An extract from The Complex Commercial Litigation Law Review, 2nd Edition

Contract formation

A contract is the major medium through which commercial transactions are effected.

i Elements of contract

To be legally enforceable, a contract must contain the following elements:

  1. an agreement;
  2. the intention to create legally binding relations;
  3. the capacity to enter into the agreement;
  4. consideration (unless the agreement is contained in a deed); and
  5. certainty of terms.
Agreement reached

An agreement is normally reached when an offer made by a party (the offerer or promisor) is accepted by the other party (the offeree or promisee). An offer is an indication to enter into a contract on specified terms, made in such a way that it is to become binding once it is accepted by the offeree. Acceptance is the unequivocal acceptance to all the terms specified in the offer. An agreement is thus reached as soon as the offeree accepts the offer.

An offer must be distinguished from an invitation to treat. An invitation to treat is only a display of willingness to receive offers, such as a display of goods on shelves in a self-service store. Both offer and acceptance can be made by words or conducts. The courts normally apply the objective approach, in other words, how a reasonable person would interpret a party's intention from his or her conduct in all the circumstances, in deciding whether the parties have reached an agreement. An offer may be terminated by various means. The most common methods include rejection by the offeree, revocation by the offerer and lapse of time. Once an offer has been rejected by the offeree, it cannot be accepted at a later stage.

Consideration given

Consideration, in essence, means 'something of value in the eye of the law' (sufficiency). An agreement is not binding unless consideration is given by the parties or it is made in a deed. However, consideration need not be 'adequate', in other words, the court will not concern itself with whether the value of consideration is equivalent to that which is promised in return.

Although the offeree must generally supply the consideration, it is not necessary that the consideration should be intended to benefit the promisor. Past consideration alone is generally not valid support for a promise. However, there are exceptions to this general rule. One exception is where the promisor requested the act to be carried out. This exception could apply in resolving commercial disputes where the parties must have understood that the act was to be remunerated.

Terms of contract certain

An agreement may be held to fail for uncertainty, 'where the parties have expressed themselves in language that is too uncertain, vague or unintelligible'. The courts will endeavour to find practical meaning in commercial contracts and are reluctant to strike down as too vague and uncertain agreements that businessmen have made and acted upon. The court also has the power to sever a meaningless term, leaving the rest of the contract enforceable in law.

ii Third-party beneficiaries

In common law, the doctrine of privity of contract dictates that a third party cannot sue on a contract intended by the parties to be for his or her benefit. A way of circumventing the injustice or commercial inconvenience placed by the privity doctrine could be by finding a collateral contract between the contracting party and a third party.

The doctrine of privity of contract was modified by the Contracts (Rights of Third Parties) Ordinance (Cap 623), which came into effect on 1 January 2016. The Ordinance (Cap 623) allows a third party to 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'. Notably, classes of contract set out in Section 3(2) are excluded from the Ordinance.

iii Promissory estoppel

A party (the promisee) may invoke the doctrine of promissory estoppel to prevent the other party (the promisor) from enforcing his or her strict legal rights under a contract. It occurs where it would be unjust or unconscionable for the promisor to go back on his or her promise not to enforce his or her contractual rights after detrimental reliance was placed by the promisee on such promise. Waiver is analogous to promissory estoppel. A promissory estoppel might arise where:

[T]he parties are in a relationship involving enforceable or exercisable rights, duties or powers;

or

[O]ne party (the promisor) by words or conducts, conveys or is reasonably understood to convey a clear and unequivocal promise or assurance to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers;

or

[T]he promisee reasonably relies upon that promise and is induced to alter his position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise.

Nonetheless, as a general rule, promissory estoppel is suspensory, not extinctive. It does not permanently alter the legal relationship between the parties; in other words, the promisor may resile from his or her promise on (1) giving reasonable notice and (2) providing to the promisee a reasonable chance to resume his or her position. The promise will only become final and irrevocable if the promisee cannot resume his or her position.

iv Quantum meruit

If the court takes the view that the contract is too uncertain to be enforced, the court may order that a reasonable sum of money be paid for services rendered or work done.