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Chapter 2 Contract Law

2.2 Formation of Contract
2.2.1 Offer
2.2.2 Acceptance
2.2.3 Consideration
2.2.4 Legal Intention
2.2.5 Capacity
Simple & Formal Contracts (revision)
● Simple contracts must be supported with
consideration in order to be legally
effective.
● Formal contracts (Deed) do not need to be
supported by consideration because the
seal itself represents consideration and it
shows very strong contractual intention
which waives the consideration
requirement.

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 Simple & Formal Contracts (revision)

The statutory limitation for

-- a simple contract is 6 years from the
date the contract is breached. S 4(1)
Limitation Ordinance (Cap 347)
-- a deed is 12 years from the date of
breach. (s 4(3), LO)

Simple contract 6 years

Formal contract 12 years

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 2.2.3 Consideration ( 約因 )
An act or forbearance of one party, or the promise
thereof, is the price for which the promise of the other
is bought, and the promise thus given for value is
enforceable 。一方的行为或忍耐，或其承诺，是购买另
一方的承诺的价格，这样的承诺是有价值的，是可以执行
的。
● Offeree uses his act, forbearance or promise (price)
● To buy the offeror’s promise
● Offeree can enforce offeror’s promise.
● A gift contract cannot be enforced by the donee.
Promise
Offeror Offeree
Price = act, forbearance or promise
Consideration
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 2.2.3 Consideration
The Price Theory
B has provided
The Benefit & Burden Theory consideration
Book (benefit to B)
A B
P/sor P/see
$100 (B’s burden)

Consideration must be moved from the promisee.

Purpose: Consideration enables P/see to enforce
the promise of the P/sor.
No consideration-B cannot enforce A’s promise. 5
 2.2.3 Consideration
1. Consideration need not be adequate,
but it must be sufficient 。
2. Consideration may be executed or
executory.
3. Past consideration is no consideration.
4. Performing existing duties is no
consideration

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1. Consideration need not be adequate, but it
must be sufficient.
Adequate: equal in value to the consideration
received in return. There is no remedy for
someone who makes a bad bargain.
Sufficient: must be regarded as consideration by the
courts.
Value: measurable in monetary terms. Love &
affection, or an moral obligation is insufficient.
Even a nominal $1 could be sufficient consideration
for the purchase of a car.

sufficient
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1. Consideration need not be adequate, but it
must be sufficient.

What does not amount to consideration?

● Love and affection
● Personal feelings or self satisfaction
● Sentimental value, memories
● Ethical value
● Illegal items

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Need not be adequate
Thomas v Thomas (1842) 2 QB 851
Facts: By a will, a husband allowed her wife to stay in his
house after his death for a rent of ￡ 1 per year. After
the death of the husband, the executors tried to evict
the wife from the house.
Held : Compliance with the H’s wishes was not valuable
consideration (no economic value). The payment of
￡ 1 (known as a peppercorn rent) nominal rent was
sufficient consideration.

sufficient 9
Consideration is sufficient if it has some
identifiable value which is measureable in
monetary terms.
Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87
As a sales promotion scheme, Nestle offered to supply a
record to anyone who sent in 1s 6d & 3 wrappers of
chocolate bars made by them.
Issue: whether the wrappers constituted the
consideration for the sale of the records?
Held: The wrappers were part of the consideration as
they had commercial value to Nestle.

consideration
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 2. Consideration may be executed or
executory.
(1) Executory consideration
● It is a promise given for a promise (exchange of
promises). It is to take place at some future
time.
● Example: Where X promises to provide service
to Y in return for Y’s promise to pay for the
service. At the time of the contract, neither
party has performed their respective side of the
bargain; the promises will be performed at a
later date.
Promise to Clean once per week
Cleaner Employer
Promise to pay once per month 11
(2) Executed consideration
● Executed consideration means that one of
the parties has discharged its part of the
obligation by performing the required act in
return for the promise. The consideration for
the promise is a performed, or executed, act.
● Example: In a contract for sale of goods, the
consideration is executed if the price is paid
at the same time that the goods are
delivered.

Seller Buyer
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3. Past consideration is no consideration.

‘… something which has already been done

at the 1time the promise is made. An
Mar voluntary act, received no payment
example would be a promise to pay for work
already carried out, unless there was an
implied promise to pay a reasonable sum
before the work began.’

1 Sth done in the past

Offeror 2 Promise to pay now Offeree

3 No Consideration 13
 (2) Where an act is done voluntarily & subsequently
an agreement is made to perform that act in return
for a promise.

1 Mar voluntary act, received no payment

Past consideration
A B
1 Apr agt to pay $500 for act on 1 Mar

Consideration ?
● Voluntary act + subsequent agreement
● It is something already completed before the promise is
made
● Common law concerns whether a particular
consideration is intended for that specific performance
before the act has been commenced or completed. 14
3. Past consideration is no consideration
Re McArdle [1951] Ch 669
Facts: Mother, son & wife lived in a house. Son’s wife (W)
made improvements to the house and paid. On the
death of mother, the house passed to all the children.
They promised to pay money for improvements to the
W in gratitude. On the children’s refusal to pay, she
sued.
Held: W already paid for the repair & improvements
before the agreement was entered into. Therefore, her
con/n was past to exchange for the payment & the agt
was unenforceable.
Improvement done

Wife Children
Promise to pay 15
(1) Where a legally binding contract has been
made and subsequently one of the parties tries
to alter the contract by a promise of some
variation or amendment.
Roscorla v Thomas (1842)
Facts: The buyer agreed to buy a horse from the seller at
a given price. When negotiations were over and the
contract was formed, the seller told the buyer that the
horse was “free from vice”. The horse proved to be
vicious. Buyer sued for breach of contract.
Held: The subsequent promise was made after the sale
was over and was unsupported by fresh consideration.

Sale contract formed

Seller Subsequent Promise: Free from vice Buyer

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No consideration
3. Past consideration is no consideration.
Exception for past consideration:
Where a request is made for a service this
request may imply a promise to pay for it. If,
after the service has been rendered, the person
who made the request promises a specific
reward, this is treated as fixing the amount to
be paid. Lampleigh v Braithwaite (1615) 80 Er 255

Requested service
Lawyer Client
Service provided then
asked for the payment 17
4. Performing existing duties is no consideration

Performing an existing legal obligation shall not

constitute good consideration. The party is
legally bound to do the act anyway and thereby
the other party has incurred no extra benefit in
the eye of the law.
Extra money
Employer Employee
Contractual work
No consideration

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4. Performing existing duties is no
consideration
Stilk v Myrick (1809)
Facts: On a voyage from London to the Baltic, 2
sailors deserted a ship & the master promised to
divide the wages of the deserters between the
remaining 8 crews if they sailed the ship home.
The shipowners however repudiated the promise.
Held: In performing their existing contractual duties
the crew gave no consideration for the promise of
extra pay & the promise was not binding.

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If the performance of the work had exceeded
the existing contractual duty then it would
constitute valid consideration.
Hartley v Ponsonby (1857)
Facts: 17 men out of a crew of 36 (47%) deserted a
ship. The remainders (19) were promised extra
wages if they continued to sail the ship home.
The captain later refused to pay the extra wages.
Held: The desertion of half of the crew rendered
the working conditions too dangerous which
exceeded the existing contractual duties
and therefore constituted fresh
consideration.
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Request the contracting party to meet the contractual
deadline.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991]
Facts: RB was a firm of builders contracted to renovate
a block of flats. The contract contained a penalty
clause for late completion. RB sub-contracted the
carpentry work to W for £20,000. W fell behind
schedule, RB promised to pay W an additional sum of
£10,300 to complete the work on time. RB later
refused to pay the extra amount.

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Held: RB had reason to doubt whether W would be
able to complete the work on time and therefore
promised W an additional payment in return for
W’s promise to perform his contractual obligations
on time. As a result of giving his promise, RB
obtained a practical benefit of avoiding the late
penalty. This practical benefit amount to sufficient
consideration in absence of economic duress.

1. $ paid for work done

Contractor Sub-Contractor
(RB) 2. $ paid for work on time (W) 22
Whether part payment of a debt is consideration?

General Rule: The payment of a lesser sum on the

due day is no consideration for the satisfaction of
a larger debt. (Foakes v Beer [1884])

● Example: Debtor owes Creditor $10,000. Cdr

agrees to accept $6,000 for the full debt.
Since Dbr has no consideration for Cdr’s
promise. Cdr can chase for the $4,000 to be
repaid after the payment of $6,000.
Loan $10,000

Creditor Debtor
Repay $6,000 23
Foakes v Beer (1884) (HL)
Facts: The Cdr had obtained judgement against the
Dbr. Judgement debts bear interest from the date
of judgement. By a written agreement the Cdr
agreed to accept payment by instalments, no
mention being made of the interest. Once the Dbr
had paid the amount of the debt in full, the Cdr
claimed interest.
Held: Cdr was entitled to the debt with interest. No
consideration had been given by the Dbr for
waiver of any part of the Cdr’s rights against him.

Loan £2,090

Creditor By installments, not to sue Debtor

No consideration 24
 Exceptions to Part-payment

(1) Alternative consideration

(2) Third party part payment
(3) Promissory estoppel

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 Exceptions to Part-payment
(1) Alternative Consideration
If the Debtor can provide any additional benefit in
relation to the part payment, then it would
constitute valid consideration under common law.
Pinnel’s Case (1602)

Examples:
● Creditor agreed to accept the part-payment earlier
than the due date. (eg repay earlier on 1 Sept , not
1 Oct)
● The method of repayment is better than they
originally agreed. (eg pay cash rather than cheque)
● The payment is made in a better place to that
originally agreed. (eg pay in Zhuhai rather than in
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HK)
 Exceptions to Part-payment

(2) Part-payment of the debt by a third party

▪ Part payment from the third party is a fresh
consideration
▪ By suing the debtor, the creditor would commit a
breach of contract against the third party

Loan
Creditor Debtor
Not to sue
Par t
paym
ent
(70% 3/P
) 27
(3) Promissory Estoppel
● Doctrine of promissory estoppel is an
equitable defence which maintains fairness
by prohibiting someone from breaking his
promise.
● It will not allow a Plaintiff to enforce legal
rights where the P caused the Defendant to
suppose that the P did not intend to enforce
those rights & the D has changed his positon
to his detriment.

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(3) Promissory Estoppel

Central London Property Trust Ltd v High

Trees House Ltd [1947] KB 130
Facts: The Ds (tenants) leased a block of flat from the Ps
(landlords). The property suffered from falling
occupancy rates due to the outbreak of WWar II in 1940,
so the landlords agreed to reduce the rent by half (fr
£2,500/year to £1,250). Tenants then remained in the
property. No consideration was provided.
By 1945 the war had ended & the flats were at full
occupancy. The landlords sued for the full rent from
1945 onwards.
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Held: The agt for the reduction of rent had been acted upon
by the D, the P was estopped in equity from claiming for
full rent from 1941 until early 1945 (during war time). The
agt was only operative during the continuance of the
conditions which gave rise to it (WW2). P succeeded to sue
for full rent from July to Dec 1945.
Denning J stated that the cases showed that a promise which
the promisor knew was going to be acted on by the person
to whom it was made was enforceable despite a lack of
consideration. The time had come for this to be recognized
as giving rise to an estoppel.
Flats leased
Rent 2,500/year
Landlord Tenant
Accepted ½ rent
Consideration?
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Held: The agt for the reduction of rent had been acted upon
by the D, the P was estopped in equity from claiming for
full rent from 1941 until early 1945 (during war time). The
agt was only operative during the continuance of the
conditions which gave rise to it (WW2). P succeeded to sue
for full rent from July to Dec 1945.

Flats leased
Rent 2,500/year
Landlord Tenant
Accepted ½ rent
Consideration?
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 Chapter 2 Contract Law

2.2 Formation of Contract

2.2.1 Offer
2.2.2 Acceptance
2.2.3 Consideration
2.2.4 Legal Intention & Capacity

2020/3/16 Tai Sik Kwan 32

 2.2.4 Legal Intention & Capacity
A. Legal Intention
The parties to a contract must intend to create a legal
relationship of their agreement which is to be binding.
The Objective Test: the courts do not look at the
subjective intentions of the parties, but look at
whether or not a reasonable person would regard the
parties as intending their agreement to have legal
effects.

Intent to create binding contract

A B
Joke: No binding contract 33
 2.2.4 Legal Intention & Capacity
A. Legal Intention
Presumptions
(1) Domestic or Social Agreements—are not
legally intended, such as husband agrees with
wife, a friend agrees to attend a party.
(2) Commercial Agreements—are legally
intended

Agrees to buy a diamond ring

H W
Cannot sue; no legal
intention 34
 A. Legal Intention
Rebuttable Presumptions
● Presumption means that it is assumed that
something is the case.
● Rebuttable means that the presumption is
refuted; the burden of proof for rebutting is
on the party seeking to escape liability.

During divorce, agrees to pay

maintenance
H W
Binding—burden of proof 35
 A. Legal Intention
(1) Social or Domestic Agreements
It is presumed that social agreements between
friends and domestic agts between close relatives
do not amount to legally binding contract.
● Domestic agreements: living in the same
household are presumed as not intended to be
legally binding.
● between husband & wife Balfour v Balfour
(1919), parents & children Jones v Padavatton
(1969)
Domestic agreement
Husband Wife
No legal intention 36
 (1) Social or Domestic Agreements
 There is a rebuttable presumption against an intention to
create a legally enforceable agreement when the agreement
is domestic in nature.
In Balfour v Balfour (1919), Mr B (D) who worked in Ceylon,
went to England with his wife (P) on holiday. He later
returned to Ceylon alone, Mrs B remaining in England for
health reasons. Mr B promised to pay Mrs B £30 per month as
maintenance until she returned to Ceylon.
When the marriage broke up he failed to keep up the
payments. The wife sued.
Held: There was no enforceable agreement. (1) she had
provided no consideration for the promise to pay £30; and (2)
the agreement was a purely domestic agreement and
therefore it was presumed that the parties did not intend to
be legally bound. 37
(1) Social or Domestic Agreements
● It is not intended that a court action will be
brought if the parties are not carried out.
● The presumption will not apply if it can be shown
from the circumstances that they did intend to be
legally bound by their agreement.
● No presumption applies where the cohabitants
were not living in harmony. Family members are
not in harmony if if the couples are in divorce or
the father is suing the son.
Example: if a husband & wife agree to separate and
they sign a piece of paper which states how they will
divide the contents of their former home. It is a
binding contract. 38
 A. Legal Intention
(2) Commercial Agreements
A contract made in the course of business—
it is presumed that the parties intended to
make a legally binding contract.
● The presumption will not apply if their agreement
expressly states that they have no such intention.
(1) Without Prejudice: it is used to ensure that what
is said is not legally binding.
(2) Subject to Contract: whatever has been agreed is
not binding until a formed contract is drawn up.

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 A. Legal Intention
Contract containing Honour Clause
● Presumption can be rebutted by the use of
an honour clause which states that the
clause is “binding in honour only”
Jones v Vernon’s Pools (1938)
● If there is any wording in the contract
which would negate intention, the court
would presume the statement maker is
not intended to be legally bound by the
contract.
Gentleman’s
Agreement 40
Commercial agreements are presumed to be
binding unless this is expressly disclaimed or the
circumstances indicate otherwise.
Rose and Frank Co. v Crompton Bros. Ltd (1925)
Facts: A US co (P) & an English co (D) entered into a sole
agency agreement for the sale of paper goods in the USA. The
written agt contained a clause stipulating that it was not a
formal nor legal agt, & an “honourable pledge” between
business partners. Subsequently, the US co placed orders for
paper which were accepted by the British co. Before the
orders were fulfilled, the British co terminated the agency agt
& refused to send the goods, claiming that the agt was not
legally binding & that the orders did not create legal
obligations.

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Issue: The questions arose as to (1) whether the sole
agency agt constituted a legally binding contract,
and (2) whether the orders constituted enforceable
contracts of sale.
Held:
1. The agency agt was not binding (Honourable
Pledge Clause) as there was no obligation to
stand by any clause in it.
2. However, the orders for goods were separate &
binding contracts. The claim for damages for
non-delivery of goods ordered succeeded.

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2.2.4 Legal Intention & Capacity
B. Capacity

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 B. Capacity: Corporations
Contracting Capacity--Corporation
● Companies (cos) are legal persons.
● A co has the legal capacity of a natural person at full
age (18 yrs) (s 115 Companies Ordinance)
• Examples: a co can make contracts, acquire, hold
and dispose of assets in its own name.

sale contract
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 B. Capacity
● A co’s capacity to contract is determined by its
constitution, i.e. its Articles of Association. (s 116,
Companies Ordinance)
● A co may state its objects in its Articles. If the objects
are so stated, the co’s power is limited by its objects.

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 2.2.4 Legal Intention & Capacity
B. Capacity: Natural Persons
● Adults: All persons over 18 with clear mind
have the legal capacity to enter the legal
relations.
● The following persons lack of contracting
capacity:
1. Minor Persons under 18 years of age (s 2, Age of
Majority (Related Provisions) Ordinance (Cap 410) )
2. Intoxicated person under the influence of drugs
or alcohol
3. Mentally disturbed person
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 B. Capacity: Natural Persons
Pay Reasonable Price for Necessaries
S 4(1), Sale of Goods Ordinance
• (1) Where necessaries are sold and delivered to an
infant or minor, or to a person who, by reason of
mental incapacity or drunkenness, is incompetent to
contract, he must pay a reasonable price therefor.
• (2) Necessaries means goods suitable to the
condition in life of such infant or minor or other
person, and to his actual requirements at the time of
the sale and delivery.
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 B. Capacity: Mentally Disordered &
Intoxicated Persons
● Certified:
● Where certain people have been
declared to be of unsound mind
(Alzheimer's disease 脑退化症 ), they
have no capacity to enter into any
contracts. S 10B, Mental Health
Ordinance (Cap 136)

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 B. Capacity: Mentally Disordered &
Intoxicated Persons
● Uncertified
● For other mentally disordered, drunk or drugged
persons will be able to avoid the contract, if he can
show that:
(1) he did not understand what the contract was
about; &
(2) the other party was aware of his disability.
● The contract is voidable at the option of the
intoxicated person.
● Option should be exercised within reasonable time
after sober.
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 B. Capacity: Mentally Disordered &
Intoxicated Persons
Imperial Loan Co v Stone (1892) CA
A person of unsound mind was sued on a promissory
note. He had signed it as surety. The jury found that he
was insane when he signed the note but there was no
finding as to the creditor’s knowledge of such insanity.
The judge entered a verdict against the creditor, who
appealed.
Held: A contract made by a person who lacked the
capacity to make it was not void, but could be avoided
by that person provided that the other party to the
contract knew (or, as is now generally accepted, ought
to have known) of his incapacity. 50
END

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