Contract Law in Hong Kong

8: Contractual Terms

8 Contractual Terms 1. Cap. 26. OVERVIEW Having examined those elements necessary for the formation of a valid contract, we now turn to the contents or “terms” of the contract. Here a distinction must be drawn between statements made by the parties which are mere representations and which do not form part of the contract and those other statements that are terms of the contract. This distinction is vital as a breach of a term gives rise to certain remedies for the innocent party which are not otherwise available. Whether the statement is a term or not depends on various factors including the timing and importance of the statement, whether or not such a statement is usual, the relative expertise of the parties and whether or not the parties later produce a written agreement. Terms may be express or implied. The courts can imply terms into a contract based either on the common law or statute. The courts are reluctant to imply terms into a contract on common law grounds and have produced a number of tests — principally the business efcacy and the ofcious bystander tests — to decide what the true intentions of the parties are and whether a term should be implied into the contract to give effect to those intentions. Statutory implied terms derive from many sources, the most important of which, from the contract perspective, is the Sale of Goods Ordinance.1 Terms are not of equal importance and may be classied into either conditions or warranties. Breach of a condition entitles the innocent party to choose either to terminate the contract (and sue for damages if appropriate) or to continue with the contract and sue for damages only. Breach of the lesser term, a warranty, only entitles the innocent party to sue for damages. The contract continues in existence. The rigid classication of terms into conditions and warranties and the differences in remedies available to the innocent party, however, may result in injustice. A third category of the intermediate or innominate term has, therefore, been introduced by the courts. This approach mandates that the court should decide the status of a term only after considering the effects of the breach. This affords the courts a chance to achieve justice between the parties but at the expense of uncertainty. 146 Contract Law in Hong Kong A major emphasis of this chapter is the exemption clause. An exemption clause either totally or partially excludes the liability of one of the parties to a contract. As a result of concerns over the rights of consumers in their dealings with parties of greater bargaining power, the courts and more recently legislation, have acted to restrict the scope of exemption clauses and, thereby, protect the interests of consumers. If an exemption clause is to operate it must, at common law, be found to be a part of the contract; that is, it must be “incorporated” either in writing or via notice. It must also, of course, clearly cover the breach from which exemption is sought. If the clause does not unambiguously cover the breach, the courts will construe the clause against the party seeking to rely on it. The courts also refuse to allow reliance on exemption clauses where their effect has been misrepresented or where they are contradicted by a clear “overriding” statement of the “exemptor”. The rules of “privity” may also be invoked so as to preclude a non-contracting party from taking the benet of an exemption clause.2 Despite the efforts of the courts to reduce the scope of exemption clauses, legislators, in England and Hong Kong, have found that additional restrictions are necessary, particularly in the area of consumer protection. Major legislation, in the form of the Control of Exemption Clauses Ordinance (CECO),3 was enacted in Hong Kong, based on previous English legislation4 CECO largely, though not exclusively, regulates the relationship between business and consumer. The Ordinance encompasses attempts to restrict liability for breach, misrepresentation and negligence; precluding entirely certain types of exemption and making others subject to a test of reasonableness. 8.1 Representations and Terms Not all statements made in connection with a contract are regarded as terms by the courts. A distinction must be drawn between statements which merely induce the other party to form a contract and statements which form part of the contract itself. The former are representations while the latter are terms. If a term is broken, the innocent party has a right to...