B262F Business Law I

1. B262F Business Law I Lecture 5 19/10/2006 S.Y. Chung

2. Illegality

3. 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

4. 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.

5. 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.

6. 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

7. 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.

8. Duress

9. 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.

10. Undue Influence

11. 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

12. Lloyds Bank Ltd v. Bundy (1974) • But the classification has been blurred by the Lloyds Bankcase. • 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.

13. 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)

14. Discharging a contract • By performance • By agreement • By frustration • By breach

15. Frustration

16. 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.

17. 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 beunique. • But land (not building) is considered asindestructible.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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 ……

23. 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.

24. Remedies for Breach of Contract

25. Damages • Remoteness • According to Hadley v Baxendale (1864), the plaintiff can be compensated for 2 types of loss: • 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 • 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

26. 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.

27. 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)

28. 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)

29. 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.

30. 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)

31. 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.

32. Thank you for coming Q & A