2119 LEC3

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TERMS, DISCHARGE AND BREACH OF A CONTRACT L3

• OBJECTIVES:

• Provide guidance on understanding of:

• a. terms of a contract

• b. discharging a contract

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I. INTRODUCTION

• 1.1 Express Terms of Contract• Express terms - terms of the agreement which they

have set out, whether in writing, orally or a mixture of the two

• Conditions - most important terms of the contract which form its main purpose. If broken, may cancel contract and claim damages.

• Warranties - less important terms of the contract. If broken, cannot cancel but can claim damages.

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I. INTRODUCTION

• package holiday contract - express terms usually set out in the booking conditions.

• tour operator should remind the client on the booking conditions as part of the contract.

• 1.2 Implied Terms of Contract

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I. INTRODUCTION• EXAMPLE• Harry booked a holiday with Cheap Holidays Ltd

which included 14 nights’ accommodation at a hotel in Malaga, Spain. When he arrived he was amazed to discover that his room did not have a bed. The hotelier offered to hire him a bed for 1600 pesetas (approximately HKD130) per night.

• The holiday representative was unhelpful and told

him that he would have to pay or sleep on the floor. On his return he claimed a refund of HKD1820. The tour operator pointed out that there was no mention of beds in the brochure.

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I. INTRODUCTION

• The reasonable person would argue that it is implied that when a holidaymaker books a room he or she is entitled to be provided with a bed as part of the price.

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I. INTRODUCTION

• CASE• Wong Mee-wan (the personal representative of

Ho Shui-yee) v• Kwan Kin Travel Services Ltd.

• [1995] 2 HKLR 541• HSY travelled to the PRC under a package tour

arranged by KKTS. On their arrival at a lake, the travel group had missed the ferry and so a speedboat was arranged. The speedboat was driven by someone who was not competent, it collided with another boat and HSY drowned. Her mother claimed damages for breach of contract.

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I. INTRODUCTION

• It was held that KKTS undertook to provide, and not merely arrange, all the services included in the programme, even though some of the activities were to be carried out by others. KKTS were therefore bound to ensure that all the services were performed with the exercise of reasonable care and skill. The trip across the lake was not carried out with reasonable care and skill in that no steps were taken to see that the driver of the boat was competent. KKTS was liable for breach of contract.

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I. INTRODUCTION

• 1.3 Tickets• ticket is not a written contract. • A travel ticket is a voucher - evidence of the right

to travel in the manner indicated. • Most airline, ferry, rail and coach tickets refer to

by-laws or conditions subject to which the passenger is being carried. Passengers are bound by those conditions or by-laws if they were clearly referred to on the ticket.

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I. INTRODUCTION

• CASE• Thompson v London Midland & Scottish Railway

• [1930] 1 KB 41• Mrs. Thompson was injured alighting from a train

because of the LMS’s negligence. Mrs. Thompson could not read and the ticket was bought for her by a relative. Despite this her claim did not succeed because an exemption clause found on p. 552 of a separate timetable which cost 6d was held to apply! The court took the view that the issue of a railway ticket ought to indicate to a reasonable person that there were conditions attached to it.

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I. INTRODUCTION

• 1.4 Exclusion and exemption clauses• An exemption clause (also known as an exclusion

clause) attempts to deprive the innocent party of his/her remedies.

• A limitation clause attempts to restrict the available remedy.

• Exemption clauses are regarded as fair when they are the result of negotiations between the parties, the parties have equal bargaining power, and their intentions are clear.

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I. INTRODUCTION

• CASE• McKay v Scottish Airways

• [1948] SC 254• The pursuers sought damages against an airline

because one of their relatives had been killed in a crash caused by the airline’s negligence.

• The action failed because of an exemption clause in the contract of carriage which exempted the airline from liability for breach of contract for failing to carry a passenger safely as well as exempting the company from its duty to pay damages for harm caused by its negligence.

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I. INTRODUCTION

• CASE• Olley v Marlborough Court Ltd

• [1949] 1 KB 532• Furs were stolen from a guest’s hotel bedroom,

after the door was locked. On one of the room’s walls was a notice purporting to exclude the hotel from liability.

• Held. When the guest sued the hotel the court decided that the notice had not been incorporated into the contract since the contract was in fact made at reception before the guest was shown the room.

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I. INTRODUCTION

• Those clauses which are incorporated into the contract (e.g., signing the contract) and which, on a strict construction, actually apply to the situation in question will be upheld, even if the clause is legible but in small print.

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I. INTRODUCTION

• CASE• Anglo-Continental Holidays Ltd. v Typaldos

Lines (London) Ltd.• [1967] 2 Lloyd’s Rep. 61

• A group of Jewish school children were booked on a cruise. The cruise was to include a two-day stop at Haifa, enabling them to visit Jerusalem and Galilee. A week before departure they were informed that they would be traveling on a ship of inferior quality to that originally booked and that

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I. INTRODUCTION

• they would be stopping Haifa for only eight hours, not giving them enough time to visit Galilee. The plaintiffs cancelled the cruise, refunded their clients’ money and sued the defendants for breach of contract. The shipowners relied on a clause in the handbook which indicated ‘steamers, sailing, rates and itineraries are subject to change without prior notice’.

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I. INTRODUCTION• Held. Lord Denning M. R. said: • “In my opinion a steamship company cannot rely

on a clause of this kind so as to alter the substance of the transaction. For instance, they could not say: ‘We will change you from this fine modern ship to an old tramp’. Nor could they say: ’We are taking you to Piraeus instead of to Haifa’ … No matter how wide the terms of the clause, the Courts will limit it and modify it to the extent necessary to enable effect to be given to the main object and intent of the contract.

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I. INTRODUCTION

• “Applied to this case we have to ask ourselves: Was the proposed trip by the Anjelika in substance a performance of the contract or was it a serious departure from it? To my mind there is only one answer. It was a radical departure.

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I. INTRODUCTION

• “The change from the 22,000 ton Atlantica (with two swimming pools and lots of accommodation0 to this small old crate (as one of the witnesses called the Angelika) was itself substantial departure. But most important of all was the shortened time at Haifa. The climax of the trip for these Jewish boys and girls was two days at Haifa, whereas they were only to have eight hours. The defendants cannot excuse it by reliance on the clause.”

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I. INTRODUCTION

• Liability for death or personal injury resulting from negligence cannot be excluded or restricted by any contract provision or notice.

• ‘reasonableness’ test

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I. INTRODUCTION• Limitation clauses in relation to claims for death,

personal injury and loss or damage to luggage are very common in the tourism and hospitality industries. These limitation clauses have been agreed at an international level as part of the international regulation of civil aviation, shipping, road and rail travel by the Warsaw Convention for the Unification of Certain Rules Regarding Air Transport 1929 (as amended), the Athens Convention relating to the Carriage of Passengers and Their Luggage by Sea 1974, the Convention for the International Carriage of Passengers and Luggage by Rail 1961 and the International Convention for the Carriage of Passengers and Luggage by Road 1974 respectively.

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I. INTRODUCTION

• The Common Law Rules • (a) The exclusion clause must be incorporated into

(i.e., have become a part of) the contract, e.g., signing the document

• (b) If the meaning or scope of the exemption

clause is misrepresented by the business to the consumer, then the business cannot escape liability.

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I. INTRODUCTION

• (c) must show that reasonable steps have been taken to bring the clause to the notice of the other party.

• (d) previous course of dealing included an exclusion clause, then this may have been incorporated into the new contract.

• Control of Exemption Clauses Ordinance (enacted

in 1990) completely ruled out exemption clauses that try to exclude liability for personal injury or death if used by someone in business.

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II. DISCHARGING CONTRACTS

• 2.1 Discharge by Performance.• When all of the promises of a contract have been

performed - discharged. • Performance of a contract must be precise and exact. • EXAMPLE• If A contracts to sell and deliver 50 tonnes of rice to

B, and B promises to pay $10,000, cash on delivery, A must perform his promises before he can sue for the price.

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• The right to sue on a contract depends on complete performance, or, if the other party is in breach, on a willingness to perform his own promises.

• EXAMPLE• In the situation given above, if A fails to

deliver, B can sue A for non-delivery, provided B is willing to pay the agreed price.

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• 2.1.1 Partial Performance of a Contract

• performance of half of the contract does not entitle a party to claim half the price.

• entire contract vs. severable contract

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• CASE Bolton v Mahadeva• [1972] 2 All ER 1322

• The plaintiff installed a central heating system in the defendant’s house, and the price agreed upon was a lump sum of £560. The plaintiff did not do the work properly, and the cost of putting the system right would be another £179.

• The Court of Appeal said that this was an entire contract to do the work properly for one lump sum. Since the plaintiff had not performed his work properly, he could not recover money for the partial performance.

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• CASE Cutter v Powell

• [1775-1802] All ER Rep159

• The defendant (Powell) agreed to pay Cutter 30 guineas ‘provided he proceeds, continues and does his duty as second mate’ on the Governor Parry, a ship which was to travel from Jamaica to Liverpool. Payment was to become due ten days after the arrival of the vessel, but Cutter died before the vessel arrived at Liverpool. He had served on board the ship for about seven weeks.

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• It was held that his widow could not recover anything for the work he had done. The contract was said to be ‘entire’; nothing was to be paid unless Cutter had performed his entire duty under the contract. A more accurate phrase than an entire contract would be an entire obligation, because in such a contract the consideration is usually a lump sum which is payable upon complete performance by the other party.

– The rule laid down in Cutter v Powell in relation to entire contracts was that, unless the contracting party had performed the whole of his/her contract, s/he was not entitled to recover anything.

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• 2.1.2 Severable Contracts– contract is separable into parts- the party in question is entitled to payment

when he has performed some parts of what he undertook to do

– The SOGO (Sale of Goods Ordinance) provides, in s 33(2):

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• Where there is a contract for the sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses to take delivery of or pay for one or more installments, it is a question in each case depending on the terms of the contract and the circumstances of the case, whether the breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated.

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• 2.2 Discharge by Agreement• Discharge by agreement occurs where A promises to give up

his rights under the contract in return for a promise by B to give up his rights. – discharged automatically upon some events - after a fixed period of time– by giving notice to the other.

• For example, an employment contract may provide as follows:

• .

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• (a) Where an employer gives an employee notice of termination of employment, the parties may mutually agree to the employment ending at any time after the giving of the notice and before the expiration of the period of the notice; in such a case, wages shall be paid only up to the time of the agreed termination.

• (b) A party may terminate the employment contract by giving to the other party not less than one month’s notice

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– A contract may also be discharged by a subsequent agreement .

• The agreement for rescission ( 撤消 ) may be either express or implied. Non-performance for a long period may lead to an inference of abandonment.

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• CASE Pearl Mill Co. v Ivy Tannery Co.• [1919] 1 K.B. 78

• In September 1913, X agreed to sell to Y fifty dozen skins ‘delivery as required.’ By September 1914, Y had from time to time requested delivery of twenty dozen which had been duly delivered, but no more deliveries were asked for until July 1917.

• Held, an inordinate delay having taken place, the parties must be taken to have abandoned the contract.

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• 2.2.1 Accord and Satisfaction

• Accord and satisfaction occurs when after a contract is concluded a party obtains the release from his/her contractual obligation by giving or promising a consideration other than that which the other party is bound to accept under the contract. The agreement is known as accord and the consideration as satisfaction.

• Accord without satisfaction is no discharge of a contract or of a right of action arising from the contract. When the other side has already completely performed his/her promises, fresh consideration or a deed is required.

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• 2.2.2 Variation• The parties may seek to vary, rather than discharge, their

original contract. • CASE Electronic Industries Ltd. v

• David Jones Ltd.• [1954] 91 CLR 288

• The plaintiff undertook to demonstrate television equipment in the defendant’s store for a stated period, but was subsequently asked to postpone demonstrations when a strike broke out.

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• The plaintiff agreed to a postponement of the demonstrations until another date could be fixed. Subsequently, the plaintiff wrote to the defendant suggesting that the demonstration should be staged in August. The defendant did not reply to that letter until mid-July, when it intimated that it did not agree to the proposal as trade in its retail store was still adversely affected by the industrial disturbance. The plaintiff did not make any attempt to begin the installation of the equipment in mid-July, but awaited further information as to the time or times which would prove suitable to the defendant.

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• Further attempts by the plaintiff to fix a mutually convenient date failed, and the defendant then informed the plaintiff that it no longer desired to have the television demonstration staged in its store. The plaintiff thereupon sued the defendant for breach of the contract.

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• The High Court of Australia held that, in the situation, both parties remained bound by the contract. In delivering the written judgment, the court said, among other things: ‘Of course if the parties did intend to keep the original agreement no longer on foot, to rescind it, that is the end of the matter…. But it is certain that they did not intend to rescind the original contract and that they never did so. The plaintiff always meant to perform it and hold the defendant bound to it. Never for a moment did the plaintiff mean to exonerate the defendant from the contract.

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II. DISCHARGING CONTRACTS• All it meant to do, and all it did do, was to accede to the

defendant’s request for a postponement in order to oblige the defendant and consult the interests of the defendant…. The truth was that the plaintiff expressed its willingness to vary the contract by substituting a new agreed date, and awaited an answer to its proposal, forbearing in the meantime in pursuance of the defendant’s request to tender actual performance. In the situation which resulted both parties remained bound by the contract. The fact that there was no longer a fixed date for performance brought into application the principles which impose on parties, in all cases where the performance of their obligations require co-operative acts, the duty of complying with the reasonable requests for performance made by the other.

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• In Mackay v Dick (1881) 6 App Cas 251, Lord Blackburn says: “I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.”’

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• 2.3 Discharge by Frustration (合約落空 ) • Unforeseen events may occur which make the

contract impossible to perform, while other events may simply make it more expensive or more difficult to perform. Where the parties foresee the difficulties, the contract can contain a variation clause or a force majeure clause.

• The courts will hold that a contract is frustrated only when an event which was unforeseen by the parties, and for which the contract makes no provision, has occurred.

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- neither of the parties is at fault

- circumstances are radically different now

• CASE Wong Lai-ying and Ors v

• Chinachem Investment Co., Ltd.

• [1979] HKLR 1

• W entered into a contract with CIC to purchase a flat in a development known as ‘University Heights’ to be constructed on land owned by CIC. A term of the contract provided that in the event of a dispute or unforeseen circumstances CIC could rescind, i.e., cancel, the contract.

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II. DISCHARGING CONTRACTS• During the construction a major landslip occurred above

Po Shan Road, causing all the building works of University Heights to be destroyed. Work was eventually resumed and the flat was completed two and a half years later than originally agreed. CIC Ltd. then refused to complete the sale to W, claiming that the contract was frustrated. W claimed an order for specific performance of the contract of sale.

• The Privy Council was asked to decide whether provision was made for an event causing the circumstances of performance to be radically different from that undertaken by the contract. Clause 22 of the agreement provided as follows:

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• It is further agreed that notwithstanding anything herein contained should any dispute arise between the parties touching or concerning this Agreement or should any foreseen circumstance beyond the Vendor’s control arise whereby the Vendor becomes unable to sell the said undivided shares and Apartment to the Purchaser as hereinbefore provided, the Vendor shall be at liberty to rescind this Agreement forthwith and to refund to the Purchaser all installments of purchase price paid by the Purchaser hereunder without interest or compensation and upon such rescission and upon

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II. DISCHARGING CONTRACTS• repayment of the instalments of purchase price this

Agreement shall become null and void as if the same had not been entered into and neither party hereto shall have any claim against the other in respect thereof.

• It was held that the general words of cl 22 could not be construed as making provision for the possibility of the landslip, which was an unforeseen contingency having the consequences of fundamentally changing the character and duration of the performance of the contract, and that the inclusion of such a clause is not inconsistent with the operation of the doctrine of frustration and does not show an intention that that doctrine shall not apply.

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• The landslip was a major interruption which fundamentally changed the character and duration of the performance of the contract. The contract was frustrated.

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• CASE Davis Contractors Ltd. v

• Fareham Urban District Council

• [1956] AC 696

• The appellants agreed to build 78 houses for a local authority in eight months for a fixed sum. Because of a shortage of skilled labour and building materials, the work took 22 months to complete, and the appellants incurred additional expenses. They claimed that the contract was frustrated, and they also claimed to be entitled on a quantum meruit to a sum in excess of the contract price.

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• The House of Lords held that the contract was not frustrated. The fact that, without the fault of either party, there had been an unexpected turn of events which rendered the contract more onerous than had been contemplated was not a ground for relieving the appellants of the obligation which they had undertaken and allowing them to recover on the basis of a quantum meruit (按實值支付 ) . There must be such a change in the significance of the obligation that that thing undertaken would, if performed, be a different thing from that contracted for.

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– Essential factors of Contract Frustration:• (a) There must be some outside event or extraneous

change of situation, not foreseen or provided for, making performance of contract impossible or radically different.

• (b) The outside event or extraneous change must have occurred without the fault of either party to the contract.

• frustrated contract is terminated from the date of the court’s decision.

• relieved of all future obligations yet remain liable for performance already rendered or for money which has already become due.

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II. DISCHARGING CONTRACTS• Law Amendment and Reform (Consolidation)

Ordinance, enacted in 1986, which provides:

- Money paid before the frustrating event is recoverable.

- Money payable before the frustrating event ceases to be payable.

- Expenses incurred in performance of the contract prior to the frustrating event may be recovered if a sum is paid or is payable before the frustrating event.

- If a valuable benefit is received under the contract prior to the frustrating event, the court may order payment for that benefit.

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• 2.4 Discharge by Breach• Breach of Contract - if one of the parties fails to

perform his contractual promises or deviates from the terms of the contract

• Condition broken - the innocent party may treat himself/herself as discharged from the contract (to repudiate the contract) and to recover damages for loss of the contract, or to keep the contract valid and recover damages for the particular breach.

• Warranty broken - the innocent party cannot obtain damages for loss of the contract but recover damages for the particular breach.

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• Alternatively, the courts may consider the consequences of the breach

• Anticipatory breach prior to the date of performance

• Choice of the innocent party:• to accept the breach, treat the contract as

discharged, and sue immediately for breach of contract, or

- to wait for the time of performance to see whether the other party does in fact perform.

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• CASE White & Carter (Councils) Ltd. v McGregor• [1961] HL

• W & C, suppliers of litter bins, contracted with M to advertise M’s garage on a number of the litter bins for a period of three years. On the same day, M decided to cancel the contract, but W & C refused to accept the cancellation and proceeded to display the advertisements. M refused to pay for the advertisements.

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• It was held that W & C were not bound to accept M’s breach as repudiation. The innocent party may accept the repudiation and sue for damages, or he may refuse to accept it and then the contract remains in full effect. W & C were entitled to the contract price.

2119 LEC3

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Transcript of 2119 LEC3