Welcome to Your Study Journey!

Hello! If you are preparing for the HKICPA Module 10 examination, you already know that The Contract Law is a massive part of your syllabus. While we often think of a contract as just an "agreement," the law in Hong Kong requires specific ingredients for that agreement to be legally binding. In this chapter, we explore three of these essential elements: Consideration, Intention, and Capacity.

Think of a contract like a tripod: it needs all three of these legs to stand up. If one is missing, the contract falls over, and the court will not enforce it. Don't worry if these terms sound legalistic; we will break them down into simple, everyday concepts that you can apply to the exam scenarios.

1. Consideration: The "Price" of the Promise

In simple terms, consideration is what each party gives to the other. It is the "price" paid for the promise. If I promise to give you my car for free, that is a gift, not a contract, because you haven't given me anything in return. To have a contract, there must be a "quid pro quo" (something for something).

Key Rules for Consideration

To succeed in a Level 2 scenario-based question, you must check if the consideration follows these rules:

A. Consideration must be "Sufficient" but need not be "Adequate"

This is a classic exam point! Adequacy refers to whether the deal is fair or has equal value. The court does not care if you made a bad bargain. If you sell a \(HK\$2,000,000\) apartment for \(HK\$1\), the \(HK\$1\) is sufficient consideration because it has some value in the eyes of the law. The court will not step in to say the price was too low.

Quick Tip: Whenever you see a scenario where someone claims a contract is "unfair" because the price was too low, remember that the law only requires the price to exist, not to be fair!

B. Past Consideration is No Consideration

If you perform an act before a promise is made, that act cannot be used as consideration for the new promise.
Example: You find a lost dog and return it to its owner for free. The next day, the owner feels happy and promises to give you \(HK\$500\). If they later refuse to pay, you cannot sue them. Why? Because you returned the dog before the promise was made. Your act was "past."

C. Existing Duties

Generally, doing something you are already legally required to do is not good consideration.
1. Public Duty: A police officer cannot claim a reward for catching a thief because catching thieves is already their job.
2. Existing Contractual Duty: If a builder is already contracted to finish a house by Friday, promising them an extra \(HK\$10,000\) to finish it by that same Friday is usually not binding, because they aren't doing anything "extra."

Summary Key Takeaway: Consideration is the exchange of value. As long as there is some value (sufficiency) and it isn't "past," the law is usually satisfied.

Not every agreement is meant to be a legal contract. If you agree to meet a friend for dinner and you don't show up, your friend can't sue you for breach of contract. Why? Because you didn't intend for that agreement to have legal consequences.

In the exam, the courts use two presumptions to decide intention:

A. Social and Domestic Agreements

In arrangements between family members or close friends, the law presumes there is no intention to be legally bound. The law assumes these are based on mutual trust, not legal "teeth."
However, this can be "rebutted" (disproven) if the parties take formal steps, like writing a document or if the relationship has already broken down.

B. Business and Commercial Agreements

In a business setting, the law presumes there is an intention to create legal relations. It is very difficult for a business to claim they "didn't mean it" if they signed a commercial deal.
The famous case of Carlill v Carbolic Smoke Ball [1893] showed that even an advertisement can show legal intention if the company takes specific steps (like depositing money in a bank) to show they are serious about their promise.

Quick Review:
- Family/Friends = Presumed NO intention.
- Business/Commercial = Presumed YES intention.

3. Capacity: The Ability to Contract

Capacity refers to whether a person is legally "competent" to enter into a contract. The law protects certain groups of people from being taken advantage of.

A. Minors (Persons under 18)

In Hong Kong, a person under 18 is a minor. The general rule is that contracts are not enforceable against a minor, with two major exceptions:

1. Contracts for "Necessaries": A minor must pay a reasonable price for things they actually need, such as food, clothing, and medical services.
2. Beneficial Contracts of Service: Contracts for education, apprenticeships, or employment that help the minor earn a living are usually binding, provided they are for the minor's benefit.

B. Persons of Unsound Mind or Drunkenness

A contract is voidable (can be cancelled) if:
1. The person was so mentally impaired (or drunk) that they did not understand what they were doing; AND
2. The other party knew (or should have known) about their condition.

C. Corporations

As we see in Salomon v Salomon [1897], a company is a "separate legal person." This means it has the capacity to enter into contracts just like a human being, provided the contract is within the powers of the company.

Key Takeaway: Capacity ensures that the person signing the contract is legally "adult" and "aware" enough to be held to their word.

Exam Strategy: How to Answer Scenario Questions

In your Module 10 exam, you will likely see a scenario where Party A refuses to follow through on a promise to Party B. To advise them, follow these steps:

Step 1: Identify the Issue. Is the problem about money/value (Consideration)? Is it about a joke or a family promise (Intention)? Or is it about a 16-year-old signing a deal (Capacity)?

Step 2: State the Rule. For example: "The general rule is that past consideration is no consideration."

Step 3: Apply to the Facts. "In this case, since the dog was returned before the reward was offered, the act is past."

Step 4: Reach a Conclusion. "Therefore, there is no valid contract and Party A is not legally required to pay."

Note: For more on how contracts are formed through Offer and Acceptance, please refer to the chapter "Essential elements of a contract: offer and acceptance."

Quick Summary Table

Element: Consideration
What it means: The exchange of value (The "Price").
Watch out for: Past consideration or "existing duties."

Element: Intention
What it means: The desire to be legally bound.
Watch out for: Family vs. Business settings.

Element: Capacity
What it means: The legal power to sign.
Watch out for: Minors and "Necessaries."