2 Have we got a contract and when do we have to perform? Presented by Steven Yip/James Yeung20 June 2007
3 Topics Formation of contract Privity of Contract Offer Acceptance IntentionConsiderationPrivity of Contract
4 OfferExpression 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 unambiguousCommunication of offer to the offeree (eg. Letter, fax, newspaper, , conduct etc.)Can be withdrawn before acceptance
5 Offer v Invitation to Treat Invitation to treat is an indication of willingness to negotiate a contractNot an offerObjective testExample: Display GoodsInvitation to Tender
6 Harvey v Facey 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.”Held by Privy Council: No contract. Facey’s telegraph onlyamounts to a statement of price. Offer to buy the pen was made by Harvey’s 2nd telegram.
7 Invitation to TenderNot 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
8 Tender May amount to an offer Normally stipulates a time within which the tender is to remain validIf time is not stipulated, reasonable time to accept is to be impliedCosts of tender
9 AcceptanceA final and unqualified expression of assent to the terms of an offerDefinite and unambiguousMust be unconditionalMust be communicated to offeror
10 Acceptance ‘Meeting of minds’/’Concurrence of will’? Objective test Can only be accepted by the offereeSilence cannot be construed as acceptance
11 Conditional Acceptance Not an acceptanceAmount to counter-offerNo contract is formed until acceptance of counter-offer‘Mirror image rule’ acceptance in its entirety→
12 Certainty of Terms Reasonable degree of certainty Approach sensibly and reasonablyCustom and trade usageCommercial reality
13 ‘Back to Back’ Contract Usually in sub-contractsIncorporating main contract terms into sub-contractDifficulty to ascertain extent of incorporationEg. Scope of work, payment terms
14 ‘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
15 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
16 Intention Intention to create legal relations between themselves Objective test – how reasonable persons would perceive the words, conduct and circumstancesIf reasonable persons would assume that there was no intention to create legal relation no contractPresumption that an intention to create legal relationship exists in commercial contextPresumption that NO intention to create legal relationship exists in social or family arrangements
17 Cable & Wireless (Hong Kong) Ltd Staff Association v Hong Kong Telecom International Ltd  The Court held thatLook at the terms of the agreement itselfIf the terms show intention to create legal relationship ContractIf the terms do not provide a clear answer, the Court would look at all the surrounding circumstancesSurrounding circumstances include background of entering into the agreement, relationships of parties, nature of the agreement etc
18 Intention Family arrangements Balfour v Balfour  Merritt v Merritt 
19 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 becauseMake it an enforceable contractThe law will not enforce gratuitous promise (eg. gift)Only the person who provides consideration can enforce
20 Types of Consideration Consideration must be executory or executedExecutory – Promise to do something in the future is given for another promise to be done in the futureExample: Buying a houseExecuted – When a promise is actually executed, in exchange for another promise to be executed in the future.Example: Finding a dog.
21 Rules of Consideration Consideration must be referable to the promiseConsideration must move from the promiseeConsideration must be sufficient, but need not be adequateConsideration must be currentPerformance of an existing obligation is not enoughPerformance of public law duty is not considerationPerformance of a contractual obligation owed to a third party is good consideration
22 Referable to the Promise Some kind of connection between the promise and the considerationInducement to enter into the promise
23 Move from the Promisee But not necessarily to the Promisor Example: A promised to pay B $1000 if B clean C’s car.
24 Sufficient, not Adequate Capable of expression in economic termsSome legal value in the eyes of the lawNo need to be adequateNominal value can be sufficient considerationExample: $1 to buy a car
25 Ho Yuk Chu v Shun Hing Refrigerator Air-Conditioning Engineering  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
26 White v Bluett (1853)Cessation of complaints are not sufficient considerationNo economic valueNo contract was formed
27 Current, not Past Past consideration is not good consideration Consideration that was provided before the promise was made = past considerationRequires an exchange of current promises/consideration at the time of the contract
28 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 PromisorCommon understanding that the promisee will be rewarded for the performanceConsideration is legally enforceable
29 Not Existing Obligation Performance of existing contractual duty is not good considerationStilk v Myrick (1809)Exceptions in William v Roffey Bros & Nicholls Will the promisor gain an advantage arising out of the continuing relationship with the promisee?Example: Risk of Liquidated Damages
30 Williams v Roffey Bros & Nicholls ExceptionRoffey sub-contracted the carpentry work to WilliamsRoffey doubted that Williams would perform his obligation under the contractRoffey promised to pay Williams an extra amount in return (consideration) for a promise that Williams would fulfill his obligation under the contractAs a result, Roffey received benefit or avoided a detrimentRoffey did not make the promise to pay more under duress form Roffey
31 UBC (Construction) Limited v Sung Foo Kee Limited  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
32 Not Public Law DutyPerformance of a public law duty is not good considerationPromisee required to carry out the statutory duty anywayCollins v Godefroy (1831)Subpoena
33 Partial Satisfaction of Existing Liability Generally not a good considerationExceptionsChanges to the original arrangement (eg. place, mode or time of repayment) to the convenience of the creditorSettlement Agreement?
34 Settlement Agreement Usually partial satisfaction of debt How to get around the ‘lack of good consideration’ hurdle?
35 Overcoming a Lack of Consideration Nominal ConsiderationExample: $1 to settle claimsEvidence of considerationBy DeedNo need for consideration in a deedDeed of SettlementGratuitous assurance made without consideration is enforceable
36 Privity of ContractOnly the parties to a contract are bound by it and entitled to sue on itA third party cannot enforce a promise made in a contract for its benefit if it is not party to the contract
37 Privity of Contract (Cond’t) Relationship between privity and consideration:some say consideration and privity are flip sides of the same coinsome say consideration and privity are distinct and separate principlesLaw 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)
38 Construction Contracts EmployerMain ContractorSub-ContractorPrivity of contractNo privity of contractPrivity of contractA 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  and Shui On Construction Co Ltd v Moon Yik Co )
39 Insurance ContractMain ContractorSub-ContractorPrivity of contractNo privity of contractInsurerPrivity of contractThe 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 )