Mindy Lecture Notes

2023/8/22 下午5:55 Mindy Lecture Notes
The University of Hong Kong, LLB Law of Contract I & II, 2019 – 2020
Part A: The Creation of a Contract
Topic 1: Offer and Acceptance, Intention to Create Legal Relations
Lecture Notes
Sandy Steel, August 2019

sandy.steel@law.ox.ac.uk
Textbook reading:
Chen-Wishart, ch 2 (no need to read the section on ‘Certainty’)
1. What is a contract?
The basic idea: a legally binding promise (or set of promises).

General features of contractual obligations:
(i) voluntary
● Contracts are voluntarily undertaken by both parties (Compare:
criminal law, tort law)
● Freedom of contract; minimal legal intervention, fairness and
equality
(ii) generally strict

● Parties must abide by contractual terms when the contract is duly
formed
● Can be breached regardless of fault; liability not solely based on
fault
● Breaching of promise is a moral wrong?
(iii) bilateral or unilateral

● Unilateral: a promise for an act
○ Example: I promise to pay you $100 if you run 5 km in less
than 30 minutes.
● Bilateral: a promise for a promise
○ Example: I promise to wash your car if you promise to pay
me $100.
about:blank 1/232
2. The basic requirements for creating a

contract
a. An offer made by the promisor to the promisee (Topic 1)

b. The offer was accepted by the promisee (Topic 1)
(NOTE: offer + acceptance = agreement)
c. The parties intended to create a legal relation (Topic 1)
d. The terms of the contract were sufficiently certain (We will not
focus on this point)
e. The promisee gave consideration for the promise by the promisor
(This means: the promisee gave something of value in return for the
promise – See Topic 2)
3. Offer
a. What is an ‘offer’?
‘an 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 person to whom it is addressed’ (Treitel, Law
 of
Contract, 14th
 edn [2-002])
● As long as the offeree accepts the offer, the offeror will be
bound by the offer.
b. An offer must be distinguished from an ‘invitation to treat’

Why is it so important to distinguish an invitation to treat from an
offer?
● Invitation to treat = invitation to negotiate/make an
offer
● Specificity: invitation to treat is abstract and vague that the
inviter does not intend to be bound by it at the time when
the invitee gives a positive response
● Definiteness: the language of an invitation to treat is not
100% certain that the outcome is subject to change;
tentative and exploratory attitude of the inviter
● Completeness of the terms proposed: the terms of an
invitation to treat is usually incomplete; not all specified
terms (in the sense of a reasonable man) communicated to
the invitee
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Some examples of the distinction:
i. Display of goods in shops
Pharmaceutical Society of Great Britain v Boots Cash

Chemists (Southern) Ltd [ 1953] 1 QB 401
“in the case of an ordinary shop, although goods are

displayed and it is intended that customers should go and
choose what they want, the contract is not completed
until, the customer having indicated the articles which he
needs, the shopkeeper, or someone on his behalf, accepts
that offer. Then the contract is completed” (Somervell LJ,
at 406)
● Customer will not be bound by offer simply by putting

article in the shopping basket → not obliged to buy the
article (Somervell LJ, in Boots )
● Price tags could never be absolute; shops can commit errors
● Display of goods in a self-service system is an invitation
to customers to offer to buy only and the offer is
accepted by the vendor when it accepts payment of the
price.
ii. Advertisements of bilateral contracts
Partridge v Crittenden [ 1968] 1 WLR 1204
“The transmission of…a price-list does not

amount to an offer to supply an unlimited
quantity of the wine described at the price
named, so that as soon as an order is given
there is a binding contract… If it were so, the
merchant might find himself involved in
any number of contractual obligations”
● Such advertisements could only amount to an invitation to

treat → sellers not bound to sell the articles (at the listed
price)
about:blank 3/232
iii. Advertisements of unilateral contracts
Carlill v Carbolic Smoke Ball Co [ 1893] 1 QB 256
“100l. Reward will be paid by the Carbolic Smoke

Ball Company to any person who contracts the
increasing epidemic influenza, colds, or any disease
caused by taking cold, after having used the ball three
times daily for two weeks according to the printed
directions supplied… 1000l. is deposited with the
Alliance Bank… shewing our sincerity in the
matter”.
● Such advertisement amounts to an offer

● Audience: to the world at large
● The seller expressed intention to fulfill the promise
about:blank 4/232
4. Acceptance
a. What is acceptance?
i. Unqualified expression of assent/agreement to the terms of an

offer
● All the terms of the offer must be assented
● Subjective assent not necessarily required; acceptance can
occur by conduct
Example: A. I’ll sell you my CD for £20. B. I’ll give you £20 for
your CD, but only if you agree to autograph it.
ii. Acceptance by conduct
Brogden v Metropolitan Rly Co ( 1877) 2 App Cas 666
● MRC made Brogden an offer by drafting and delivering

written contract to him
● Brogden made a counter-offer by adding in arbitrator’s
name
● MRC accepted by placing an order in accordance with
the terms of draft agreement
iii. Acceptance in the context of ‘battle of the forms’
Example:
● Wines r Us: We’ll sell you 12 bottles of Chateau HKU wine on our
standard terms and conditions
● Restaurant: Sure, we’ll buy 12 bottles and I enclose our standard
terms and conditions which will govern the deal
Suppose Wines r Us then deliver the 12 bottles without objecting to
Restaurant’s terms…
about:blank 5/232
Butler Machine Tool Ltd v Ex-Cell-O-Corp (England) Ltd

[1979] 1 WLR 801
● Butler Machine Tool makes offer

● Ex-Cell-O makes counter-offer
● Butler Machine Tool accepts Ex-Cell-O’s counter-offer,
despite accompanying letter
Bridge LJ: “… the language is equivocal and wholly

ineffective to override the plain and unequivocal terms of
the printed acknowledgment of order”.
b. Communication of acceptance
i. General rule
● Acceptance must be communicated to the offeror, i.e.
the offeror must have at least received the communication
Entores v Miles Far East Corp [ 1955] 2 QB 327
“Suppose… that I shout an offer to a man across a

river…but I do not hear his reply because it is
drowned by an aircraft flying overhead. There is
no contract at that moment…”
“Suppose… I make an offer to a man by

telephone and, in the middle of his reply, the line
goes “dead” so that I do not hear his words of
acceptance. There is no contract at that moment”
“In all the instances…so far, the man who sends

the message of acceptance known that it has not
been received or he has reason to know. So he
must repeat it. But suppose that he does not
know… ”
about:blank 6/232
● How can a reasonable man believe the offer can be duly

accepted without the offeree even acknowledging it?
ii. Special cases
1. Unilateral contracts
Carlill v Carbolic Smoke Ball Co [ 1893] 1 QB 256
● When does a unilateral contract come into

existence?
○ The advertisement was not a unilateral
offer to all the world but an offer
restricted to those who acted upon the
terms contained in the advertisement
○ Satisfying conditions for using the smoke
ball constituted acceptance of the offer (by
conduct)
○ Purchasing or merely using the smoke ball
constituted good consideration, because it
was a distinct detriment incurred at the
behest of the company
○ The company's claim that £1000 was
deposited at the Alliance Bank showed the
serious intention to be legally bound
○ Unilateral contract exists when one
accepts the offer by acting upon the
terms therein; no communication
needed
Errington v Errington [ 1952] 1 KB 290
● Unilateral contracts cannot be revoked once the

performance has begun
Soulsbury v Soulsbury [ 2007] EWCA Civ 969
about:blank 7/232
2. Acceptance by post – the postal rule

● Postal rule: acceptance takes effect when a letter
is posted, i.e. dropped in a post box or handed to a
postal worker.
○ Post office acts as each party’s agent (since
the post office is only the representative of
each party to communicate the
offer/acceptance)
○ Person who offers by post creates the risk
that the acceptance could be lost (and they
could have excluded the rule)
○ Prevents hardship to offeree, especially
when post is the sole available method for
the acceptance to be communicated; the
wrong should lie on the post office if it
fails to communicate acceptance, thus the
consequence should not be borne by the
offeree
● Postal rule can be invalidated when the use of postal

services could manifest inconvenience and
absurdity:
○ The use of post apparently not needed
○ Example: A went to B’s store and offered to
buy a pen, but B posted A a letter to
communicate his acceptance instead of
instantly accepting the offer in an oral
agreement
Adams v Lindsell ( 1811) 1B & Ald 681
“no contract could ever be completed by the

post. For if the [offerors] were not bound by
their offer when accepted by the [offerees] till
the answer was received, then the [offerees]
ought not to be bound till after they had
received the notification that the [offerors] had
received their answer and assented to it. And
so it might go on ad infinitum”
about:blank 8/232
● Time lag in posting makes conclusion of contract

impossible if the offeror is only bound when the
letter of acceptance is received (since both parties
have to communicate their acknowledgement as
well)
Household Fire Insurance Co v Grant ( 1879) 4 Ex D

216
● Acceptance can be valid even if the letter is lost, as

long as it has been posted
Holwell Securities Ltd v Hughes [ 1974] 1 All ER 161
● Postal rule can be excluded by the terms of an offer
3. Instantaneous and electronic communication

● General rule applicable to instantaneous and
electronic communication
● Contract effective when communication of
acceptance is received because the offeree
has knowledge that whether the offeror can
be communicated
Entores Ltd v Miles Far East Corp [ 1955] 2 QB 327
“Now take a case where two people make a

contract by telephone. Suppose, for instance,
that I make an offer to a man by telephone
and, in the middle of his reply, the line goes
‘dead’ so that I do not hear his words of
acceptance. There is no contract at that
moment. The other man may not know the
precise moment when the line failed. But he
will know that the telephone conversation was
abruptly broken off: because people usually
say something to signify the end of the
conversation. If he wishes to make a contract,
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he must therefore get through again so as to

make sure that I heard. Suppose next, that the
line does not go dead, but it is nevertheless so
indistinct that I do not catch what he says and
I ask him to repeat it. He then repeats it and I
hear his acceptance. The contract is made, not
on the first time when I do not hear, but only
the second time when I do hear. If he does not
repeat it, there is no contract. The contract is
only complete when I have his answer
accepting the offer.”
● The contract is only complete when the acceptance is

received by the offeror: and the contract is made at the
place where the acceptance is received.
Brinkibon Ltd v Stahag Stahl GmbH [ 1983] 2 AC 334
“Unquestionably, as a general proposition,

when an offer is made, it is necessary in order
to make a binding contract, not only that it
should be accepted, but that the acceptance
should be notified. And the postal rule is an
exception based on commercial
expediency… more convenient, and makes on
the whole for greater fairness, than the general
rule itself would do”.
about:blank 10/232
Rules re e-commerce are found in the Electronic

Transactions Ordinance (Cap. 553), ss 17-19
“Unless otherwise agreed between the originator

and the addressee of an electronic record, the time
of receipt of an electronic record is determined as
follows –
(a) if the addressee has designated an information

system for the purpose of receiving electronic
records, receipt occurs –
(i) at the time when the electronic record is

accepted by the designated information
system; or
(ii) if the electronic record is sent to an

information system of the addressee that is
not the designated information system, at
the time when the electronic record comes
to the knowledge of the addressee;
(b) if the addressee has not designated an

information system, receipt occurs when the
electronic record comes to the knowledge of the
addressee”
● Acceptance is validly communicated as long as

it has been reached to the server/inbox of the
offeror
● If not communicated to the designated server,
acceptance only valid when read by offeree
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4. Prescribed method of acceptance
Manchester Diocesan Council for Education v

Commercial and General Investments [ 1970] 1 WLR
241
● The method of acceptance prescribed for a tender

was not mandatory
● If an offeror wishes it to be mandatory this needs
to be made explicit.
● Method of acceptance must be reasonable
5. Acceptance by silence?
Felthouse v Bindley ( 1862) 11 CB 869
“The uncle had no right to impose

upon the nephew the sale of his horse”
● Silence ≠ Acceptance

● Exception: offer solicited by offeree/offeree claims
to accept by silence beforehand
6. Acceptance in ignorance of an offer
R v Clarke ( 1927) 40 CLR 227
● Offeree must act upon the offer → requires

awareness of it
● How to act upon an offer without knowing its
existence?
● Offeree must be motivated to act upon the offer
in accepting it → his awareness of the offer is
essential
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5. Termination of an offer
Before an offer is accepted by the offeree and thus a binding contract is made, it
may be terminated by:
(i) Revocation/withdrawal
● Must be communicated at any time before acceptance
● Postal rule not applicable; revocation only effective when the
offeror receives it
Byrne v Van Tienhoven ( 1880) 5 CPD 344
● Revocation must be communicated to the offeror
Dickinson v Dodds ( 1876) 2 Ch D 463
● Revocation can be communicated by a third party instead of only

the offeror
(ii) Rejection/counter-offer
● Original offer can no longer be accepted, i.e. original offer terms
no longer valid unless the original offeror agrees
● Should be distinguished from request for further information,
which is an enquiry and does not intend to reject the original offer
Hyde v Wrench ( 1840) 3 Beav 334
● Counter-offer cancels the original offer
Stevenson, Jacques & Co v McLean ( 1880) 5 QBD 346
“Please wire whether you would accept forty for delivery

over two months, or, if not, the longest limit you would give”
● Request for further information does not intend to reject the

original offer; such requests do not cover all contractual terms but
only a specified aspect
● Request for further information could be tentative and exploratory
(Compare: invitation to treat)
about:blank 13/232
Example. A . I’ll sell you my CD for £20. B.

 I’ll give you £20 for your CD,
but only if you agree to autograph it. A. No, absolutely not, I never
autograph my CDs. B. OK, I’ll pay you £20 for your CD – forget about
the autograph.
(iii) Lapse of time

● Offer terminates after:
○ Expressed time limit stated in the offer
○ Implicit time limit (determined by the nature of transaction
or the standards of a reasonable man), e.g. volatile market
trading → prices often fluctuate
(iv) Death
● Offer loses effect when any one of the parties involved dies before
an acceptance could be made
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6. Intention to create legal relations
Textbook reading:
Chen-Wishart, ch 2, section 2.7
● Legal relations: legal consequences follow if breached

● Burden of proof rests on the party who wishes to deny the
existence of intention to create legal relations
Blue v Ashley [ 2017] EWHC 1928
“Even when a person makes a real offer which is accepted, it does not
necessarily follow that a legally enforceable contract is created. It is a
further requirement of such a contract that the offer, and the agreement
resulting from its acceptance, must be intended to create legal rights and
obligations which are enforceable in the courts, and not merely moral
obligations. Not every agreement that people make with each other,
even if there is consideration for it and the terms are certain, is
reasonably intended to be enforceable in the courts. For example, if
two people agree to meet for a drink at an appointed place and time
and one does not turn up, no one supposes that the other could sue to
recover his wasted travel expenses”: at [55] per Leggatt J
● Offer was allegedly declared after pints of beer in a pub →

considered as a joke
○ Absence of a meeting agenda
○ Purpose and setting of meeting was intended to be casual
○ Nature/tone of conversation was not serious
○ Makes no commercial sense
○ Not consistent with expectations of Mr Blue’s role on the
Mr Ashley’s business
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1. Domestic Agreements
(i) Agreements between husband and wife
Balfour v Balfour [ 1919] 2 KB 571
“…one of the most usual examples…of agreement which

does not constitute a contract appears to me to be the
arrangements which are made between husband and wife”.
● There is a rebuttable presumption against an intention to create a

legally enforceable agreement when the agreement is domestic
in nature, unless the agreement is proven to be otherwise
● Are family arrangements legally enforceable?
● If so, the floodgates would be opened and the court would be left
to decide on matters that should/could be decided within the
function of domestic relationships
(ii) Agreements between parent and child
Jones v Padavatton [ 1969] 2 All ER 616
“No normal mother will sue her daughter”.
Danckwerts LJ: Same principles apply as in Balfour v Balfour –

presumption against intention to create legal relations, not rebutted
Salmon LJ: Agreed in result, but held presumption rebutted here
(iii) Other domestic arrangements
Simpkins v Pays [ 1955] 3 All ER 10
Sellers J: Not like a “rough and ready” family arrangement, and

emphasised “mutuality” in the dealings here.
● Valid contract because both parties intended to gain
financially despite having domestic relationships
about:blank 16/232
2. Commercial agreements
(i) Rebuttable presumption of intention to create legal relations
Esso Petroleum Co Ltd v Commissioners of Custom and Excise [ 1976]

1 WLR 1
● Presumption of intention to create legal relations in commercial

context (later cases establish this is true only in relation to express
agreements)
● Lord Simon:
○ burden of proof on Esso to prove no intention;
○ offer made for commercial advantage and entirely took
place in setting of business relations;
○ undesirable to allow businesses to make ‘puffs’.
● How to rebut the presumption?
○ e.g. “This arrangement is not entered into… as a formal or
legal agreement”: Rose v Frank Co  [1925] AC 445
about:blank 17/232
Part A: The Creation of a Contract
Topic 2: Consideration and Promissory Estoppel
Lecture Notes
Consideration
Textbook reading:
1. The requirement of consideration
In order for a promise to be binding as a contract, there must be consideration

given for the promise.
Unless: the promise is contained in a deed ( signed, sealed and delivered).
[And: we will also see later, when we look at promissory estoppel , that
promises can have some legal effects in the absence of consideration or a
deed.]
2. Consideration defined
The basic idea: something of value given in return for a promise (the ‘price of
the promise’)
“something which is of value in the eye of the law” Thomas v Thomas

[1842] 2 QB 851, 859
● The law determines something which is of value, by convention,

something beneficial to the promisee or detriment to the promisor
● Consideration must be given at the request of the promisor in return
for the promise
about:blank 18/232
Currie v Misa ( 1875) LR 10 Ex 153, 162 (Lush J):
“... may consist either in some right, interest, profit, or benefit accruing to the
one party, or some forbearance, detriment, loss, or responsibility, given,
suffered, or undertaken by the other.”
“ ‘Consideration’ means that, in exchange for a promise by one party, a

counter-promise or performance is given by the other party”: A Burrows,
Restatement of the Law of Contract ( 2016), s.8(2)
● Promise in return for another promise at the request of the

promisor
Example 1. A promises to pay B $1,000. In reliance on this promise, B buys an

expensive CD.
● Conclusion: No consideration; A did not request B to buy him CD.
Example 2. A promises B that A will pay B $100 if B washes A’s car.
● Conclusion: Yes; consideration, i.e. to wash A’s car, requested by
A
 promises B $10,000 if B promises to act as A’s financial

Example 3. A
advisor.
● Conclusion: Yes; promise of B in return for a promise of A
Example 4. A. “I promise to pay you $100.” B. “Great, let me buy you a
drink.”
● Conclusion: No consideration; A did not request a drink from B.
3. Past consideration is not good consideration

● Performance occurred prior to giving of promise ≠ Consideration
○ Such performance is not motivated by the promise
● Mere promise of courtesy will not be supported by consideration
Re McArdle [ 1951] Ch 669
Lampleigh v Brathwaite ( 1615) Hob I05
about:blank 19/232
Pao On v Lau Yiu Long [ 1980] AC 614
4. Consideration must move from the promisee
In order to enforce a promise made to her, the promisee must herself provide
consideration for it. → Privity of contract
Tweddle v Atkinson ( 1861) 1 B & S 393, 399
Example. A promises B that A will pay B $1,000 if C washes A’s hair.

● NOTE: C is not a party of the contract
● NOTE: No consideration provided by B
● Conclusion: consideration enforceable only if B makes (or that
B has contributed to make) C to wash A’s hair
5. Consideration only needs to be sufficient, it does not need to be adequate

● Courts are unable to ascertain the value of something in return of a promise
● Parties should have the freedom to decide on the value unless it is deduced
from fraudulent causes or exploitation of one of the parties etc.
● Unpredictable effects arise when courts interfere
● Conclusion: consideration is sufficient as long as it is present. (Extended
study: $1 nominal payment)
○ Consideration gives a cost for a promise
○ Consideration can be used to release contractual obligations
(rescindment of a contract)
Example. I promise to pay you $500,000 if you promise to give me your pen.
Chappell & Co Ltd v Nestle Co Ltd [ 1960] AC 87
6. Sufficiency of consideration: some classic problems
Problem of insufficient consideration often occurs in the context of

agreements to end the contract and variation of contract
Agreement to end the contract:
A agrees to sell B A’s car for $100,000. Before the time for performance
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arises, A and B agree not to go ahead with the sale.
Variation:
Two common examples:
● Performance of, or promise to perform, an existing contractual duty

to the other party
Stilk v Myrick ( 1809) 2 Camp 317
“the agreement is void for want of consideration. There was no

consideration for the ulterior pay promised to the mariners who
remained with the ship. Before they sailed from London they had
undertaken to do all that they could under all the emergencies of
the voyage. They had sold all their services till the voyage should be
completed. If they had been at liberty to quit the vessel at
Cronstadt, the case would have been quite different.”
● Promise to perform an existing contractual duty to the promisor, in

return for a further promise from the promisor (“more for the
same”)
● Captain coerced to pay more to the seamen
● “More for the same” will not be supported by consideration as the
“same” is still within the contractual obligations
D & C Builders Ltd v Rees [ 1966] 2 QB 617
● Promise to accept a smaller amount by cheque is not supported by

consideration
● Cheque is just as the same as cash
Williams v Roffey Bros & Nicholls [ 1991] 1 QB 1
“[if]... at some stage before A has completely performed his

obligations under the contract B has a reason to doubt
whether A will, or will be able to, complete his side of the
bargain; … and B therupon promises A an additional
payment in returned A’s promise to perform his contractual
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obligations on time; and as a result of giving his promise, B

obtains in practice a benefit, or obviates a disbenefit; and
B's promise is not given as a result of economic duress or
fraud on the part of A; then the benefit to B is capable of
being consideration for B's promise, so that the promise will
be legally binding.” : Glidewell LJ
“As a result of the argument the defendants secured their position

commercially.”: Purchas LJ
Russell LJ: defendant obtained benefit by avoidance of the need to

employ another subcontractor and a more formalised system of
payments
● Practical benefits were given to the defendant as a result, so

more consideration should be provided
Promise to accept less of the same:
● Forbearance of existing rights (e.g. part payment of a debt in

discharge of the full amount)
If A owes a debt and pays or promises to pay part of it in return
for B’s promise to forgo the balance, can A hold B to this
promise?
Pinnel’s Case ( 1602) 5 Co Rep 117a
“payment of a lesser sum on the day in satisfaction of

a greater, cannot be any satisfaction for the whole,
because it appears to the Judges that by no possibility,
a lesser sum can be a satisfaction to the plaintiff for a
greater sum: but the gift of a horse, hawk, or robe,
&c. in satisfaction is good. For it shall be intended
that a horse, hawk, or robe, &c. might be more
beneficial to the plaintiff than the money, in
respect of some circumstance, or otherwise the
plaintiff would not have accepted of it in
satisfaction.”
about:blank 22/232
● Promise not binding; no consideration provided for the

promise
● Other consideration in replacement of part of the original
consideration is acceptable if it confers (additional) benefit of
the promisee
Foakes v Beer ( 1884) 9 App Cas 605
“all men of business… do every day recognise and act

on the ground that prompt payment of a part of their
demand may be more beneficial to them than it would
be to insist on their rights and enforce payment of the
whole. Even where the debtor is perfectly solvent,
and sure to pay at last, this is often so. Where the
credit of the debtor is doubtful, it must be more so.”
● Promise not to enforce debt was not supported by

consideration; no new entitlement provided and no new
benefit for the original contractual obligation
In re Selectmove Ltd [ 1995] 1 WLR 474
● Selectmove owed a substantial amount of tax to the Inland

Revenue
● Selectmove offered to repay part of the tax and the rest by
installments
● Inland Revenue had not replied, and sought to recover the
full amount of the tax
● No consideration even if Inland Revenue replied
MWB Business Exchange Centres Ltd v Rock Advertising Ltd

[2017] QB 604, noted J O’Sullivan (2017) 133 LQR 191
“Accordingly this is not a case in which the only

benefits conferred in MWB by the oral variation
agreement were benefits of a kind of contemplated by
Lord Blackburn in Foakes v Beer 9 App Cas 605 and
by this court in In re Selectmove Ltd [1995] 1 WLR
about:blank 23/232
474. MWB derived a practical benefit which went

beyond the advantage of receiving a prompt
payment of a part of the arrears and a promise that it
would be paid the balance of the arrears and any
deferred license fees over the course of forthcoming
months.”
● MWB derived a practical benefit (recover some of their

arrears) by making such promise, so the promise is
supported by consideration
 as reversed by the
Note: the Court of Appeal decision in MWB w
Supreme Court on a different point: [2018] UKSC 24, but note
Lord Sumption’s obiter r emarks at [18]:
“That makes it unnecessary to deal with

consideration. It is also, I think, undesirable to do
so. The issue is a difficult one. The only
consideration which MWB can be said to have been
given for accepting a less advantageous schedule of
payments was (i) the prospect that the payments were
more likely to be made if they were loaded onto the
back end of the contract term, and (ii) the fact that
MWB would be less likely to have the premises left
vacant on its hands while it sought a new licensee.
These were both expectations of practical value, but
neither was a contractual entitlement. In Williams v
Roffey Bros & Nicholls (Contractors) Ltd [1991] 1
QB 1, the Court of Appeal held that an expectation of
commercial advantage was good consideration. The
problem about this was that practical expectation of
benefit was the very thing which the House of Lords
held not to be adequate consideration in Foakes v
Beer (1884) 9 App Cas 605: see in particular p 622
per Lord Blackburn. There are arguable points of
distinction, although the arguments are somewhat
forced...The reality is that any decision on this point
is likely to involve a re-examination of the decision in
Foakes v Beer. It is probably ripe for reexamination.
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But if it is to be overruled or its effect substantially

modified, it should be before an enlarged panel of the
court and in a case where the decision would be more
than obiter dictum. ”
● Should the applicable rule of consideration be the same in cases of

promises to pay more for an existing entitlement, and promises to
accept less in respect of a debt?
● Promise to pay more for the same: practical benefit suffices, but the
precise nature of practical benefit remains unclear (ambiguity)
○ Remedies for breach less effective in cases of breach of a
contract to provide a service
● Promise to accept less for the same: practical benefit arguably
suffices, but requires something beyond the mere act of part
payment
○ But there is an incontrovertible value of money
● Should we accept ‘practical benefit’ as consideration at all?
7. Should the law require consideration?

● Justification for the doctrine
○ Evidentiary, cautionary and channeling functions
■ Consideration provides evidence for a contract to be
concluded
■ Consideration causes parties to think carefully before
contract and avoid making hasty decisions
■ Consideration is the rubber stamp for contracts to be
binding
○ Fairness
■ Unfair to enforce promises without paying for them
■ BUT consideration only needs to be sufficient, not
adequate
○ Over-enforcement of promises without the doctrine?
■ Protection against duress: agreement made by coercion not
enforceable without consideration
■ Familial/social relationships: keeps the law out of domestic
agreements
○ More harm than good if changed
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For some discussion:

Gay Choon Ing v Loh Sze Tie Terrence Peter [ 2009] 2 SLR(R) 332
https://mcbridesguides.com/category/contract-law/doctrine-of-consideration/
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Promissory Estoppel
Textbook reading:
1. What is an estoppel?
There are various types of estoppel. We will only focus on one of them,
namely promissory estoppel.
● Estoppel = Stopped
● My world is my bond
(i) Common law estoppel

● Estoppel by representation: limited to existing facts
● In the case of estoppel by representation, the estoppel operates so
as to prevent a person from denying that a given fact is the
case, where he has represented that it is the case, thereby
inducing the representee to act to his detriment in reliance on
that fact.
(ii) Estoppel by convention

● The assumption in question must be shared by the parties, or at least one party
must make the assumption and then the other party accepts or agrees to it, but in
any event the assumption must be communicated between the parties.
● The party which is claiming the benefit of the convention in question must have
relied upon the assumption. Reliance includes being influenced by the
assumption.
● It must also be “unconscionable” or “unjust” for the party in question to act
contrary to the convention, so that he is “estopped” from departing from it.
● The estoppel argument can only be used as a defensive mechanism to a claim,
rather than to found a claim in its entirety.
● Once the common assumption on the facts or the law is made known to the other
party, then the estoppel comes to an end.
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Amalgamated Investment and Property Co v Texas Commerce International

Bank Ltd [ 1982] QB 84
“When the parties to a transaction proceed on the basis of an underlying

assumption – either of fact or of law – whether due to misrepresentation or
mistake makes no difference – on which they have conducted the dealings
between them – neither of them will be allowed to go back on that assumption
when it would be unfair or unjust to allow him to do so. ”
● Parties assume for years that a loan agreement made by a subsidiary

company of the defendant was covered by guarantee given by the
plaintiff to the defendant
● Party seeking to deny such assumption will be estopped from doing
so because it has acted upon the assumption
(iii) Proprietary estoppel

● Proprietary estoppel transfers rights if,
○ someone is given a clear assurance that they will acquire a right
over property,
○ they reasonably rely on the assurance, and,
○ they act substantially to their detriment on the strength of the
assurance
○ it would be unconscionable to go back on the assurance
Thorner v Major  [2009] 1 UKHL 18
● Example : A makes a representation to B that B has an interest in

A’s property or both gains interest.
(iv) Promissory estoppel
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2. Promissory estoppel
● The doctrine of promissory estoppel prevents one party from
withdrawing a promise made to a second party if the latter has
reasonably relied on that promise.
● A promise made without consideration is generally not enforceable.
○ Thus, if a car salesman promises a potential buyer not to sell a
certain car over the weekend, but does so, the promise cannot be
enforced.
○ But should the car salesman accept from the potential buyer even
one penny in consideration for the promise, the promise will be
enforceable in court by the potential buyer.
● Estoppel extends the court's purview even to cases where there is no
consideration
● ‘Shield’: not a basis on which to initiate a lawsuit.
Origins:
Central London Property Trust Ltd v High Trees House Ltd [ 1947] 1 KB
130
“They are cases in which a promise was made which was intended to create
legal relations and which, to the knowledge of the person making the promise,
was going to be acted on by the person to whom it was made, and which was in
fact so acted on. In such cases the courts have said that the promise must be
honoured... The decisions are a natural result of the fusion of law and equity… ”
● Common law estoppel not applicable as the defendant had made a

representation
● The plaintiff entitled to the full amount of the rent through the remainder of
the lease, also during the war, i.e. could have restored the full rent at any time
after the initial promise was made provided a suitable period of notice had
been given, since the request for rent reduction was not supported by
consideration
● Estoppel was applied to a “negative promise”, that is, one where a party
promises not to enforce full rights.
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Hughes v Metropolitan Highway ( 1877) 2 App Cas 439
“if parties who have entered into definite and distinct terms involving certain legal
results… afterwards by their own act or with their own consent enter upon a course of
negotiation which has the effect of leading one of the parties to suppose that the strict
rights arising under the contract will not be enforced, or will be kept in suspense,
or held in abeyance, the person who otherwise might have enforced those rights will
not be allowed to enforce them where it would be inequitable having regard to the
dealings which has thus taken place between the parties.”
● Plaintiff was the landlord of the defendant

● Under the lease, the plaintiff was entitled to compel the defendant (tenant) to
repair the building within six months of notice.
○ Notice was given on 22 October 1874 from which the tenant had until
22 April to finish the repairs.
● On 28 November, the tenant railway company sent a letter proposing that the
plaintiff purchase the tenant’s leasehold interest. Negotiations began and
nothing was settled.
● Once the six months had elapsed the plaintiff sued the defendant for breach of
contract and tried to evict the defendant.
● The initiation of the negotiations there was an implied promise by the plaintiff
not to enforce their strict legal rights with respect to the time limit on the
repairs, and the defendant acted on this promise to their detriment.
● The plaintiff not entitled to forfeit the lease
3. Elements of promissory estoppel
a. Clear promise
Woodhouse AC Ltd v Nigerian Produce Ltd [ 1972] AC 741
“Payment can be made in Sterling and in Lagos.”
● Clear promise which is intended to be legally binding
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● Promise made by seller could be understood in two ways:

○ Pay the contract amount in Sterling (100 NP =
£100 GBP)
○ Pay the contract price with the equivalent value in
Sterling (100 NP = £114 GBP)
● Seller could not stop the “promise” since the promise itself
was ambiguous
● To found a promissory estoppel there has to be a clear
and unequivocal representation as to the intended
actions of the defendant.
b. Reliance on the promise
● Does the promise have to rely upon the promise to their detriment
or it is sufficient that the promisee simply acts on the basis that the
promise will be kept?
Alan v El Nasr [ 1972] 2 WLR 800 The Post Chaser [ 1982] 1 All ER
19, 25-27
“In none of these cases does the party who acts on the belief suffer a
detriment. It is not a detriment, but a benefit to him, to have an
extension of time or to pay less.”
● A requirement of promissory estoppel is that the promisee‘s conduct has

been influenced by the promise or representation.
● To rely on promissory estoppel, detrimental reliance is not a key
requirement. You must only establish that the promisor has changed their
position.
The Post Chaser  [ 1982] 1 All ER 19
● The sellers agreed to sell a quantity of palm oil to the buyers who
had contracted to sell this onto sub-buyers. A clause in the
contract required the sellers to send a declaration of shipment to
the buyers in writing as soon as possible after the ship set sail.
● The sellers gave the declaration a month after the ship had set sail
and the buyers did not protest the time delay.
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● The sellers also handed the documents directly to the sub-buyer at

the request of the first buyer. It was then the sub-buyers that
rejected the documents.
● The buyers followed this and the sellers sold the oil, less money,
elsewhere.
● The sellers had waived their rights to claim against error/delay by
requesting that the documents are submitted directly to the
sub-buyers. On this basis, the buyers were not found to be
inequitable in their actions in rejecting the documents.
● Detrimental reliance not always required, but may be
required in some cases
Collier v Wright
 [ 2008] 1 WLR 643, noted Trukhtanov (2008) 124
LQR 364
● Part payment of debt can be sufficient reliance (even not

detrimental)
● Endorsed the view that in some cases, detrimental reliance is not
needed
● Reasonable prospect of success for the promissory estoppel
argument
Austen-Baker  (2008) 71 MLR 611
c. Inequitable to go back on the promise
● If promisee has detrimentally relied, more likely to be inequitable

● If parties acted on agreement for a long time, more likely to be
inequitable
● If party has fully paid off agreed part payment of a debt, likely to
be inequitable, but less so where only one payment in a series of
installments made
● Not equitable if undue pressure or misrepresentation
D & C Builders Ltd v Rees [ 1966] 2 QB 617
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [ 2017]

QB 604 (see above)
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d. Cannot serve as a cause of action (‘a shield, not a sword’)
Combe v Combe [ 1951] 1 All ER 767
“... does not create new causes of action where none existed before. It only
prevents a party from insisting upon his strict legal rights.”
Robertson v Minister of Pensions [ 1949] 1 KB 227
● May be part of a cause of action, but not cause of action in itself

● Compare: Amalgamated Investments  case
But see Waltons Stores v Maher ( 1988) 164 CLR 387; noted Duthie
(1988) 104 LQR 362
● Illogical to accept promise can be binding without consideration in

context of existing relationship, but not outside one (Mason CJ and
Wilson J)
● Illogical to have cause of action for proprietary estoppel, but not
promissory
● Undermines consideration?
○ No; because it is based on protecting detrimental reliance
(Brennan J)
And English law’s response to Walton Stores i n Baird Textile Holdings

Ltd v Marks and Spencer Plc [ 2002] 1 All ER (Comm) 737
● Proposition that promissory estoppel can be an independent cause of

action not accepted in English law
Baird Textiles v Marks and Spencer (CA, 2001)
● Use promissory estoppel as a sword

● Legal intervention justifiable to rely upon the perception
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4. The extent of enforcement: suspensory or extinctive?
● Suspensory: suspend the operation of legal rights

● Extinctive: deny the operation of legal rights
Tool Metal Manufacturing Co. Ltd. v Tungsten Electric Co Ltd. [ 1955] 1 WLR
761
● Generally suspensory, but can be extinctive where it would be inequitable for

the rights to be revived, e.g. High Trees  case and Collier case
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [ 2017] QB 604
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HONG KONG UNIVERSITY

LAW OF CONTRACT
2019-20
TOPIC 3 TERMS &

INTERPRETATION
PROFESSOR MINDY CHEN-WISHART
I. INTRODUCTION
1. Overview
After ascertaining that a contract has been validly formed, the natural step that follows is to
ascertain what are the contents of that contract. It is only from the terms of a contract that its
obligations can be created and liabilities correspondingly imposed. Determining whether an
alleged obligation is enforceable is a four-step process:
(1) Identification of express terms
Terms vs Mere representation
( 2) Incorporation
Has the term be incorporated in the

contract?
(3) Interpretation
If bound, what does the term mean?

Does the term apply to the event?
(4) Implied terms
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If the alleged term is not expressed,

can it be implied?
(5) Invalidity ( see topic 4)
If the term applies to the event, is

the term nevertheless invalidated?
2. The policies in play
The problem of standard form contracts

● Standard form contracts do not involve ‘bargain’, ‘negotiation’, or ‘consent’ in
any meaningful sense.
● Advantages of standard form contracts
○ Efficient for mass-contracting
○ Allows management of large corporations to maintain control over
employees
● Disadvantages of standard form contracts
○ Unfair terms: Profferors of standard form contracts can
■ reduce their own obligations and liabilities
■ increase that of counterparties
○ Lack of negotiation
○ Lack of comprehension
○ Lack of consent
The problem of consent
The problem of unfair terms
II. EXPRESS TERMS
Terms may be:

A. Express:
(i) Wholly written
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(ii) Wholly oral

(iii) Partly written and partly oral
B. Implied
1 What are Express Terms? versus Representations & Puffs
Why do we care?
The remedies available for disappointed expectations depend on whether the expectation
is based on a term inside t he contract or a representation outside t he contract.
● A term is an enforceable contractual undertaking to do (or refrain from doing)

something, or to guarantee the truth of something. The remedies for breach are, broadly
speaking, ‘forward looking ’ .
● A representation is a statement which asserts the truth of a given state of affairs and
invites reliance upon it, but it does not give an enforceable guarantee of its truth. If it is
actionable, the remedial response is, broadly speaking, ‘backward looking ’ .
● ‘Puffs’ have no legal
effect (since no
reasonable person
would believe a puff
would be true).
2 How is the representation-term distinction made?
Heilbut, Symons & Co v Buckleton [ 1913] AC 30
(i) Importance of the truth of the statement
Bannerman v. White, (1861) 10 CBNS 844
● Buyer asked whether hops were

treated with sulphur
● Seller told hops not treated; in fact
treated
● It is a term: buyer would not have
bought the hops if they were treated
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(ii) Special knowledge of speaker
Compare:
Oscar Chess Ltd v. Williams, [1957] 1 All ER 325
● Car seller, without professional knowledge, relied on the log book to make a
statement
● The statement is a representation
Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd, [1965] 2 All ER 65.
● Car dealer has a better position to find out the particular details of the car
● It is a term
Ko Ching Fung v Fulltin Investment Ltd [2007] HKCU 1182
● Building premises in compliance with the Buildings Ordinance as stated by

the investment company, however not
● It is a term: tenant will not open a Japanese restaurant there if
non-compliance with law; responsibility lies upon the investment company
(iii) Request to verify
Ecay v Godfrey [ 1947] 80 Lloyds Rep 286
Schawel v Reade [ 1913] 2 IR 81
(iv) Initiation or mere passing on
Routledge v McKay [ 1954] 1 WLR 615
(v) Formal recording
Heilbut Symons v Buckleton
● Statement recorded in the document that purports in a contract is a term
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3. Written documents purporting to be the contract:

The Parol Evidence Rule
2.1 The Parol Evidence Rule
Contract parties are generally barred from adducing extrinsic (or ‘parol’) evidence to add
to, vary, or contradict a document which purport to record the parties’ agreement.
Contract law accords almost sacred status to such documents; they are regarded as
exclusively embodying the ‘four corners of the contract’. The parol evidence rule
ostensibly promotes certainty and predictability and avoids evidential difficulties. But,
long list of exceptions, including:
✓ for interpretation of terms
✓ implied terms
✓ variation of contract
✓ vitiating factors
✓ collateral term
4. Collateral terms and collateral contracts
A term (or a contract) may be collateral t o the main terms (or contract). The existence of
collateral terms or contracts is said to depend on the parties’ intentions. The test is similar to that
between terms and representations (see 1. above).
Couchman v. Hill [ 1947] KB 554
● Auction of a cow
● Cow was claimed to be not pregnant, but it was
● Bidder claimed not to buy the cow if it was pregnant
● Cow died of miscarriage two months later
● The seller claimed to be excluded from all legal liabilities as stated in a written contract
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Functions:
(i) Conferring the remedial advantages of an action for breach over that for misrepresentation.
(ii) O
 verriding inconsistent terms in the main written contract: circumventing the parol evidence
rule to allow a party to add to , vary, or contradict a contractual document.
● City and Westminster Properties (1934) Ltd v. Mudd [1959] Ch. 129
● Mendelssohn v. Normand Ltd [ 1976] 1 WLR 1078
● Bank of China (HK) Ltd v Fung Chin Kan ( 2002) 5 HKCFAR 515
III. INCORPORATION
Was the Term Incorporated into the

Contract?
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One party may attempt to rely on a term in a document purporting to be the contract but
the term is unknown and very prejudicial to the claimant. Is the term binding? A
statement in a document can be ‘incorporated’ into the contract by:
(i) signature;
(ii) reasonable notice of the written term; or
(iii) previous dealing or custom
1. Incorporation by signature
1.1 The rule

L’Estrange v Graucob, [1934] 2 KB 394
Grogan v Robin Meredith Plant Hire [ 1996] CLC 1127
1.2 Exceptions to the signature rule:
(i) Non est factum
(ii) Vitiating factors such as misrepresentation, mistake, undue influence,

unconscionability, duress, or incapacity
(iii) The signed document is not contractual in nature (eg is a time sheet, which is for
administrative purposes)
 obin Meredith Plant Hire [ 1996] CLC 1127

Grogan v R
1.3 Rationale for the signature rule
Ming Shiu Ching v Ming Shiu Sum ( 2006) 9 HKCFAR 334

Reliance is universally placed on signatures appended to documents by persons of
full age and understanding as signifying the signatory’s assent or adherence to what
the document states. Where such a person has signed a document which purports to
have legal effect, the law has never regarded as enough to show that he signed without
knowing its contents for the document to be disavowed. It is an everyday occurrence that
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people sign documents without reading the small (or even the large) print and therefore
sign without actually knowing the terms (or all the terms) of the document signed. That
they are held to the documents which they have chosen to sign unless there is shown to
be a recognized legal basis for concluding that the apparent consent has been in some
way vitiated or that reliance on that document by some other person falls into some
category of unconscionable conduct justifying relief in equity.
Incorporation by reference
1.4 Criticisms of the signature rule
Lord Denning:
● “going back to my junior days when I induced the Court of Appeal to uphold a
most unrighteous clause in L’Estrange v Graucob ” . [1986] Denning Law
Journal 1 at 2
● “In those days I wasn’t concerned so much with the rightness of the cause. I was
concerned only, as a member of the Bar, to win if I could.” “This is My Life”
[1986] Denning Law Journal 17 at 20
● “... since I have become a judge I have done everything I can to get that
decision altered, and if students are up to date with their reading of the Law
Reports, I think they will find good ground for argument somewhere in them.”
“The Right Standards of Conduct” (1957) Law Society’s Gazette 609 at 610
1.5 Reform?
Tilden Rent-a-Car Co v Clendenning ( 1978), 83 DLR (3d) 400
The Ontario Court of Appeal held that a signor is only bound when
  is reasonable for
it
the enforcing party to believe that the signature manifests assent to the onerous
term sought to be enforced. In the hurried, informal, or consumer transaction w  ith
finely printed, unexpected, and harsh clauses, ‘the signature by itself does not truly
represent an acquiescence to unusual and onerous terms which are inconsistent with
the true object of the contract’.
● The enforcing party should first take reasonable measures to draw such terms to
the attention of the other party’
Wing On Properties and Securities Co Ltd v Wave Front Enterprise (HK) Ltd [ 2007] 2
HKC 54
about:blank 42/232
● Accepted Tilden Rent-A-Car in principle
Citibank (HK) Ltd v Au Wing Lun [ 2006] HKCU 42
1.6 Entire Agreement Clause
● Agreed parol evidence clause

● The function is to the exclusion of collateral terms
Deepack Fertilisers & Petrochemicals Corp v ICI Chemicals and Polymers Ltd [ 1999] 1
Lloyd’s Rep 387
Inntrepreneur Pub Co (GL) v East Crown Ltd [ 2000] 2 Lloyd’s Rep 611
The purpose of an entire agreement clause is to preclude a party to a written agreement
from threshing through the undergrowth and finding, in the course of negotiations,
some chance remark or statement (often long forgotten what difficult to recall or
explain) upon which to found a claim... to the existence of the collateral warranty. The
entire agreement clause obviates the occasion for any such search, and the peril to the
contracting parties posed by the need may arise in its absence to conduct such as
search. For such a clause constitutes a binding agreement between the parties that the
full contractual terms are to be found in the document containing the clause and not
elsewhere, and that, accordingly, any promises and assurances made in the course of
negotiations (which, in the absence of such a clause, might have effect as a collateral
warranty) shall have no contractual force, save in so far as they are reflected and given
effect in that document. The operation of the clause is not to render the evidence of the
collateral warranty inadmissible in evidence... it is to denude what would otherwise
constitute a collateral warranty of legal effect.
2. Incorporation by notice in unsigned documents

2.1 The rule- The party seeking to rely on the terms must show that he has given the other
party adequate notice o f them. The notice must be:
(i) given at or before c ontract formation;
(ii) in a document intended to have contractual effect;
(iii) reasonable ( ie commensurate with the harshness or unexpectedness of the
terms).
Parker v. South Eastern Railway Co ( 1877) 2 CPD 416
about:blank 43/232
The general rule is that the recipient of a ticket is bound if he had reasonable notice that
the document contains terms , even if he remains ignorant of the term. Enough if railway
gave notice sufficient to inform people in general that the ticket contains conditions; a
particular plaintiff ought not to be in a better position due to his exceptional ignorance or
stupidity or carelessness For onerous and unusual terms- ‘the more unreasonable a clause
is, the greater the notice which must be given of it’.
Thornton v. Shoe Lane Parking Ltd, [1971] 2 QB 163
Denning LJ said that the exclusion clause is ‘so wide and so destructive of rights that the
court should not hold any man bound by it unless it is drawn to his attention in the most explicit
way . . . In order to give sufficient notice, it would need to be printed in red ink with a red hand
pointing to it—or something equally startling’.
Unsigned documents
A party has notice
● Of terms; if know document contains terms

● Of onerous and unusual terms; notice reasonable to draw the adhering party’s
attention to it
Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd, [1989] 1 QB 433
Wong Wai-Chun v The China Navigation Co Ltd [ 1969] HKLR 471

‘The acceptance of a ticket shall be taken as conclusive evidence that neither the
passenger nor any other person shall have any right of action whatsoever against
the owners, the managers and agents, in respect of any loss, damage, injury,
whether fatal or otherwise, inconvenience, or delayed to the passenger or his
baggage or other property howsoever and wheresoever caused.’
‘This ticket is issued subject to the company’s terms and conditions of carriage
which may be read in the office of the principal agents in each port.’
‘anyone who thinks that in the Far East the majority of persons who entered
into these types of contract know that conditions are likely to be imposed and
that such conditions will be set out in ticket is living in a dream world of his
own’
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Chan Woon-hung (t/a Ocean Plastic Factory) v Associated Bankers Insurance Co Ltd
[1993] 2 HKLR 127 PC on appeal from HK
● Bound even read and known

● Contracted previously before and advised in Chinese
● Negligence
3. Incorporation by previous course of dealing or trade usage
British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [ 1975] QB
303
Hollier v. Rambler Motors (AMC) Ltd [ 1972] 2 QB 71 (BBF

978)
III. INTERPRETATION OF TERMS
Once courts have identified the binding terms of the contract, the next question is what
those terms mean; in particular, whether and how they apply to the dispute before the
court. Lord Goff said, ‘the staple diet of the Commercial Court can be summed up in one
1 
word— “Construction”’. It is for the courts t o determine the meaning of contractual
terms and, as with other areas of contract law, a number of policies vie for expression in
this area. The cases reveal the usual tension between: o the need for certainty v
administrative efficiency; o giving effect to the intentions of the parties v avoiding unfair
results.
1. Contextual approach
Investors Compensation Scheme Ltd v. West Bromwich Building Society [ 1998] 1 WLR 896
(1) Objective approach: The overall aim of interpretation is the ‘ascertainment of the
meaning which the document would convey to a reasonable person having all the
background knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the contract.’
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(2) Contextuality: ‘ subject to the requirement that it should have been reasonably available to
the parties and to the exception to be mentioned [barring evidence of pre-contractual
negotiations]. . . , it includes absolutely anything which would have affected the way in
which the language of the document would have been understood by a reasonable man’;
‘there is no conceptual limit to what can be regarded as background’. It should be a question
of the weight attached to the evidence rather than of artificially restricting the scope of
admissible evidence.
(3) Meaning of the p erson using the words: T he meaning of words is a matter of dictionaries
and grammars; the meaning of the document is what the parties using those words against the
relevant background would reasonably have been understood to mean. The background may
not merely enable the reasonable man to choose between the possible meanings of words
which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the
parties must, for whatever reason, have used the wrong words or syntax . . . (4) Something
must have gone wrong: i f one would nevertheless conclude from the background that
something must have gone wrong w  ith the language, the law does not require judges to
attribute to the parties an intention which they plainly could not have had . . . . [As Lord
Diplock said in The Antaios ( 1984)] ‘if detailed semantic and syntactical analysis of words in
a commercial contract is going to lead to a conclusion that flouts business commonsense, it
must be made to yield to business commonsense’
Chartbrook Ltd v. Persimmon Homes Ltd [ 2009] 1 AC 1101
if it is clear that something has gone wrong with the language and i t is clear what a
reasonable person would have understood the parties to have meant, then there is no ‘limit to
the amount of “red ink” or verbal rearrangement or correction which the court is allowed’.
R Goff, ‘Commercial Contracts and the Commercial Court’ [1984] 1 LMCLQ 3 82, 385.
(5) Bias towards fairness

(i) where the contract appears one-sided or onerous, it will be construed strictly
against the party seeking to rely on it; contra proferentem: any ambiguity in a
contractual term to be construed against the party who introduced it. (ii) an
interpretation that leads to very unreasonable results will be avoided unless
it is required by clear words and there is no other tenable construction; (6)
The specific overrides the general
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(iii) a specially agreed provision should override an inconsistent standard provision

which has not been individually negotiated; and (iv) a more precise provision
should override an inconsistent general provision.
2. When will court conclude that something has gone wrong with the language? If
natural
meaning:
(i) is inconsistent with the parties’ intention a s evinced by the context (Chartbrook Ltd v
Persimmon Homes) ;
(ii) would not accord with business common sense. (iii) would lead to very unfair results.
Staughton describes this as ‘the most important’2 principle of interpretation; namely, the
presumption against unreasonable results. Lord Reid in L Schuler AG v Wickman
Machine Tool Sales Ltd [ 1973] UKHL 2
‘The more unreasonable the result the more unlikely it is that the parties can have
intended it, and if they do intend it the more necessary it is that they should make that
intention abundantly clear.’ When speaking to students, I tell them that what Lord Reid
said there is something which they should learn by heart.
3. Criticisms of contextual approach

Stoughton
Sumption
4. Literal or contextual?
Rainy Sky SA v Kookmin Bank [ 2011] UKSC 50
Arnold v Britton [ 2015] UKSC 36
Wood v Capita [ 2017] UKSC 24
(i) Objective approach (ii) A unitary and iterative exercise

balancing text and context.
C Staughton, ‘How Do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 3 03, 308.
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Fully Profit (Asia) Ltd v Secretary for Justice ( 2013) 16 HKCFAR 351
 here rival interpretations are possible, need to take account of:

(iii) W
✓ The nature, formality and quality of drafting of the contract
✓ The coherence of the agreement
Mitsui Construction Co Ltd v AG of HK [ 1987] 1 HKC 31, 39
It is obvious that this is a badly drafted contract. This, of course, affords no reason to depart
from the fundamental rule of construction of contractual documents that the intention of the
parties must be ascertained from the language to have used interpreted in the light of the
relevant factual situation in which the contract was made. But the poorer the quality of the
drafting, the less willing any court should be to be driven by semantic niceties to attribute to
the parties an improbable and unbusinesslike intention, if the language used, whatever it may
lack in precision, is reasonably capable of an interpretation which attributes to the parties an
intention to make provision for contingencies inherent in the work contracted for on a
sensible and businesslike basis
(iv) T
 he court cannot have regard to:
 subjective declarations of intention;
 pre-contractual negotiations and post-contractual conduct;
 hindsight; and
 what a reasonable and properly informed party would have intended, since this would
illegitimately rewrite the parties’ bargain.
 he court should bear in mind that ‘business common sense’, but:
(v) T
● may be unclear;
● should not be invoked to undervalue the importance of the language; and
● should not override what turned out to be a bad bargain for one of the
parties.
5. Extrinsic evidence of prior negotiations and subsequent conduct

5.1 The rule: I nadmissibility of evidence of conduct subsequent to formation
Investors Compensation Scheme Ltd v. West Bromwich Building Society [ 1998] 1 WLR 896
Chartbrook Ltd v. Persimmon Homes Ltd [ 2009] 1 AC 1101
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Schuler AG v Wickman Machine Tool Sales [ 1973] UKHL 2
5.2 Justifications
5.3 What should be the law on the admission of evidence of prior negotiations and
subsequent conduct?
Arguments for and against?

pre-contractual negotiation
IV. IMPLIED TERMS
1. Introduction
Terms may be implied:
● In fact
● In law (statute Eg SOGO (Cap 26), common law or custom). Judicial
caution
2. Implication in fact
2.1. The traditional test
• Business efficacy The Moorcock ( 1889)
• Officious bystander Shirlaw v Southern Foundries ( 1926) Ltd ( 1939)
Kenland Realty Ltd v Whale View Investment Ltd & Another ( 2001) 4 HKCFAR 381,
393
BP Refinery(Western point) Pty Ltd v Shire of Hastings ( 1978) 52 ALJR 20, 26
(1) It must be reasonable and equitable;
(2) Kitchen must be necessary to give business efficacy to the contract, so that no term
will be implied if the contract as effective without it;
(3) It must be so obvious that ‘it goes without saying’;
(4) It must be capable of clear expression;
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(5) It must not contradict any express term of the contract.
Indicators against implication in fact
2.2 Implied in fact terms different from construction
Attorney-General of Belize v Belize Telecom Ltd [ 2009] UKPC 10
Marks & Spencer Plc v BNP Paribas Securities Services Trust Co [ 2015] UKSC
72
Lord Hoffman’s observations in Belize s hould be treated as ‘a characteristically inspired
discussion rather than authoritative guidance on the law of implied terms’. The law is
that: (i) ‘a term can only be implied if, without the term, the contract would lack
commercial or practical efficacy’. His lordship warned against any suggestion that the
strict test for implying terms had been relaxed; the test is still necessity. (ii)
Interpretation is different from implication; interpretation involves construing the
words the parties use in their contract and precedes a ny question of implication. (iii) A
term should not be implied into a detailed commercial contract merely because it
appears fair or because the parties would have agreed if it had been suggested to them;
fairness and reasonableness are necessary but not sufficient for implied term. (iv) 
The business necessity and obviousness tests could be alternatives, in the sense
that only one of them needs to be satisfied:
Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc, The
Reborn [ 2009] EWCA Civ 531
Twinkle Step Investment Ltd v Smart International Industrial Ltd ( 1999) 2 HKCAPR 255,
257, 263 D-G The Court found an implied term in agreements for the sale and purchase of
land that the purchaser was entitled to view the premises immediately before completion.
Litton PJ said:
What’s more natural then, when the vendor had contracted to give vacant position to the
purchaser, that he should afford the purchaser an opportunity to see that he was indeed
getting what he had bargained for, prior to handing over his money? There are, as I see them,
rights and obligations necessarily flowing from the contract the parties had made.
Approaching the matter in this way, the court is not exercising discretion by imposing terms
which appear to the Court to be fair and reasonable; the court is simply giving true effect to
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the contract which the parties themselves have made.
2.3 Implied limits on the exercise of discretionary power An term may give one party the
discretion to determine a particular matter that affects the rights or liabilities of the other
party. This power may be conferred in an unqualified w  ay, using terms such as ‘satisfied’,
‘approved’, ‘as he thinks fit’ or ‘in his sole discretion’
Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) [ 1991] 2
Lloyd's Rep. 508
‘where A and B contract with each other to confer a discretion on A, that does not
render B subject to A’s uninhibited whim’
Braganza v BP Shipping Ltd [ 2015] UKSC 17, Lady Hale:

Contractual terms in which one party to the contract is given the power to exercise a
discretion, or to form an opinion as to relevant facts, are extremely common. .. [T]he
party who is charged with making decisions which affect the rights of both parties to the
contract has a clear conflict of interest. That conflict is heightened where there is a
significant imbalance of power between the contracting parties .... The courts have
therefore sought to ensure that such contractual powers are not abused. They have done
so by implying a term as to the manner in which such powers may be exercised, a term
which may vary according to the terms of the contract and the context in which the
decision-making power is given.... [T]he authorities show that not only must the
discretion be exercised honestly and in good faith, but, having regard to the provisions
of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously
or unreasonably.”
Hayes v Willoughby [ 2013] UKSC 17 What is required is some logical connection between the
evidence and the ostensible reasons for the decision, and an absence of arbitrariness, of
capriciousness or of reasoning so outrageous in its defiance of logic as to be perverse. It has two
limbs:
● the decision-making process – whether the right matters have been taken into account;
and
● the outcome – whether the result is so outrageous that no reasonable decision-maker
could have reached it.
Different strictness depending on facts, eg:

● consumer credit:
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Paragon Finance plc v Nash [ 2001] EWCA Civ 1466;

New World Development Co Ltd & Others v Sun Hung Kai Securities Ltd ( 2006)
9 HKFCAR 403
● employment:
Braganza v BP Shipping Ltd [ 2015] UKSC 17
● commercial contracts:
Paragon Finance plc v Plender [ 2005] EWCA Civ 760
Watson, Hersov and Moore v Watchfunder.co.uk ltd [ 2017] EWHC 1275 (Comm)
Ying Ho Co Ltd & Others v Secretary for Justice ( 2004) 7 HKCFAR 333,
373C-374E, 376B-E
2.4 Implied duty of good faith in contract performance?

Yam Seng v International Trade Corp [ 2013] EWHC 111
● Honesty
● Fair dealing
● Fidelity to the contractual purpose
3. Implication in law
Terms implied in law s et out the default terms of a definable category of contractual
relationship on the basis of wider considerations that will serve to regulate this market
transaction Scally v Southern Health & Social Services Board [ 1992] 1 AC 294 Equitable
Life Equitable Life Assurance Society v Hyman [ 2000] UKHL 39
3.1 Terms implied in law by statute
Sale of Goods Ordinance (Cap 26) implies into sale of goods contracts in commercial
contracts, eg, that:
✓ the seller has title to sell the goods (s14(1));
✓ goods sold are free from charges or encumbrances, and the buyer will enjoy quiet
possession of the goods subject to the disclosed or known rights of others before contract
formation (ss14(2));
✓ goods sold by description correspond with their description (s15(1));
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✓ goods sold in the course of business are of satisfactory quality or fitness for purpose,
unless the buyer’s attention has been drawn to, or the buyer’s examination ought to reveal, any
defect (s16) and
✓ goods sold by sample will correspond to the sample (s17) Similar terms are implied into
hire-purchase contracts by the Supply of Services (Implied Terms) Ordinance (Cap 457).
3.2 Terms implied in law by custom

Cunliffe-Owen v Teather & Greenwood [ 1967] 1 WLR 1421
It must be: certain, notorious, recognised as binding, reasonable and consistent with
the express terms or nature of the contract Applied in Hyundai engineering &
construction Co Ltd v UBAF (Hong Kong) Ltd [ 2013] HKEC 1368
Faranrah ltd v Cherry Garments Co Ltd [ 2004] HKCU 490
3.3 Terms implied in law by the courts
It is implied in employment contracts that:
✓ the employee will serve diligently, loyally and with reasonable competence (Lister v
Romford Ice & Cold Storage Co Ltd [ 1956] UKHL 6);
✓ the employer will not require the employee to act unlawfully (Gregory v Ford ( 1951) All
E.R 121);
✓ the employer will provide safe premises (Matthews v Kuwait Bechtel Corp [ 1959] 2 Q.B.
57), and
✓take reasonable care not to endanger the employee’s health (Johnstone v Bloomsbury
Health Authority [ 1992] QB 333); and
✓ the parties owe each other a duty of trust and confidence (Malik v Bank of Credit and
Commerce Intl [ 1997] UKHL 23)
It is implied into building contracts that:

✓ the work will be done in a good and workmanlike manner, the builder will use good and
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proper materials and the building, once completed, will be reasonably fit for human
habitation (Miller v Cannon Hill Estates Ltd ( 1931) 2 KB 113).
3.4 The test for terms implied in law
Liverpool CC v Irwin [ 1977] AC 239
Necessity v reasonableness- which is the law? Which should be the law?

Atiyah:
the difference between the judges on this point seems somewhat unreal. . . . It is not
necessary t o have lifts in blocks of flats ten storeys high [indeed high-rise buildings
predate the invention of lifts], though it would no doubt be exceedingly inconvenient
not to have them. So ‘necessary’ really seems to mean ‘reasonably necessary’, and that
must mean, ‘reasonably necessary having regard to the context and the price’. So in the
end there does not seem to be much difference between what is necessary and what is
reasonable.
Lord Denning MR in Shell UK v Lostock Garages ( 1976): The question

is:
has the law already defined the obligation or the extent of it? If so, let it be followed. If not,
look to see what would be reasonable in the general run of such cases . . . and then say what
the obligation shall be . . . the obligation is a legal incident of the relationship which is
 yson LJ in Crossley v Faithful & Gould Holdings Ltd ( 2004):
attached by the law. D
rather than focus on the elusive concept of necessity, it is better to recognise that, to
some extent at least, the existence and scope of standardised implied terms raise
questions of reasonableness, fairness and the balancing of competing policy
considerations.
Peden, ‘Policy Concerns Behind Implications of Terms in Law’ (2001) 117 LQR 4 59
✓ whether the proposed term is consistent with the existing law;
✓ how it would affect the parties; and
✓ wider issues of fairness in society.
Société Générale, London Branch v Geys [ 2012] UKSC 63, [55]-[60]
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‘the existence and scope of standardised implied terms raise questions of reasonableness,
fairness and the balancing of competing policy considerations’.
Implied in law terms are for a class of contracts: Scally v Southern

Health & Social Services Board [ 1992] 1 AC 294
A term was implied into a very narrow subcategory of employment contracts, requiring the
employer to take reasonable steps to inform their employees of this right in cases
where:
(a) a particular term makes a valuable right available to an employee contingent
on her taking action; (b) the term results from collective bargaining; and (c) the
employee cannot reasonably be expected to know of the term without being
notified.
Overlap between terms implied in fact and in

law.
Terms implied in law are imposed by the law, not based on the parties’
intentions.
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1
M Chen-Wishart: Contract 2019-20
LAW OF CONTRACT 2019-20
TOPIC 4 UNFAIR TERMS:

INCLUDING EXEMPTION CLAUSES
1. INTRODUCTION
Recall the problems with standard for contracts: one of these is the inclusion of
terms that exclude or exempt liability. They can be deprived of effect if:
● they are not INCORPORATED;
● properly INTERPRETED, they do not cover what has happened;
● legislation make them unenforceable.
2. INCORPORATION
Recall: (topic 3)
● Signature rule; exceptions: including Tilden Rent-a-Car Co v Clendenning
(1978), 83 DLR (3d) 400
● Unsigned documents: need notice of terms, and reasonable notice of

onerous or unusual terms
● Previous dealing
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2
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3
3. INTERPRETATION OF EXEMPTION CLAUSES
3.1 Then and now
BCCI v Ali [2001] UKHL 8
Judicial creativity, bordering on judicial legislation’ has sought to prevent
contract-breakers from escaping the normal consequences of breach under the
‘cover’ of exemption clauses.
Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827
Legislation to control unfair exemption clauses means that:
any need for this kind of judicial distortion of the English language has been
banished . . . In commercial contracts negotiated between businessmen capable of
looking after their own interests and of deciding how risks inherent in the
performance of various kinds of contract can be most economically borne (generally
by insurance), it is… wrong to place a strained construction upon words in an
exclusion clause which are clear and fairly susceptible of one meaning only.
3.2 Fundamental breach

The ‘rule of law approach’: In essence, parties were barred from relying on
clauses which excluded liability for a breach which is fundamental in the sense
that it ‘goes to the very root’ of the contract.
Karsales (Harrow) Ltd v Wallis [1956] EWCA Civ 4
This approach was rejected (The Suisse Atlantique [1967] 1 AC 361) in favour
of:
The rule of construction approach: based on the assumption that the more
unreasonable the result, the less likely it is that the parties could have intended it
and the court is to interpret the clause as applying to breach. Thus, very clear
words will be necessary to exclude liability for breach of terms that go to the
root/essential character/purpose of the contract. However, such an exclusion is
effective if it is clearly set out and fairly susceptible to that interpretation.
eg
Photo Production v Securicor Transport [1980] UKHL 2

‘under no circumstances’ were security providers to ‘be responsible for any
injurious act or default by any employee . . . unless [this] . . . could have been
foreseen and avoided by the exercise of due diligence’.
1.1 Exemption for deliberate breach
Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013]
EWCA Civ 38. Contract term provided that MCCC would have
“no liability whatsoever in contract, tort (including negligence) or otherwise for
any loss of goodwill, business, revenue or profits…suffered by the Contractor
or any third party in relation to this Agreement “.
Carewins Development (China) Ltd v Bright Fortune Shipping Ltd [2009] 5 HKC
160. P engaged D to carry goods, not to be delivered without getting the
necessary papers from the recipients (that ensured P would be paid by
recipients). D breached this term.
Contract term states:
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4
“shall be under no liability in any capacity whatsoever for loss or misdelivery of
or damage to the goods however cause whether or not through the negligence
of the carrier, his servants or agents or sub-contractor or for any direct or
indirect loss or damage caused by delay or for any indirect or consequential
loss or damage”
● interpretation of ‘misdelivery’:
o include deliberate breach of basic obligation
o only includes non-deliberate breach
“an essential purpose of the contract is… that the goods should be delivered by the
carrier only against surrender of an original bill of lading….[The first
interpretation] would mean that the carrier could with impunity consciously
disregard that primary contractual purpose by releasing the goods well knowing
that the recipient has not provided any bill of lading relative to the cargo. This is
the construction which the court inclines against as it would deprive the shipper
of an essential protective obligation and seriously undermine the purpose of bills
of lading.”
Possible but courts will lean against interpreting it to cover the breach- return of
‘fundamental breach’?
1.2 Contra proferentem interpretation
Need for ambiguity in interpretation of the term.
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803,
296-7, Lord Denning:
Faced with this abuse of power—by the strong against the weak—by the use of the
small print of the conditions—the judges did what they could to put a curb upon it.
They still had before them the idol, ‘freedom of contract’. They still knelt down and
worshipped it, but they concealed under their cloaks a secret weapon. They used it to
stab the idol in the back. This weapon was called ‘the true construction of the
contract’. They used it with great skill and ingenuity. They used it so as to depart
from the natural meaning of the words of the exemption clause and to put upon them
a strained and unnatural construction. In case after case, they said that the words
were not strong enough to give the big concern exemption from liability; or that in
the circumstances the big concern was not entitled to rely on the exemption clause...
In short, whenever the wide words—in their natural meaning—would give rise to an
unreasonable result, the judges either rejected them as repugnant to the main purpose
of the contract, or else cut them down to size in order to produce a reasonable result.
฀ Andrews Brothers (Bournemouth) Ltd v Singer and Co Ltd [1934] 1 KB 17 A

clause in a contract for the sale of a ‘new car’ excluded: ‘all conditions,
warranties and liabilities implied by statute, common law or otherwise’ was
held not to protect the seller from liability for delivering a used car (done 550
miles). The clause only covered breach of implied conditions and not of an
express term to deliver a new car.
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5
฀ Beck & Co v Szymanowski & Co [1923] AC 43, a term deemed the sewing
cotton delivered complied with contract, unless the sellers were notified
within 14 days of delivery. The buyers complained 18 months later that the
cotton received was on average 12 yards short of the stipulated 200 yards
long. The House of Lords found the sellers liable on the basis that the
relevant clause only applied to ‘goods delivered’ while the complaint was of
partial non-delivery.
฀ Closely related is the ‘peas not beans’ rule.
Chanter v Hopkins (1838) 4 M & W 399 (Exch)
Lord Abinger (at 404):
‘If a man offers to buy peas off another, and he sends him beans, he does not
perform his contract.’ An exemption clause protects from defective performance,
not from non-performance. This echoes the fundamental breach rule below.
Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128:
Commercial parties are entitled to allocate between them the risks of something going
wrong in their contractual relationship in any way they choose. Nor is [contra
proferentem] to be mechanistically applied wherever an ambiguity is identified in an
exclusion clause. The court must still use all its tools of linguistic, purposive and
common-sense analysis to discern what the clause really means.
1.3 Distinction between Total Exclusion and Limitation Clauses

Ailsa Craig Fishing Co v. Malvern Fishing Co [1983] 1 WLR 964
Criticism of the distinction
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161
CLR 500
1.4 Exemption of negligence liability

Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71
Canada Steamship Lines Ltd v R [1952] AC 192
(i) Where express exemption for negligence:
An exemption clause will only cover negligence liability if it expressly
exempts such liability; use of words synonymous with negligence may be
effective, but even exempting liability for ‘loss whatsoever or howsoever
occasioned’ may not be sufficiently express.
(ii) Where no express exemption for negligence:
Here, the question is whether the words used are wide enough in their ordinary
meaning to cover negligence liability (any doubt being resolved contra
proferentem). Examples of such words are: ‘will not be liable for any accident
howsoever caused’, ‘shall not be liable under any circumstances whatsoever
for theft’ and excluding liability ‘arising from any cause whatsoever’.
• If not, the exemption will not cover negligence liability.
• If so, and the clause only limits rather than excludes liability, the term is
effective.
• If a clause which is apparently wide enough to cover negligence totally
excludes liability, another question arises.
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6
(iii) Can the exemption cover liability other than negligence?
• If not, and the contract-breaker’s only possible liability is for negligence,
then the exemption is effective.
Alderslade v Hendon Laundry Ltd [1945] KB 189

● If the clause can apply to liability other than negligence (eg it can also
cover strict liability for breach of contract or for breach of statutory duty),
it will only exempt from the non-negligence liability and not the
negligence liability.
Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397:

The Canada Steamship principles ‘should not be applied
mechanistically and ought to be regarded as no more than
guidelines.’ They do not provide an ‘automatic solution’ to a
particular case. On the facts, the Court held that there was no
justification for reading the words ‘any claim’ narrowly to
exclude negligence claims.
1.5 Modern approach

Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827
Legislation to control unfair exemption clauses means that:
any need for this kind of judicial distortion of the English
language has been banished . . . In commercial contracts
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7
negotiated between businessmen capable of looking after their
own interests and of deciding how risks inherent in the
performance of various kinds of contract can be most
economically borne (generally by insurance), it is, in my view,
wrong to place a strained construction upon words in an exclusion
clause which are clear and fairly susceptible of one meaning only.
Investors Compensation Scheme Ltd v. West Bromwich Building

Society [1998] 1 WLR 896, 912, Lord Hoffmann declares that
‘[a]lmost all the old intellectual baggage of “legal” interpretation
has been discarded’, including the ‘artificial rules’ relating to the
construction of exemption clauses (BCCI v Ali (2001) at [62]).
This is an overstatement as it may be too soon to write the
obituary for the old rules, which have been approved by appellate
courts.
4. CONTROL OF EXEMPTION CLAUSES ORDINANCE (CAP

71) [‘CECO’]
4.1 Introduction
A. 1. Terms exempting 3. Terms exempting 4. Terms exempting

Reviewable liability for liability for breach of liability for breach of
Terms: negligence specific statutory contract
(Ss 7, 10 CECO) implied terms in sale (S 8 CECO)
S5
and supply contracts
(Ss 11, 12 CECO)
B. Who may
be ‘Business liability’
prejudiced?
S2
C. Who are
protected?
Consumers ✔ ✔ ✔
S4
Businesses ✔ ✔ if dealing on the other’s

S2 standard written terms
D. The Ineffective ouright or Ineffective ouright Effective if reasonable

review only effective against against consumers;
mechanism if reasonable only effective against
S3 businesses if
reasonable
schedule 2
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8
4.1.1 A ‘person’
‘Includes a body of persons corporate or unincorporated.’
4.1.2 Business Liability

CECO s2(1)
‘business’ includes a profession and the activities of a public body, a
public authority, or a board, commission, committee or other body
appointed by the Chief Executive or Government
CECO s2(2)
(2) In the case of both contract and tort, sections 7 to 12 apply (except
where the contrary is stated in section 11(4)) only to business liability,
that is liability for breach of obligations or duties arising-
(a) from things done or omitted to be done by a person in the
course of a business (whether his own business or another's); or
(b) from the occupation of premises used for business purposes of
the occupier, and references to liability are to be read accordingly;
but liability of an occupier of premises for breach of an obligation or
duty towards a person obtaining access to the premises for
recreational or educational purposes, being liability for loss or
damage suffered by reason of the dangerous state of the premises, is
not a business liability of the occupier unless granting that person
such access for the purposes concerned falls within the business
purposes of the occupier.
4.1.3 Reasonableness test

CECO s.3
(1) In relation to a contract term, the requirement of reasonableness
for the purposes of this Ordinance and section 4 of the
Misrepresentation Ordinance (Cap 284) is satisfied only if the court or
arbitrator determines that the term was a fair and reasonable one to be
included having regard to the circumstances which were, or ought
reasonably to have been, known to or in the contemplation of the
parties when the contract was made.
(3) In relation to a notice (not being a notice having contractual effect),

the requirement of reasonableness under this Ordinance is satisfied only
if the court or arbitrator determines that it would be fair and reasonable
to allow reliance on it, having regard to all the circumstances obtaining
when the liability arose or (but for the notice) would have arisen.
(4) In determining (under this Ordinance or the Misrepresentation

Ordinance (Cap 284)) whether a contract term or notice satisfies the
requirement of reasonableness, the court or arbitrator shall have
regard in particular to whether (and, if so, to what extent) the
language in which the term or notice is expressed is a language
understood by the person as against whom another person seeks to
rely upon the term or notice.
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(5) Where by reference to a contract term or notice a person seeks to
restrict liability to a specified sum of money, and the question arises
(under this Ordinance or the Misrepresentation Ordinance (Cap 284))
whether the term or notice satisfies the requirement of reasonableness,
the court or arbitrator shall have regard in particular (but without
prejudice to subsection (2) or (4)) to-
(a) the resources which he could expect to be available to him
for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
(6) It is for the person claiming that a contract term or notice satisfies
the requirement of reasonableness to prove that it does.
Schedule 2 “Guidelines” for application of reasonableness test

The matters to which the court or arbitrator shall have regard in particular
for the purposes of sections 11(3) and
12(3) and 4 are any of the following which appear to be relevant-
(a) the strength of the bargaining positions of the parties relative to each
other, taking into account (among other things) alternative means by
which the customer's requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or
in accepting it had an opportunity of entering into a similar contract
with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the
existence and extent of the term (having regard, among other things, to
any custom of the trade and any previous course of dealing between the
parties);
(d) where the term excludes or restricts any relevant liability if some condition
is not complied with, whether it was reasonable at the time of the contract
to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special
order of the customer.
Always Win Ltd v Autofit Ltd [1995] 2 HKC 48
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd

[1983] 2 AC 803
G (farmers) bought winter cabbage seeds from F but received autumn cabbage
seeds that produced inferior plants, useless for G’s purposes. G sought to
recover losses of £61,000 but an exemption clause limited damages to the cost
of the seeds (£200). The House of Lords invalidated the clause as
unreasonable. The main factors were:
(a) the availability and affordability of insurance to the seller;
(b) the seller’s breach was due to its negligence; and
(c) the seller’s past practice of settling claims in excess of the limit
imposed if it regarded the claims as ‘genuine’; this indicated that even
F regarded the clause as often inappropriate and unreasonable.
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Stag Line Ltd v Tyne Ship Repair Group Ltd (The Zinnia) [1984] 2 Lloyd’s
Rep 211
Li Kwok Heem John v Standard Charter International (USA) Ltd [2016] 1

HKC 535
5. Negligence Liability
CECO s 7
(1) A person cannot by reference to any contract term or to a notice given
to persons generally or to particular persons exclude or restrict his liability
for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or
restrict his liability for negligence except in so far as the term or notice
satisfies the requirement of reasonableness.
(3) Where a contract term or notice purports to exclude or restrict liability
for negligence a person's agreement to or awareness of it is not of itself to
be taken as indicating his voluntary acceptance of any risk
6. Liability for breach of contract

CECO s.8
(1) This section applies as between contracting parties where one of them
deals as consumer or on the other's written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term-
(a) when himself in breach of contract, exclude or restrict any liability of
his in respect of the breach; or
(b) claim to be entitled-
(i) to render a contractual performance substantially different from
that which was reasonably expected of him; or
(ii) in respect of the whole or any part of his contractual obligation,
to render no performance at all,
except in so far as (in any of the cases mentioned above in this
subsection) the contract term satisfies the requirement of
reasonableness.
Orient Overseas Container Inc v Regal Motion Industries Ltd and Tang Wai
Kuen (t/a Inter China Transport Co) [1994] 1 HKLR 282
Between two co-defendants, who should bear the cost of damage to the
plaintiff’s property while it was being transported by road from Hong Kong to
Shenzhen?
The second defendant provided the driver to the first defendant. There was an
accident in China. The second defendant relied on the cargo receipt:
‘The owner of goods shall be responsible for the damage done to the goods
during loading and unloading; the consignor or shall purchase its own
insurance. If during the consignment of goods are damaged due to any traffic
accident, theft and burglary, fire and water floods, drivers negligence and other
disaster not resistible by human beings, our company shall not be responsible
and their transportation charges are still payable.’
The court decided:
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● The clause does not cover the situation because the damage was to the
container and not the contents.
● The situation falls within s8 CECO, and was invalid for
unreasonableness:
‘Factors which seemed to me to be relevant to the present case are the short
duration of the contract and the inability of the first defendant to exercise
any meaningful control over the arrangements. In addition to this was the
evidence given by the first defendant that it was not feasible for the risk of
damage to the container being covered by insurance.’
S8(2)(b) extends the reasonableness requirement to terms which purport to

allow one party to substantially vary or not to perform part or all of his
contractual obligation.
Timeload Ltd v British Telecommunications plc [1995] EMLR 459
6.1.1 “Dealing as a Consumer”

CECO s.4
(1) A party to a contract "deals as consumer" in relation to another party
if-
(a) he neither makes the contract in the course of a
business nor holds himself out as doing so;
(b) the other party does make the contract in the course
of a business; and
(c) in the case of a contract governed by the law of sale of goods or
by section 12, the goods passing under or in pursuance of the
contract are of a type ordinarily supplied for private use or
consumption.
(2) [buyer in auction or competitive tender is not to be regarded as dealing
as consumer.
(3) It is for the person claiming that a party does not deal as consumer to
prove that he does not.
R & B Customs Brokers Co Ltd v United Dominions Trust Ltd

[1988] 1 WLR 321
R&B (a freight forwarding agent) purchased a car for its director’s personal
and business use. When the car roof suffered an irreparable leak leaving the
upholstery ‘sodden with water, mouldy and evil smelling’, R&B successfully
challenged the validity of a term excluding implied terms (as to condition or
quality or fitness for purpose) because it was ‘dealing as a consumer’. Buying
cars was only incidental to R&B’s business activity; it was not integral to it,
nor was R&B engaged in it with a sufficient degree of regularity.
7. Sale of goods
CECO s.11 Seller’s liability [s.12 is similar re other transactions under
which goods pass]
(1) Liability for breach of the obligations arising from section 14 of the
Sale of Goods Ordinance (Cap 26) (seller's implied undertakings as to
title, etc.) cannot be excluded or restricted by reference to any contract
term.
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(2) As against a person dealing as consumer, liability for breach of the
obligations arising from section 15, 16 or 17 of the Sale of Goods
Ordinance (Cap 26) (seller's implied undertakings as to conformity of
goods with description or sample, or as to their quality or fitness for a
particular purpose) cannot be excluded or restricted by reference to any
contract term.
(3) As against a person dealing otherwise than as consumer, the liability
specified in subsection (2) can be excluded or restricted by reference to a
contract term, but only in so far as the term satisfies the requirement of
reasonableness.
(4) The liabilities referred to in the section are not only the business
liabilities defined by section 2 (2), but included those arising under any
contract of sale of goods.
8. Scope of ‘terms limiting or excluding liability’

CECO s5 Varieties of exemption clauses
(1) To the extent that this Ordinance prevents the exclusion or
restriction of any liability it also prevents-
(a) making the liability or its enforcement subject to
restrictive or onerous conditions;
(b) excluding or restricting any right or remedy in respect of the
liability, or subjecting a person to any prejudice in consequence
of his pursuing any such right or remedy;
(c) excluding or restricting rules of evidence or procedure, and (to
that extent) sections 7, 10, 11 and 12 also prevent excluding or
restricting liability by reference to terms and notices which exclude
or restrict the relevant obligation or duty.
Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600

The no set-off clause was an exemption clause, and was unreasonable.
● excludes D’s ‘right’ to set-off their claims against P’s claim for the
price,
Lee Yuk Shing v Dianoor International Ltd (in liquidation) [2016] 4 HKC
535
Liquidators selling 8 gemstones, through auction, as diamond stones.
At auction, bidders were provided with written conditions of sale,
including:
Any representation or statement made by the auctioneers in any
catalogue as to the authorship, attribution, genuineness, origin, date, age,
prominence, condition, estimated selling price or otherwise of any lot is
only statement of opinion, neither the auctioneers nor the servants/agents
are responsible for the correctness of such statements. Every interested
person should exercise and rely upon his own judgement as to all matters
affecting the lots.
Bidders were also provided with a notice to bidders which provided:
All goods are sold “AS IS, WHERE IS, WITH ALL FAULTS”
illustrations, pictures or weights are for the convenience of buyers only.
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The auctioneer has used its reasonable endeavours to ensure that the
description of each lot appearing in this catalogue are accurate, but
buyers are recommended to rely upon such description at its own risk.
Lee bought seven of the stones for HK$1.155 million. In fact they were
synthetic cubic zirconia and virtually worthless.
Court:
These clauses are in substance an attempt to exclude or restrict liability.
To construe them as merely defining the extent of each parties’ contractual
obligations ‘parts company with reality’. The reality was
● that the stones were advertised and described as rough diamond
stones;
● that they were goods of a reputable international business selling
quality jewellery items;
● that the sale was conducted by a reputable auctioneer in a five star
hotel with reserve price comparable to that of genuine items; and
● that the auctioneer represented it had used its reasonable
endeavours to ensure that the descriptions were accurate.
What is the difference between ‘duty defining’ clauses and ‘exemptions

of liability’ clauses? Can you control one without controlling the other?
Smith v Eric S Bush [1990] 1 AC 831: ‘but for’ test:

- Would liability arise ‘but for’ the challenged term?
Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd [2012]
EWHC 2198 (Ch)
- Does the challenged term attempt to retrospectively alter the character
of what has gone before, to rewrite history or part company with
reality?
CECO s5(2) An agreement in writing to submit present or future

differences to arbitration is not to be treated under this Ordinance as
excluding or restricting any liability.
9. Manufacturer’s liability
CECO s.10 “Guarantee” of consumer goods

(1) In the case of goods of a type ordinarily supplied for private
use or consumption, where loss or damage-
(a) arises from the goods proving defective while in consumer
use; and
(b) results from the negligence of a person concerned in the
manufacture or distribution of the goods, liability for the loss or
damage cannot be excluded or restricted by reference to any
contract term or notice contained in or operating by reference to a
guarantee of the goods.
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14
Weakness of CECO.
10. SUPPLY OF SERVICES

Supply of Services (Implied Terms) Ordinance (cap. 457), s 8 (also s 4)
This Ordinance implies a number of terms into every contract of service eg
Section 5 Implied term as to skill and care
Section 6 Implied term as to the time of performance: reasonable
unless specified
Section 7 Implied term as consideration: reasonable unless
specified
Section 8 Exclusion or restriction of implied terms

(1) As against a party to a contract for the supply of a service who
deals as consumer, the other party cannot, by reference to any
contract term, exclude or restrict any liability of his arising under
the contract by virtue of this Ordinance.
(2) Except as provided in subsection (1), where a right, duty or
liability would arise under a contract for the supply of a service
by virtue of this Ordinance, it may (subject to subsection (3) and
the Control of Exemption Clauses Ordinance (Cap 71)) be
negatived or varied by express agreement, or by the course of
dealing between the parties, or by such usage as binds both
parties to the contract.
11. MISREPRESENTATION
Misrepresentation Ordinance (Cap 284) s.4 Avoidance of provision excluding

liability for misrepresentation
If a contract contains a term which would exclude or restrict-
(a) any liability to which a party to a contract may be subject by reason
of any misrepresentation made by him before the contract was made;
or
(b) any remedy available to another party to the contract by reason of
such a misrepresentation,
that term shall be of no effect except in so far as it satisfies the
requirement of reasonableness as stated in section 3(1) of the Control
of Exemption Clauses Ordinance (Cap 71); and it is for the person
claiming that the term satisfies that requirement to show that it does.
`
12. OTHER INEFFECTIVE EXEMPTION CLAUSES

Those misrepresented by proferens:
Curtis v Chemical Cleaning Co [1951] 1 KB 805
‘This article is accepted on condition that the company is not liable for any
damage howsoever arising’.
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15
13. Liability for fraud
S Pearson & Son v Dublin Corp [1907] AC 351
And for duress? Undue influence?
14. Other unfair terms
15. Illegality, contravention of public policy

A brief introduction (not examinable)
Patel v Mirza [2016] UKSC 42
15.1 Introduction
One doctrine that overtly controls the contents of contracts, and yet is left off the
syllabus of most contract law courses, is the so-called ‘illegality’ doctrine. For
reasons of space, a brief summary is offered here.
(i) This represents the most open and direct interference with contract parties’
freedom to determine the substance of their contracts. It is justified in
terms of the law’s refusal to support immoral or reprehensible contracts.
(ii) Before the recent Supreme Court judgment in Patel v Mirza (2016), courts
would generally neither enforce an illegal contract nor allow restitution of
any money or property transferred under it, subject to limited exceptions.
(iii) Following the majority’s reasoning in that case, the enquiry is a more
nuanced one, with the courts’ assistance likely to depend on balancing
relevant policy factors and the proportionality of denying assistance.
15.2 What contracts are illegal or contrary to public policy?

(i) Statutes may prohibit the formation, purpose or performance of certain
contracts. Eg prohibitions on the trade of certain weapons and body parts.
Gambling Ordinance (Cap 148) gambling and lotteries are unlawful unless
specifically authorized: fine of $500,000, and imprisonment of 2-7 years.
(ii) The categories of common law illegality reflect changing social and moral
values. They include contracts which:
• commit or further a criminal or civil wrong;
• interfere with the administration of justice;
• oust the jurisdiction of the court, although parties can agree to arbitrate
before resorting to the courts;
• prejudice the state, such as trading with the enemy in wartime, and
contracts which corrupt public life, like the buying of ‘honours’;
• prejudice family life, such as contracts to transfer parental rights and
duties;
• unduly restrict personal liberty, such as contracts of slavery and
‘servile’ employment contracts;
• further sexually immoral purposes, such as prostitution; however,
changes in societal attitudes mean that courts are unlikely to hold with
the past refusal to enforce contracts such as to pay rent on premises
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16
known to accommodate the promisor’s mistress or contracts between
unmarried cohabiting couples; or
• are in restraint of trade (in practice, the most important head of
illegality), whereby one party agrees to restrict her freedom to trade or
conduct her profession or business in a particular locality for a
specified time. The doctrine applies principally to employment, sales
of businesses and exclusive dealing agreements. Such restraints are
invalid to the extent that they are more than is reasonably necessary to
protect the legitimate interests of the party imposing the restraint.
15.3 What is the effect of illegality?

(i) The relevant statute may stipulate the consequence of the illegality (eg
impose a penalty or bar enforcement by either or both parties).
(ii) If not, the court must decide the consequences on the same general
principles as apply to common law illegality. These principles have
changed following the majority’s approach in Patel v Mirza, although
the precise implications of that decision are not yet clear.
(iii) It is clear, following Patel v Mirza, that restitution of the benefits
which one party conferred on the other under an illegal contract is
likely to be more widely available, not simply in the exceptional
circumstances previously recognized, which included where the
claimant:
• was less blameworthy than the defendant (eg was a member of the
protected class);
• had withdrawn from the transaction in time; or
• could establish a legal or equitable proprietary right to the property
independent of the illegal contract.
(iv) Instead of the rules-based approach that was advocated prior to Patel
v Mirza, the majority in that case supported a more flexible,
policy-based approach. In order to determine whether to allow
recovery in respect of benefits conferred under an illegal contract, the
court should consider:
(a) ‘the underlying purpose of the prohibition that had been
transgressed’ and
(b) ‘other relevant public policies which may be rendered
ineffective or less effective by denial of the claim’;
(c) it should also keep in mind ‘the possibility of overkill unless
the law is applied with a due sense of proportionality’ (Lord
Toulson).
Various factors might be relevant to this enquiry; Lord Toulson
declined to set out a ‘prescriptive or definitive list’ but suggested
potentially relevant factors included:
- ‘the seriousness of the conduct,
- its centrality to the contract,
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17
- whether it was intentional and
- whether there was marked disparity in the parties’ respective
culpability’.
(v) What about enforcement of an illegal contract? The rule of thumb

prior to Patel v Mirza was that courts would not enforce contracts
expressly or impliedly prohibited by statute or contrary to public
policy, irrespective of the claimant’s good faith, subject to some
exceptions, eg:
• A collateral contract not tainted by illegality could be enforced.
• An innocent claimant could claim damages for fraudulent
misrepresentation.
• Even a bad faith claimant could enforce the contract if:
(a) the purpose of the illegality was to protect a class of persons to
which the claimant belongs;
(b) the illegality was too remote from the contract; or
(c) the claimant was seeking to enforce a statutory entitlement (eg
against unfair dismissal) attaching to the contract.
Eg illegal worker from the mainland in HK and working, but fell
to death on the job. His dependents could bring action for
employer’s compensation.
• A good faith claimant ignorant of the illegal manner in which the
other party is performing a legal contract could enforce the
contract. Even the offender could enforce if the purpose of the
illegality was merely to impose a penalty on the offender rather
than to prohibit the contract.
• A contract was enforceable if its illegal part could be severed.
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TOPIC 5 MISREPRESENTATION
1. INTRODUCTION: ‘Can I get out of this contract?’
Even if an agreement satisfies the test of formation, its enforceability is not guaranteed. The
contract may still be avoided if there is a good reason for releasing one party from it.
(i) A’ s impaired consent;
(ii) B’ s improper behaviour in inducing A ’ s consent to the contract;
(iii) unforeseeable change of circumstances; or
(iv) the unfairness of the contract.
Topic 5 Misrepresentation and non-disclosure

Topic 6 Mistake
Topic 7 Frustration
Topic 8
● Duress,
● Undue influence,
● Non-commercial guarantees,
● Unconscionable transactions
These doctrines may render the affected contract void, voidable, or discharged. Briefly:
• most vitiating factors render a contract voidable;
• but the mistake doctrine may render the contract void; and
• the frustration doctrine automatically discharges the contract.
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2. WHAT IS AN ACTIONABLE MISREPRESENTATION?
(i) an unambiguous false statement of existing fact,

(ii) made to the plaintiff,
(iii) which induces her to enter the contract.
Proof of these allow the plaintiff to rescind the contract (i.e. contract is voidable)
If the plaintiff also (or instead) wants to claim damages, an additional element is required:
(iv) the misrepresentation must have been made with the requisite state of mind.
Fraud, negligence, section 3(1) Misrepresentation Ordinance.
Recall: when a statement turns out to be false the remedies available depend on the status of
the statement, whether a term or a representations; and
Recall how the distinction is made (see Topic 3).
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For HK:
Replace s1(a), with 2(a)
Replace s2(1) with 3(1)
Replace UCTA with CECO
Replace MA 1967 with Misrepresentation Ordinance
Delete B2B, B2C, CRA 2015
Starting at the left side, the first question is: ‘Did the statement complained of induce P into a
contract with the misrepresentor?’
฀ If the answer is ‘no’ (2) P must rely on the common law tort actions of fraudulent or
negligent misrepresentation and the equitable action for innocent misrepresentation.
● If the statement does induce a contract between the parties (1). The next question relates
to the status of the false statement, for this determines (3) the remedies available, and (4)
the law applicable to any exemptions of liability. If the statement is:
• a term, its falsity gives P an action for breach of contract; any term exempting liability
is subject to CECO.
• a representation, P can claim damages under the Misrepresentation Ordinance (MO).
Any terms exempting liability also subject to MO. The pre-existing tort and equity
actions continue to be available, the claimant will have no incentive to resort to them.
• a mere ‘puff’, it has no legal effect; P has no action.
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2.1Representations and terms: remedial significance
2.1.1 Which action to bring?

-if a statement is both a misrepresentation and a contractual term?
Which remedy is superior in the circumstances?
2.1.2 Damages: good Bargain, bad bargain

Here, C pays £50,000 for goods that turn out to be worth only £30,000 because D’s statement
was untrue.
2.1.3 Getting out of the contract

● any misrepresentation entitles the claimant to rescind the contract,
● yet only a serious breach allows P to terminate the contract (see Topic 9).
Misrepresentation Ordinance
Section 2 Removal of certain bars to rescission for innocent misrepresentation
Where a person has entered into a contract after a misrepresentation has been made to him, and—
(a) the misrepresentation has become a term of the contract; or
(b) the contract has been performed,
or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud,
he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters
mentioned in paragraphs (a) and (b).
But section 2(2) MO, which empowers courts to deny rescission by reference to
equitable considerations (see later).
2.2 Statements of fact and other statements

A representation, to be actionable, must be an unambiguous, false statement of existing fact
or law.
Overview of actionable statements and non-disclosures:
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2.2.1 Statements of fact or law

Words or by conduct: Walters v Morgan (1861) 3 De GF & J 718, 45 ER 1056.
‘a nod or a wink, or a shake of the head, or a smile from the purchaser intended to
induce the vendor to believe the existence of a non-existing fact, which might
influence the price of the subject to be sold’ is actionable.
Implied statement of fact: Spice Girls Ltd v Aprilia World Service BV [2000] EWHC Ch 140
Statement as to the law: Pankhania v Hackney LBC [2002] EWHC 2441 (Ch)
2.2.2 Statements of intention

NOT actionable UNLESS:
(i) it is a term of the contract; or
(ii) it is dishonest: a statement of intention always implies a statement of fact to the effect
that it reflects the speaker’s state of mind. Edgington v Fitzmaurice (1885) 29 Ch D 459
the state of a man’s mind is as much a fact as the state of his digestion. It is true that
it is very difficult to prove what the state of a man’s mind at a particular time is, but
if it can be ascertained it is as much a fact as anything else. A misrepresentation as
to the state of a man’s mind is, therefore, a misstatement of fact.
฀ no claim if the statement is honest.
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Wales v Wadham  [1977] 1 WLR 199

Kleinwort Benson Ltd v Malaysia Mining Corp Berhad  [1989] 1 WLR 379
2.2.3 Statements of opinion

ONLY actionable if:
(i) dishonest
(ii) no reasonable ground for it and the representor is in a better position to know the truth.
Smith v Land and House Property Corp (1884) 28 Ch D 7
where the facts are equally well known to both parties, what one of them
says to the other is frequently nothing but an expression of
opinion . . . But if the facts are not equally known to both sides, then a
statement of opinion by the one who knows the facts best involves very often
a statement of a material fact, for he impliedly states that he knows facts
which justify his opinion.
Bisset v Wilkinson [1927] AC 177
during negotiations for sale of land seller indicated that the land would support
2,000 sheep although sheep had only been farmed on a small part of the land
beforehand.
(iii) contractual terms:
Esso Petroleum Ltd v Mardon [1976] EWCA Civ 4
Oil company told prospective tenant of petrol station that estimated volume of sales
would be 200,000 gallons (which was the original estimate calculated but it did not
reflect the effect that the change in the positioning of the petrol station would have on
the likely sales).
2.2.4 ‘Puffs’
Dimmock v Hallett (1866-67) LR 2 Ch App 21
Smith v Land and House Property Corp  (1884) 28 Ch D 7
Carlill v Carbolic Smoke Ball Co  [1892] EWCA Civ 1
2.3 Silence
2.3.1 No general duty of disclosure
Smith v Hughes  LR 6 QB 597
if the vendor was aware that the purchaser thought that the article possessed that
quality, and would not have entered into the contract unless he had so thought, still
the purchaser is bound, . . . a mere abstinence from disabusing the purchaser of that
impression is not fraud or deceit; for, whatever may be the case in a court of morals,
there is no legal obligation on the vendor to inform the purchaser that he is under a
mistake, not induced by the act of the vendor.
MO only applies where the defendant makes a positive representation, and not where she is
completely silent on the matter: Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd
[1991] 2 AC 249
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2.3.2 Justification for the general no liability rule

1. Incentive to invest
2. Permissible self-interest
3. No liability for omissions
4. Uncertainty and floodgates
On the other hand,
● danger of sharp practice and unacceptable advantage-taking.
● If the knowledge is only accessible to one party or more easily discovered by one party?
● If knowledge not generated by investment?
2.3.3 Extending the scope of actionable misrepresentation

Eg
(i) Change of facts: falsification by later events
With v O’Flanagan [1936] Ch 575
The vendor of a medical practice told the purchasers that it took in £250 a year. This
was true at the time but before the contract was signed the takings had fallen to almost
nothing because the vendor had been ill.
Must the representor know of the change of circumstances?

Does the continuing representation rule apply to statements of intention? i.e. need to disclose
change of mind?
✔ Trail v Baring (1864) 4 De G J and S318
฀ Wales v Wadham  [1977] 1 WLR 199
(ii) ‘Half-truths’: only painting part of the picture

✔ Nottingham Patent Brick and Tile Co v Butler (1886) 16 QBD 778
✔ Clinicare Ltd v Orchard Homes & Developments Ltd [2004] EWHC 1694 (QB)
2.3.4 Disclosure requirement based on special relationships

(i) Contracts uberrimae fidei : contracts of utmost good faith
Eg insurance contracts, contracts of partnership, contracts to subscribe to company shares,
family settlements and contracts of guarantee.
(ii) Fiduciary relationships

Broadly speaking, fiduciary relationships arise where A entrusts B to perform a specific job,
or to hold or control A ’s property, or A trusts in or depends on B. Where B  abuses A’s trust to
obtain an advantage at A ’ s expense, B ‘will not be permitted to retain the advantage, although
the transaction could not have been impeached if no such confidential relation had existed’
Tate v Williamson (1886) LR 2 Ch App 55
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2.3.5 Indirect techniques giving relief for non-disclosure

The law protects ignorant parties by giving the knowing party incentives to disclose (mainly
the terms of the contract) in a number of situations, eg:
(i) Where A knows of B’s mistake as to the terms of the contract, the contract is void.
(ii) Onerous or unusual terms in an unsigned document can only bind a party who had
reasonable notice of them before the conclusion of the contract.
(iii) Statutory duties of disclosure
(iv) The use of implied terms: Rather than requiring A to disclose departures from B’s
reasonable expectation, implied terms make these expectations enforceable unless A discloses
the departures. Moreover, A may be barred from excluding these implied terms (eg under
CECO).
2.4Made to the claimant
An actionable misrepresentation must have been addressed either to P directly, or to a third

party with the intention that it be passed on to P, who may be a member of the public at large.
2.5 Inducement and materiality

2.5.1 Inducement
The misrepresentation must have induced (caused) P to enter into the contract with D. i.e. P
would not have entered the contract ‘but for’ the misrepresentation.
But, the standard of causation required is lowered in the case of fraud: the misrepresentation
need only be ‘one of’ her reasons for entering into the contract: Edgington v Fitzmaurice
(1885) 29 Ch D 459.
Up to the representor to show that the representee was not induced by it to enter the
transaction Vahey v Kenyon  [2013] EWCA Civ 658
The fact that P could have, but did not, verify the accuracy of the representation will not
ordinarily bar her claim: Redgrave v Hurd (1881) 20 Ch D 1
‘[t]he representation once made relieves the party from an
investigation . . . [Ordinarily], the mere fact that he does not avail himself of the
opportunity of testing the accuracy of the representation made to him will not enable
the opposing party to succeed’.
But, Smith v Bush [1990] UKHL 1

Unreasonable of C to rely: Co-operative Bank Plc v Hayes Freehold Ltd  [2017] EWHC 1820
(Ch) (A party is not entitled to rely on a statement that the party was reasonably expected to
have checked by its lawyers)
Taberna Europe CDO II Plc v Selskabet [2016] EWCA Civ 1262, [2017] Q.B. 633
“In an age when most commercial documents exist primarily in electronic form and
can be made available to a wide audience at the touch of a button it is important not to
allow inroads to be made too easily into the principles enunciated in cases such as
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Peek v Gurney . . . In order for a representation in a document to be actionable at the

suit of the recipient there has to be a connection between the maker and the recipient
of a kind that enables the court to be satisfied that the maker was intending the
recipient to rely on the document in a particular way”. On the facts, the defendant had
encouraged the party selling the investments to direct the investor to the information
on the defendant’s website.
No requisite inducement if P:
฀ is unaware  of the representation: Horsfall v Thomas (1862)
 1 H & C 90
฀ is unaffected  by the representation because she relies on other information: Atwood v

Small [1838] UKHL J60
฀ regards it as unimportant : JEB Fasteners v Marks Bloom and Co [1983] 1 All ER 583
฀ relies on own judgment : Peekay Intermark Ltd v ANZ Banking Group Ltd [2006]
EWCA Civ 386
Kyle Bay Ltd v Underwriters [2007] EWCA Civ 57
✔ However, in a fraud case, the UK Supreme Court has found inducement even when
the representee did not believe in the truth of the misrepresentation.
Zurich Insurance Co plc v Hayward [2016] UKSC 48
‘there may be circumstances in which a representee may know that the
representation is false but nevertheless may be held to rely upon the
misrepresentation as a matter of fact.’
Eg a staged road traffic ‘accident’ ‘where the representee may actually be
certain from his own direct knowledge that the statement is a deliberate lie.
But even then he and his advisers cannot choose to ignore it; they must still
take into account the risk that it will be believed by the judge at trial.’
2.5.2 Materiality
Overlap with inducement
Probably enough that D knew that question mattered to P even if would not matter to
most people.
3. STATEMENT IS FALSE
Avon Insurance Plc v Swire Fraser [ 2000] Lloyd’s Rep IR 535 (statement will be
treated as true if it is substantially correct and the difference would not have induced a
reasonable person to enter the contract)
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4. RESCISSION FOR MISREPRESENTATION
Available for all types of misrepresentations: fraudulent, negligent or innocent.
3.1What is ‘rescission’?
• Rescission of contracts for misrepresentation (and other vitiating factors such as duress,
undue influence)
o backwards looking: nullifies the contract prospectively (any obligations yet to be
performed are cancelled), and retrospectively (any benefits transferred must be
returned) .
o Innocent party can elect to rescind or affirm.
• contrast with termination of contracts for breach (see Topic 9) recognises the existence
of a valid contract between the parties, but that, in limited circumstances, the contract
may be terminated by the innocent party, thereby dispensing both parties from further
performance of their primary obligations.
Property rights can pass up to the time of rescission, important for third parties who obtain
from D
Rescission is only effective once it is communicated to the other party.

The timing of rescission is important if the representee wants to recover property transferred
to a third party.
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Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525
3.2The ‘bars’ to rescission

Unlike void contracts, the right to set aside voidable contracts is not absolute: it can be lost or
‘barred’.
3.2.1 Removal of bars by section 2 MO

We saw that section 2(a) preserves the representee’s right to rescission even if the
representation becomes incorporated as a term of the contract. She can elect.
Section 2(b) removes the former bar to rescission where contracts for the sale of property
induced by non-fraudulent misrepresentations have been performed, so that rescission is now
available even if the contract has been executed.
3.2.2 Affirmation
(i)  requires knowledge of the facts giving rise to the right to rescind.
(ii)  can be express or implied from conduct.
3.2.3 Lapse of time

With fraud, lapse of time cannot bar rescission whilst the representee remains ignorant of the
misrepresentation: Armstrong v Jackson  [1917] 2 KB 822
With non-fraudulent misrepresentations,

o a representee who fails to rescind the contract within a reasonable  time of discovering
the truth may be held to have affirmed the contract: Clough v London & NW Rly
(1871) LR 7 Exch 26
o even if the representee remains ignorant of the non-fraudulent misrepresentation, it
was once thought that a substantial passage of time may  itself bar rescission:
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Leaf v International Galleries [1950] 2 KB 86

Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745
‘It is only the lapse of a reasonable time such that it would be inequitable in all
the circumstances to grant rescission which constitutes a bar to the remedy’,
eg because the delay amounted to affirmation of the contract or otherwise put
the other party in a prejudicial situation if rescission were thereafter asserted.
This is in essence the principle of laches. Longmore LJ also said that it did not
seem to him that ‘lapse of time on its own can be a bar to rescission….’
3.2.4 Third party rights

Rescission will be barred if an innocent third party has given consideration to acquire an
interest in the subject matter of the contract: White v Garden (1851) 10 C.B. 919
3.2.5 Impossibility of mutual restitution

Rescission involves the ‘giving back and taking back of the obligations which the contract
has created, as well as the giving back and the taking back of the advantages’ (Newbigging v
Adam  (1886) 34 Ch. D. 582)
o Executory (unperformed) contracts
o Partially or wholly executed (performed)
Rescission has been barred where return in kind:
฀ to the representee was never possible, as with services; or has become impossible, as
where the property is substantially dissipated through use, consumption or selling on
to a third party; and
฀ to the representor is not substantially possible, as where P bought a mine and sought
to rescind after it had been worked out.
But, some signs of relaxation by allowing monetary substitution for benefits that cannot be
physically returned.
O’Sullivan v Management Agency & Music Ltd [1985] QB 428
Erlanger v New Sombrero Phosphate Co  (1878) 3 App Cas 1218
Salt v Stratstone Specialist Ltd  [2015] EWCA Civ 745
Spence v Crawford [1939] 3 All ER 271: Fraud
 increases the courts’ willingness to make
adjustments to allow rescission.
The court will be less ready to pull a transaction to pieces where the defendant is
innocent, whereas in the case of fraud the Court will exercise its jurisdiction to the
full in order, if possible, to prevent the defendant from enjoying the benefit of his
fraud at the expense of the innocent plaintiff. But restoration is essential to the idea
of restitution . . . the court can go a long way in ordering restitution if the
substantial identity of the subject-matter of the contract remains  (emphasis added).
Smith New Court Securities Ltd v Scrimgeour Vickers [ 1996] UKHL 3
3.2.6 Inequity: section 3(2) MO

“Where a person has entered into a contract after a misrepresentation has been made
to him otherwise than fraudulently, and he would be entitled, by reason of the
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misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings
arising out of the contract, that the contract ought to be or has been rescinded the
court or arbitrator may declare the contract subsisting and award damages in lieu of
rescission, if of opinion that it would be equitable to do so, having regard to the nature
of the misrepresentation and the loss that would be caused by it if the contract were
upheld, as well as to the loss that rescission would cause to the other party.”
Section 3(2) is pro-misrepresentor .

Balances section 2(a).
William Sindall plc v Cambridgeshire CC  [1993] EWCA Civ 14
3.3Section 3(2) MO: damages in lieu of rescission
3.3.1 Availability of section 3(2) damages

Only available if right to rescind still exists (not barred): Salt v Stratstone Specialist Ltd
[2015] EWCA Civ 745.
The representee must claim rescission. Cannot get s3(2) damages by claiming it.
3.3.2 Damages under section 3(2)

If rescission is barred under section 3(2), how are ‘damages in lieu’ measured?
✗ does not replicate section 3(1) reliance damages;
Section 3(3)
Damages may be awarded against a person under subsection (2) whether or not he is
liable to damages under subsection (1), but where he is so liable any award under
subsection (2) shall be taken into account in assessing his liability under subsection
(1).
✗ not literally ‘in lieu of rescission’, eg William Sindall.
The Court of Appeal in William Sindall held that the correct measure is the difference in
value between what the representee believed they were acquiring and what they in fact
acquired. Likewise, Hoffmann LJ said that this section ‘concerned with damage caused by
the property not being what it was represented to be’.
i.e. treating the misrepresentation as a term of the contract that has been breached. But,
should not cover consequential reliance losses (which belong under s 3(1)), or consequential
losses of expectation (which belong properly in a breach of contract claim).
4 MONEY AWARDS FOR MISREPRESENTATION
4.1 Overview
The misrepresentee may be able to claim damages compensating her for loss incurred by
entering the contract as well as, or instead of rescission.
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For HK:
Replace s2(1) with s3(1)
Replace s2(2) with s3(2)
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4.2Damages under section 3(1) MO

Common law claims for misrepresentation (ie fraudulent, negligent, and innocent
misrepresentation) continue to be available, but ‘out-gunned’ by a claim under section 3(1)
where the misrepresentation induced a contract between A the representee and B the
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representor. Common law actions only necessary where no contract results between A and B.
Section 3(1) MO:
Where a person has entered into a contract after a misrepresentation has been made to
him by another party thereto and as a result thereof he has suffered loss, then, if the
person making the misrepresentation would be liable to damages in respect thereof
had the misrepresentation been made fraudulently, that person shall be so liable
notwithstanding that the misrepresentation was not made fraudulently, unless he
proves that he had reasonable grounds to believe and did believe up to the time the
contract was made that the facts represented were true.
4.2.1 Lowering the qualifying threshold: comparing fraudulent, negligent and section
3(1) misrepresentation
(i) Section 3(1) of MO

(i) the measure of damages: ‘fiction of fraud’
(ii) the low qualifying threshold. P only needs to show that:
✔ D made a false statement of fact or law (express or implied) which
✔ induced her into the contract with the representor.
Then up to D to show that she honestly believed on reasonable grounds that her statement
was true when she made it. Reversal of the burden of proof is pro-representee.
Howard Marine and Dredging Co v A Ogden & Sons  [1978] QB 574
(ii) Fraudulent misrepresentation (deceit)

Derry v Peek [1889] UKHL 1 The representor made the false statement-
(i) knowingly;
(ii) without belief in its truth (including knowing that she is ignorant of its truth); or
(iii) recklessly; careless of whether it be true or false, even if her motive is worthy. Acting
unreasonably is not enough; what is required is gross carelessness justifying an inference of
fraud.
Damages for all loss caused, even if unforeseeable.
(iii) Negligent misrepresentation

Hedley Byrne v Heller [1964] AC 465 ‘special relationships’ can trigger a duty to take care in
making statements.
but is still subject to uncertain limits such as ‘reliance’, ‘assumption of responsibility’,
‘undertaking’.
Damages for negligence:

• subject to remoteness limit: only available for foreseeable loss.
• subject to the representee’s contributory negligence (Law Amendment and Reform
(Consolidation) Ordinance (Cap 23) s 23; Gran Gelato Ltd v Richcliff (Group) Ltd).
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(iv) Innocent misrepresentation

o At common law, no damages available; only remedies are rescission and indemnity.
o Comparison with MO: category of when no damages available is narrower under MO
because of reversal of the burden of proof; only if the representor can prove her
representation to be honest and on a reasonable basis i.e. ‘purely innocent’
misrepresentation.
(v) Non-disclosure
Section 3(1) does not apply to pure non-disclosures;  an active misrepresentation is required.
4.2.2 The remedial advantages of a section 3(1) claim: the ‘fiction of fraud’
(i) The basic measure of damages) is the tortious or reliance
 measure: to put the
representee in the position she would have been in had the misrepresentation not been made
(ie the contract not entered).
Doyle v Olby [1969] 2 QB 158
Royscot Trust Ltd v Rogerson [1991] EWCA Civ 12
(ii) The starting point- can recover for:

• reduction in property value at the time of contracting: where the representee is induced to
buy some property; and
• consequential losses: other ‘out of pocket’ losses such as personal injury, loss of or
damage to property and wasted expenses.
(iii) The ‘fiction of fraud’: the generous common law measure for fraud applies to claims
under section 2(1); the representor is liable for damages as if she was fraudulent even though
she was not (Royscot Trust v Rogerson).
Overview of the advantages of the fraud measure over the negligence measure at common
law and the extent to which the section 2(1) claims mimic the fraud measure.
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Doyle v Olby (Ironmongers) Ltd (1969) and Smith New Court Securities Ltd v Scrimgeour
Vickers (Asset Management) Ltd [1996] UKHL 3 set out the main principles in assessing
damages for fraud and thus a section 3(1) MO claim:
1. Causation: for fraud, damages are calculated on the assumption that the representee
would not have entered the contract ‘but for’ the misrepresentation; can claim all her losses
from entering the contract.
For negligent misrepresentation, must prove ‘but for’ causation.
2. No remoteness limit
3. ‘Existing flaw’ and being ‘locked into the property’

Smith New Court v Scrimgeour Vickers
£23.00 million = Price paid
£21.80 million = after devaluation due to fraud
£12.25 million = after further devaluation due to existing flaw
£11.75 million = price received after further devaluation from being locked into
property.
Damages = £23 million – £11.75 million = £11.25 million
4. Loss of opportunity: to make another similarly profitable contract.

Mimics expectation damages
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Clef Aquitaine SARL v Laporte Materials Ltd [2000] 2 All ER 493: but for the
misrepresentation, she would have made a more profitable contract (ie on better terms) with
the representor
East v Maurer [1990] EWCA Civ 6
Price for hairdressing business = £20,000
sold the business for £5,000. The court awarded:
✔ the difference between what E paid and what was received;
✔ trading losses;
✔ E’s wasted expenditure, eg in trying to improve the business; and
✔ £10,000 as the loss of profits which E would have made from buying another similar
hairdressing business.
4Eng Ltd v Harper [2008] 3 WLR 892
damages included its loss of opportunity to acquire another company, which P was seriously
considering investing at the time it acquired D’s company.
Can D argue that if P had not entered the contract with D, P would have put money elsewhere
and also suffered loss??
Yam Sen v International Trade Corp  [2013] EWHC 111
D must show ‘with a reasonable degree of certainty… both the fact that the claimant would
probably have suffered a loss from entering into an alternative transaction and the amount
of loss’.
5. Contributory negligence: Ppt

 20
✔ Can reduce damages for negligent misrepresentation: Law Amendment and Reform
(Consolidation) Ordinance (Cap 23) s 23
฀ Cannot reduce damages for fraud. Standard Chartered Bank v Pakistan National
Shipping Corp (No 2) [ 2003] 1 AC 959
฀ S3(1) ‘fiction of fraud’
✔ Can reduce damages where there are concurrent claims in negligence and section
3(1) MO: Gran Gelato v Richcliff (Group) [1992] 1 All ER 865
6. Damages for non-pecuniary loss:

In fraud action, can claim damages
✔ for worry and inconvenience: Jones v Emerton-Court [1983] C.L.Y. 982
✔ for mental and physical suffering: Shelley v Paddock [1980] 1 All E.R. 1009
Criticism of the ‘fiction of fraud’

● ‘fools should not be treated as if they were rogues’.
● section 3(2) signals the legislature’s intention to differentiate between degrees of
blame.
● Smith New Court Securities v Scrimgeour Vickers notes the ‘trenchant academic
criticisms’ of the fiction of fraud.
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● Section 3(1) is said to be out of step with modern developments. eg Hedley Byrne v
Heller [ 1964] AC 465, which recognises lesser liability for negligent
misrepresentation than for deceit.
Supporting the fiction of fraud:

● MO intended to simplify and enhance protection  for misrepresentee; and
● merely compensates for provable  losses.
4.2.3 When is it preferable to claim fraud over section 3(1)?

(i) Bar to rescission of lapse of time for fraud, only runs from the representee’s discovery
of fraud (not from time of contract).
(ii) Bar to rescission of mutual restitution operates less stringently for fraud.
(iii) Section 3(2) MO bar to rescission ineffective in fraud cases.
(iv) Contributory negligence (at common law or under the Law Amendment and Reform
(Consolidation) Ordinance (Cap 23) s 23) is no defence against fraud damages.
(v) Fraud relaxes the requirement that the representee must communicate her election to
rescind to the representor (Car & Universal Finance v Caldwell) .
(vi) The limitation period for fraud = six years after it was or could have been discovered
(rather than six years after the statement is made under section 3(1); Garden
Neptune Shipping Ltd v Occidental World Wide Investment Corp [1990] 1
Lloyd's Rep 330).
(vii) Exclusion clauses are ineffective against fraud.
4.2.4 Other money claims: expectation damages, restitution and indemnity

The possible claims are the following:
(i) Damages on the contract where the representation is incorporated as a term of the
contract.
(ii) Restitution on rescission: where the contract is rescinded for misrepresentation, the
representor must return any benefit (money or non-money) received under the contract.
(iii) Indemnity on rescission
Whittington v Seale-Hayne  (1900) 82 LT 49
(iv) Damages in lieu of rescission under section 3(2).
4.2.5 Combination of claims

● Any item of loss can only be claimed once.
● P must choose between going ‘forwards’ and ‘backwards’; she cannot do both at the
same time.
• ‘backwards’ = (a) restitution and indemnity on rescission (or damages in lieu of
rescission), + (b) reliance damages, and (c) loss of opportunity to make profits from
another contract; or
• ‘forwards’ = remedies for breach of contract.
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5 EXEMPTION OF LIABILITY FOR MISREPRESENTATION

5.1 Common Law
A party cannot exclude or restrict liability for fraud
S Pearson & Son v Dublin Corp [1907] AC 351
Exemptions of liability for non-fraudulent misrepresentations?
5.2Construction
AXA Sun Life v Campbell Martin [2011] EWCA Civ 133
‘This Agreement . . . constitute the entire agreement and understanding between you
and us in relation to the subject matter thereof . . . [It] shall supersede any prior
promises, agreements, representations, undertakings or implications whether made
orally or in writing . . .’.
5.3Section 4 MO
If a contract contains a term which would exclude or restrict

(a) any liability to which a party to a contract would be subject by reason of a
misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a
misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of
reasonableness...”
Two questions arise:

(i) Does the clause come within the scope of section 4; ie does it exclude or restrict
liability or the available remedies for misrepresentation?
(ii) If so, does it satisfy the requirement of reasonableness?
✔ excluding liability for damages for misrepresentation, and

✔ presumably terms excluding the right to rescind or set up misrepresentation as a
defence.
฀ It does not cover terms that limit the agent’s authority, even though the effect is to exempt
liability.
5.4No representation’ or ‘no reliance’ clauses

Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 W.L.R. 2333, 2344:
[A] The parties have negotiated this contract on the basis that the terms and conditions
set out herein represent the entire agreement between them relating in any way
whatsoever to the aircraft and the initial and continuing spares which form the subject
matter of this contract and
[B] accordingly they agree that all liabilities for and remedies in respect of any
representations made are excluded save in so far as provided in this contract.
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[C] The parties further agree that neither party has placed any reliance whatsoever on
any representations agreements statements or understandings whether oral or in
writing made prior to the date of this contract other than those expressly incorporated
or recited in this contract.
Does a no-reliance clause come within section 4 MO?
Watford Electronics Ltd v Sanderson CFL Ltd [ 2001] EWCA Civ 317, [2001] Build.
L.R. 143 (may create an estoppel, but it will not work if D knows that it is not true)
Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221,
[2010] 2 C.L.C. 705, no-reliance clause = a party’s agreement that it had made its
decision to contract independently, without relying on the other party, and that it was
fully familiar with the risks, created a contractual estoppel to the effect that any
statement by other would amount to merely one of opinion and was not within
section 4.
IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm), Toulson J
The question is one of substance and not form. If a seller of a car said to a buyer ‘I
have serviced the car since it was new, it has had only one owner and the clock
reading is accurate’, those statements would be representations, and they would still
have that character even if the seller added the words ‘but those statements are not
representations on which you can rely’. ...
If, however, the seller of the car said ‘The clock reading is 20,000 miles, but I have no
knowledge whether the reading is true or false’, the position would be different,
because the qualifying words could not fairly be regarded as an attempt to exclude
liability for a false representation arising from the first half of the sentence.
Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland  (2010):

. . . If sophisticated commercial parties agree, in terms of which they are both aware,
to regulate their future relationship by prescribing the basis on which they will be
dealing with each other and what representations they are or are not making, a
suitably drafted clause may properly be regarded as establishing that no
representations (or none other than honest belief) are being made or are intended to
be relied on….
Per contra, to tell the man in the street that the car you are selling him is perfect
and then agree that the basis of your contract is that no representations have been
made or relied on, may be nothing more than an attempt retrospectively to alter the
character and effect of what has gone before, and in substance an attempt to exclude
or restrict liability.
Ultimately, the question is whether a misrepresentation was made:

฀ if the evidence, including the clause, shows that the representee did not, or was not
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entitled to, rely on a misrepresentation, then section 4 does not apply;

✔ but if the contract was induced by misrepresentation, section 4 applies, and its effect
cannot be excluded.
The reasonableness requirement

Cleaver v Schyde Investments (2011) Etherton LJ said:
. . . there is nothing self-evidently offensive, in terms of reasonableness and fairness, in
a contractual term which restricts a purchaser’s right to rescind the contract in the event of
the vendor’s misrepresentation to cases of fraud or recklessness or where the property
differs substantially in quantity, quality or tenure from what the purchaser had been led to
expect, and to confine the purchaser to damages in all other cases. That is a perfectly
rational and commercially justifiable apportionment of risk in the interests of certainty
and the avoidance of litigation. While each case turns on its own particular facts, the
argument in favour of upholding such a provision as a matter of the commercial autonomy
of the contracting parties is particularly strong where, as here, (1) the term has a long
history, (2) it is a well established feature of property transactions, (3) it is endorsed by
the leading professional body for qualified conveyancers, (4) both sides are represented
by solicitors, and (5) the parties (through their solicitors) have negotiated variations of
other provisions in the standard form.
FoodCo UK LLP (t/a Muffin Break) v Henry Boot Developments Ltd [2010] EWHC 358
(Ch)
Here, the term was reasonable:
(1) each side was legally advised and the buyer had also instructed architects and planning
consultants;
(2) the law required sale of land contracts to be in a signed contractual document;
(3) the clause was not of the ‘take-it-or-leave-it’ type sometimes imposed in small print; it
was a special condition agreed by both parties’ lawyers, with equal negotiating positions;
(4)the t erm was used by the regional law society and in common use;
(5) had the buyers wished to rely on an oral statement, they could have made a written
pre-contractual inquiry and relied upon the written response.
First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396
Misrepresented to the tenant, in its replies to pre-contract enquiries, that it had no knowledge
of any environmental (including contamination) problems affecting the property.
Held: No-reliance clause was an attempt retrospectively to alter the character and effect of
what had gone before and was therefore in substance an attempt to exclude or restrict
liability, engaging section 3 MA. The burden was on the landlord to prove its reasonableness.
Given the well-recognised importance of pre-contractual enquiries, it was highly
unreasonable for the landlord to withhold, in its replies to those enquiries, knowledge of a
serious problem.
A landlord was liable for the cost of remedial works to remove asbestos and of alternative
warehouse accommodation whilst those works were carried out.
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TOPIC 6 MISTAKE: ‘I should not be bound as things really are’
1. INTRODUCTION
The most fundamental distinction is between:

• Mistake as to terms: what is in the contract or what the contract is for.
• Mistake as to background assumptions: some fact or law that affects a party’s
reasons for entering the contract.
If we allow people to escape contracts on the grounds of all kinds of mistakes, having a
contract would no longer be valuable.
Diagram Overview of the law on mistake
*Misrepresentation is a kind of Mistake – an induced kind of mistake

**non est factum – this is not my document
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2. MISTAKE AS TO TERMS
2.1 Unilateral mistake

2.1.1 The objective approach (see Chen-Wishart 6th ed, chapter 2.1)
Smith v Hughes LR 6 QB 597
“If, whatever a man’s real intention may be, he so conducts himself that a reasonable
man would believe that he was assenting to the terms proposed by the other party, and
that other party upon that belief enters into the contract with him, the man thus
conducting himself would be equally bound as if he had intended to agree to the other
party’s terms.”
2.1.1.1 The justification for objectivity

(i) Accessibility: it is impossible to access the true intentions of the man/woman
(ii) Avoidance of fraud: one can easily deny having the intention to be bound in court; one
can persuade themselves to believe something false
(iii) Certainty and the protection of reasonable expectations
(iv) Objectivity is intrinsic to contracting
2.1.1.2 The meaning of objectivity

(i) Objectivity from whose point of view?
(ii) Objectivity on what evidence?
• contextual objectivity in Investor Compensation Scheme Ltd v West
Bromwich Building Society:
- what would a reasonable and honest addressee believe the actor was
intending to agree to
- Infused with the standard of reasonableness; and
- Can ‘run out’ i.e. fail in the case of latent ambiguity
• Formal objectivity limits the kinds of conduct that count and prioritise them
according to a fairly strict hierarchy of probative value as follows:
(i) signed final writing contained in a contractual document – the best
evidence of one’s intention
(ii) unsigned final writing contained in a contractual document
(iii) other writing or speech
(iv) non-verbal conduct (a nod, a wink, contractual performance)
(v) silence or omissions – the least preferable evidence of one’s intention
2.1.2 Objectivity and ‘mistaken offers’

Some distinguished commentators (Treitel, Atiyah, McKendrick, Chitty) state that contract law
recognises exceptional cases where the subjective approach trumps the objective approach to
void the parties’ agreement for so-called ‘mistake as to terms’.
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However, the authorities they rely on are entirely consistent with the objective approach on
the more expansive contextual version of objectivity. However, this objectivity:
(i) assumes the addressee’s honesty in interpreting the actor’s conduct;
(ii) is infused with the standard of reasonableness; and
(iii) can ‘run out’ in the case of latent ambiguity.
2.1.2.1 Knowledge of the other’s ‘mistake as to terms’ and the objective interpretation of
intention
Hartog v Colin & Shields [1939] 3 All ER 566:
• hareskins offered ‘per pound’ or ‘per piece’?
• The seller said ‘per pound’ instead of ‘per piece’
• in the context of the custom of the trade and the negotiations (verbal and written)
between the parties, which always discussed the price ‘per piece’ and never ‘per pound’,
the buyer must have realized and did in fact know, that a mistake had occurred in the
seller’s offer
Smith v Hughes LR 6 QB 597:

• ‘oats’ or ‘old oats’?
Horse trainer bought oats by inspection. Seller did not specify whether they were old oats.
Trial judge set aside the contract because: the seller knew that the buyer ‘believed . . . that he
was contracting for old oats’—
The appeal court found this direction by the trial judge confusing; it failed to distinguish
clearly between the seller’s knowledge that the buyer believed:
Î (i) the oats to be old (which does not void a contract); and
ü (ii) that the seller was promising them to be old (which does void the contract).
Other ways of avoiding the contract:
(a) the seller made an actionable misrepresentation that the oats were old; or
(b) there is no objective agreement at all because of latent ambiguity
Centrovincial Estates plc v Merchant Investors Assurance Co Ltd [1983] Com LR 158: rent
review, £65,000 or £126,000?
Court ruled that by objectivity, you said 65,000, then it is 65,000. Unless it can be proved that
the other party knew that they meant 126,000, the offer of 65,000 stands.
Chwee v Digilandmall.com Pte Ltd [2005] 1 SLR(R) 502: commercial laser printer advertised
at ‘$66’ (actual retail price $3,854). 4086 orders had been received and confirmation notes
automatically dispatched within a few minutes. D refused to supply C’s order for 1606 printers.
Actual knowledge of the mistake to void the contract could be established by inference
from circumstantial evidence: ‘Phrases such as “must have known” or “could not
reasonably have supposed” are really evidential factors or reasoning processes used by the
court in finding that the non-mistaken party did, in fact, know of the error made by the
mistaken party.’ It also includes ‘“Nelsonian knowledge”, namely, wilful blindness or
shutting one’s eyes to the obvious’.
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2.1.2.2 Misleading offers: fault

Scriven Brothers & Co v Hindley & Co [1913] 3 KB 564: bid for one lot believed to be ‘hemp’
when in fact ‘tow’
Auctioneers are generally entitled to assume that bidders know what they are bidding for
(making their mistakes legally irrelevant), they cannot do so if they have carelessly induced the
bidder’s mistake. In fact, the mistake was due to the seller’s misleading auction catalogue: since
the seller deliberately perpetrated the confusion to swindle the bank financing the shipment, “it
was peculiarly the duty of the auctioneer to make it clear to the bidder which lots are ‘hemp’
and which lots are ‘tow’.”
2.1.2.3 Latent ambiguity

Raffles v Wichelhaus [1864] EWHC Exch J19:
• ‘Peerless from Bombay’
• Non-coincidence of the parties’ subjective intentions
• Latent ambiguity – there is no way to tell which of us was right (e.g. which ship is the
seller referring to when the seller has many different ships for sale?)
• Objectivity fails; no contract
SUMMARY:
The invalidity of contracts in these circumstances has been presented as instances of
exceptional resort to the subjective test of intentions, but the preferable interpretation is that
the law is simply applying the objective test, but that test is:
(i) contextual, so that the question is what a reasonable defendant would believe the
complainant was intending to agree to, given all the background context;
(ii) infused with the standard of reasonableness; and
(iii) can ‘run out’ in the case of latent ambiguity.
2.2 Common mistake in recording the contract: rectification
2.2.1 What must be proved?

Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
Lord Hoffmann approved the following conditions for allowing rectification:
(i) The parties had a common continuing intention up to the execution of the instrument to
be rectified, whether or not amounting to a concluded contract, in respect of a particular matter
in the instrument.
(ii) There was an outward expression of accord: the test is objective. Requires evidence that
the parties shared a common intention even if not put into words.
Chitty (at para 3-067) states that:
‘when A submits to B a draft which differs from the parties' earlier agreement, the
correct approach in principle is to ask whether B realised or should reasonably have
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realised that the draft agreement was intended to differ from the prior agreement rather
than to implement the prior accord.’
Rectification is only available in the latter case.
Joscelyne v Nissen [1970] 2 QB 86
(iii) The parties’ common intention was not accurately reflected in the instrument by
mistake. Mistake must be in the recording of the contract and not in the making of it.
The court can put the common intention back into the contract for rectification.
No rectification if there is:
(i) any confusion over what was agreed;
(ii) merely an omission to deal with some matter;
(iii) an intention to vary the earlier agreement;
(iv) no literal disparity between the terms used in the parties’ agreement and the document
purporting to record it.
Frederick E Rose v William H Pim Junior, [1953] 2 QB 450
• ‘horse beans’ as prior agreement and as recorded
• Both mistakenly believed horse beans as feveroles
• No rectification due to no literal disparity
2.2.2 Rectification and interpretation
Has this made the rectification doctrine largely superfluous?
Daventry DC v Daventry & District Housing Ltd [2011] EWCA CIV 1153
Differences between interpretation and rectification:
(i) evidence of prior negotiations is admissible in a rectification claim, but not generally for
interpretation;
(ii) for rectification, P must provide evidence of the parties’ prior intention or understanding
that deviates from the written contract;
(iii) rectification is an equitable remedy and, therefore, subject to somewhat different rules
from interpretation (eg no rectification if it would affect third party rights);
The court cannot, by the process of interpretation, insert whole clauses that the parties have
mistakenly failed to include.
LSREF III Wight Limited v Millvalley Limited [2016] EWHC 466
An agreement had mistakenly referred to the wrong version of the master agreement.
Cooke J refused to correct the mistake via interpretation; on the face of the documents,
there was no ambiguity, no syntactical error and no lack of commercial sense as to make
it absurd. However, the agreement would be rectified.
2.2.3 Rectification for unilateral mistake
Commission for the New Towns v Cooper [1995] Ch. 259

Rectification may be allowed for a unilateral mistake in recording the contract if it
would be inequitable for the other party to object because the mistake results in benefit
to the unmistaken party or detriment to the mistaken party, and:
(i) The benefited party actually knew of the mistake and of the mistaken party’s real
intentions; (actual knowledge includes willfully shutting one’s eyes to the
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obvious, or willfully and recklessly failing to make such inquiries as an honest and
reasonable person would have made).
or
(ii) she failed to draw the mistaken party’s attention to the mistake, or made ‘false
and misleading statements’ to divert the other from discovering the mistake.
The contract may be enforced on the mistaken party’s understanding.
NB: Rectification for unilateral mistake is simply the objective test of contract formation in
action, i.e. where A leads B into believing that A is agreeing to B’s terms. (Needs to be a
fundamental difference for it to be rectified)
!
2.3 Unilateral mistake about the nature of the document:
non est factum (‘this is not my document’)
2 party cases: balance of justice clearly favour C

• Non est factum
• Misrepresentation
• Knowledge of other’s mistake
3 party cases: balance of justice NOT clearly favour C
2.3.1 How serious must the mistake be to get out of the contract by non est factum?
There must be a ‘fundamental’, ‘essential’, ‘radical’, ‘very substantial’ or ‘serious’
difference between the nature of the actual document and the document as it is believed to be
The difference is one of degree rather than of kind: it must be determined by the ‘difference
in practical result’, rather than ‘difference in legal character’.
Instances of operative non est factum are rare:
Saunders v Anglia Building Society, affirming Gaillie v Lee [1970] AC 1004
Aim: to help her nephew raise money on the security of her house
• Believed (i) as a deed of gift to her nephew
• Actually (ii) as a sale of her house to L, her nephew’s friend (who had agreed with
the nephew to raise money in his own name for the nephew because the latter
wanted to avoid his wife’s maintenance claim).
• The mistake was not sufficiently fundamental because her aim was to raise
money for nephew (selling her house is also a way to raise money for her nephew)
Gillman v Gillman (1946) 174 LT 272
2.3.2 Who qualifies for relief?

Saunders v Anglia Building Society: ‘those who are permanently or temporarily unable
through no fault of their own to have without explanation any real understanding of the
purport of a particular document, whether that be from defective education, illness or innate
incapacity’, or from being tricked.
United Dominion’s Trust Ltd v Western [1966] 2 QB 431
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P must still take such care as could be expected of someone with those impairments. P who
signs a document in blank leaving another to fill in the details is disqualified.
In two-party cases, the claimant’s carelessness is irrelevant: it cannot lie in the fraudster’s
mouth to say that P should not have been taken in, and the fraudster should not profit from her
wrong.
In three-party cases where the contest is between two innocent parties, P’s carelessness is
directly relevant to the question of who should bear the loss.
3. MISTAKEN IDENTITY
3.1 The nature of the problem

A makes an apparent contract with B believing B to be C;
A passes property to B under this contract, but B fails to pay.
B then passes the property to D in a subsequent transaction before B disappears or is not worth
suing.
Can A sue D for the return of the property?
• In two-party cases, B’s fraud or knowledge that A only intends to contract with someone
else is usually enough to deny B the contract.
• In three-party cases the law must allocate the risk of B’s fraud between A and D.
The public interest in protecting the security of transactions is largely suppressed by the law’s
overly technical approach in deciding whether B’s transaction with A is void or voidable.
The distinctions made are beset by ‘illogical and sometimes barely perceptible distinctions’
(Shogun Finance Ltd v Hudson [2003] UKHL 62)
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Rules to determine whether the contract involving 3 parties and mistaken

identity is void or voidable
Note: the rules are somehow contradictory – they cannot be used concurrently
3.2 Identity vs attributes
The general rule is that a mistake as to the identity of the other party will only void a contract
if it goes to the other party’s ‘identity’ as opposed to merely her ‘attributes’ (eg as to solvency,
character or social position).
Problems
four sometimes contradictory ‘rules’ guide the courts in making the identity–attribute
distinction: (i) objectivity, (ii) written contracts, (iii) non-existence of the identity assumed, and
(iv) face-to-face dealings
3.3 Objectivity: you cannot accept someone else’s offer

The objective test of formation prevents a party from accepting an offer that she knows was
not intended to be made to her.
Bolton v Jones (1857) 2 H & N 564
J sent a written order for goods to ‘Brocklehurst’, with whom J had previously dealt and against
whom J had the right to set off sums that Brocklehurst owed him. Bolton took over
Brocklehurst’s business and received and filled out the order without disclosing the change of
ownership to J.
Court ruled contract void.
3.4 Written contracts

Where a contract is reduced to writing, it can only be between the persons named in a written
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contract as the parties to the contract.

Cundy v Lindsay (1877–78) LR 3 App Cas 459
L received an order for goods from Blenkarn of ’37 Wood Street, Cheapside’, who had forged
the signature of Blenkiron & Co of 123 Wood Street, with whom L had previously dealt.
L sent the goods to Blenkarn, who sold the goods to C.
Shogun Finance Ltd v Hudson [2003] UKHL 62

S sold a car on hire purchase to R, a fraudster who posed as ‘Mr Patel’ as he had ‘Mr Patel”s
driving license. S checked Mr Patel’s credit rating, then sold the car to R, who then sold it to
H.
3.5 Non-existence of the identity assumed

According to this rule, A’s mistake as to B’s identity will only void their contract if A mistook
B for another existing and identifiable party, C. If A merely believes that B is C who is non-
existent or unidentifiable, the contract is only voidable.
King’s Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (1897) 14 TLR 98
An order of goods came from the fictitious ‘Hallam & Co’, written on headed stationery with
a picture of a large factory and a list of overseas depots. K sent goods in response.
The fraudster then sold the goods to E.
Court ruled contract only voidable. Though the contract was in writing, K intended to contract
with the writer of the letter, mistaken only as to his attributes (solvency and respectability of
the writer).
The contract was not void for K’s mistake that it was contracting with ‘Hallam & Co’ because
‘Hallam & Co’ was non-existent.
“If it could be shown that there was a separate entity called ‘Hallam & Co’, then the
case might have come under the decision of Cundy v Lindsay.”
3.6 Face-to-face dealings

Where the parties deal with each other face to face (inter praesentes), the law presumes that
each intends to deal with the ‘person present, and identified by sight and hearing’. The contract
is only voidable and bona fide third-party purchasers who obtain title before the mistaken party
rescinds the contract are protected.
Phillips v Brooks Ltd [1919] 2 KB 243
Court ruled contract only voidable – P is contracting with the person right in front of him,
not the person’s reputation.
Ingram v Little [1961] 1 QB 31

Court ruled contract void
Lewis v Averay [1972] 1 QB 198
Court ruled contract only voidable
Shogun Finance Ltd v Hudson [2003] UKHL 62
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The real problem in 3-party cases – whether to protect the third party or not - cannot be
solved by the void-voidable distinction.
The crucial point is that it is A who assesses the risk and decides whether to sell on credit.
This makes A better able to self-protect than D and so A should take the risk of mistake.
Alternative approach?
Good faith third party purchasers fully protected if they obtain title before
rescission: change the law by legislation.
4. MISTAKEN ASSUMPTIONS: reasons for contracting
4.1 General principles

Nomenclature (lots of ways to describe this phenomenon, but they’re just the same thing):
‘mistaken assumption’, ‘motivation mistake’, ‘mistake of fact’ or more opaquely ‘mutual
mistake’ or ‘common mistake’, since both parties must share the mistake.
May be as to background fact or relevant law: Brennan v Bolt Burdon [2004] EWCA Civ 1017
Difference between ‘mistake as to terms’ and ‘mistaken assumptions’: former concerns terms,
latter concerns representations
Difference between misrepresentation and mistaken assumptions: former involves the

misrepresentor inducing a mistake made on the misrepresentee’s part, latter involves both
parties operating under a mistake
Relief given on mistaken assumptions is very narrow, as shown in the following cases.
Bell v Lever Brothers [1931] UKHL 2

L paid £50,000 to end the employment of two employees as part of its corporate restructuring.
L did not know that the two employees had breached the contracts of employment by
speculating on their own account. This would have entitled L to dismiss them without giving
compensations. L, upon knowing, attempted to get the money back from them. When they
failed, L relied on the alternative ground of mistake. The jury found: (1) L would never have
paid the money had they known the truth; (2) at the time they negotiated the payment, the
employees were not thinking about the breaches – they have forgotten about it or regarded
them unimportant. Court recognized that there was a jurisdiction to void a contract on mistaken
assumption, but controversially held that the mistake was not fundamental to void the contract.
Great Peace v Tsavliris [2002] EWCA Civ 1407

T was an owner of a ship that was in trouble. The ship had suffered serious structural damage
in the Southern Indian Ocean, and it was in imminent danger of going down with the crew and
cargo. They tried to get a tug to rescue it, but the tug was 5 days away. They needed a bridging
rescue ship who could be on duty for 5 days until the actual tug got there. They looked for ships
in the vicinity who could rescue the stricken ship if necessary. They relied on information from
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a third party, who said that there was a ship Great Peace that was just 35 miles away. So they
hired Great Peace for 5 days to divert to the stricken ship as a backup awaiting for the tug’s
arrival. However, Great Peace was actually 400 miles away and there were ships nearer than
that. T refused the pay the hire, and claimed the contract was void for common mistake.
Alternatively, T claimed the contract voidable under equity.
The Court rejected both grounds. The Court of Appeal set out the conditions for voiding a
contract for common mistake at common law:
(i) there must be a common assumption as to the existence of a state of affairs;
(ii) there must be no warranty by either party that that state of affairs exists;
(iii) the non-existence of the state of affairs must not be attributable to the fault of
either party;
(iv) the non-existence of the state of affairs must render performance of the contract
impossible;
(v) the state of affairs may be the existence, or a vital attribute, of the consideration
to be provided or circumstances which must subsist if performance of the
contractual adventure is to be possible.
It seemed that the fact that Great Peace was 400 miles away made it impossible for the contract
to be performed. However, the Court found it possible – the ship could still provide 2.5 days
of service.
This can be summarised as a three-step inquiry. P can only void a contract by showing that:
(1) construction: the risk of the mistake was not allocated to either contract party;
(2) fault: P was not at fault (eg by making a very unreasonable mistake or inducing the other
party’s mistake); and
(3) fundamentality: P’s mistaken assumption was shared by the other party and was so
serious as to make performance ‘impossible’.
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4.2 The contractual allocation of risk: construction
Has the contract:

(i) allocated the risk of mistake to either party? (If so, there would be no mistake but a
breach of contract)
(ii) provided, expressly or impliedly, that the contract’s existence is contingent on the
existence of an assumed state of affair (‘condition precedent’)?
If so, then the contract governs the situation.
E.g. if I am selling a property to B, and both me and B wrongly believed that I owned the
property, there cannot be no relief given for mistake. This is because the Sale of Goods
Act/Ordinance gives an implied term that I have to be in ownership of the property I am
claiming to sell, or else I would be in breach of contract. This allocates the risk of the mistake
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on me, thus there is no mistake.
McRae v Commonwealth Disposals Commission [1951] HCA 79

CDC invited tenders for an oil tanker lying on the Shoreman Reef said to contain oil, i.e. there
was a sunken ship containing oil, if you would like to bid for salvaging it, then this is what you
had to tender for. M successfully tendered for the salvaging operation and started an expensive
salvaging campaign, but it turned out that the oil tanker and the location were non-existent.
The Court rejected CDC’s argument that they shouldn’t be liable because of common mistake
as to the existence of the subject matter. M claimed damages for breach of contract and they
were successful. The Court held that the only proper construction of the contract was that it
included a promise by the CDC that there was a tanker in the position specified, any
impossibility therefore, of performance far from relieving CDC from its contractual obligations
triggered the liability for breach.
Associated Japanese Bank v Crédit du Nord [1989] 1 WLR 25

A fraudster purported to sell AJB 4 machines and to lease it back to the fraudster. The machines
in fact didn’t exist. CDN was a guarantor for the fraudster. When the fraudster went bankrupt,
CDN was sued for the outstanding lease fees.
The Court held that the guarantee, i.e. the contract between CDN and AJB, was stipulated that
the machine could only be substituted with CDN’s consent. They interpreted this as a condition
precedent that the guarantee was for the lease of existing machines. If the machines did not
exist, the whole guarantee contract was off, and CDN was not liable.
4.3 Fault
Associated Japanese Bank v Crédit du Nord [1989] 1 WLR 25

‘a party cannot be allowed to rely on a common mistake where the mistake consists of
a belief which is entertained by him without any reasonable grounds for such belief’
because ‘policy and good sense dictate that the positive rules regarding common
mistake should be so qualified’. Moreover, no relief is available if a party contracts
‘with minimal knowledge of the facts to which the mistake relates but is content that it
is a good speculative risk’.
The question to ask is whether the mistake was a reasonable one to make.
4.4 Fundamental common mistake at common law
An actionable common mistake at common law must be: (i) shared; and (ii) of fundamental
importance.
Why shared?
(i) serves an evidentiary function by corroborating:
• P’s assertion of the existence of the mistake; and
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• the importance of the mistake; shared assumptions are more likely to relate to the
essential substance of the contract; (if both parties have mistaken, then the matter
concerned must be very important)
(ii) shows that the other party’s expectations are not reasonable since they are also tainted
by catastrophic mistake. Voiding the contract in such circumstances deprives her of benefits
(including unexpected windfalls) which are unworthy of protection because she could not
reasonably have expected them at contract formation.
The fundamentality requirement asks whether there is a sufficient degree of disparity

between performance of the contract on the mistaken state of affairs, and its performance on
the actual state of affairs, that consent to the contract can be regarded as boid.
Operative mistake must relate to ‘the existence, or a vital attribute, of the consideration to be
provided or circumstances which must subsist if performance of the contractual adventure is to
be possible’ (Great Peace v Tsavliris).
The traditional categories of common mistake (encompassing mistake as to terms &
mistaken assumptions):
(i) mistake as to the existence of the subject matter;
(ii) mistakenly acquiring one’s own property;
(iii) mistake as to the essential quality of the thing contracted for; and
(iv) mistake as to an essential background assumption.
This is not a list of qualifying mistakes. They are merely illustrations of mistakes that can but
not necessarily will undermine the substance of the contract such as to make the performance
of the original contract impossible, such as to void the contract. Relief may not be granted on
the facts just because the case seemed to come under one of these doesn’t necessarily mean
that you will be able to avoid the contract.
4.4.1 Mistake as to the existence of the subject matter

The non-existence of the subject matter of the contract that is mistakenly thought to exist (res
extincta) will normally negate the essential purpose of a contract or the means for achieving it.
Bell v Lever Brothers: Lord Atkin said that: ‘the agreement of A and B to purchase a specific
article is void if in fact the article had perished before the date of sale. . . a consent to transfer
or take delivery of something non-existent is deemed useless, the consent is nullified’. The
same should apply if the subject matter had never existed, as in McRae v Commonwealth
Disposals Commission, unless the risk was allocated (which it was in McRae).
Couturier v Hastie [1856] UKHL J3

The sale of corn that was in transit to England. The cargo had deteriorated and before the date
of sale, it had already been sold as it had so deteriorated that they had to sell the corn for some
inferior use. The seller who was selling the now non-existent corn nevertheless sued for the
price, claiming the buyer had bought not the corn itself, but the rights derived from the shipping
documents for the corn so that the risk of the non-existence of the corn was allocated to the
buyer, i.e. you bought whatever was in the containers was taking a risk that there could be
nothing in the containers and would still need to pay.
The Court disagreed. As a matter of construction; the contract was for the sale of existing cargo,
14
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i.e. the corn itself, but not of the cargo whether it existed or not. The risk of mistake as to the
existence of the corn was allocated to the seller. Its non-existence meant that the buyer did not
need to pay. The contract is void.
Section 9 SOGO: Goods perishing before sale but after agreement to sell
Where there is an agreement to sell specific goods, and subsequently the goods, without any
fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement
is thereby avoided.
4.4.2 Mistakenly acquiring one’s own property

Where the parties’ contract transfers some interest in property that, unknown to either, already
belongs to the buyer (res sua), the contract is void. It is not only senseless to buy one’s own
property, but ‘such a transfer is impossible’ (Bell v Lever Brothers).
Cooper v Phibbs [1867] UKHL
C agreed to lease a fishery from P. Unknown to both parties, P had no title to the fishery, while
C was already a tenant for life of the fishery. The lease was set aside.
But note: section 14(1) of the Sale of Goods Ordinance implies a term that the seller warrants
(guarantees) her title to the property sold and is therefore liable for breach if this is untrue.
4.4.3 Mistake as to an essential quality of the subject matter

In both of the previous categories (res extincta and res sua), performance of the contract is
physically impossible. This is not necessarily so with the next two categories (mistakes as to
the quality and as to background assumptions). Here, ‘impossibility’ of performance is
measured by the extent of deviation from the ‘substance of the contract’ which is, in turn,
determined by the parties’ common purpose (in the broadest sense of what they thought they
were contracting for/about). What is required is a mistake about ‘the existence of some quality
which makes the thing without the quality essentially different from the thing as it was believed
to be’ (Bell v Lever Brothers). The distinction is between:
✗ mistakes as to ‘quality’ (or attributes), which will not void the contract; and
✓ mistakes as to ‘substance’ (or ‘essence’ or ‘vital quality’), which will.
This is similar to the distinction in mistaken identity between ‘identity’ and ‘attribute’
However, the application of the distinction has given rise to much uncertainty and
inconsistency.
Diagram Mistakes as to quality: an overview of some cases
15
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Difficulty in drawing the line.

Treitel’s suggestion asking ‘the parties, immediately after they made the contract, what its
subject matter was. If, in spite of the mistake, they would give the right answer [eg
‘horse’ rather than ‘racehorse’] the contract is valid at law.’
Objective or subjective test?
4.4.4 Other mistaken fundamental assumptions

Other background assumptions fundamental to the essential point of the contract:
‘circumstances which must subsist if performance of the contractual adventure is to be
possible’ (Great Peace v Tsavliris), eg:
ü Gallaway v Gallaway (1914) 30 TLR 531
A couple, assuming themselves to be married, engaged in a separation deed that was voided
for mistake because parties not married
ü British Red Cross v Werry (2017)
a settlement following a supposed intestacy was void for common mistake when it was
subsequently discovered that the deceased had left a will.
ü Scott v Coulson [1903] 2 Ch 439
a life insurance policy was sold for £460 on the assumption that the insured was alive but
in fact, was dead, increasing the value of the policy to its full surrender value of £777.
ü Griffith v Brymer (1903) 19 TLR 434
contract for ‘hire of a room to see the coronation procession of King Edward VII’ made
when the procession was already cancelled.
Î In Great Peace v Tsavliris: The question was whether the GP was actually so far away
from T’s distressed ship ‘at the time of the contract as to defeat the contractual purpose [to
provide escort and standby services for 5 days until the rescue tug arrived]—or, in other
words, to turn it into something essentially different from that for which the parties had
16
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bargained?
Parties believed that the GP was 35 miles (3 hours’ sailing) away, rather than actually 400
miles (39 hours’ sailing) away.
Toulson J said that, if there was more than 5 days’ sailing distance between the ships, the
contract would be void since its purpose would be unachievable.
✗ Bell v Lever Brothers
Lord Atkin: ‘The contract released is the identical contract in both cases, and the party
paying for release gets exactly what he bargains for.’ Analogously, he said that there would
be no remedy where a purchaser of a roadside garage was unaware that a decision had
already been taken to construct a bypass road that would divert substantially all the traffic
from passing his garage.
4.5 The effect of common mistake
Makes contract void. Property rights are not passed, and bona fide third parties are not
protected.
Great Peace v Tsavliris recognised the desirability of greater remedial flexibility analogous to
that available in cases of frustration (the Law Reform (Frustrated Contracts) Act 1943).
4.6 Common mistake at equity
4.6.1 Rescission (on terms)

Associated Japanese Bank v Crédit du Nord,
‘Equity will give relief against common mistake in cases where the common law will not,
and it provides more flexible remedies including the power to set aside the contract on
terms.’
Solle v Butcher [1950] 1 KB 671
The landlord and tenant agreed a 250-pound yearly rental. In fact it was worth 250 pounds, but
they thought that the building made renovations and the building was a new building, and did
not need to give a notice of an increase in rent. In fact, it was not regarded as a new building
and had to give notice of the increase, so the rent should only be 140 pounds. The landlord put
the matter to court.
Denning came up with equitable relief. The Court allowed the contract to be set aside, but
not before the 250-pound rent was once again offered to the tenant first and the tenant
rejected the rental.
Grist v Bailey [1967] Ch 532
Involved a house that was sold on £850 on a commonly mistaken assumption that there was a
protected tenant still in occupation, which reduced the value of the house. However, the tenant
was dead before they made the sale, and raised the price to £2,250. The sale was rescinded in
equity on terms that the seller offers the buyer to buy the house with the proper vacant
possession price.
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4.6.2 Rejection of the equitable jurisdiction

Great Peace v Tsavliris rejected an equitable jurisdiction that would render contracts voidable.
Four reasons:
(i) Contradiction of Bell v Lever Brothers: Solle v Butcher represents a significant extension
of any jurisdiction exercised up to that point and one that was not readily reconcilable with
Bell v Lever Brothers. Solle v Butcher did not so much supplement or mitigate the common
law as outflank and contradict it.
(ii) Lack of precedent: Bell v Lever Brothers never mentioned an equitable doctrine.
(iii) Uncertainty
(iv) Illegitimacy
Counter-arguments:
1. Uncertainty: this allegation is a bit exaggerated, as such uncertainty exists in all other
laws
2. Authority: the existence of equitable common mistake is accepted by a number of
decisions after Solle v Butcher, including Court of Appeal decisions. 1 The mistake in
Great Peace was insufficiently serious to qualify even for equitable relief, so it was
unnecessary to decide on the validity of the doctrine. As a matter of precedent, Solle v
Butcher should have been regarded as binding on both the High Court and the Court of
Appeal in Great Peace.
3. Fairness: It is a relevant consideration in law. Even in Bell v Lever Brothers, it was not
an unfair decision to say that the serious mistake in the case was not sufficient to avoid
the contract.
4. Proportionality of legal response: It makes sense that a fundamental mistake can void the
contract, while a mistake less fundamental can also make the contract voidable to give
remedial flexibility.
5. Judicial vs legislative development: Reynolds: ‘It is not clear why a statute (hardly an
item of priority for law reformers) would do any better than a careful judicial
interpretation of Lord Denning’s doctrine, which is after all but a slight extension of lines
of existing equity cases on misrepresentation and unconscionability in general.’ 2 In Great
Peace, the Court called for legislation to give greater remedial flexibility to common
mistakes, while at the same time struck down equitable mistake that does the exact same
thing. While it can be said that the law can progress much quicker through legislative
development than through the slow evolution of law through court decisions case-by-
case, this is not the case for contract law. Contract law generates very few legislation;
there is little parliamentary legislation time for contractual matters. It is much more likely
that the courts develop the law.
6. Remedial flexibility: Great Peace calls for greater flexibility by legislation - odd in the
1
Rose v Pim (1953); Grist v Bailey (1967); Magee v Pennine Insurance (1969); Laurence v Lexcourt
Holdings (1978); William Sindall v Cambridgeshire CC (1994); Nutt v Reed (1999); Clarion v
National Provident Institution (2000); West Sussex Properties v Chichester DC (2000).
2
F M B Reynolds, ‘Reconsider the Contract Textbook’ (2003) 119 LQR 177, 179.
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context of its denial of equitable mistake, because, if a mistake is not sufficiently

fundamental to void the contract, it is valid and cannot be the subject of ‘remedial
flexibility’.
• German law, a party making a unilateral mistake can set aside the contract on
compensating the other party who does not know of the mistake (§ 122 of the
German Civil Code (BGB)).
• The New Zealand Contractual Mistakes Act 1977 confers on the court a wide
discretion to grant relief including cancellation, validation or variation of the
contract, and the awarding of restitution or compensation.
4.7 Justifications for the mistake doctrine

The mistake doctrine undermines contract certainty; how do we justify it?
4.7.1 The implied terms analysis

Some distinguished commentators deny there is a mistake jurisdiction at common law:
They argue that all the problems of contractual mistake can be dealt with by:
ü the law on contract formation (because there is no mirror image offer and acceptance);
or
ü implied terms (specifically, the ‘implied condition precedent’ that no contract comes
into effect if the parties’ common assumption is incorrect).
So, when contracts are voided, this is the result of something that the parties themselves
have agreed, albeit impliedly; it is not imposed by the law. There is no room left for the
operation of a distinct doctrine of mistake.
Counterarguments:
1. Contradicted by weight of authority
2. Odd reasoning: there is something distinctly odd in saying that a contract is void (a
nullity from the beginning) because an implied term inside that void contract says so: the
contract ‘self-destructs’ before coming into being.
3. Uncertain
4. Over-inclusive
5. Unrealistic!
!!
4.7.2 Impossibility of performance
• Great Peace v Tsavliris: mistake is said to operate ‘if it transpires that one or both of the
parties have agreed to do something which it is impossible to perform’.
• Lords Atkin and Thankerton in Bell v Lever Brothers support the impossibility justification
by analogy to the frustration doctrine.
• Great Peace, the court agreed that ‘consideration of the development of the law of
frustration assists with the analysis of the law of common mistake’.
Taylor v Caldwell [1863] EWHC QB J1
There was a musical hired for concerts for 4 nights. After the formation of contract
and before the first concert, the musical burnt down. The Court excused performance,
because the performance depended on the continued existence of the musical.
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What does ‘impossibility of performance’ mean?

• impossibility of performance was insufficient to avoid the contract in McRae v
Commonwealth Disposals Commission; the risk of th e impossibility was allocated to the
seller.
• In Great Peace, Lord Phillips MR approved Vaughan Williams LJ’s view in Krell v
Henry (1903) that:
you first have to ascertain, not necessarily from the terms of the contract, but, if
required, from necessary inferences, drawn from surrounding circumstances
recognised by both contracting parties, what is the substance of the contract, and then
to ask the question whether that substantial contract needs for its foundation the
assumption of the existence of a particular state of things. If it does, this will limit the
operation of the general words [ie qualify the obligation], and in such a case, if the
contract becomes impossible of performance by reason of the non-existence of the
state of things assumed by both parties as the foundation of the contract, there will be
no breach of the contract thus limited (emphasis added).
4.7.3 No consent to contract on the real state of affairs

(i) Meaningful consent
(ii) Threshold of consent is fixed by the law
(iii) Explains the effect of fundamental mistake as being imposed by law
(iv) Explains the effect of voidness
Existence of equitable mistake?
For: Solle v Butcher

Against: Great Peace
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Topic 7 Frustration: ‘I#should#not#be#bound#as#things#have#

turned#out’
1. INTRODUCTION
National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675:

Frustration of a contract takes place when there supervenes an event (without fault of either
party and for which the contract makes no sufficient provision) which so significantly
changes the nature (not merely the expense or onerousness) of the outstanding contractual
rights and/or obligations from what the parties could reasonably have contemplated at the
time of its execution that it would be unjust to hold them to the literal sense of its stipulations
in the new circumstances.
1.1 Frustration and mistake

The doctrines of frustration and common (ie shared) mistaken assumption deal with essentially
the same problem, namely how the law should respond when the parties’ assumptions are, or
turn out to be, radically different from those which the parties assumed when they entered the
contract. Both doctrines apply to a very narrow spectrum, i.e. contracts will only be discharged
in the most exceptional circumstances.
(i) Only difference in timing
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(ii) Two coronation cases:

Krell v Henry [1903] 2 KB 740
Involved a flat overlooking a street which was going to be a route of the coronation. It
was rented out for the purpose of watching the coronation procession pass by. When
the King fell ill, and the coronation was cancelled, the contract was frustrated; neither
party had to perform the contract. The common assumption was that the coronation
would take place, and this was falsified after contract formation.
In Griffith v Brymer (1903) 19 TLR 434
A case with similar facts, but the contract was made when the King was already sick,
i.e. the coronation was already cancelled. Thus, the contract was void for mistake.
(iii) Judicial recognition of similarity:
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407
assimilated the two doctrines under the formulation of ‘impossibility of performance’.
One doctrine can cater for both situations.
(1) Construction: was the risk of the change of circumstances expressly or impliedly
allocated to one of the parties?
(2) Fault: was the frustration self-induced?
(3)Fundamentality: did the new circumstances render the obligation to perform radically
or fundamentally different from that originally undertaken?
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Three main differences between mistake and frustration:

(i) Scope: frustration is wider than common mistake
(ii) Contract discharged, not void or voidable
(iii) Monetary adjustments for frustration under statute.
1.2 Development of the frustration doctrine

Paradine v Jane [1647] EWHC KB J5: absolute contractual liability
One party that they shouldn’t have to pay as they were driven out by an invading enemy. The
Court rejected that plea. ‘If the lessee promises to repair her house, although it be burnt by
lightning or thrown down by enemies, they still need to repair it’. It is regarded a harsh,
ridiculous and absolutist decision.
Taylor v Caldwell [1863] EWHC QB J1: recognition of frustration

Caldwell hired a music hall in order to hold concerts for 4 nights. He was sued for breach when
the music hall burnt down before the first night of the concert. The Court found Caldwell not
liable because the perishing of the person or thing which the performance depended excuses
the performance.
Jackson v The Union Marine Insurance Co Ltd (1874) 10 Common Pleas 125
Jackson’s ship was chartered to sail from Liverpool to load a cargo of iron rails and to continue
to San Francisco. The journey was delayed for 6 months because the ship was stranded before
loading the cargo. At the end of the 6 months, J asked if the voyage should be continued. The
Court held the voyage undertaking after the ship was sufficiently repaired would have been a
completely different voyage. The delay was so substantial that it destroyed the commercial
sense of the original transaction.
2. JUSTIFICATION
2.1 Implied terms

“Condition subsequent”
FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916 ] 2 AC 397
The relevant question is: ‘Were the altered conditions such that, had [the parties] thought of
them, they would have taken their chance of them, or such that as sensible men they would have
said, “if that happens, of course, it is all over between us”?’ On this view, the contract is
discharged because that is what the parties have provided for in the contract and not because
the court has imposed a solution from outside the contract; ‘the law is only doing what the parties
really (though subconsciously) meant to do themselves’
Criticisms
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1. Can agreement be implied about an unforeseeable event?

Davis Contractors Ltd v Fareham UDC [1956] UKHL 3
‘there is something of a logical difficulty in seeing how the parties could even
impliedly have provided for something which ex hypothesi they neither expected nor
foresaw’.
James Scott & Sons Ltd v Del Sel [1923] UKHL 437
‘A tiger has escaped from a travelling menagerie. The milk girl fails to deliver the
milk. Possibly the milkman may be exonerated from any breach of contract; but, even
so, it would seem hardly reasonable to base that exoneration on the ground that “tiger
days excepted” must be held as if written into the milk contract.’
2. Would the parties have agreed to discharge and let losses lie where they fall?
Denny, Mott & Dickson Ltd v Fraser (James B) & Co Ltd [1944] AC 265
‘On the contrary, they would almost certainly on the one side or the other have sought
to introduce reservations or qualifications or compensations’
3. Courts can override the parties’ attempt to continue the contract:

Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260
A contract was discharged for frustration even though the parties expressly provided
that their obligations should only be postponed but not discharged
By this time it might seem that the parties themselves have become so far
disembodied spirits that their actual persons should be allowed to rest in
peace. In their place there rises the figure of the fair and reasonable man.
And the spokesman of the fair and reasonable man, who represents after all
no more than the anthropomorphic conception of justice, is and must be the
court itself.
2.2 Just and reasonable solution

Hirji Mulji v Cheong Yue SS [1926] AC 497
J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd's Rep 1
The frustration doctrine:
was evolved to mitigate the rigour of the common law’s insistence on literal performance
of absolute promises. The object of the doctrine was to give effect to the demands of justice,
to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to
escape from injustice where such would result from enforcement of a contract in its literal
terms after a significant change in circumstances.
Criticism:
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Inconsistent with drastic consequences: the concern with justice and reasonableness does
not explain why contracts are automatically discharged rather than, for example, modified
to make them more just and reasonable.
2.3 Radical change in the obligations: no consent

Frustration occurs whenever the law recognises that without default of either party a
contractual obligation has become incapable of being performed because the circumstances
in which performance is called for would render it a thing radically different from that which
was undertaken by the contract. Non haec in foedera veni. It was not this that
I promised to do.
British Movietonews v London & District Cinemas [1952] AC 166
‘[If] consideration of the terms of the contract, in the light of the circumstances existing
when it was made, shows that they never agreed to be bound in a fundamentally different
situation which has now unexpectedly emerged, the contract ceases to bind at that point—
not because the court in its discretion thinks it just and reasonable to qualify the terms of
the contract, but because on its true construction it does not apply in that situation’ (British
Movietonews v London & District Cinemas, emphasis added).
The no consent rationale, underlying the ‘radical change of obligations’ test, is consistent with
other judicial formulations of frustration which ‘shade into one another’: National Carriers v
Panalpina [1981] AC 675, eg
(i) The construction approach
(ii) Disappearance of the foundation of the contract
(iii) Impossibility of performance
Great Peace v Tsavliris:
You first have to ascertain, not necessarily from the terms of contract, but, if required,
from necessary inferences, drawn from surrounding circumstances recognised by both
contracting parties, what is the substance of the contract, and then to ask the question
whether that substantial contract needs for its foundation the assumption of the existence
of a particular state of things. If it does, this will limit the operation of the general words,
and in such a case, if the contract becomes impossible of performance by reason of the
non-existence of the state of things assumed by both parties as the foundation of the
contract, there will be no breach.
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3. WHEN IS CHANGE SUFFICIENTLY ‘RADICAL’? Frustrating

circumstances
A court must:
ü (I) construe the contract terms ‘in the light of the nature of the contract and of the relevant
surrounding circumstances when the contract was made’ to determine the scope of the
original rights and obligations (Davis Contractors v Fareham); and
ü (II) compare this with a literal enforcement of the obligations in the new circumstances
to see whether it is radically or fundamentally different from the original rights and
obligation (Tsakiroglou & Co Ltd v Noblee Thorl GmbH).
‘[W]hether a supervening event is a frustrating event or not is, in a wide variety of cases,
a question of degree’ (National Carriers v Panalpina).
Edwinton(v.(Tsavliris(Russ(The Sea Angel [2007]%EWCA%Civ%547

‘multi-factorial approach’, taking into account:
• the terms of the contract itself;
• the matrix or context of the contract;
• the parties’ knowledge, expectations, assumptions and contemplations, in
particular as to risk, as at the time of contract, objectively determined;
• the nature of the supervening event; and
• the parties’ reasonable and objectively ascertainable calculations as to the
possibilities of future performance in the new circumstances.
3.1 Legal impossibility

The law may:
(i) prohibit the performance undertaken in the contract: eg:
• Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4;
• Lau Kam Hoi, Ben trading as Vin Li Hong v New Kwun Lun Film Production Co Ltd
[1985] HKEC 138
(ii) deprive a party of control over the subject matter of the contract: as where the state
compulsorily acquires land or oil fields (BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979]
1 WLR 783
• Ertel Bieber v Rio Tinto [1918] AC 260: The public policy underlying the illegality
trumps the parties’ express provisions.
• Aside from trading with the enemy, a supervening law (or fact, triggering the application
of existing law) will only frustrate a contract if it makes a radical difference to the
contractual obligations originally undertaken and not if it merely delays or hinder its
operation in part:
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✓ Metropolitan Water Board v Dick Kerr [1918] AC 119

A contract to build a reservoir in 6 years. As it was wartime, the government ordered the
builders to cease work and to remove and sell their plant. The contract provided that they
can extend the time for completion. In theory, the contract should never be frustrated as the
parties agreed that they could just delay the performance. The Court held that the clause
did not apply as ‘the interruption was of such a character and likely to last for so long as to
fundamentally change the obligations undertaken. The builder is not bound to submit to a
random bargain to which he has not agreed’.
✗ Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd
[1922] 2 AC 180
Involved a 99-year-old lease. The Court held that it was not frustrated by government
restrictions on building because the lease still had 99 years to run. The length of the
interruption so caused was just a small fraction of the whole term.
✗ FA Tamplin Steamship v Anglo-Mexican Petroleum Products [1916 ] 2 AC 397
A ship chartered for 5 years. It was requisitioned by the government after 2 years. It altered
it for use as a troop ship. The question was who got the compensation from the Crown. The
shipowner claimed that the contract was frustrated; they got the ship back, and any
compensation should be given to them. The Court held that there was no frustration because
the charter party expressly allowed the borrower of the ship (charterer) to sub-let the ship to
someone else. There remained many months when the ship may still be free for commercial
use. Thus, the compensation belonged to the charterer.
3.2 Physical impossibility

The supervening event makes performance physically impossible (usually only for one party,
the other still being able to perform by paying money). However:
(i) Impossibility of performance is insufficient: depends on the construction (risk allocation)
of the contract; ‘a man may undertake to do that which turns out to be impossible, and yet he
may still be bound by his agreement’ (Taylor v Caldwell).
(ii) Impossibility of performance is unnecessary: because of frustration of purpose (see
later). Moreover, supervening events may only result in partial impossibility or only make the
contract more onerous or time-consuming to perform. Whether they frustrate the contract is a
question of degree.
3.2.1 Death or incapacity in personal service contracts

renders its performance impossible or radically different.
✓ death;
✓ internment, conscription or imprisonment for all or the substantial remainder of the
contract’s duration; although only the employer can frustrate the contract for an employee’s
imprisonment. The employee is barred since it is her fault (ie the frustration is self-induced);
✓ incapacitated by illness: in Notcutt v Universal Equipment Co [1986] ICR 414
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An employment contract was frustrated

Relevant considerations include: the terms of the contract; the nature and duration of the
employment and of the illness; the period of past service; and the prospect of recovery.
Death or incapacity not frustrating if performance is not of a personal character:
3.2.2 Destruction of the subject matter

Destruction of something necessary for contractual performance may frustrate the contract. eg
Appleby v Myers (1867) LR 2 CP 651
The Wai Lee Firm v Ku Chung Ming (1911) 6 HKLR 146
The contract was to perform alterations and repairs to a building in a limited time for a lump
sum. The building was dragged down and destroyed by the collapse of the adjoining structure.
The Court held that this frustrated the contract as the continued existence of the building was
a fundamental condition of the contract. The Court has even suggested that leases could in
wholly exceptional circumstances be frustrated by the literal disappearance of the land, as ‘by
some vast convulsion of nature swallowed up the property altogether or buried it in the depth
of the sea’.
Leases ? could, wholly exceptionally, be frustrated by the literal disappearance of the

premises, as where ‘some vast convulsion of nature swallowed up the property altogether, or
buried it in the depths of the sea [eg a tsunami]’ (Cricklewood v Leightons) or if an upper floor
flat were totally destroyed by fire or earthquake (National Carriers v Panalpina).
Wong Lai-ying v Chinachem Investment Co Ltd PC on appeal from HK [1980] HKLR1

The question is whether 24 contracts for the sale of flats by Chinachem to Wong in two tower
blocks which was to be built by Chinachem is frustrated by a landslide. Chinachem was to
build 24 flats. There was an unforeseeable landslide, which disrupted the building for the 24
flats. The landslide obliterated the work already done, killing 63 people. The Court held the
contract frustrated. The scale of the destruction on the construction site was such that it caused
the total loss of all the work that had been done on the building’s foundation, this amounted to
$2 million, amounting to a huge commercial loss. It woujld be unjust to hold the builders to
the contract in such circumstances.
Partially destruction? a matter of degree.

✓ Asfar v Blundell [1896] 1 QB 123
There was a cargo of dates which was supposed to be delivered. It was submerged in water
of sewage for 2 days. It became a different commodity in business.
ü Jackson v Union Marine Insurance Co [1874] LR 10 CP 125
A charter party; a ship was grounded and required repairs for 7 months.
3.2.3 Failure or disruption of supplies

ü Section 9 of the Sale of Goods Ordinance provides: ‘Where there is an agreement to sell
10
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specific goods and subsequently the goods, without any fault on the part of the seller or
buyer, perish before the risk passes to the buyer, the agreement is avoided.’
Î Contracts for unascertained goods are rarely frustrated because, subject to physical or legal
impossibility, the source of supply is normally at the supplier’s risk: Blackburn Bobbin Co
Ltd v TW Allen Ltd [1918] 1 KB 540
ü But a contract may be frustrated if the source of supply was intended by both parties and it
fails without the fault of either party, e.g. in Howell v Coupland, a potato crop grown on
land specified in the contract fails through drought or disease, the contract was void for
frustration.
Where the commonly intended source partially fails, a term will be implied requiring the
supplier to deliver the smaller quantity available. The supplier is relieved only to the extent of
the deficiency. Sainsbury v Street [1972] 1 WLR 834
Street agreed to sell Sainsbury 275 tons of barley grown on his farm. But the farm only yielded
140 tons and Street tried to claim frustration. Street then sold the 140 tons to a third party. The
Court ruled that Sainsbury had the right to requiring Street to deliver the 140 tons which was
produced on the property. This decision is right, as in a time of failing crops, the seller can
disregard the contract and sell the produced crops to others at a higher price.
3.2.4 Delay and hardship (overlaps with physical impossibility)

Delay and hardship have many potential causes.
Charterparties may be affected by the ship being: stranded, requisitioned; seized; or
detained.
They may also be affected by strikes, or the closure of intended routes.
Building contracts may be affected by: shortages of labour and materials; or wartime
restrictions.
Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724
The focus is on the effect it has on the performance of the obligations undertaken. Do they fall
outside what the parties could reasonably contemplate at the time of contracting?
Three factors are particularly significant in finding whether there is frustration:
(i) The increased difficulty of performance must be caused by a new and unforeseeable event,
and not merely be within the commercial risks undertaken
✗ Davis Contractors v Fareham
Davis agreed to build 78 houses for Fareham. The work took almost 3 times longer than was
anticipated and cost 17000 pounds more than was planned because of a serious labour
shortage and difficulty in getting building materials. Davis completed the houses, but argued
that the contract was frustrated and so they were not limited to the contract price but could
claim the extra 17000 pounds on a quantum merit (if there is no contract, you can confer a
benefit on someone that they ask for, you are entitled to ask for a reasonable price if there is
no contract).
The Court rejected this claim. By agreeing a fixed price, Davis took the risk of increased cost
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and delay. Secondly, the difficulties they encountered were clearly foreseeable and Davis
could have provided for them in the contract. Thirdly, although Davis’ performance was
significantly more onerous, it was not radically different from what was originally intended.
‘it is not hardship or inconvenience or material loss itself which calls the principle of
frustration into play. There must be as well such a change in the significance of the
obligation that the thing undertaken would, if performed, be a different thing from that
contracted for’. Thus, frustration will not avail where building contracts encounter delays
or disruptions in the supply of labour or materials, or where rising prices eat into the
builder’s expected profit. As Lord Reid said, although ‘the delay was greater in degree than
was to be expected . . . [i]t was not caused by any new and unforeseeable factor or
event: the job proved to be more onerous but it never became a job of a different kind from
that contemplated in the contract.’
✗ Inflation and fluctuations in the value of currencies will not normally frustrate the contract,
although fluctuations of a wholly astronomical order may do so.1
✗ Severe economic crises will not normally frustrate the contract: Tandrin Aviation v Aero
Toy Store [2010] 2 Lloyd's Rep. 668
the court rejected the argument that the ‘unanticipated, unforeseeable and cataclysmic
downward spiral of the world’s financial markets’ was sufficient to constitute a force
majeure (irresistible force of superior strength) event, nor would it amount to frustration.
✗ Bad weather conditions which delayed the unloading of cargo by four days did not frustrate
the contract in Thiis v Byers (1876) L. R. 1 Q. B. 244
Since the charterer was given a number of days for unloading, it must ‘take the risk of any
ordinary vicissitudes (i.e. shit happens, you just have to take it); it was liable for demurrage.
Î The same generally applies where delays in loading or unloading are caused by strikes:
Budgett & Co v Binnington & Co [1891] 1 Q. B. 35
ü However, a prolonged strike may exceptionally frustrate the charterparty because of the
operation of the following two factors.
(ii) Parties are entitled to know where they stand
A party can claim frustration through delay before the expiry of the time for performance, since
parties should be able to rearrange their affairs in response to the event and not be left in
suspense.
The Nema, Lord Roskill said (and see National Carriers v Panalpina; Bank Line v Arthur
Capel):
“it is often necessary to wait upon events in order to see whether the delay already suffered
and the prospects of further delay from that cause, will make any ultimate performance of
the relevant contractual obligations ‘radically different’ . . . from that which was undertaken
by the contract. But, as has often been said, businessmen must not be required to await
events too long. They are entitled to know where they stand. Whether or not the delay is
1
Multiservice Bookbinding Ltd v Marden (1979); British Movietonews v London and District
Cinemas (1952); Davis Contractors Ltd v Fareham; National Carriers v Panalpina.
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such as to bring about frustration must be a question to be determined by an informed

judgment based upon all the evidence of what has occurred and what is likely thereafter to
occur. Often it will be a question of degree whether the effect of delay suffered, and likely
to be suffered, will be such as to bring about frustration of the particular adventure in
question.
In The Nema, a ship was chartered for seven consecutive voyages between April and December
1979. After the first voyage, strikes beginning on 6 June grounded The Nema. On 3 October,
an arbitrator (later upheld by the House of Lords) decided that the contract was frustrated
although the strike ended two days later. It was irrelevant as on 3 October, it didn’t seem that
it wouldn’t end any time soon.
Embiricos v Reid [1914] 3 KB 45
a charterparty for a voyage through the Dardanelles was frustrated on the outbreak of war
between Greece and Turkey when it was thought that the Dardanelles would be closed for the
entire length of the charterparty, although it was actually opened for a period during which the
contract could have been performed.
(iii) Performance in the new circumstances radically alters the original rights and obligations
(a) the contract was to be performed only at a specified time or within a specified period,
subsequent delayed performance may be of no use to the recipient and so frustrate the
contract.
Jackson v Union Marine Insurance Ltd
This involved a 7-month delay in a charterparty and according to which a ship was to sail
with all possible dispatch to load a cargo in San Francisco. The delay frustrated the
contract. The Court ruled the voyage after the delay would be fundamentally different as
it would be an autumn voyage but not a spring voyage, and this was crucial to the context
of the contract.
(b) performance after the delay would be radically different because performance would
occur in a radically altered market.
Acetylene Corp of Great Britain v Canada Carbide Co (1921) 6 Ll.L.Rep. 410
This involved a shipment of goods, and was delayed for 3 years due to wartime
requisitioning. The contract was held to be frustrated because 3 years later the market
conditions had radically changed.
Metropolitan Water Board v Dick Kerr [1918] AC 119
This involved wartime restrictions that delayed indefinitely the building of a reservoir 2
years into a six-year contract.
“I agree that the probability of hardship to one side or the other is not a matter of
material consideration, but it is quite a different matter when there is an indefinite and
indeterminate liability which might impose on either party an unforeseen burden
totally foreign to the ordinary incidents in a contract of this character . . .
[Performance] at some future period . . . will be under a different contract based on
changed considerations. All the prices will have to be fixed in reference to different
conditions, and the time over which the work will be carried on will be wholly
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different.”
(c) the contemplated means of performance is made impossible by a supervening event
when: (i) it is the only method of complying with the contract; or (ii) the alternative means
radically alters the obligations undertaken.
Codelfa Construction Pty Ltd v SRA (NSW) (1982) 149 CLR 337
There was a contract to excavate a tunnel within 130 weeks. It was anticipated that they
would work day and night. The contract was frustrated when the means contemplated by
the two parties to allow them to finish in 130 weeks was prohibited by an injunction which
prevented work from 10pm to 6am.
The Eugenia [1964] 2 QB 226
A charter-party was supposed to sail between Genoa and India. Normally, they do it
through the Suez Canal, but it was affected by the blocking of the canal due to the Anglo-
French Invasion of Egypt in 1956. The alternative route via the Cape of Good Hope
increased the journey time from 108 days to 138 days. The Court held that this did not
frustrate the contract. The difference was not sufficiently radical, because the cargo was
not such to be affected by the delay, and there was no evidence that the early arrival of
the cargo in India was of particular importance. The delay didn’t really matter.
Tsakiroglou v Noblee Thorl [1962] AC 93
This involved alternative performance of a charter-party (the stipulated route was through
Suez Canal, this time through Cape of Good Hope). The Court held that the contract was
not frustrated, the contract was not commercially or fundamentally different, because the
route was normally irrelevant to the buyer, the goods were not perishable, there was no
fixed date of delivery, and there was no shortage of ships passing through the Cape of
Good Hope.
3.3 Impossibility of purpose

The obvious danger of this category is its width and possibility for people to escape bad bargains
easily.
Two factors severely limit the scope of its operation:
(i) The purpose which has become impossible to achieve must be common to both parties
and have, expressly or impliedly, ‘been assumed by the parties to be the foundation or basis of
the contract’ (Krell v Henry).
(ii) The common purpose must be thwarted to a very high degree.
3.3.1 Non-occurrence of an event (The coronation cases)

Krell v Henry [1903] 2 KB 740
The purpose can be inferred from: the position of the flat, the owner’s advertisement of
the windows that can view the coronation procession, the unusual hire terms
Herne Bay Steamboat v Hutton [1903] 2 KB 683
Hutton hired a pleasure boat for the purpose of viewing the naval review and a day’s
cruise around the naval fleet. The naval review was cancelled along with the
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coronation. The Court rejected the claim for frustration because they regarded Hutton’s
adventure to charge passengers for the cruise as his own adventure.
3.3.2 Leases and sales of land
National Carriers v Panalpina [1981] AC 675
This involved a ten-year lease of a warehouse. The warehouse was used only as a warehouse
for the lessee’s business. Five years into the lease, the government closed access to the
warehouse for 20 months. The Court held the contract was not frustrated, as there was more
than 3 years’ lease to go. If the prohibition was to be longer, the contract may have been
frustrated.
The House of Lords accepted that leases can in principle be frustrated, e.g. a short term lease
with a closely prescribed purpose.
Cricklewood v Leightons [1943] KB 49
This involved a 99-year building lease. The Court will not be frustrated by war-time building
restrictions imposed when it still had 90 years to run, and the war would likely only last for
a fraction of the 90 years.
Li-Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353
This involved the outbreak of SARS. The defendant leased an apartment for 2 years. Many
residents in the block were infected with SARS. The defendant then moved out. The
Department of Health issued an order to isolate the block for 10 days. The residents were
evacuated. The defendant then sought to end the agreement, claiming the contract to be
frustrated. The Court ruled that there was no frustration. It did not significantly change the
nature of the outstanding contractual rights and obligations, and from that which the parties
can reasonably contemplate at the time when entering into the contract.
Yung Kee Co v Cheung So Yin Kee [1983] 1 HKC 386
This involved a lease of 4 years. Less than 3 months from the end of the lease, fire destroyed
the building. tenant claimed frustration and the return of their deposit. The Court held that
there was no frustration; the closer the lease was to the end of the agreement, the more
difficult to say this is not what I bargained for.
Wong Ying Wah v Tsang Ying Ying Sophia [2015] HKCU 1718
This involved an unfurnished residential flat. This caught fire 5 months into a 3-year tenancy
agreement. The fire caused serious damage only to the living room. Two other rooms had
smudges and stains, and 2 air-conditioners melted. The Court said no frustration, because
there was no implied warranty for anything. There was no warranty that the flat was fit for
inhabitation.
ü In Denny, Mott & Dickson v Fraser, an agreement to lease a timber yard to allow the
parties to perform their contract was frustrated when wartime regulations prohibited the
performance.
ü Leases may also be frustrated by catastrophic events that physically destroy the leased
premises (7.3.2.2 physical impossibility).
Frustration of sales of land is even rarer than frustration of leases, since the risk of destruction,
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damage or changes to the land’s uses is usually borne by the purchaser as the equitable owner
in the period between the making and completion of the contract (when she becomes the legal
owner):
Hillingdon Estates Co v Stonefield Estates Ltd [1952] Ch 627
Amalgamated Investment & Property Ltd v John Walker & Sons Ltd [1977] 1 WLR 164
John Walker advertised the site as suitable for redevelopment, and Amalgamated Investments
made clear that it was buying the property solely for the purpose of redevelopment. Shortly
after the contract was made, the building was listed as a place of special architectural and
historical interest. The listing meant that they couldn’t do any redevelopment. The Court
rejected Amalgamated Investment’s claim of frustration as there was no promise that the
property can be redeveloped and the risk might be listed was one that runs with the property;
all buyers of the property have to take that risk. Performance was not radically different from
what was undertaken.
This seemed like a retreat from Krell v Henry, which shows that impossibility of purpose is
a very narrow category. The Courts are very reluctant to find impossibility of purpose in most
cases.
4. CONSTRUCTION OF THE CONTRACT (Risk allocation)
4.1 Express provision of risk allocation: force majeure and hardship

clauses
These clauses: Increases Certainty
Can depart from the default rules.
Parties can specify:
(i) the circumstances excusing further performance of the contract (these may be wider or
narrower than the scope of frustrating circumstances), e.g. acts of God (natural phenomena) or
of war, strikes, riots, breakdown of machinery, currency fluctuation or increased costs;
(ii) the consequences of the triggering circumstance, e.g. provision for delay or
suspension of performance, conferring rights of cancellation on one or both parties,
requiring submission to arbitration, disciplinary procedures or good faith renegotiation
between the parties, or triggering a price-escalation clause.
The courts have taken a restrictive approach to the interpretation of such clauses in order to
avoid unfair outcomes. This is similar to the approach taken by the courts in dealing with contra
proferentum clauses for exclusion clauses.
Metropolitan Water Board v Dick Kerr:
a clause in the contract provided for an extension of time in the event of delay ‘whatsoever
and howsoever occasioned’. The Court held that it didn’t cover the situation because the
disruption and the delay ensuing cannot be possibly in the contemplation of both parties
when the contract was made. The delay is interpreted as moderate delays.
Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] 1 WLR 138
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a contract was made in 1929 for the supply of water for 7 pence per 1,000 gallons ‘at all
times hereafter’.
Wong Lai-ying v Chinachem Investment Co Ltd PC on appeal from HK [1980] HKLR1
Landslide case- there was a clause:
… should any dispute arising between the parties touching or concerning this agreement or
should any unforeseen circumstances beyond the vendors control arise whereby the vendors
becomes unable to sell the said undivided shares and apartment to the purchaser as
hereinbefore provided, the vendor shall be at liberty to rescind this agreement forthwith
and to refund to the purchaser all instalments of purchase price paid by the purchaser
hereunder without interest or compensation and upon such rescission and upon repayment
of the instalments of purchase price this agreement shall become null and void as if the
same had not been entered into and neither party shall have any claim against the other.
4.2 Implied allocations of risk: foresight (i.e. no frustration)

The court may infer from the parties’ silence that they have impliedly allocated the risk of the
supervening event to the performing party (i.e. the latter remains liable for non-performance).
Whether this is so depends on the type of transaction and the particular risk, eg:
• a long-term lease or a sale of property generally allocates almost all risks to the
lessor/buyer; a short-term lease for a specific purpose allocates fewer risks;
• a building contract allocates to the builder the risk that the soil conditions and the cost and
availability of labour and materials will make performance more onerous than anticipated
(Davis Contractors v Fareham), but not that subsequent legislation will make it illegal;
• fluctuations in prices or the value of currencies will not normally frustrate the contract
(Davis Contractors v Fareham, but Lord Reid reserved his position on fluctuations of a
wholly astronomical order).
How foreseeable must the supervening event be to oust the frustration doctrine?
It is a question of construction whether the parties’ silence, despite foreseeing the risk, should
be taken to mean:
(i) that the fate of the contract should be left to ‘the lawyers to sort it out’, by reference to
the frustration doctrine; or
(ii) that the contract remains binding irrespective of the change of circumstances, ousting
the frustration doctrine. This inference should only be drawn where the degree of
foreseeability is very high.
The court will not allow the frustration doctrine to be excluded easily by silence.
The Eugenia, Lord Denning explains:
It has frequently been said that the doctrine of frustration only applies when the new
situation is ‘unforeseen’ or ‘unexpected’ or ‘uncontemplated’, as if that were an essential
feature. But it is not so. The only thing that is essential is that the parties should have made
no provision for it in their contract . . . cases have occurred where the parties have foreseen
the danger ahead, and yet made no provision for it in the contract.
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WJ Tatem Ltd v Gamboa [1939] 1 KB 132

G chartered a steam ship from T for 30 days to evacuate refugees from the Spanish Civil War.
A high daily rate of hire was payable until the ship’s return and would only cease when the
ship was missing. It turned out that half way through the charter period, the ship was seized,
and it was not returned for about two months. T claimed the daily hire rate during the entire 2-
month period, while G claimed the contract frustrated. The Court agreed with G; the contract
was frustrated when the ship was seized. Although the ship was to some extent foreseen to be
seized judging from the high daily rate of hire, it was not foreseeable that the ship would be
detained for so long during the short hire period of 30 days.
5. FAULT: self-induced frustration (i.e. no frustration)

Even if the supervening event was sufficiently fundamental, and the risk was NOT allocated by
the contract to either one of the parties, it still had to be shown that the claimant was not responsible
for bringing the frustrating event.
It’s up to the party suing for breach to prove that the other party was at fault so that there was no
frustration. But how?
5.1 Breach of contract

A party cannot plead frustration if she has contributed to the alleged frustrating event by
conduct amounting to a breach of the contract.
5.2 Anticipatory breach of contract

A party is also disqualified from claiming frustration if her deliberate, voluntary or negligent
conduct has the effect of disabling her from performance of the contract, analogous to
anticipatory breach by the party’s own act.
The issue is one of control; the test is whether the complainant had the means and opportunity
to prevent the alleged frustrating event from occurring, but nevertheless caused or permitted it
to occur.
Joseph Constantine v Imperial Smelting Corp [1942] AC 154
‘The possible varieties are infinite, and can range from the criminality of the scuttler
who opens the sea-cocks and sinks his ship, to the thoughtlessness of the prima donna
who sits in a draught and loses her voice.’ However, not ‘every destruction of corpus
for which a contractor can be said, to some extent or in some sense, to be responsible,
necessarily’ excludes frustration for being self-induced; it is a matter of degree.
If one party is disqualified by her self-induced frustration, the other party can still rely on the
otherwise frustrating event: FC Shepherd v Jerrom [1986] ICR 802
J was detained in a borstal for 39 weeks, preventing him his performance of his apprenticeship.
The borstal boy cannot claim for frustration for not being able to perform, but his employer
could dismiss him. If J had sued him for unfair dismissal, the employer could have said
‘frustration’.
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5.3 Power to elect (controversial, sometimes comes up in exams)

Partial destruction of supplies such that a party cannot satisfy all her contracts.
She must choose which contracts to allocate remaining supplies to, and which to leave
unperformed. The very fact that a party has exercised a choice not to perform a certain contract
bars the frustration of that contract; her choice breaks the chain of causation between the
external event and her inability to perform.
Frustration allowed if: (i) the outside event completely destroys a party’s supplies; or (ii) she
had specified only one mode of performance or allocated a specific supply to a particular
contract, and that becomes impossible to perform due to the outside event.
Maritime National Fish v Ocean Trawlers [1935] UKPC 1

MNF chartered from OT a trawler for otter trawling. It can only be used for otter trawling
and can only operated with a license. MNF applied for 5 licenses for 5 ships, one of them
from OT. They only got 3 licenses, so they had to choose from the 5 ships they hired. They
allocated the licenses to 3 trawlers that did not include OT’s trawler. They tried to frustrate
the contract with OT due to impossibility of purpose. The Privy Council said no
frustration, as the trawler was only not usable because of MNF’s own choice. The
contract with OT would have been possible to perform if MNF had allocated a license to
the trawler.
The Super Servant Two [1990] 1 Lloyd's Rep 1

W agreed to transport L’s drilling rig between 20 June and 20 August using either The Super
Servant 1 or The Super Servant 2. W internally The Super Servant 2 to this contract, and
allocated The Super Servant 1 to another contract. Before the performance, The Super Servant
2 sank. The owner of the ship then claimed frustration. The Court of Appeal rejected the
claim for frustration because it was just W’s election not to use the remaining ship that led to
its own non-performance. In the end, W was excused under a force majeure (unforeseeable
circumstances that prevent someone from fulfilling a contract) clause – there was an express
allocation of risk which covered several events, including ‘perils or dangers and accidents in
the sea’. If there wasn’t that clause, they would not have frustrated the contract.
Criticism
It leaves a seller or supplier of goods in an impossible position where her source partially fails
due to an unforeseeable event and she can’t satisfy all her contractual obligations. The problem
is, if she can’t perform all of her contracts but she can perform some of them, she would not be
able to frustrate any of them. Merely choosing which contracts not to perform breaks the chain
of causation with a supervening event. This seems to go against the idea of frustration, which
should allow a party to frustrate only some of her contracts if the supervening event makes it
impossible to perform all of them.
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6. EFFECT OF FRUSTRATION
6.1 Automatic discharge (The contract cannot be revived; the Court cannot
keep the contract)
Hirji Mulji v Cheong Yue [1926] AC 497
A charter-party was frustrated. Although the parties were initially willing to continue with the
charter-party after the ship was released from requisitioning, i.e. the parties agreed that this
will happen after the frustrating event has passed, the contract was discharged and thus this
agreement was irrelevant.
6.2 Losses and gains in performing the contract up to frustration

6.2.1 Overview
Automatic discharge is straightforward where the contract is executory (yet to be performed),
but problems arise where the contract is partly executed (performance has begun).
E.g. a contract where A contracts to pay £50,000 for ten performances by B in A’s theatre. At
the point of frustration:
• A may have actually made some payment to B or the payment may be owing; A may also
have incurred other costs in furtherance of its own contractual performance, e.g.
maintaining the theatre and advertising the performances; and
• B may have given all or just some of the performances and may also have incurred costs in
furtherance of its contractual performance by, e.g. hiring actors and making costumes.
The Law Amendment and Reform (Consolidation) Ordinance (Cap23) (LARCO) ss 16, 17, 18
incorporates the English Law Reform (Frustrated Contracts) Act 1943
6.2.2 The common law position

The common law position is important to an understanding of LR(FC)A itself.
(i) Money paid or due:
• originally, losses lie where they fall
Chandler v Webster [1904] 1 KB 493
Another coronation case. C paid 100 pounds immediately to watch the coronation. 40 pounds
was payable at a later date. The coronation was cancelled later. The contract was frustrated.
C could not get his 100 pounds paid, and was still liable for 40 pounds. This position was
softened by allowing recovery of money paid for total failure of consideration (failure of
performance). If the other side had given nothing in return, the buyer can recover money.
• this position was softened by allowing recovery of money paid for total failure of
consideration
Fibrosa Spolka Ackcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4
Fibrosa paid 1000 pounds for the manufacture of machinery. The contract was frustrated by
the outbreak of war. Fairbairn refused to repay the money because they had already incurred
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considerable expenses for the contract. The Court said the 1000 pounds had to be returned.
Although Fairbairn had done preparatory work, they haven’t done anything owed under the
contract.
This leaves the law in an unsatisfactory state.
• The requirement of total failure bars total recovery if the payer receives trivial
performance of the contract
• The payee cannot offset the costs incurred for the performance of the contract
(ii) Non-money benefits conferred under the contract was only recoverable if payment for
them was ‘due’ under the contract before the frustrating event. Obligations to pay thereafter,
as with all outstanding obligations, are discharged on frustration.
Appleby v Myers (1867) LR 2 CP 651
A contract to install machinery in Myers’ factory and to maintain it for 2 years, payment on
completion of the work. Accidental fire destroyed the machinery in the factory, and the Court
held the contract frustrated. Myers recovered nothing for the work already done, because the
payment only fell due on completion.
6.2.3 The aims of LR(FC)A

The Law Amendment and Reform (Consolidation) Ordinance (Cap23) (LARCO) ss 16, 17, 18
incorporates the English Law Reform (Frustrated Contracts) Act 1943
-regulates the effects of frustrated contracts unless the parties have expressly provided
otherwise.
BP Exploration Co (Libya) Ltd v Hunt [1979] 1 WLR 783
the ‘fundamental principle underlying the Act . . . is prevention of unjust enrichment of either
party to the contract at the other’s expense’ and not the apportionment of the loss caused by
the frustration of the contract.
Lawton LJ said in the Court of Appeal that LR(FC)A was simply to ‘make the operation of the
law fairer’ (BP v Hunt (1981)).
6.3 Money paid or payable under LR(FC)A

S16(2) LARCO:
All sums paid or payable to any party in pursuance of the contract before the time when the
parties were so discharged (in this section and section 17 referred to as the time of discharge)
shall, in the case of sums so paid, be recoverable from him as money received by him for the
use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be
so payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses before
the time of discharge in, or for the purpose of, the performance of the contract, the court may,
if it considers it just to do so having regard to all the circumstances of the case, allow him to
retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not
being an amount in excess of the expenses so incurred.
• allows the payer’s claim to recover payments made prior to the frustrating event;
• relieves the payer from paying sums due prior to discharge; and
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• empowers the court ‘if it considers it just to do so having regard to all the circumstances’
to allow the payee to deduct against the sum to be returned, and claim against the sum payable
by payor but not paid i.e. the amount paid can be smaller:
• the whole or part of her expenses incurred, before the time of discharge, in or for the
purpose of, the performance of the contract. ‘Expenses’ include ‘such sum as appears to be
reasonable in respect of overhead expenses and in respect of any work or services performed
personally by the said party’ (s16(4)), including pre-contract expenses incurred ‘for the
purpose of, the performance of the contract’.
(i) How should the payee’s ‘just expenses’ (B2) be calculated?

Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226
Of the 3 possibilities above, the Court rejected (a) and (b), and exercised broad discretion:
‘There is no indication in the Act, the authorities, or the relevant literature that the court
is obliged to incline either towards total retention or equal division’.
Neither of these approaches (a and b) takes account of the payer’s wasted expenses.
Garland J exercised a broad discretion in allowing the promoters to recover the whole of the
$412,500 paid without deduction to reflect the group’s wasted expenses of $50,000.
Unjust enrichment prevented (the pop group would not be enriched by just needing to
pay $362.5k)
Full loss apportionment? [($450k + $50k)/2], each party bears $250k of the loss
Not adopted by Court
(ii) What is the ceiling of ‘just expenses’?

The sums paid + any sum due
Her wasted expenses in excess of that figure are not recoverable.
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E.g. Changing the facts of Gamerco v ICM:

• if the group’s wasted expenses were $1,000,000, it would only have been able to offset up
to $775,000 of that, being the total sum due from the promoters; and
• the group cannot recover any of its expenses if no sums were paid by or due from the
promoter at the time of frustration.
Advantageous for a party to secure a large pre-payment from the other party against which it
can offset its wasted expenses in the event of frustration. Otherwise, that party must make a
section 16(3) claim.
6.4 Non-money benefits under
S16(3) LARCO:
Where any party to the contract has, by reason of anything done by any other party thereto
in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other
than a payment of money to which subsection (2) applies) before the time of discharge, there
shall be recoverable from him by the said other party such sum (if any), not exceeding the
value of the said benefit to the party obtaining it, as the court considers just, having regard to
all the circumstances of the case and, in particular—
(a) the amount of any expenses incurred before the time of discharge by the benefited
party in, or for the purpose of, the performance of the contract, including any sums
paid or payable by him to any other party in pursuance of the contract and retained
or recoverable by that party under subsection (2); and
(b) the effect, in relation to the said benefit, of the circumstances giving rise to the
frustration of the contract.
E.g. Contract: A pays for B’s services/goods

Allows B to claim a ‘just sum’ where B’s contractual performance before discharge confers on
A a ‘valuable benefit’ other than money.
The ‘just sum’ cannot exceed the value of the benefit conferred on A and should be fixed having
regard to all the circumstances of the case and, in particular:
(i) A’s expenses incurred before the time of discharge in, or for the purpose of, the
performance of the contract, including any sums paid or payable by A to B under the contract
and retained or recoverable by A under section 16(2); and
(ii) the effect of the frustrating circumstances on the benefit conferred.
BP v Hunt, Goff J:
Stage I: identifying and valuing the benefit; and
Stage II: assessing the ‘just sum’ to be awarded to B.
6.4.1 Stage I: identification and valuation of the benefits conferred

• Where B transfers goods to A, the benefit is easily identifiable.
• Where B performs services, this is more complicated; is this:
• end product (eg a building or a manuscript). Goff J said that ‘benefit’ under LR(FC)A
23
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will usually denote the end product of services rather than the services themselves,
although a small service may create a very valuable end product while lengthy service
may create a worthless product.
• what if no end product? (eg transportation, surveying, entertainment or a holiday). Goff
J acknowledged that in cases of ‘pure’ services, which are never intended to produce
end products, the ‘benefit’ must be the value of the services themselves.
• What if part performance? What is part of a building, a painting, a play, a haircut or
a voyage worth to the recipient? Even if part performance of services can be
objectively valued, the recipient should still be entitled to say ‘but it isn’t worth that
to me. I only promised to pay for completed performance’. The point is underscored
where the contract is ‘entire’ (ie payment is only due on completion). This problem
is exacerbated in pure services cases . The better course is to accord any objective
value of the partial performance at Stage I, leaving the problem of determining the
just sum to be paid to Stage II.
• Reduction of the benefit by frustrating event: the frustrating event may reduce or
completely destroy the value of the end product of B’s goods or services.
• Goff J interprets this as belonging in Stage I to reduce or eliminate the benefit
transferred so that there is a lower ceiling for B’s ‘just sum’ claim at Stage II. If the
benefit was destroyed in Stage 1, the ceiling for ‘just sum’ is zero.
Mindy: Goff J is wrong. The preferable approach is to consider, at Stage II:

• the ‘subjective devaluation’ of the claimant’s partial performance; and
• the effect of the frustrating event on the benefit conferred,
in the court’s discretionary assessment of the ‘just sum’.
This approach is supported by:
• the wording of section 16(3) which defines valuable benefit (at Stage I) as that
obtained ‘before the time of discharge’; and
• the reference to the effect of the frustrating circumstance in section 16(3)(b) as one
of the factors to be considered in fixing the ‘just sum’ (at Stage II).
6.4.2 Stage II: assessment of the ‘just sum’

Little guidance on how the court will calculate the ‘just sum’.
Goff J confined the aim of LR(FC)A to the prevention of unjust enrichment
Court of Appeal in BP v Hunt (1981) preferred a broader discretionary approach.
This discretion is confined by four factors:

(i) Ceiling: the objective value of the benefit fixed at Stage I is the maximum for the
‘just sum’.
(ii) The effect of the frustrating event on the benefit conferred: section 1(3)(b) requires
this to be taken into account here.
24
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(iii) Contractual risk allocation: Goff J said that the contractual allocation of risk is an
important consideration; he thought it ‘likely’ that most section 1(3) claims will be limited to
a rateable portion of the contract price.
(iv) Recipient’s expenses: section 1(3)(a) directs the court to take account of the recipient’s
expenses in, or for the purpose of, the performance of the contract, including sums paid or
payable by the recipient under the contract which are retained or recoverable by her under
section 1(2).
7 HARDSHIP and CONTRACT MODIFICATION: frustration, duress

and consideration
In practice, a supervening event that makes the contract impossible or more onerous for one
party to perform may trigger renegotiation of the contract (usually to pay more or to accept
less). Whether the parties are bound by the modified contract brings together questions of
frustration, duress, and consideration.
(i) Frustration: if the original contract is frustrated then the modified contract is enforceable
because there is, strictly speaking, an entirely new contract so that the problems raised by one
party paying more or accepting less than under the original contract are sidestepped: the
consideration doctrine presents no obstacle.
Alternatives?
1. The contract may include a force majeure clause expressly providing for price or other
adjustments in specified circumstances of hardship, and may require good faith
renegotiation or submission to arbitration.
2. The law could require the parties to renegotiate, backed up by judicial modification if
renegotiations fail in defined circumstances of hardship. The UNIDROIT Principles of
International Commercial Contracts stipulated at Arts 6.2.1 and 6.2.2 that in such
circumstances the parties are bound to enter into negotiations with a view to adapting the
contract or terminating it. On failure to reach agreement within a reasonable time, either
party can resort to the court to modify the contract, or to terminate the contract at a date
and on terms fixed by the court.
(ii) No frustration, just hardship: if the supervening event does not frustrate the contract
but merely results in hardship to one of the parties, the enforceability of the renegotiation
depends on: (a) whether it is supported by consideration; and (b) whether duress vitiates the
renegotiation.
25
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Unfairness/2016-17/MC-W 1
UNFAIRNESS: Duress, Undue Influence, Non-Commercial Guarantees, and

Unconscionable Bargains, Unconscionable Contracts Ordinance (HK)
I. Introduction
1 ‘Where are we?’
2 Related law
3 Procedural and substantive unfairness (Basis of vitiating factors under unfairness)

 Procedural unfairness
o Defective consent (Claimant’s bargaining disability or weakness)
o Reprehensible conduct (Defendant’s unconscientious conduct)
o Lack of independent advice (Claimant)
Hart v O'Connor [1985] A.C. 1000, per Lord Brightman in defining procedural and
substantive unfairness:
‘If a contract is stigmatised as ‘unfair’, it may be unfair in one of two ways. It may be
unfair by reason of the unfair manner in which it was brought into existence; a contract
induced by undue influence is unfair in this sense. It will be convenient to call this
‘procedural unfairness’. It may also, in some contexts, be described as ‘unfair’ by reason
of the fact that the terms of the contract are more favourable to one party than to the other....
It will be convenient to call this ‘contractual imbalance’ (i.e. substantive unfairness). The
two concepts may overlap. Contractual imbalance may be so extreme as to raise a
presumption of procedural unfairness, such as undue influence or some other form of
victimisation. Equity will relieve a party from a contract which he has been induced to
make as a result of victimisation. Equity will not relieve a contract on the ground only that
there is contractual imbalance not amounting to unconscionable dealing.’
 Substantive unfairness
 Transaction is unbalanced against Claimant
 Or otherwise very improvident for C
The law is ready to intervene for procedural unfairness, but is not ready to intervene for the
outcome of the contract as long as ‘the game is properly played’.
4 Remedial effects of common law doctrines

4.1 Resist specific performance
4.2 Rescission ;
Contract is voidable (bona fide third-party purchaser protected; misrepresentation)
Contrast with:
 void contracts (mistake)
 termination for breach
 discharged contracts (frustration)
May give rise to an action for restitution of benefits conferred
4.3 Bars to rescission:

i) affirmation (I want to keep going)
ii) lapse of time
about:blank 142/232
iii) rights of third parties

iv) ability to restore the Defendant to status quo ante: restitution in integrum
impossible
Halpern v Halpern (No 2) [2006] 3 All ER 1139, [2008] QB 195
A bar to rescission due to inability to restore the Defendant’s status quo ante
was rattled. A family were arguing about a will. They reached a
compromised contract. A part of the compromised agreement was that one
party had to destroy certain documents. The party then complained for
duress and demand the contract to be set aside. The other party said that the
contract cannot be rescinded, as the party cannot ‘undestroy’ the documents.
The Court ruled that the complainant should not be unjustly enriched. If the
complainant was not unjustly enriched, then they are not so worried about
the second consideration – the complainant was prejudiced.
II. Duress
1 Justification
1.1 Overborne will? ‘I didn’t really consent’
Atiyah 98 LQR 197
Lynch v DPP for Northern Ireland [1975] 1 All ER 913, 926-38
1.2 Illegitimate pressure?

Barton v Armstrong [1976] AC 104
“…in life, including the life of commerce and finance, many acts are done "under
pressure, sometimes overwhelming pressure": but they are not necessarily done
under duress. That depends on whether the circumstances are such that the law
regards the pressure as legitimate.”
Universe Tankships of Monrovia v International Transport Workers Fed (The “Universe
Sentinel”) [1983] AC 366 at 383-384 and 400-401.
“The rationale [of economic duress] is that his apparent consent was induced by
pressure exercised upon him by that other party which the law does not regard as
legitimate, with the consequence that the consent is treated in law as revocable
unless approbated either expressly or by implication after the illegitimate pressure
has ceased to operate on his mind.”
2 The Legal Test for Duress

[There are] “two elements in the wrong of duress: (1) pressure amounting to compulsion
of the will of the victim (defective consent); and (2) the illegitimacy of the pressure
exerted. There must be pressure, the practical effect of which is compulsion or the
absence of choice. Compulsion is variously described in the authorities as coercion or
the vitiation of consent. The classic case of duress is, however, not the lack of will to
submit but the victim's intentional submission arising from the realisation that there is no
other practical choice open to him.” Universe Tankships of Monrovia, Lord Scarman, at
400.
R v Attorney-General for England and Wales [2003] UKPC 22
about:blank 143/232
(i) illegitimate pressure

(ii) causation
(iii) no practicable alternative (not a very important test)
3 Threats to the Person

Wa Lee Finance Co Ltd v Staryork Investment Ltd [2004] HKCU 691
The plaintiff’s employee and 3 other men kidnapped the owner of the defendant to an office
associated to the plaintiff. They told the owner of the defendant that he would not be
released unless he signed a loan agreement between the plaintiff and the defendant for $29
million. He signed, and was told that he was required to sign other documents and 2 men
would be stationed at his office until that happened. The Court of Appeal ruled that the
contract voidable for duress.
Mir v Mir [2013] 4 HKC 213
The parties were in a romantic relationship. They bought a property, he paid for it, but he
formally had a 3-quarter share. She lived in the flat with her children from a previous
marriage. He later gave her his share such that she owned the house. He later found out the
she had an affair and beat her up on 1 July. After that, he moved in to keep an eye on her.
On 12 July, she conveyed half the property to him, and he tried to force a sale of the
property. The Court ruled that the earlier assault was clearly a basis for finding illegitimate
pressure. The fact that she had 3 days to seek advice from a lawyer did not really matter,
as it was obviously a constant threat that he would beat her up if she tried anything.
Barton v Armstrong [1976] AC 104

The parties were both major stakeholders of a company. They were locked in a bitter power
struggle for ownership of the company. Barton claimed that he was induced to buy out
Armstrong’s interests in very generous terms because Armstrong threatened to murder him
and his family.
The Court:
‘If Armstrong’s threats were ‘a’ reason for Barton’s executing the deed he is
entitled to relief even though he might well have entered into the contract if
Armstrong has uttered no threats to induce him to do so.’
‘in this field the court does not allow an examination into the relative importance
of contributory causes…no contract resting in any degree on that foundation can
stand.’
Duress to the PERSON

1. Illegitimate pressure Unlawful threat or act
- Demand Generally unwarranted
- Good faith No mention but unlikely
2. Causation ‘A’ cause is enough
3. No practicable alternative No mention

Policy considerations *Protection of physical integrity
*Wrongdoers should not profit from own wrong
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4 Threats to Property
The Siboen and the Sibotre [1976] AC 104
‘A contract cannot stand if it is agreed ‘under an imminent threat of having one’s
house burnt down or a valuable picture slashed, though without any threat of
physical violence’
Vantage Navigation Corp v Suhail and Saud Bahwan Building Materials (The Alev)
[1989] 1 Lloyd's Rep. 138
Vantage chartered a ship to another party. That party was carrying steel to Suhail. The
shipper defaulted on the hire instalment to Vantage. Vantage told Suhail that unless
Suhail agreed to pay the hire for the shipper, they would not get the cargo. Suhail agreed.
It was held that the agreement was not entered into voluntarily because there was relevant
economic duress and duress to goods. The illegitimate pressure was unlawful as Vantage
was threatening to detain goods that belonged to someone else.
Duress to property must have been a ‘significant cause’ Dimiskal Shipping Co SA v

International Transport Workers Federation (The Evia Luck (No 2)) [1992] 2 AC 152
But test easily met in practice; Astley v Reynolds Astley v Reynolds (1731) 2 Str.915
Astley pawned a valuable plate to Reynolds. Reynolds told Astley that he could not get his
plate back unless he paid more than twice the legal interest rate. Astley paid, but he
successfully recovered the excess payment for duress. The Court found the necessary
causation because it was prepared to assume that Astley might have had such an imminent
want of his property that an alternative cause of action, i.e. to sue for breach of contract,
would not do.
Duress to the PERSON
1. Illegitimate pressure Unlawful threat or act

- Good faith No mention but unlikely
2. Causation ‘A’ cause is enough
3. No practicable alternative No mention
Policy considerations *Protection of physical integrity
*Wrongdoers should not profit from own wrong
5 Economic Duress: Threats to Breach a Contract unless they pay you more
5.1 Policy considerations
5.2 Overlap with Consideration Doctrine

Williams v Roffey Bros [1990] 1 All ER 512
about:blank 145/232
Gay Choon Ing v Loh Sze Ti Terence Peter and Another Appeal [2009] SGCA 3, Andrew
Phang Boon Leong JA on reform of the consideration doctrine:
[113] … the doctrines of economic duress, undue influence and unconscionability
appear to be more clearly suited not only to modern commercial circumstances but
also (more importantly) to situations where there has been possible “extortion”.
5.3 Economic Duress: the causation approach

Pao On v Lau Yiu Long [1980] AC 614
Factors relevant to establishing the causal connection between the pressure and the
entry into the contract.
 Whether practical and reasonable alternative courses of action
 Whether the claimant protested at the pressure
 Whether independent advice taken
 Whether steps taken to avoid contract at earliest opportunity
A bit inconclusive
B&S Contracts v Green [1984] ICR 419
B&S agreed to build exhibition stands for Green, but its workforce had been given
redundancy notices. They refused to work unless they receive 9000 pounds in severance
pay. Green offered to pay 4500 pounds as advance payment to help B&S out. But B&S
made clear that the performance would not proceed unless an extra 4500 pounds was paid.
They were cranking up the price. The Court said that B&S were impliedly threatening to
breach the contract. They had no practicable alternative, as non-performance would have
damaged Green’s reputation and expose Green to heavy claims from its exhibitors.
Atlas Express v Kafco [1989] 1 All ER 64

Atlas was a carrier company. They were carrying some goods from Kafco to a department
store in time for the Christmas sales. They made a mistake in giving the wrong quote.
They underquoted half the price in giving Kafco’s goods. In realizing the mistake, Atlas
drove up a truck, and said unless Kafco double the payment, they will not make the
delivery. Kafco agreed, as they would not be able to find another delivery company in
such short notice, and they will lose their lucrative contracts.
Huyton v Peter Cremer [1999] 1 Lloyd's Rep 620

‘the minimum basic test should be the ‘but for’ test: ‘The illegitimate pressure must
have ... actually caused the making of the agreement, in the sense that it would not
otherwise have been made either at all or, at least, in the terms in which it was made.
In that sense, the pressure must have been decisive or clinching.’
5.4 Is ‘no practicable alternative’ a third requirement? It is.

Huyton v Peter Cremer [1999] 1 Lloyd's Rep 620: Mance J had an ambiguous opinion
towards using the ‘no practicable alternative’ test -
“the ‘but for’ test could lead too readily to relief being granted. It would not, for
example, cater for the obvious possibility that, although the innocent party would
never have acted as he did, but for the illegitimate pressure, he nevertheless had a
about:blank 146/232
real choice and could, if he had wished, equally well have resisted the pressure and,
for example, pursued alternative legal redress”.
The following 2 cases, however, supported the use of ‘no practicable alternative’.
Adam Opel v Mitras Automotive (UK) Ltd [2007] All ER (D) 272
Adam was a manufacturer of vans. It informed its supplier Mitras in February that it would
cease getting parts from them in August. Mitras proceeded to demand certain compensation
and an increase in the price of parts that were supposed to already be supplied. Adam
unsuccessfully sort an injunction against Mitras. Adam continued to try to negotiate, until
it realized that it only had 20 hours’ worth of supplies remaining. At that point, Adam
agreed to Mitras’ demand. The agreement was set aside for economic duress. The Court
rejected Mitras’ claim that there was no economic duress as Adam had a practicable
alternative, as Adam’s new supplier was not ready for production, Adam could not obtain
alternative parts from anyone else. Although Adam could seek an injunction from the Court
to force Mitras to supply, the Court recognized that Adam had to make a quick decision in
circumstances where the threat had become the reality. “Capitulation can ensure with
certainty that their supplies can be restored, at a price, which seen by them as extortionate,
would actually be a fraction of the loss they would have suffered. In contrast, there was
serious imponderables in the injunction route. The outcome was not inevitably in their
favour.” The Court’s attitude was that they didn’t really have a reasonable alternative, so
Adam caved in.
Estinah v Golden Hand Indonesian Employment Agency [2001] 4 HKC 607

The defendant is an employment agency, and the complainant is an Indonesian domestic
helper who had tried to get the defendant’s help to get a job for her in Hong Kong. The
maid paid the agency $10,000 instead of $300. The agency was only allowed to get $300;
anything more would be illegal. However, the agency charged $10,000. They said that they
wouldn’t properly register her and she would become an illegal overstayer and she would
have been deported.
5.5 Economic Duress: shifting emphasis towards illegitimate pressure

5.5.1 All threats to breach contract illegitimate:
McKendrick, “The Further Travails of Duress” in Burrows & Rodger, Mapping the
Law: Essays in Memory of Peter Birks (OUP, 2006) at 187-188.
In this case, all cases would fall under economic duress. Mindy disagrees.
5.5.2 Good Faith of the threatening party- what does this mean?
DSDN Subsea Ltd v Petroleum Geo-Service ASA [2000] BLR 530, 545:
“In determining whether there has been illegitimate pressure, the court takes into
account a range of factors. These include
 whether there has been an actual or threatened breach of contract;
 whether the person allegedly exerting the pressure has acted in good faith
or bad faith;
 whether the victim has any realistic practical alternative but to submit to
the pressure;
 whether the victim protested at the time; and whether he affirmed and
sought to rely on the contract.
about:blank 147/232
These are all relevant factors. Illegitimate pressure must be distinguished from the
rough and tumble of the pressures of normal commercial bargaining.”
It is ‘difficult to accept that illegitimate pressure applied by a party who believes
bona fide in his case could never give grounds for relief against an apparent
compromise.’ (Good faith is relevant, but sometimes we can threaten someone with
good faith and still falls under duress, and thus is not determinative)
AS Burrows, The Law of Restitution (2nd ed., 2002), 233
"A threatened breach of contract should be regarded as illegitimate if concerned to
exploit the claimant’s weakness rather than solving financial or other problems of
the defendant. To this can be added two supplementary or clarificatory ideas....
First, a threat should not be considered illegitimate (made in bad faith) if the threat
is a reaction to circumstances that almost constitute frustration. And, secondly,... if
it merely corrects what was always clearly a bad bargain."
Problems with Good Faith Approach:

 Doesn’t explain the cases. There are cases where court have found duress although
you could argue that the threatening party acted in good faith, e.g. Atlas v Kafco,
B&S Contracts v Green.
 Seems inconsistent with competing policies e.g. the idea of sanctity and certainty
of contracts.
5.5.3 Alternative: Does the threatening party have any practicable alternative?
There is no duress if the threatening party had no practicable alternative but to ask for
more in order to complete the contractual performance.
“Threats are illegitimate; warnings are not.”
At the end of the day, the threatening party should not be able to get away with it unless it was
on the verge of bankruptcy.
5.6 The Demand

Universe Tankships of Monrovia v International Transport Workers Fed [1982] 2 All
ER 67
“The legitimacy of the pressure depends on the nature of the threat and the nature of
the demand.”
“The unfairness of the demand could be evidence that the illegitimate pressure caused
the complainant to the modification.”
5.7 Economic duress: other than by threats to breach contract

Universe Tankships of Monrovia v International Transport Workers Fed [1982] 2 All
ER 67
Involved a trade union that threatened to withdraw labour. They did that for backpay
and donation to the union. The Court found that there was no duress in respect of the
backpay. Present legislation protected trade unions. They did find duress in respect of
the demand for donation.
about:blank 148/232
Borrelli, Cornforth Hill, Christensen (Liquidators) v James Ting [2010] UKPC

21
Involved liquidators of a company who brought a claim against its former chairman
James Ting. They brought a claim for misappropriation of funds from the company and
concealment through false accounting. Ting tried to defeat the liquidators’ action by
saying that they agreed not to bring a claim against him. The Court held that the
settlement was voidable for economic duress. Firstly, they said that economic duress
can include unconscionable or unlawful action if it was for an improper motive. The
means employed by Ting was as follows: his failure to assist the liquidators in their
investigation of the company’s affairs. Ting did so through a long process of evasion
and deliberately avoided providing the liquidators with any meaningful information.
Ting opposed the liquidators’ scheme to raise money on the value of the company’s
stock exchange listing. He opposed them through resort to fraud and provision of false
evidence; he wanted to deprive liquidators of funds with a view to preventing any
investigation of his own conduct of the affairs of the company. Ting’s opposition to the
scheme was not made in good faith but was made for an improper motive. His conduct
was also described as unconscionable. Thirdly, Ting agreed to withdraw his opposition
to the scheme in exchange to the liquidators’ agreeing not to pursue any claims against
him, i.e. in reaching the settlement agreement. Effectively, it was illegitimate pressure
to take some lawful action opposing the liquidators’ scheme. It is bad faith if it is done
for bad reasons. It would offend justice to permit Ting to rely on the settlement
agreement to defeat the liquidators’ claims against him that he had misappropriated
large sums from the company for his own benefit. Secondly, ‘no practicable alternative’
is a necessary requirement for economic duress. The liquidators had to agree to the
settlement that they agreed not to claim against him because they stood to los funds to
continue the liquidation because of the impending deadline for approval of the scheme
to raise money. Thus, the choice faced by the liquidators was between two evils; either
to abandon the scheme and thus any real prospect of funds to continue to liquidation,
or to agree not to make any claims against Ting in relation to the conduct of the
company’s affairs. The liquidators had no reasonable or practicable alternative but to
make a deal with James Ting.
ECONOMIC duress
1. Illegitimate pressure Unlawful threat
Should it always be illegitimate?
- Good faith Relevant but inconclusive
2. Causation At least ‘but for’ cause; clinching or decisive cause
Inconsistently applied
3. No practicable alternative Formal requirement
about:blank 149/232
*Promote sanctity of contract,

Policy considerations *Prevent exploitation
BUT modification may be appealing because:
* change of circumstances has made performance
impossible without it; it encourage co-operation,
and accommodation in contracts
* the victim cannot obtain actual performance without it
*it is economically efficient
6 Lawful Act Duress
6.1 Policy considerations
6.2 Judicial recognition

Universe Tankships of Monrovia v International Transport Workers Fed [1982] 2 All ER
67
Alf Vaughan & Co Ltd v Royscot Trust plc [1999] 1 All ER (comm.) 956
Blackmail
Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm), [2012] 1
Lloyd’s Rep 501
It would be unusual where lawful act becomes duress, particularly in a commercial context.
Tam Lup Wai Franky v Vong Shi Ming Nicholas [2002] 4 HKC 135
The parties had been friends for 3 years. They trusted each other. The case arose from a
failed Internet venture in the late 90s. The claimant wanted a clean break and to get back
as much of his loss in investment as he could from the defendant. The claimant got the
defendant to agree to pay him 1.5 million by saying that the scheme they entered into would
amount to a fraud in law on his and his wife’s part, and that he, his wife and his friend
might get in jail, so the defendant had to buy the clamant out.
The Court found that this was set aside for duress. They found that the defendant was
appalled by the prospect that his wife’s reputation would be damaged. He was very
concerned that his friend would get into a criminal investigation. He himself in the past
was charged with indecent assault, and he worried that though he was not convicted, his
reputation would be tarnished when there is a police investigation. In addition, the court
found that there was an oppressive behavior by the claimant. The court held that though
the defendant was a sophisticated person, he had never before faced such a pressure,
especially when his Achilles’ heel was struck – the reputation of him and those close to
him would be jeopardized.
6.3 Normally legitimate to:

6.3.1 Threaten not to contract
Smith v William Charlick (1924) 34 CLR 38
The wheat board threatened to stop trading unless Smith agreed to pay more for the grain
that Smith was already contractually entitled to, a threat the board was entitled to make.
about:blank 150/232
CTN Cash and Carry Ltd v Galagher [1994] 4 All ER 714

Galagher delivered CTN’s order of 17,000 pounds’ worth of cigarettes to the wrong place.
The delivery of cigarettes was stolen before they could drive it to the right place. But
Galagher still demanded payment for the cigarettes. They honestly but mistakenly believed
that they were still entitled to demand the payment as they thought the risk had already
transferred to the buyer. They demanded this, or else they would withdraw all future credit
facilities. The Court found no duress, as Galagher acted in good faith even when they were
mistaken, and he was entitled to vary terms of future contracts with CTN. The Court
stressed that lawful act duress would not be likely to be found in arms-length commercial
dealings where certainty is paramount.
Not misrepresentation because it was an honest opinion
Tung Wing Steel Co Ltd v George Wimpey International Ltd [1985] HKEC 164
A price rise in steel rods for the building of the MTR. Tung Wing said that if you don’t
pay more, we are not going to deliver it. The Court said that this was not illegitimate
pressure.
6.3.2 Refuse to waive an existing contractual obligation or right / threat to exercise a power
R v Her Majesty’s Attorney General for England and Wales (2003) 17 March PC
An SAS soldier breached a confidentiality agreement when he tried to publish an account
of his experiences. He claimed that the agreement was voidable for duress, because they
threatened if he did not sign the agreement, he would be returned to a regular unit. The
Court ruled that not only was the agreement lawful, it was appropriately within its
jurisdiction to transfer soldiers. It was also reasonable because it was motivated by a
legitimate concern to prevent the disclosure of secrets that might threaten the security of
its operations and its personnel. The threat was lawful, the demand was reasonable.
Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd [2007] 3
HKLRD 439
The bank threatened to liquidate Esquire unless it agreed to the sale of property, which the
bank held as mortgagee. The court held that the bank was perfectly entitled to call in the
mortgage. The key to proving economic duress is prove of the illegitimacy of the pressure.
Much commercial activity necessarily involved pressure, often considerable and
sometimes overwhelming, exercised by parties with powerful bargaining positions, but that
in itself was not illegitimate.
6.3.3 Threaten to sue/ compromise of claims

CTN Cash and Carry Ltd v Gallagher [1994] 4 All ER 714
Huyton v Peter Cremer [1999] 1 Lloyd’s Rep 620
6.4 Lawful act duress?
6.4.1 Conduct in the context of past unlawful act or threat of future breach
about:blank 151/232
Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm), [2012]
1 Lloyd’s Rep 501 (The only clear case of lawful act duress)
This involved a charter of a ship. The shipowner then repudiated it because they re-
chartered it to someone else; clearly, they breached the contract. The charterer still
wanted the ship because they had the obligation to deliver cargo. The shipowner said
they could only provide another boat for a reduced rate and would give it to them later.
Later on, they said they would only provide a boat if the charterer waived all their
rights for the shipowner’s breach. The shipowner argued that there was no illegitimate
pressure, as when they insisted on the agreement not to sue them in order to provide
the substitute ship, they were not threatening to breach an existing contract. They were
not obliged to provide a substitute.
The Court said that there was duress. It was their repudiatory breach that put the
charterer in a position of having no practicable alternative but to submit to the demand
to avoid further catastrophic losses. The shipowner was taking advantage of their own
past breach of contract. Cook J said that once it was accepted that there is scope for
the doctrine to operate where the threatened act was lawful, each case would be fact-
sensitive. The more serious the impropriety, the more likely the pressure amounts to
illegitimate pressure.
Illegitimate pressure:
‘can be constituted by conduct which is not in itself unlawful, although it will be
an unusual case where that is so, particularly in the commercial context. It is also
clear that a past unlawful act, as well as a threat of a future unlawful act can, in
appropriate circumstances, amount to “illegitimate pressure”.’
6.4.2 Blackmail (lawful blackmail)

6.4.3 Salvage
The Port Caledonia, The Anna [1903] P 184
6.4.4 Actual undue influence- threat to harm C or someone that C is especially concerned to
protect
Williams v Bayley [1866] LR 1 HL 200.
The son had owed some people some money. Those people went to his father and said
that if they didn’t pay up, they would prosecute his son. The transaction was set aside.
Diners Club International (HK) Ltd v Ng Chi Sing [1987] 1 HKC 78

Mutual Finance v Wetton [1937] 2 KB 389
Joseph Wetton guaranteed his friend’s hire purchase to mutual finance. He forged the
signature of his brother and father, who were directors of the defendant’s company. On
the friend’s default, mutual finance threatened to prosecute Joseph unless the brother
paid. The Court held that mutual finance knew that the brother paid only because he
feared for his father’s life.
(US) Second Restatement of Contracts, section 176(2):

A threat is improper if the resulting exchange is not on fair terms and
(a) the threatened act would harm the recipient and would not significantly benefit
the party making the threat,
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(b) the effectiveness of the threat in inducing the manifestation of assent is

significantly increased by prior unfair dealing by the party making the threat, or
(c) what is threatened is otherwise a use of power for illegitimate ends.
LAWFUL ACT duress
1. Illegitimate pressure Immoral or unconscionable threat
- Good faith Relevant but inconclusive
2. Causation No mention but necessarily implicit
3. No practicable alternative No mention but necessarily implicit
*Sanctions lawful but unconscionable conduct,
Policy considerations *Sanctions abuse of power
BUT uncertainty in drawing the line
III. Undue Influence
1 Introduction
Tate v Williamson [1866] LR 2 Ch App 55
Wherever two persons stand in such a relation that, while it continues, confidence is
necessarily reposed by one, and the influence which naturally grows out of that confidence
is possessed by the other, and this confidence is abused, or the influence is exerted to obtain
an advantage at the expense of the confiding party, the person so availing himself of his
position will not be permitted to retain the advantage, although the transaction could not
have been impeached if no such confidential relation had existed.
2 Justifications
Allcard v Skinner (1887) 36 Ch D 145
2.1 Claimant’s impairment:
Birks and Chin “On the Nature of Undue Influence” in Beatson J and Friedmann D
eds, Good Faith and Fault in Contract Law, 1995, 57, 86-87
"… the word 'influence' indicates, in relation to some decision to be taken
or some class of such decisions, a degree of reduced autonomy on the part
of the one and a corresponding degree of control or ascendancy on in the
other. . . . 'Undue influence' is therefore too much influence, too much to be
compatible with the general presumption that adults all have the standard
common law capacity to manage their own affairs.. . . but the degree in
question is exceptional. Although adults are in reality of widely differing
intelligence and personality, by and large they must be presumed equally
able to cope with their own affairs. Similarly, adults come under all sorts of
different influences, and again they have to be assumed able to cope. The
law relieves only an extreme loss of autonomy."
about:blank 153/232
2.2 Defendant’s wrongdoing:

Royal Bank of Scotland v Etridge No 2 [2001] 3 WLR 1021, ¶ 6 – 7
"The objective is to ensure that the influence of one person over another is
not abused. In everyday life people constantly seek to…persuade those with
whom they are dealing to enter into transactions, whether great or small.
The law has set limits to the means properly employable for this purpose….
If the intention was produced by an unacceptable means, the law will not
permit the transaction to stand. The means used is regarded as an exercise
of improper or ‘undue’ influence, and hence unacceptable, whenever the
consent thus procured ought not fairly to be treated as the expression of a
person’s free will.”
Allcard v Skinner (1887) 36 Ch D 145
Involved a nun, who spent 2 years in a convent before she took her vow. The rules
of the convent imposed the most absolute submission by the sisters to the Mother
Superior who was to be regarded as the voice of God. They couldn’t seek advice
from anyone else without her permission. She eventually joined the sisterhood, but
later on decided to leave, and sought to get back what was left of the things she
gave to the Mother Superior. The Court found undue influence. As the Mother
Superior did nothing wrong, it was hard to show that there was any wrongdoing.
Also, it was also difficult to say that the novice nun had her consent impaired.
This shows that to find undue influence, it is not compulsory to find impaired
consent and/or wrongdoing.
Jennings v. Cairns, In the Estate of Davidge [2003] EWCA Civ 1935, [40]
‘The fact that the conduct of the person exercising influence is unimpeachable is
not by itself an answer to acclaim in undue influence’.
2.3 Failure to protect:

 Chen-Wishart, “Undue Influence: Vindicating Relationships of Influence” (2006) 59 Current
Legal Problems, 231-266
 Chen-Wishart, “Undue Influence: Beyond Impaired Consent and Wrong-
Doing, Towards a Relational Analysis” in Essays in Honour of Peter Birks eds
Burrows and Rodger, Oxford University Press, 2006, chapter 11 201-222
 Allcard v Skinner the undue influence doctrine is ‘a fetter placed upon the conscience of the
[trusted party], and one which arises out of public policy and fair play’ (at 190).
 Etridge the defendant commits undue influence by ‘preferring his own interests’ and ‘failing
to protect the claimant’s interests’ (at [9]).
3 The structure of undue influence

3.1 Pre-Etridge: Barclays Bank v O'Brien [1993] 3 WLR 786
Class 1 actual undue influence
Class 2 presumed undue influence from Claimant’s proof of:
i) a relationship of trust and confidence with Defendant - 2 ways
2A 'well-established categories of relationship' which the law regards as
automatically giving rise to a presumption of undue influence. E.g.
doctor- patient, solicitor-client, parent-child and religious advisor-
disciple
about:blank 154/232
2B relationships where it is proved that Claimant 'generally reposed

trust and confidence in the wrongdoer'
ii) the manifestly disadvantageous nature of the transaction to C
This raises a presumption of undue influence which D can rebut, by showing that
C’s consent was full, free and informed (usually can be proved by providing
independent advice)
3.2 Royal Bank of Scotland v Etridge No 2 [2001] 3 WLR 1021, especially paragraphs
6-30, 92-93, 104-107, 156-161 and 219-220
i) Undue influence is based on Defendant’s wrong-doing. [6]-[7]
ii) Rejection of the old categories (Class 1, Class 2A & 2B) as ‘apt to lead to error and
confusion.’ [92]
iii) There is just one category of undue influence:
‘[93]… At the end of the day, after trial, there will either be proof of undue
influence or that proof will fail. And it will be found that there was no undue
influence. In the former case, whatever the relationship of the parties and
however the influence was exerted, there will be found to have been an actual
case of undue influence. In the latter there will be none.’
2 ways of proving undue influence:

o Active abuse of relationships of influence
o Failure to protect
iv) The burden of proof for undue influence lies on C throughout although it can be
proved in different ways. ‘Presumed’ undue influence (Class 2) is merely an
evidential presumption: an inference of actual undue influence drawn from C’s
proof of particular circumstances (analogous to res ipsa loquitur) which then shifts
the evidential onus onto D to rebut the inference.
“[16]…This use of the term ‘presumption’ is descriptive of a shift in the
evidential onus on a question of fact. When a plaintiff succeeds by this
route he does so because he has succeeded in establishing a case of undue
influence. The court has drawn appropriate inferences of fact upon a
balanced consideration of the whole of the evidence at the end of a trial in
which the burden of proof rested upon the plaintiff. The use, in the course
of the trial, of the forensic tool of a shift in the evidential burden of proof
should not be permitted to obscure the overall position. These cases are the
equitable counterpart of common law cases where the principle of res ipsa
loquitur (the facts speak for themselves) is invoked. There is a rebuttable
evidential presumption of undue influence.”
4 Failure to protect by overt abuse (old class 1 actual undue influence)

Dunbar Bank plc v Nadeem [1998] 3 All ER 876, 883: ‘neither coercion, nor pressure, nor
deliberate concealment is a necessary element in a case of actual undue influence.’
BCCI v Hussain [2000] EWCA Civ 395
The husband of Benazir Bhutto's sister often subjected his wife to public humiliation
verbally and physically, slapping her and pulling her hair. She did not like him much, nor
about:blank 155/232
did she trust him. He put her head in a sink, turned on the hot water and told her she had
better accompany him to his lawyer where she guaranteed his debt. The Court found undue
influence.
BCCI v Aboody [1990] 1 QB 923
There must be: [1] influence, [2] exercise of that influence, [3] exercise was undue,
[4] inducement.
4.1 Bullying, confrontation and harassment-

BCCI v Aboody 1990] 1 QB 923
Involved a woman who did not understand business matters and relied on her husband. She
was an Iraqi Jew born and educated in Baghdad. At the age of 17, she moved to England
knowing no English. Her family moved exclusively in the Iraqi Jewish community and
observed the customs. Customs were none of the girls ever went out to work. Business was
a matter not discussed with women. Marriage was always arranged by the parents. Mrs
Aboody aged 17 married Mr Aboody who was 20 years older than her. She would sign
anything which he told her to sign. In this case, the bank manager told Mr Aboody that she
needed to be advised alone and he could not be in the same room, but Mr Aboody argued
that it was unnecessary as she would sign anything he gave her. He eventually relented,
allowing a solicitor to advise her against signing an extremely onerous document.
However, she said she wanted to go ahead. The lawyer then made a few suggestions to
limit her liability, but she didn’t seem to be interested. The lawyer was still trying to advise
her when the husband barged into the room uninvited, saying ‘why da hell don’t you get
on with what you are paid to do??’ and witnessed her signature while berating the lawyer.
The scene deteriorated with the husband throwing a fit, and Mrs Aboody was reduced to
tears. The lawyer couldn’t do anything to counter the husband’s barbaric behavior.
Clarke v Prus [1995] NPC 41 (Ch
Elderly man’s wife died. Made friends with younger woman. Gave her lots of presents
totalling about 2 million pounds over 20 years. The Court ruled that what started as Mr
Clarke’s folly ended with Ms Prus’ victimization at the end of his life when her demands
became vehement and filled with verbal abuse.
4.2 Threats to abandon-

Langton v Langton [1995] 2 FLR 890 (Ch).
The son and a daughter-in-law of a man moved in with him after he got out of jail. He was
jailed for murdering his wife, and was an old man already. The son and the daughter- in-
law knew that he was scared of going back into the institution and so they threatened to
stop looking after him as his health deteriorated if he didn’t sign over the property to them.
The Court found undue influence.
Bank of Scotland v Bennett [2001] 3 WLR 1021

The husband wanted the wife to sign a guarantee. She was a bit reluctant, so he accused
her of disloyalty and he said that she would be a waste of rations if she refused to guarantee
his debts and she would be splitting up the family. The Court found that this was moral
blackmail amounting to coercion and victimization.
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4.3 Excessive control, secrecy and exclusion of others who might dilute the defendant’s
influence-
Morley v Loughan [1893] 1 Ch 736
Morley was sickly but rich. Loughan was appointed as his companion. He persuaded him
to become an exclusive brethren in the church and went to live with him in practical
seclusion for the last 7 years of his life. Loughan controlled almost every aspect of his life.
In the end, Morley gave his entire fortune of $140,000 to Loughan.
4.4 The importance of:

 the relationship of influence?
 the unfairness of the transaction?
Both are important in determining whether there is due or undue influence.
CIBC Mortgages v Pitt [1993] 4 All ER 433
The Court said that actual undue influence is a species of fraud. A man guilty of fraud is
no more entitled to argue that the transaction was beneficial to the person who than to the
man who has procured the transaction by misrepresentation.
RBS v Etridge [2001] 3 WLR 1021
5. Failure to protect by omission (old class 2 presumed undue influence)

Etridge (at [160]):
 recognizes the possibility of undue influence ‘without any specific overt acts of
persuasion.
 The relationship between two individuals may be such that, without more, one of
them is disposed to agree a course of action proposed by the other
 the latter betrays this trust by preferring his own interests. He abuses the influence
he has acquired’ by failure to protect the weaker party ([9]).
5.1 Burden of proof and presumptions

Recall 3.2 above
5.2 The relationship of influence

5.2.1 Specially protected relationships- automatic (not just evidentiary) presumption:
[Old class 2A]
‘well-established categories of relationship’ which the law regards as automatically giving
rise to a presumption of undue influence. Why?
 doctor and patient,
 solicitor and client,
 parent and child; guardian and ward
 trustee and beneficiary
 religious advisor and disciple.
 Male fiancée and female fiancée
 NOT husband and wife.
Royal Bank of Scotland v Etridge (above) at [104] The presumption is that a relationship
of influence exists; there is no presumption properly so called that the confidence has been
abused unless the transaction is suspicious.
about:blank 157/232
5.2.2 Proved relationship of influence: [Old class 2B]

Relationships where it is proved that the C ‘generally reposed trust and confidence
in the wrongdoer’.
 The claimant expects protection from the other party
 The defendant knows that he/she had to protect the claimant
 Unnecessary to prove blind, unquestioning trust. It is enough that in past
dealings the claimant generally reposed trust and confidence in the
defendant. Potentially very broad category:
Bank of Credit & Commerce International SA v Aboody [1990] 1 QB 923 a wife and her
husband
Avon Finance v. Bridger [1985] 2 All ER 281 parents and their adult child
Cheese v. Thomas [1994] 1 WLR 129 great-uncle and great-nephew
Pesticcio v Huet [2004] EWCA Civ 372 brother and sister
Re Craig [1971] Ch 95 an elderly man and his housekeeper-companion
Lloyds Bank v. Bundy [1975] QB 326 a customer and a bank
O’Sullivan v. Management Agency and Music Ltd [1985] QB 428 a pop singer and his
manager
Goldsworthy v. Brikell [1987] Ch 378 an elderly farmer and his farm manager
Tufton v Sperni (1952) 2 T. L. R. 516
Tufton was a Muslim new convert with no business experience. He wanted to set up a
centre for Muslim culture in London. Sperni was another Muslim with business experience
and was brought into the committee to oversee the project. Sperni sold his house to Tufton
for the project for more than twice the market value. He reserved numerous privileges
including a right to substitute other premises at his complete discretion. There was clearly
a relationship of influence. The case was set aside for undue influence.
Credit Lyonnaise v. Burch [1997] 1 All ER 122 a junior employee and her employer
‘The mere fact that a transaction is improvident or manifestly disadvantageous to
one party is not sufficient by itself to give rise to a presumption that it has been
obtained by the exercise of undue influence; but where it is obtained by a party
between whom and the complainant there is a relationship like that of an employer
and junior employee which is easily capable of developing into a relationship of
trust and confidence, the nature of the transaction may be sufficient to justify the
inference that such a development has taken place; and where the transaction is so
extravagantly improvident that it is virtually inexplicable on any other basis, the
inference will be readily drawn.’ (Millett LJ. Emphasis added)
6 A transaction calling for explanation

National Westminster Bank plc v Morgan [1985] 1 All ER 821
a necessary limitation upon the width of the first prerequisite [the relationship of
influence]. It would be absurd for the law to presume that every gift by a child to a
parent, or every transaction between a client and his solicitor or between a patient
and his doctor, was brought about by undue influence unless the contrary is
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affirmatively proved. Such a presumption would be too far-reaching ... The law
would be rightly open to ridicule, for transactions such as these are
unexceptionable. They do not suggest that something may be amiss. So, something
more is needed before the law reverses the burden of proof (i.e. raises an inference
and gets the other party to try and rebut it), something which calls for an
explanation. When that something more is present, the greater the disadvantage to
the vulnerable person, the more cogent must be the explanation before the
presumption will be regarded as rebutted. It is not simply a matter of
disproportionate exchange measured against some objective market price. It also
depends on the nature of the alleged undue influence, the personality of the parties
and their relationship, the extent to which the transaction cannot be readily
accounted for by the ordinary motives of the ordinary persons of that relationship
and all the circumstances of the case.
BCCI v Aboody at 965
‘There must be a disadvantage that would have been obvious as a disadvantage to
any independent and reasonable person who considers the transaction at the time
with the knowledge of the reasonable facts.’
Allcard v Skinner (1887) 36 Ch D 145, at 185.
“But if the gift is so large as not to be reasonably accounted for on the ground of
friendship, relationship, charity, or other ordinary motives on which ordinary men
act, the burden is upon the donee to support the gift.”
“an advantage taken of the person subjected to the influence which, failing proof to
the contrary, was explicable only on the basis that undue influence had been
exercised to procure it. Such a transaction would be set aside. ”
What are the relevant factors to determine a transaction calls for an explanation?
1. They care about the claimant’s future needs
2. Proportionality (was the transaction explicable by the parties’ relationship)
3. Does it leave out other people who would have had a claim on the claimant’s
bounty?
Hammond v Osborn [2002] EWCA Civ 885
Hammond was an elderly and frail man. No children, no other relatives. He was befriended
by a neighbour Osborn. The neighbour helped him as he became increasingly infirmed
over 18 months. She claimed that H told her to cash in all of his investments which
amounted to some 300,000 and told her to keep it. The Court found undue influence, as the
sum represented 92% of his liquid assets. It made him liable for capital gains tax, and he
would be unable to meet the cost of his care as he became sicker in the future. It was
disproportionate to their relationship.
Randall v Randall [2004] EWHC 2258 (Ch)
The Court set aside 4 gifts of land by an elderly woman to her nephew who had her pair of
attorneys. They called for an explanation, as it divested her of all her property in the
twilight of her life. Also, these gifts could not be accounted for on the grounds of ordinary
motives, she was not the sort of person who would engage in spontaneous acts of generosity
or charity at all, particularly as they would attract substantial capital gains tax. Thirdly, it
would deprive her of assets to look after other things she cared about, e.g. the donkeys
living on her land. These things make the transaction calling for explanation.
about:blank 159/232
Allcard v Skinner (1887) LR 36 Ch D 145

The Court said that the novice nun’s gifts to the church was calling for an explanation.
There was an acceptable explanation, but the Court didn’t like it. This was probably
because the gifts undermined her future autonomy. This makes it unacceptable for the
Mother Superior to refuse giving back what was left of the gifts to the novice nun.
Portman Building Society v Dusangh [2000] 80 P & CRD 20
Involved guarantees by parents to support loans to their children. The Court said that this
is improvident for the parents, but is unexceptional. Parents do that all the time on the basis
of parental affection.
Credit Lyonnaise v. Burch [1997] 1 All ER 122
A junior employee guaranteeing the debts of her employer to the tune of a quarter million
pounds would have caused the bank manager to raise his eyebrows by more than a little.
This calls for an explanation as she wasn’t even having an affair with him!
7 Rebutting the presumption / inference

The Court says ‘the defendant must show that the complainant’s consent to the transaction is full,
free and informed’, i.e. being provided with independent advice.
Re Brocklehurst Estate [1978] Ch 4
Involved an old aristocrat without independent advice, gave a garage proprietor a 99-year lease of
the shooting rights over his estate. This heavily reduced the value of the estate. The Court found
that there was no relationship of trust and confidence. The aristocrat was imperious and looked
down on the garage proprietor, he was not unduly influenced. The gift was spontaneous and
explicable in terms of their friendship, and as the estate was going to be inherited by a nephew
whom he detested, there was reason for the aristocrat to reduce the value of the estate.
Inche Noriah v Shaik Allie Bin Omar [1929] AC 127

Involved a donor and a done. A Malay woman who was old and illiterate executed a gift to her
nephew who had managed all her affairs. Before executing the deed, the lady had independent
advice from a lawyer. However, the lawyer did not know that the gift consisted practically all of
her property and was thus not able to advise her properly. The gift was set aside.
The Court said that adequate advice is:
 independent,
 given with knowledge of Claimant’s vulnerability and the material aspects of the negotiation,
 effectively communicated to Claimant and
 competent (one which only supported transactions that can sensibly be entered by a party free
of influence)
How terrible the transaction is can be evidence that the consent was not full, free and informed
Hammond v Osborn [2002] EWCA Civ 885
“Hammond’s gift was an act of generosity wholly out of proportion to the kindness shown to him
by the other party. It was an irrational decision which serves only to heighten the anxiety that
pressure was operating on his mind.”
“It is inconceivable that Hammond, who was prudent in investing for his future, would have
saddled himself with a debt he could not pay, that is the tax implications”.
about:blank 160/232
Taking legal advice is not always necessary. What needs to be shown is that the weaker party is
emancipated from the influence, and it maybe that recommending advice is not enough
Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144
Bank of Montreal v Stuart [1911] AC 120
The wife said she acted on her own free will. The Court said that this just showed that how deep-
rooted and long-lasting her husband’s influence had on her.
[20]….In the normal course, advice from a solicitor or other outside advisor can be
expected to bring home to a complainant a proper understanding of what he or she is about
to do. But a person may understand fully the implications of a proposed transaction, for
instance, a substantial gift, and yet still be acting under the undue influence of another.
Proof of outside advice does not, of itself, necessarily show that the subsequent completion
of the transaction was free from the exercise of undue influence. Whether it will be proper
to infer that outside advice had an emancipating effect, so that the transaction was not
brought about by the exercise of undue influence, is a question of fact to be decided having
regard to all the evidence in the case (by the Court).
IV. Non-commercial Guarantees/ Securities
1 Introduction
1.1 Nomenclature
1.2 The problem and the policies
Anti-relief Pro-relief
Freedom of contract- i) lack of choice in emotional and economic terms
individual ii) priority in preservation of family relationship over direct
responsibility financial advantage
iii) peripheral to the loan transaction
'couples share' so i) wife has economic interests separate from and independent of her
benefit to one cannot husband.
be disadvantageous ii) wives in traditional roles access less of the discretionary income;
for the other at husband’s discretion
iii) clear MD if the chances of saving the business are slim- ie
failure inevitable, as in Bundy.
socially useful to use loss of the family home generally has a very serious impact on
family home as wives in traditional roles who usually ‘keep’ the children
security in business
Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449

[36]…the high degree of trust and confidence and emotional interdependence
which normally characterizes a marriage relationship provides scope for abuse. One
party may take advantage of the other's vulnerability. Unhappily, such abuse does
occur. Further, it is all too easy for a husband, anxious or even desperate for bank
finance, to misstate the position in some particular or to mislead the wife, wittingly
about:blank 161/232
or unwittingly, in some other way. The law would be seriously defective if it did
not recognize these realities.
2 Pre-Etridge techniques
The lender (bank) cannot enforce the contract (i.e. guarantor can leave the contract) if:
i) primary debtor is lender’s agent
ii) Lender has actual notice of the debtor’s wrongdoing
iii) Lender has constructive notice of the debtor’s wrong-doing
Barclays Bank v O'Brien [1993] 3 WLR 786
3 Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449
about:blank 162/232
3.1 Wrongdoing by debtor inducing guarantor’s agreement

Undue influence between husband and wife
Barclays Bank v O'Brien [1993] 3 WLR 786
"The sexual and emotional ties between the parties provide a ready weapon for
undue influence: a wife's true wishes can easily be overborne because of her fear
about:blank 163/232
of destroying or damaging the wider relationship between her and her husband if
she opposes his wishes".
Royal Bank of Scotland v Etridge (No 2)

Relationship of husband and wife raises no automatic presumption that the
relationship is one of influence (the Court backtracked a bit) [19]
[32] …. I add a cautionary note …. Statements or conduct by a husband which do
not pass beyond the bounds of what may be expected of a reasonable husband in
the circumstances should not, without more, be castigated as undue influence.
Similarly, when a husband is forecasting the future of his business, and expressing
his hopes or fears, a degree of hyperbole may be only natural. Courts should not
too readily treat such exaggerations as misstatements
[159]. …[we should not] regard a relationship of trust and confidence between a
wife and husband as something special rather than as the norm… [even if] a wife
doubts the wisdom of her husband's financial or business decisions, … I would
regard her support as a natural and admirable consequence of the relationship of a
mutually loyal married couple. The proposition that if a wife, who generally reposes
trust and confidence in her husband, agrees to become surety to support his debts
or his business enterprises a presumption of undue influence arises is one that I am
unable to accept.
[28] In a narrow sense, such a transaction plainly ('manifestly') is disadvantageous
to the wife. She undertakes a serious financial obligation, and in return she
personally receives nothing. But that would be to take an unrealistically blinkered
view of such a transaction… If the husband's business is the source of the family
income, the wife has a lively interest in doing what she can to support the business.
A wife's affection and self-interest run hand- in-hand in inclining her to join with
her husband in charging the matrimonial home … to obtain the financial facilities
needed by the business.
Bank of China (HK) Ltd v Leung Wai Man [2011] 4 HKLRD 707
In every normal, healthy marriage, it is only natural that there is a mutual trust and
confidence between a wife and husband and that the wife would support her
husband’s business to the best of her ability, and…the court cannot presume that
merely because a wife, who generally proposes trust and confidence in her husband,
agrees to become surety or mortgagor to support his business enterprise or his debts,
there must be ‘undue influence’.
Bank of China (HK) Ltd v China Hong Kong Textile Co Ltd [2011] 4 HKLRD 457
In Hong Kong, bearing in mind the close-knit sitting in a Chinese family, we regard
much of what has been said by Lord Hope in a charge in the context of husband-
and-wife can be applied to a mother using her property to finance the business of
her sons, although we recognize there might be a difference in degree.
3.2 Lender’s Notice
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Guarantee is non-commercial
Etridge, [87].
Li Sau Ying v Bank of China (Hong Kong) Ltd [2005] 1 HKLRD 106
Li gave security over her flat to secure the loans to a company by a bank. Li did
this at the suggestion of her friend who was an associate of the company she gave
her loan to. That particular transaction was the end of a string of transactions that
started off tainted with undue influence, but the last step was not tainted with undue
influence. The Court said that the real issue is whether the defendant lender
unconscionably abuses the guarantor’s trust in the primary debtor.
[41] … It must be borne in mind, however, that the relationship between the
surety and the principal debtor must be looked at with the eyes of
the bank. The bank would generally, but not always, know whether the surety
was the wife of the principal debtor, its customer. Some wives, however, do not
take their husbands’ surnames and the concept of a “non-commercial”
relationship is inherently imprecise. It is certainly not necessary for a proposed
mortgagee to make inquiries about the relationship between its principal debtor
and the proposed surety/mortgagor before deciding on the steps it should take to
satisfy itself that the surety understands the transaction he or she is entering
into. Nothing Lord Nicholls said in Etridge suggests the contrary. And for
a bank/mortgagee to make inquiries of that character would in most cases be an
unwarrantable impertinence.
Dao Heng Bank v Ho Yin Yuk [2003] 1 HKLRD 28

Madam Ho was born in Mainland China. She was old and illiterate. Her husband
died 28 years ago, leaving her with a sizeable fortune. She has limited contact with
her adopted and step children. Madam Ho came to know a beauty therapist and her
husband. They became close friends, and soon the couple began to call her
godmother. She came to trust them very much. She began to give them blank
cheques. They told her that they needed $4 million to give to a foreign lady for
products they have brought for her. Since Madam Ho didn’t have much cash left,
they suggested her to mortgage her two properties to the bank. She was introduced
to the solicitors as their ‘mother’. She said she wasn’t given any detailed
explanation; she was simply asked to sign. They essentially exploited her and even
got her to sign a will. They obtained $15 million from her. There was clearly undue
influence and misrepresentation. Secondly, the bank thought that she was the
primary debtors’ mother, which was clearly a non-commercial relationship, and
knew that the guarantee only benefited the debtors. However, the bank did not take
any reasonable steps. Thus, the contract was set aside.
The transaction is for the debtor’s benefit

CIBC v Pitt [1993] 4 All ER 433
“If the creditor is aware that the purpose of the loan was to pay the husband’s
debts or otherwise for his as distinct from their joint purpose, the creditor,
without taking precautionary steps, may be affected by the husband’s
misconduct.”
Etridge, [48]-[49].
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Re Lai Yin Shan [2002] 3 HKLRD 500

The bank should have been on notice. Undue influence by the husband to
induce the wife to enter into the guarantees plus he misrepresented the effects
of the documents.
Dao Heng Bank v Ho Yin Yuk [2003] 1 HKLRD 28-
Yien Yieh Commercial Bank Ltd v Hung Oi Wah [2009] HKEC 1775
The elder’s daughter and son-in-law asked the mother to sign a security
document totalling $8 million borrowed by a company they owned and
controlled. The Court said the guarantee was good. Firstly, the transaction
was one that was readily explicable by the relationship of mother and
children; parents often confer benefits on children. Although she had put
forward a guarantee on her home, she had many other properties, she had
substantial cash and stocks. Besides, she got something out of the transaction.
She had signed 6 prime mortgages over the property; she was well aware of
the consequences, which was also explained clearly by the bank.
3.3 Failure by the lender to take reasonable steps

3.3.1 Normally, enough if the lender ([56], [79], [114], [171])
(i) Makes adequate disclosure itself or ensures independent advice is received
(ii) If the latter, must ensure that the guarantor understands function of independent
advice and must refuse to act without a lawyer’s certificate
(iii) Make adequate disclosure to the adviser
3.3.2 Exceptional situations –
[31] There will be cases where a wife's signature of a guarantee or a charge of her
share in the matrimonial home does call for explanation.
McGregor v Michael Taylor [2002] 2 Lloyd’s Rep 468
4. The justification for this doctrine?

A doctrine confined to its own facts
[43]… These are tripartite transactions. They involve the debtor as well as the
creditor and the guarantor. The guarantor enters into the transaction at the request
of the debtor. The guarantor assumes obligations. On the face of the transaction the
guarantor usually receives no benefit in return, unless the guarantee is being given
on a commercial basis. Leaving aside cases where the relationship between the
surety and the debtor is commercial, a guarantee transaction is one-sided so far as
the guarantor is concerned. The creditor knows this. Thus the decision in O'Brien is
directed at a class of contracts which has special features of its own…”
V. Unconscionable Bargains
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1. Introduction
Evans v Llewellin (1787)1 Cox 333
A poor man entitled to a share of an estate worth 1700 pounds sold it for 210.
Clark v Malpas (1862) 4 De GF & J 401, 54 ER 1067
An elderly man, ill and intellectually ‘not gifted’, sold his property for an inadequate
consideration and undue haste and without independent advice.
Cresswell v Potter [1978] 1 WLR 243
A wife, in the course of divorce, transferred the shares in the matrimonial home to her
husband. She felt guilty at that time, but later on thought the better of it and wanted the
shares back. The Court said she was impaired of her bargaining power at that time as she
was very emotional and was not well educated.
Backhouse v Backhouse [1978] 1 WLR 243
An intelligent businesswoman with some ability was decided as impaired because she was
emotionally strained during her marriage break-up.
Ayres v Hazelgrove (9 Feb.1984, 1982/NJ/1003, unreported)
Involved an 84-year-old widow with dementia. She sold paintings in her home worth 6-
7000 pounds for 40 pounds to a young dealer who was buying second-hand things. He
reassured the widow that the deal was fine, but the Court did not believe him that he didn’t
know anything about the true worth of the paintings.
Ming Shiu Chung v Ming Shiu Sum [2006] 2 HKLRD 831
Each of the 7 children of the testator were allotted 1000 shares in the family company, but
one child was allotted 10,000 extra shares, making him the majority shareholder. The other
children disputed this and asked the Court to declare that the 10,000 allocation was
avoidable. The Court said that there was no suggestion that the father was under a special
disability which seriously affected his ability to judge what was in his best interest, nor that
the son knew or should have known that there was such a condition and took advantage of
such a condition. In fact, this son had worked with his father and have taken on an
increasing share of it. He was just being paid fairly for what he had done.
2. Burden of proof?
Boustany v Pigott [1993] 42 W Indies R 85 (PC)
(i) Claimant’s operative bargaining impairment, placing him/her in a disadvantaged position
(ii) Defendant’s exploitation of C in a morally culpable manner.
(iii) The resulting transaction is manifestly improvident to Claimant.
(iv) Claimant lacked adequate advice
Seems similar to that of undue influence, but notice that the bargaining impairment is much
more general. It is not simply relational weakness or vulnerability to the other bargaining party.
It is very wide, making it very contestable.
3. Justifications
3.1 Protection of the impaired
Fry v Lane (1888) 40 Ch D 312
Two brothers, one a plumber’s assistant and one a laundryman, were advised by an
inexperienced solicitor, who was also acting for the other party, and sold their interests at
a significantly lower market value.
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'where a purchase is made from a poor and ignorant man at a considerable

undervalue, the vendor having no independent advice, a Court of Equity will set
aside the transaction....The circumstances of poverty and ignorance of the vendor,
and absence of independent advice, throw upon the purchaser, when the transaction
is impeached, the onus of proving...that the purchase was fair, just and reasonable.'
Do not need to show exploitation of weakness. All that is required is passive victimization,
i.e. the benefiting party knew of the bargaining impairment, allowing them to secure a good
deal.
3.2 Prevention of victimisation

[the contract]…must be unconscionable, in the sense that "one of the parties to it
has imposed the objectionable terms in a morally reprehensible manner...in a way
which affects his conscience"....'Unconscionable' relates not merely to the terms of
the bargain but to the behaviour of the stronger party which must be characterised
by some moral culpability or impropriety....Unequal bargaining power or
objectively unreasonable terms provide no basis for equitable interference in the
absence of unconscientious or extortionate abuse of power...equity will not provide
relief unless the beneficiary is guilty of unconscionable conduct...namely that
unconscientious advantage has been taken of his disabling condition or
circumstances.
A contract cannot be set aside in equity as “an unconscionable bargain” against a party
innocent of actual or constructive fraud. Even if the terms of the contract are “unfair” in
the sense that they are more favourable to one party than the other (“contractual
imbalance”), equity will not provide relief unless the beneficiary is guilty of
unconscionable conduct: Hart v O’Connor [1985] AC 1000, [1985] 2 All ER 880, applied
in Nichols v Jessup [1986] NZLR 226.
4. Improvident transaction
Gaertner v Fiesta Dance Studios (1972) 32 DLR (3d) 639
Involved a young lady, who signed up 500 hours of dancing lessons with a guy who led
her to think that he had romantic interest towards her. The Court said that she had limited
money and talent, and that since she worked full time, she couldn’t have used up all the
500 hours in time. It was thus a manifestly improvident transaction.
Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144
A junior employee guaranteeing her home to help her employer
Portman Building Society v Dusangh [2000] 2 All ER (Comm) 221
‘the transaction could reasonably be explained on the basis of a borrower father’s
wish to help his son purchase and run a small business, that he was doing this out
of natural love and affection. The notion that it is common for parents to make
financial sacrifices for their children…is commonplace... [the transaction] was
capable of reasonable explanation on the basis of parental affection’
‘I cannot accept that building societies are required to police transactions of this
nature to ensure that parents (even poor and ignorant ones) are wise in seeking to
assist their children.’
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Lilik Andayani v Chan Oi Ling [2001] 1 HKC 252

Involved an employment agency colluding with a future employer, getting a
prospective domestic helper agreeing to a rate only about half of the government
stipulated minimum for immigration purposes. The resulting contract could be set
aside. The Court said:
‘Such a wage is outrageously low by our standard and is insufficient to provide a
decent standard of living for the appellant and a reasonable amount of take-home
pay which a migrant worker reasonably expects for her labour (objective
unfairness). Any right-thinking member of our civilised society must regard such a
wage as an affront to justice and insult to human dignity. The appellant was lured
into this contract of exploitation through the undue influence of the agency and
unconscionable conduct of the employer and as a result of unequal bargaining
power. Public policy must require that this contract be declared void. ’
5. Bargaining impairment (incredibly broad)

Blomely v Ryan (1954-56) 99 CLR 362
'The circumstances adversely affecting a party are of great variety and can hardly
be satisfactorily classified. Among them are poverty or need of any kind, sickness,
age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education,
lack of assistance or explanation where...[this] is necessary.’
Personal weakness lies mostly dormant until it is activated by significant
substantive unfairness.
6. Unconscionable conduct
5.1 Active victimisation
Semana Bachicha v Poon Shiu Man [2000] 3 HKC 452
Involved an employment dispute between a female domestic helper and her employer. She
was driven out after 6 months. She was subjected by her employer to an oppressive and
repetitive work regime in disregard to her legal rights. Her female employer was always
short-tempered; even for small matters she would get angry with her. Both the employer
and her kids often physically abused her. She often found that she could not finish her work
until very late in evening because of the sheer amount of work. The employer was not
happy with her work. She claimed that the claimant was impolite because she did not
properly greet her every morning. The employer gave the helper a written notice to
terminate her employment. She refused, as she would have been sent back to Philippines.
The employer got very angry and hurt her. Then the helper asked her agency whether to
sign it, they told her to sign it, so she signed it. Later on, the employer claimed that the
helper was liable for walking out. The helper then signed a compromise document,
receiving only $900 instead of the originally entitled $54,000.
The Court held that the helper did not wrongfully walk out; she was unlawfully driven out
of her job. The helper was a person of economic and social disadvantage and with a marked
inequality in bargaining power when compared with her employer. They must have known
of her mistake that she did not owe them money for walking out. The employer than took
advantage of her ignorance and of the officer’s faulty advice to secure an oppressive by
unconscionable means. The Court set it aside.
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Involved Pigott, who was an elderly woman described as ‘quite slow’, leased premises to
Boustany for less than one-sixth of the market value. This was fixed for 10 years, and there
was an option in the contract to renew it for another 10 years. It also exempted Boustany
from many other existing obligations. Pigott’s affairs were being dealt with by a Cousin
George. Boustany knew that George was away, and he invited Pigott to a tea party. They
flattered her and got her to agree to the deal. The lawyer provided by Boustany to Pigott
advised her against signing the contract, but she still went on to sign it anyway.
The transaction itself is already troublesome enough to make it unconscionable.
5.2 Passive victimisation

Cresswell v Potter, supra
Ayres v Hazelgrove, supra
Commercial Bank of Australia v Amadio (1983) 151 CLR 447 (BBF 942)
The bank required the debtor to secure an overdraft by a mortgage on a property owned
by the debtor’s parents. The parents were elderly and had limited knowledge in English.
They guaranteed all the sums that may be owing by the son’s company. The son told
the parents that it would only be 6 months and would only be fo r $50,000. In fact, his
company went into liquidation owing over a quarter million. The Court said the parents
had special disability. There was sufficient evidence that their son persuaded them in
an unconscientious way.
Gustave v Macfield [2008] NZSC 47 NZ Supreme Court
…
 Before a finding of unconscionability will be made, the stronger party must know
of the weaker party’s disability or disadvantage and must “take advantage of”
that disability or disadvantage by simply accepting an extremely unfair transaction.
 The requisite knowledge may be that of the principal or an agent, and may be
actual or constructive. Factors associated with the substance of a transaction (for
example, a marked imbalance in consideration) or the way in which a transaction
was concluded (for example, the failure of one party to receive independent advice
in relation to a significant transaction) may lead to a finding that the stronger party
had constructive knowledge. So, in the particular circumstances the stronger party
may be put on enquiry, and in the absence of such enquiry, may be treated as if he
or she knew of the disability or disadvantage.
 “Taking advantage of” (or victimisation) in this context encompasses both the
active extraction and the passive acceptance of a benefit. Accordingly … an
unconscionable victimisation will occur where there are:
 … circumstances which are either known or which ought to be known to the
stronger party in which he has an obligation in equity to say to the weaker party:
no, I cannot in all good conscience accept the benefit of this transaction in these
circumstances either at all or unless you have full independent advice.
 [31] While factors such as a marked imbalance in consideration or procedural

impropriety are generally present in unconscionability cases, neither is a
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prerequisite for relief. However, if there is no significant imbalance in consideration

or if the weaker party received full independent advice it is unlikely that any issue
of unconscionability will arise.
Lo Wo v Cheung Chan Ka Joseph [2001] 3 HKC 70

Involved 3 sisters in China who were left a property by their 4th sister in Hong Kong. When she
died, she left her property to her 3 sisters. The 3 sisters sold the property to the defendant, who
was a substantial Hong Kong property developer. It had entered into contract to acquire all the
units of 2 buildings, with the exception of this particular flat owned by the deceased. He wants
this flat, and so travelled to China where the 3 sisters lived. He took with him $100,000 to pay
as deposit and a blank sale-and-purchase contract. He told the sisters that he was intending to
buy the property to demolish it and store sand. He offered $870,000 for the flat and told them
that they couldn’t get anything more than that. In fact, the property developer had been paying
$2.5 million for these flats. He was clearly paying them about a quarter of what they actually
worth. The 3 sisters were simple country folk. They lived in a remote area far from city life.
They were very old and illiterate. The developer was held to be acting unconscientiously. The
agreement was entered into in great haste when there was no need to. The developer deliberately
told them the wrong price. The 3 sisters lacked independent advice, and was lied to about the
true purpose of using the land. The developer did not recommend the sisters have legal advice.
7. Lack of independent advice

Shows that the claimant was not protected by anyone else who could have protected them given
their impairment. Independent advice must be adequate to the extent that the bargaining
impairment of the weak party can be negated.
8. Unconscionable Contracts Ordinance (Cap 458) (“UCO”)

8.1 Scope of application (relatively narrow)
8.1.1 Section 5(1)
(1) If, with respect to a contract for the sale of goods or supply of services
in which one of the parties deals as consumer, the court finds the contract
or any part of the contract to have been unconscionable in the
circumstances relating to the contract at the time it was made …
HK Housing Authority v The Incorporated Owners of Tung Yan Court

[2011] HKCU 2442
8.2 Onus of proof

Section 5(2)
It is for the person claiming that a contract or part of a contract is
unconscionable to prove that it is. (consumer proves)
Hang Seng Credit Card Ltd v Tsang Nga Lee [2000] 3 HKC 269
When the defendant fails to appear, it does not preclude the court from looking at
all the available circumstances to determine whether the contract is unconscionable.
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8.3 The court’s power

Section 5(1)
…the court may-
(a) refuse to enforce the contract;
(b) enforce the remainder of the contract without the unconscionable part;
(c) limit the application of, or revise or alter, any unconscionable part so as
to avoid any unconscionable result.
8.4 Circumstances relevant to determining unconscionability

8.4.1 Section 6(1)
(1) In determining whether a contract or part of a contract was
unconscionable in the circumstances relating to the contract at the time it
was made, the court may have regard to (among other things)-
(a) the relative strengths of the bargaining positions of the consumer and
the other party;
(b) whether, as a result of conduct engaged in by the other party, the
consumer was required to comply with conditions that were not
reasonably necessary for the protection of the legitimate interests of the
other party;
(c) whether the consumer was able to understand any documents relating
to the supply or possible supply of the goods or services;
(d) whether any undue influence or pressure was exerted on, or any unfair
tactics were used against, the consumer or a person acting on behalf of
the consumer by the other party or a person acting on behalf of the other
party in relation to the supply or possible supply of the goods or
services; and
(e) the amount for which, and the circumstances under which, the
consumer could have acquired identical or equivalent goods or services
from a person other than the other party.
(2) In determining whether a contract or part of a contract was
unconscionable in the circumstances relating to the contract at the time it
was made-
(a) the court shall not have regard to any unconscionability arising from
circumstances that were not reasonably foreseeable at the time the
contract was made; and
…
(3) In considering the exercise of its powers under section 5 to grant relief
in respect of a contract or part of a contract found to be unconscionable, the
court may have regard to the conduct of the parties to the proceedings in
relation to the performance of the contract since it was made.
Chang Pui Yin v Bank of Singapore Ltd [2017] 4 HKLRD 458

The Changs, an elderly couple, suddenly acquired a fortune due to a will. They got another party
to manage their money. Their profile meant that they should have been low-risk investors. The
bank changed their profile to high-risk investors and sold them 14million worth of high-risk
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investment products. In the 2008 Financial Crisis, they lost all their money. The bank tried to hide
behind exemption clauses.
Court- this comes within consumer contract
 S6(1) list is non-exhaustive
 The ordinance was drafted with reference to Australian legislation but there is a distinction.
The Australian statutes target unconscionable conduct as opposed to unconscionable
contract. As such, the enquiry under the Australian statute is wider, transcending beyond
the circumstances at the time when the contract is made. In Hong Kong the ordinance direct
against unconscionable contract and expressly stipulates that the court shall not have regard
to any unconscionability arising from circumstances that were not reasonably foreseeable
at the time the contract was made.
 Other factors mentioned in section 22 of the Australian legislation in addition to section
6(1) of the UCO:
(f) The extent to which the supplier’s conduct towards the customer was consistent with
the supplier’s conduct in similar transactions between the supplier and other like
customers; and
(g) The requirements of any applicable industry code; and
(h) The requirements of any other industry code, if the customer acted on the reasonable
belief that the supplier would comply with that code; and
(i) The extent to which the supplier unreasonably failed to disclose to the customer:
(i) Any intended conduct of the supplier that might affect the interests
of the customer; and
(ii) Any risks to the customer arising from the suppliers intended
conduct (being risks that the supplier should have foreseen would
not be apparent to the customer); and
(j) If there is a contract between the supplier and the customer for the supply of the
goods or services:
(i) The extent to which the supplier was willing to negotiate the terms
and conditions of the contract with the customer; and
(ii) The terms and conditions of the contract; and
(iii) The conduct of the supplier and the customer in complying with the
terms and conditions of the contract; and
(iv) Any conduct that the supplier or the customer engaged in, in
connection with their commercial relationship, after they entered
into the contract; and
(k) Whether the supplier has a contractual right to vary unilaterally the term or
condition of the contract between the supplier and the customer for the supply of goods
or services; and
(l) The extent to which the supplier and the customer acted in good faith.
 Look to Australian statutes in interpreting the UCO
o Unconscionability means something not done in good conscience and it is to be
evaluated by reference to a normative standard of conscience. In doing so the court
is not constrained by the general equitable concept of unconscionability.
o Hardship or bad bargain for a party per se cannot be a sufficient foundation for a
finding of unconscionability. Whilst conducts involving dishonesty, sharp practice
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or conscious wrongdoing are unconscionable, conduct falling short of these could

still be regarded as unconscionable.
o Australian case of Pacciocco v ANZ Banking Group:
…it does not involve personal intuitive assertion. It is an evaluation which must be
reasoned and enunciated by reference to the values and norms recognised by the
text, structure and context of the legislation, and made against an assessment of all
connected circumstances. The evaluation includes a recognition of the deep and
abiding requirement of honesty in behaviour; a rejection of trickery or sharp
practice; fairness when dealing with consumers; the central importance of the
faithful performance of bargains and promises freely made; the protection of those
whose vulnerability as to the protection of their own interests placed them in a
position that calls for a just legal system to respond for their protection, especially
from those who would victimise, predate or take advantage; a recognition that
inequality of bargaining power can (but not always) be used in a way that is contrary
to fair dealing or conscience; the importance of a reasonable degree of certainty in
commercial transactions; the reversibility of enrichments unjustly received; the
importance of behaviour in a business and consumer context that exhibits good faith
and fair dealing; and the conduct of an equitable and certain judicial system that is
not a harbour for idiosyncratic or personal moral judgement and exercise of power
and discretion based hereon.
 Much of what his honour said in terms of the norms and values embedded in the law is
equally apposite in Hong Kong. We respectfully echo the sentiment and we consider that
a similar approach is equally applicable in the context of our UCO though we are confined
to the consumers dealings and unconscionability of the terms of the contract at the time
when the contract is made.
On the facts:
 There is some inequality of bargaining power because there is a little very little scope for
them to negotiate for a different set of terms and conditions
 There is a reasonable need for protection of some potential liabilities flowing from
recommendations of financial products, but we do not see any legitimate interest on the
part of the bank to have absolute protection so that it would not be liable for conducts
amounting to a complete disregard of the express instructions of the customers in terms of
their investment objectives and risk appetites as had happened here.
 None of the factors are conclusive. The court must have regard to all the circumstances
relating to the contract at the time when it was made in the exercise of its evaluative
judgement to determine of the contract (or part of it) is unconscionable.
 Beyond the statutory list, the following facts and matters are also relevant to the exercise
of that evaluative judgement:
o That the plaintiffs placed trust in an employee of the bank, and she represents the
bank and dealing with them.
o The plaintiffs were not uneducated or unintelligent, but they had very limited
understanding and experience in investments and financial products.
o The bank was well aware that the investment objective was to preserve the capital
and achieve a return that was slightly better than bank deposits. Their profiles (old
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age in moderate lifestyle) also indicated that the investment objective was
moderate;
o The bank marketed itself as one providing solutions to suit the personal situations
of its customers and significantly, not as salesperson, but one selecting the best
products from the market to match the clients risk profile. In fact, the banks
employee was acting as a salesperson with no particular expertise. The bank made
no effort to draw the plaintiff’s attention to the clauses in the services agreements
and the risk disclosure statements as the employee had no knowledge of them.
o The banks employee not only gave investment advice, but also managed the
investment portfolios for the plaintiff’s without alerting them as to how their funds
were invested nor to the risks pertaining to the products;
o The unconscionability flowing from the clauses excluding the banks liabilities
arising from these matters was reasonably foreseeable when the agreements were
executed.
 The clauses were unconscionable because (a) it makes a complete mockery of the purported
compliance by the Bank with the regulatory duties (which were in place to protect investors
like the Changs) and the important efforts in ascertaining the investment objectives and
risk appetites of the plaintiff’s in order to select suit suitable products for them; and (b) the
whole arrangement adopted by the Bank was to deprive the plaintiffs of the opportunity to
make informed decisions on risk level of the products they invest in and yet place the entire
risk arising out of such decisions on them, taking advantage of the trust they placed in their
employee.
 The bank acted against the Code of Conduct and yet tried to rely on these exemption
clauses. The Code was a standard of fear and responsible dealing in the financial industry
agreed by the stakeholders. It was the norms set up by the industry. As such the court
should excepted as the embodiment of the business conscience to which we can make
reference in assessing what is unconscionable in the context of the UCO.
 We have no problem with the bank telling the plaintiff’s that they should be at the risk
consequences of their own investment decisions provided that the bank had not conducted
itself in a manner which misled the plaintiff’s. Had the plaintive is made informed choices
on the investments, it would not be unconscionable for the bank to stipulate that they should
be of the consequences. The banks employee exploited the trust which the plaintive is
placed upon her and load them into a false sense of security without drawing to their
attention that the bank did not accept responsibility for recommendations and the products
were a fire risk nature. The plaintiffs were not given any opportunity to make informed
choices.
 The features in the present case are so apparent from the commercial norms that reliance
of the clauses in question to avoid liabilities on the part of the bank can properly be
characterised as unconscionable…
 It was not reasonably necessary to give the clauses the full effect to protect the banks
legitimate interest. They should have either made it very clear to the customers that they
only act as sales persons and the recommendations of the representatives might not be
consistent with the customer’s objectives or to take reasonable steps to make sure the
customers understand the risk level of the products they recommended.
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 The court should exercise its powers under section 5 of the UCO to limit the applications
to those clauses to avoid the unconscionable result by holding that the bank cannot rely on
those clauses to avoid liabilities to the plaintiffs in the present case.
Shum Kit Ching v Caesar Beauty Centre Ltd [2003] 3 HKC 235
The claimant on 29 March became a member of the beauty centre for 2 months for $550. 2 days
later, she agreed to extend her club membership to the end of the year for an extra cost of $1600.
On 7 April, they gave her a free facial treatment, and persuaded her to join a gold-card VIP
membership for $48,000. She paid the money by 3 credit cards. On 8 April, she tried to get away
from it. There was a clause in the contract that said that if the treatment contracted for was to end,
or if you cancel in any circumstances, she was not entitled to be refunded of any money she paid.
The Court said:
 Although the ordinance makes no reference to “special disabilities” and “unconscientious
advantage taking” including knowledge of the other party’s weakness, the law would certainly
require an element of knowledge of the weakness and knowingly taking advantage of the
weakness before the Court would give relief to the bargain.
 knowledge = actual knowledge and constructive knowledge or knowledge that a person should
have reasonably possessed.
On the facts:
 They knew that she was very persuadable, and she couldn’t really afford the membership
 She didn’t understand what the contract said, especially the exemption clause. The words were
small and lightly print. No one told her about the onerous clause.
Freeway Finance Co Ltd v Lai Sau Kei [2016] HKCU 1546

The “defendants might have had little educational and little knowledge of English, but the
plaintiff had not knowingly taken advantage of the defendant’s vulnerability.’
8.5 Critique
Hang Seng Credit Card Ltd v Tsang Nga Lee (above)- Yam J:
“The UCO is meant to give the court new power to do justice in consumer contracts where
the bargaining power is unequal, and the consumer has no choice of the terms contained in
standard form contracts. They are often printed in small fonts that discourage reading.
Further, the consumer often has little or no choice, let alone understanding of the effect and
consequences of such terms which are capable of being unfairly applied. In applying the
UCO, the court is not shackled by the traditional old classic theories in contract law.”
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TERMINATION, AFFIRMATION
1. INTRODUCTION
A contract may be lawfully brought to an end by:

(i) full performance;
(ii) agreement: (needs consideration);
(iii) operation of a term in the contract;
(iv) operation of the law: as where contracts are frustrated;
(v) termination for breach of contract: an aggrieved party’s right to terminate the
contract for the other party’s breach in limited circumstances.
 Parties may have agreed the remedies for breach.

 If not, or when the court decides the agreed remedies are not enforceable, contract law
provides a menu of default remedies to the aggrieved party who meets the qualifying
conditions:
• termination;
• damages;
• specific performance.
When a contract is breached, the aggrieved party (C) must first decide whether to:
 continue with (affirm) the contract and sue for money and/or specific performance; or
 stop performing (terminate) the contract and sue for money.
The amount of money C can claim will depend on whether she has terminated or affirmed the
contract after the other’s breach.
What we need to know are:

1. What is a breach of contract and when does that occur?
2. When will a breach entitle the aggrieved party to terminate the contract?
3. What is the effect of termination?
4. When can the aggrieved party insist on continuing with his/her own performance if the
defendant no longer wants performance?
2. BREACH OF CONTRACT
A party breaches a contract when, without lawful excuse, she fails to perform any of her
contractual obligations. The burden of proof is on C alleging breach. The question is whether
C has received exact and precise performance of the contract from D.
Re Moore & Co Ltd and Landauer & Co [1921] 2 KB 519
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Involved a contract to sell 3000 tins of fruit to be packed in cases of 30 tins. The contract was
breached when the tins were packed in cases of 24 tins. This entitled the buyer to reject the
entire consignment and get out of the contract even though the performance was no less
valuable.
Is the contractual obligation strict liability or requir es only the exercise of reasonable care?
Thake v Maurice [1986] QB 644
D’s breach may be:

• anticipatory: by (i) renunciation (expressly or impliedly refusing to perform), or (ii)
impossibility (being unable to perform) before performance is due; or
• actual: by (iii) failure to perform when performance is due.
Universal Cargo Carriers Corp v Citati [1957] 2 QB 401

‘grounds of termination’, ‘repudiatory breaches’, ‘rescission for breach’ =
‘Renunciation’, ‘impossibility’ and ‘failure of performance’
2.1 Renunciation
Renunciation (also called repudiation) occurs when one party by words or conduct evinces an
intention not to perform part, or all, of the contract.
Unless there is an express refusal, the question is whether D’s acts or omissions would lead a
reasonable person to conclude that she no longer intends to perform her contractual obligations:
Universal Cargo Carriers Corp v Citati [1957] 2 QB 401.
Leung Yuk Lin v Karson Oten Fan Karno [2009] HKEC 1137
D committed 2 breaches of contract. The first was the prohibition against collecting student
data. They also were required to teach only on C’s school premises. Court found that though D
never expressly refused to perform his obligations, his history of persistent and wilful breaches
evinces an intention not to be bound. C can thus terminate the contract and sue for damages.
2.1.1 Timing of renunciation

Renunciation before the time fixed for performance is often referred to as ‘anticipatory
breach’, suggesting erroneously that breach is ‘to come’. In fact, renunciation is itself a
breach and, if sufficiently ‘serious’, entitles C to terminate the contract immediately and claim
damages for the loss of the contract.
Hochster v De la Tour (1853) 2 E&B 678

DLT employed H to start work for 3 months from 1 June. On 11 May, DLT told H that they
didn’t need him anymore.
‘The promisee has an inchoate right to the performance of the bargain, which becomes
complete when the time for performance has arrived. In the meantime, he has a right to
have the contract kept open as a subsisting and effective contract. Its unimpaired and
unimpeached efficacy must be essential to his interests.’
2.1.2 The extent of renunciation:
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 where D refuses to perform all of her contractual obligations, C can terminate

the contract.
? any partial renunciation must be sufficiently ‘serious’ to justify termination.
2.1.3 Relevance of D’s mistake or good faith

A party’s words or conduct can amount to renunciation even when they result from an
honest but mistaken view of her contractual rights and obligations.
The question is whether D’s conduct objectively signals:
 an intention not to perform the objective interpretation of the contract, which
constitutes renunciation by me; or
 a genuine dispute about the proper construction of the contract (I’m not gonna do
it this way because it’s not a good way to do it), where the courts will find no
renunciation by me.
The cases are quite inconsistent.

Cases where renunciation (repudiation) was not found:
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR277
The buyer of land honestly but mistakenly purported to exercise a contractual right to
terminate the contract. The seller then said they were not entitled to do that, and that it
was a renunciation of the contract. They called the contract off instead and sue for
damages. The HL said that far from repudiating the contract, the buyer was relying on
the contract and invoking one of its provisions, plus, on the facts, the seller’s letter
showed that he knew that the buyer was willing to perform the contract if his purported
termination was found to be invalid. Good faith was found in the buyer’s act to continue
perform the contract.
Eminence Property v Heaney [2010] EWCA Civ 1168
Sellers of land purported to terminate the contract on the mistaken basis. The buyer then
purported to terminate for the seller’s wrongful termination. The Court of Appeal rejected
that. The seller’s mistake was clear to the reasonable buyer. The seller had not clearly shown
an intention to abandon and refuse to perform the contract.
Cases where renunciation (repudiation) was found:

Federal Commerce and Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] 1 All
ER 307
The owner disputed the charterer’s deduction from the hire payment. On wrong legal
advice, the owner refused to issue freight pre-paid bills of lading. Without these documents,
it had serious consequences on the charterer. The Court held that by refusing to issue these
documents this amounted to repudiatory breach by the owner entitling the charterer to
terminate the contract, although the owner had acted in good faith and had wanted to
maintain the profitable charter party. This is because the repudiation was clear. Secondly,
the owner put the charterer in a difficult situation. Thirdly, there was no time to sort out the
problem.
Creatiles Building Materials Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD
309
3
about:blank 179/232
The Court said that the deliberate failure to make an interim payment amounted to
repudiation that justified termination.
ATAL Technologies Ltd v Stratech Systems Ltd [2012] 3HKLRD 281
C was the main contractor for the e-channel system established by the HK Immigration
Department. D was subcontracted to provide and maintain a CCTV system and associated
software. The parties argued about C’s obligations to make certain payments, and
eventually, D threatened to use tokens that had been embedded in the e-channel system to
shut down part of the system unless its payment demands were met. D’s persistent refusal
to either remove the tokens or cease to threatening to use them amounted to illegitimate
commercial pressure and repudiation of the sub-contract. The Court accepted repudiation,
and said that repudiation may comprise of one party exerting illegitimate commercial
pressure on the other party. (claiming for duress would only set aside the contract, which is
not something C would prefer)
What if C purports to terminate the contract for D’s alleged renunciation but gets it wrong (ie
the court concludes that D did not renounce the contract)?
C’s unjustified termination will itself amount to a wrongful repudiation entitling D to
terminate (C’s termination ‘gun’ turns back on herself). This shows how dangerous it
is to get renunciation wrong.
Come the time for performance, a party whose performance deviates from the objectively
correct interpretation of the contract will have actually breached the contract irrespective of
her good faith.
2.2 Impossibility of performance

A party whose act or omission has disabled her from performance commits a breach of contract.
 Renunciation only requires D’s conduct to lead a reasonable person to believe that she
was intending not to perform.
 Impossibility requires C to show, on the balance of probabilities, that D’s performance
was impossible in fact: Alfred C Toepfer Intl GmbH v Itex Hagrani Export SA [1993] 1
Lloyd's Rep 360; King’s City Holdings Ltd v De Monsa Investment Ltd [2013] HKEC
925
Universal Cargo Carriers Corp v Citati [1957] 2 QB 401

Universal chartered a ship to Citati, who agreed to provide the cargo and nominate a berth and
shipper before a certain date. Citati wanted to perform but they did nothing even just 3 days
before the due date. This left it so late that there would inevitably be delayed and this would
frustrate the commercial purpose of the contract. The Court held that Citati had not renounced
the contract, but its inability to perform entitled U to terminate the contract find another
charterer. However, impossibility was not made out just because the defendant declared its
intention to perform in a way that seems impossible if they can also choose to perform via
possible means.
Chao Keh Lung v Don Xia [2004] 2 HKLRD 11
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Defendant contracted to sell 30,000 of his shares, which is in fact less than 5% of the share
structure of the company. D sold his shares 6 months before he was due to perform the contract.
D did not tell Claimant that they would not perform the contract. The Court said that C did not
show impossibility of performance come the time of performance because D could still buy
these shares; there was still 95% of the shares D could buy and then sell to C.
An anticipatory breach must be proved in fact and not in suspicion.
Under English law, the party who is worried about the other party’s performance has no right
to demand reassurance from the other party that they would actually perform, but there is such
a right in civil law.
A-Mayson Development Co Ltd v betterfit Ltd [1992] 2 HKC 533

A sell and purchase of property in Peking Road. This was for $25.75 million with a 10% deposit
and completion date of 18 Oct. the property contained 8 shops but the occupation permit
allowed only 5 shops. By 12 Oct, it would be impossible to remedy the problem of non-
compliance with the occupation permit. The purchaser then terminated the contract for
repudiatory breach and demanded the return of the deposit. The vendor claimed damages for
breach of contract. The Court found that the defect in the title was fundamental and could not
be corrected before the time of completion.
“the purchaser is not always bound to give the vendor until the date fixed for completion
to come up with a satisfactory answers to the purchasers objection to the title”, and there
are “circumstances under which the purchaser can properly call off the contract without
waiting for the completion date”.
Impossibility can also be anticipatory.
2.2.1 Timing
 Impossibility occurring before performance is due amounts to anticipatory breach;
the contract can be terminated from this point and damages claimed.
 Impossibility occurring after performance is due constitutes actual breach.
2.2.2 The extent of impossibility

 A party is only entitled to terminate the contract if the part that is impossible to
perform would amount to a sufficiently ‘serious’ breach of contract.
 The test has been compared with that for frustration.
2.2.3 The contract-breaker’s good faith is irrelevant

D is liable for the breach that is bound to happen whether due to her own acts or omissions,
or from circumstances for which she bears the risk (Universal Cargo v Citati). If neither
party bears the risk for the occurrence of circumstances making performance impossible, the
issue becomes one of frustration.
2.3 Failure of performance

when performance becomes due amounts to actual breach . Failure can take the form of non,
about:blank 181/232
late, or defective performance: all entitle C to sue for damages and, if sufficiently serious, to
terminate the contract.
3. WHAT IS TERMINATION?
3.1 Terminology
 Termination: ‘repudiated’, ‘rescinded’, ‘brought to an end’, ‘discharged’ or ‘rejected’
(in sale of goods): sets aside the contract prospectively (de futuro), and gives C the right
to expectation remedies.
 ‘rescission for vitiating factors’ (eg misrepresentation and duress), which sets aside a
contract both retrospectively and prospectively, requires mutual restitution and gives
no expectation remedies.
 ‘discharge by frustration’ occurs automatically. (falls under LARCO)
3.2 The effect of termination

(i) Termination discharges both parties from further performance of their primary
obligations under the contract.
 Neither party needs to accept and neither can demand performance from the other.
 But the D’s breached primary obligation is replaced by ‘a secondary (remedial)
obligation to pay monetary compensation’ to C for her loss (Photo Production Ltd v
Securicor Transport Ltd (1980)).
(ii) Accrued and other continuing obligations remain enforceable:
 since the contract only discharges the parties from future obligations (i.e. due after
termination), ‘rights are not divested or discharged which have been unconditionally
acquired’, e.g. a reasonable deposit paid cannot be recovered.
 Terms in the terminated contract that specifically relate to the post-termination situation
(e.g. agreed damages) or restriction of otherwise available remedies for breach (e.g.
requiring arbitration or exempting liability) continue to apply.
(iii) Claims for restitution: subject to the bar on double recovery, C may (instead of
expectation damages), elect to sue for:
✓ restitution of any money paid under the contract if there has been total failure of
consideration from the defendant (i.e. nothing had been done); or
✓ a quantum meruit or quantum valebat for the reasonable value of goods or services
supplied but not yet paid for under the contract:
Planché v Colburn [1831] EWHC KB J56
P agreed to write a book as part of the collection for a ‘juvenile library’. The contractual
price was 100 pounds to be paid on completion. P had done quite a bit of writing when C
cancelled the arrangement. C was not going to pay P anything, but the Court said that P was
entitled to recover 50 pounds for the work P had done in writing.
These restitutionary claims are preferable if C has made a bad bargain.
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The advantages of termination for C:

(i) a self-help remedy
(ii) often preferable for C to discontinue her own performance.
(iii) can save C from a bad bargain
Termination may be very disadvantageous to D:

(i) may have incurred expenses in performance, which will now be wasted;
(ii) she may not get restitution for her part-performance;
(iii) she may lose the benefit of a good bargain.
4. WHEN IS TERMINATION AVAILABLE?
 Where breach or anticipatory breach is total, C can clearly terminate the contract;
 where breach is partial, difficult technical questions arise:
The rule of thumb is that the defendant’s:
✓ breaches of ‘conditions’ allow C to terminate; but
✗her breaches of mere ‘warranties’ do not.
However, balancing the parties’ interests necessitates a consequentialist approach: We

will see that the law has moved some way in that direction by recognising the category of
‘innominate terms’. However, the concern to promote certainty (important for a self-help
remedy not requiring resort to the courts) while also avoiding harshness to the defendant
has resulted in considerable complexity.
4.1 Clearing the ground

The expression ‘condition’ is used in different senses when determining whether C can
withhold her own performance.
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Levels I–III concern the order of performance: C may be able to withhold her own
performance simply because it is ‘not her turn yet’.
4.1.1 Level I: Contingent or promissory obligation?

A contingent condition is one for which neither party is responsible, but upon which both
parties’ obligations to perform or keep performing depend:
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 may be a condition precedent (as where performance depends on one party obtaining
a licence or planning permission), or
 a condition subsequent (as where continuing performance depends on continued
funding from a specified source).
There is no question of breach if the condition precedent fails or the condition subsequent
occurs: the obligation to perform the contract simply does not arise or is discharged.
A promissory condition refers to what one party has an obligation to bring about. But
whether breach of this condition entitles C to terminate the contract depends on whether the
promissory condition is ‘dependent’ or ‘independent’.
4.1.2 Dependent or independent obligation?

 Where the promissory condition undertaken by C is independent of D’s performance,
C cannot terminate the contract on D’s breach, however serious (C must still
perform), eg a tenant’s covenant to pay rent is independent of the landlord’s covenant
to repair: the tenant cannot withhold payment even if the landlord fails to repair
(Taylor v Webb (1973) 2 K.B. 283)
Since this may leave C inadequately protected from D’s non-performance, courts are
slow to designate an obligation as being ‘independent’ unless the contract makes this
very clear.
 Contractual obligations are normally regarded as being dependent (or
interdependent): each party’s obligation to perform is dependent on the other’s
performance or readiness and willingness to perform.
Eg, the Sale of Goods Ordinance, s 30, regarding the delivery of the goods and
payment of the price; the failure of one party discharges the other from performance.
4.1.3 ‘Entire’ or ‘divisible’ obligation?

Dependent obligations may be ‘entire’ or ‘divisible’.
 An obligation is ‘entire’ when it must be completely performed before the other party is
obliged to perform (also called the ‘entire contract’ rule).
Cutter v Powell (1795) 101 ER 573
Cutter agreed to work on a ship sailing from Jamaica to England for 30 guineas, which
was almost 4 times the going rate, but they would only be paid on completion of the
voyage. Cutter died just before completing the voyage, and his widow tried to sue for
part of the wages, but she was denied recovery of wages for part performance.
Re Hall & Barker (1878) 9 Ch D 538
‘if a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe
and ask you to pay one half the price’, i.e. I only agreed to pay for full
performance.
The potential harshness of the rule is mitigated by:

(i) the doctrine of ‘substantial performance’: Hoenig v Isaacs [1952] EWCA Civ 6
Dakin (H) & Co Ltd v Lee [1916] 1 KB 566
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The defendant agreed to carry out repairs for 1500 pounds. They did so, except in
minor respects which would cause 80 pounds to sort out. The Court said that they
have substantially performed the contract, so Dakin was entitled to the price
minus 80 pounds.
(ii) allowing the part-performing contract-breaker to claim restitution for the benefit
conferred on and ‘accepted’ by the other party:
 Section 32(1) of the Sale of Goods Ordinance allows a buyer who receives less than
the quantity of goods contracted for to reject them or pay the contract rate for them.
 A part-performer can claim a quantum meruit (the market value) ONLY if the other
party had the opportunity to reject but has accepted the benefit.
Sumpter v Hedges [1898] 1 QB 673
Sumpter agreed to build 2 houses for Hedges for a lump sum of 565 pounds. Then
Sumpter informed Hedges that he could not complete because he did not have
enough money. Hedges completed the house himself. It was held that Sumpter
could not get reasonable remuneration for the work he had done because Hedges
had no option but to accept the work that had been done on his land. However,
Sumpter could recover the value of the materials he left behind, which Hedges had
the chance to reject, but Hedges, instead of giving them back, used them and
incorporated them in his property. This was regarded as acceptance and he was
obliged to pay for the materials.
To avoid the potential unfairness associated with the entire obligations rule, Courts lean
towards finding obligations to be ‘divisible’. Breach gives the aggrieved party an action
for damages, but doesn’t necessarily allow them to withhold their own performance by
terminating the contract. Whether they are allowed to terminate depends on the term
breached.
• Level IV concerns the conformity of any performance with the contractual obligations: here,
lack of conformity amounts to breach and C’s withholding of her own performance, if she is
entitled, amounts to termination.
4.2 Termination for breach

4.2.1 Conditions, warranties and innominate terms
It was once assumed that every contractual term could be classified at the time of formation as:
• a condition, or
• a warranty.
C can terminate if the term breached is a condition, but not if it is a warranty, irrespective of
the seriousness of the actual consequences of breach.
 ‘innominate’ (or ‘intermediate’) terms. ‘Wait and see’ terms

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7
10
about:blank 186/232
HK shipping chartered a ship to Kawasaki, but they breached the charter because they
breached a term requiring the ship to be in every way fitted for ordinary cargo service (they
failed to provide adequate personnel to maintain the old ship). They ship had many serious
breakdowns and only spent 2 months of its first 7 months of its charter in the sea. The Court
held that the sea-worthiness term to fit the sea in every way for ordinary cargo service was
an innominate term, the breach of which would only the entitle the charterer to terminate if
its consequence was so serious as to frustrate the commercial purpose of the venture.
The question is whether the breach has deprived or will deprive the claimant ‘of substantially
the whole benefit which it was intended he should obtain from the contract’.
“It is for the simple reason that the seaworthiness clause is breached by the slightest
failure to be fitted ‘in every way’ for service...If a nail is missing from one of the
timbers of a wooden vessel or if proper medical supplies or two anchors are not on
board at the time of sailing, the owners are in breach of the seaworthiness stipulation.
It is contrary to common sense to suppose that in such circumstances the parties
contemplated that the charterer should at once be entitled to treat the contract as at an
end for such trifling breaches.”
Although there was a delay that already occurred and may occur in the future, Kawasaki
was not substantially deprived of the whole benefit of the contract, because HK shipping
had taken steps to remedy the failings and because of the length of the charter involved (the
charter period was 24 months, and they sued for breach after 7 months). Thus, Kawasaki’s
purported termination of the contract itself became a repudiatory breach, entitling HK
shipping to damages for loss of profits. Moreover, Kawasaki’s purported termination was
considered bad faith as the reason for them to terminate was because of recent market
fluctuations that made it more profitable for them to terminate the current contract to seek
a new charterer.
The high threshold for termination has been expressed by saying that the breach:
 must go to ‘the root of the contract’ (Cehave NV v Bremer Handelsgesellschaft (The
Hansa Nord) (1976));
 be ‘fundamental’ (Suisse Atlantique Société d’Armement SA v NV Rotterdamsche Kolen
Centrale (1967));
 amount to ‘a substantial failure to perform the contract at all’ (Wallis, Son & Wells v Pratt
& Haynes (1910)); or
 ‘frustrate the commercial purpose of the venture’ (Trade and Transport Inc v Iino Kaiun
Kaisha Ltd (The Angelia) (1973)).
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [ 2013] EWCA Civ 577
On the facts, the Court of Appeal held that a property company was not entitled to termination
agreement to take a 999-year lease in 4 blocks on the grounds of the construction company’s
delay in building 2 of the blocks, because int eh scheme of the whole performance, thus delay
was not substantial enough.
A multi-factorial assessment to determine whether a breach of an innominate term amounts
to termination:
[T]he starting point must be to consider what benefit the injured party was intended to obtain
11
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from performance of the contract. . . .

The next thing to consider is the effect of the breach on the injured party. What financial
loss has it caused? How much of the intended benefit under the contract has the injured
party already received? Can the injured party be adequately compensated by an award of
damages? Is the breach likely to be repeated? Will the guilty party resume compliance with
his obligations? Has the breach fundamentally changed the value of future performance of
the guilty party’s outstanding obligations?
In practice, strong disincentives to elect termination in response to its breach.

In Hong Kong, the existence of innominate terms has been acknowledged by the Court of Final
Appeal in Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1, but this was
very rarely invoked.
4.2.2 How are terms classified?

Relevant policies:
(i) Commercial certainty:
Bunge Corp v Tradax Export SA [1981] UKHL 11
Certainty is particularly important
(a) where the contract is one of a chain or ‘string’ of contracts because ‘most members of
the “string” will have many ongoing contracts simultaneously and they must be able
to do business with confidence in the legal results of their actions’, or
(b) where it would be difficult for C and the court to quantify the loss suffered.
(ii) Freedom of contract
(iii) Avoiding bad faith terminations

 Arcos Ltd v E A Ronaasen & Son [1933] AC 470
The parties contracted for the sale and purchase of timber cut to 8/16 of an inch
thickness. This was said as a condition, and the parties could reject the goods for being
9/16 of an inch thick. But their real reason for termination was to escape what had
turned into a bad bargain. A fall in timber prices meant that the buyers could go off
and buy timber from someone else much cheaper. Termination is still allowed in this
case.
Potential unfairness of termination for ‘technical’ or unmeritorious reasons.
 Cehave v Bremer (The Hansa Nord) [1976] QB 44

The parties contracted for the sale of citrus pulp pallets for 100,000 pounds to arrive
in good conditions. Meanwhile, the market price for the pallets dropped to about
8600, so they thought they could buy it from someone else. The buyers thus rejected
the goods on the grounds that some of the pallets were damaged and thud did not
arrive in good conditions. The sellers then said ok, and sold the pallets to the third
party, who then sold it to the original buyers for about 30,000 pounds. The buyers
then used them to manufacture cattle feed, which was the original intention of the
citrus pulp pallets. The Court held that the buyer’s termination was unlawful, because
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the term breached was an innominate term, and the consequences was not sufficiently
serious to allow the contract to be avoided.
Use of the innominate term classification to counter economic opportunism.
“ where there is a free choice between two possible constructions . . . the court should
tend to prefer that construction which will ensure performance and not encourage
avoidance of contractual obligations’.
(iv) Upholding bargains: Dicta from The Hansa Nord suggest that courts should encourage
the performance, rather than the termination, of contracts (unless C has been substantially
deprived of the benefit of the contract).
The modern default position is to treat terms as innominate.

Bunge Corp v Tradax [1981] UKHL 11
‘unless the contract makes it clear, either by express provision or by necessary
implication arising from its nature, purpose, and circumstances . . . that a particular
stipulation is a condition or only a warranty, it is an innominate term’.
The European Draft Common Frame of Reference treats all terms as innominate for the
purposes of the remedy of termination (Art III.-3:502).
4.2.2.1 Classification by statute

Statute may classify terms as either conditions or warranties. Recall that the Sale of Goods
Ordinance implies as conditions into sale of goods contracts terms guaranteeing that:
• the seller has title to sell the goods (s 14(1)(a));
• goods sold by description correspond with their description (s 15(1));
• goods sold by sample correspond with the sample (s 17(2));
• goods sold in the course of business are of satisfactory quality unless the buyer’s attention
has been drawn to, or the buyer’s examination ought to have revealed, any defect (s
16(2)); and
• goods sold in the course of business are reasonably fit for the purpose that the buyer has
made known to the seller (s 16(3)).
The Act also implies as warranties terms guaranteeing that:
• goods sold are free from charges or incumbrances in favour of third parties not disclosed
or known to the buyer before the contract, and that the buyer will enjoy quiet possession of
the goods subject to the disclosed or known rights of others (s 14(1)(b)).
S13 When condition to be treated as warranty

(1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer
may waive the condition, or may elect to treat the breach of such condition as a breach of
warranty, and not as a ground for treating the contract as repudiated.
(2) Whether a stipulation in a contract of sale is a condition, the breach of which may give
rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give
rise to a claim for damages but not a right to reject the goods and treat the contract as
repudiated, depends in each case on the construction of the contract. A stipulation may be a
condition, though called a warranty in the contract.
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(3) Where a contract of sale is not severable, and the buyer has accepted the goods or part
thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach
of warranty, and not as a ground for rejecting the goods and treating the contract as
repudiated, unless there is a term of the contract, express or implied, to that effect.
37 Acceptance of goods
(1) Subject to subsection (2), the buyer is deemed to have accepted the goods—
(a) when he intimates to the seller that he has accepted them; or
(b) when the goods have been delivered to him and he does any act in relation to them
which is inconsistent with the ownership of the seller.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is
not deemed to have accepted them under subsection (1) until he has had a reasonable
opportunity of examining them for the purpose—
(a) of ascertaining whether they are in conformity with the contract; and
(b) in the case of a contract for sale by sample, of comparing the bulk with the
sample.
(3) The buyer who deals as consumer cannot lose his right to rely on subsection (2) by
agreement, waiver or otherwise.
(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable
time he retains the goods without intimating to the seller that he has rejected them.
(5) The questions that are material in determining for the purposes of subsection (4) whether a
reasonable time has elapsed include whether the buyer has had a reasonable opportunity of
examining the goods for the purpose mentioned in subsection (2).
(6) The buyer is not by virtue of this section deemed to have accepted the goods merely
because the goods are delivered to another under a sub-sale or other disposition.
There are no examples of statutes classifying a term as ‘innominate’.
4.2.2.2 Classification by the parties

In principle, it is always open to the parties to agree the status (and hence, consequences of
breach) of particular terms.
Even apparently trivial terms can be classified as ‘conditions’, allowing termination for their
breach, eg
Lombard North Central plc v Butterworth [1987] QB 527
Butterworth agreed to buy a computer on hire purchase in 1987. They agreed to pay quarterly
payments for 5 years, totalling 11680 pounds, time being of the essence, i.e. it is a condition to
pay on time. When the payments were almost complete, they were late with some of the final
payments, and Lombard terminated the contract. The computer was repossessed and resold for
only 173 pounds. The Court of Appeal upheld Lombard’s termination, and allowed Lombard
to claim damages up to termination and to claim future instalments as part of their loss to the
bargain.
The stronger party can insist that even minor obligations of the other party are conditions, or
can include a ‘termination clause’ giving itself a wide power to end the contract. This power
can be exercised opportunistically (even for a trivial breach) to escape a bad bargain and so
deprive the contract-breaker of its bargain.
Judicial techniques for controlling the unreasonable creation of conditions and termination
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clauses:
(i) Courts may find that the parties used the labels ‘condition’ or ‘warranty’ in their non-
technical sense (i.e. simply meaning ‘terms’) and not in their technical sense of determining
whether there is a right to termination on breach; courts can classify the term as innominate.
SOGO s13(2)
Whether a stipulation in a contract of sale is a condition, the breach of which may give rise
to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise
to a claim for damages but not a right to reject the goods and treat the contract as repudiated,
depends in each case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.
Schuler v Wickman [1973] UKHL 2

Wickman had the sole right to sell Schuler’s shoes for 4 years. Clause 7 of the contract made
it a condition that Wickman’s representatives should visit particular manufacturers each week
to promote Schuler’s shoes. They failed to do so. The Court held that this was not a condition,
as this would turn one missing visit would become a repudiatory breach and entitle the other
party to termination. Though the party used the word ‘condition’, the fact that a particular
construction lead to unreasonable results makes it a necessary consideration.
The fact that ‘a particular construction leads to a very unreasonable result must be a
relevant consideration. The more unreasonable the result the more unlikely it is that the
parties can have intended it, and if they do intend it the more necessary it is that they shall
make that intention abundantly clear’.
But, Arnold v Britton [2015] AC 1619 Lord Neuberger PSC remarked:

“[C]ommercial common sense is not to be invoked retrospectively. The mere
fact that a contractual arrangement, if interpreted according to its natural
language, has worked out badly, or even disastrously, for one of the parties is
not a reason for departing from the natural language. Commercial common
sense is only relevant to the extent of how matters would or could have been
perceived by the parties, or by reasonable people in the position of the parties,
as at the date that the contract was made. Judicial observations such as those of
Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235,
251 … have to be read and applied bearing that important point in mind.
(ii) Courts may treat termination under an agreed ‘termination clause’ as less remedially
potent than breach of a ‘condition’ proper: this restricts the available damages.
Financings Ltd v Baldock [1963] 2 QBD 104
Baldock bought a van from Financings on hire purchase on payment of 100 pounds and
monthly instalments of 28 pounds for 2 years. The contract gave Financings the express right
to terminate the contract if any instalment was 10 days late. They terminated the contract
when Baldock failed to make the first 2 payments, and sold the car for 140 pounds. The court
found that the termination under the contract was much less potent than termination under
common law.
Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75:
If C can terminate both under a termination clause and under the common law, the court will
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be slow to find that the claimant has abandoned her valuable rights under the common law.
(They would treat the claimant to have terminated under the common law if they could have
done so)
(iii) Courts may read down agreed ‘termination clauses’ to restrict their scope of operation:
Rice (t/a Garden Guardian) v Great Yarmouth BC [2003] TCLR 1
There was an agreement by Rice to manage and maintain Yarmouth’s sports facilities, parks,
and playgrounds. The contract allowed Yarmouth to terminate the contract if the contractor
commits a breach of any of its obligations. They purported to terminate the contract because
they breached a few of its obligations. The Court held this to be unlawful, because they could
only terminate under common law for repudiatory breach, and that has not occurred.
The Court rejected a literal interpretation of the termination clause as offending common
sense. Rice’s performance involved a myriad of obligations of differing importance and
varying frequency which could be broken in many different ways with varying consequences,
typical of innominate terms.
Dominion Corporate Trustees Ltd v Debenhams Properties Ltd [2010] EWHC 1193 (Ch)
‘the courts have shown some reluctance to interpret a termination clause in a complex
contract containing many innominate terms as providing a party with the right to
terminate for any breach, however minor’ as this ‘flouts business commonsense’.
Secretary for Justice v Yu’s Tin Sing Enterprises Ltd [2008] HKCU 1391
A 3-year contract between D and the director of cultural leisure services of the HK Government
to provide cleansing and supporting services for leisure venues in Kowloon East. A clause in
the contract allowed the government to terminate the contract for breach of clause 15, 16, 25…
There was a general catch-all clause 25: “the government has the rught to terminate if the
contractor shall fail to carry out the whole or any part of the services or neglect to observe or
perform any of the terms and conditions of the contract. The Court distinguished Rice v Great
Yarmouth as instead of simply providing a catch-all termination clause in general, there was
many repetitions of a termination clause.
Contrast termination clause in sophisticated financial instrument: BNP Paribus v Wockhardt

EU Operations (Swiss) AG [2009] EWHC 3116 (Comm)
“the parties have… spelt out the consequences which result from the breach of condition.
It is unrealistic to suppose that, having done so, they are to be taken to have intended that
a failure to pay should be regarded as a warranty or innominate term.”
4.2.2.3 Classification by the courts

Where a term is not classified by the parties or by statute, the courts must do so.
 Where a binding precedent has classified the term, certainty generally requires it to be
followed (e.g. time clauses are often treated as conditions, as are stipulations in a time
charterparty as to the date for payment), or in voyage charterparties as to the time when
the chartered vessel should be ready to load).
But, Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989
Lord Wilberforce said some previous decisions as ‘excessively technical’ and can be open
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to re-examination by the House of Lords.
 Where a term is previously unclassified (no precedent), the default position is to treat it as
an innominate term unless this is contra-indicated (Bunge Corp v Tradax).
But, Lord Wilberforce said that courts should not be reluctant to find a condition if the
intentions of the parties so indicate, especially in the case of time clauses in mercantile
(i.e. commercial) contracts.
State Trading Corp of India Ltd v M Golodetz [1989] 2 Lloyd's Rep. 277
In the last analysis, the court is making ‘what is in effect a value judgment about the
commercial significance of the term in question’ (and different courts may reach
different conclusions.
Classification as a condition is more likely if the term:

• involves a single performance with a clearly specified time limit and sequence of
performance (e.g. a period within which events inhibiting performance are to be notified,
an extension of time to be claimed or the buyer is to have the option of cancelling the
contract);
• can only be breached in one way;
• is vital to the contract; or
• is necessary for commercial certainty.
Classification as innominate if:
• it can be breached in different ways with varying degrees of seriousness;
• performance is to take place over a long time and substantial performance has been
given; or
• the obligation is loosely framed (e.g. the citrus pallets case).
Bunge Corp v Tradax [1981] 2 All ER 513

A condition was found. The buyer of soya bean meal was required to nominate the time for
shipment, giving the seller ‘at least 15 consecutive days’ notice of probable readiness of
vessel(s) and of the approximate quantity required to be loaded’. The seller would then
nominate a port to load the goods (shipment being required by 30 June). The seller treated the
buyer’s late notice as a repudiatory breach. The House of Lords agreed that the term breached
was a condition, although it did not deprive the seller of substantially the whole benefit under
the contract, because:
• of the need for certainty in commercial transactions, particularly those involving a chain of
sales, when timely performance is vital and parties need to know where they stand when
faced with breach;
• the seller’s (claimant’s) obligation to nominate a port and be ready to load was dependent
on the buyer (contract-breaker) giving the requisite notice;
• damages for breach would be very difficult to assess; and
• due to precedents on similar time terms and predominant commercial practice.
Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyds Rep 109
An innominate term was found. Here, a time term in another soya bean meal contract required
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the seller to advise the buyer ‘without delay’ of impossibility of shipment because of
prohibition of export. However, it did not stipulate any time limit by which the advice was to
be given.
Even precise time clauses may be construed as innominate terms depending on their
‘commercial significance’.
Ioannis Valilas v Valdet Januzaj [2014] EWCA Civ 436

Innominate term found: The Court of Appeal found that a dentist had not committed a
repudiatory breach when he informed the practice owner that he would be making payments
late because:
• the time of payment was not generally of the essence in a commercial contract unless the
parties had agreed that it should be.an innominate term;
• the effect of the dentist’s past and threatened future breaches could not be said to deprive
the practice owner of substantially the whole benefit of the contract. The owner had other
sources of income and knew that he would obtain payment in the end. His only likely loss
was the loss of the use of the money in the meantime.
Homyip Investment Ltd v Chu Kang Ming Trade Development Co Ltd [1995] 2 HKC 458
Innominate term found: A provisional sale and purchase agreement of a 2-storey residential
house with 2 bedrooms and in each of the bedrooms, the vendor had made some alterations.
When the purchaser’s mortgagee surveyor discovered that there were alterations, suspicion
arose as to whether the property would contravene the Buildings Ordinance. The purchaser
asked the seller about it, and the seller then removed the alterations and said that the work has
been discontinued and reinstated. The purchaser alleged that the seller had breached the
agreement that the property is sold in an ‘as is’ basis. The court said that it is indisputable that
the property had to be sold in an ‘as is’ basis had been breached. However, this is an innominate
term. This is because the buyer had not inspected the property. Thus, the physical state and
condition inside was simply not of concern. The removal of the operations would not have the
effect of substantially depriving the buyer of the whole benefit that they should have.
Time terms:
Lombard North Central plc v 4.2.2 [1987] QB 527
A stipulation that time is of the essence… denotes that timely performance is a condition
of the contract. The consequence is that delay in performance is treated as going to the root
of the contract, without regard to the magnitude of the breach.
A neutral time stipulation may be construed as a condition, warranty or innominate term.

Can give notice requiring performance within a reasonable time if there is a delay, i.e. one can
make notice to make a time term once there had been a delay.
Modern tendency in Commercial courts - certainty
Union Eagles Ltd v Golden Achievement [1997] AC 514 PC

Involved a house purchase in HK for 10 million. The buyer was to tend the payment by 17:00,
but due to traffic conditions, the buyer was 10 minutes late. As soon as they were late, the seller
said that they committed a repudiatory breach. They would keep the 10% deposit and would
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sue the buyer for damages. The Privy Council allowed the seller to terminate the contract
because of the importance of certainty in commercial transactions. The seller needs to know
immediately whether they are free to deal with someone else. Because the 10% deposit is in
line with well-established customs, they could forfeit the 10% deposit.
World Ford Development Ltd v Ip Ming Wai [1994] 2 HKLR 1

The performance was 24 minutes late.
“[g]enerally speaking, there is no elasticity in punctuality”
The position appears to be the same in Hong Kong with respect to contracts for the sale of land
even if time is not explicitly made of the essence by the parties, in contrast with the position in
English law. (Hong Kong is very strict on punctuality, while UK isn’t)
Wong Wai Chi Ann v Cheung Kwok Fung Wilson [1996] 3 HKC 287
“In these provisional agreements for sale and purchase in today’s secondary
market in Hong Kong, everybody does, usually, proceed on the footing that time
is to be of the essence .… Of course, each case must depend on its own facts.
But in the absence of special circumstances, it will usually be the case that a
provisional agreement for sale and purchase in the common form in use in Hong
Kong will be treated as one of which time is of the essence, although no express
provision in that behalf is contained in the agreement …”
Joy & Peace.com Inc v Topshow Consultants Ltd [2002] 2 HKC 143
“Of course a contract for due performance which expresses no time limit is not
a charter for unreasonable delay. If undue delay can be established, the
aggrieved party is entitled to give notice, calling for performance within a
reasonable period of time; what is reasonable will depend on the facts and
circumstances. Once that period has expired without performance then the
aggrieved party can sue for breach. In this case there is evidence of delay but
not undue delay. More importantly, there was no notice from the plaintiff calling
for performance which preceded its announcement that there was a breach
giving it the right to rescind.”
Leung Yee v Ng Yiu Ming [2001] 1 HKLRD 309

A compromise agreement require a payment of $6.5 million, and it was not paid on time. The
Court held the time to be a warranty because the parties did not say that time is of the
essence, and the delay would not deprive the aggrieved party of substantial benefit from the
contract.
But, no repudiation if D’s non-compliance with the contract is due to C’s own earlier breach.
Kensland Realty Ltd v Whale View Investment Ltd [2002] 1 HKC 243
The parties agreed to buy and sell premise in Mong Kok for $55 million. The agreement
required Whale View, at settlement, to present cheques payable to persons directed by
Kensland. The agreement did not say how much notice Kensland had to give to Whale View,
but that Whale View had to pay by 1pm on a specified date and place. Time was expressed
as of the essence in every sense. Kensland gave Whale View only 72 minutes prior to
settlement to present 8 cheques and settlement orders. Kensland rejected Whale View’s
request for an extension of the deadline, and Whale View presented the cheques 6 minutes
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late. Kensland treated the lateness as repudiation, forfeiting the 10% deposit, and Whale
View claimed for the return of their deposit and damages for breach of contract. The Court
held that there was an implied term requiring Kensland to give reasonable notice of the
payment which was to be made, and that implied term was breached. This was repudiated,
Kensland had breached the contract and allowed Whale View to terminate.
4.3 Electing termination (Acceptance of repudiation)
Geys v Société Générale, London Branch [2012] UKSC 63
(i) Termination must be clear and unequivocal: but

Vitol SA v Norelf Ltd [1996] AC 800
It ‘requires no particular form . . . The aggrieved party need not personally, or by an agent,
notify the repudiating party . . . It is sufficient that the fact of the election comes to the
repudiating party’s attention’.
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(ii) Termination can only come after repudiatory breach:

North Eastern Properties Ltd v Coleman & Quinn Conveyancing [2010] EWCA Civ 277
(iii) C is not bound to elect at once;

The Mihalios Xilas [1979] 1 WLR 1018
C can wait for performance or negotiate in the hope of a settlement
However, if C does not accept repudiation must herself remain ready and willing to perform.
Stocznia Gdanska SA v Latvian Shipping Co (No 2) [2001] 1 Lloyd's Rep 537

C runs a risk whilst making up her mind:
If he does nothing for too long, there may come a time when the law will treat him
as having affirmed . . . [Anyway, as] long as the contract remains alive, the innocent
party runs the risk that a merely anticipatory repudiatory breach, a thing ‘writ in
water’ until acceptance, can be overtaken by another event which prejudices the
innocent party’s rights under the contract—such as frustration or even his own
breach. He also runs the risk . . . that the party in repudiation will resume
performance of the contract and thus end any continuing right in the innocent party
to elect to accept the former repudiation as terminating the contract.
The length of time that C may wait whilst making up her mind will depend upon the facts of
each case: some cases ‘may well be more or less complex and call for more or less urgency’:
Force India v Etihad Airways [2010] EWCA Civ 1051.
(iv) C’s termination is valid if she is legally entitled to terminate even if her real motive is to
escape what has become a bad bargain because of market fluctuations, and even if the reason
she puts forward is:
• invalid (e.g. being mistaken);
• dishonest (e.g. Arcos v Ronaasen); or
• she gives no reason, because she was unaware of the good reason at the time of termination
e.g. The Mihalis Angelos [1970] 3 WLR 601
‘bad faith’ terminations?

Article III.-1:103 of the European Draft Common Frame of Reference imposes a non-
excludable ‘duty to act in accordance with good faith and fair dealing’. This duty will bar
termination for invalid or dishonest reasons.
(v) The choice, once made, is irrevocable.
4.4 Loss of the right to terminate
C’s right to terminate a contract may be lost by:

(i) C’s conduct, eg
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 in affirming the contract;

 by operation of ‘waiver by estoppel’; or
 by her own subsequent breach making her liable for damages (Fercometal SARL
v Mediterranean Shipping Co SA (The Simona) [1986] 1 Lloyd's Rep. 171.
(ii) D’s performance when it becomes due, in the case of renunciation or anticipatory breach.
However, once there has been actual repudiatory breach, the claimant’s right to
terminate is not lost by the defendant’s cure of the breach.
Buckland v Bournemouth University [2010] EWCA Civ 121
Involved the university’s action of having C’s exam scripts remarked behind C’s back.
This amounted to an implied duty of trust and confidence in employment, entitling C to
terminate the contract. The Court held that the right to terminate was not lost even when
the university had effectively cured the breach by establishing a formal enquiry into the
matter, returning C to his original position.
(iii) The operation of a rule of law, eg

 supervening frustration (Avery v Bowden (1856)),
 section 13(3) of the Sale of Goods Ordinance, which deprives the buyer of her right
to reject the goods if she has ‘accepted’ the goods even if she was ignorant of the
breach.
Section 37 states that the buyer is deemed to have accepted the goods:
(a) when she so communicates to the seller;
(b) when her conduct in relation to the goods delivered is inconsistent with the
seller’s ownership; or
(c) by lapse of time.
5. AFFIRMATION
Rather than terminate the contract for D’s breach, C may elect to affirm (continue with) the
contract.
When would C prefer to affirm?
 C has incurred substantial expenses that would be difficult to recover as damages
 C’s expectation damages would be nominal (e.g. due to mitigation)
 Termination would damage C’s reputation for which damages are rarely available
and, anyway, difficult to assess
 Termination would put C in breach of contract with third party
 D has repudiated in bad faith
Geys v Société Générale, London Branch [2012] UKSC 63

the Supreme Court:
✗rejected the automatic termination approach; and
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✓ affirmed the general election approach.
(i) Electing affirmation:

 C must evince an unequivocal intention (expressly or impliedly) to continue with the
contract, with knowledge of the facts giving rise to the breach, and her legal right to
elect (Peyman v Lanjani [1985] 1 Ch 457).
e.g. cashes cheque for inadequate amount Zebra Industries Ltd v Wah Tong Paper
Products Gp Ltd [2016] 1 HKC 213
 C does not generally affirm the contract by mere inactivity or by simply calling for D’s
performance: ‘the law does not require an injured party to snatch at repudiation and he
does not automatically lose his right to treat the contract as discharged merely by
calling on the other to reconsider his position and recognise his obligation’ (Yukong
Line Ltd of Korea v Rendsberg Investments Corp of Liberia [1996] 2 Lloyd's Rep 604).
 However, she will have affirmed the contract if she continues to press for, or accepts,
performance.
Tele2 International Card Co SA v KUB 2 Technology Ltd [2009] EWCA Civ 9
 Also, may affirm if delay is consistent only with an affirmation of the contract. If there
is any reasonable alternative explanation for the delay, it will not amount to
affirmation. E.g. if the aggrieved party is still considering his position. Cheung Ching
Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324
(ii) Irrevocability: once C has communicated her affirmation to D, it is irrevocable, even

without reliance by or detriment to the contract-breaker (Peyman v Lanjani).
Johnson v Agnew [1980] AC 367
On termination ‘the contract has gone—what is dead is dead’ (at least, its primary
obligations). But, if D persists with her non-performance or commits a fresh breach, C can
rely on this to terminate the contract.
(iii) The effect of affirmation: both parties remain bound to perform their primary obligations,
but C is entitled to damages for any loss flowing from the delay (although logically not for loss of
bargain). C may also seek specific performance come the time for performance.
(iv) Restrictions on the right to affirm: faced with an anticipatory repudiatory breach, C will
sometimes prefer to affirm a contract, complete her own performance and claim the contract
price where:
• she has incurred substantial expenses that would be difficult to recover as damages;
• her expectation of damages would be nominal (eg due to the mitigation requirement or too
remote;
• termination would damage her reputation, for which damages are rarely available and
difficult to assess;
• termination would put her in breach of contracts with third parties; or
• the contract-breaker has repudiated in bad faith (eg because of a personal dispute with C)
and not because C ’s performance was unwanted.
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However, C cannot always affirm.

White & Carter (Councils) Ltd v McGregor [1961] UKHL 5
McGregor contracted for his garage business to be advertised on garbage bins that W&C
supplied to the local council for 3 years. On the same day, McGregor tried to cancel the
contract, but W&C refused and insisted to put the ads on the bins, and sued McGregor for the
price of the ads. The House of Lords, by 3-2, said that W&C could claim for the price of
advertising. At the same time, Lord Reid set limits on C’s ability to affirm the contract (neither
applied in this case):
(i) Need for the contract-breaker’s cooperation: in practice, the claimant faced with a
repudiatory breach will often have no choice but to terminate the contract because she cannot
complete her own performance without the contract-breaker’s cooperation.
(ii) ‘No legitimate interest’: the claimant cannot affirm if she has ‘no legitimate interest,
financial or otherwise, in performing the contract rather than claiming damages’.
Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic) [2003] 2 Lloyd's Rep
(a) the burden of proof is on the D to show that C has no legitimate interest in performing
the contract;
(b) it is not enough to show that the benefit of affirmation to C is small in comparison with
the loss to D;
(c) the exception to the general rule applies only in extreme cases where damages would
be adequate and where an election to keep the contract alive would be wholly unreasonable.
Criticism of White & Carter
‘cooperation of repudiating party’

Fuji Xerox (HK) Ltd v Vigers HK Ltd [2006] HKCU 1335
Fuji rented 2 fax machines to Vigers under 2 separate contracts. Each contracts was to last 3
years with a monthly rental of $500. Vigers ceased to make payments on both contracts. Fuji
also rented other equipment to Vigers for 6 years. Vigers made no rental payments, indicated
to Fuji that they wanted out from all 3 agreements. Fuji chose to affirm the contract and sued
for the outstanding payments. The Court found that Fuji had a legitimate interest in upholding
the contract because there was no second-hand market in Hong Kong for these machines. They
would have suffered loss if they didn’t affirm. Though Fuji cannot service these machines as
part of their obligation without the cooperation of Vigers, it was irrelevant as this obligation
does not go to the contract’s essential purpose.
‘My reading of Lord Reid’s judgement is that he was not laying down in the new
proposition of law, rather he was affirming the general proposition that a party may
enforce his contractual rights as he sees fit whether it be in a reasonable or unreasonable
way. The furthest he went was to suggest that the party could not use his contractual
rights to penalise the other party by taking one course if there was another course which
was equally advantageous to him. In the first place, the plaintiff is not seeking to
penalised the defendant but simply to enforce the contract. In the second place, on the
findings of the judge, any alternative course would not have been equally advantageous
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to the plaintiff who might have been in the position of being left with useless and
unsaleable second-hand machines’
In Hong Kong, a refusal of cooperation will not deprive the innocent party of the right to affirm
the contract unless the refusal makes it impossible for the innocent party to perform an
obligation that goes to the contract’s essential purpose.
‘legitimate interest’: The question is whether, on the facts, the wastefulness of C’s continuing
performance is completely disproportionate to its performance interest in earning the contract
price. The scale is easily tipped in C’s favour.
Affirmation allowed for legitimate interest:

Gator Shipping Corporation v Trans-Asiatic Oil Ltd and SA Occidental Shipping
Establishment (The Odenfield) [1978] 2 Lloyds Reports 357
The claimant owners, under a time charter, were allowed to affirm a contract because it
would be difficult to find another employment for the ship, and termination would put the
claimant in breach in other contracts
Reichmann v Gauntlett [2006] EWCA Civ 967

A landlord was allowed to affirm a contract and sue for unpaid rent where the tenants, a firm
of solicitors, were shut down by the law society and vacated the premises. The landlord had a
legitimate interest in affirming the contract because he could foresee the difficulty in reletting
the property and he could not be sure of getting damages for loss of future rent.
The Isabella Shipowner Ltd v Shagang Shipping Co Ltd (The Aquafaith) [2012] 2 Lloyd's Rep.
61
A ship was chartered for a minimum of 59 months. The charterers tried to return the ship 3
months early. The Court held that the ship owner was allowed to charge rent for the last 3
months because that action could not be described as perverse or wholly unreasonable.
Funfair Co Ltd v Wong Lui Wing [2007] 3HKLRD 609

D repudiated his tenancy agreement by trying to return the landlord’s keys to the rented
property. The landlord rejected repudiation and claimed for the unpaid rent. The Court of
Appeal said that there could be no unilateral right to terminate a contract unless the contract
provided for it, and the landlord didn’t need to accept the tenant’s repudiation unless it was
wholly unreasonable, and this case was not wholly unreasonable.
Affirmation rejected for illegitimate interest:

Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH, The Puerto
Buitrago [1976] 1 Lloyds Reports 250
The charterer returned the ship to the owners in a damaged condition and almost a year before
the hire period. The repairs of the ship would have caused $2 million when the ship would
only worth $1 million. The Court held that the owner cannot insist on repairing the ship and
charging higher for the charter period, because the obligation to repair was not a condition
precedent to the right redeliver. The charter, in this case, could not continue without the
charterer’s cooperation, and the owner had no legitimate interest in continuing the contract
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Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader) [1984] 1 All ER 129
The owner chartered a ship out for 24 months, and the charterer returned it after 12 months,
as it required extensive repairs that would take 7 months to complete. The owner refused to
accept the charterer’s repudiation, repaired the ship and kept it fully crewed and prepared for
the remainder of the charterer’s hire period. The arbitrator found this to be wholly
unreasonable, and allowed the charterer to recover the hire for the period after the ship’s
return. Lloyd J accepted the importance of commercial certainty and the difficulty of
distinguishing between affirmation that is merely unreasonable and thus permissible and
affirmation that it wholly unreasonable and thus impermissible.
26
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REMEDIES FOR BREACH OF CONTRACT

DAMAGES
MONEY REMEDIES
Introduction
Settlement of dispute
Agreed remedies;
Self-help remedy: termination
Judicial remedies
Structure of lectures
COMPENSATION
1. Expectation measure of compensatory damages – the normal one
2. Damages measured in other ways
3. Price reduction for consumers
PERFORMANCE
4. Payment of money
5. Specific performance
6. Injunction
1. EXPECTATION MEASURE OF COMPENSATORY DAMAGES – Available as of right

upon proven breach of contract
(1) The Aim of Compensation for Breach of Contract – Protection of the Expectation (or
Performance) Interest
(i) Leading case and theoretical justifications
Robinson v. Harman (1848) 1 Exch 850, 855
‘The rule of common law is that where a party sustains a loss by reason of a
breach of contract he is, so far as money can do it, to be placed in the same
situation, with respect to damages, as if the contract had been performed.’
Livingstone v Rawyards Coal (1879-80) LR 5 App Cas 25, 39 per Lord Blackburn
“[W]here any injury is to be compensated by damages, in settling the sum of money
to be given for reparation of damages you should as nearly as possible get that sum
of money which will put the party who has been injured, or who has suffered, in the
same position as he would have been in if he had not sustained the wrong for which
he is now getting his compensation or reparation. ”
Hawkins v. McGee 84 NH 114, 146, Atl 641 (1929)
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Hawkins was 11 years old when he was scarred from contact with an electrical wire.
His hand was burnt. A medical doctor guaranteed to him that his hand would become a
100% good hand after treatment. McGee used skin grafting, and used Hawkins’ skin on
his chest. As Hawkins grew into puberty, the skin on his palm grew hairy, becoming a
hairy palm. The Court awarded expectation damages being the difference between a
100% good hand and what he received – a hairy palm.
Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628
Fuller and Perdue ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52
(ii) Comparing expectation, reliance and restitution

A buys a picture for £50,000 which B, a dealer, sells as the work of C, a famous painter.
A makes a good bargain: ie had the picture been genuine as B promised, it would have
been worth at least £70,000. In fact it is a forgery worth only £200.
A’s expectation: Expected value (£70,000) - value received (£200) = £69,800
A’s reliance: Amount paid (£50,000) - the value received (£200) = £49,800
A’s restitution interest if she returns the picture, is aimed at preventing B’s unjust
enrichment at A’s expense. B should return A’s payment of £50,000.
If A had made a bad bargain because, say, the picture was in fact worth only £10,000
if genuine, then:
A’s expectation: Expected value (£10,000) - value received (£200) = £9,800
A’s reliance: Amount A paid (£50,000) - value received (£200) = £49,800
A’s restitution interest if he returns the picture: the amount A paid = £50,000
If B makes a profit by breaching the contract, say by lending it to an exhibitor for £5,000,
A may now be able to claim B’s profit from breach or damages for loss of hypothetical
bargain permitting B’s breach, even if it caused no loss to A.
(iii) No full/true reliance interest protected in contract

Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111
Anglia TV Ltd v Reed [1972] 1 QB 60, CA
Reed is a film star, and he was contracted with Anglia to make a film. At the last
moment, Reed repudiated the contract, and Anglia was not able to find a replacement.
The project was called off eventually. It was difficult to assess what profits Anglia
would have made if the film was produced. The Court said that Anglia could be awarded
its reliance losses being its expenses, though they were incurred before the contract with
Reed was made.
McRae v Commonwealth Disposals Commission, (1950) 84 CLR 377

CDC sold McRae a sunken oil tanker that turned out didn’t exist. The Court said they
couldn’t find mistake because the seller took the risk that the sunken oil tanker really
existed. It was instead a breached contract. The problem is, the value of a non-existent
ship and its contents was too speculative for the purposes of measuring the expectation
interests. The Court was ready to award McRae’s reliance loss, which was the price paid
for the oil tanker and the wasted expenses incurred to find and salvage it.
C and P Haulage v Middleton [1983] 1 WLR 1461, CA;

Middleton leased premises to C & P for its garage business. Middleton breached the
contract by chucking them out 10 weeks earlier. C & P sued for reliance loss for
improving the premises. The Court refused to award reliance damages. The contract
prevents the tenants from removing any improvements at the end of the lease. They were
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attached to the premises, and they could not ask to be paid for them. The court only
awarded nominal damages, as C & P did not incur any other loss.
CCC Films (London) v Impact Quadrant Films Ltd [1985] QB 16

The courts do not allow a claimant to escape from a known bad bargain by claiming
reliance damages. The burden of proving a bad bargain is on the defendant.
Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm)
esp. [42]-[57], noted Tettenborn [2011] LMCLQ 1
‘reliance losses are a species of expectation losses and that they are
neither…“fundamentally different” nor awarded on a different “juridical basis of
claim”’ (at [42]
Reliance is in fact a backstop for expectation damages
(Commonwealth v. Amann Aviation Pty Ltd (1991) 66 ALJR 123 – do not read in full
unless you are Australian), noted Treitel, ‘Damages for Breach of Contract in the High
Court of Australia’ (1992) 108 LQR 226
Mason CJ and Dawson J (at 85) reject as inappropriate, ‘the language of election or
the notion that alternative ways are open to a plaintiff in which to frame a claim for
relief’. In truth, ‘damages for loss of profits and damages for expenditure reasonably
incurred are simply two manifestations of the general principle enunciated in
Robinson v Harman’.
(iv) Loss of a Chance and Minimum Obligations

Chaplin v Hicks [1911] 2KB 786
The defendant held a beauty contest to find girls for a live show. 6000 girls entered,
there were 50 finalists, out of which 12 would be chosen for the live show. The
defendant failed to inform Chaplin that she was chosen as one of the finalists. Her loss
was either 100% or 0%, either she was chosen or not. The Court awarded Chaplin her
damages for loss of the chance, which was assessed at 25% of winning the contest.
Refinement of Chaplin v Hicks: You only get damages on loss of a chance if the
causation of the loss rests on the hypothetical action of a third party.
Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602
A solicitor failed to warn his client that the company that the client was buying had
some potential liabilities. This meant that the client did not try to negotiate a better
deal. The Court said that if there was a substantial chance that the third party would
have acted to confer a benefit on, or avoid a loss to the claimant, then the Court can
award a sum for the claimant’s loss of a chance. The question is, would the seller of
the company, i.e. the third party, be ready to give a discount? If the loss rests on the
hypothetical action of the third party, and that there is a significant chance that the
third party would have benefited the claimant, then the court can award the sum.
In this case, if the claimant was properly advised, they would have gone to the third
party to renegotiate and probably would get a discount.
Semana Bachicha v Poon Shiu Man [2003] 3 HKC 452

The plaintiff was employed by the defendant as a domestic helper. The defendant
dismissed her on 8 September claiming that she had walked off the job, and she did
not receive permission from the Immigration Department to start a new job until June
of next year. The Court of Appeal said that the contract could have been ended by
giving proper notice. Damages is measured by what the employee would have received
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had the employer lawfully terminated the contract. In this case, the loss of the domestic
helper was not the whole of her salary, but the extent to which her chances of obtaining
the Immigration Department’s approval to take up new employment had been reduced
by her dismissal. The claimant was thus awarded 50% of the wages she would have
earned in the 9 months.
McGregor on Damages
At first glance it may seem somewhat strange to have different tests applicable
to hypothetical acts of the claimant and hypothetical acts of third parties. But
it can be seen to make sense. For a claimant can hardly claim for the loss of
the chance that he himself may have acted in a particular way: he must show
that he would have done.” 7th edition, 2003, paragraph 8-035.
Mance LJ in Gregg v Scott [2002] EWCA Civ 1471, paragraph 71:

“[T]he rationale of the distinction… must, I would think, be the pragmatic
consideration that the claimant may be expected to produce persuasive
evidence about his own conduct (even though hypothetical), whereas proof of
a third party’s hypothetical conduct may often be more difficult to adduce”.
Lavarack v Woods of Colchester Ltd [1967] 1 QB278
Lavarack was employed at a rate of not less than 4000 pounds per annum and such
bonuses, if any as the directors shall from time to time determine. When Lavarack
was wrongfully dismissed and sued for the bonuses, the Court said that the employer
had no contractual obligation to provide bonuses. If the contract gives the party
discretion as to how he/she is to perform it, the court is to assess the damages
according to how the defendant would have exercised the discretion on the balance
of probabilities.
Durham Tees Valley Airport v BMI Baby [2010] EWCA Civ 485, [96]-[147]
BMI Baby is a budget airline. They agreed to operate airlines from the defendant’s
airport. In breach of contract, BMI withdrew, but argued that since the contract did not
require them to operate a minimum amount of flights, they were not liable for any
damages. The Court rejected this argument. They held that the court had to assume
that the contract-breaker would have performed the contract at least in its own interests
having regard to the factors that were prevailing at that time. The Court is not required
to make assumptions that the defaulting party would have acted uncommercially
merely to spite the claimant.
Quantification of the loss of chance isn’t necessarily going to be speculative; it depends on

the value of the expected benefit, and the likelihood of the claimant actually getting it. The
more the contingency, the lower the chance of awarding the damages.
(v) Third Parties

Where A contracts for B’s performance to be directed towards a third-party C (hereafter
‘third-party contracts’), B breaches contract, can A claim?
The general rule: A cannot claim as he does not have legitimate interests; C cannot claim as
he is not a contractual party
C may now have a claim under
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Contracts (Rights of Third Parties) Ordinance (cap 623)

4. Third party’s right to enforce contractual term
(1) A third party may enforce a term of a contract (including a term that excludes or limits
liability) if—
(a) the contract expressly provides that the third party may do so; or
(b) the term purports to confer a benefit on the third party.
(2) The third party must be expressly identified in the contract by name, as a member of a
class or as answering a particular description.
(3) Subsection (1)(b) does not apply if, on a proper construction of the contract, the term is
not intended to be enforceable by the third party.
(4) The enforcement of the term by a third party under this section is subject to any other
term of the contract relevant to the term.
(5) Subsection (1) applies whether or not the third party has given consideration for the
term.
(6) Subsection (1) applies to a third party even if the third party was not in existence when
the contract was entered into. (E.g. an unborn child)
5. Remedy available to third party

(1) There is available to a third party who enforces a term of a contract under section 4 a
remedy that would have been available to the third party in an action for breach of contract if
the third party had been a party to the contract.
…
6. Rescission and variation of contract

(1) If a third party may enforce a term of a contract under section 4, the parties to the
contract may not, without the third party’s consent—
(a) by agreement, rescind the contract; or
(b) by agreement, vary the contract so that the third party’s right under the term is
altered or extinguished.
(2) Subsection (1) applies only if—
(a) the third party has assented to the term and the promisor has received notice of
the assent (whether the assent and the notice are in writing or otherwise); or
(b) the third party has relied on the term and—
(i) the promisor is aware of the reliance; or
(ii) the promisor can reasonably be expected to have foreseen that the third
party would rely on the term.
(3) In addition, an express term of the contract prevails over subsection (1) if the term provides
to the effect that—
(a) one or more parties to the contract may rescind or vary the contract without the
third party’s consent; or
(b) the third party’s consent to rescind or vary the contract is required in
circumstances specified in the contract instead of those set out in
subsection (2)(a) and (b).
(4) Subsection (3) applies only if, before the circumstances set out in subsection (2)(a) or
(b) occur—
(a) the third party is aware of the term referred to in subsection (3); or
(b) one or more parties to the contract have taken reasonable steps to make the third
party aware of the term.
15. Third party not to be treated as party to contract

…a third party is not to be treated as a party to the contract for the purposes of any enactment
or any instrument made under the enactment.
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(vi) Difference in the value of property, cost of cure or loss of amenity (loss of
satisfaction)?
‘diminution of value’: the market value of the performance D promised minus
that actually given; gives C of the financial advantage it has lost by not receiving
part or all of the contractual benefit.
‘cost of cure’: the cost of buying substitute performance from another party
(including undoing any defective performance); the amount required to put C in
as good a position as if it had received the contractual benefit.
Very exceptionally, ‘loss of amenity’
Tito v. Waddell (No 2) [1977] Ch 106, 328 –338

Involved a company that obtained a license to mine phosphate on Ocean Island. They
promised to restore the island afterwards by replanting coconuts and other fruit-bearing
trees. The company failed to do that and the islanders claimed a cost of cure of 73,000
per acre. The Court refused to grant the claim as by the time of the action, all the
islanders had resettled miles away due to the damage done to the island by World War
II. The difference in value between the original Ocean Island and the scarred Island was
significantly less, and thus diminution of value is given.
‘Whatever the circumstances, if the plaintiff establishes that the contractual work has
been, or will be done, then in all normal circumstances it seems to me that he has
shown that the cost of doing it is, or is part of, his loss and is recoverable as damages.’
Radford v. De Froberville [1977] 1 WLR 1262

De F bought part of R’s land. They agreed to build a wall between their adjoining lands.
They failed to do so. The Court awarded the cost of cure, although the wall did not
increase the value of the property by any amount, i.e. diminution of value would be zero.
‘In the instant case, I am entirely satisfied that the plaintiff genuinely wants this work
done and that he intends to expend any damages awarded on carrying it out.’
Ruxley Electronics and Construction Ltd v. Forsyth [1996] AC 344

Ruxley agreed to build a swimming pool for £17,800. The swimming pool built was
shallower than the original design, but it was still safe for diving and no less valuable.
Diminution of value would have been zero. Forsyth, nevertheless, claimed £21,500 to
rebuild the pool to the specified depths, i.e. a cost of cure. The Court of Appeal allowed
the claim on the basis that Forsyth was entitled to the precise dimensions of the pool.
This was reversed by the House of Lords. The cost of cure would be unreasonable in
this circumstance.
The Court considered 3 factors =
(1) The C’s purpose(s) in contracting (ie.
whether economic, so that diminution in value is sufficient, or
beyond simply economic so that diminution of value will not fully
compensate);
(2) Whether C has cured or intends to cure the breach (will they use the money
to cure the breach?); and
(3) The proportionality between the cost of cure, the contract price, the benefit
already received by C, and the benefit she would receive from cure.
In this case, diminution of value is insufficient, as the Forsyth is a tall person and thus
has a special preference of having a deep pool – he has a subjective taste that is beyond
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simply economic. However, if Forsyth was granted the cure, he would obtain a windfall
– Ruxley had already rebuilt the pool once to rectify other defects, and they had already
reduced the price to compensate for the loss of Forsyth. Moreover, Forsyth had been
claiming for damages for other minor defects, and only put forward the depth issue after
5 years. In addition, the fact that the pool was shallower didn’t mean that Forsyth didn’t
actually get a safe and usable pool. It is not a total failure of contract that would require
full cost of cure.
Thus, cost of cure was rejected as it would over-compensate the claimant. Diminution
of value was also rejected as it would under-compensate the claimant. Alternatively, the
House of Lords gave a loss on amenity, i.e. a loss of satisfaction of £2500.
The judicial concern were the avoidance of waste, over-compensation of the claimant,
and unnecessary hardship on the defendant.
The Maersk Colombo [2001] 2 Lloyd’s Rep 275

A vessel in the process of berthing collided with a crane. The crane collapsed. The vessel
was at fault, and the claimant claimed for damages for the replacement of the crane. The
replacement claim was 2.5 million, but the crane’s market value was just 600 thousand.
The Court said that they can only get the market value, as they haven’t actually replaced
the cranes, and it wouldn’t be reasonable for them to do so because they were already
planning to replace the old crane.
(Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272)
Tabcorp leased an office space from Bowen, and the lease forbade the tenant from
changing anything in the office space without the landlord’s approval. Tabcorp did
exactly just that. The tenant argued that the money they need to pay was only AUD
34,800, while the landlord argued that the money they should receive was AUD 1.38
million. The Court awarded the greater sum of cost of cure. Ruxley’s unreasonableness
factor was distinguished.
(vii) ‘Lost gross profits minus costs saved’ (examples from Burrows)
(a) A contracts to supply a machine to B for £1000. B is to use this machine to
manufacture clay pots, which he has contracted to sell to X for £5000. B has
paid A for the machine and in addition has spent a further £800 in part
performance of his contract with X. A breaks the contract by failing to supply
the machine and hence B’s contract with X is lost. B would have had to spend
a further £1200 to complete performance of his contract with X. Assuming B
could not have got a machine elsewhere and that X does not sue B, assess B’s
damages for A’s breach.
£5000 (expected profit) - £1200 (cost saved that would have been spent to
earn the £5,000) = £3800
(b) C, a house-owner, has contracted with D, a builder, for the building of an

extension for £2000 payable on completion. It will cost D £800 for materials
and £1000 on labour to complete the job. C wrongfully repudiates when the
job is three-quarters of the way through. Assess D’s damages (assuming,
simplistically, that D, at the time of the breach, had used three-quarters of the
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required materials and labour and that D could not undertake other profitable
work in the time left free).
£2000 (expected profit) – (cost saved = 0.25 x £1800 = £450) = £1550
(2) Limitations on Damages Protecting the Expectation Interest
(i) Remoteness (the defendant does not need to pay for losses that is too remote)
The foreseeability test:
Loss is recoverable if the defendant did or ought reasonably to have contemplated that
loss as seriously possible at the time of contracting.
Hadley v. Baxendale (1854) 9 Exch 341
Baron Alderson, at p354: ‘Where two parties have made a contract which one
of them has broken, the damages which the other party ought to receive in
respect of such breach of contract, should be such as may fairly and reasonably
be considered, either arising naturally, i.e. according to the usual course of things
from such breach of contract itself, or such as may reasonably be supposed to
have been in the contemplation of both parties, at the time they made the contract
as the probable result of the breach of it.’
The Heron II [1969] 1 AC 350
The defendant is liable when the parties could only foresee the type of loss but not the
extent of the loss.
The degree of foreseeability is very high (a high possibility)
(The Wagon Mound [1961] AC 388)
Lord Reid, at 385–386: ‘In contract, if one party wishes to protect himself
against a risk which to the other party would appear unusual, he can direct the
other party’s attention to it before the contract is made … In tort however, there
is no opportunity for the injured party to protect himself in that way and the
tortfeasor cannot reasonably complain if he has to pay for some very unusual
but nevertheless foreseeable damage which results from his wrongdoing.’
Loss in the ordinary course of things:

Victoria Laundry v. Newman Industries [1949] 2 KB 528
Victoria bought a boiler from Newman. Newman knew that Victoria needed it for
immediate use in her laundry business. The boiler was delivered 5 months late, and
Newman was liable for the loss of profits Victoria could have made in that period, given
Newman’s expertise as qualified engineers. The Court said that they were not liable for
the loss of some exceptionally profitable government contracts due to the delay, because
Newman didn’t know anything about them, and they couldn’t possibly foresee this loss.
Jackson v Royal Bank of Scotland [2005] UKHL 3, [2005] 1 WLR 377

Jackson imported dog biscuits from Thailand, and then sold them to a third party at a
high price. The bank, in breach of its duty of confidence to Jackson, disclosed to the
third party the extent of the mark-up. The third party was pissed off and bought dog
biscuits directly from the Thailand suppliers. Jackson sought to claim damages for loss
of repeat business as loss arising from the ordinary course of things. The Court accepts
that it is completely foreseeable for the Bank to see that there would be such a
consequence.
Brown v. KMR Services Ltd [1995] 4 All ER 598
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Exceptional loss:
Simpson v London and North Western Railway (1876) 1 Q.B.D. 274
A party transported samples of cattle food from Bedford agricultural show to Newcastle
agricultural show. The goods were marked ‘must be at Newcastle by Monday certain’,
but did not arrive until the show was over. Simpson was awarded the loss of profit that
he would have made from the Newcastle show. The court was ready to infer N’s
knowledge of this special circumstance because the contract was made with N’s agent
at the Bedford show.
The assumption of responsibility test:

Transfield Shipping Inc v Mercator Shipping Inc, The Achilleas [2008] UKHL 48,
[2008] 3 WLR 345
The charterers returned the ship 9 days late in breach of contract. This caused the ship-
owner to lose a lucrative charter with a third-party. The shipowners actually managed
to make a new contract with the third-party at a lower price. The owners then claimed
the loss of this profit. The arbitrators and the lower court found that the loss was clearly
foreseeable under the first limb foreseeability test.
However, the House of Lords disagreed. It was too crude to rely solely on the
foreseeability of the loss in question. The real question is what liability the charterers
had assumed for the risk. Given the understanding in the shipping industry, and the
uniform dicta of the courts, the damages for late delivery is the charter rate minus the
market rate for the period of the delay. The charterers, could not be reasonably be
regarded as having assumed the owner’s loss for the entire 6 months, i.e. £1.3 million.
noted Hoffmann (2010) Edin LR 47
“It seems to me logical to found liability for damages upon the intention of the parties
(objectively ascertained) because all contractual liability is voluntarily undertaken. It
must be in principle wrong to hold someone liable for risks for which the people
entering into such a contract in their particular market, would not reasonably be
considered to have undertaken.”- Lord Hoffmann
Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, [2010]
1 Lloyd’s Rep 349
John Grimes Partnership Limited v Gubbins [2013] EWCA Civ 37 [17]- [24]
Inferred an emerging consensus that: (1) Lord Hoffmann was not departing from the
foreseeability test of remoteness, but merely rationalizing it on the basis of the parties’
inputted intention in the ordinary case; (2) the foreseeability test would only be
inapplicable when the parties could not reasonably have meant it.
‘Normally, there is an implied term accepting responsibility for the types of
losses which can reasonably be foreseen at the time of contract to be not
unlikely to result if the contract is broken. But if there is evidence in a
particular case that the nature of the contract and the commercial background,
or indeed other relevant special circumstances, render that implied assumption
of responsibility inappropriate for a type of loss, then the contract-breaker
escapes liability. Such was the case in The Achilleas.’
The situation in Hong Kong:

Richly Bright International Ltd v De Monsa Investments Ltd [2015] 3 HKC 583
ON 8 March, Richly Bright contracts to sell to De Monsa the entire floor at the New
Mandarin Plaza at Tsim Sha Tsui. The price was $135.8 million, and 10% deposit was
made. The agreement was the fourth in a chain of property contracts, all of which
provided for completion on or before 17 Sept. In the third contract of the chain, Richly
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Bright agreed to buy the same property for $133.2 million and they paid a deposit of
15%. De Monsa, the fourth party in the chain, failed to buy it. Because of this, Richly
Bright didn’t complete the third contract in the chain; they lost the anticipated profit.
Richly Bright also forfeited De Monsa’s deposit of 10% and claimed damages and
indemnity in a total of more than $40 million.
In the Court of Final Appeal, the Court said that the plaintiffs were not entitled to $40+
million representing all the losses incurred by it and other vendors. Its entitlement was
limited to the forfeiture of the deposit, in the sum of $13.5 million.
The court effectively synthesised and reconciled Lord Hoffmann’s approach in the
Achilleas and the line of authority stretching back to Hadley v Baxendale in three steps.
(i) Although the principal in Hadley v Baxendale remains important, the court
endorsed the view that the two limbs are merely “the practical expression of a
single principle …that parties should only be liable for damages which were
when they contracted within the contemplation in the event of a breach and both
limbs turn on an objective assessment of what the contract-breaker ought to have
known.’ The question is whether it was recently within the parties’
contemplation as being a consequence of the contractual breach. Liability
depends on whether the breaching party has assumed the responsibility of the
loss “the assumption of risk responsibility provides a criterion in appropriate
cases for deciding when it is or is not proper to hold a contract breaker liable for
loss of a particular type”. This proceeds from the recognition that contracts are
consensual arrangements and that a “rule of law which imposes liability upon a
party for a risk which he reasonably thought was excluded gives the other parties
something for nothing”.
(ii) The two limbs do not establish different tests of remoteness but recognize
different “horizons of contemplation” for the same test. Whether arising in the
natural course of things or from circumstances of which the contract broker had
actual knowledge.
(iii) The foreseeability test is only “a prime facie assumption about what the parties
may be taken to have intended, no doubt applicable in the great majority of cases
but capable of rebuttal in cases in which the context, surrounding circumstances
or general understanding in the relevant market shows that a party would not
reasonably have been regarded as assuming responsibility for such losses”. , the
context in which the contract was made might instead indicate that the breaching
party assumed a wider responsibility then would arise under an application of
the principle in Hadley v Baxendale. Whether a party has “assumed
responsibility for a particular type of loss is decided by viewing the nature and
object of the contract against its commercial background” by reference to
“objective indicia”. Therefore, absent some object of contraindication in the
context made, including the surrounding circumstances, the “general
understanding in the relevant market”, and the nature of the contract and its
commercial background, a party’s liability to compensate can be assessed by a
straight application of the single principle in Hadley v Baxendale.
The court essentially said that there is only one rule of foreseeability test – the
consideration of assumption of liability is part of the test.
(ii) Intervening Cause (A complete bar to claiming damages)

Levicom International Holdings BV v Linklaters [2009] EWHC 812 (Comm)
Involved solicitors who were in breach of contract by not giving clear and proper advice
to the clients. However, the clients were only given nominal damages because the court
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found that even if they were given proper advice, the clients would still do what they
did. Basically, it was the claimants’ own stupidity.
Chinluck Properties Ltd v Casil Clearing Ltd [2007] 1 HKC 231
In July 1997, there was contract by the defendant to lend $330 million to the plaintiff to
develop certain land on Ping Chau. In Sept 1997, the defendant advanced $251.5
million, but then they didn’t advance the rest of the money. In Nov, the Asian financial
Crisis hit, the plaintiff’s development plans came to a grinding halt. The plaintiff
claimed substantial damages for losses due to not developing the land. But they were
only awarded nominal damages ($100) on the basis that the defendant’s breach of not
advancing the rest of the money was not the real cause of the loss.
“it is overwhelmingly plain that the real cause for the failure of the project
was that quite unexpected intervention of the Asian financial crisis in late 1997,
which caused a dramatic decline in property values in Hong Kong, from late
1997 and continuing through until 1999. With that decline in property values
came a decline in demand. The demand anticipated for the project simply no
longer existed.” (The Asian Financial Crisis was not treated as a frustrating
event)
Lambert v. Lewis [1982] AC 225
Involved a dealer who sells a trailer coupling. He sold it to a farmer who could see that
it was broken, but the farmer continued to use it. The coupling gave way, the cart ran
off and caused injuries to other people. The farmer claimed an indemnity to the dealer
who supplied the coupling. The Court rejected the claim, as his act of continuing to use
the broken coupling broke the chain of causation.
Quinn v. Burch [1966] 2 All ER 683
The defendant employer failed to supply a step-ladder for a job that he required his
employee to do. The employee rigged up an unsafe way of climbing up and injured
himself. He sued the employer for breach of contract. The Court said that the
employee’s own unreasonable conduct was the real cause of the problem. The
employer’s breach was merely the occasion but not the cause.
Galoo v. Bright Grahame Murray [1994] 1 WLR 1360
Glidewell LJ, at pp 1374-5, ‘How does the court decide whether the breach of
duty was the cause of the loss or merely the occasion for the loss?...The answer
in the end is “By the application of the court’s common sense.”’
(iii) Contributory negligence (pro rata bar)

The Law Amendment and Reform (Consolidation) Ordinance (Cap 23)
“s.21 apportionment of liability in cases of contributory negligence
(1) Where any person suffers damage as the result partly of his own fault and
partly of the fault of any other person or persons, a claim in respect of that damage
shall not be defeated by reason of the fault of the person suffering from the damage,
but the damages recoverable in respect thereof shall be reduced to such extent as the
court thinks just and equitable having regard to the claimant’s share in the
responsibility for the damage.
Provided that –
(a) this subsection shall not operate to defeat any defence arising under a contract;
(b) where any contract or enactment providing for the limitation of liability is
applicable to the claim, the amount of damages recoverable by the claimant by
virtue of the subsection shall not exceed the maximum limit so applicable…
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(10) In this section- … ‘fault’ means negligence, breach of statutory duty or other act
or omission which gives rise to a liability in tort or would, apart from this Act, give
rise to the defence of contributory negligence.”
Forsikringsaktieselskapet Vesta v. Butcher [1989] AC 852 CA; affd on a different point
[1989] AC 880, HL
where the defendant has been in breach of a contractual duty of care and is also liable
in the tort of negligence.
Trebor Bassett Holdings Ltd and the Cadbury UK Partnership v ADT Fire and
Security plc [2012] EWCA Civ 1158
ADT supplied a tailor-made fire-suppression for Trebor Bassett confectionary
factory. All they undertook was to exercise reasonable skill and care in the design
of the system. In breach of that duty, they caused a fire in the popcorn production
area. The fire spread and destroyed the whole factory. The Court ruled that Trebor
Bassett was contributorily liable for 75% of the loss, because (1) it had negligently
failed to segregate the production from the rest of the building, (2) they failed to
install sprinklers, and (3) they encouraged the fire to spread on their discovery, as
they panicked and ejected a load of popcorn in an attempt to stop the spread but
instead caused its spread.
In Hong Kong, it has only been successfully applied in cases against employees.
Gurung Chandra Kumar v Kin Kei Engineering Co [2002] HKCU 923
Hang Huu Duc v Hanbo Engineering Ltd [2005] HKCU 1628
International Trading Co Ltd v Lai Kam Man [2004] HKLRD 937
The would-be purchasers of property in Shanghai sued their solicitors who had
negligently handled their transaction, causing loss. The solicitors tried to reduce the
damages for the clients’ contributory negligence, and the court found that the
former clients had not been negligent, and even if the clients were, their damages
could not be reduced this way. The Court rejected the applicability of contributory
negligence.
(iv) Mitigation
British Westinghouse Electric v. Underground Electric Rys [1912] AC 673
Viscount Haldane LC, at 689, ‘…there are certain broad principles which are quite
well settled. The first is that, as far as possible, he who has proved a breach of a
bargain to supply what he contracted to get is to be placed, as far as money can do
it, in as good a situation as if the contract had been performed…but this first
principle is qualified by a second which imposes on a plaintiff the duty of taking all
reasonable steps to mitigate the loss consequent on a breach, and debars him from
claiming any part of the damage which is due to his neglect to take such steps.’
The Golden Victory [2007] 2 AC 353, [10] (Lord Bingham)
“An injured party such as the owners may not, generally speaking, recover damages
against a repudiator such as the charterers for loss which he could reasonably have
avoided by taking reasonable commercial steps to mitigate his loss. Thus where, as
here, there is an available market for the chartering of vessels, the injured party's
loss will be calculated on the assumption that he has, on or within a reasonable time
of accepting the repudiation, taken reasonable commercial steps to obtain
alternative employment for the vessel for the best consideration reasonably
obtainable. This is the ordinary rule whether in fact the injured party acts in that
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way or, for whatever reason, does not. The actual facts are ordinarily irrelevant. The
rationale of the rule is one of simple commercial fairness. The injured party owes
no duty to the repudiator, but fairness requires that he should not ordinarily be
permitted to rely on his own unreasonable and uncommercial conduct to increase
the loss falling on the repudiator.”
In other words, the innocent party’s duty is to take positive action to minimize the
loss flowing from the breach. This is such that the court can give damages according
to the amount of reasonable expenses made by the innocent party in mitigating that
loss. Secondly, the innocent should not incur unreasonable expenses trying to
mitigate the loss. The reasonableness requirement is in fact not high.
Wayfoong Credit Ltd v Cheung Wai Wah Samuel [1990] 1 HKC 367
The defendant repudiated a hire purchase agreement for a van, which the claimant then
repossessed. The original price was $134,700. It was resold by the claimant, only a few
months later, for $64,000. The problem was, the claimant restricted the invitation to
tender for this van to people it did business with, and this was held to be an unreasonable
mitigation. The court concluded that the van was actually worth $109,000, using a
formula of 55% annual depreciation. The claimant cannot sue as if the loss of profit was
the difference between $134,700 and $64,000.
Fulltrend Co Ltd v Longer Year Development Ltd (unreported, HCMP 3211/1989. 27
Nov 1992) (HC)
The June-fourth Incident triggered a calamitous fall in the Hong Kong real estates
market. The sub-purchasers of a property repudiated a contract made on 3 June. The
sub-vendors then allowed their own deposits to be forfeited then sued the sub-vendor
for this part as part of their loss (The sub-vendors were buying from the sub-vendor to
sell to the sub-purchasers). The court held that this was a reasonable thing to do.
Wong Choi-kiu v Poon Pan-wo (t/a Thorough Construction Co) (unreported, HCA
2482/1988, 19 March 1990) (HC)
The plaintiff sued in respect of defects in the house that the defendant built and
completed in 1986. The claimant did not repair it until 1989. That cost $120,000 in 1989.
The court said that damages based on 1986 prices would only be awarded, because that
was the reasonable time for mitigation.
The onus of proof is on the defendant to show that the claimant was reasonably to have
taken certain mitigating steps.
Mitigation may require C to accept contract variation from D

Yetton v. Eastwood Froy [1967] 1 WLR 104
A claimant employee was wrongfully dismissed. If the employer came back and offer
employment again, the claimant does not need to accept it if the new employment was
of a lower pay, employment elsewhere would be more permanent, or the claimant had
lost confidence on the employer.
Brace v. Calder [1895] 2 QB 253
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There was a failure to mitigate by refusing employment by the former employer.

Mitigation might require the innocent party to renegotiate a new contract with the
contract-breaker.
Payzu Ltd v Saunders [1895] 2 QB 253

Involved suppliers of silk who wrongly in breach of contract insisted on cash payment
on delivery. The claimant then sued for the difference between the contract piece and
the greater market price. The court did not allow them to claim this because they rejected
the supplier’s offer to supply the silk on cash terms. This amounted to a failure to
mitigate. In commercial cases, a party can be expected to consider and accept a
reasonable offer made by the contract-breaker, and the claimant may even be expected
to initiate the renegotiations. However, the more egregious the contract-breaker’s
conduct, the less likely the claimant is expected to mitigate loss by accepting a ne offer
from the contract-breaker.
Tung Guab Co Pte Ltd v Jih Dong Enterprises Co [1992] 2 HKLRD 225
The defendant had twice repudiated the contract to sell some soy bean extract. The court
held that the claimant would be taking an unreasonable risk to accept a third offer by
the defendant to supply the goods. Therefore, it was reasonable for him not to accept he
third offer.
(v) Date of Assessment (Overlaps with mitigation)

Normally, the measure of loss is at the earliest date that the claimant can be expected
to mitigate, i.e. to find substitute performance or take remedial action. Thus, the
measure of loss is usually taken on the date of breach.
Exceptionally, if at a later time it would be more just and appropriate in the
circumstances, the court would allow it. For instance, the claimant could not have
reasonably know of the breach at the time of the breach (The Hansa Nord). Secondly,
if the claimant reasonably waits to see if the defendant would remedy the breach.
Thirdly, it is due to the claimant’s own impecuniosity – the innocent party can’t really
afford to take mitigating action. Fourthly, where a contingency had occurred by the
time of the trial, damages should be assessed by the known facts at the later date.
Radford v De Froberville [1977] 1 WLR 1262, 1285-6
De F bought part of R’s land. They agreed to build a wall between their adjoining
lands. They failed to do so. The Court awarded the cost of cure, although the wall did
not increase the value of the property by any amount, i.e. diminution of value would
be zero. The plaintiff said that they were clearly entitled to wait until the final date of
performance to see if there is performance.
Johnson v Agnew [1980] AC 367, 400-1

The seller of the land obtained an order for specific performance. However, the party
liable for the specific performance delayed in performing. This forced the seller to
have to continue paying the mortgage to the land, which he could not afford, causing
the land to be sold at a lower value. The court said that the date for assessment of
damages was fixed at the date the land was sold by the bank, meaning the seller could
get a higher value of damages.
The Golden Victory [2007] 2 AC 353

The charterers breached the contract by returning the ship 4 years early. Normally, this
would entitle the ship-owners to profits of the 4 years of the hire they did not receive.
14 months after the return of the ship, the Gulf War broke out. A term in the contract
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said that if war breaks out, either party could end the contract without paying anything.
The House of Lords then had to decide if the owners could get the 14 months’ profit
before the start of the Gulf War or the entire 4 years regardless? The court said that
they would not shut their eyes to subsequent events even if it may lead to uncertainty
and delay in the measurement of damages.
(Lord Bingham, however, dissented, stressing the problem of uncertainty, the need of
finality, and inconsistency with the general rule.)
Bunge SA v Nidera BV (Formerly Nidera Handelscompagnie BV) [2015] UKSC 43
(vi) Non-pecuniary loss (non-financial loss - mental distress, loss of enjoyment)

Harris, Ogus and Phillips ‘Contract Remedies and the Consumer Surplus (1979) 95
LQR 581
Addis v. Gramophone Co [1909] AC 488 (Authority for the general rule that there is no
damages for mental distress)
The claimant was wrongly dismissed from a job in a harsh and humiliating manner. The
court said, “tough luck, no damages.”
Jarvis v. Swan’s Tours [1973] QB 233

Jarvis, a solicitor, paid in 1973 about £65 for a package holiday as his annual skiing
holiday. The brochures promised a house party with a variety of activities, including
skiing and a yodeller evening. In fact, there were only 13 people in the hotel in the 1st
week, and Jarvis was alone for the 2nd week. The judge said that the hotel owner could
not speak English, and Jarvis was also dissatisfied with skiing and the food. The yodeller
evening consists of one man from the locality dressed in his working clothes, who just
sang a few songs and then left. Effectively, he didn’t get very much. He was thus
awarded the sum he paid for the holiday, and was also compensated for disappointment,
distress, upset and frustration to a total of £125.
Jackson v. Horizon Holidays [1975] 3 All ER 92

The court said of the Jacksons’ situation: The room had not got any connecting doors
with the room for the children at all; the room for the children had fungus growing on
the walls, the toilet was stained. The shower was dirty, there was no bath. They could
not get the children to sleep in the room, so for the first 3 days, they had the entire family
in the same room. After 3 days, they were moved to one of the best rooms in the hotel,
but they still had to put their children to sleep in the sitting room. There was dirty linen
on the bed, no private bath but a shower, no mini-golf, no swimming pool, no beauty
salon, no hairdressing salon. Worst of all was the cooking. There was no choice of
dishes on some occasion. Curry was served as an alternative in some cases. The food
was extremely distasteful. They obtained damages of £1000 for the grossly substandard
holiday. This was interpreted as recovering not only for mental distress, but the fact that
his family suffered as well.
Heywood v. Wellers [1976] QB 446

The claimant was awarded damages for mental distress, when her solicitor failed to get
an injunction to prevent her former boyfriend from harassing her.
Diesen v. Samson [1971] SLT 49

Involved damages regarding a photographer who failed to turn up on the claimant’s
wedding day.
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Perry v. Sidney Phillips [1982] 3 All ER 705

The claimant bought a house in reliance on a negligent survey, which failed to mention
a leaking roof and a smelling septic tank. Damages was awarded for the distress and
discomfort of living there, and the claimant’s anxiety as to when the repairs would be
made as he couldn’t afford to do it.
Watts v. Morrow [1991] 4 All ER 937 (Summarises the situation)

Bingham LJ at 959–960: ‘A contract-breaker is not in general liable for any
distress, frustration, anxiety, displeasure, vexation, tension or aggravation which
his breach of contract may cause to the innocent party. This rule is not, I think,
founded on the assumption that such reactions are not foreseeable, which they
surely are or may be, but on considerations of policy. But the rule is not
absolute. Where the very object of a contract is to provide pleasure, relaxation,
peace of mind or freedom from molestation, damages will be awarded if the fruit
of the contract is not provided or if the contrary result is procured instead. If the
law did not cater for this exceptional category of case it would be defective. A
contract to survey the condition of a house for a prospective purchaser does not,
however, fall within this exceptional category. In cases not falling within this
exceptional category, damages are in my view recoverable for physical
inconvenience and discomfort caused by the breach and mental suffering
directly related to that inconvenience and discomfort. ’
Farley v. Skinner [2001] 3 WLR 899 (Expansion of the exception from just the sole
purpose of a contract to including a distinct and important obligation of the contract)
Farley wanted to buy a property for holiday use. He employed a surveyor to survey the
property, and he intended it to be a quiet and peaceful weekend, so he asked the surveyor
to check for disturbance by aircraft noise. The surveyor said the property wouldn’t
suffer greatly from noise, but in fact it did. Farley had spent more than £100,000 to
improve it, he experienced great discomfort in interference with his preference of ‘a
quiet breakfast, a morning stroll in the garden, and pre-dinner drinks on the terrace’.
The House of Lords awarded £10,000 for loss of enjoyment.
Limits to the expansion – the mental distress must be reasonably foreseeable, not in a
commercial context, does not result in substantial damages given (10,000 as the ceiling),
and that other measures are inappropriate.
Johnson v. Gore Wood [2001] 2 WLR 76

A solicitor negligently failed to advise Johnson about various financial matters.
Substantial damages was denied, because it was not remotely arguable that Johnson’s
mental distress and anxiety was a consequence that was reasonably in the contemplation
of the parties as liable to result from breach at the time the contract was made.
Hamilton Jones v. David and Snape [2004] 1 All ER 657

The claimant was separating from her husband. She was worried that her husband would
kidnap her children and then she would lose custody of them. The solicitor should have
taken certain action so that if the husband tried to bring the children out of the country,
he would be banned. The solicitor failed to do so, allowing the husband to kidnap the
children and brought them to Tunisia, where he then went to court and was given
custody of the children. Lord Neuberger held that both parties would have had in mind
that a significant reason for the claimant instructing the solicitor was with a view of
ensuring that, as far as possible, the claimant retain her children in her custody for her
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own pleasure and peace of mind. The non-pecuniary purpose can be argued as a clear
purpose of the contract. The claimant was awarded £20,000 by taking into account her
grief, her anxiety and hurt, and the fact that she could still them from time to time. In
addition, she also received £25,000 for her financial loss.
(vii) Loss of reputation

Addis v. Gramophone Co [1909] AC 488 (no damages for mental distress and loss of
reputation for employment contracts)
Aerial Advertising v. Batchelors Peas [1938] 2 All ER 788 (general rule – cannot get
damages unless there is financial loss)
Aerial Advertising advertised the peas of Batchelors Peas during the two-minute silence
on armistice day. Batchelors Peas expressly told Aerial Advertising not to fly the banner
during the two-minute silence. This incident resulted in a loss of sales and reputation of
Batchelors Peas. The court held that Batchelors Peas was not entitled to damages due
to loss of reputation, but was entitled to damages due to loss of sales.
Malik v. Bank of Credit and Commerce International [1998] AC 20 (if it is foreseeable

that there will be pecuniary loss consequent on the loss of reputation, then you can claim
for the financial consequences)
There was a collapse of the bank BCCI. They found incredible amount of fraud and
corruption in the bank. Malik and other senior employees were made redundant
following BCCI’s collapse, and they sued for stigma damages, because they were not
able to find alternative employment because their previous tenure in BCCI tainted their
reputation. The court agreed that the employers breached their duty of trust and
confidence, which was an implied term in employment contracts. In principle, Malik
and others can claim damages if they can prove financial loss as a result of the breach.
The employer’s only breach was only of not giving adequate notice to the employees.
Even if adequate notice was given, they would still have incurred the same loss. In this
case, it was very difficult to prove that Malik and his friends didn’t get other jobs just
because of the stigma.
2. DAMAGES MEASURED OTHER THAN BY EXPECTATION

(1) Reliance damages (a ‘back-stop’ for expectation damages)
(2) Nominal Damages ($100)
(3) Restitution of money paid for total failure of consideration
(4) “Account of profits” (breach of contract to work for a third-party for higher profits)
General rule: claimant cannot claim the extra profit the defendant earned from working
for third-party
Teacher v Calder [1899] AC 451
Tito v Waddell (No 2) [1977] Ch 106
City of New Orleans v Fireman’s Charitable Assoc 9 So 486 (1891)
The defendant was paid the full price for providing fire-fighting services. When the
contract ended, they found out that the defendant w as paid for providing a certain number
of men and horses. They in fact didn’t do that – they cut corners. However, there weren’t
any fires throughout the contract. Thus, they are not liable for any damages.
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Attorney-General v. Blake [2001] 1 AC 268

An account of profit was awarded for breach of contract which did not involve a breach
of confidence or a breach of fiduciary duty.
George Blake, a double agent for the UK and USSR during the Cold War, published an
autobiography and made a profit. This was in breach of his contract of secrecy with the
Crown and in breach of criminal law. He had already been paid 60,000 by his publishers.
The action was to prevent him getting a further 90,000 that he was still owed by the
publishers. The House of Lords awarded the Crown an account of profits for breach of
contract. They said it was the demand of practical justice in the exceptional circumstances
of this case.
Lord Nicholls, at p 285, ‘An account of profits will be appropriate only in
exceptional circumstances. Normally the remedies of damages, specific
performance and injunction, coupled with the characterisation of some contractual
obligations as fiduciary, will provide an adequate response to a breach of contract.
It will be only in exceptional cases, where those remedies are inadequate, that any
question of accounting for profits will arise. No fixed rules can be prescribed. The
court will have regard to all the circumstances, including the subject matter of the
contract, the purpose of the contractual provision which has been breached, the
circumstances in which the breach occurred, the consequences of the breach and
the circumstances in which relief is being sought. A useful general guide, although
not exhaustive, is whether the plaintiff had a legitimate interest in preventing the
defendant’s profit-making activity and, hence, in depriving him of his profit.
One Step (Support) Ltd v Morris-Garner [2018] UKSC

The Supreme Court recognized that an account of profits may be awarded, but stressed
that it was very exceptional and would be hard to think of other cases that would warrant
such award in the future.
(5) Negotiating Damages (a kind of accounting of profits)
4.1 Orthodox position - if the defendant, in breach of contract, had interfered with the
claimant’s proprietary rights, then they must pay a reasonable fee for the interference even
if it caused no loss to the property
Wrotham Park Estate v. Parkside Homes Ltd [1974] 1 WLR 798
Wrotham Park sold land to Parkside. There was an agreement that Parkside could only
build a limited number of houses. In breach of the agreement, extra houses were built, and
extra profits were made. Wrotham Park applied for an injunction to undo the breach. The
court refused them the injunction, because it would be too wasteful, but would award
damages in lieu of the injunction, estimating it to be 5% of the profits.
4.2 Position after Blake

AG v Blake
Referred to the Wrotham Park case as a “shining beacon”
One Step (Support) Ltd v Morris-Garner [2018] UKSC
“it is a source of potential confusion because of the opacity of its reasoning, and it can
now be regarded as being of little more than historical interest.”
4.3 When available? And how is it measured?

4.3.1 Post Blake, pre-One Step
Experience Hendrix LLC v. PPX Enterprises Inc [2003] 1 All ER (Comm) 830
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Involved Jimmy Hendrix’s ex-Estate. PPX was using Hendrix’s music without paying for
it, and a settlement agreement was reached. However, the settlement was breached when
PPX used Hendrix’s music again. The Court of Appeal awarded based on the percentage
of profits the defendants had made even though the claimants couldn’t show they had
suffered any loss.
The Court of Appeal referred to some of the factors relevant to the granting of an
account of profit as relevant to their discretion to grant Wrotham Park damages:
o the defendant “did do the very thing it had contracted not to do”
o the defendant “knew that it was doing something which it had contracted not to
do”;
o it was a “deliberate breach” a “flagrant contravention”.
The circumstances need not be exceptional in the way required for an account of profits
award.
Was followed in HK Choy Nga Wai Nancy v Gentle Smart Ltd [2009] 4 HKLRD 75
But after One Step?
4.3.2 One Step (Support) Ltd v Morris-Garner [2018] UKSC 20

One Step was a business providing support for young people who were leaving care.
Morris Garner had 50% shareholding. He sold his shares to One Step and they agreed a 3-
year non-compete agreement. But, in breach of that, MG had already set up a rival
company and they started operating immediately. The new company was very successful
and was sold for £12.8 million after 3 years. Meanwhile, One Step suffered a decline in
profits. One Step claimed for loss of profits of £4 million. Alternatively, they claimed for
negotiating damages. The Court rejected the claim of negotiating damages. The court’s
position was back to the pre-Blake state of law, i.e. before there were the exceptions for
account of profits. However, the court added one exception:
breach of contract that are analogous to proprietary rights:
"the breach of contract results in the loss of a valuable asset created or protected by
the right which was infringed" (at [92]);
"the contractual right is of such a kind that its breach can result in an identifiable loss
equivalent to the economic value of the right, considered as an asset, even in the absence
of any pecuniary losses which are measurable in the ordinary way" (at [93]).
Lord Sumption:
Where C has an interest in contractual performance extending beyond financial
reparation, e.g. Blake (‘a non-pecuniary governmental interest’). Scope?
(6) No Punitive/Exemplary Damages (yet)

Addis v. Gramophone Co [1909] AC 488
Whiten v. Pilot Insurance Co [2002] SCC 18
An accidental fire destroyed the claimant’s home, and the claimant claimed for insurance.
The defendant alleged that the claimant started the fire deliberately. This was against the
investigation undertaken by the firefighters and the company itself. The court said the
insurance company acted in bad faith – they were trying to force the claimant to accept a
low pay-out. The court ordered $1 million of punitive damages.
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CONTRACT
2019-20
PERFORMANCE REMEDIES
Performance = payment of money action for the agreed sum = most common action
Performance = non-money action for specific performance = rare, subject to many ‘bars’
Performance = refrain from action action for injunction = less rare but also subject to
‘bars’
1. AWARD OF THE AGREED SUM

Advantages for C
o May be better than damages – doesn’t need to prove any loss caused by breach
o Summary judgment – a quick legal process with procedural advantages
o Can also claim damages
Protection of D
o Pre-condition for payment is strict-ish (entire obligations rule)
Sumpter v Hedges [1898] 1 QB 673
The builder agreed to build something under a lump-sum. They failed to perform, and thus
can recover nothing for the work that was actually done, even though the other party may
have received some actual benefit from the partly finished work.
Bolton v Mahadeva [1972] 2 All ER 1322
The full payment was not due in a contract to install a central heating facility for £5600
when the defects amounted to 31% of the total price.
Hoenig v Isaacs [1952] EWCA Civ 6
Full payment was due subject to the deductions where the defects amount to less than 10%
of the value of the contract
o Defendant Can set-off against agreed price (can deduct what the claimant owes
her from the sum to be paid if it would be unjust not to allow it). Bar to set-off may
be under CECO
o Restrict C’s right to affirm
White & Carter v. McGregor [1962] AC 413
2. SPECIFIC PERFORMANCE
‘Bars’ to specific performance award -
Claimant-sided considerations:
(1) Ready, willing and able to perform own obligations
(2) Adequacy of damages
(3) Lack of consideration
(4) Lack of clean hands
(5) Delay
(6) Claimant’s termination of the contract
Defendant-sided considerations:
(7) Contracts for personal services;
(8) Impossibility
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(9) Severe hardship
(10) Want of mutuality
Impracticability/Unsuitability:
(11) Uncertainty
(12) Constant supervision
(13) Avoidance of waste
(14) Human rights
*Co-operative Insurance Soc Ltd v. Argyll Stores (Holdings) Ltd [1998] AC 1

In 1979, the claimant leased out the largest unit in its shopping centre to Argyll to operate
a supermarket. Argyll covenanted that for 35 years it would keep it open for retail trade
during the usual hours of business in the locality and display windows properly dressed in
a suitable manner in keeping in a good class a parade of shops. The supermarket then
started to run into a loss with 19 years still to go. They made the decision that it was
uneconomic to keep on trading, and stripped out all the shop fittings. Since the supermarket
was the main attraction in the shopping centre, its closure undoubtedly had and would have
a continued negative impact on the other shops, and the claimant. The claimant tried to get
specific performance.
The lower court initially denied specific performance. However, the Court of Appeal
allowed specific performance. The House of Lords ultimately denied the claim for specific
performance.
In support of specific performance, the CA emphasised the inadequacy of damages in
compensating the claimant, who faces enormous obstacles in proving what loss was caused
by the breach of contract. Secondly, CA said that the breach was deliberate and cynical.
Against specific performance, the HL played down the factors of inadequacy of damages
and deliberate breach. This is because both parties are large, sophisticated commercial
organizations who entered into the contract purely for financial reasons, and the entered on
the basis that the remedy for breach would likely be limited to damages – the parties knew
that specific performance would not be available. The HL placed primary emphasis on the
following: (1) there was a settled practice against specific performance when this would
require defendant to carry on an activity as opposed to achieving a result by performing a
single, well-defined act; (2) there was a certain oppressiveness in requiring the defendant
to run a business under the heavy-handed threat of proceedings of contempt of court for
which one might be imprisoned; (3) it would need constant supervision and would
perpetuate a continuing and hostile relationship; (4) uncertainty of the contract to come up
with a precise court order; and (5) it would occasion enormous losses to the defendant.
The application of specific performance, which is equity, is subject to moral judgment.
(1) The claimant must be ready, willing and able to perform his own obligations
Lau Suk Ching Peggy v Ma Hing Lam (2010) 13 HKCFAR 226
(2) Adequacy of Damages PPT 5

Land:
Sudbrook Trading Estate v. Eggleton [1983] 1 AC 444, 478 (Claim for specific
performance is almost always granted concerning the transfer of interests in land)
Is land always unique?

SP has been denied in land contracts in:
o Canada, see e.g. Semelhago v Paramadevan (1996) 136 DLR (4th) 1 (SC);
o New Zealand, see e.g. Landco Albany Ltd v Fu Hao Construction Ltd [2006] 2
NZLR 174 (CA); and in
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o Singapore EC Investment Holding Pte Ltd v Ridout Residence Pte Ltd & Ors
[2011] SGCA 50, [2012] 1 SLR 32 (CA).
Goods:
Falcke v. Gray (1859) 4 Drew 651
SOGO s.54: PPT6

"In any action for breach of contract to deliver specific or ascertained goods,
the court may, if it thinks fit, on the application of the plaintiff, by its judgment
direct that the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on payment of damages. The
judgment may be unconditional, or on such terms and conditions as to
damages, payment of the price, and otherwise, as to the court may seem just.
The application by the plaintiff may be made at any time before judgment."
Sky Petroleum v. VIP Petroleum [1974] 1 WLR 576

An injunction amounting to specific performance was granted, effectively preventing
VIP from breaching their contract – supplying petrol to Sky. VIP’s petrol was Sky’s
sole means of continuing business.
Goulding J, at pp 578-9, ‘I come to the most serious hurdle in the way of the
plaintiffs which is the well-known doctrine that the court refuses specific
performance of a contract to sell and purchase chattels not specific or
ascertained….the ratio, behind the rule, is, as I believe that under the ordinary
contract for the sale of non-specific goods, damages are a sufficient remedy.
That, to my mind, is lacking in the circumstances of the present case. The
evidence suggests, and indeed it is common knowledge, that the petroleum
market is in an unusual state in which a would-be buyer cannot go out into the
market and contract with another seller, possibly at some sacrifice as to price.
Here the defendants appear for practical purposes to be the plaintiffs’ sole
means of keeping their business going and I am prepared so far to depart from
the general rule as to try to preserve the position under the contract until a later
date.’
Thames Valley Power Ltd v Total Gas and Power Ltd [2005] EWHC 2208 (Comm),
[2006] 1 Lloyd’s Rep. 441
Damage excluded, hard to prove or enforce:

AB v CD [2014] EWCA Civ 229, [2014] 3 All E.R. 667 at [25] –[27]
Where the only losses suffered were excluded by the contract, it would be unjust if
specific performance were barred, even for the most gross and cynical breach of
contract. The parties’ expectation was that the contract would be performed. The
expectations created by an exclusion or limitation clause were about something
different, namely, what damages would be recoverable in the event of breach.
No other substantial remedy:

Beswick v. Beswick [1968] AC 58
Involved an elderly coal merchant who sold his business to his nephew in return for various
undertakings, including a promise that after he died, the nephew would pay his widow 5 a
day. The nephew did not do so. The estate suffered no loss; the widow could not sue because
she was a third party. The widow, however, could sue as the representative of the coal
merchant in his estate. In that capacity, she obtained specific performance.
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Ratio?
The ratio is much narrower than people expect.
(3) Lack of consideration

Cannon v Hartley [1949] Ch. 213
Jeffreys v Jeffreys (1841)) (1841) Cr & Ph 138; 41 ER at 444
(4) Lack of clean hands

Walters v Morgan (1861) 3 De GF & J 718
The claimant unfairly hurried the defendant into granting a mining lease in ignorance of the
value of the property. Without the doctrine of unconscionability, it was set aside by specific
performance.
Falcke v. Gray (1859) 4 Drew 651
The claimant was a dealer in antiquities and ceramics for 25 years and was eminent in his
trade. The defendant dissuaded the claimant from consulting anyone else when buying 2
Chinese vases and said that the vases are worth 40 pounds, give or take. Later on, the
defendant found out that the vases were in fact worth 200 pounds, and so decided to sell them
to a third party offering the higher price instead. The court refused to grant specific
performance to the claimant.
Griffith v Spratley (1787) 1 Cox Eq Cas 383
(5) Delay
The six-year limit to contractual action does not apply to the equitable action of specific
performance, but nevertheless, delay can deny specific performance.
Lazard Brothers & Co Ltd v Fairfield Properties co (Mayfair) Ltd [1977] 121 SJ 793. The
defendant must establish:
unreasonable delay by the plaintiff; mere delay per se is not sufficient.
that there has been consequent substantial prejudice or detriment to the defendant
which justifies the refusal of the equitable relief sought.
(6) The claimant’s termination of the contract

Johnson v Agnew [1980] AC 367
(7) Contracts for Personal Service (to be performed by the defendant)

Personal service contract – a contract that can only be done by a specific person and not
anyone else; involves mutual trust and confidence
De Francesco v. Barnum (1890) 45 ch D 430
A 14-year old girl was an apprentice for 7 years to learn stage dancing. She agreed to be
entirely at the disposal of her master, not to accept professional engagements elsewhere
without his permission, she was not going to be paid unless he actually employed her and he
was not required to employ her, he could send her abroad, he could terminate the contract, she
would have deemed to have resigned if she got married. The girl accepted professional
engagement without his permission. The court refused specific performance for her to work
for him because the contract was so unreasonable and harsh and thus invalid.
Labour Tribunal Ordinance s7: The HK Labour Tribunal cannot hear claims for mandatory
orders or SP.
Dela Cruz v Yu Wai Sam [1996] HKEC 300 can only hear claims for money
Giles v. Morris [1972] 1 WLR 307
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“if the singer sang flat, or shut up, or too fast, or too soft, or too slow, or resorted to a dozen
of the manifestations of temperament associated with some singers, who could say whether
the imperfection of performance was natural or self-induced.”
Hill v. Parsons [1972] ch 305
The employer had made an agreement with a trade union. They had to order the claimant to
join the union. When the claimant failed to do so, he was fired for not joining the union. The
Court of Appeal granted an interim injunction to prevent the employer from firing him even
though this amounted to a temporary specific performance for a contract for personal service.
This is because: damages are inadequate, there was no break down in mutual confidence
between the employer and employee, granting the injunction would allow the claimant to
remain an employee until an act was passed which would protect the claimant from being
dismissed
Powell v. London Borough of Brent [1988] ICR 176
Ralph Gibson LJ, at p 194, ‘Having regard to the decision in Hill v Parsons … the
court will not by injunction require an employer to let a servant continue in his
employment, when the employer has sought to terminate that employment and prevent
the servant carrying out his work under the contract, unless it is clear on the evidence
not only that it is otherwise just to make such a requirement but also that there exists
sufficient confidence on the part of the employer in the servant’s ability and other
necessary attributes for it to be reasonable to make the order. Sufficiency of confidence
must be judged by reference to the circumstances of the case, including the nature of
the work, the people with whom the work must be done and the likely effect upon the
employer and the employee’s operations if the employer is required by injunction to
suffer the plaintiff to continue in the work.’
‘Change of mind’
“Specific Performance: Rights, Remedies and Change of Mind” in Commercial
Remedies, eds G. Virgo and S Worthington, Cambridge University Press, 2015
“Contractual Remedies: Beyond Enforcing Contractual Duties” (2017) 85 George

Washington Law Review, 1617
(8) Impossibility
Castle v Wilkinson (1870) 5 Ch App 534
The defendant contracts to sell land which it turned out he did not own and he could not obtain.
Therefore, it was impossible for him to perform this.
Warmington v Miller [1973] QB 877
The defendant agreed to sublet to the claimant, although the head lease prohibits sub-letting,
so he had to pay the claimant damages, but he cannot be compelled to sub-let.
(9) Severe hardship

Patel v Ali [1984] Ch 283
The claimant tried to get specific performance to transfer an interest in land. The court said
no. It would be unjust to compel the defendant to perform after all the unforeseeable changes
over the 4 years of delay – the defendant had cancer, had 2 more children, her husband went
bankrupt and went into jail.
Goulding J (at 288) emphasized that ‘mere pecuniary difficulties’ are insufficient:
[O]nly in extraordinary and persuasive circumstances can hardship supply an excuse
for resisting performance of a contract for the sale of immovable property. A person
of full capacity who sells or buys a house takes the risk of hardship to himself and his
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dependents, whether arising from existing facts or unexpectedly supervening in the
interval before completion... [but] equitable relief may... be refused because of an
unforeseen change of circumstances not amounting to legal frustration, just as it may
on the ground of mistake insufficient to avoid a contract at law.
Denne v Light (1857) 8 De GM & G 774
The court refused specific performance against a buyer who had mistakenly bought a land-
locked land, i.e. could not physically access the land.
Wroth v Tyler [1974] Ch 30
There was no specific performance for a contract to sell land, because it would have required
the defendant to take legal action to evict his wife and daughter from the matrimonial home.
Cooperative Insurance v Argyll Stores (above)
The losses to the defendant would be enormous, unquantifiable, unlimited, and out of all
proportion to the uncompensated losses suffered by the defendant.
(10) Want of Mutuality

Fry on Specific Performance (6th ed 1921) p 219
‘A contract to be specifically enforced by the court must, as a general rule, be mutual,
that is to say, such that it might at the time it was entered into have been enforced by
either of the parties against the other of them.’
Ames (1903) 3 Col LR 1
‘Equity will not compel specific performance by a defendant if after performance the
common law remedy of damages will be his sole security for the performance of the
plaintiff’s side of the contract.’
Price v. Strange [1978] Ch 337
The defendant orally agreed to grant the claimant a lease of the flats in return for the claimant’s
promise to do certain repairs. The claimant started to repair, but the defendant stopped the
claimant and completed the repairs himself. The defendant refused to give the claimant the
lease. The court forced the defendant to give the lease, subject to the claimant compensating
the defendant for the amount spent on completing the remainder of the repairs.
(11) Uncertainty
Cooperative Insurance v Argyll Stores (above)
Counter-point: the court can always actively enforce specific performance, thus giving it
certainty. Why doesn’t the court do so?
Answer: Because the court wants to uphold autonomy and “change of mind” – allowing the
parties to set aside a contract that at least one of them no longer wanted/can do.
(12) Constant Supervision

Ryan v. Mutual Tontine Westminster Chambers Assoc [1893] 1 Ch 116
Specific performance would be denied if it involved a continuous act.
Posner v. Scott-Lewis [1986] 3 WLR 531
A contract to employ a resident porter was specifically enforced, because the contract stated
the required performance with sufficient precision. This meant that specific performance
would be denied if too much judicial time and effort would be spent in seeking compliance
with the order, thus reading down the ruling in Ryan v Mutual Tontine Westminster Chambers.
Wolverhampton Corp v. Emmons [1901] 1 KB 515
Specific performance would be ordered for a contract to build something if the order were
certain, damages were inadequate, and the defendant had ownership or possession of the land
where work had to be done.
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In this case, the claimant acquired land for development, and sold port of it to the defendant,
who promised to demolish the houses and build new ones on it. They demolished the houses,
and got approval for the plans for the new houses, but then they were stopped.
Specific performance was not barred as the defendant had possession of the land to complete
the buildings.
Co-operative Insurance Soc Ltd v. Argyll Stores (Holdings) Ltd [1998] AC 1 (cf Millett LJ
[1996] 3 All ER 934, 944 – 950)
The Constant Supervision bar was a very significant factor in the ultimate refusal to grant
specific performance.
The question is, how much judicial supervision is too much? The answer depends on how
committed the law is to ensuring performance.
(13) Avoidance of waste

Specific performance can be denied if it would entail a very significant waste of resources
when the cost of performance would far exceed the benefit to the claimant.
Tito v. Waddell (No 2) [1977] ch 106
The court declined to compel the defendants to incur the enormous costs of replanting and
restoring the island that they mined out of phosphate, because the islanders had resettled
elsewhere.
Co-operative Insurance Soc Ltd v. Argyll Stores (above)
(14) Human Rights

It is both a bar to specific performance and can be a reason for granting specific performance.
Ashworth v The Royal National Theatre [2014] EWHC 1176 (QB) esp. [27]
A case of refusal to grant specific performance to musicians who wanted the Royal
National Theatre to re-hire them for the production of the play ‘War-horse’. The court
said that to do so would interfere with the Theatre’s right of artistic freedom.
Section 12(1) and (4) of the Human Rights Act 2010
Verrall v Great Yarmouth B.C. [1981] Q.B. 202
The government rented out halls of the government building to a political party to hold
conferences. When the government changed parties, the new labour government
refused to allow the National Front to hold their meetings. The court granted specific
performance to the party in order to uphold freedom of assembly and freedom of
speech.
3. INJUNCTIONS
3.1 Mandatory Injunction:

Balance of convenience test:
Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (in negotiating
damages)
No mandatory injunction to undo what should not have been done if there would be a
disproportion between the detriment to defendant and the benefit to the claimant.
Wakeham v Wood [1982] 43 P & CR 40
The defendant had, in breach of a restrictive covenant, deliberately put up a building so as to
block the claimant’s sea view. The court said that damages would not be adequate, the
defendant had inflicted harm on the claimant’s rights, thus granting mandatory injunction.
3.2 Prohibitory Injunction:
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Doherty v. Allman (1878) 3 App Cas 709, 720
Lord Cairns, ‘…if there had been a negative covenant, I apprehend, according to well-
settled practice, a Court of Equity would have no discretion to exercise, If parties, for
valuable consideration, with their eyes open, contract that a particular thing shall not
be done, all that a Court of Equity has to do is to say, by way of injunction that which
the parties have already said by way of covenant, that the thing shall not be done; and
in such case, the injunction does nothing more than give the sanction of the process of
the Court to that which already is the contract between the parties. It is not then a
question of the balance of convenience or inconvenience, or the amount of damage or
of injury.’
In general, the court is reluctant in granting mandatory injunction, but is quite willing
to grant prohibitory injunction.
Araci v Fallon [2011] EWCA Civ 668

Fallon is a famous jockey. He contracted to ride Araci’s horse and no one else at the Epsom
Derby. The court therefore granted a prohibitory injunction to prevent Fallon from riding a
rival horse, as adequacy of damages is irrelevant, but damages would be inadequate here
because it would be exceptionally difficult to calculate the loss that would result if the rival
horse had beaten Araci’s horse. Nothing could compensate the claimant for losing the prestige
from one of his horses winning the Derby.
Objection against prohibitory injunction: unacceptable if it amounts to an indirect specific

performance.
Lumley v. Wagner (1852) 21 LJ Ch 898
An injunction was granted to restrain Wagner from singing for anyone else during the 3
months that she had agreed to sing in Lumley’s theatre. The court said that they could not
compel her to sing for Lumley, but they could prevent her from singing for others.
Lord St Leonards LC, at p 902, ‘It was objected that the operation of the injunction in
the present case was mischievous, excluding the defendant…from performing at any
other theatre while this Court had no power to compel her to perform at Her Majesty’s
Theatre. It is true, that I have not the means of compelling her to sing, but she has no
cause of complaint, if I compel her to abstain from the commission of an act which
she has bound herself not to do…in continuing the injunction, I disclaim doing
indirectly what I cannot do directly.’ (By ordering a prohibitory injunction, I am not
indirectly compelling her to specific performance)
Warner Bros v. Nelson [1937] 1 KB 209 (Controversial and unrealistic)

An injunction was granted to restrain Nelson from working as an actress anywhere for 3 years.
The court said that by forcing her not to perform for anyone else, this was not indirect specific
performance, because she could, at the peak of her career, stop acting and do something else
and be at least as well-paid.
Branson J, at pp 219-220 ‘It was also urged that the difference between what the
defendant can earn as a film artiste and what she might expect to earn by any other
form of activity is so great that she will in effect be driven to perform her
contract…[but] no evidence was addressed to show that, if enjoined from doing the
specified acts otherwise than for the plaintiffs, she will not be able to employ herself
both usefully and remuneratively in other spheres of activity…She will not be driven,
although she may be tempted, to perform the contract, and the fact that she may be so
tempted is no objection to the grant of an injunction.
Page One Records v. Britton [1968] 1 WLR 157
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An injunction was denied where a pop group breached a contract to be managed by and to
make records solely for the claimant for 5 years.
Stamp J, at pp 166-7, ‘…it was said in this case, that if an injunction is granted, The
Troggs could without employing any other manager or agent…seek other employment
of a different nature…I think that I can and should take judicial notice of the fact that
these groups, if they are to have any great success, must have managers. As a practical
matter…I entertain no doubt that they would be compelled, if the injunction were
granted,…to continue to employ the plaintiff as their manager and agent…I should if
I granted the injunction, be enforcing a contract for personal services, in which
personal services are to be performed by the plaintiff. ’
Warren v. Mendy [1989] 1 WLR 853

A 3-year injunction was denied.
Nourse LJ, at pp 865-866, ‘In Lumley v Wagner itself the contractual period was three
months of which there was less than two to run when the injunction was granted. That
was the maximum period for which Miss Wagner would have had to remain idle in
England…Although it is impossible to state in general terms where the line between
short and long term engagements ought to be drawn it is obvious that an injunction
lasting for two years or more (the period applicable in the present case) may practically
compel performance of the contract.’
Beacon College Ltd v Yiu Man Hau [2001] 3 HKLRD 558

Ds were employed in C’s private tutorial school. C accepted that could not get SP to
compel Ds to teach for them. But sought injunction to prevent Ds from joining rival
school, and from teaching in any such schools anywhere else in HK.
The court allowed the injunction, as Ds had reasonable alternatives. Can teach at
government schools and earn a reasonable income.
Worth Achieve Associates Ltd v Huang Sheng Yi [2007] HKEC 465

Refusal of injunction to enforce a negative stipulation in personal service contract
between manager and actress -
contract involves continuous exercise of special skill or talent and a high
degree of mutual trust and confidence
injunction would effectively compel SP of positive obligations or result in the
actress being idle.
4. Can parties agree to specific performance or an injunction?

No: Quadrant Visual v Hutchison Telephone [1993] BCLC 442
The Court of Appeal held that the discretion of whether to grant specific performance belongs
to the court. It cannot be usurped by the parties. The parties cannot exclude the court from
that decision.
We can only determine whether specific performance is appropriate when we come to court,
not during contract formation.
Impact of agreed damages clause?

This impliedly excludes the court’s jurisdiction to grant specific performance, as it indicates
that the agreed damages are adequate. However, the courts are eager to preserve their
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jurisdiction over specific remedies. They have interpreted agreed damages clauses as only
indicating the amount of damages recoverable if the claimant sues for damages. If they are
not suing for damages, then the clause is not triggered.
5. REFLECTIONS
Should specific enforcement be more widely available?
(i) YES because of the inadequacy of damages
(ii) YES to Protect C’s performance interest
(iii) NO Specific Performance because of Efficient breach
(iv) YES/NO Comparative law
The European Draft Common Frame of Reference (Art III.–3:302) recognises a general
entitlement to specific performance unless:
• performance would be unlawful or impossible; unreasonably burdensome or
expensive; of such a personal character that it would be unreasonable to enforce it; or
• the claimant fails to seek specific performance within a reasonable time after he has
become, or could reasonably be expected to have become, aware of the defendant’s
non-performance; or
• the claimant ‘insist[s] unreasonably on specific performance in circumstances where
he could have made a reasonable substitute transaction without significant effort or
expense’, in which case he will be barred from recovering damages (or an agreed sum
for non-performance) to the extent that he has increased the loss (or the amount of the
stipulated payment) through his insistence on specific performance.
Policy considerations shaping judicial remedies (termination, damages, SP, injunction)

Uphold performance of the contract, but also:
(i) The aggrieved claimant:
• protecting her expectation of performance and of what the performance was for; in other words,
acknowledging her losses from breach; e.g. nominal damages, non-pecuniary loss, negotiating
damages…
• protecting her from unfairness (e.g. by controlling exemption clauses); and
• encouraging her to act and react sensibly in relation to the contract (e.g. by requiring mitigation
of loss).
(ii) The defendant contract-breaker:
• signalling disapproval of the breach even where the claimant’s loss is unclear (e.g. nominal damages,
and resorting to measures of loss other than expectation).
avoiding unnecessary interference with her freedom – change of mind (e.g. by not compelling
specific performance if the claimant can otherwise be adequately protected);
• minimizing her liability-
protecting her from the claimant’s unforeseeable and preventable losses (e.g. remoteness and
mitigation)
(iii) Administration of law:
• responding to evidential and quantification difficulties, and the potential for fraudulent claims
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(e.g. reluctance to give damages for pain and suffering, i.e. non-pecuniary loss);
• avoiding indeterminate liability and opening the floodgate to claims (e.g. again in respect of pain
and suffering); and
• preventing waste (e.g. mitigation).
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2023/8/22 下午5:55 Mindy Lecture Notes

Part A: The Creation of a Contract

Topic 1: Offer and Acceptance, Intention to Create Legal Relations

Sandy Steel, August 2019

The basic idea: a legally binding promise (or set of promises).

(ii) generally strict

(iii) bilateral or unilateral

2. The basic requirements for creating a

a. An offer made by the promisor to the promisee (Topic 1)

b. An offer must be distinguished from an ‘invitation to treat’

Some examples of the distinction:

i. Display of goods in shops

Pharmaceutical Society of Great Britain v Boots Cash

“in the case of an ordinary shop, although goods are

● Customer will not be bound by offer simply by putting

ii. Advertisements of bilateral contracts

Partridge v Crittenden [ 1968] 1 WLR 1204

“The transmission of…a price-list does not

● Such advertisements could only amount to an invitation to

iii. Advertisements of unilateral contracts

Carlill v Carbolic Smoke Ball Co [ 1893] 1 QB 256

“100l. Reward will be paid by the Carbolic Smoke

● Such advertisement amounts to an offer

i. Unqualified expression of assent/agreement to the terms of an

ii. Acceptance by conduct

Brogden v Metropolitan Rly Co ( 1877) 2 App Cas 666

● MRC made Brogden an offer by drafting and delivering

iii. Acceptance in the context of ‘battle of the forms’

Butler Machine Tool Ltd v Ex-Cell-O-Corp (England) Ltd

● Butler Machine Tool makes offer

Bridge LJ: “… the language is equivocal and wholly

Entores v Miles Far East Corp [ 1955] 2 QB 327

“Suppose… that I shout an offer to a man across a

“Suppose… I make an offer to a man by

“In all the instances…so far, the man who sends

● How can a reasonable man believe the offer can be duly

ii. Special cases

Carlill v Carbolic Smoke Ball Co [ 1893] 1 QB 256

● When does a unilateral contract come into

Errington v Errington [ 1952] 1 KB 290

● Unilateral contracts cannot be revoked once the

Soulsbury v Soulsbury [ 2007] EWCA Civ 969

2. Acceptance by post – the postal rule

● Postal rule can be invalidated when the use of postal

Adams v Lindsell ( 1811) 1B & Ald 681

“no contract could ever be completed by the

● Time lag in posting makes conclusion of contract

Household Fire Insurance Co v Grant ( 1879) 4 Ex D

● Acceptance can be valid even if the letter is lost, as

Holwell Securities Ltd v Hughes [ 1974] 1 All ER 161

● Postal rule can be excluded by the terms of an offer

3. Instantaneous and electronic communication

Entores Ltd v Miles Far East Corp [ 1955] 2 QB 327

“Now take a case where two people make a

he must therefore get through again so as to

● The contract is only complete when the acceptance is

Brinkibon Ltd v Stahag Stahl GmbH [ 1983] 2 AC 334

“Unquestionably, as a general proposition,

Rules re e-commerce are found in the Electronic

“Unless otherwise agreed between the originator

(a) if the addressee has designated an information

(i) at the time when the electronic record is

(ii) if the electronic record is sent to an