1. What is a contract?

1. What is a contract?

A contract is an agreement giving rise to obligations which are recognized by law and which can be enforced under the law. A contract often involves paying money in exchange for goods or services. Except for some specific types of contract (e.g. contracts for the sale of land or real estate), Hong Kong law does not require a usual consumer contract to be in writing.

Contractual obligations are based on the agreement of the contracting parties. An agreement is made when one party accepts an offer made by the other party.

How does a person make a legally binding contract?
 

The essential elements in the formation of a contract are: a) offer, b) acceptance of that specific offer, c) consideration, and d) intention to create legal obligations.

(a) Offer

An offer is an expression of willingness, made by one party to another, to enter into a contract on specified terms. An offer will turn to a binding contract as soon as it is accepted by the other party.

An offer must be distinguished from an "invitation to treat" (an invitation to make an offer). The following example illustrates the difference:

A shopkeeper is not making an offer to you by displaying a camera in the window or on the shelves. Instead, such display is an invitation to treat. It means that you are being invited to make an offer to buy the camera but the shopkeeper can either accept or reject your offer. Rationale: The shopkeeper has limited stock (say 10 pcs). If he has made an offer to sell by such display AND his offer is accepted by 50 customers at the same time, he would be bound to supply 50 cameras. If he cannot supply enough cameras, he would be "in breach of contract" and can be sued by those unsatisfied customers.

(b) Acceptance

There is NO contract unless and until the other party has accepted the offer.

There are two general rules for acceptance:

1. an acceptance has no effect until it is communicated to the person making the offer; and
2. the person accepting an offer must agree with ALL the terms of the relevant offer.

With regard to point (i) above, an acceptance can be communicated by the spoken word (orally), by writing, or by conduct. An example of "acceptance by conduct" would be when the shopkeeper/cashier collects your money (which is paid for the relevant product) without saying or writing anything.

For point (ii) above, you should note that both the offer and the acceptance must be made in the same terms with both sides clear about what they're agreeing to. Example:

Suppose you had said, "I want to buy the digital camera that you've got in your window" and the shop had said, "We've just sold the last one that we had on a special promotional offer. We can get you another one but you will have to pay the full price". Here the seller isn't accepting your offer. He's making what the law calls a "counter-offer" and asking you whether you still want to go ahead knowing that the price will increase. At this point you're free to back out of the deal by rejecting his counter-offer. If you accept then you're agreeing to pay the higher price.

A contract is made at the time when the deal is struck. It is not necessarily the moment when you hand your money to the seller. For example, you see an item being displayed in a shop window but because it is out of stock, you ask the shop to order one for you. If the shop agrees to do it, then you have made a contract, even if you have not signed anything nor paid any money over at that time. You have agreed to pay once the item arrives.

(c) Consideration

"Consideration" is the legal term given to the benefits (which include money, services or goods) in exchange between the contracting parties. For instance, the money you paid and the goods delivered to you by the seller are both considerations.

No contract can be formed if one party is not bound to provide consideration to the other party. An exception to this principle is that when a contract is executed in a specific form called a "deed", the contracting parties may or may not be required to give consideration to each other.

(d) Intention to create legal obligations

Once you have agreed the terms of your deal and made a contract , you have a legal obligation or duty to go through with it. If you try to back out of it or violate any of the contract terms, you will be liable to be sued for breach of contract by the other party.

Is it possible that a contract would contain an implied term (without the parties' express agreement)? What are the requirements for implying a term in a contract?

Implied terms are terms that have not been orally mentioned or written down but are incorporated in the agreement/contract according to the law or the previous dealings between the parties (if any).

When you read Section II of this topic, you can find out that some ordinance provisions (e.g. Sale of Goods Ordinance and Supply of Services (Implied Terms) Ordinance) may be implied in a consumer contract even if the contracting parties have not mentioned about them. An example of an implied contract term is that the buyer has the right to be given reasonable time to inspect the goods (even if that term is not stated in the relevant contract).

The well-known requirements for implying a term in a written contract were stated in a judgment from the British's Privy Council. Those requirements were adopted by the Hong Kong Court of Final Appeal in the case of Kensland Realty Ltd v Whale View Investment Ltd and Another. For a term to be implied, the following conditions (which may overlap) must be satisfied:

1. it must be reasonable and equitable (fair to the contracting parties);
2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3. it must be so obvious that "it goes without saying";
4. it must be capable of clear expression;
5. it must not contradict any express term of the contract.