Lecture 3 Principles of Law of Contract
Lecture 3 Principles of Law of Contract
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Lecture 3
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Definition of Contract
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Essential Ingredients of Valid
Contract
• Offer
• Acceptance
• Consideration
• Contractual Capacity
• Genuineness of Consent
• Form of Contract
• Terms of contract
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Offer
The nature of an offer
• Agreement takes the form of offer and acceptance.
• An offer is a manifestation by one party (the offeror) to
the other (the offeree) of a willingness to be bound to the
offeree in contract, in the terms of offer, if the offeree will
show willingness to be bound to the offeror on the same
terms.
• The offer gives to the offeree the power to create a
contract by making an acceptance.
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Offer
The nature of an offer
• A contract is formed when an express or implied offer is
made by the offeror and is accepted without qualification
or amendment by the offerree.
• An offer may be made by spoken words or writing or
conduct or any mixture of those methods.
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Offer
The nature of an offer
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Invitation to Treat
• An invitation to treat is an invitation to make offer.
• The person making the invitation to treat does not intend
to be legally bound if terms are accepted, so this cannot
be turned into a contract.
• An invitation to treat is not an offer.
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Invitation to Treat
Examples of invitation to treat :
• Display of goods for sale.
The customer by taking the goods form the shelf and presenting them at
the cashier counter is making an offer, at which the cashier may accept or
reject.
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Invitation to Treat
Examples of invitation to treat :
• Advertisements, price lists, catalogues.
– Generally, advertisements only invite offers, price indicates the
range along which an offer may be made.
• Auctions
– The auctioneer’s request for a bid is merely an invitation to treat
and is not an offer which can be converted into a contract by the
highest bidder.
– It is an invitation to bid and it is the bid itself which is the offer. It is
up to the auctioneer to accept or reject the offer.
– The Sale of Goods Ordinance (Cap 26) s60
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Tender
• A tender is an offer.
– Client/Employers often invite tenders, that is they ask others to
submit details of prices at which goods or services may be bought.
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Supply of Information
• A negotiation statement will not be an offer if it is merely
intended to supply information, because then the
intention to be bounding will be lacking.
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Offeree
• Only a person to whom the offer is addressed can accept
it.
• The offer may be made to one person, or a number or class
or the whole world.
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Termination of Offer
An offer may come to an end in the following ways.
• Termination by acceptance
– An offer to one person will come to an end it is accepted – its
purpose is then fulfilled – or it is rejected or if for some reason it
lases.
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Termination of Offer
• Termination by Rejection
– This may be an outright rejection or refusal of an offer or it might
take the form of counter offer.
• Termination by Revocation
– Withdrawal or revocation of an offer must be communicated to the
offeree before acceptance.
– Revocation is of no effect until it is actually brought to the notice of
the offeree.
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Termination of Offer
• Lapse of time
– If the offeror gives a time for acceptance it will end when that time
has passed without acceptance.
– If no time is specified it will lapse when not accepted within a
reasonable time. The court will decide what is and what is not a
reasonable time.
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Acceptance
• Acceptance may be oral, in writing or by conduct.
• The offeree must accept all terms of the offer without any
qualification or amendment.
• The acceptance must be communicated to the offeror. However,
under some circumstances conduct may be sufficient evidence of
acceptance.
• For example, if a person owning a flat asks a builder to call around to
the flat to carry out certain repairs, and the builder does so, there is
legally binding contract: the builder having accepted the flat owner’s
offer by conduct.
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Consideration
• Consideration is essential to the formation of all contract not under
seal.
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Rules of Consideration
1. Consideration must not be past
• The law does not recognize past consideration as this is treated as no
consideration at all.
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Consideration
2. Consideration need not be adequate (fair) but it must be sufficient
(valuable)
• The court will not inquire into the value of the consideration given to
the other party, providing it is valuable consideration, meaning that it
has some monetary value.
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Consideration
4. To carry out existing contractual obligation does not provide
consideration
• For example, a project might be short of workers due to resignation of
some staff. The employer may agree to share the wages of the wages of
those resigned workers between those who have stayed behind to
finish the project.
• If the employer did not pay out as agreed, the workers who stayed back
were not entitled to sue as they were already under the contractual
obligation to work on the project.
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Consideration
5. Only a person who has himself given consideration will be able to
enforce a contract.
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under-seal 26
Contract Under Seal
A simple contract may be made in writing, orally or by
conduct and each party must contribute consideration to
make it binding. The only exception to this principle is a
contract under seal.
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Contract Under Seal
2. Need not provide consideration
– A party may make a promise under seal which is enforceable, even
though there is no consideration.
– This would be accepted by a court of law and is the major
difference between a contract under seal and a simple contract
which requires consideration.
3. Limitation Ordinance
– Another important difference is that under the Limitation
Ordinance, for simple contracts, once six years have passed the
right to sue in a court of law is no longer possible.
– However, for a contract under seal, this right lasts for twelve years.
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Contractual Capacity
The general rule is that any person may enter into a bonding contract. To
do this , there are certain Rules:
• Minor
– a person under the age of 18 is considered to be a minor and as
such do not have the legal capacity to enter into contracts.
However, there are exceptions, such as contracts for necessities,
and contracts of services which are the benefit of the minor, for
example, contract of apprenticeship.
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Contractual Capacity
The general rule is that any person may enter into a bonding contract. To
do this , there are certain Rules:
• Companies
– A company which has been properly formed following the
procedures laid down in the Company Ordinance is recognized by
the law as having legal personality of its own.
– The Memorandum of Association contains details of the
company’s business and defines the objects of the existence of the
company.
– Any of these objects is said to be beyond the power of the
company and it may lose its capacity to enter a valid contract.
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Genuineness of Consent
• A contract may become void if there is no
genuineness of consent between the two parties.
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Mistake
• Mistakes are a group of rules in English contract law, which happen to
share the same name. If the law deems a mistake to be sufficiently
grave, then a contract entered into on the grounds of the mistake may
be void.
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Unilateral Mistake
• Unilateral mistake is where only one party to a contract is mistaken
as to the terms or subject-matter.
• The courts will uphold such a contract unless it was determined that
the non-mistaken party was aware of the mistake and tried to take
advantage of the mistake. It is also possible for a contract to be void
if there was a mistake in the identity of the contracting party.
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Unilateral Mistake
• There are two categories within unilateral mistakes: mistakes relating
to the terms of the contract and mistakes as to identity.
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Unilateral Mistake
• Mistakes as to identity are generally induced by fraud in that one of
the parties is claiming to be someone who they are not.
• There is thus an overlap with misrepresentation. A claim based in
mistake is more favorable to one based in misrepresentation as the
affect of a finding of mistake is that the contract is void as oppose to
voidable. This is important where a rogue has acquired goods and
sold them on to a third party. If the contract is void the rogue will
never receive title to goods and will not be able to pass title when
selling the goods. However, if the contract is voidable the contract
exists and title passes. If the goods are sold before the innocent
party rescinds the contract, the purchaser acquires good title to the
goods. In determining whether a contract will be held void for
mistake the courts draw a distinction between contracts made inter
absentes (at a distance) and contracts made inter praesentes (face to
face transactions).
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Unilateral Mistake
• Inter absentes
– Where the parties are not physically present when the contract is
made, for example, where the contract is made through dealings
through the post, telephone or over the internet, the courts will
only make a finding of mistake if the claimant can demonstrate
an identifiable person or business with whom they intended to
deal with. A mistake as to their attributes will not suffice:
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Unilateral Mistake
• Inter praesentes
– Where the parties contract in a face to face transaction the law
raises a presumption that the parties intend to deal with the
person in front of them:
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Mutual Mistake
• Mutual mistake is when both parties of a contract are mistaken as to
the terms.
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Common Mistake
• Common mistake is where both parties hold the same mistaken belief
of the facts.
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Common Mistake
• Common mistakes exist where both parties to the contract make the
same mistake. Three categories have emerged as giving rise to a cause
of action:
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Common Mistake
• Common mistakes exist where both parties to the contract make the
same mistake. Three categories have emerged as giving rise to a cause
of action:
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Common Mistake
• Common mistakes exist where both parties to the contract make the
same mistake. Three categories have emerged as giving rise to a
cause of action:
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Mistake
General Recap:
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Misrepresentation
A misrepresentation is an untrue statement by one party to the other
which causes him/her to entre into the contract.
• Fraudulent Misrepresentation
– An untrue statement made with the knowledge that it is true or
made recklessly without attempting to access its validity.
• Negligent Misrepresentation
– A statement made honestly, but without reasonable ground for
belief that is true.
• Innocent Misrepresentation
– A untrue statement is made in the belief that is true.
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Misrepresentation
Fraudulent Misrepresentation
• The burden of proof lies on the claimant: Derry v Peek (1889) 5 T.L.R.
625
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Misrepresentation
Negligent Misrepresentation
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The Form of a Contract
• In most cases, simple contract made orally or by conduct will usually
be just as effective as a written one.
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Terms of Contract
Express Terms
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Terms of Contract
Condition
• This is the word used to a condition is so essential to the nature of the
contract that its non-performance may fairly be considered by the
other party as a substantial failure to perform the contract at all.
• For example
– in the case of a construction contract, if the employer refuses to
pay the contractor for work which has been properly executed, the
contractor an take the employer to court and terminate the
contract.
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Terms of Contract
Warranty
• This is a term considered to be subsidiary to the main purpose of the
contract, an obligation which, although it must be performed, is not so
vital as a condition.
• For a example
– The contractor may fail to provide the site with a site office. In such
case the employer cannot break the contract but will be entitled to
recover the cost the providing a site office from the contractor.
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Terms of Contract
Implied terms
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Completion or Discharge of Contract
Once each party’s contractual obligations have been fulfilled, the contract
is considered to be discharged, this is known as discharge by
performance.
1. Performance
– completion of all obligations by all parties wholly in accordance
with the contract.
– For example, if a contractor has completed his obligations under
the contract and Employer has paid the contractor of all cost in
relation to the works, then the contract is discharged.
However, there are ways which a contract may be discharged without the
parties fulfilling their obligations, these are by agreement, frustration and
breach of contract.
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Completion or Discharge of Contract
2. Agreement
– A contract is made by agreement and it is also possible to end it
by subsequent agreement which can arise from agreement
between the parties to terminate the contract.
3. Frustration
– where performance becomes impossible due to an unforeseen
event which must be so unexpected or unforeseeable at the time
the contract was entered into.
– Where such circumstances are determined by the court as to be
unforeseeable, both partied may discharged from their obligation
for further performance.
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Completion or Discharge of Contract
4. Fundamental breach in performance (by either party)
– that is a breach going to the root of the agreement.
– Failure to fulfill obligations during the execution of contract.
– In this case the injured party can choose either to treat the matter
as a repudiation by the other party, unless the injured party has
received a substantial benefit or property has passed to him, or as
a breach of warranty only.
– In either case the injured party can also claim damages.
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Remedies for the Breach of Contract
1. Damages
• The aim of damages is put the injured party in the same financial
position as he would have been in if the contract had been properly
performed.
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Remedies for the Breach of Contract
1.1 Liquidated Damages
• Liquidated damages - These are damages specified in the contract,
an amount of money payable as compensation should there be a
breach in the completion of the work.
• The words liquidated means that the principle to pay money as
compensation for a breach has been established.
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Remedies for the Breach of Contract
Penalty
• However, if the amount of liquidated damages are too extravagant
and unreasonable, the agreed sum will be treated as a Penalty (a
payment to make the offending party to suffer for his faults) and is
revocable by the court. The court has the power to substitute its own
award of damages, calculated on the basis of compensation for the
loss sustained.
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Remedies for the Breach of Contract
1.2 Unliquidated Damages
• These are damages not specified in a contract and should there be a
claim for a breach, it will be up to the court to decide
whether a breach has occurred and,
the assessment of the value of the damages.
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Remedies for the Breach of Contract
2. Specific Performance
Specific performance is whereby a party in breach is ordered to perform a
specific task. It will only be awarded if it is fair and reasonable to do so, or
if the court decides that damages are inadequate. There a number of
specific performance such as:-
• 2.1 Injunction
– An injunction is an order made by the court to stop a person or
party from doing a certain act complained of.
– Party in breach is ordered to refrain from taking a specific action.
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Remedies for the Breach of Contract
• 2.2 Rescission:
– It is a remedy which is generally used in cases where one of the
parties to a contract has been misled, and so occurs mainly in
cases of fraudulent or negligent misrepresentation. It gives the
misled party the option of avoiding or accepting the contract.
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Remedies for the Breach of Contract
• 2.3 Quantum Meruit:
– It means to pay reasonable sum for goods received or for the
benefit of services rendered. The court has laid down no rules
limiting the way in which a reasonable sum is to be assessed.
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Termination of Contract by the
Employer/Engineer
In the HK Standard form of Contract, there are clauses empower the
Engineer or Employer to terminate the contract, if the contractor:
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Termination of Contract by the
Employer/Engineer
Process of Termination In Accordance with the Standard Form of
Contract
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Termination of Contract by the
Employer/Engineer
• As soon as may be practicable after such entry, the Engineer shall:-
– ascertain and record the quantity of the completed works to such
time
– ascertain the amount of constructional plant and partially
completed works or materials delivered
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Termination of Contract by the
Employer/Engineer
Default of the Employer
• If the employer fails to pay the contractor within the period as specified
in the contract and continuous such default for 7 days, the contractor
may notify client by registered post of such event.
• If payment still not be made within a further 7 days from the date of
the notice, the contractor can terminate the contract
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References
Textbooks:
1. CHUI, C. AND ROEBUCK, D. (1991) Hong Kong Contracts. 2nd ed.,
Hong Kong University Press.
2. KNUTSON, K. et al. (2009) Construction Management
Fundamentals. 2nd ed., New York: McGraw-Hill.
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References
References:
1. ASHWORTH, A. (2006) Contractual Procedure in the Construction Industry.
5th ed. New York: Prentice Hall.
2. BOCKRATH, J. T. AND PLOTNICK, F. L. (2011) Contracts and the Legal
Environment for Engineers and Architect, 7th ed., International Edition,
McGraw-Hill.
3. BROOKE, M. (2008) Estimating and Tendering for Construction Work. 4th
ed. Butterworth- Heinemann.
4. EGGLESTON, B. (2006) The NEC 3 engineering and construction contract: a
commentary. 2nd ed. Oxford: Blackwell Science.
5. MARSH, P.D.V. (2000) Contracting for engineering and construction
projects. 5th ed. Aldershot, Hampshire: Gower.
6. MAU, S. D. (2010) Contract Law in Hong Kong: An Introductory Guide.
Hong Kong University Press.
7. MURDOCH, J. and HUGHES, W. (2008) Construction contracts: law and
management. 4th ed. New York: Taylor & Francis.
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References
Technical Documents
1. FIDIC. (1999) Construction contract (Red Book). Geneva: International
Federation of Consulting Engineers.
2. FIDIC. (1999) EPC/Turnkey contract (Silver Book). Geneva: International
Federation of Consulting Engineers.
3. FIDIC. (2006) Client-consultant model agreement (White Book). 4th ed.
Geneva: International Federation of Consulting Engineers.
4. NEC. (2005) NEC3 engineering and construction contract. London: Thomas
Telford.
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References
Technical Documents
1. HONG KONG. DEVELOPMENT BUREAU. (1999) General conditions of
contract for civil engineering works.
2. HONG KONG. DEVELOPMENT BUREAU. (2002) General conditions of
contract for term contracts for civil engineering works.
3. HONG KONG. CIVIL ENGINEERING AND DEVELOPMENT DEPARTMENT.
(2006) General Specifications for Civil Engineering Works.
4. HONG KONG. CIVIL ENGINEERING AND DEVELOPMENT DEPARTMENT.
(1992) Standard method of measurement for civil engineering works.
(Continuously updated version incorporating corrigenda posted in the
official webpage of the Department)
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References
Technical Documents
1. HONG KONG. DEVELOPMENT BUREAU. (1999) General conditions of
contract for building works, 1999 edition.
2. HONG KONG. DEVELOPMENT BUREAU. (2004) General conditions of
contract for term contract for building works.
3. HONG KONG. ARCHITECTURAL SERVICES DEPARTMENT. (2001) Standard
method of measurement for building elements.
4. HONG KONG. DEVELOPMENT BUREAU. (1999) General conditions of
contract for design and build contract.
5. HONG KONG. DEVELOPMENT BUREAU. (1999) Administrative procedures for
use with general conditions of contract for design and build contract.
6. HONG KONG. DEVELOPMENT BUREAU. (1999) Note on administrative
procedures for use with general conditions of contract for design and build
contract.
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End
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