[1]

Definition of Contract

An agreement between two or more parties to do or not to do some acts, their intention is
to create a legal relationship which is enforceable by law.
In the case of a civil contract, this is an agreement under which the contractor undertakes
for reward to carry out the civil work for the project owner, commonly referred to as
either the Client or the Employer.

[2]

Essential Ingredients of a Valid Contract

1. Offer and Acceptance

2. Consideration
3. Contractual Capacity
4. Genuineness of Consent
5. Form of Contract
6. Terms of contract

2.1 Offer and Acceptance

2.l.l

Offer
Agreement takes the form of offer and acceptance. A contract is formed when an
express or implied offer is made by one party known as the offeror and is accepted
without qualification or amendment by the other party known as the offeree.
Offer is an expression of willingness to enter into a contract on certain terms and to
be bound by it when accepted by the party to whom it is addressed.
It may be oral, in writing or by conduct.

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2.l.l

Offer (contd)

An offer may come to an end before acceptance is made in the following ways

Lapse of time : If the offeror gives a time for acceptance it will end when that time has
passed without acceptance. If no time is specified it will lapse when not accepted
within a reasonable time. The court will decide what is and what is not a reasonable
time.

Demise of offeror or offeree : In case of an offer made by one individual to another
individual, if either dies before acceptance, the offer will immediately come to an end.

Rejection : This may be an outright rejection or refusal of an offer or it might take the
form of counter offer.

Revocation :

Withdrawal or revocation of an offer must be communicated to the

offeree before acceptance. Revocation is of no effect until it is actually brought to the

notice of the offeree.

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2.1.2 Invitation to Treat

An invitation to treat is an invitation to make offer.. The person making the invitation to
treat does not intend to be legally bound if terms are accepted, so this cannot be turned into
a contract. An invitation to treat is not an offer.
Examples of invitation to treat :

Display of goods for sale.
The customer by taking the goods form the shelf and presenting them at the cashier
counter is making an offer, at which the cashier may accept or reject.

Advertisements, price lists, catalogues.
Generally, advertisements only invite offers, price indicates the range along which an
offer may be made.

Auctions
The auctioneers request for a bid is merely an invitation to treat and is not an offer which
can be converted into a contract by the highest bidder. It is an invitation to bid and it is the
bid itself which is the offer. It is up to the auctioneer to accept or reject the offer.
2.1.3 Tender
A tender is an offer. Client/Employers often invite tenders, that is they ask others to
submit details of prices at which goods or services may be bought.
For example, tendering for construction works. An invitation to tender from the
Client/Employer to the contractor is an invitation to treat whereby the tender price
submitted by the Contractor is the offer from the Contractor subject to acceptance by the
Client/Employer.

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2.1.4 Acceptance

Acceptance may be oral, in writing or by conduct.

The offeree must accept all terms of the offer without any qualification or
amendment.

The acceptance must be communicated to the offeror. However, under some
circumstances conduct may be sufficient evidence of acceptance.

For example, if a person owning a flat asks a builder to call around to the flat to
carry out certain repairs, and the builder does so, there is legally binding contract:
the builder having accepted the flat owners offer by conduct.

2.2 Consideration
Consideration is essential to the formation of all contract not under seal.
Consideration is what a party contributes towards the contract; it is the price which
is paid for the other partys act or promise.

In the case of a civil contract, the contractor construct a seawall, for example, for
the employer who in turn pays the contractor an agreed sum of money The
contractor has given consideration to the employer by constructing the seawall and
the employer has given consideration by paying the contractor.

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Rules of Consideration. :-

a) Consideration must not be past

The law does not recognize past consideration as this is treated as no consideration
at all.
For example, a contract may build a house without a price being agreed beforehand.
After completion, the employer promised to pay the contractor $500,000 but
eventually pays only $400,000. Under such circumstances the contractor will not be
able to enforce the original promise to pay the $500,000.
This is because the house was completed (therefore the consideration given) before
the promise to pay was made. Th contractors consideration was past, and therefore
could not be recognised as a consideration for the purpose of supporting the
contract.

b) Consideration need not be adequate (fair) but it must be sufficient (valuable)

The court will not inquire into the value of the consideration given to the other party,
providing it is valuable consideration, meaning that it has some monetary value.
For example, a contract will be binding even if a Mercedes is exchanged for a
bicycle as both have value, even though not equivalent.

c) To carry out a public duty does not provide consideration

If a person promises to do something he is already legally obliged to do, this is not a
valid consideration.

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2.2 Consideration (contd)

d) To carry out existing contractual obligation does not provide consideration
For example, a project might be short of workers due to resignation of some staff.
The employer may agree to share the wages of the wages of those resigned workers
between those who have stayed behind to finish the project.
If the employer did not pay out as agreed, the workers who stayed back were not
entitled to sue as they were already under the contractual obligation to work on the
project.
e) Only a person who has himself given consideration will be able to enforce a
contract.
The relationship which exists between the parties to a contract is known as Privity
of contract, since only the parties to the contract provide consideration. This
particular rule has an important bearing on construction contracts.
If, during the course of construction, the main contractor employs a sub-contractor
to carry out the work and the work turns out to be defective, the employer cannot
sue the sub-contractor for breach of contract. The employer must sue the main
contractor who would in turn sue the sub-contractor.

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2.2 Contract Under Seal

A simple contract may be made in writing, orally or by conduct and each party
must contribute consideration to make it binding. The only exception to this
principle is a contract under seal.
Must be in writing, signed and sealed
A contract under seal is a contract made by deed, that is to say a contract in writing,
sealed, and delivered by the party who arranges the contract, which in the case of a
building contract will be the employer. Where an individual is a party to a contract
under seal, his signature is also necessary. A corporation, however, has no signature
and the affixing of its seal is necessary.
Need not provide consideration
A party may make a promise under seal which is enforceable, even though there is no
consideration. This would be accepted by a court of law and is the major difference
between a contract under seal and a simple contract which requires consideration.
Limitation Ordinance
Another important difference is that under the Limitation Ordinance, for simple
contracts, once six years have passed the right to sue in a court of law is no longer
possible. However, for a contract under seal, this right lasts for twelve years.

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2.3 Contractual Capacity

The general rule is that any person may enter into a bonding contract. To do this , there are
certain Rules:Age - a person under the age of 18 is considered to be a minor and as such do not have the
legal capacity to enter into contracts
Mental defficiency or influenced by drugs - Contracts made by person of mentally
disordered or influenced by drugs are only valid if the person so affected understand the
nature of the contract.

2.4 Genuineness of Consent

A contract may become void if there is genuineness of consent between the two parties.
Contract made maybe rendered void by mistake, misrepresentation, duress and undue
influence.

2.5 The Form of a Contract

In most cases, simple contract made orally or by conduct will usually be just as effective
as a written one. However, in some circumstances written formalities are required for
example in contract such as share transfer or hire purchase agreement.

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2.6

Terms of Contract

2.6.1 Express Terms

Where it is clear that a valid contract has been formed, it is necessary to decide
precisely what it is the parties have undertaken to do, in order to be able to say
whether each has performed, or not performed, his part of the agreement.

Statements made by each of the parties, which are intended to be incorporated into
the contract, are known as express terms which can be classified as condition and
warranty.

a) Condition
This is the word used to a condition is so essential to the nature of the contract that its
non-performance may fairly be considered by the other party as a substantial failure to
perform the contract at all.
So if certain conditions are not carried out in a contract, the injured party may repudiate
and sue for damages.
For eg. in the case of a construction contract, if the employer refuses to pay the contractor
for work which has been properly executed, the contractor an take the employer to court
and terminate the contract.

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b) Warranty
This is a term considered to be subsidiary to the main purpose of the contract, an
obligation which, although it must be performed, is not so vital as a condition.
A warranty may be defined as a term, the breach of which may give rise to a right to claim
damages but not a right to reject the contract and treat it as repudiated.
For a example, the contractor may fail to provide the site with a site office. In such case
the employer cannot break the contract but will be entitled to recover the cost the
providing a site office from the contractor.

2.6.2

Implied terms

A contract may contain and be subject to implied terms. Such terms originate from custom
or statute. Also a term may be implied by the court, where it is necessary to achieve the
result which the parties obviously intended the contract to have.

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[4] Completion or Discharge of Contract

Once each partys contractual obligations have been fulfilled, the contract is considered to
be discharged, this is known as discharge by performance.

4.1 Performance: completion of all obligations by all parties wholly in accordance
with the contract. For example, if a contractor has completed his obligations under the
contract and Employer has paid the contractor of all cost in relation to the works, then
the contract is discharged.
However, there are ways which a contract may be discharged without the parties fulfilling
their obligations, these are by agreement, frustration and breach of contract.

4.2

Agreement

4.3

Frustration

4.4

Fundamental Breach in Performance

4.2 Agreement:A contract is made by agreement and it is also possible to end it by

subsequent agreement which can arise from agreement between the parties to
terminate the contract.

4.3 Frustration: where performance becomes impossible due to an unforeseen event
which must be so unexpected or unforeseeable at the time the contract was enterd into.
Where such circumstances are determined by the court as to be unforeseeable, both
partied

may

discharged

from their

obligation

for

further performance.

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[4]

Completion or Discharge of Contract (contd)

4.4 Fundamental breach in performance (by either party): that is a breach going to
the root of the agreement. Failure to fulfill obligations during the execution of
contract.
In this case the injured party can choose either to treat the matter as a repudiation by
the other party, unless the injured party has received a substantial benefit or property
has passed to him, or as a breach of warranty only.
In

either

case

the

injured

party

can

also

claim

damages.

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[5]

Remedies for the Breach of Contract

5.1 Damages
Damages are a remedy for breach of contract which consists of a court awarding financial
payment as compensation for loss resulting from a breach.
The aim of damages is put the injured party in the same financial position as he would
have been in if the contract had been properly performed.
Damages are not awarded as a punishment of the breach, merely compensation for the
financial loss the injured party has incurred.

5.1.1.Liquidated Damages
Liquidated damages -These are damages specified in the contract, an amount of
money payable as compensation should there be a breach in the completion of the
work..

The words liquidated means that the principle to pay money as compensation for a
a breach has been established.

Under Clause 52 of the General Conditions of Contract, if the contractor fails to

complete the works during the specified contract period, the employer is entitled to
be paid an agreed sum of money by the contractor as compensation for the delay in
the works.

The amount in the Liquidated Damages are pre-determined and should be a genuine
pre-estimate of possible loss.

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Penalty
However, if the amount of liquidated damages are too extravagant and unreasonable, the
agreed sum will be treated as a Penalty ( a payment to make the offending party to suffer
for his faults) and is revocable by the court.
The court has the power to substitute its own award of damages, calculated on the basis of
compensation for the loss sustained.
On the other hand, where an agreed sum is in the nature of liquidated damages, no greater
sum will be awarded by the court even if is proved that the consequences of breach have
been more serious than foreseen.

5.1.2 Unliquidated Damages

These are damages not specified in a contract and should there be a claim for a breach,
it will be up to the court to decide
(i) whether a breach has occurred and,
(ii) the assessment of the value of the damages.

The amount valued should be a compensation of the loss sustained and as a remedy
for the breach of contract and not as a punishment.
The work unliquidated means that there is no agreement in principle to pay
compensation.
When no L.D.is specified, then the sum is to be negotiate/agreed between the two
parties, or settled by legal means. Basically by mean of quantum meruit.

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[5]

Remedies for the Breach of Contract (Contd)

5.2 Specific Performance

Specific performance is whereby a party in breach is ordered to perform a specific task.. It
will only be awarded if it is fair and reasonable to do so, or if the court decides that
damages are inadequate. There a number of specific performance such as:
5.2.1 Injunction: An injunction is an order made by the court to stop a person or
party from doing a certain act complained of. Party in breach is ordered to refrain
from taking a specific action.

5.2.2 Rescission: It is a remedy which is generally used in cases where one of the
parties to a contract has been misled, and so occurs mainly in cases of fraudulent or
negligent misrepresentation. It gives the misled party the option of avoiding or
accepting the contract.

5.2.3 Quantum Meruit: It means to pay reasonable sum for goods received or for the
benefit of services rendered. The court has laid down no rules limiting the way in
which a reasonable sum is to be assessed. However, useful evidence in any particular
case may include:
 Negotiation as to price
 Calculations based on the net cost of labor and materials used, plus a sum for
overheads and profit.
 Measurement of work done and materials supplied
 Opinions of qualified experts in the field of construction

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[6]

Termination of Contract by the Employer/Engineer

In the HK Standard form of Contract, there are clauses empower the Engineer or
Employer to terminate the contract, if the contractor:
1. becomes bankrupt of going into liquidation (but excluding the voluntary liquidation
resulting from the re-organisation of company)
2. assigns the contract without the written consent of the employer
3. suspends the works without any valid reasons
4. refuses or neglects to comply with the Engineers Instruction to remove defective
works or goods
5. fails to proceed regularly and diligently with the works
Process of Termination In Accordance with the Standard Form of Contract
In that case of a termination, the Engineer may give notice to the contractor specifying the
defaults.
If the contractor persistently neglect to comply with the requirements of the notice for 14
days, the Employer may terminate the contract, enter the site and take over the site and
employ others to complete the remaining portion of the works.
As soon as may be practicable after such entry, the Engineer shall:
ascertain and record the quantity of the completed works to such time

ascertain the amount of constructional plant and partially completed works or
materials delivered
Upon completion of the remaining portion of works, and after deduction of the additional
charges Employer has to pay to complete the works, and provided that there is a residue,
the contractor shall be entitled for payment.
If the valuation is not enough to cover the additional charges, the deficient may be covered
in the form of a debt from the contractor.

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Default of the Employer

If the employer fails to pay the contractor within the period as specified in the contract
and continuous such default for 7 days, the contractor may notify client by registered
post of such event.

If payment still not be made within a further 7 days from the date of the notice, the
contractor can terminate the contract

Client interferes with or obstruct the issue of any of the certificates

Client becomes bankrupt

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