).

General rule: Restrictive covenants are acceptable only if

they are reasonable with reference to time and space
and must not deprive the livelihood of the party being
restrained.

If restraint of trade is found, the contract is void.

 Restraint of trade
Typical situations:
(1) Employment contracts
(2) Sale of business
(3) Solus agreement (e.g. sole agent agreement)
 Discharge of a contract
A contract coming to an end by:
1. Performance/defective performance
2. Agreement (“Accord and satisfaction”)
3. Breach
4. Frustration
Performance/Defective Performance
A contract may be discharged by full performance. The
traditional view as expressed by Cutter v Powell (1795) 6
Term Rep 320, may be watered down by the doctrines of :
(1)Divisible contract
(2)Substantial performance
- and be paid on a quantum meruit basis (i.e. pro rata
basis).

The contract in Cutter v Powell is regarded as a “whole”

contract and must be performed in full. Hoenig v Issacs
[1952] 2 Al ER 176, demonstrating the modern approach,
used doctrines (1) and (2) above.
 Discharge by agreement
Accord and satisfaction:

“Accord” – agreement
“Satisfaction” – consideration
 Discharge by breach
2 types of breach:
(1) Repudiatory breach
(2) Anticipatory breach
 Repudiatory breach
= No performance by the contracted time, place and
conditions

Effects:
(1) Condition or innominate term (with serious
consequences)  innocent party can treat the contract
as discharged.
(2) Warranty or innominate term (with less serious
consequences)  innocent party can only sue for
damages
 Anticipatory breach
(1) A party express its intention not to perform,
(2) A party acts in such a way as to sow its intention not to
perform

Remedies:
(1) The innocent party may accept the breach and treat
the contract as discharged then, and sue for damages
(2) The innocent party may wait until the due date and sue
for loss incurred by him as a result of such a breach
(i.e. damages) or may seek specific performance
 Discharge by frustration
“…Without fault of either party, a contractual obligation
has become incapable of being performed because
circumstances in which performance is called for would
render it a thing radically different from that which was
undertaken..” per Lord Radcliffe in Davis Contractors v
Fareham UDC [1956] ACC 696
- Extraneous change of circumstances which makes
performance impossible – examine : the subject matter
of the contract – and ask: what are such circumstances ?

Effect: Both parties need not perform – contract

discharge
 Discharge by frustration
Examine:
(1) Subject matter destroyed: Taylor v Caldwell (1863) 3 B&S 826 –
Hall destroyed by fire – contract discharged.
(2) Expected event does not occur : Coronation cases :
Krell v Henry [1903] 2 KB 740: King George VI sicked – rented
premises not served its purpose – contract discharged.
(3) Person to perform dies or falls ill: Robison v Davison (1871) LR
Ex 269: performer sicked on performance day – contract
discharged
(4) Change in law making it impossible to perform: Baily v
DeeCrespigny (1869) LR 4 QBB 180: no blockade clause turns
impossible because of change of law – contract discharged
 Discharge by frustration
(5)Change in law makes performance illegal: Czarniko Ltd v Rolimpex
[1979] AC 351: export of goods impossible because of change in law
– discharged
(6) Performance become radically different: Wong Lai Ying v Chinachem
[1980] HKLR 1: landslide stopped construction work for 3.5 years –
discharged.

No frustration under:
(a) Performance more expensive
(b) Self-induced frustration: failure to apply for a licence (Maritime
National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524)

Money paid lies where it falls except when there is a total failure of
consideration (Fibrosa case [1943] AC 32)
 Remedies
1. Damages (compensation for loss)
2. Specific performance
3. Injunction

Remoteness of damages –reasonable foreseeable loss

Duty to mitigate-innocent party must mitigate (minimise) its

loss
 Q & A session
Please examine the sample tenancy agreement in some details. Discuss:
1. Is there any offer, acceptance, consideration, or binding intention in it ?
2. What are the condition and warranties ?
3.What is the subject matter ?
4.What does party A provide ?
5.What does party B provide ?
6.Any guarantee by party A and/or party B?
7.What are the rights of party A ?
8.What are the duties of party A ?
9.How long is the tenancy ?
10.If you were party B, would you accept this tenancy agreement ? What
amendments would you like to make ?
 Q & A session
Examine your own employment contract.
1. What is the subject matter ?
2. What are the terms ?
3. Do you think such terms are fair to you ?
4. Can you find terms in the employment contract that are illegal under
the Employment Ordinance ?
5. What can you get if you were dismissed by your employer who gives
you one month’s notice ? Do you have to attend office after receiving
the notice ?
6. If you had accumulated 40 days of annual leave and your
employment contract provides that annual leave cannot be
accumulated, can such annual leave be set off against your notice
period ? What should your employer do in respect of such annual
leave ?