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Have we got a contract and when do we have

to perform?

Presented by Steven Yip/James Yeung

20 June 2007

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Topics

• Formation of contract

• Offer

• Acceptance

• Intention

• Consideration

• Privity of Contract

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Offer

• Expression of willingness to contract on certain terms,

made with the intention that it shall become binding as

soon as it is accepted by the offeree.

• Definite and unambiguous

• Communication of offer to the offeree (eg. Letter, fax,

newspaper, email, conduct etc.)

• Can be withdrawn before acceptance

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Offer v Invitation to Treat

• Invitation to treat is an indication of willingness to

negotiate a contract

• Not an offer

• Objective test

• Example: Display Goods

Invitation to Tender

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Held by Privy Council: No contract. Facey’s telegraph only

amounts to a statement of price.

Offer to buy the pen was made by

Harvey’s 2nd telegram.

Harvey v Facey [1983]

Harvey: “Will you sell us Bumper Hall pen? Telegraph

lowest price.”

Facey: “Lowest cash price for Bumper Hall pen £900.”

Harvey: “We agree to buy Bumper Hall pen for the £900

asked by you.”

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Invitation to Tender

• Not an offer binding the employer to accept the lowest

tender UNLESS express the wordings are clear to turn

the invitation to tender into an offer, eg. lowest tender

made

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Tender

• May amount to an offer

• Normally stipulates a time within which the tender is to

remain valid

• If time is not stipulated, reasonable time to accept is to be

implied

• Costs of tender

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Acceptance

• A final and unqualified expression of assent to the terms

of an offer

• Definite and unambiguous

• Must be unconditional

• Must be communicated to offeror

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Acceptance

• ‘Meeting of minds’/’Concurrence of will’?

• Objective test

• Can only be accepted by the offeree

• Silence cannot be construed as acceptance

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Conditional Acceptance

• Not an acceptance

• Amount to counter-offer

• No contract is formed until acceptance of counter-offer

• ‘Mirror image rule’ acceptance in its entirety→

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Certainty of Terms

• Reasonable degree of certainty

• Approach sensibly and reasonably

• Custom and trade usage

• Commercial reality

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‘Back to Back’ Contract

• Usually in sub-contracts

• Incorporating main contract terms into sub-contract

• Difficulty to ascertain extent of incorporation

• Eg. Scope of work, payment terms

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‘Pay when paid’ clause

• ‘In the absence of any clear express words to the

contrary, those clauses merely provide for the time of

payment and that the right to be paid is not dependent

upon the party getting paid first?

• Very high standard for those clauses to be held to be

valid

• ‘Pay if paid’ is usually not enforceable

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Contract Price

• Original contract price will invariably change

• Variations, missing items etc.

• Implied promise on the Employer to pay for the

work/services on basis of reasonable charge (ie. quantum

meruit)

• Mechanism by which the price for the particular works or

services to be rendered can be determined

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Intention

• Intention to create legal relations between themselves

• Objective test – how reasonable persons would perceive

the words, conduct and circumstances

• If reasonable persons would assume that there was no

intention to create legal relation no contract

• Presumption that an intention to create legal relationship

exists in commercial context

• Presumption that NO intention to create legal relationship

exists in social or family arrangements

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Cable & Wireless (Hong Kong) Ltd Staff Association v Hong Kong Telecom International Ltd [2001]

• The Court held that

• Look at the terms of the agreement itself

• If the terms show intention to create legal relationship

Contract

• If the terms do not provide a clear answer, the Court would

look at all the surrounding circumstances

• Surrounding circumstances include background of entering

into the agreement, relationships of parties, nature of the

agreement etc

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Intention

• Family arrangements

• Balfour v Balfour [1919]

• Merritt v Merritt [1970]

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Consideration

• Consideration is generally expressed as follows:

• ‘Consideration may be found in an exchange of mutual promises

or in an exchange of a promise for an act or forbearance’

• Consideration is important because

• Make it an enforceable contract

• The law will not enforce gratuitous promise (eg. gift)

• Only the person who provides consideration can enforce

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Types of Consideration

Consideration must be executory or executed

• Executory – Promise to do something in the future is given

for another promise to be done in the future

• Example: Buying a house

• Executed – When a promise is actually executed, in

exchange for another promise to be executed in the future.

• Example: Finding a dog.

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Rules of Consideration

• Consideration must be referable to the promise

• Consideration must move from the promisee

• Consideration must be sufficient, but need not be adequate

• Consideration must be current

• Performance of an existing obligation is not enough

• Performance of public law duty is not consideration

• Performance of a contractual obligation owed to a third party is good

consideration

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Referable to the Promise

• Some kind of connection between the promise and the

consideration

• Inducement to enter into the promise

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Move from the Promisee

• But not necessarily to the Promisor

• Example: A promised to pay B $1000 if B clean C’s car.

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Sufficient, not Adequate

• Capable of expression in economic terms

• Some legal value in the eyes of the law

• No need to be adequate

• Nominal value can be sufficient consideration

• Example: $1 to buy a car

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Ho Yuk Chu v Shun Hing Refrigerator Air-Conditioning Engineering [2001]

• The procurement of an award of air-conditioning

contract by way of introduction, recommendation and

assistance in preparation of tender was found to be valid

consideration to support an agreement to pay 7% of the

contract sums

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White v Bluett (1853)

• Cessation of complaints are not sufficient consideration

• No economic value

• No contract was formed

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Current, not Past

• Past consideration is not good consideration

• Consideration that was provided before the promise was

made = past consideration

• Requires an exchange of current promises/consideration

at the time of the contract

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Current, not Past

• Eastwood v Kenyon (1840)

• Roscorla v Thomas (1842)

• Exceptions in Pau On v Lau Yiu Long (1980)(Privy Council)

• The consideration was at the request of the Promisor

• Common understanding that the promisee will be rewarded for

the performance

• Consideration is legally enforceable

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Not Existing Obligation

• Performance of existing contractual duty is not good

consideration

• Stilk v Myrick (1809)

• Exceptions in William v Roffey Bros & Nicholls [1991]

• Will the promisor gain an advantage arising out of the

continuing relationship with the promisee?

• Example: Risk of Liquidated Damages

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Williams v Roffey Bros & Nicholls

• Exception

• Roffey sub-contracted the carpentry work to Williams

• Roffey doubted that Williams would perform his obligation under the contract

• Roffey promised to pay Williams an extra amount in return (consideration)

for a promise that Williams would fulfill his obligation under the contract

• As a result, Roffey received benefit or avoided a detriment

• Roffey did not make the promise to pay more under duress form Roffey

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UBC (Construction) Limited v Sung Foo Kee Limited [1993]

• In such circumstances that they were clearly incentives

to both the main contractor and subcontractor to make a

further arrangement in order to relieve the subcontractor

of its financial difficulties and also to ensure that the

subcontractor was in a position or was willing to continue

with the subcontract works to a reasonable and timely

completion

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Not Public Law Duty

• Performance of a public law duty is not good

consideration

• Promisee required to carry out the statutory duty anyway

• Collins v Godefroy (1831)

• Subpoena

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Partial Satisfaction of Existing Liability

• Generally not a good consideration

• Exceptions

• Changes to the original arrangement (eg. place, mode or

time of repayment) to the convenience of the creditor

• Settlement Agreement?

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Settlement Agreement

• Usually partial satisfaction of debt

• How to get around the ‘lack of good consideration’

hurdle?

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Overcoming a Lack of Consideration

• Nominal Consideration

• Example: $1 to settle claims

• Evidence of consideration

• By Deed

• No need for consideration in a deed

• Deed of Settlement

• Gratuitous assurance made without consideration is enforceable

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Privity of Contract

• Only the parties to a contract are bound by it and entitled

to sue on it

• A third party cannot enforce a promise made in a contract

for its benefit if it is not party to the contract

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Privity of Contract (Cond’t)

• Relationship between privity and consideration:

• some say consideration and privity are flip sides of the same coin

• some say consideration and privity are distinct and separate principles

• Law in Hong Kong is clear: ‘only a person who is a party

to a contract can sue on it’ (see Dunlop Pneumatic Tyre

Co Ltd endorsed in B+B Construction)

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Construction Contracts

• A sub-contractor cannot sue the employer on the main

contract obligations in relation to payment for the works

(See Morison, Son & Jones (Hong Kong) Ltd v Yiu Wing

Construction Co Ltd [1989] and Shui On Construction Co

Ltd v Moon Yik Co [1987])

Employer

Main Contractor

Sub-Contractor

No privity of contract

Privity of contract

Privity of contract

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Insurance Contract

• The Main Contractor cannot enjoy privity of contract with

the subcontractor’s insurers and cannot claim under the

insurance policy (see Otis Elevator Company (HK)

Limited v Wide Project Engineering & Construction

Company Limited [1985])

Main Contractor

Sub-Contractor

Privity of contract No privity of contract

InsurerPrivity of contract

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Any Questions?

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