B262F Business Law I
Lecture 5
19/10/2006
S.Y. Chung
Illegality
Contracts illegal at common law
 Contracts to commit a crime or tort
Contract to assault someone or cause a
nuisance
 Contracts that are sexually immoral
 Contracts to corrupt public life
Contract to bribe an official
 Contracts to ‘stifle a prosecution’ or which
are prejudicial to the administration of justice
Effects
 The contract is void.
 Neither party can sue on the contract.
 Any goods, money, or property which have
been handed over cannot be recovered.
 The only exception is that in performing the
contract, one party contravenes the law. The
innocent party may recover if he repudiates
the contract as soon as he is aware of the
illegality.
Contract illegal by statute
 For example
S.24 of the Money Lenders Ordinance
Any person who lends money at a rate of
interest exceeding 60% p.a. commits an offence.
The loan agreement is also unenforceable.
Contracts contrary to public policy
 Contracts to oust the jurisdiction of the courts
 But the court will recognize those terms such as “without
prejudice”, “subject to contract”
 An arbitration clause in commercial contract is also
binding
 Contracts prejudicial to the status of marriage
 A contract to prevent a person from marrying or to marry
one particular person is void.
 Contracts in restraint of trade
Contracts in restraint of trade
 A typical example is a term in an employment contract
which restricts an employee
 to work or trade in the same field for a period of time (e.g. 6
months) in a specified area (e.g. Mongkok district); and/or
 from soliciting business from his former employer’s
customers (e.g. those who had business with the employer
within 12 months before the termination)
after the termination of employment.
 The term is enforceable only if it is necessary to
protect the employer/business partner’s proprietary
interest and must be reasonable as to time and area.
Duress
Duress & Economic Duress
 If a party to a contract or his family member is
threatened or subjected to violence and forced to
enter into contract with the other party, the contract
is voidable at common law.
 Economic duress
 Coercive commercial pressure
 The victim is forced to enter into the contract against his
will with the party exerting the pressure.
 He has no other alternative.
Undue Influence
Undue Influence
 If there is no special relationship between the parties
 Must establish coercion, cheating or other unfair and
improper conduct
 Where a confidential relationship exists
 Undue influence is presumed but rebuttable
 e.g independent legal advice?
 Solicitor and client, doctor and patient, trustee and
beneficiary, guardian and ward, parent and child, religious
adviser and disciple
 But not banker and customer or husband and wife
Lloyds Bank Ltd v. Bundy (1974)



But the classification has been blurred by the
Lloyds Bank case.
It was held that there was a special relationship
of trust and confidentiality between the bank and
the defendant (who was an elderly farmer and
who gave a personal guarantee to the bank to
secure an overdraft granted to his son’s
company).
Since the bank failed to advise the defendant to
have any independent advice, the guarantee was
set aside.
Undue influence exercised by the
borrower
 Usually Husband and Wife
 Barclays Bank plc v. O’Brien (1994)
It was held that the wife was entitled to set
aside the charge. The bank knew or ought to
know (i.e. constructive notice) that at the time of
execution of the charge, the wife was under the
undue influence of her husband and failed to
advise the wife to take independent legal advice.
 Royal Bank of Scotland v. Etridge (No.2)
(2001)
Discharging a contract
 By performance
 By agreement
 By frustration
 By breach
Frustration
Doctrine of Frustration
 2 basic requirements
 The supervening event must destroy a fundamental
assumption on which the contract was based.
 The event must not be self-induced or anticipated.
 According to case law, the application of the
doctrine is very limited indeed.
 If the parties have made express provision for the
contingency (force majeure clause), there will be
no frustration.
Circumstances in which the contract
is frustrated
 Impossibility of Performance
Subject matter of the contract
 The subject matter is destroyed or ceases to exist:
Taylor v Caldwell (1863).
 The subject matter is not destroyed but ceases to be
available for the purpose of performing the contract,
e.g. requisitioning of a ship would frustrate a short
term charterparty.
 The subject matter must be unique.
 But land (not building) is considered as indestructible.
Impossibility of performance
Party to the contract
 Death of the person who has undertaken a personal
obligation, e.g. a contract of employment.
 Illness, e.g. a temporary illness of a singer might
frustrate a contract to appear on a particular night.
Method of performance contemplated by the
parties
 Only if the contract provides that particular method of
performance is of fundamental importance.
 Otherwise more expensive or onerous to perform is
not frustration.
Circumstances in which the contract
is frustrated
 Object of the Contract Defeated
 A contract will be frustrated if supervening events defeat
the whole purpose of the contract: Krell v Henry (1903)
 No frustration if part of the purpose is defeated: Herne
Bay Steam Boat Co. v Hutton (1903)
 Supervening Illegality
 Passing of new legislation which renders the
performance of the contract illegal.
 Due to outbreak of war which renders the performance
of the contract involving trading with the enemy.
Effects of Frustration
 Common Law Rule
 The contract automatically comes to an end from the
time the frustrating event occurs.
 It is not rescission.
 The parties are discharged from further obligations only.
 They are not discharged from carrying out those
obligations which have already fallen due.
 The Common Law Rule was defective
 Payment would only be recovered if there had been
total failure of consideration.
 One party might have incurred expenses or rec’d
valuable benefits.
The defects were remedied by s.16 of
LARCO, Cap.23 1948
(2) All sums paid or payable to any party …… before the time
when the parties were so discharged …… shall, in the
case of sums so paid, be recoverable from him……, and,
in the case of sums so payable, cease to be so payable:
provided that, if the party to whom the sums were so paid
or payable incurred expenses before the time of discharge
in, or for the purpose of, the performance of the contract,
the court may, if it considers it just to do so …… allow him
to retain or …… recover the whole or any part of the sums
so paid or payable, not being an amount in excess of the
expenses so incurred.
S.16 of Law Amendment and Reform
(Consolidation) Ordinance, Cap.23
(3) Where any party to the contract has, by reason of
anything done by any other party thereto in, or for the
purpose of, the performance of the contract, obtained a
valuable benefit (other than a payment of money to which
subsection (2) applies) before the time of discharge, there
shall be recoverable from him by the said other party such
sum (if any), not exceeding the value of the said benefit to
the party obtaining it, as the court considers just, having
regard to all the circumstances of the case ……
S.16 of Law Amendment and Reform
(Consolidation) Ordinance, Cap.23
(4) In estimating …… the amount of any expenses incurred
by any party to the contract, the court may…… include
such sum as appears to be reasonable in respect of
overhead expenses and in respect of any work or services
performed personally by the said party.
(5) In considering whether any sum ought to be recovered or
retained …… by any party……, the court shall not take into
account any sums which have …… become payable to
that party under any …… insurance unless there was an
obligation to insure imposed by an express term of the
frustrated contract or by or under any enactment.
Remedies for
Breach of Contract
Damages
 Remoteness
 According to Hadley v Baxendale (1864), the
plaintiff can be compensated for 2 types of loss:
1. Normal loss – this refers to loss which arises
according to the usual course of things from the
breach and which is presumed to be within the
contemplation of the parties
2. Special loss – this is loss which arises from special
circumstances of which the defendant was aware or
is presumed to have been aware at the time of
contracting
Remoteness
Hadley was about the defendant’s actual
knowledge in exceptional loss.
In Victoria Laundry (Windsor) Ltd v Newman
Industries Ltd (1949), the 2nd limb of the test
was extended to the defendant’s imputed
knowledge in the plaintiff’s business.
Quantification
 Quantification is to put the plaintiff, so far as money can do
it, in the same position he would have been in if the
defendant had carried out the contract.
 Examples:
 Non-delivery or Non-acceptance –> the difference in prices
 Defects –> the costs of making good the defects
 In case of building contract, where the cost of
reinstatement is out of proportion to the advantage to be
gained by the injured party, the court may award the
difference in value plus a modest damages for loss of
amenity: Ruxley Electronics and Construction Ltd v Forsyth
(1995)
Mitigation of loss
 The plaintiff must take all reasonable steps to minimize the
extent of his loss.
 If an innocent party refuses to accept an “anticipatory
breach”, he has no duty to mitigate the loss until the date of
performance: White & Carter (Councils) Ltd v McGregor
(1962)
 But the innocent party could not insist on completing
performance so as to recover the agreed price greater than
the damages which the law would allow at the time of the
breach if he had no legitimate interest in performing the
contract rather than claiming damages: Clea Shipping Corp.
v Bulk Oil International Ltd (The Alaskan Trade)(1984)
Liquidated damages and penalties
 e.g. $1,000 is to be paid for each day of delay.
 LD must be a genuine estimation of the loss.
 If the sum fixed is substantially greater than the
likely loss caused by the breach, it is a penalty
clause and will not be awarded.
Injured feelings
 The general rule is that no damages could be
recovered for injured feelings.
 One exception is contract for package holiday or
entertainment: Jackson v Horizon Holidays Ltd
(1975)
Specific Performance
 Specific performance will not be granted
 where damages are an adequate remedy
 Where the court cannot supervise its enforcement, e.g.
a contract of service or contract for service
 Damages would not be adequate:  In contracts for the sale of land or real property
 In contracts for unique goods, e.g. antique
 It is an equitable remedy. The court will only order
it where it is just and equitable to do so.
Thank you for coming
Q&A