The Law of Contract 合約法

Definition 定義

A contract is an agreement between two or more parties that is enforceable at law. Each party gains rights and takes on obligations under it, and if one party breaks it the other can seek a remedy through the courts, such as damages.

Note the difference between an agreement and a contract: not every agreement is a contract. A social arrangement, such as friends agreeing to meet for dinner, will not be enforced by the law. Only an agreement that has all the essential elements is a legally binding contract. An insurance policy is a contract between the insurer and the policyholder.

Types of Contracts 合約的種類

Specialty contracts (contracts by deed, or under seal) must be in writing and signed and delivered with the required formalities. Their key feature is that they are binding even without consideration. A typical example is the conveyance of land or property.

Simple contracts are all contracts other than specialty contracts. They may be made orally, in writing or by inference from the parties' conduct, but they are valid only if supported by consideration.

Most insurance contracts are simple contracts. Even an oral arrangement, such as temporary cover agreed by telephone, can be binding, and the policy document is evidence of the contract. Statute makes special provision for some classes, however: under the Marine Insurance Ordinance (Cap. 329), a contract of marine insurance is not admissible in evidence unless it is embodied in a marine policy.

Elements or Essentials of a Contract 合約元素和要點

Offer and acceptance: one party makes a clear offer and the other accepts it unconditionally. The acceptance must be communicated to the offeror, and silence is generally not acceptance. If the other party adds new terms, that is a counter-offer and the original offer lapses. An offer can be withdrawn before acceptance, and it also ends on rejection or when a time limit expires. In insurance, the proposer submitting a proposal form usually makes the offer and the insurer accepts it by agreeing to cover. If the insurer asks for extra premium or adds an exclusion, that is a counter-offer, and there is no contract until the proposer accepts it.

Consideration: each party must give something of value to the other. In insurance, the insured's consideration is the premium (or the promise to pay it) and the insurer's is the promise to pay if an insured event happens. Consideration must have some value but need not match the value of what the other side gives. Past consideration, meaning something already done before the promise was made, is not valid consideration.

Intention to create legal relations: for commercial agreements the law presumes the parties intend to be legally bound, and for domestic and social agreements it presumes they do not. Capacity: minors (in Hong Kong, people under 18), people who are mentally incapacitated and people who are drunk have limited capacity to contract. For example, a contract made by a minor generally cannot be enforced against the minor, except a contract for necessaries.

Legality and genuine consent: a contract with an illegal purpose, or one against public policy, is void, for example insuring smuggled goods. Each party's consent must be real and freely given. A contract induced by misrepresentation, duress, undue influence or mistake may be voidable, meaning the innocent party can choose whether to set it aside. Know the three outcomes: a void contract has no legal effect from the start; a voidable contract is valid until it is avoided; an unenforceable contract is valid but cannot be enforced in court because of a technical defect, such as missing written evidence.

Privity of Contract 合約的相對性

Privity of contract means that only the parties to a contract have rights and obligations under it and can sue or be sued on it. Traditionally, a third party cannot enforce the contract, even if it would benefit from it.

The main common law exceptions are agency (where an agent contracts for a principal, the principal can sue and be sued directly on the contract), assignment (for example, when a life policy is assigned to a bank, the bank as assignee can claim directly from the insurer) and trusts.

In Hong Kong, the Contracts (Rights of Third Parties) Ordinance (Cap. 623) came into force on 1 January 2016. Under it, a third party can enforce a term of a contract in its own right if the contract expressly says so, or if the term purports to confer a benefit on that third party, unless it appears from the contract that the parties did not intend the term to be enforceable by the third party.

Other statutory exceptions in insurance: under the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap. 272), an injured third party who has obtained judgment against the insured can, in specified circumstances, recover directly from the insurer. The Married Persons Status Ordinance (Cap. 182) also allows a life policy taken out for the benefit of a spouse or children to create a trust in their favour, so the beneficiaries are entitled to the policy benefits.