Law of Contract –

Elements of Contract

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1. Introduction

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 Meaning of Contract
Distinction between Agreement and Contract

An agreement is a concord of understanding and

intention between 2 or more parties with effect upon
their relative rights and duties, of certain past or future
facts or performance.

A contract is an agreement which is enforceable by law.

• Not all agreements are contracts.

• But all contracts are agreements.

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 Meaning of Contract

Elements of Contract

• Over the years, the common law courts have

developed the following elements of contracts:
1. Offer
2. Acceptance
3. Consideration
4. Intention to be legally bound
5. Capacity

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 Meaning of Contract
Valid & Unenforceable Contracts
Valid Contract

It is a contract that meets all the legal requirements

for a contract. Valid contracts are therefore
enforceable in court.

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 Meaning of Contract
Unenforceable contract

A contract that meets the basic legal requirements for a

contract but will not be enforced due to some other legal
rules.
e.g. If a contracts for the sale of real estate is not in
writing, it is unenforceable according to s3 of
Conveyancing and Property Ordinance.

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2.1 Offer

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 Offer
Meaning of Offer

• An offer is a statement of the terms made by one party

(‘offeror’) to the other party (‘offeree’).
The offeror is willing to be bound by the terms of the
statement if the offeree accepts the offer. Generally offer
can be viewed as composed of 3 elements:
1. the offeror must have an intention to be legally
bound once it is accepted;
2. it must contain certain definite terms; and
3. it must be communicated to the offeree.

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 Offer
Invitation to Treat
• Sometimes the person (“X”) making the statement
is merely inviting the other party (“Y”) to make an
offer or is willing to enter into negotiations. Such
invitation asking Y to make an offer is called
‘invitation to treat’.
• X making the invitation has no intention to make an
offer and will not be bound by the terms mentioned
in the statement.

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 Offer
• To distinguish an offer from an invitation to treat
is a question of intention of the party making
the statement.

• If the party making the statement does not have

any intention to be legally bound, the statement
is an invitation to treat (Gibson v Manchester
City Council [1979]).

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 Offer
• The following situations are all considered as
examples of invitation to treat:

1. Display of Goods for Sale

Goods on display in a shop window or on shelves in the
shops or supermarkets, even with a price tag attached to
the goods, are generally regarded as an invitation to
treat. A customer does not make any offer to purchase
when s/he inspects the goods.

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 Offer
The customer makes an offer to purchase only when
taking the goods to the counter for payment, or telling
the shopkeeper that he/she wants to buy the goods.

The cashier at the counter or the shopkeeper can decide

whether or not to accept the offer. Either may reject the
customer’s offer if the goods are out of stock or defective
or for some other reasons (Pharmaceutical Society of
Great Britain v Boots Cash Chemists (Southern)
Limited [1953]).
 Offer
• There may be some occasions when the
intention to be legally bound is so clear that
display of goods may in fact be an offer rather
than an invitation to treat.

e.g. A display of goods with the statement ‘Crazy

sale of $1 to the first 10 customers next Sunday’
may in fact be an offer.

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 Offer
Advertisement

• General rule: An advertisement is regarded as

an invitation to treat (Partridge v Crittenden
[1968]).
• Exception: Unilateral contracts or “an offer to the
whole world” are not scenarios of invitation to
treat (Carlill v Carbolic Smoke Ball Co [1893]).

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 Offer
Tender

• A request for an organization to submit tenders

is an invitation to treat unless it is couple with a
promise to accept the lowest, or the highest,
tender (Spencer v Harding [1870], Harvela
Investments Ltd v Royal Trust Co of Canada
Ltd [1985]).

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 Offer
Auctions

The advertisement of an auction, or the display of lots at

an auction, is an invitation to treat. It is the bidder who
makes the offer, which the auctioneer can accept or
reject (Payne v Cave [1789]).

Acceptance would occur on the fall of the hammer. This

common law rule is incorporated in s60(2) of Sale of
Goods Ordinance:
“A sale of auction is complete when the auctioneer
announces its completion by the fall of the hammer, or in
other customary manner; and until announcement is
made any bidder may retract his bid.”
 Offer
Certainty of Offer

• A contract must contain the basic terms of the

relevant transaction:
1. Price
e.g. How much are the goods to be sold?

2. Property
e.g. How many goods are to be sold?
 Offer
Revocation of Offer

• General Rule: The offeror may revoke his/her

offer at any time before acceptance:
Payne v Cave [1789].

• If the offeror revokes his/her offer before the

offeree accepts it, no contract would have been
formed.

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 Offer

• When the offer is stated to be irrevocable, or

irrevocable within a certain period, that offer
cannot be withdrawn, or cannot be withdrawn
within that period of time.

• To revoke an offer effectively, the notice of

revocation must be communicated to the offeree
(Byrne & Co v Van Tienhoven [1880]). The
notice needs not be communicated personally
by the offeror. It could come from a third party
(Dickinson v Dodds [1876]).
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 Offer

• If the offer does set a deadline for acceptance,

the offeror can still revoke the offer before this
deadline unless the offeree provides
consideration (i.e. price) to keep the offer open.

• If the offeror revokes his offer before the end of

that period in such a situation, he would have
broken the contract and has to compensate to
the offeree (Routledge v Grant [1828]).

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 Offer
Counter-offer

• A counter-offer is a new proposal made by the

offeree in response to the offer. Any counter-
offer, if made by the offeree, is taken as a
rejection of the original offer.

• Once the offeree rejects an offer, the offer no

longer exists. The offeree cannot then accept
the offer afterwards (Hyde v Wrench [1840]).

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 Offer
Rejection of Offer

• If an offer is rejected by the offeree, a contract

would not be formed.
• If the offeree asks the offeror whether he can
pay by a particular method, he has only made
an inquiry and has not rejected the offer. He can
accept the offer sometime afterwards.
Stevenson v McLean [1880]
 Offer
Lapse of Offer
• If the offeror specifies a time period for the
offeree to reply and the offeree fails to do so, the
offer will lapse. If no time period has been fixed,
it will remain open only for a reasonable time.
What is reasonable depends on the facts of
each case.

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 Offer
• A lapse of 5 months was considered to be
unreasonable in relation to a contract of sale of
shares: (Ramsgate Victoria Hotel Co. Ltd. v
Montefiore [1866]).

• Whereas, a lapse of 7 months was considered to

be reasonable in relation to a contract of sale of
land (Manchester Diocesan Council for
Education v Commercial and General
Investments Ltd. [1970]).
 Offer
Death
• The death of either the offeror or the offeree
before acceptance will normally terminate the
offer. Upon the death of the offeror, the offer
cannot be accepted once the offeree comes to
know of the death.

• Death of the offeree will normally terminate the

offer, unless there is an option to keep the offer
alive after death which an executor/
administrator can exercise (Carter v Hyde
[1923]).
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2.2 Acceptance

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 Acceptance
Meaning of Acceptance
• Acceptance is the offeree’s (1) unconditional,
(2) final, and (3) clear assent to all the original
terms of the offer.

(1) Unconditional

• A party has not accepted the offer if this is subject to

conditions (Lung Yuk-lun v Gratefulfit Industrial Ltd
[1992]).

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 Acceptance
Final

• If an agreement is said to be “subject to

contract” , it is not a final agreement. There is
no contract between the parties (Darton Ltd v
Hong Kong Island Development Ltd [2001]).

• By contrast, a “provisional agreement” in the

sale and purchase of land was a binding
contract until such time as the parties replace it
with a more formal one (Yiu Yau Ping v Fong
Yee Lan [1992]).

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 Acceptance
Clear Assent

• The assent to the terms of the offer must be

clear:China Great Wall Finance Co v
Wonderyouth Industries Ltd [2004]

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 Acceptance
Communication of Acceptance
General Rule
• Acceptance must be communicated to the
offeror. There is no contract until the offeror
knows that his/her offer has been accepted
(Powell v Lee [1908]).

• As acceptance must be communicated to the

offeror, silence is not normally sufficient to
amount to acceptance (Felthouse v Bindley
[1862]).

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 Acceptance
Exceptions

1. Postal rule

• Where the medium for communication of an

acceptance of an offer sent is through the Post
Office, the point of formation of the contract will be
the moment when it is posted: Adams v Lindsell
[1818]

• The postal rule does not apply to notice of

revocation of offer and only applies to acceptance.

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 Acceptance
• Exceptions to postal rule:
(a) if known to the offeror and offeree that the
post is not prescribed as a means of
communicating the acceptance, postal rule
will not apply.
(b) if the offeror has made it clear beforehand
that s/he is not prepared to be bound until
s/he actually receives the written notice of
acceptance (Holwell Securities v Hughes
[1974]).

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 Acceptance
Waiver of Communication of Acceptance

• The terms of an offer may expressly or implicitly

waive any requirement to communicate the
acceptance to the offeror.

• If an offer can be accepted by conduct, the

offeree does not need to notify the offeror in
advance (Carlill v Carbolic Smoke Ball
Company [1893]).

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 Acceptance
Offeror’s Fault

• If, due to the offeror’s fault, the offeror does not know
that the offer has been accepted, the offeror cannot
deny that acceptance has been communicated to him.

e.g. the offeree writes to the offeror to confirm the

acceptance and the letter arrives in the offeror’s place.
The offeror simply puts the letter on the desk without
reading it, so he does not know his offer has been
accepted. In this case, acceptance is valid, and the
offeror cannot deny the offeree’s proper communication
of the acceptance.

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 Acceptance
Offeror’s Authorized Agent

• If an agent (e.g. the offeror’s solicitor) has been

authorized by the offeror to receive
communication of acceptance, acceptance
takes effect even if the acceptance is
communicated to the agent only.

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 Acceptance
Methods of Communication

In Yates Building Co Ltd v Pullegyn & Sons (York)

Ltd [1975] , the court stated the following principles:

1. If the offeror insists on a particular method of

communication of acceptance, the offeree must
comply.
2. If the offeror only recommends a method, any
method no less favourable to the offeror will suffice.
3. If there is no recommendation/instruction as to
method of communication, acceptance must be
communicated by a “reasonable” method.

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 Acceptance
When Acceptance Takes Effect

• General rule: Acceptance takes effect when and where

notice is received by the offeror.

1. On Instantaneous Communication

(i) Telephone
General rule: a contract is formed when acceptance
of an offer is instantaneously communicated, e.g.
over the telephone by the offeree to the offeror:
Brinkibon Ltd v Stahag Stahl [1982].

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 Acceptance

(ii) Fax
Susanto Wing Sun Co. Ltd. v Yung Chi Hardware
Machinery Co. Ltd. [1989]
(iii) Email
Email as a message will have to pass through at
least one server to reach its target destination. The
sender knows that the recipient will only check
his/her mail inbox from time to time. This means
there will usually be a delay before it is read. It is
likely that email may be viewed as subject to the
normal rules.

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2.3 Consideration

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 Consideration

• Consideration: something of value in the eyes

of the law in exchange for the other’s promise.

e.g. If A (the promisor) promises something to B

(the promisee), the consideration for A’s promise
can be viewed as a detriment to the promisee
B, since B has to give something in return for A’s
promise, or B’s something in return can be
viewed as a benefit to A, since A will receive
something from B.
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 Consideration

• Mutual promises can be consideration

e.g. A promises to supply certain goods to B,
who in return promises to pay A for this. As far
as A is concerned, B’s promise to pay is the
consideration for A’s promise to supply the
goods.
As far as B is concerned, A’s promise to supply
the goods is the consideration for B’s promise to
pay. Both promises are made in exchange for
the other’s promise.
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 Consideration
• If there is no consideration, there would be no valid
contract.
e.g. A promises to donate three hundred copies of
books to B. This is A’s promise. Since this is a donation
and B does not make any promise in return to A’s, it is
a gift.
Although A and B have reached an agreement, this
agreement cannot be a valid contract and will not be
enforced because of the lack of consideration. So if A
subsequently breaches the promise, B may not be able
to successfully sue A for this.
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 Types of Consideration

• Executed consideration
A promise performed when a contract is made.

• Executory consideration
A promise to be fulfilled at some future time.

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 When Consideration Is Valid?

When does consideration validly exist?

1. Existence of consideration is subject to the
fact that consideration must have value.
2. Consideration must be sufficient but
need not be adequate. It means that it
must be of some value in the eyes of the law
but need not be of equivalent value to the
other party’s consideration

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 When Consideration Is Valid?

Even if consideration is of little economic value,

it can be sufficient in the eyes of law: Thomas v
Thomas [1842], Chappell v Nestle [1960]
• Natural love and affection may not be sufficiently
regarded as consideration, unless the promise is
contained in a deed under seal.

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 When Consideration Is Valid?

Past Consideration is No Consideration

Past consideration is where a promise to pay is

made in return for a service which has been
done before the promise is made. It does not in
law amount to “consideration” and cannot be
used to support a promise : Roscorla v Thomas
[1842], L & D Associates v Chan Man Chon
Madalena [1987].

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 When Consideration Is Valid?

Exception:

(a) It was implied that at the time the services

rendered, it was to be paid for: Re Casey’s
Patent [1892]
(b) Where an act had been done at the promisor’s
request, and the parties had understood that the
act was to be remunerated either by payment or
conferment of a benefit: Pao On v Lau Yiu
Long [1980]

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 When Consideration Is Valid?

Consideration must move from the promisee

It means that the party wishing to enforce the

other party’s promise must prove that he has
personally provided something of value in return:
Tweddle v Atkinson [1861]

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 Performance of Existing Duty

Performance of Existing Contractual Duty

(a) A promise to perform existing contractual
obligations is not consideration. This is
because the promisor will merely give
what he is already bound to give (Stilk v
Myrick [1809]).

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 Performance of Existing Duty

• If the promisee’s act will exceed the scope of

existing contractual duty, such act may
constitute valid consideration for the promisor’s
new promise (Hartley v Ponsonby [1857],
Williams v Roffey Bros [1991], followed by the
Hong Kong High Court in UBC (Construction)
Ltd v Sung Foo Kee Ltd [1993]).

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 Performance of Existing Duty

Performance of Existing Public Duty

Mere performance of an existing public duty

cannot be good consideration for a promise:
Collins v Godefroy [1931]

However, if the service provided is beyond the

scope of the public duty, it may be consideration.

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 Performance of Existing Duty

Performance of Duty owed to Third Party

Mere performance of a duty owed to a third party

may be good consideration for a separate
promisor’s promise: New Zealand Shipping Co
Ltd v A.M. Satterthwaite & Co Ltd (The
Eurymedon) [1975]

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 Part Payment of Debt

Common law rule:

• As full payment of a debt is the contractual duty
of the creditor, part payment cannot fully
discharge a debt and thus is not good
consideration: Pinnel’s case [1602]
• The rule in Pinnel’s case received approval by
the House of Lords in Foakes v Beer [1884].

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 Promissory Estoppel

Doctrine of Promissory Estoppel

• If a person X makes a statement of fact (promise) to Y,
intending that Y would rely on it, and Y does in fact rely on it
and acts upon it to his/her detriment, then X is “estopped”
from denying the truth of those facts.

• The rule was laid down in Central London Property Trust

Ltd v High Trees House Ltd [1947].

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 Promissory Estoppel
Limitations:
1. There must be an unambiguous promise made by
the promisor to the contract that he does not intend to
enforce his strict contractual rights.
2. It can only be used as a defence in a legal action, not
as the basis for bringing an action.
3. It does not extinguish the original rights of the
promisor. It only suspends the promisee’s rights.

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 Privity of Contract
Privity Rule:

Only the parties to the contract can enforce the

contract and other people who are not parties to
the contract cannot sue on the contract.
Dunlop Pneumatic Tyre v Selfridge and Co
Ltd [1915], B + B Construction Ltd v Sun
Alliance and London Insurance plc [2000]

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2.4 Intention to Create
Legal Relations

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 Intention
• If an agreement is to be legally binding, the
parties to the agreement must have genuine
intention to create a legally binding contract.

• If the parties did not express their intention, how

do the courts know their intention in their
agreement? The courts would give
presumptions to the following types of
agreements:
(a) commercial (presumed intention exists);
(b) domestic (presumed intention does not exist);
(c) social (presumed intention does not exist);

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 Intention

Rebutting the Presumption

• The party who denies the intention has to submit

evidence to rebut the presumption. If the parties
expressly state that they do not want to create a legally
binding contract, the agreement will not be legally
enforceable.
e.g. An agreement marked ‘subject to contract’ is
not binding, unless and until a formal contract is
made.

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2.5 Capacity

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 Capacity
• It is not everyone to have proper capacity to
enter into a legally binding contract. Generally,
adults with sound and capable mind have proper
capacity to enter into legally binding contracts.

• Minors and people who are mentally ill or are

intoxicated by alcohol or drugs do not possess
full capacity to enter into legally binding
contracts.

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 Minor
Meaning of Minor

• In the context of law of contract, minors are persons who

are under the age of 18.

General rule

• A minor has the capacity to enter into a contract and to

enforce contractual rights against adults at his/her option,
so the contract made with a minor is a voidable contract.
But this is not so the other way around, i.e. as a general
rule, adults are restricted in enforcing contracts against
minors.

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 Minor
Exceptions to the Rule

A contract is made between a minor and an adult

for necessary goods or services is
enforceable by the adult. An adult can recover
money lent to a minor to enable the minor to buy
necessary goods at a reasonable price.

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 Minor
Some service contracts (e.g. contracts of
apprenticeship, young performer and education)
are on the whole beneficial to the minor, and
are thus binding on the minors: De Francesco v
Barnum [1890]

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 Minor
There are certain contracts that give lasting
benefits to a minor, e.g. shares in a
company. Such contracts can be enforced
against the minor when s/he reaches the age
of 18.
If a contract made by a minor is ratified by
him/her when s/he reaches the age of 18,
while the contract was not binding on
him/her when s/he made it below 18, it
becomes enforceable against him/her.
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 Minor
Repudiation of Contract
• The contract is binding upon the minor unless
and until s/he repudiates it during minority or
within a reasonable period after reaching
majority.
• Once a minor repudiates s/he can incur no
future liabilities under the contract. However,
any money already paid by the minor is
irrecoverable: Steinberg v Scala (Leeds) Ltd
[1923].
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 Minor
Remedy
1. Damages for Breach of Contract
Whether or not the contract with a minor is
enforceable, the only remedy for breach remains
damages. Specific performance is never awarded
against a minor.
2. Restitution in Equity
Where the minor has acted fraudulently, and the
precise goods obtained could be identified, the
adult is permitted to restitution of property from the
minor by equity: Stock v Wilson [1913].

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