Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract...

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Transcript of Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract...

Page 1: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Chapter 8 Contract lawChapter 8 Contract law

Page 2: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

1 1 Concept

2 2 Contract Law unifies and modernizes tripod contract statutes

3 3 Classification

4 4 Formation

5 5 Validity

6 6 Terms

7 7 Modification and assignment

8 8 Performance

9 9 Discharge

10 10 Breach and remedies for breach

Page 3: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

1 Concept

Contract and tort Contract and tort

Contract Tort

Liability is voluntarily undertaken Liability is imposed by Courts

Liability is strict Liability is based on fault in principle

Put the injured as if contract had been performed

Put injured as if tort had never been committed

Page 4: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

2 Contract Law unifies and modernizes tripod contract statute

s

428-article Contract Law: general provisions and specific provisions (15 specific contract )

By far longest and one of the most detailed commercial laws of China

Page 5: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

2.1 Fragmentary and outdated contract legislations ECL: 1981, 1993FECL: 1985TCL: 1987

GPCL: 1986

2.1.1 Over-regulation

Brake rather than facilitator

2.1.1.1 Planned contracts 2.1.1.2 Minimal terms2.1.1.3 Administrative approval process 2.1.1.4 Invalidation of contracts 2.1.1.5 Obsolescence

Page 6: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

2.1.2 Discriminatory treatment

2.1.3 Complexity

2.1.4 Numerous legal vacuums

2.1.5 Obstacles to progress

Page 7: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

2.2 Major breakthroughs in Contract Law

2.2.1 National treatment

2.2.2 Minimize regulation

2.2.2.1 Minimizing planned contract 2.2.2.2 Reducing government approvals 2.2.2.3 Reducing the scope of invalid contracts

2.2.3 Promoting freedom of contract

2.2.4 Legitimizing business ethics

2.2.4.1 Honest and good faith 2.2.4.2 Recognizing trade practices

2.2.4.3 Trade secrets

Page 8: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

3 Classification

Page 9: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

3.1 Oral and written contracts 3.1.1 Oral contracts 3.1.2 Written contracts

3.2 Express and implied contracts 3.2.1 Express contracts 3.2.2 Implied contracts

3.3 Informal and formal contracts

3.4 Entire and divisible contracts 3.4.1 Entire contracts 3.4.2 Divisible contracts

3.5 Planned and non-planned contracts

Page 10: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4 Formation

Page 11: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4.1 Offer 4.1.1 Concept

4.1.1.1 Offer and invitation to treat

(1) Mass media advertisements (2) Price lists, catalogues, public announcement for auction,

public call for tender and prospectus

Page 12: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration: Illustration:

Mrs. Wang enters a supermarket, picks up one of the wire baskets provided by the market and fills it with groceries from the shelves. She then remembers that she has left her money at home and begins to return the goods to the shelves. The manager of the supermarket stops her and says that Mrs. Wang has bought the goods and must pay for them. The Supermarket manager is wrong. Mrs. Wang is entitled to return the goods she has selected from the shelves. The display of goods on the shelf is merely invitation to treat, thus Mrs. Wang's selection of goods is only an offer. Before acceptance, there is no contract between Mrs. Wang and the shop.  Mr. Li sees in a shop window a fur coat marked "Sale price RMB 200". He tries on the coat and agrees to buy it, but is then told by the shop assistant that there has been a mistake, and the coat is priced at RMB 2000. If Mr. Li still desires to buy that fur coat, he shall pay RMB 2000 for it. Why? There is no contract between Mr. Li and the shop, before the price of RMB 200 is accepted.

Page 13: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4.1.2 What constitute an offer

4.1.2.1 Specific person or class of persons

4.1.2.2 Certainty of terms

4.1.3 Communication

4.1.3.1 Methods of communication

4.1.3. 2 Cross offer Offeree cannot accept an offer until first learning of it.

Page 14: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration:Illustration: If A wrote to B offering to sell his apartment for RMB 100000 and B at the same time has written a letter crossing A's letter in the mail offering to buy A's apartment for RMB 100000, there is no contract here. B was unaware of A's offer when he wrote, and B's letter could not be an acceptance. A was unaware of B's offer, so A's letter could not be acceptance. Unless A or B sends a follow-up acceptance, no contract is formed.  Mr. Wang finds a gold watch in the street. He recognizes it as one belonging to his neighbor, Mr. Zhang, and so he returns it to Mr. Zhang, who thanks him profusely. On returning home Mr. Wang opens his newspaper and sees an advertisement describing the watch and giving Mr. Zhang's name and address, and offering a reward of RMB 500 for the return of the watch. Mr. Wang is not entitled to that reward because he did not act in response to the offer. At the time he returned the watch, he did not know the offer of reward.

Page 15: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4.1.4 Termination of an offer  

4.1.4.1 Lapse Illustration:Illustration:

If X offers to subscribe for 100 shares in Y Company offering shares to the public, X makes his offer in June. He does not receive a letter of allotment (acceptance) from Y Company until the following November. Must X pay for the shares? No, X shall not pay for the shares because his offer has lapsed within a reasonable time.  Mr. Li, an attorney working late every night in an attempt to build up his practice, decides to buy some red roses for his wife. It is winter and only one florist has such flower. Mr. Li asks their price and is offered two for RMB 20. He does nothing. He returns two weeks later and says that he accepts the offer. In view of the perishable nature of flowers, the offer has lapsed within the fortnight.

Page 16: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

 4.1.4.2 Revocation

Illustration: Illustration:

Chen in a letter posted 15 January offered to sell his business to Zhang for RMB 700,000, received by Zhang on 17 January. On 19 January Zhang posted her letter of acceptance, which did not reach Chen until the 21st January. On 18 January Chen had decided to revoke his offer and posted a letter to Zhang revoking it. This letter did not reach Zhang until 20 January. Is there a binding Contract between Chen and Zhang? Yes. The notice of revocation reached Zhang too late and the acceptance has become effective on 19 January. Thus there is a contract.

4.1.4.3 Rejection and counter offer

4.1.4.4 Acceptance

Page 17: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4.2 Acceptance 4.2.1 Concept 4.2.2 What constitute an acceptance? 4.2.2.1 Awareness of the offer 4.2.2.2 Correct offeree 4.2.2.3 Unconditional 4.2.2.4 Correct manner 4.2.2.5 Within time limit fixed by offeror

4.2.2.6 Communication 4.2.3 Time and place of acceptance

• Acceptance takes effect as soon as it reaches the offeror. • Place where acceptance takes effect is the place of contract formation. • In E-commerce, recipient's main place of business is the place of formation of the contract.

Page 18: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

4.2.4 Withdrawal of acceptance Withdraw the acceptance only before it is communicated

Effective time of communication Effective time of communication

Transmission Receipt

Offer √

Withdrawal of offer √

Revocation of offer √

Acceptance √

Withdrawal of acceptance √

4.3 Proper form

4.3.1 Oral form, written form and other forms

4.3.2 Government approval

Page 19: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5 Validity

Page 20: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.1 Conditions of validity 5.1.1 Competent parties 5.1.1.1 Minors and mentally ill persons

Illustration: Illustration: Wu, aged 16, takes a seven-year lease at RMB 3000/month. This contract is void since it is not suitable for Wu's age and intelligence.

5.1.1.2 Legal persons Illustration:Illustration: Unqualified importer Unqualified importer In April 1984, A company based in Shenzhen executed a contract on import of steel and cement from HK with X, a HK based company. X delivered all steels and cements to Shenzhen as per stipulation of contract. A entrusted the Shenzhen Railway Construction Company to handle procedures of import and make payment to X. Afterwards Shenzhen Railway Construction Company stopped payment on behalf of A. Thus A owed HK$13000 to X. X sued A for the foregoing amount in September 1987. The court held that A did not have the permit to engage in import and export business, thus the contract was nullified. The court also held that A should be liable for the nullity of the contract, and ordered A to pay the balance and its interest to X.

Page 21: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.1.2 Intention to create legal relationship • It is generally presumed that family, social or domestic

agreements lack intention • It is generally presumed that the parties intend to be

legally bound under business background.

Illustration: Illustration: (1) A invited his close friend B to a dinner at 7:00 pm at Garden Hotel. A made a reservation and ordered foods for the dinner. However B did not show up. It resulted in considerable trouble and expenses for A. Can A sue B for breach of contract and claim damages? No, since there is no real intention to create legal relation here.  

(2) Liu is a practicing attorney. He encouraged his son to study hard and said: "If you can obtain LL.M, I will make you a partner in my law firm". The son eventually obtained the LL.M but he has a girlfriend his father dislikes. His father refused to give him a partnership. Can the son sue Liu? No, he cannot.  

(3) Adams saved Bodnar from drowning. Afterwards Bodnar promised to pay Adams $ 100 out of gratitude. Bodnar’s promise was made for “past consideration”, therefore unenforceable.

Page 22: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.1.3 Voluntariness

5.1.3.1 Fraud Illustration: Mr. Zhao’s un-conceived milk cow Illustration: Mr. Zhao’s un-conceived milk cow On 6 October 1986, Ma bought a milk cow on the market from Zhao. At the time of the transaction, Zhao told Ma that the cow was conceived on 25 July 1986, and has been pregnant for three months. Thus Ma bought the cow at a much higher price, i.e. RMB 3000. A few days after the transaction, Ma found that the cow was in fact not conceived. Ma asked Zhao to refund the price and compensate damages suffered therby. Zhao rejected Ma's request, and Ma sued Zhao in the court for refund of price and compensation of damages. The court found that Zhao willfully misrepresented the fact and induced Ma to pay a higher price. Thus it ruled that contract was void, and ordered Zhao to refund RMB 3000 and pay damages RMB 400 to Ma, and Zhao to take back the cow from Ma.

5.1.3.2 Duress

5.1.3.3 Material mistake

Page 23: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.1.4 Fairness Illustration:Illustration: Grossly unfair cow’s price Grossly unfair cow’s price

On 6 October 1986, Yang bought eight (8) milk cows. The price of each cow is RMB 800. On the same day, he reached an agreement on purchase of cow feed with Zhou. Yang would purchase cow feed 4000 kg from Zhou with a total price of RMB 800. The feed would be delivered on 10 February 1987, and price would be paid to Zhou simultaneously. On 1 January 1987, Yang's own feed was destroyed completely by a fire, thus he needed advance delivery by Zhou so as to feed his cows. Zhou says: “I still follow the price we have determined last year, but I need cows rather than money. I want to use cow feed 4000 kg in exchange for your two cows.” Since Yang urgently needed the feed, he agreed on this. Yang delivered two cows to Zhou, and Zhou delivered cow feed 4000kg to Yang. On the next day, Yang proposed to buy back his two cows rejected by Zhou. Yang sued to court for the return of the cows. The court found the sacrifice made by Zhou was only half of the price of Yang's, and it was grossly unfair. Thus the court ruled the latter contract should be cancelled, and ordered Zhou to return Yang the two cows, and Yang to pay Zhou RMB 800.

Page 24: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.1.5 Legality of object

Illustration: Illustration:

Two highwaymen conspired together to rob coach and share proceeds. One sued the other for his share. The contract will doubtlessly be nullified because of its illegal purpose.  Chen's financial problems cause him to become irritable and his married life suffers. He and his wife agree to a separation. He offers his attractive secretary RMB 3000 to spend a weekend with him at Chonghua Hot Spring Resort based in the suburb of Guangzhou and she accepts to do so. Their contract is promoting sexual immorality and thus void.

Page 25: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

5.2 Void and voidable contract • Void contract: void ab initio • Voidable contract: victims may amend or revoke such contracts w

ithin 1 year from they know or should have known the cause for revocation

• Standard contracts: (1) excluding liability for property damages caused to the other party

due to such party's intentional misconduct or gross negligence (2) excluding liability for personal injury caused to the other party (3) excluding liabilities of the party providing such terms, increasing

the liabilities of the other party, or depriving of the other party’s material rights

 • If the invalidity of part of a contract does affect the validity of the

other parts, the other parts remain valid.

Page 26: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

6 Terms

Creation of contractual terms Creation of contractual terms

Con

tract terms

Express terms Offer + Acceptance

Implied terms

By statute

By custom & trade practice

Page 27: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

6.1 Basic terms

(1) names of the parties and the domiciles

(2) subject matter

(3) quantity

(4) quality

(5) price or remuneration

(6) time limit for, place and method of, performance

(7) liabilities for breach of contract

(8) method for dispute resolution.

Page 28: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

6.2 Express and implied terms

6.2.1 Express terms

6.2.2 Implied terms

6.2.2.1 Terms implied by law Illustration:Illustration: Purchase of stolen Benzz car invalidated Purchase of stolen Benzz car invalidated A bought a Benzz car from his friend B for RMB 1 million. Three months later, he found that it was a stolen car when the owner reclaimed it. A can sue B for recovery of the price RMB 1 million, since B breached the implied condition of their contract that he should have ownership over it, or at least the right to dispose of it.

6.2.2.2 Terms implied by custom and trade practice

Illustration:Illustration: Risk of rice in transitu under FOB & CIF Risk of rice in transitu under FOB & CIF

Page 29: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

(1) In a FOB contract, the seller sells 300 tons grade A rice to the buyer. The seller delivers the foregoing rice inspected by a notary public and finds that the quality is in conformity with the contract. The seller also sends shipment notice to the buyer promptly. In the course of the voyage, the vessel suffers tremendous wave steeping the rice. The buyer has to resell the rice as grade C rather than grade A. Thus the buyer claims damages against the seller. Is the seller liable for the foregoing losses? No, the seller is not liable. The risk of the rice has passed to the buyer at the moment when the rice is shipped pursuant to INCOTERMS 2000.  

(2) In a CIF contract, the goods are delivered as per the time and shipping port specified in the contract. Only after four hours the vessel departs from the port, it sinks after running into a reef. Since the seller has obtained all the shipping documents including B/L, insurance policy and commercial invoice, it demands the buyer to pay the price in the next day after collision. The buyer refuses to pay the price under the defense of the complete loss of the goods. Is the seller entitled to do so? Is the buyer bound to make payment? Yes, the seller has the right to request payment and the buyer is obliged to make such payment. Why? The risk of the goods has passed to buyer as soon as they are loaded on the vessel pursuant to INCOTERMS 2000.  

(3) A lincolnshire farmer was asked to quit the farmer. He asked the owner to pay allowance for seeds and labor.Court: Y. It was agricultural custom there.

(4) Bakery trade: a dozen means 13 rather than 12.

Page 30: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

6.3 Conditions and warranties

Basic types of contractual termsBasic types of contractual terms

Term

s

Cancellation

Damages

Conditions

Warranties Damages only

Page 31: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration:Illustration: Moon-cake intended for moon festival Moon-cake intended for moon festivalIn a CIF contract, the buyer purchases from the seller 100 tons moon-cakes so as to satisfy the moon festival market. The seller should deliver the goods by 10 August. However the seller delivers the moon-cakes on 17 August, two days after the moon festival. Thus the buyer rejects the goods. Is the buyer entitled to do so? Yes, the buyer is entitled to reject the goods. Why? The circumstances indicate that time is of essence, thus the term of delivery time is a condition, main obligation of the seller. The buyer's failure to deliver on time is a fundamental breach, the buyer may choose to treat the contract as discharged and reject the goods.  

Illustration:Illustration: Seven-day delay of chicken delivery Seven-day delay of chicken delivery In a CIF contract, an American buyer imports from a Chinese exporter 500 tons of iced chicken. The seller should deliver the goods by the end of September. However the seller fails to deliver the goods until 7 October. When the goods arrive at the destination port, the American importer rejects the goods. Is the importer entitled to do so? No, the importer may not do so. Why? Normally a minor or slight delay does not amount to fundamental breach. In this case, the exporter’s seven-day delay does not seriously affect the importer's economic benefits. Therefore the importer may not treat the contract as discharged, instead only claim damages for the late delivery.

Page 32: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

7 Modification and assignment

Page 33: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

7.1 Overview Contractual modification and assignmentContractual modification and assignment

Modification Creditor’s rights

assignment Obligation assignment

Concurrent assignment

Consensus √ Notice √ √

Incidental rights √ √

Incidental obligations

√ √

Approval (if any) √ √ √ √

7.2 Requirements

7.2.1 Necessity of an agreement

Page 34: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration:Illustration: Assignment nullified for absence of consent Assignment nullified for absence of consent In December of 1981, A company based in HK entered into a joint venture contract on establishment of a hotel in Shenzhen, with B company. On 24 May 1983, A executed an agreement on transfer of equity shares with C company, by which A would transfer eighty (80) percent of its shares in the hotel to C, and in return C would pay RMB960,000 to A, of which half shall be paid in RMB and the remaining in HKD. The competent authorities also approved this assignment agreement. After the agreement, A requested C to pay all the price in HKD which C also agreed. However dispute arose as to the conversion rate. C proposed SWAP rate, while A insisted on official exchange rate. A sued C in the court and the court found that the original partner of the hotel has not agreed on the assignment of equity shares, despite the government approved the assignment agreement between A and C. The court ruled that assignment was void and A should compensate losses suffered by C.  

Illustration:Illustration: Modification invalidated for absence of agreement Modification invalidated for absence of agreement On 14 September 1983, A company based in Shenzhen and B company based in HK entered into a contract on sale of KAD-41 WA car. B would supply one (1) KAD-41 WA car to A by 24 September, and A would pay HK$ 43,000 to B within seven (7) days after receipt of the car. After execution of said contract, HKD depreciated and freight went up. Thus B proposed that A should increase the price of the car and postpone delivery date. However A gave no response to such proposal, and B failed to deliver the car to A. Therefore A sued B before the court for damages. The court found that there was no agreement on modifying the contract, though B proposed to do so. Before modification, the original contract was still binding. The court ruled that B was liable for breach of contract and should compensate HK$ 1000 to A as damages.

Page 35: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

7.2.2 Approval

Illustration:Illustration: Assignment nullified for lack of approval Assignment nullified for lack of approval On 1 November 1983, A company based in Shenzhen entered into a joint venture contract on establishing a hotel in Shenzhen with B company based in HK. A shall contribute investment worth of RMB 2.2 million and B shall contribute investment worth of RMB 1.9 million. The joint venture contract was approved by Shenzhen Municipality on 29 December 1983. B contributed all the investment, however A failed to do so. On 1 April 1984, A executed a supplement contract on joint operating the foregoing hotel with C company, by which A would assign fifty (50) percent of its equity shares to C, which B consented to. However this supplementary contract was not approved by the government. From April through July 1984, A and C transferred their joint venture's working funds worth of RMB 370000 to the hotel. The foregoing funds were originally lent to A and C's joint venture by Agricultural Bank of China. In 1984, the hotel project had to be ceased due to insufficient funds. B sued A in the court for breach of contract. The court found joint venture contract was legally formed, however the supplementary contract was not legally formed because it was not approved by Shenzhen Municipality. Thus the court ruled the assignment was null and void, A should be liable for the principal responsibility of such breach, and B should also be liable for certain degree of such failure.

Page 36: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

7.2.3 Assignment should be lawful

(1) in light of the nature of the contract(2) as agreed upon by the parties(3) as provided by the law

Assignment unavailable:

Illustration:Illustration: Illegal assignment of foreign trade permit Illegal assignment of foreign trade permit On 5 January 1987, a HK based X company entered into a contract on sale of tape recorders with a Shenzhen based Y company, by which X would supply 4000 sets of recorders to Y and Y would pay to X within seven (7) days after receipt of X's shipping document. Since X was only an agent for foreign trade business, the ultimate buyer was Z. At the request of X and Z, Y agreed to assign all the contractual rights and obligations to Z, and Y was only responsible for handling various official procedures. X confirmed such an assignment in writing. Thereafter X delivered goods, however Z failed to pay the price to X. X sued Y in the court and the court found that Z was not entitled to engage in foreign trade and therefore unable to pay to X directly. The court ruled that the assignment was null and void, and Y should pay the price specified in the sales contract.

Page 37: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

7.3 Legal consequence

Illustration:Illustration: Modification ineffective for lack of certainty Modification ineffective for lack of certainty On 13 September 1988, X company based in Shenzhen and Y company based in HK executed a contract on purchase of jellyfish, by which the quality of jellyfish shall be Grade 1 and delivery date is November 1988. In December, X delivered the goods to Shenzhen and Y inspected the goods and found that the quality was not in conformity with contract standard. Thus X and Y reached an oral agreement to reduce the price to USD 5000/T. Y made advance payment to X and sent cars to take delivery. However X went back on its word and refused to deliver the goods to Y. Y requested for refund of advance payment, but X rejected. Thus Y sued X in the court for refund of the advance payment and damages. The court found that the agreement on reduction of price between X and Y was ineffective for lack certainty. Thus the court ruled that X should refund advance payment to Y.

Page 38: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

8 Performance

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8.1 Nature

8.2 Proper performance (1) deliver subject matters as specified in contract

(2) deliver the agreed amount and quality

(3) to pay agreed price

(4) to perform within agreed time limit

(5) to perform in the place specified in contract

(6) to perform in the manner as specified in the contract

Page 40: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

8.2.1 Performing parties and vicarious performance

8.2.2 Subject matters Illustration:Illustration: Supply of indispensable computer parts required Supply of indispensable computer parts required On 10 Jan 10, 1985, A company based in HK and B company based in Tianjin executed a contract on import of IBM-5550 computers. A sold to B 140 sets of computers with a unit price HK$47800 totaled HK$6686000 under the term CIF Tianjin. On 26 January the seller delivered the foregoing computers to B, and B also made the foregoing payment in full. Thereafter B inspected the computer and found that the coordinate parts are incomplete, particularly lack of guarantee card and the 3-meter-long cable. B immediately notified A and requested A to promptly make up the coordinate parts. However A did not do so until July 1985. Due to the incompleteness in coordinate parts and delay in time, B could not resell any computers in five months. What is worse, the price of computers dropped dramatically during that period from HK$ 47680 per unit dropped to HK$30000, even to HK$20000 per unit afterwards. B found the transaction would not be profitable, and therefore requested A to take back all computers it had delivered, but A refused to do so. B submitted this case to CIETAC for arbitration, which held that A's failure to provide coordinate parts was a fundamental breach. It thus ruled that A should take back all the computers and refund all the payments to B.

Page 41: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration:Illustration: Substantially different amount of rice delivery Substantially different amount of rice delivery

In a CIF contract, the seller sells 100 tons of rice with a total value of US$20000. However the seller only delivers five (5) tons of rice to the buyer. Can the buyer reject the goods? Yes, the buyer can do so. Why? The seller delivers a substantially different amount of rice, thus the buyer is free to treat the contract as discharged. What if the seller delivers ninety (90) tons? Is the buyer still entitled to do so? No, the buyer cannot. Normally the buyer may not treat the contract as discharged, if the seller only delivers a minor different amount. What it may do is to claim damages for the undelivered goods.

Page 42: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

8.2.3 Quality

Illustration:Illustration: Moldy rice rejected Moldy rice rejected In a contract for sales of Chinese rice, shipment shall commence from February with 1000 tons per month. All the rice should be delivered by ten installments. The seller delivers goods as per contractual provisions and four installments have been completed. In the goods of the fifth installment, the buyer discovers that the rice goes moldy and becomes inedible. Thus the buyer proposes to reject the goods and all the subsequent installments. Is the buyer entitled to do so? No, the buyer may not do so. It may only reject the installment of goods going moldy, rather than all the subsequent installments.  

Illustration:Illustration: Defective equipment rejected Defective equipment rejected In a plant export contract, all the equipment should be delivered in five installments. In the third installments the buyer finds serious defects in the goods rendering the plant impossible to reach the contractual technical standards. Thus the buyer proposes to treat the whole contract as discharged. Is the buyer entitled to do so? Yes, it can. Why? The circumstances of this case are different from the former. The functioning and operation of the whole plant require cooperation and working of all the equipments. If any part is defective, it may render the whole plant inoperative. Though only the third installment lacks conformity, it amounts to a fundamental breach. The buyer is entitled to treat the whole contract as discharged, return the equipment it has accepted and cancel the subsequently installment of equipments.

Page 43: Chapter 8 Contract law. 1 Concept Concept 2 Contract Law unifies and modernizes tripod contract statutes Contract Law unifies and modernizes tripod contract.

Illustration:Illustration:(1) Kendall v Lillico (1969) (1) Kendall v Lillico (1969) A game farm owner bought groundnut extract used for making food for birds. The extract is normally used as cattle food, and he didn’t tell the seller of his intention to feed it to birds. It contained a mould poisonous to birds, but not harmful to cattle. He sued for damages.

House of Lords: It was of merchantable quality. 

(2) Shine v general Ltd (1988)(2) Shine v general Ltd (1988) A motorist bought a second-hand sports car giving him problems. After he found the car had been involved in car crash and totally submerged in water, he sought to reject it.

Court of appeal: Not of merchantable quality. 

(3) Rogers v Parish Ltd (1987) (3) Rogers v Parish Ltd (1987) A motorist bought a new Range Rover for $16000. It had minor problems, but was drivable and defects could have been put right. He rejected it.

Court of appeal: Not merchantable due to high price for very high expectations.

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8.2.4 Time limit

8.2.5 Place

8.2.6 Price and payment

8.2.7 Manner of performance Illustration:Illustration: Seller liable for the improper storage of tea Seller liable for the improper storage of teaIn a contract for purchase of tea, the buyer purchases 10000 kg tea with a value of US$25000, by which the buyer should take over the tea in October. On 1 October seller sends to buyer the delivery order and the buyer also makes payment in full. However the buyer fails to take delivery of the tea till 31 October. Thus the seller moves the foregoing goods to an improper warehouse, in which the tea and ox heifer-hides are stored together. The buyer comes to take delivery on 15 November 15, and finds that ten (10) percent of the tea has bad odor and loses merchantability. Who will be liable for such damage? In this case, the buyer has delay in taking delivery, which is a breach of contract. All the fees particularly the warehousing fee for preservation of the tea after delivery date should be borne by the buyer. However, the seller fails to preserve the tea properly, it is infringement on the buyer’s ownership. The seller thus should be liable for the ten (10) percent loss of the tea.

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  Illustration:Illustration: Buyer liable for the deterioration of fresh litchi Buyer liable for the deterioration of fresh litchi

In a contract for sale of fresh litchi, the buyer purchases 10 tons of litchis with a total value of US$15000. The buyer should take over the goods at the farm on 25-31 May. After repeated urges by the seller, the buyer fails to take over the goods till 7 June. On 8 June, the seller has to resell the litchi. However the proceeds are only US$100000, which is US$500000 less than the original price. Is the seller entitled to claim damages against the buyer? Yes, it may do so. Why? The buyer has serious delay in taking delivery. Further litchi is fresh product subject to rapid deterioration. The seller is entitled to resell them so as to mitigate the loss. The difference between the original price and resale price and the fees for preserving and reselling the goods should be borne by the buyer. The buyer should compensate the seller the foregoing price difference and relevant extra fees.

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8.3 Cross obligations

8.3.1 Set-off Both identical subject matters and non-identical subject

matters could be set off.  

8.3.2 Concurrent performance

8.3.3 Sequenced performance and right of suspension

8.3.4 Right of subrogation and revocation

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8.4 Escrow

Illustration: Illustration: S agrees to sell $ 1000 worth of flour to B, cash on delivery. Before delivery flour price rises substantially. S wants to avoid the contract and hearing a rumor that B is in financial difficulty. He uses this as pretext for terminating contract. B of course wishes to go through with the deal at agreed price. B takes the contract to the bank and borrows sufficient cash in legal tender. B then tenders the money to S in the presence of C. If S doesn’t deliver flour, B may sue S for breach of contract.

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9 Discharge

9.1 Consensual discharge

9.2 Statutory discharge

9.2.1 Discharge by breach (1) Anticipatory breach.

(2) One party’s failure in performing main obligation. (3) One party’s failure rendering the contract meaningless.  

9.2.2 Discharge by force majeure

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Illustration: Illustration: (1) A contracts to transport earth for B. Upon realizing it has made bad bargain, A sells all their dump truck and claims that it can’t fulfil the contract due to frustration. Obviously this is a self-induced frustration.

(2) A contracts to transport earth for B in an isolated northern community. After execution, its truck is stolen and wrecked. The contract is therefore discharged by frustration.

(3) A contracts to transport earth for B. Its dump truck breaks down due to employee’s negligence. There will be long delays in its repair as it is in a small isolated northern community. Since A is attributable for the delay, it will be liable for the contractual breach.

Illustration:Illustration: Howard rented a room to Kennedy along the route scheduled for emperor’s procession for the day on which the Royal family would appear in Halifax. The rent was payable at the time of procession. Howard redecorated the room. Later it was announced that the route had been changed and wouldn’t pass Howard’s building. Kennedy refused to pay the rent for the room. Howard sued for the rent. Should Howard win?  What if they agreed that the rental should be paid immediately upon conclusion of contract? Assume Kennedy should pay $140, but just paid $100 since he had no more money at that moment. Kennedy requested the return of the $100 he had paid. Howard not only refused the return of the money, but also requested the payment of the remaining $40. Should Howard win?

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9.2.3 Discharge by operation of law

9.3 Procedures and legal consequence

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10 Breach and remedies for breach

10.1 Types of breach

• Non-performance• Partial failure of performance • Delayed performance

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10.2 How breach may occur?

10.2.1 Express repudiation 10.2.2 One party makes performance impossible

Illustration: Illustration: A agrees to sell her Ferrai car to B for RMB 300000 to be delivered in 3 weeks. A few days later, X unaware of contract between A and B, offers A RMB 350000 for the same car. A agrees and delivers it to X that day. B may sue A for breach of contract.

Illustration:Illustration:(1) A contract of sale calls for delivery of 6000 T of coal in 12 installments of about 500 T each. The buyer shall provide the trucks to take coal away. In the first month the buyer sends sufficient trucks taking away only 400 T. Such minor breach will not discharge seller from its obligation to stand ready to provide the remaining 5600 T.

(2) A seller is required by contract of sale to deliver 150 T of iron per month but delivers only 21 T in the first month. Such default is very likely sufficient to discharge the buyer from the contract.

10.2.3 Failure of performance

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10.3 Types of remedies

10.3.1 Damages

10.3.2 Specific performance

Generally available

Unavailable: (1) performance can not be rendered in law or in fact(2) subject matter of the obligation is not fit for specific pe

rformance or the cost of specific performance is excessively high

(3) creditor fails to demand performance within a reasonable time limit

10.3.3 Discharge of contract

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10.4 Measurement of damages

10.4.1 Types of damages

10.4.1.1 Liquidated damages

Illustration:Illustration: Reduced liquidated damages Reduced liquidated damages X, a HK based company, and Y, a Shenzhen based company executed a contract on purchase of prawn on 14 September1985, by which Y shall supply 200 tons of prawn to X, with a total value of USD 1.5 million. Y failed to deliver the prawn in time, and instead requested X to increase the purchase price, but rejected by X. Y still failed to supply it to X. X sued Y in the court for liquidated damages worth of USD 75,000. Y claimed that the contract provided Y should pay to X 5 percent of the total value of the contract as liquidated damages, upon which the foregoing claim was based. The court found that Y violated the contract and should be liable for X's losses thereby. However the amount of liquidated damages as alleged by X was not specified in the contract. It was merely unilaterally proposed by X, which Y did not consent to. The court set aside X's claim of five (5) percent, but imposed two (2) percent of the total value of the contract as liquidated damages on Y, which Y should pay to X within ten (10) days from effective date of the judgment.

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10.4.1.2 Direct and indirect damages

• Direct damages: losses and extra cost resulting from breach

• ndirect damages include the lost profits that the non-defaulting party may expect to obtain without such breach, and may even include damage claims against the non-defaulting party by its own customers as a result of its unavoidable contracts with them.

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Illustration: Illustration: McDonald’s lossesMcDonald’s losses A makes a written contract with McDonald to supply its restaurants with breads twice weekly, on Tuesday and Saturday respectively. A fails to deliver on Saturday, and other suppliers are busy servicing their customers and refuses to supply breads to McDonald. McDonald runs out of breads Saturday afternoon and cannot obtain fresh supply until next Monday. McDond's losses include both the extra cost of obtaining breads elsewhere, and the lost profits on breads sales over the weekend. The former is direct damages, and the latter indirect damages.  

Illustration:Illustration: Reducing the price of defective machine tools Reducing the price of defective machine tools In a CIF contract, the seller sells to the buyer 200 sets of machine tools. When the goods arrive at the destination, the buyer finds that part of the tools get rusty. The buyer retains expert to conduct examination and finds that such rusty part will reduce its value by 25%. After several rounds of discussion, they reach an agreement in which the seller agrees to reduce the price by 20%.

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Illustration:Illustration: Price differences of the rice as damages Price differences of the rice as damages In a CIF contract for sale of 1000 tons of Grade A rice, with unit price of US$ 200/T totaled US$ 200000. The seller delivers Grade B rice to the buyer, which is worth US$150/T, as per the current price at the time of rescission. How many damages can the buyer recover from the seller? What if the market price drops at the time of rescission? Let's assume the Grade A rice drops to US$100/T, and Grade B rice drops to US$75/T. How much damages can the buyer recover from the seller then? In the first case, it is fairly simple. The difference between contract price and current price is US$50/T. Thus the total difference is US$ 50000. The buyer may recover US$50000 from the seller. The situation in the second case is quite different, since the price has dropped. From the point of view of the buyer, it may assert that the price difference is US$125/T, and the total is US$ 125000. This is advantageous to the buyer. However the seller may propose defense and assert that the difference is US$25/T and the total is only US$25000. The gap between the buyer's request and seller’s defense is large. It will take time for the parties to negotiate and make compromises. We believe that the seller should be liable for the risk of price fluctuation due to its breach of contract.

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Illustration:Illustration: Price difference of machine tool and the Price difference of machine tool and the substitute as damagessubstitute as damages In a contract for sale of machine tools, the seller sells to the buyer 100 sets for a total value of US$ 50000. The tools should be delivered by 1 December. On 1 July the seller gives notices to the buyer and declares that it will not supply the goods, unless the buyer agrees to pay US$ 60000 for the tools, instead of the original price. The buyer gives written notice rejecting such proposal and requires the seller to make delivery by 1 December as per original contract. However the seller fails to give any response in one month. The buyer has to purchase 100 sets of replacement from another supplier, which cost an additional US$ 6700. The buyer also suffers additional expenses for the purchase of replacement of US$ 1000. The buyer requires the seller to compensate the foregoing damages. Is the buyer entitled to do so? Yes, the buyer may do so and recover them. Why? After rescission of contract, the buyer's purchase of replacement is reasonable. The seller should be liable for the difference between the contract price and the price in substitute transaction. The seller shall also be liable for the expenses suffered by the buyer making the foregoing substitute transaction.

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10.4.1.3 Nominal damages

10.4.2 Pre-conditions for an award of damages To obtain an award of damages, two prerequisites shall be

satisfied: (1) the defaulting party is at fault; and (2) the

damages are foreseeable.  

10.4.2.1 Fault

10.4.2.2 Foreseeability

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Illustration:Illustration: Foreseeable expenses for renting car Foreseeable expenses for renting car

A, a Shenzhen based company, and X, a HK based company executed a contract on purchase of car on 14 September 1983. The price of the ISUZU car is HK$ 43,000, and it should be delivered in ten (10) days after execution of contract. When the time of delivery arrived, X failed to deliver the car without any notice to A. After repeated push by A, X proposed to increase the price of the car because HKD depreciated, rejected by A. X still failed to deliver the car, and A had to rent a car for their business purposes. On 20 November 1983, A sued X in the court for recovery of damages. The court found that the sales contract was legally established and X violated the contract by non-performance, for which it was liable. To remedy X's breach, A adopted remedial measures by renting car. The costs and expenses for renting the car were foreseeable by X. Thus the court ruled that X should compensate the costs and expenses sustained by A for doing so.

10.4.3 Mitigation of damages by non-defaulting party

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10.5 Pre-contract and post-contract liabilities

• Parties are required to keep confidential any trade secrets acquired in the course of negotiation even in the absence of existence of any contracts. Even after termination of the contracts, the parties are still required to keep secrets.

 

• Such party is liable for damages if its disclosure or improper use of such trade secrets has caused loss to other party.