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Breach of contract37

A breach of contract may arise in the following circumstances:

  1. failure to perform contractual obligations (an actual breach);
  2. defective performance of contractual obligations (an actual breach); or
  3. refusal or inability to fulfil contractual obligations due in the future (an anticipatory breach).

Broadly speaking, there are two types of breaches: one that allows a party to sue for damages and another that discharges a party from further performance under the contract (in addition to a claim for damages).

i Materiality of breach

The following events allow the innocent party to terminate the contract and treat himself or herself as discharged from further liability under the contract:

  1. the guilty party has shown a clear unwillingness to satisfy the contract ('renunciation');
  2. performance has been rendered impossible by the guilty party's breach;
  3. there has been a breach of an important term of the contract ('condition'); or
  4. there has been a breach of an intermediate (or innominate) term that '[goes] to the root of the contract'.

A contractual term may be classified as a condition if it has been so categorised by statute or by judicial decision, or if the parties have so agreed in their contract. Where the failure of performance is a breach of a term classified as a warranty (i.e., a non-essential term), it will merely entitle the non-breaching party a right to damages. In contrast, where the failure of performance is a breach of an intermediate term, the non-breaching party will only be entitled to terminate the contract (in addition to claiming damages) if the breach in question deprived him or her of 'substantially the whole benefit' of the contract. Notably, the effect of the breach will only be determined after the breach.

ii Right of election

A repudiatory breach normally allows the innocent party the right to claim damages for the breach and the right to elect to:

  1. bring the contract to an end, in other words, terminate the contract; or
  2. accept the breach and treat the contract as continuing, in other words, affirm the contract.

If the innocent party elects to terminate the contract, he or she is discharged from further performance. For the defaulting party, his or her primary obligation to perform is replaced by a secondary obligation to pay damages to the innocent party for the loss resulting from his or her failure to perform the primary obligation.

Where a repudiatory breach takes place, in order to terminate the contract, 'the innocent party must clearly and unequivocally accept the repudiation'. The burden of proof of repudiation is on the party who alleges it.

Defences to enforcement

There are a number of defences available to enforcement of a contract. Most notably, a contract cannot be enforced unless all its essential terms are established with reasonable certainty. In this section, the most notable defences are discussed, specifically, uncertainty of essential terms, duress and undue influence, and unconscionable contracts.

i Uncertainty of essential terms

Parties to a contract sometimes fail to reach an agreement because their agreed terms are too uncertain or some of the essential terms are simply missing. An objective standard is used when determining whether terms are too uncertain. The objective standard is that of a reasonable person in the position of the contracting parties. When the parties have failed to agree on essential terms because some of them were missing or because some were unclear, Hong Kong courts will not make the contract for the contracting parties. If any unclear term is essential in the pertinent way, the entire contact will be void for uncertainty even if the parties intended it to be contractually binding.

Lack of consideration is a defence to enforcement of a contract as the consideration or price of the deal is always an essential term in any contract. A contract that fails to clearly establish consideration with sufficient certainty will be void. When the parties fail to agree on the price to be paid (in monetary terms or otherwise) for any obligations to be performed, a contract may fail for uncertainty of consideration.

However, failure to reach any agreement as to consideration in a contract for the sale of goods or the supply of services will not cause the contract to be void for lack of certainty. Section 10 of Sale of Goods Ordinance (Cap 26) and Section 7 of Supply of Services (Implied Terms) Ordinance (Cap 457) provide that, in the absence of agreement between the parties, the consideration shall be a reasonable price or charge.

The general rule is that failure to settle all essential terms with reasonable certainty is adequate as a defence to enforcement of a contract as it can suggest a lack of intention between the parties to create legal relations.

ii Duress and undue influence

A contract may be voidable on the ground of duress or undue influence if it was entered into under some forms of threat or pressure. Duress is confined to violence or threats of violence or imprisonment by one contracting party to the other or others whereas undue influence consists of pressure by unfair persuasion.

Duress is categorised into different types. Duress to the person consists of 'violence or threat of violence to the person or imprisonment or threat of imprisonment'. In order to rely on duress, one must show that the contract was entered into while he or she was subjected to the other party's actual or threatened violence.

Duress to property (or goods) consists of unlawful seizure or detention or threat of seizure or detention of property. In Hong Kong, this form of duress involving unlawful damaging or destruction of a person's properties extends to include land.

Economic duress is 'illegitimate economic pressure in the form of threat to a person's economic well-being, business or trade, with the result that a contract is entered or payments are made'. It is necessary to institute pressure amounting to coercion of the will of the victim or the absence of choice. In such a situation, the pressure exerted must be illegitimate and must constitute a significant cause inducing the victim to act.

Whereas duress deals with forced pressure directed against the victim's life, property or economic interests such that his or her will is diverted and his or her practical alternative options are eliminated,undue influence deals with the more delicate situation where one party unfairly abuses his or her position of trust or influence over the other in order to obtain the other's agreement to a contractual relationship.
iii Unconscionable contracts

Hong Kong's statutory models for unconscionable contracts are from Australia where unconscionability has gained more traction than in England. The Unconscionable Contracts Ordinance (Cap 458) came into force in October 1995.

A critically important limitation on the scope of the Ordinance is that it applies only to contracts for the sale of goods or supply of services, and only if one of the parties deals as a consumer. Commercial contracts and contracts for an interest in land, intellectual property and securities are outside the reach of the Ordinance.

The onus of proof lies on the party asserting that a contract is unconscionable. Where a court finds that a contract, or any part of a contract, was unconscionable in the circumstances relating to the contract at the time it was made, the court has three powers: (1) refuse to enforce the contract; (2) enforce the remainder of the contract without the unconscionable part; (3) limit the application of, or revise or alter, any unconscionable part so as to avoid any unconscionable result.

Under the Ordinance, unless the party against whom the plea is raised knew or ought reasonably have known of any weakness, which impairs his or her ability to make a judgment as to his or her own interests, and has taken advantage of it, the weakness of the party pleading unconscionability is not a factor.