Page 0: Page 1: Lectures 2 & 3 LAW OF CONTRACT ESSENTIAL ELEMENTS OF CONTRACTS EDINBURGH NAPIER UNIVERSITY BA (HONS) ACCOUNTING FULL-TIME PROGRAMME 2009 Page 2: Law of Contract   WHAT IS A CONTRACT? ESSENTIAL ELEMENTS OF A CONTRACT     Offers Acceptance Consideration Intention to be legally bound    CAPACITY OF PARTIES VOID AND VOIDABLE CONTRACTS VITIATING FACTORS      Mistake Misrepresentation Duress Undue influence不正當 Illegality 2 Hong Kong Law [L2 & 3] Copyright Reserved Page 3: WHAT IS A CONTRACT?   A contract is a legally enforceable agreement. It is also valid, binding and effective “legally enforceable”  if any party breaches the promise, the other party may ask the court to “enforce” it.  Freedom of contract (no one can force you to sign)   Everyone is free to make whatever contracts one wishes. Every contract is, as a general rule, enforceable, unless it falls within one of the exceptions recognised by the common law, such as misrepresentation, undue influence, and so on. (you cannot withdraw the contract, you need to pay compensation) 3 Hong Kong Law [L2 & 3] Copyright Reserved Page 4: ESSENTIAL ELEMENTS OF A CONTRACT  An legally enforceable contract must consists of the following elements:     an offer, acceptance, consideration, and intention to be legally bound Hong Kong Law [L2 & 3] Copyright Reserved 4 Page 5: Offer (spot out the meaning of offer)    An offer is a statement of the terms proposed by one party (the offeror) to the other party (the offeree). The offeror is willing to be bound by the terms of the statement if the offeree accepts the offer. (complete) Offer and acceptance constitute two essentials of creating a legally binding agreement. Stott B Law p.40-43  Hong Kong Law [L2 & 3] Copyright Reserved 5 Page 6: Essential elements of an offer  An offer can be viewed as composed of three essential elements: (1) It must contain definite terms which will become binding as soon as they are accepted by the offeree. (clear, unambiguous, certain) (2) It must be communicated to the offeree. If not, it is not an offer. It can be communicated to a person, a group of persons and the world at large (3) The offeror must have an intention to be legally bound once it is accepted. (before offeree accept the offer) Hong Kong Law [L2 & 3] Copyright Reserved 6 Page 7: Offers and invitations to treat (no need to accept)     If a statement is an offer and the offer is accepted, a contract may result. However, if the statement is an invitation to treat, it cannot be accepted; it is merely an invitation to make an offer. For example, if A offers to sell 5 sets of handbags for $15,000 to B, and B accepts the offer, a legally enforceable contract will be made once the offer is accepted. A‟s re-confirmation is not necessary. On the contrary, if A does not have any intention to enter into a contract, it is not an offer. It is only an “invitation to treat”. Hong Kong Law [L2 & 3] Copyright Reserved 7 Page 8: Offers and invitations to treat (II) Special cases: (1) Advertisements    In general, an advertisement is not an offer, because it only describes the goods or services to be provided. It is not intended to be legally binding if the readers “accept” it. It is therefore normally an invitation to treat. However, there are exceptions. One of the important exceptions is unilateral contracts or “an offer to the whole world”.   Carlill v. Carbolic Smoke Ball Co [1893] (not the time he get the compensation) Missing Person or missing animals notices (offer has a definitely amount but invitation just only a range) 8 Hong Kong Law [L2 & 3] Copyright Reserved Page 9: Offers and invitations to treat (III)  Carlill v. Carbolic Smoke Ball Co [1893] 1 QB 256  a company said in an advertisement that ₤100 would be paid to any person who contracted influenza, colds, or any disease caused by taking the cold, after having used the carbolic smoke ball for 14 days according to the printed directions. (legally bind)  It was also mentioned in the advertisement that a sum of ₤1,000 was deposited with a bank to show its sincerity.  Mrs Carlill caught the influenza after using the carbolic smoke ball as instructed, and sued the company but the company refused to pay.  It was held that the advertisement was an offer to the whole world and the company was bound when a customer claimed the ₤100 having proved that she caught cold after having used the ball as prescribed. 9 Hong Kong Law [L2 & 3] Copyright Reserved Page 10: Offers and invitations to treat (IV) (2)  Display of Goods for sale The display of goods on the shelf in a supermarket is an invitation to treat, rather than an offer. (the time you pick up the things, we are offeree) This is because, even after a consumer has put the goods into her trolley, she will still be permitted to change her mind and put them back on the shelf. Only when she brings the goods to the cashier does she make an offer to the cashier, who may accept or reject the offer. Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd [1953] 10    Hong Kong Law [L2 & 3] Copyright Reserved Page 11: Offers and invitations to treat (V) Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd      Boots was a famous self-service chain of shops in England, like Watson‟s in HK. According to the law, certain drugs could only be sold in the presence of a qualified pharmacist but they were only kept on open shelves in the store. Customers simply selected their goods from the shelves, put them in the shopping basket and paid for them at the cashier which was supervised by a pharmacist. It was held that the display of drugs on the open shelves only constituted an invitation to treat. The customer made an offer to buy at the cashier and the sale was completed when the cashier accepted the offer. Since the cashier was supervised by a qualified pharmacist, Boots had not committed an offence. 11 Hong Kong Law [L2 & 3] Copyright Reserved Page 12: Offers and invitations to treat (VI) (3)    (4)   Auction The bid from a bidder in an auction is normally an offer. Each bid is superseded by a higher bid. Acceptance of the offer is made by the fall of the hammer. (the one who bid is offeror, and the one who have hammer is offeree) Tender 投標 A tender notice is not an offer. The offer comes from the persons making the tender. 12 Hong Kong Law [L2 & 3] Copyright Reserved Page 13: Effectiveness of an offer    There are many ways in which an offer may lapse (no response), or cease to be a valid offer. It is important for an offeree to know when an offer lapses. If an offer has lapsed, the offeree can no longer accept it. Hong Kong Law [L2 & 3] Copyright Reserved 13 Page 14: Effectiveness of an offer (II) A. Withdrawing an offer – revocation of an offer  If an offeror wishes to withdraw an offer, he must first inform the offeree.  An offer can be withdrawn (revoked) by the offeror at any time before acceptance.  However, notice of withdrawal (revocation) has to be communicated to the offeree in order to be effective.  Once the offeree has accepted the offer, a binding contract is made and the offeror can no longer withdraw.  The notice of withdrawal may come from the offeror himself, or from a reliable source.  Dickinson v. Dodds [1876] 14 Hong Kong Law [L2 & 3] Copyright Reserved Page 15: Effectiveness of an offer (III)  Dickinson v. Dodds [1876]    Dodds offered to sell a property to Dickinson on a Wednesday, stating that the offer would remain open until Friday. On Thursday, Dickinson heard from a reliable source that the property had been sold. Knowing that, he still handed a letter of acceptance to Dodds on Friday. It was held that as Dickinson had heard about the withdrawal of the offer from a reliable source, the offer was no longer available for acceptance. (withdraw on Thursday, no consideration, he has three days for withdraw) 15 Hong Kong Law [L2 & 3] Copyright Reserved Page 16: Effectiveness of an offer (IV) In Dickinson v. Dodds, Dodds specified that his offer would remain open until Friday. Can Dodds sell to another person before Friday? In this situation, there are actually 2 offers: 1. An offer to sell the property 2. An offer to keep the first offer open until Friday  An offeror is not bound to keep his offer open unless the offeree has accepted the 2nd offer and they have a legally binding agreement (contract).  If Dickinson has made a payment to Dodds for the 2nd offer, there will be consideration for the 2nd contract and Dodds will have to keep his offer open until Friday. Hong Kong Law [L2 & 3] Copyright Reserved 16 Page 17: Effectiveness of an offer (V) B. Offer is rejected by the offeree (rejection)  Once the offeree has rejected an offer, the offer no longer exists.  If he tells the offeror that he wishes to make a contract in terms other than that of the original offer, he will be regarded as making a new offer, or known as a “counter-offer”. (position change, origin offeror change to offeree and origin offeree change to offeror)   Hyde v. Wrench [1840] Please see to slide 23 as well 17 Hong Kong Law [L2 & 3] Copyright Reserved Page 18: Effectiveness of an offer (VI)  Hyde v. Wrench [1840]      Offeror offered to sell his farm for $1,000. The offeree‟s agent offered $950 for the farm and asked for a few days to consider it. (reject) The offeror refused to sell at $950 and the offeree subsequently wrote a letter to the offeror to „accept‟ the offer at $1,000. (no way for accept at $1000) The offeror had already sold the farm to someone else. It was held that the counter-offer of $950 was an implied rejection of the original offer and it no longer existed. Hong Kong Law [L2 & 3] Copyright Reserved 18 Page 19: Effectiveness of an offer (VII) C. Offer expires  An offeror often imposes a time limit for acceptance, and if the offeree does not accept it within that time, the offer will lapse. (perpetual offer)  If the offeror does not specify the duration of the offer, the offer will expire after a reasonable period of time. D. Death of the offeror  If the offer requires personal performance, such as employment, it will lapse upon the death of the offeror. Hong Kong Law [L2 & 3] Copyright Reserved 19 Page 20: Acceptance    Acceptance refers to the situation where the offeree unconditionally (clearly, not just ok) agrees on all the terms of the offer. Merely acknowledging receipt of an offer is not an acceptance, nor is a reply that the offeree is considering it. A mere request for more information is not an acceptance. (no change of the position of offer) Stott B Law p. 43-47  Hong Kong Law [L2 & 3] Copyright Reserved 20 Page 21: Acceptance (II)  Stevenson v. McLean [1880]      Offeror offered to sell a quantity of iron for cash. Offeree enquired as to whether he could have credit terms. Offeree then accepted the terms of the original offer when the offeror did not reply to their enquiry. Offeror had sold the iron to someone else. It was held that the enquiry was a mere request for more information and not a rejection of the original offer. The acceptance was effective and the offeror was liable for failing to supply the iron. 21 Hong Kong Law [L2 & 3] Copyright Reserved Page 22: Acceptance (III)  An acceptance may be made verbally, in writing or by conduct.  For example, when a bus stops, an offer is made to all potential passengers. When you get on the bus and pay the fare, you accept the offer. The contract is not made verbally or in writing, but it is still a valid contract   An acceptance cannot be deemed or assumed Silence is not an acceptance  Felthouse v Bindley [1862]   The offeror wrote to his nephew offering to buy one of his horse and stated in this letter that „if I don‟t hear from you, I‟ll consider the horse will be sold to you at $xxx‟. The nephew did not reply and the court held that his silence did not constitute acceptance and there was no contract. 22 Hong Kong Law [L2 & 3] Copyright Reserved Page 23: Counter-offers  An acceptance is effective only if the offeree accepts all the terms of the offer unconditionally and without any reservation. If A offers to sell certain goods at $1,000, but B counteroffers to buy half of them at $500, no contract is made. Hyde v. Wrench [1840]   A counter-offer has the following effects: (1) it rejects the offer; (2) it makes the offer invalid and it cannot be accepted in future; and (3) it constitutes a new offer by itself, which the offeror may free to accept or reject. Hong Kong Law [L2 & 3] Copyright Reserved 23 Page 24: Acceptance must be communicated  As a general rule, an acceptance must be communicated to the offeror. (by conduct or oral)   However, there is no requirement that the communication must be made by the offeree directly to the offeror. The acceptance is valid even if the offeror is aware of it from other sources.  1. 2. 3. Exceptions to the general rule: Postal Rule Waiver of communication of acceptance Offeror‟s own fault Offeror‟s authorized agent 24 4. Hong Kong Law [L2 & 3] Copyright Reserved Page 25: Postal rule (time you post the letter into letter box) (the most important exception)  An acceptance becomes effective from the moment of the posting of a letter of acceptance.  properly addressed, stamped and put into the hands of the postman in a post office or a post box in a normal way, even if the letter of acceptance never arrives Grant applied for shares in the Company. A letter of allotment (acceptance) was posted but Grant never received it. When the Company went into liquidation, Grant was asked to pay up on the shares that were allotted to him. It was held that Grant was a shareholder of the Company and liable to pay. 25  Household Fire Insurance Co. v. Grant [1879]    Hong Kong Law [L2 & 3] Copyright Reserved Page 26: Postal rule (II)    However, the postal rule applies only when it is reasonable to communicate the acceptance by post. The offeror may also stipulate that postal rule does not apply in his offer. If the offer is dispatched, say, by telegraph, a letter of acceptance by post will probably be considered unreasonable. If an acceptance is dispatched by fax but the offeror does not receive it due to mechanical problems (not because of carelessness by the offeror), the acceptance normally will not take effect. (fax: time the machine receive letter email: computer receive letter)  This is because if there is any problem in transmission, the offeree will receive a message from his own machine. Communication by e-mail probably follows the same rule. 26 Hong Kong Law [L2 & 3] Copyright Reserved Page 27: Postal rule (III)   The postal rule does not apply to notice of revocation of offer. Postal rule only applies to acceptance.  A notice to revoke an earlier offer takes effect only when the offeree receives it. The same applies to transmission of a notice of revocation of offer by fax and e-mail. Byrne & Co v. Van Tienhoven & Co [1880] (Stott, p.46)  It was held that the offeree had accepted the offer prior to receipt of the letter of revocation.  The letter of revocation was effective only when it was received by the offeree and postal rule did not apply to revocation of offer.  Hong Kong Law [L2 & 3] Copyright Reserved 27 Page 28: Postal rule (IV) (no problem for using faster communication, email)  Postal rule does not apply to more instantaneous method of communication, eg. Fax, email, telephone, etc   Entores Ltd v. Miles Far East Corporation [1955] (Stott, p.46) Two companies located in two different countries. The offer was accepted by a communication received by E‟s telex machine in London. It was held that the rule about instantaneous communications is different from the postal rule. The contract was only completed when the acceptance was received by the offeror and the contract was made in the place where the acceptance was received. So the contract was made in London, England. 28    Hong Kong Law [L2 & 3] Copyright Reserved Page 29: Consideration (make assumption that is a consideration, money is the consideration)  Acceptance of an offer results in an agreement, but it is not legally enforceable without “consideration”.  If A promises to give a MP3 to B as a birthday present, and B “agrees”, such “agreement” is not legally enforceable because no consideration is given by B.  Consideration is something of value in the eyes of the law in exchange for other‟s promise. It is not necessarily money. If A agrees to give a MP3 to B on the condition that B will wash A‟s car twice a week for three months (a service), it will also be a legally binding contract. The promise to wash the car for three months is good consideration. (A can sue for damages) Stott B Law p. 47-53   Hong Kong Law [L2 & 3] Copyright Reserved 29 Page 30: Adequacy of consideration  Consideration must be sufficient in the eyes of the law, but it need not be adequate. ($1 is money, it is sufficient, e.g. full metal alchemist等價交換)  A contract to sell a car at the consideration of $1 is perfectly valid. The court is not concerned whether the price of $1 is fair or adequate, so long as there is true consensus between the parties. (unfair unconscionable contract不合情理合同 a chocolate manufacturer promised to provide an LP music record on the production of three chocolate wrappers plus a small fee. A customer produced three chocolate wrappers, and the court held that the production of the wrappers constituted consideration) 30  Chappell & Co. Ltd v. Nestle Co. Ltd [1960]   Hong Kong Law [L2 & 3] Copyright Reserved Page 31: Adequacy of consideration (II)    Consideration must be something of value in the eyes of the law, e.g. cash, “wash the car twice a week”, or “a promise not to claim damages”. Natural love and affection are not sufficient consideration, nor is moral obligation. (in eyes of law) Hence, an agreement between two individuals that they must love each other forever is not legally enforceable. 31 Hong Kong Law [L2 & 3] Copyright Reserved Page 32: Past consideration    The consideration for a promise must be given in exchange for the promise. (present consideration must be match present and past must be match past) If the benefit (or detriment) which constitutes the consideration was given (or suffered) before the promise was given, it is past consideration. “Past consideration” does not in law amount to “consideration” and cannot be used to support a promise. 32 Hong Kong Law [L2 & 3] Copyright Reserved Page 33: Past consideration (II) Special case:  An act done before the promise was made can be valid consideration (i.e. not “past consideration”) if the following conditions are satisfied: (still enforceable) the act was done at the request of the person who later gave the promise; 2. it was understood that payment would be made; and 3. the payment, if it had been promised in advance, must have been legally recoverable. (pet grooming service, pet is giving to them for service and payment would be paid later)  Re Casey’s Patent; Stewart v Casey (1892) Hong Kong Law [L2 & 3] 33  Stott B Law p. 49 Copyright Reserved 1. Page 34: Promise to perform existing obligations   If a person promises to perform a duty which he is already bound to perform, then he is not offering anything of value and the consideration is not sufficient. (police are order by us to do something that don‟t relate to his duty, we have to pay extra fee to him) Stilk v. Myrick [1809]   two of the crew of a ship had deserted the ship during the voyage for which they had contracted to serve and the master of the ship promised to divide the wages of those who deserted among the remaining crewmembers. The master later changed his mind and refused to share the extra wages. It was held that under the original contract, the remaining crewmembers were under an obligation to continue working. 34  Hong Kong Law [L2 & 3] Copyright Reserved Cf. Hartley v Ponsonby [1857] Page 35: Promise to perform existing obligations (II)  Hartley v Ponsonby [1857]     Almost half of the crew left the ship, the captain offered those remaining extra wages to complete the voyage. The captain and the crew knew that the ship was so seriously undermanned that the rest of the journey had become extremely difficult and dangerous. (bad weather and ship) It was held that since the journey was extremely dangerous (supervening event), the sailors were discharged (by frustration, end contract immediately) from their existing contract and left them free to enter into a new contract for the rest of the voyage. (new and fresh consideration) As a result, they were entitled to the additional wages. 35 Hong Kong Law [L2 & 3] Copyright Reserved Page 36: Promise to perform existing obligations (III)     In Williams v. Roffery Bros. & Nicholls (Contractors) Ltd. [1991], (Stott, p.51), A engaged a contractor B to do some construction work at the price of ₤20,000. Later A recognised that the originally agreed sum of ₤20,000 was too low, and feared that B (who was in financial difficulties) did not have sufficient resources to complete the work on time, which could in turn prejudice A because of some penalty clauses. Hence, A promised to make extra payment to B. (paid you more) The court held that A‟s promise was supported by consideration because there were “practical benefits” of avoiding the penalty obtained by A from B‟s performance of the obligations under the original contract. (B is entitle to get extra pay) One of the judges said that Stilk v. Myrick might be differently decided today. 36 Hong Kong Law [L2 & 3] Copyright Reserved Page 37: Part payment of a debt    If A owes B $100, but A only repays $90 to B, is the debt settled? The original loan agreement of $100 is a binding contract. If A offers to repay only $90, it is not supported by new consideration even if B “accepts”. (agreement) In legal terms, it is a “variation” (change) of the original contract. There is no new consideration. Common law rule  If a creditor promises to accept part of a debt in settlement of the whole debt, the promise is not legally enforceable because it is not supported by new consideration. Hong Kong Law [L2 & 3] Copyright Reserved 37 Page 38: Part payment of a debt (II)     In Pinnel’s case [1602], there was a contract made between a debtor and his creditor under which he agreed to repay the loan in full to the creditor in November. Later the debtor repaid part of the debt in October (i.e. a month earlier) in exchange for the creditor‟s agreement to waive his right to claim the remaining debt. The court held that early part payment did not constitute valid consideration. This common law rule was useful to protect a creditor from a ruthless debtor who exploited the advantage of being a defendant in litigation. (unfair to creditor if debtor didn‟t have sufficient money to pay for creditor, duress) Hong Kong Law [L2 & 3] Copyright Reserved 38 Page 39: Part payment of a debt (III)     In Foakes v. Beer [1884], the debtor requested that the creditor accept his repayment by instalments. The creditor subsequently claimed the interest payable on the instalments. It was held that the creditor was entitled to the interests as the new agreement was not supported by consideration from the debtor. In D&C Builders Ltd. v. Rees [1966], a debtor owed £ 496 to a creditor, but he offered to pay the creditor only £ 300 in full settlement. The creditor reluctantly accepted the offer as the company was in serious financial difficulty, which the debtor knew. It was held that the creditor was entitled to recover the balance, and two of the judges based their decision on the rule in Foakes v. Beer. Hong Kong Law [L2 & 3] Copyright Reserved 39 Page 40: Part payment of a debt (IV) Exceptions to Pinnel‟s rule : 1. Part-payment made before the due date, made at the creditor‟s request, or at a different place, or in a different currency, or together with other benefit (for example, in addition to the payment of money, some goods are given in lieu of part of the balance), or the payment is made by a third party, would be „valuable‟ consideration for the release of the whole debt. (Carver, p.283) (paid earlier) 2. Where the creditor‟s claim is disputed in good faith, and there is a settlement between the creditor and the debtor under which the creditor is paid the lesser sum.  This is known as “waiver” or “forbearance”. 40 Hong Kong Law [L2 & 3] Copyright Reserved Page 41: Doctrine of promissory estoppel     If a person (L) makes a statement of fact (promise) to another (T), intending that T should rely on it, and T does in fact rely on it and acts upon it to his (T’s) detriment, (sufferance on second world war) then L is “estopped” (or prevented) from later denying the truth of those facts.  L can no longer use the lack of consideration to deny his obligation. (no consideration, no contract) So, there are three important elements in this doctrine: (1) promise; (2) reliance on the promise; and (3) detriment. This is known as the “doctrine of promissory estoppel” laid down in the case of Central Property Trust Ltd. v. High Trees House Ltd [1947], commonly known as “High Trees case”. Stott B Law p.52 41 Hong Kong Law [L2 & 3] Copyright Reserved Page 42: Doctrine of promissory estoppel [II]  In the High Trees case, a landlord in 1937 granted (given) a 99-year lease on a property to a tenant at a certain rent. Due to World War II, the landlord agreed to reduce the rent by half. When the War ended in 1945, the landlord claimed the rent at the original amount.  It was held that the landlord would be entitled to the original amount of rent after the War ended, but could not claim the original rent for the wartime period. A promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply.  Where the doctrine applies, we need not worry about the question of consideration. 42 Hong Kong Law [L2 & 3] Copyright Reserved Page 43: Doctrine of promissory estoppel (III) Limitations of the doctrine: 1. There must be an unambiguous promise made by a party to the contract that he does not intend to enforce his strict contractual rights. (not paid me full rental) 2. It can only be used as a defence in a legal action. It cannot be used as the basis for bringing an action. It has been said that it can be used only as a “shield” (defendant) but not a “sword” (plaintiff). 3. It does not extinguish the original rights of the promisor. It only suspends his rights. 4. The consensus between the parties must be real. Hong Kong Law [L2 & 3] Copyright Reserved 43 Page 44: Intention  If there is no intention to create a contract, there is no contract. (a boy paid $500 for entertainment with girl, but it is not enforceable a girl to pay back $500)  For domestic agreements, it is presumed that the parties do not intend to create a legally binding contract. However, some social agreements are binding because the parties clearly intend to be legally bound by them. For example, a separation agreement between husband and wife is a binding, legally enforceable contract. For commercial agreements, it is presumed that the parties concerned have intention to create a legally binding contract, unless there is sufficient evidence to prove the contrary. Stott B Law p. 53 – 54 (presumption of domestic and social arrange: rebuke, the burden of proof is on the part of the party that alleged to have the intention. E.g. boy buy mark 6 and the girl will promise to pay the balance of mark 6 later, after few days, he win the first price and don‟t share the price with girl, it is enforceable) (presumption of commercial agreement: rebuke, the burden of proof is on the part of the party that alleged to have no intention.)      Hong Kong Law [L2 & 3] Copyright Reserved 44 Page 45: CAPACITY OF PARTIES  A party to a contract may lack the necessary contracting capacity in the following situations: 1. 2. Minors Mentally disordered persons  If any party does not know the nature and contents of a contract, he or she may lack the necessary contracting capacity  the contract made by such party may be avoided, i.e. the contract is “voidable”. (unenforceable) Hong Kong Law [L2 & 3] Copyright Reserved 45 Page 46: Minors     In Hong Kong, persons under the age of 18 are minors. A minor has the capacity to enter into a contract and to enforce contractual rights against adults. However, adults are restricted in enforcing contracts against minors. (normal contract) Exceptions to this general rule:   Contracts for necessaries Contracts of employment Hong Kong Law [L2 & 3] Copyright Reserved 46 Page 47: Contracts for necessaries  Contracts for necessaries refer to contracts for goods and services that are essential to the minor. (bread, butter, soft drink)   Necessaries are not confined to those goods or services required for sustaining life. Ordinary clothing, food, education and medical service are necessaries. In comparison, luxury clothing is not. S4(2) SOGO has given the meaning of necessaries However, sometimes expensive items may be necessaries, provided they are useful and appropriate for his social background and financial circumstances.   A minor is bound by his contracts for necessary goods and is bound to pay a reasonable price for such goods. With respect to non necessary goods, which have not paid for and are in the minor possession, need to return under the Age of Majority (related Provisions) Ordinance 47 Hong Kong Law [L2 & 3] Copyright Reserved Page 48: Contracts of employment     Hong Kong Law [L2 & 3] Copyright Reserved If an employment contract (including apprenticeship) is beneficial to a minor, it is also legally enforceable. If its terms are oppressive to the minor, it is not legally enforceable. Its validity thus depends on circumstances. Both contracts of apprenticeship and of service of minors are now subject to legislation in Hong Kong under the Apprenticeship Ordinance and the Employment Ordinance. Contract which confer some form of lasting benefit on a minor are enforceable against him after 18 years old unless he expressly avoids the contract within a reasonable time after 18, eg shares and lease etc. 48 Page 49: Mentally disordered persons    Generally, contracts entered into by a mentally disordered person are binding on both parties. If a mentally disordered person wishes to avoid or repudiate a contract, (not come from free view) he has the burden to prove that he did not know what he was doing or did not understand what the contract is about, and that the other party was aware of his disability. A person suffering from a mental disability is also bound, like a minor, by his contracts for necessary goods and is bound to pay a reasonable price for such goods. 49 Hong Kong Law [L2 & 3] Copyright Reserved Page 50: Privity of contract   The doctrine of privity of contract is an old common law doctrine. It has two aspects:   as a general rule, a person cannot acquire and enforce rights under a contract to which he is not a party; and a person who is not party to a contract cannot be made liable under it. (Simon don‟t want to come to school, we can‟t force him to come since he only has the contract with school)  A and B have entered into a contract for sale of goods. If the contract is in breach, A and B are the only parties who can enforce it. No third party should be allowed to intervene. 50 Hong Kong Law [L2 & 3] Copyright Reserved Page 51: Formalities of making contracts   In most cases, there is no requirement for formalities. A contract may be made in writing, orally or even by conduct.   This does not mean that an oral contract is less effective. It is just more difficult to prove the terms when there is any dispute. However, there are some exceptions to the general rule. In some cases, the law requires that a contract must be made either in writing, or evidenced in writing, or even made by a deed, for example, the sale and purchase of land and buildings must be contained in a Memorandum of sale and purchase 51 Hong Kong Law [L2 & 3] Copyright Reserved Page 52: Deeds    A deed is a document under seal. It refers to the form in which the document appears. At the place of signature of a deed, it is stated as follows: “SIGNED, SEALED AND DELIVERED by Mr. Chan Tai Man” There is usually a red circular sticker put besides the signature. It is called a “seal”. Although this red sticker is not essential, there must at least be an indication of a seal. The indication can be in the form of a mark representing a seal, such as a printed circle containing the letters “LS” (legal seal). 52 Hong Kong Law [L2 & 3] Copyright Reserved Page 53: Terms of contract  The terms of a contract can be classified into express terms and implied terms. Express term  Express terms are those specifically indicated and explicitly agreed upon by the parties at the time of contracting.  They can be made orally, in writing or partly orally and partly in writing.  Express terms can be divided into „conditions‟ and „warranties‟.   Conditions are the vital or most important terms. If they are broken, the innocent party is entitled to discharge the contract and claim damages. Warranties are generally minor terms. If they are broken, the innocent party is only entitled to damages. Hong Kong Law [L2 & 3] Copyright Reserved 53 Page 54: Implied terms  Implied terms are terms which are not expressly stated in a written or oral contract, but are valid and form part of the contract. Terms implied by facts      Terms can be implied by facts if the terms are obvious, necessary in order to give business efficacy and intended by the parties, even if the parties do not include them in the contract. Terms can be implied by previous dealings of the parties For example, in a contract for the sale of a camera to be used underwater, it goes without saying that the camera must be waterproof. Even if there is no express term in the contract that the camera must be waterproof, the term must have been implied. 54 Hong Kong Law [L2 & 3] Copyright Reserved Page 55: Implied terms (II) Terms implied by law  Some terms are implied by law, either by legislation or common law rules. Often they are inserted into the contract irrespective of the parties‟ intention. For example:  In an employment agreement, there is a term implied by law that an employee must follow all reasonable instructions of an employer.  Further, there are terms containing duties and liabilities imposed on the employer by common law and the Employment Ordinance which are implied and inserted into every employment contract, e.g. pregnant employees are entitled to maternity leave.  Those implied terms are not subject to negotiation for amendment. Hong Kong Law [L2 & 3] Copyright Reserved 55 Page 56: VOID AND VOIDABLE CONTRACTS  A Void contract is void from the beginning (void ab initio). It never existed.   Neither party has the right to continue with it. The original position is restored.  A Voidable contract continues to exist and is valid until it is avoided or revoked by the innocent party.   The innocent party has a choice: he can choose to avoid or revoke it, or to go ahead with (or “affirm”) the contract. Both parties are obliged to carry out their respective contractual obligations until the contract is revoked. 56 Hong Kong Law [L2 & 3] Copyright Reserved Page 57: Void and voidable contracts (II) Example:  Imagine that A entered into an agreement with B for the sale of goods. Later B re-sold the goods to C.  If the contract between A and B was void, it never existed. The title of the goods has never been transferred to B; thus B cannot transfer the title to C. A therefore has the right to ask C for the return the goods.  On the contrary, if the contract between A and B is voidable, it exists and is valid. If B has sold and delivered the goods to C and C has paid for the goods before A elected to avoid, then so long as C has no knowledge of the vitiating factors which make the contract voidable, the title of the goods has been duly passed to C. A has no right to demand C for the return of the goods. 57 Hong Kong Law [L2 & 3] Copyright Reserved Page 58: Remedies for invalidity   Damages Rescission    available under equity only Put the parties back to the original position as if the contract never comes into existence. Money paid or goods delivered must be returned but rescission will not be ordered in case of unfairness or injustice (equity). 58 Hong Kong Law [L2 & 3] Copyright Reserved Page 59: VITIATING FACTORS   A legally binding contract may still be invalid if there is no true consent or if it is illegal. No real consent/meeting of mind     Mistake Misrepresentation Duress Undue influence 59 Hong Kong Law [L2 & 3] Copyright Reserved Page 60: True consent of parties  Parties concerned can freely and voluntarily decide whether to enter into the contract, and if so, on what terms.   When one of the parties does not genuinely give true consent, no enforceable contract can exist. Genuine consent can only be given by an adult of sound and capable mind; thus minors, people with mental disabilities or incapacitated by alcohol or drugs are not considered capable of giving true consent.  Various other factors may prevent true consent. Those factors are known as vitiating factors. They include misrepresentation, duress, undue influence, mistake and illegality. 60 Hong Kong Law [L2 & 3] Copyright Reserved Page 61: Mistake    Mistake does not mean a bad bargain or an error in judgment, but a situation in which the innocent party has made a factual mistake at the time of the contract with the result that no genuine consent has been forthcoming. The effect of such a mistake is to render the contract void. There are two types of mistake: 1. 2. common mistake; unilateral mistake.  Stott B Law p.70 - 74 61 Hong Kong Law [L2 & 3] Copyright Reserved Page 62: Common mistake   When both parties, in entering into a contract, make the same mistake as to certain facts which form the basis of the contract, they have made a common mistake. A mistake as to the subject matter of the contract will render the contract void.  For example, in Galloway v. Galloway [1914], a couple wrongly thought that they were married, and entered into a separation agreement. In fact they were not married, and therefore the separation agreement was invalid. 62 Hong Kong Law [L2 & 3] Copyright Reserved Page 63: Unilateral mistake     Unilateral mistake is made where one party to a contract enters into it under a mistake while the other party knows the truth. If A enters into a contract with B, believing him to be C. Such a mistake does not necessarily renders the contract void. It depends on circumstances. If A is mistaken as to the identity of the other party (B), the contract will be void. On the other hand, if A is only mistaken as to the creditworthiness of the other party (B), the contract will only be voidable. 63 Hong Kong Law [L2 & 3] Copyright Reserved Page 64: Non est factum    When a party to the contract is mistaken as to the nature of a document signed by him, the contract will also be void. Non est factum means “this is not my deed”. The defence of non est factum is only available to a person who is: • • unable to understand the intention of a particular document, and the document signed by him or her is radically different from what he thought he was signing. 64 Hong Kong Law [L2 & 3] Copyright Reserved Page 65: Non est factum (II)     In Gallie v. Lee [1971], an elderly lady of 78 signed what she believed to be a deed of gift of her house to her nephew, but it was actually an assignment on sale to a third party who mortgaged the house to the bank to raise funds. The old lady had broken her spectacles and could not read the document. She just believed what her nephew said, and signed it. It was held that the defence of non est factum failed, because although the content of the document was different from what the old lady believed, the nature was the same. It was not “radically different” from what she thought she was signing. C.f. Cheung Pik-wan v Tong Sau-ping [1986], it was held that the Plaintiff, being illiterate, was not negligent to be deceived. The documents that she signed were void. [Stott B Law p.73]  65 Hong Kong Law [L2 & 3] Copyright Reserved Page 66: Non est factum (III)  The defence of non est factum is available to a person only if the mistake is not caused by his or her own fault.   In Overseas Trust Bank Ltd. v. Tang Che Ching (1986), the defendant executed a mortgage deed, but when he was being sued by the bank, he put forward the defence that he did not understand the content of the deed when he signed it. It was held that the defendant knew very well that the document was an important document when he signed it, but he did not take reasonable steps to understand its content. Hence, he could not rely on the defence of no est factum.  Nowadays, banks usually provide a translation in Chinese to prevent borrowers and guarantors from using the language barrier as an excuse in legal proceedings. 66 Hong Kong Law [L2 & 3] Copyright Reserved Page 67: Misrepresentation     A misrepresentation is a false statement of fact made before a contract is concluded by one party with an intention to induce the other party to enter into the contract. A misrepresentation must firstly be a representation of fact (which is untrue or constitutes a misleading half-truth), not opinion. Hence, mere sales puffs cannot be a misrepresentation, such as “good taste”, “outstanding”, “popular” and so on. However, “the most popular soft drink in Hong Kong” may possibly constitute a representation, because it implies that its sales figure is the highest, which is a statement of fact, and can be verified. Stott B Law p.74 -77 (trace back the property, sign the contract binding, void or avoidable contract) (Elements: 1. fact, 2. false, 3. inducement, 4. reliance: relied, all of them should be included)    67 Hong Kong Law [L2 & 3] Copyright Reserved Page 68: Misrepresentation (II)  A statement of unfounded opinion (not fact, but can be given by profession, if it gave by profession, it is fact e.g. Eva beautiful? opinion) is a misrepresentation if it implies a statement of knowledge of facts justifying the opinion.  Hence, a landlord who said that a tenant is “very desirable” was held to have made a misrepresentation on the ground that the tenant was in arrears of rent and the landlord indeed had threatened to take legal action.  A statement as to the effect of the law cannot be a misrepresentation.  Three Types of misrepresentation (which remedies after you prove it is misrepresentation)    fraudulent misrepresentation negligent misrepresentation innocent misrepresentation 68 Hong Kong Law [L2 & 3] Copyright Reserved Page 69: Fraudulent Misrepresentation欺詐  If a person making a misrepresentation knows that the statement is false, or he does so without belief in his statement’s truth, or he is reckless鹵莽 in checking whether it is true, he is making a fraudulent misrepresentation.    In Polaroid Far East Ltd. v. Bel Trade Co. Ltd. (1989), a company ordered negative film from Polaroid and stated that the film would be sold and used in China only, so that Polaroid would offer a lower price. In fact, the company sold most of the film in America and Europe for a higher profit. It was held that the company made a fraudulent misrepresentation. (prove party the intention to deceive, subjective test, case: Perry v Deek) 69 Hong Kong Law [L2 & 3] Copyright Reserved Page 70: Negligent Misrepresentation    If a person making a misrepresentation does so when he has no reasonable grounds for believing (not fraud) that his statement is true, he is making a negligent misrepresentation. In Hedley Bryne & Co. Ltd. v. Heller & Partners Ltd. [1964], the cause of action for negligent misrepresentation was established. The cause of action has its root in the Law of Negligence and negligence is a tort. This case will be further discussed in the Law of Torts. The burden of proving that the statement was not made negligently is on the person who made the statement, so it is much easier to establish negligent misrepresentation. 70 Hong Kong Law [L2 & 3] Copyright Reserved Page 71: Innocent Misrepresentation   Innocent misrepresentation occurs when the statement maker honestly believes in the truth of his statement which is in fact a false one. For example, a seller who honestly relies on a product specification in making a statement is liable for innocent misrepresentation if the product specification turns out to be untrue. (the statement relies on spec) 71 Hong Kong Law [L2 & 3] Copyright Reserved Page 72: Consequences of misrepresentation  Fraudulent Misrepresentation   At common law, if a party makes a fraudulent misrepresentation, the contract will become voidable and the other party may revoke it and recover damages in tort of deceit 欺詐. Alternatively the injured party may choose to recover damages without revoking the contract (affirm (continue) the contract). 72 Hong Kong Law [L2 & 3] Copyright Reserved Page 73: Consequences of misrepresentation (II)  Negligent Misrepresentation    Prior to Hedley Bryne v. Heller [1964], it was not recognised that the category of negligent misrepresentation existed. After that decision, the Misrepresentation Ordinance was passed and the burden of proof has been shifted to the representor to prove that he/she has reasonable grounds to believe the representation to be true. The injured party may rescind the contract and claim damages as in fraudulent misrepresentation. He/she can also choose to only recover damages and continue with the contract. 73 Hong Kong Law [L2 & 3] Copyright Reserved Page 74: Consequences of misrepresentation (III)  Innocent Misrepresentation  Under case law, the injured party can only apply to the court to revoke the contract, but cannot claim any damages. (no right to sue for damages, if you want to get damages, go to fraudulent)  However, pursuant to section 3(2) of the Misrepresentation Ordinance, the court has a discretionary power 酌情權 to declare the contract subsisting and to award damages in lieu of (substitute)rescission.  The innocent party cannot claim rescission and Hong Kong Law [L2 & 3] 74 damages at the same time. Copyright Reserved Page 75: Misrepresentation and exemption clauses  If a contract contains an exemption clause which provides that “the seller shall not be responsible for any misrepresentation made before the contract was made”, is the exemption clause valid and enforceable? (whether it is reasonable, and case by case)   If the seller can prove that the exemption clause is reasonable in the circumstances, it is valid and enforceable. We will deal with exemption clauses in full in later lectures. 75 Hong Kong Law [L2 & 3] Copyright Reserved Page 76: Duress (gun point to your head)      Duress means violence or threatened (punch you) violence to a party to a contract, who is forced into forming the contract. (all happen before you sign the contract: mistake, misrepresentation, duress) At common law a contract formed by duress is voidable and the innocent party can elect to avoid it. (rescind or affirm according to your design, Alantic Baron case, Economic duress, it has already breach of contract, we can choose not to continue) If the threat is not to do with violence, but economic pressure, does it amount to duress? A few English cases in recent years have recognised the possibility of the concept of economic duress. Law [L2 & 3] 76 Hong Kong Copyright Reserved Stott B Law p.77 - 9 Page 77: Undue influence不正當     When a party to the contract was unduly influenced by another party when making the contract, the contract may be rendered invalid and voidable. There is a presumption of undue influence in certain special relationships. (five relationships) Most cases on undue influence concern bank guarantees擔保合同 where guarantors agreed to sign guarantees under undue influence. Stott B Law p.79 - 81 77 Hong Kong Law [L2 & 3] Copyright Reserved Page 78: Illegality The contract is illegal   If it is entered into for the purpose of acts which break the law or contrary to public policy, e.g. sexually immoral; or (not paid the money may be illegal) If in carrying out the contract, one party intends to break the law, e.g. smuggling cigarettes Stott B Law p.81-5 78 Hong Kong Law [L2 & 3] Copyright Reserved  Page 79: Examples of Illegal purposes 1. To commit a crime e.g. to defraud the tax authority 2. Sexually immoral (e.g. prostitution Pearce v. Brooks – hire of coach for use of the trade of prostitution) 3. 4. 5. Bribery Trading with enemy Perverting the course of justice防礙司法公正 e.g. $10,000 in consideration for not giving evidence in court 79 Hong Kong Law [L2 & 3] Copyright Reserved Page 80: Effect of illegality  If a contract is declared illegal at common law, then as a general rule the contract is void and neither party can sue on the contract  i.e. either party cannot enforce performance of the contract by the opposite party  The court will not lend assistance to an illegal contract. 80 Hong Kong Law [L2 & 3] Copyright Reserved Page 81: