1. Ping is thinking of opening a restaurant. On Monday she contacts Dennis and is offered by him a restaurant property lease at Causeway Bay for a good rental. Dennis says that he would like to hear of her acceptance “by the end of the week”. All that week she thinks about it. On Friday morning, Ping hears from Billy that the lease has been offered by Dennis to Myna, and Myna has accepted. Ping drives past the property on Friday afternoon and this information appears to be true, as Myna is moving in. Ping is upset that the offer to her of the restaurant lease has apparently been revoked. Pretending she knows nothing of Myna, she calls Dennis Saturday morning and accepts his offer before he can get a word in. Does she have a contract? If so, why? If not, why not?
Ping does not have a contract because there was an effective revocation of the offer. To form a contract, there should be a valid offer made by one party and duly accepted by the other party. An offer is a proposal made by an offeror, which if duly accepted by an offeree creates a valid contract (Graw, 2005). This means that the offer is communicated in a manner that would result to the formation of a contract once is accepted. In the given case, there is a valid offer for the lease of the restaurant property at a given monthly rental. In addition, Dennis communicated that he would like to know of Ping’s acceptance before the end of the week. From this, the offer remains open until the end of the week.
However, there are instances when an offer lapses such as when the time given for acceptance has lapsed (Ramsgate Victoria Hotel v Montefiore, 1866), a reasonable time has already elapsed (Ramsgate Victoria Hotel v Montefiore, 1866; Manchester Diocesan Council v Commercial & General Investments Ltd, 1970), a counter offer came about (Hyde v Wrench, 1840), and if one of the parties loses the capacity to contract such as because of the death of one party (Bradbury v Morgan, 1862). An offer can also be terminated at any time as long as this is before an acceptance is given (Byrne v Van Tienhoven, 1880), provided the revocation or termination of the offer is communicated to the offeree (Dickinson v Dodds, 1876). In the revocation of an offer, it is an absolute condition that the fact that the offer has already been revoked has to be communicated or made known to the offeree. According to Dickinson v Dodds (1876), the manner of communicating the revocation does not need to be made personally by the offeror or on the offeror’s behalf. This means that as long as the offeree learned of the revocation, then there is an effective communication, giving rise to a valid revocation. In the given case, Ping learned of the revocation of the offer through a call from Billy telling her that Dennis has made an offer to Myna, which Myna has accepted. Ping even went to the lease site to see for herself that Myna was already moving in. This means that there was an effective communication of the revocation of the offer. As such, even if Ping called Dennis before the end of the week to communicate her acceptance, there was already no offer to accept.
2. Ping is also looking to buy an apartment in Aberdeen as an investment. She approaches Aberdeen Property Holdings (APH) stating that she will only buy an apartment where there are reliable tenants already in the apartment. APH advise her that they have just the property that she is looking for, “with some exceptionally good tenants who have been there 3 years”, they say. Ping buys the apartment but the tenants are terrible, always behind in their rent and regularly damaging things and neglecting the garden. She later finds out that the tenants had been there only 3 months, not 3 years. The misrepresentation was made to her due to an innocent miscommunication between staff at APH. Ping now wants to rescind the contract. APH have offered her another set of very reliable tenants who can move in immediately (since the tenancy has just expired) but Ping wants nothing more to do with APH.
Ping is entitled to the remedy of rescission with indemnity based on the misrepresentation. Misrepresentation pertains to the issuance of a false statement by one part to another party over a fact resulting to the inducement of one of the parties to enter into a contract (Graw, 2005). Based on this definition of misrepresentation, there are two major conditions to support rescission based on misrepresentation. One is the existence of a false statement of fact, which should be material fact (Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd, 1867). The other is the inducement of the party to engage in a contract because of the misrepresentation of a material fact. In the given case, there is misrepresentation because APH falsely stated to Ping that there were reliable tenants in the apartment building when the tenants have stayed in the apartment for only three months. This material fact induced Ping to enter into a lease contract since she specifically considered reliable tenants as a motivation to enter into a contract with APH. There was a substantial difference between the material fact stated to Ping about the tenants of the apartment and the actual situation of the tenants of the apartment.
Even if the statement was issued because of an innocent misunderstanding among the staff of APH, there was misrepresentation because of the occurrence of its elements in the case. Specifically, there was innocent misrepresentation (Graw, 2005) since the staff made the statement to Ping with the belief that what they were saying was true. In the event of a misrepresentation, the outcome could be rescission with indemnity or affirmation of the contract through express communication or action such as by continuing the contract or implied by allowing the lapse of a substantial period after learning of the misrepresentation. Rescission for innocent misrepresentation finds support in Leason Pty Ltd v Princess Farm Pty Ltd (1983), which provides there is no authority that precludes entitlement to rescission of the aggrieved party to an innocent misrepresentation. Rescission with indemnity based on a claim of innocent misrepresentation is an action available to Ping because she does not have any intention to continue the contract even if APH has stated that new tenants will replace the existing tenants. Ping needs to file an action in court seeking indemnity and rescission of the contract with APH and she has to prove the existence of the elements of innocent misrepresentation.
3. Ping’s friend Polly operates an import/export company in Wan Chai. She arranges for a load of a client’s furnishing supplies to be sent by train to Guang Zhou. She approaches the manager of transport services at the railroad company, Mr Bao. He prepares the written contract. Nothing is said on the written contract about when the journey will be made, and Polly is worried that the goods may arrive too late in Guang Zhou. She tells Mr Bao of her concerns. He replies: “I promise you that I will get this load on the train leaving Thursday morning.” Polly is pleased, and pays the price quoted immediately. In fact, the goods are not loaded until Friday and they eventually leave Saturday morning. Sadly, that train is involved in an accident and fire en route, and the goods are badly damaged. The written contract has an exemption clause “exempting KCR from all liability for any damage caused to a client’s goods by accident or fire during transit.”
A collateral contract constitutes a promise, which does not form part of a principal contract (Graw, 2005). A collateral contract constitutes a contract in itself operating independently but significantly linked to the primary contract so that the collateral contract emerges when a consideration of one party is engagement in the main contract (Heilbut, Symons & Co v Buckleton, 1913). In Evans v Andrea Merzario (1976), a collateral contract is explained as a promise or assurance given with the intention of acting on it through the engagement in a contract and the actual entry into a contract makes the promise binding. This means that in deciding whether statements constitute a collateral contract, the statement should be delivered with the intention to rely on it, the party insisting on the presence of a collateral contract should have relied on the statement, and the party making the statement delivered this with the intention to guarantee its truth. Concurrently, there are two major elements of a collateral contract. First, the statement communicated has a promissory nature and in the form of an assurance (JJ Savage & Sons v Blakney, 1970). Second, there should not be any inconsistency arising between the primary contract and the collateral contract. In Hoyts Pty Ltd v Spencer (1919), the promise was not recognized as a collateral contract because this was inconsistent with the primary contract. In JJ Savage & Sons Pty Ltd v Blakney (1970), the promise was not also considered as a collateral contract because this does not have a promissory nature. In the given case, Polly made express mention of her concern over the schedule of the loading of the goods to reach the destination on time. This is in the context of an already existing contract between Polly and Mr Bao. Mr Bao replied that he promises Polly that he will have the goods loaded on the train that leaves Thursday morning to reach the destination on time. This constitutes a collateral contract because this involves a promise made for the fulfillment of the primary contract. In addition, the statement was communicated as a promise or an assurance and there is not inconsistency between the promise comprising the collateral contract and primary contract for transit.
In the case of the exemption clause, this should clearly form part of the terms of the contract. However, the operation or validity of the exemption clause constitutes a matter of court determination but Photo Production Ltd v Securicor Transport Ltd (1980) provides for the application of the contra preferentum rule that the exemption clause is interpreted against the party claiming its protection.
4. Polly’s friend Paul (now 27) is a chef for Hokkaido Pty Ltd, which owns the famous Hokkaido Japanese restaurant (owned by Yoshi) in Kowloon Tong. Paul has been working there for 10 years and now thinks he can make more money if he is his own boss. He wishes to move to Discovery Bay and open another Japanese restaurant there, called “Paul’s Japanese Restaurant.” Yoshi reminds Paul that when he joined Hokkaido he signed a letter stating that he would not open another Japanese restaurant “anywhere in Hong Kong for a period of 5 years” if he left Hokkaido Pty Ltd. Paul doesn’t remember signing the letter, as it was 10 years ago. When it is shown to him, he realises that he did sign it, but that happened 6 weeks before his 18th birthday. He wants to know if he is bound by the terms of the letter. If so, why? If not, why not?
Paul may not be bound by the restraint of trade clause by proving that the clause is too broad because it covers any area in Hong Kong and the limitation of five years is too unreasonable. Restraint of trade is an employment clause that puts a restriction on the freedom of individuals to deal or trade assets or information, in a particular manner, or trade with third parties. This applies during the period of employment and could extend after the termination or expiration of the employment contract. (Graw, 2005) Laws covering restraint of trade consider this practice as against public policy making unenforceable subject to the exception that the interest of a party or public interest justifies the reasonableness of the restraint (Attwood v Lamont, 1920). This means that a restraint of trade clause becomes unenforceable when this is unreasonable, subject to the determination of courts at the time of the imposition of the clause. The burden of proof rests upon the party wanting to enforce the restraint of trade clause while the party claiming unreasonableness have to show proof of the violation of public policy by the clause. (Linder v Murdock’s Garage, 1950) Restraint of trade applies to interests subject to protection so that in the case of an employment context, broad restraint of trade clause that covers all possible future forms of competition with the employer is unenforceable because it is unreasonable and does not constitute an interest subject to legal or contractual protection. In Wentworth Partners Estate Pty Ltd trading as RE MAX Gold v Gordony (2007), the restraint clause was considered unenforceable because the clause was broad. In Orton v Melman (1981), validity of a restraint of trade clause depends on factors such as the relative bargaining power of the parties, the nature or type of the prohibition, and the period or scope of the clause. In IRAF Pty Limited v Graham (1982), a restraint period of nine to twelve months was deemed sufficient in the case of a hairdressing salon.
Paul signed the employment contract including the restraint of trade clause when he was a minor but the employment contract stands since it covers employment, which is generally beneficial to him and the continuity of his employment when he achieved the age of majority constitutes ratification of the contract (Graw, 2005). However, Paul may also question the validity of the employment contract on the grounds of unreasonable terms subject to the consideration of the court.
Graw, S. (2005). An introduction to the law of contract (5th edn.). Pyrmont, NSW: Lawbook Co.
Attwood v Lamont (1920) 3 KB 371
Bradbury v Morgan (1862) 1 H&C 249
Byrne v Van Tienhoven (1880) 5 CPD 344
Dickinson v Dodds (1876) 2 ChD 463
Evans v Andrea Merzario (1976) 1 WLR 1078
Heilbut, Symons & Co v Buckleton (1913) AC 30
Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133
Hyde v Wrench (1840) 3 Beav 334
IRAF Pty Limited v Graham (1982) 1 NSWLR 419
JJ Savage and Sons v Blakney (1970) 119 CLR 435
Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 at 587
Leason Pty Ltd v Princes Farm Pty Ltd (1983) 2 NSWLR 381
Lindner v Murdock’s Garage (1950) 83 CLR 628
Manchester Diocesan Council v Commercial & General Investments Ltd (1970) 1 WLR 241
Orton v Melman (1981) 1 NSWLR 533
Photo Production Ltd. v Securicor Transport Ltd. (1980) A.C. 827
Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109
Wentworth Partners Estate Agents Pty Ltd trading as RE MAX Gold v Gordony (2007) NSWSC 1135