Contract Law in Hong Kong

1: The Nature of Contract Law

1 The Nature of Contract Law OVERVIEW Contracts may take a huge variety of forms, from the simplest, small “one-off” transaction like buying a newspaper, to a complicated commercial contract, written in technical language and intended to be of lengthy duration. Nevertheless, the same basic rules as to formation, performance and enforcement apply to all contracts. The purpose of this chapter is to ask rst what contract law is and second what it does. In keeping with the largely non-theoretical nature of this book and the constraints of space, the answers to the above questions will be based on traditional notions of contract and more radical formulations will be merely alluded to. This should not be taken as a rejection of more radical views but an assertion that our objective is to reect how contract law is generally viewed, by traditional judges, lawyers and legal writers. In asking what contract law is, we may begin with the statement that contracts are “legally enforceable agreements”. In dening contract, these two elements — an agreement between the parties and some form of enforcement thereof — are crucial. We might, perhaps, wish to add another requirement; the agreement should not have been procured by improper means such as threats or dishonesty. We would also wish to “qualify” the rst basic element, since agreement, especially where the parties are of unequal bargaining power, is often more theoretical than real. I may make a contractual “agreement” to travel on a bus every morning but if I dislike the “infotainment” provided or the sub-zero air conditioning I am in a “take it or leave it” situation; unable to vary the conditions of travel or to negotiate a reduced fare for travelling in discomfort. My alternative is to walk or take a taxi! The notion of “agreement” must also be qualied by saying that whether parties have agreed is usually judged “objectively” rather than “subjectively”. This means that what is actually in a party’s mind is usually irrelevant; what matters is that a “reasonable person”, assessing the party’s words and deeds, should conclude that he has “agreed”. Moreover, agreement, while a necessary requirement of contract, is not a sufcient one; many agreements may lack contractual force because of other deciencies. A particular feature of contract in common law systems, such as Hong Kong and England, is the requirement of “consideration” which means, essentially, that no one may enforce 2 Contract Law in Hong Kong an agreement unless he has given something of value to the other party to the agreement, either in the form of a “benet” to that other party or a “detriment” to himself. Further, an agreement may be non-contractual where it is viewed by the courts as a purely social arrangement, never intended to be legally binding. Additionally, a party to an agreement may be found to lack contractual “capacity” because of his youth or other disability; some agreements, such as those concerning the transfer of land, may lack the necessary written formality, and the threats or dishonesty mentioned above may constitute “vitiating” elements sufcient to invalidate the agreement. Despite these additional requirements, agreement remains the fundamental basis for contractual liability. Legal obligations may exist in the absence of agreement but they will not be contractual ones. The element of “enforceability” in contract law also requires qualication in so far as it implies that parties may be required to honour their promises. In fact, actual “enforcement”, by an order known as “specic performance”, is exceptional and the normal result of the breach of a contractual undertaking by one party is that he is required to pay monetary compensation (damages) to the “innocent” party. Nonetheless, enforcement, in the sense of being entitled to seek legal redress for breach, is what distinguishes contracts from other, non-binding, types of agreement. While parties may seek to avoid litigation, especially where they have dealt with one another over a long period, the importance of the right to seek compensation for breach “as a last resort” is fundamental. Having outlined what contract is, we then need to ask what it “does”. In traditional terms, the law of contract, put most simply, allows people to make their own contracts with minimal interference and then insists on performance. In theoretical language, these are known as the principles of freedom and sanctity of contract. “Freedom of contract” denotes that it is for the parties to make their own contracts...