LE/Lecture 7
LECTURE 7
Vitiating factors, Discharge and Remedies
1.0 Duress
a. Duress can be defined as getting some one to enter into a contract through violence, a threat of
violence or other illegitimate pressure.
b. Duress is a vitiating factor and makes a contract voidable.
c. There are three types of duress:
1. Duress of the person
2. Duress of goods
3. Economic duress
1.0.1 Duress of the person
a. The threat of harm made to compel a person to do something against his will.
b. burden is on the defendant to show that the threat did not contribute at all to the decision.
c. It does not matter that P had other reasons or motives which might have led them to make
the same decision.
Case
Barton v Armstrong (1975)
a. D threatened P to make P to enter into a contract to buy D’s shares.
b. Though the threat was not the only reason to make P to sign the contract.
Held
A person who agrees to a contract under physical duress may avoid the contract, even
if the duress was not the main reason for agreeing to the bargain.
1.0.2 Duress of the goods
a. where someone is forced to enter into a contract against their own will, because their
valuable property is being held or threatened.
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Case
Maskell v Horner [1915]
a. P paid a toll fee to D under the threat.
b. D would seize P’s stock if P did not pay the money.
Held
P was entitled to recover the sums paid to D.
Case
Maskell v Horner [1915]
c. P paid a toll fee to D under the threat.
d. D would seize P’s stock if P did not pay the money.
Held
a. P was entitled to recover the sums paid to D.
1.0.3 Economic Duress (ED)
a. This is economic pressure that is applied illegitimately to induce someone to enter into a
contract.
b. This ED is recognized since 1970.
c. Mere commercial pressure is not ED
Case
North Ocean Shipping Co. Ltd. v Hyundai Construction Co. Ltd (1979)
a. D was a ship builder. P entered into a ship building contract with D.
b. D wanted to increase 10% after the price was fixed in the contract.
c. P was in need of the ship under construction and agreed to pay the increased price.
d. 9 months after the contract was discharged, P claimed for the return of the increased price
paid by him.
Held
a. There was economic duress on the P.
b. However, the P by its conduct, had affirmed the agreement to pay the extra sum after duress
had ceased.
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1.1 Undue Influence (UI)
a. Undue influence is similar to duress in nature, but the doctrine of UI is an equitable doctrine
as opposed to the common law basis of duress.
b. The key differing factor is the duress is based on a threat, whilst UI will be based on a
relationship that has been exploited.
c. Voidable → at the discretion of the court
d. Due to existence of an imbalance of power between the parties.
1.2 Classifications of UI
a. Actual undue influence
1. No any special relationship existed between the parties.
2. The innocent party to prove their free will to enter a particular contract was overcome.
3. this is the same standard as a claim for duress
b. Presumed undue influence
1. With special relationship
→ By virtue of the relationship presumed between the parties
(e.g. Parent and children, solicitor and client, doctor and patient etc.)
→ claimant must simply prove that that party exploited the nature of this relationship.
2. With no special relationship
→ a relationship built on trust and confidence
→ this presumption is rebuttable by the other party if they prove there was no trust or
confidence.
(e.g. Husband and wife, Cohabitees, Bank and Customer, Commanding Officer
and Soldier in Army etc.)
1.3 Actual Undue Influence (AUI)
a. The burden of proof is on the claimant (P) to prove AUI was used against him.
b. There is no special relationship and no abuse of confidence under AUI.
Case
Williams v Bayley (1866)
a. A father provided his home as security to prevent his son being prosecuted.
b. Because the bank discovered that the son had forged the father’s signature on promissory
notes to the bank.
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Held
a. The father had not entered the agreement through his own volition.
b. The bank had exerted undue influence.
Case
Diners Club International (Hong Kong) Ltd v Ng Chi Sing (1987)
a. D signed guarantee undertakings to guarantee payment of the credit card debts of his son.
b. D was under P’s pressure because the P would report the matter to the Commercial Crimes
Bureau if D refused to sign the documents.
Held
a. The pressure exerted on D was illegitimate.
b. The guarantee signed was voidable.
1.4 Presumed undue influence with special relationship
a. Certain relationships receive legal protection which are irrubuttable (e.g. Parent/Child)
b. Meaning influence between them automatically be presumed (in the absence of any other
facts).
c. 3 factors to establish a presumption of undue influence:
1. There is a relationship of trust and confidence influencing a party.
2. The influence appears to be undue; and
3. There is nothing to rebut the presumption of undue influence.
d. The burden of proof shifts to D, who must prove no undue influence on P.
e. D must prove:
1. P had independent and impartial advice.
2. P knew the full extent and nature of the contract when entering into it.
1.5 Presumed undue influence without special relationship (e.g. Husband/Wife)
a. Where the relationship is not a protected category, P must show that the relationship was
based on trust and confidence.
b. Such a relationship is rebuttable.
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Case
Barclays Bank v O’Brien (1994)
a. W signed a second charge agreement to pledge her home to a bank for a loan granted to her
H’s company.
b. H mispresented to W that the loan was a small sum and for short time only.
c. W did not read the documents and the bank officer did not give W detail explanations.
Held
a. The bank knew the parties were H and W and should have enquired into the circumstances in
which W had agreed to sign the charge.
b. The bank failed to warn W of the consequences
c. The bank failed to recommend W to take independent advice
d. W was entitled to set aside the charge.
Case
Lloyds Bank Ltd v Bundy (1975)
a. D mortgaged his property to the bank (P) in order to secure his son’s overdraft facilities
b. P later sold D’s property in settlement of his son’s overdraft.
Held
a. there was a trust and confidence relationship between D and P (customer/banker).
b. P had failed to advise D to obtain his independent advice.
c. The mortgage was set aside accordingly.
1.6 Presumed but rebuttable relationship
The relationship presumed but could be rebutted by showing that the plaintiff:
a. exercised free will
b. knew all the facts and not misled by defendant
c. received independent advice
1.7 Illegality
a. Illegal contact possesses the essential elements of a valid contract
b. but the court would not enforce because of illegality.
c. if one party breaks the contract, the other party has no way to rely on the contract to seek
compensation.
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d. illegal at common law on the grounds of public policy, such as:
1. contract to commit crime
2. contract which is sexually immoral
3. contract prejudicial to administration of justice
Case
Pearce v Brooks (1866)
Held
P could not recover the full price of carriage provided to a prostitute because the carriage was
used for immoral purpose.
Case
Yim Wai-tsang v Lee Yuk-har (1973)
a. P was the head of a money lending association sued a member of the association regarding the
contribution to the association
b. The member refused to pay claiming that the association was illegal as it was not registered
under the Societies Ordinance (Cap. 151).
Held
The association was illegal and the member was not liable to pay.
2.0 Discharge of a Contract
a. A discharged contract is a contract which has come to an end.
b. There are several ways to discharge a contract, i.e., discharged by:
1. Agreement
2. Breach
3. Performance
4. Frustration
2.1 Discharge by agreement
a. If both contractual parties agree, the agreement can be varied or terminated.
b. The contractual parties have freedom to vary and terminate a contract in whatever form
they like.
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2.2 Discharge by breach
a. the contract is terminated because of a breach of the terms of the contract.
b. the other innocent party has the choice to proceed with the contract and claim damages or
c. to terminate the contract and/or claim damages.
d. There is an anticipatory breach of contract
→ if a breach is foreseeable, e.g. the opposite contracting party confirmed that he would not
do as required by the contract at the future date of performance, the innocent party may
either:
1. Accept the breach and treat the contract as repudiated (terminated) and claim
damages for the breach (the innocent party can try to minimize his loss by early
arrangement of his job); or
2. Not accept the breach and proceed with the contract until the date of performance
to see if the opposite party really fails in performing his duty (if positive, the innocent
party may then claim damages for all his loss resulting from the breach.)
Case - Not accept the breach and proceed with the contract
White & Carter (Councils) Ltd. V McGregor (1961)
a. P entered into a contract with D for providing advertisement service to D.
b. D later asked the P to stop the advertisement.
c. The plaintiff refused to do as requested.
d. They continued to put advertisement for and then claimed full contract price
Held
The P was entitled to continue with the contract and claim damages for the full contract
price.
Duty of mitigation (of the innocent party)
During the waiting period, the innocent party will not have a duty of mitigation (a
duty to minimize his loss), as the breach, being not yet accepted, will be a possibility
only and cannot be regarded as happened.
2.3 Discharge by performance
a. When contractual parties duly performed what they have promised in the agreement, the
contract is discharged by performance.
b. the performance must be the entire contract (partial performance is not allowed)
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c. For partial performance, the party may claim for what he has done in the following situations:
1. Divisible contract (e.g. building contracts)
2. Substantially performance (quantum meruit (as much as he earned))
3. Acceptance of partial performance
4. Performance is wrongfully prevented
5. Frustration
Case - express term demanding full performance of contract
Cutter v Powell (1953)
a. Mr. Cutter was a sailor. He entered into a contract to work on a ship to the port of
Liverpool.
b. According to the terms of the contract, his salary would be paid when he completed
the voyage (i.e. when the ship arrived at the port.)
c. But, when the ship was almost there, he died.
d. Mr. Cutter’s wife sued D for the substantial performance of Mr. Cutter’s contract.
Held
a. According to the express terms of the contract, the sailor, Mr. Cutter was entitled to
receive the payment if the whole duty of the contract was performed, and not entitled
to any payment if the contract was only partially performed.
b. The payment conditional on performance of the full voyage was a form of insurance
for the employer.
c. The construction of the express terms of the contract, no payment was due for partial
performance.
Case - express term demanding full performance of contract
Cutter v Powell (1953)
e. Mr. Cutter was a sailor. He entered into a contract to work on a ship to the port of Liverpool.
f. According to the terms of the contract, his salary would be paid when he completed the
voyage (i.e. when the ship arrived at the port.)
g. But, when the ship was almost there, he died.
h. Mr. Cutter’s wife sued D for the substantial performance of Mr. Cutter’s contract.
Held
d. According to the express terms of the contract, the sailor, Mr. Cutter was entitled to receive
the payment if the whole duty of the contract was performed, and not entitled to any payment
if the contract was only partially performed.
e. The payment conditional on performance of the full voyage was a form of insurance for the
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employer.
f. The construction of the express terms of the contract, no payment was due for partial
performance.
Case
Hoenig v Isaacs (1952)
a. P agreed to decorate and furnish D’s flat.
b. However, P’s workmanship was not good. There were defects in some furniture.
Held
a. P had performed the contract substantially.
b. P could have the contract sum less the cost of putting right the defects.
Case - entirety of the contract/lump-sum contract
Bolton v Mahadeva (1972)
a. P installed a heating system for D’s home.
b. However, the heating system did not work properly.
c. P sued D for the full contract price.
Held
a. The contract was a lump-sum contract.
b. This meant that it required the entirety of the contract to be performed before the
obligation to pay became due.
2.4 Discharge by Frustration
a. The doctrine of frustration discharges both parties from their contractual obligations.
b. there exists a change in circumstances, after the contract was made, which is not the fault of
either of the parties
c. Where performance of the contractual obligations become either:
i. Impossible, or
ii. Radically different
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Case
Taylor v Caldwell (1863)
a. P entered into a contract with D for hiring a music hall.
b. Unfortunately, the hall was destroyed by fire before the day of the performance.
c. The P sued the landlord, D, for compensation,
Held
a. The contract was discharged by frustration and both parties were released from their
contractual obligations.
b. Therefore, the P received no compensation.
2.4.1 Not serious (mild) changes in the situations/circumstances
If the changes only cause the agreed task to be more difficult (but not impossible) to perform,
it will not amount to frustration.
Case
Tsakiroglov & Co. Ltd v Noblee Thorl GMBH (1962)
a. A seller sold some goods and agreed to delivere the goods through Suez Canal.
b. But the Canal was closed.
c. The seller claimed there was frustration
Held
a. The transportation could be made by another route
b. The closure of the canal only increased the transportation cost
c. It did not make it impossible. No frustration.
2.4.2 Consequences of frustration
a. Upon frustration, both parties will be released from their future obligations under the
contract.
b. The contract is terminated from the occurrence of the frustrating event.
c. The loss lies where it falls.
d. The allocation of loss is decided by the (Law Reform (Frustrated Contracts) Act 1943.)
e. At present, the consequences of frustration are governed by ss16-18 Law Amendment and
Reform (Consolidation) Ordinance (Cap. 23), which provide as follows:
1. Money paid before the frustrating event is recoverable
2. Money payable before the frustrating event ceases to be payable
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3. Expenses incurred before the frustrating event are recoverable
4. Valuable benefits given before the frustrating event can obtain payment
Case
Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd (1943)
a. D was contracted to supply some machinery to P.
b. D received GBP1,000 from P as the deposit.
c. Afterwards, war broke out and there was no way to perform the contract.
d. P sued for the return of the deposit from D.
Held
a. The contract was frustrated.
b. D must return the deposit to P.
c. Even though P has done some work in pursuant to the contract
No frustration
A contract will not be frustrated where:
1. It is more difficult or expensive to perform
2. Impossibility of performance is the fault of either of the parties
3. Where there is a force majeure clause (不可抗力)
4. Where the frustrating event could be foreseen
3.0 Remedies for breach of contract
When one party (defaulting party) is in breach of the terms of a contract, the other party (innocent
party/injured party/ non-breaching party) can seek for two types of remedies:
a. Common law damages (CLD)
→ CLD means compensation in terms of money.
→ The amount of compensation is to put the injured party in the position as if the
contract had been completed.
→ injured party can only receive compensation for his loss but not to gain on the
grounds of other part’s breach of contract.
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→Types of CLD:
1. Unliquidated damages
2. Liquidated damages
3. Quantum Meruit
4. Restitution
b. Equitable remedies
→ On some occasions, the money compensation is not appropriate.
→ The injured party may look for other compensation instead of money.
→ Other remedies can be sought as follows:
1. Specific performance
2. Injunction
3. Rectification
4. Rescission
3.1 Liquidated damages
a. Liquidated damages refer to a fixed sum of money.
b. Amount agreed by the parties that the injured party should get in the event of breach.
c. It is provided as a term in the contract.
d. The amount of compensation must be honestly estimated to reflect the real loss of the injured
party
e. If the amount is excessive, it will be regarded as a penalty clause, and
f. This liquidated damages clause (which in fact is a penalty clause) will be invalid, and the
amount of compensation would still be assessed by the court.
g. Penalty clause is not valid.
h. The difference between a penalty and liquidated damages is whether the sum is to reasonably
compensate the injured party or excessively high to frighten the defaulting party
3.2 Unliquidated damages
a. It refers to compensation which has not yet been determined, which requires assessments from
the court.
b. e.g. the loss of the injured party because of late delivery of the goods by the seller (defaulting
party).
c. The court will assess the degree of loss suffered by the injured party and award a damages to
the injured party
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3.3 Quantum Meruit
An amount payable corresponding to the work done.
3.4 Restitution
Returning of goods, property etc.
3.5 Specific Performance
a. a mandatory order granted by the court that the defaulting party must comply with the
terms of the contract and does what have been agreed.
b. e.g. if the seller refuses to sell the landed property, the buyer can ask the court to grant an
order to force the seller to sell the landed property.
c. Sometimes, a specific performance order will not be applicable (e.g. employment contract).
d. Specific performance will not normally be granted where damages provide adequate relief.
Case
Union Eagle Ltd v Golden Achievement Ltd (1997)
a. P agreed to buy a flat from D and paid a deposit to D.
b. However, P was late for a few minutes to deliver the final balance of the purchase money
for the flat.
c. D rescinded the contract and forfeited the deposit.
d. P sought for specific performance order from the court.
Held
a. There were express terms in the contract about the completion date and time.
b. P was late, slightly
c. Equity would not intervene when the contract said that time is of essence.
d. Specific performance was not granted.
3.6 Injunction
a. Injunction is the opposite of the specific performance.
b. It is an order from the court which prohibits one contracting party to do something in
breach of the contract.
c. It is to prevent a party from breaching the negative covenant.
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Case
Warner Brothers Pictures Inc v Nelson (1937)
a. P, a film producer, hired D, a film actress as an employee exclusively for P.
b. But later, D agreed to act for a third person.
c. P sought an injunction to restrain the D from doing so.
Held
a. Injunction would be granted to restrain D to act for another person.
b. The injunction would not amount to compelling D to perform the contract.
Case
Beason College Ltd v Yiu Man Hau (2001)
a. D was an employee of P.
b. P already got an injunction order to restrain D from working for other employer in the same
industry.
c. D sought to set aside the injunction
Held:
a. The injunction would not make D idle or unemployed.
b. D could choose to work as a teacher in government school.
c. Injunction would compel D to return to work for P.
d. D would not be allowed to set aside the injunction.
3.7 Rectification
→ Means the amending of a contract to
1. Correct a mistake
2. Express the parties’ real intention
3. Reflect what is just and fair
3.8 Rescission
a. this remedy aims to put the contracting parties back to their pre-contractual positions.
b. It is applicable when misrepresentation arises:
e.g. innocent party was induced to enter into a contract by a misstatement of fact
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c. Rescission, however, would not be possible if:
1. a third party is involved,
e.g. the computer in the example has been passed from the buyer to another person
2. cannot return to substantially the same condition before the contract,
e.g. part of the goods has been used; or,
3. the innocent party has ratified the contract.
3.9 Duty to mitigate
a. The innocent party has a duty to minimize his loss when a breach of contract arises.
b. He cannot have a full claim of his loss if he does not fulfil his such duty.
c. To protect the defaulting party so that the innocent party does not take advantage of the
defaulting party by an excessive claim.
d. Only reasonable claim is acceptable
4.0 Remoteness of damage
a. Not all losses arising from the breach are recoverable.
b. Losses that are too remote are not recoverable. (i.e. reasonably foreseeable by the D)
Case
Hadley v Baxendale (1854)
a. P asked D to transport some machine parts.
b. D was late in delivering the machine parts.
c. The delay in transportation caused P’s factory out of operation and suffered a heavy loss of
profit.
d. P sued D for the loss of profit
Held
a. a party could only successfully claim for losses stemming from breach of contract where the
loss is reasonably foreseeable upon the formation of the contract.
b. As D had not reasonably foreseen the consequences of delay and P had not informed D of the
consequences, D was not liable for the P’s lost profits.
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