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A "contract" is a legally binding agreement made between two or more parties. Examples in daily lives include contracts of sale, contracts of insurance, contracts of tenancy, etc. Not every agreement is a contract. Ordinary family arrangements, for example, are not regarded as "contracts".
Contracts can be classified into "formal contracts" and "simple contracts".
A "formal contract" is one created by deed. Its legal formality is strict and the process of creation is very complicated. It is comparatively difficult to forge or alter a "formal contract".
A "simple contract" is one not created by deed. It is the most common form of contract. It can be created in writing or orally, or simply implied by conduct.
Generally speaking, contracts can be made in any form, but there are some legal restrictions. For example, contracts of sale of land, mortgage, etc. must be in writing for them to be recognised as valid.
For there to be a valid contract, there must be:
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An "offer";
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A corresponding "acceptance";
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"Consideration" (except for "formal contracts" where this requirement can be dispensed with); and
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"The intention to create legal relations".
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"Offer"
An "offer" is a manifestation of the desire to enter into a contract knowing that once the other party accepts the proposed terms, the contract will be legally binding. The person who makes an offer is called an "offeror". The person who receives it is called the "offeree".
"Acceptance"
An "acceptance" is the unconditional and unequivocal acceptance of the terms offered by an offeror. Obviously, neither a rejection nor a counter-offer would be considered a valid "acceptance". Indeed, either of them is sufficient to "terminate" an offer. Once an offer is terminated it will cease to be capable of being accepted by the offeree.
An offer will also lapse in the following situations:
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The offeror at any time before the acceptance expressly withdraws the offer;
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The offer has not been accepted within the prescribed or reasonable period;
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The preliminary conditions stated in the offer has not been satisfied; or
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| (4) |
Either the offeror or the offeree dies before the offer is accepted. Discharge
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"Consideration"
"Consideration" is a right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other. A valid "consideration" must have a value measurable in economic terms, though the Court never questions the adequacy of the consideration, i.e. the Court is not concerned about the question as to whether the value is reasonable.
"The Intention to Create Legal Relations"
This requirement is rather self-explanatory. There is a rebuttable presumption at law that no intention to create legal relations exists where the agreement in question is purely domestic or social in nature. Where an agreement is commercial in nature, however, the intention to create legal relations is presumed to exist unless and until proved otherwise.
An otherwise valid contract may be rendered void or voidable in the following situations:
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The contract was concluded on the basis of a "misrepresentation";
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The contract was concluded under "duress";
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The contract was concluded under "undue influence";
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There was a genuine "mistake"; or
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The subject matter of the contract is illegal or otherwise manifestly contrary to public policy.
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Terms and Representations:
A "term" is part of the contract but a "representation" is not. During the course of negotiation the parties to a contract might have made a large number of representations to each other, some of which might have been incorporated into the contract as a "term" but others might not.
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Conditions, Warranties and Innominate Terms:
Contractual terms are generally divided into "conditions", "warranties" and "innominate terms".
"Conditions" are the more important terms that go to the heart of the contract. Where there has been a breach of conditions, the innocent party is entitled to set aside the contract in addition to receiving compensation for his loss.
"Warranties" are the less important terms that are only peripheral to the subject matter of the contract. Where there has been a breach of warranties, the innocent party is only entitled to compensation, but not to set side the contract.
"Innominate Terms" are those terms that can neither be classified as "conditions" nor as "warranties". Where there has been a breach of innominate terms the innocent party is entitled to compensation but may or may not be entitled to set aside the contract, depending on the gravity of the breach.
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Express Terms and Implied Terms:
"Express terms" are terms unambiguously expressed by the two parties in writing (or orally) in the contract. "Implied terms" are those which have never been mentioned by the parties in advance. Terms can be implied by the parties themselves, by law, or by customs.
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Exemption Clauses:
"Exemption clauses" are contractual terms that purport to exclude or limit the liability of a party against the other. The effects of any such clauses are regulated by the Control of Exemption Clauses Ordinance (Chapter 71, Laws of Hong Kong).
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A contract will be discharged in the following situations:
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All the obligations under the contract have been performed accurately and completely;
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All the parties to the contract have agreed to its termination;
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There was a breach of contract and a party entitled to set aside the contract has indeed set aside the contract; or
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The contract is "frustrated" because, for example, unforeseen events have rendered performance of the contractual obligations impossible.
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The remedies available for a breach of contract action include:
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Damages, i.e. monetary compensation;
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Specific Performance, i.e. an order of the court compelling a party to honour his promises; and
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Injunction, i.e. an order of the court prohibiting a party to do certain acts.
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