Welcome to Contract Law: The Building Blocks of Business!

Hello there! Welcome to one of the most important chapters in your HKICPA QP journey. Think about your daily life: when you buy a coffee, download an app, or start a new job, you are dealing with contracts. In business, contracts are the "rules of the game."

Don't worry if law feels like a different language at first. We are going to break it down into simple, bite-sized pieces. By the end of this note, you’ll understand exactly what makes a promise "legally binding" and why a simple "okay" isn't always enough to form a contract.

1. What is a Contract?

In simple terms, a contract is an agreement between two or more parties that the law will enforce. If someone breaks a contract, the court can step in to help.

For a contract to exist, we need four "magic ingredients":
1. Offer and Acceptance (together, these form an Agreement)
2. Consideration (the "price" paid)
3. Intention to Create Legal Relations (the parties want the law to be involved)
4. Capacity (the legal ability to sign)

Quick Formula:
\( Contract = Agreement (Offer + Acceptance) + Consideration + Intention + Capacity \)

2. The Offer: Making the First Move

An offer is a clear statement of the terms on which the offeror (the person making the offer) is willing to be bound. It must be specific.

Important Distinction: Offer vs. Invitation to Treat (ITT)
This is where many students get tripped up! An Invitation to Treat is not an offer. It is just an invitation for others to make an offer. It's like saying, "I'm interested in selling, make me an offer!"

Common Examples of ITT:
• Goods on a shop shelf: In the case of Fisher v Bell, the court decided that a knife in a shop window was an ITT, not an offer. The customer makes the offer at the cash desk.
• Advertisements: Most ads are ITTs. However, if the ad is very specific and promises something in return for an action (like a reward for a lost dog), it might be a Unilateral Offer (see Carlill v Carbolic Smoke Ball Co).

How does an offer end?

An offer doesn't stay open forever. It can end by:
• Revocation: The offeror takes it back before it's accepted.
• Rejection or Counter-offer: If you say "No" or "I'll pay less," the original offer dies instantly!
• Lapse of time: If no time is set, it ends after a "reasonable" time.
• Death: Usually, an offer dies with the offeror.

Summary Key Takeaway: An offer must be firm and final. If it’s just a "negotiation starter," it’s probably an Invitation to Treat (ITT).

3. Acceptance: Saying "Yes" Properly

Acceptance is a final and unqualified expression of assent to the terms of an offer. In plain English: it’s saying "Yes" to exactly what was offered without changing anything.

The Mirror Image Rule: Acceptance must "mirror" the offer. if you change even one small detail, you haven't accepted; you've made a counter-offer. A counter-offer "kills" the original offer.

The Rules of Acceptance:

1. Communication: Generally, acceptance must be communicated to the offeror. Silence is not acceptance. (Example: You can't say, "If I don't hear from you by 5 PM, we have a deal.")
2. The Postal Rule: This is a special exception! If acceptance is sent by post, it is effective the moment the letter is dropped in the post box, even if it gets lost! (Note: This only applies to acceptance, not offers or revocations).
3. Electronic Communication: For emails or WhatsApp, acceptance happens when the message is received (usually when it reaches the recipient's system).

Quick Review: Remember Felthouse v Bindley? A nephew didn't reply to his uncle about buying a horse. The court said there was no contract because silence does not mean consent.

4. Consideration: The "Price" for the Promise

English and Hong Kong law don't usually enforce "free" promises. For a contract to be binding, something of value must be exchanged. This is consideration.

Key Rules of Consideration:
• Must be "Sufficient" but need not be "Adequate": This sounds confusing, but it just means the item must have some value (even $1), but the court won't check if you got a "good deal." If you sell your Ferrari for a peppercorn, the peppercorn is sufficient consideration.
• Past Consideration is NO Consideration: You can't use something you already did in the past as payment for a new promise today.
• Existing Duties: Generally, doing something you are already legally required to do (like a police officer catching a thief) is not valid consideration for a extra reward.

Did you know? A "Deed" is a special type of document that is binding even without consideration. This is why some big property deals are signed "as a deed."

Even if you have an agreement and consideration, there is no contract if the parties didn't intend to go to court if things went wrong. The law uses two presumptions:

1. Social and Domestic Agreements: (e.g., between parents and children or husbands and wives). The law presumes there is no intention to be legally bound. We assume families rely on trust, not lawsuits.
2. Commercial/Business Agreements: The law presumes there is an intention to be legally bound. If you sign a contract with a bank, you can't later claim "I was just joking!"

Can these be changed? Yes! These are only "starting points." You can prove otherwise if you have strong evidence (like a formal written document in a family setting).

6. Capacity: Who can play the game?

Not everyone has the legal power to enter a contract. The law protects certain groups:
• Minors (Under 18): Generally, contracts with minors are not enforceable against them, except for "necessaries" (like food, clothes, or education).
• Mentally Incapacitated/Drunken Persons: A contract may be voidable if the person didn't understand what they were doing and the other party knew they were incapacitated.
• Companies: Under the Companies Ordinance, companies have the capacity of a natural person, but they must act through their authorized directors.

Common Mistake to Avoid: Don't assume every contract needs to be in writing! In Hong Kong, most contracts (like buying a phone) can be oral. Only specific things, like buying land, must be in writing.

Final Wrap-Up Checklist

Before you move to the next chapter, ask yourself:
• Is there a clear Offer (not just an ITT)?
• Was there a "Mirror Image" Acceptance?
• Did both sides give Consideration (value)?
• Did they Intend to be legally bound (Business vs. Social)?
• Did the parties have the Capacity to sign?

If you checked all five boxes, you have a legally binding contract! You're doing great—keep up the hard work!