The document summarizes key concepts related to the formation of a valid construction contract, including: 1) Offers must be definite, unambiguous and communicated to the offeree. Invitations to treat and invitations to tender are not offers. 2) Acceptance must be unconditional, definite and communicated to the offeror to form a valid contract. 3) Consideration and intention to create legal obligations are required. 4) Only parties to a contract (privity of contract) can enforce it or be bound by its terms. Subcontractors generally lack privity with main contractors or employers.

1. Construction life-cycle’s beginning phase –
How to ensure we have a construction
contract
Presented by Steven Yip/James Yeung
Minter Ellison Lawyers
20 August 2009
HK_835508_1
Topics Offer
• Formation of a construction contract • Expression of willingness to contract on certain
terms, made with the intention that it shall
• Offer
become binding as soon as it is accepted by the
• Acceptance offeree.
• Intention • Definite and unambiguous
• Consideration • Communication of offer to the offeree (eg. Letter,
• Privity of Contract fax, newspaper, email, conduct etc.)
• Can be withdrawn before acceptance
Harvey v Facey [1983]
Offer v Invitation to Treat
Harvey: “Will you sell us Bumper Hall pen? Telegraph
•Invitation to treat is an indication of willingness to lowest price.”
negotiate a contract Facey: “Lowest cash price for Bumper Hall pen £900.”
•Not an offer Harvey: “We agree to buy Bumper Hall pen for the £900
asked by you.”
•Objective test
Held by Privy Council: No contract. Facey’s telegraph
•Example: Display Goods only amounts to a statement of
Invitation to Tender price. Offer to buy the pen was
made by Harvey’s 2nd telegram.
1

2. Invitation to Tender Tender
• May amount to an offer
• Not an offer binding the employer to accept the
lowest tender UNLESS express the wordings are • Normally stipulates a time within which the
clear to turn the invitation to tender into an offer, tender is to remain valid
eg. lowest tender made • If time is not stipulated, reasonable time to
accept is to be implied
• Costs of tender
Acceptance Acceptance
• A final and unqualified expression of assent to the • Meeting of minds/Concurrence of will?
terms of an offer
• Objective test
• Definite and unambiguous
• Can only be accepted by the offeree
• Must be unconditional
• Silence cannot be construed as acceptance
• Must be communicated to offeror
Conditional Acceptance Certainty of Terms
• Not an acceptance
• Reasonable degree of certainty
• Amount to counter-offer
• Approach sensibly and reasonably
• No contract is formed until acceptance of counter-
• Custom and trade usage
offer
• Commercial reality
• ‘Mirror image rule’ → acceptance in its
entirety • Implied terms
2

3. Common Implied Terms of Contract Required of Common Implied Terms of Contract Required of
Employer Employer
• The employer to do all that is necessary on his • The employer would not hinder or prevent
part to bring about completion of the contract contractor from carrying out the contract works
eg: in a regular and orderly manner and in
accordance with the terms of the contract
• give possession of site within reasonable time
• obtain planning permission or building regulation • Instructions should be given to the contractor at
consent in sufficient time to enable the contractor such time and in such manner so as not to
to proceed without delay hinder or prevent the contractor from performing
his duties under the contract
‘Back to Back’ Contract ‘Pay when paid’ clause
• Usually in sub-contracts • ‘In the absence of any clear express words to the
contrary, those clauses merely provide for the
• Incorporating main contract terms into sub- time of payment and that the right to be paid is
contract not dependent upon the party getting paid first?
• Difficulty to ascertain extent of incorporation • Very high standard for those clauses to be held
• Eg. Scope of work, payment terms to be valid
• ‘Pay if paid’ is usually not enforceable
Contract Price Intention
• Original contract price will invariably change • Intention to create legal relations between
themselves
• Variations, missing items etc.
• Objective test – how reasonable persons would
• Implied promise on the Employer to pay for the perceive the words, conduct and circumstances
work/services on basis of reasonable charge (ie.
• If reasonable persons would assume that there was
quantum meruit)
no intention to create legal relation → no contract
• Mechanism by which the price for the particular • Presumption that an intention to create legal
works or services to be rendered can be relationship exists in commercial context
determined
• Presumption that NO intention to create legal
relationship exists in social or family arrangements
3

4. Cable & Wireless (Hong Kong) Ltd Staff
Association v Hong Kong Telecom Intention
International Ltd [2001]
• The Court held that • Family arrangements
• Look at the terms of the agreement itself • Balfour v Balfour [1919]
• If the terms show intention to create legal • Merritt v Merritt [1970]
relationship → Contract
• Letters of Intent
• If the terms do not provide a clear answer, the
Court would look at all the surrounding
circumstances
• Surrounding circumstances include background of
entering into the agreement, relationships of parties,
nature of the agreement etc
Consideration Types of Consideration
• Consideration is generally expressed as follows:
Consideration must be executory or executed
• ‘Consideration may be found in an exchange of
• Executory – Promise to do something in the future
mutual promises or in an exchange of a promise
is given for another promise to be done in the
for an act or forbearance’
future
• Consideration is important because • Example: Buying a house
• Make it an enforceable contract • Executed – When a promise is actually executed, in
• The law will not enforce gratuitous promise (eg. exchange for another promise to be executed in
gift) the future.
• Only the person who provides consideration can • Example: Finding a dog.
enforce
Rules of Consideration Referable to the Promise
• Consideration must be referable to the promise
• Consideration must move from the promisee • Some kind of connection between the promise
• Consideration must be sufficient, but need not be and the consideration
adequate • Inducement to enter into the promise
• Consideration must be current
• Performance of an existing obligation is not enough
• Performance of public law duty is not consideration
• Performance of a contractual obligation owed to a
third party is good consideration
4

5. Move from the Promisee Sufficient, not Adequate
• But not necessarily to the Promisor • Capable of expression in economic terms
• Example: A promised to pay B $1000 if B clean C’s • Some legal value in the eyes of the law
car.
• No need to be adequate
• Nominal value can be sufficient consideration
• Example: $1 to buy a car
Ho Yuk Chu v Shun Hing Refrigerator Air-
White v Bluett (1853)
Conditioning Engineering [2001]
• The procurement of an award of air-conditioning • Cessation of complaints are not sufficient
contract by way of introduction, recommendation consideration
and assistance in preparation of tender was • No economic value
found to be valid consideration to support an
agreement to pay 7% of the contract sums • No contract was formed
Current, not Past Current, not Past
• Past consideration is not good consideration • Eastwood v Kenyon (1840)
• Consideration that was provided before the • Roscorla v Thomas (1842)
promise was made = past consideration
• Exceptions in Pau On v Lau Yiu Long
• Requires an exchange of current (1980)(Privy Council)
promises/consideration at the time of the
• The consideration was at the request of the
contract Promisor
• Common understanding that the promisee will be
rewarded for the performance
• Consideration is legally enforceable
5

6. Not Existing Obligation Williams v Roffey Bros & Nicholls
• Performance of existing contractual duty is not • Exception
good consideration • Roffey sub-contracted the carpentry work to Williams
• Stilk v Myrick (1809) • Roffey doubted that Williams would perform his
obligation under the contract
• Exceptions in William v Roffey Bros & Nicholls • Roffey promised to pay Williams an extra amount in
[1991] return (consideration) for a promise that Williams would
fulfill his obligation under the contract
• Will the promisor gain an advantage arising out
of the continuing relationship with the promisee? • As a result, Roffey obtained a benefit or avoided a
detriment
• Example: Risk of Liquidated Damages • Roffey did not make the promise to pay more under
duress form Roffey
UBC (Construction) Limited v Sung Foo Kee Not Public Law Duty
Limited [1993]
• Performance of a public law duty is not good
• In such circumstances that they were clearly consideration
incentives to both the main contractor and
subcontractor to make a further arrangement in • Promisee required to carry out the statutory duty
order to relieve the subcontractor of its financial anyway
difficulties and also to ensure that the • Collins v Godefroy (1831)
subcontractor was in a position or was willing to
continue with the subcontract works to a • Subpoena
reasonable and timely completion
Partial Satisfaction of Existing Liability Settlement Agreement
• Generally not a good consideration • Usually partial satisfaction of debt
• Exceptions • How to get around the ‘lack of good
consideration’ hurdle?
• Changes to the original arrangement (eg. place,
mode or time of repayment) to the convenience of
the creditor
• Settlement Agreement?
6

7. Overcoming a Lack of Consideration Privity of Contract
• Nominal Consideration
• Example: $1 to settle claims • Only the parties to a contract are bound by it
and entitled to sue on it
• Evidence of consideration
• A third party cannot enforce a promise made in
• By Deed
a contract for its benefit if it is not party to the
• No need for consideration in a deed contract
• Deed of Settlement
• Gratuitous assurance made without consideration
is enforceable
Construction Contracts
Privity of Contract (Cond’t)
Employer
Privity of contract
• Relationship between privity and consideration: No privity of
Main Contractor
• some say consideration and privity are flip sides of the same contract
Privity of contract
coin
• some say consideration and privity are distinct and separate Sub-Contractor
principles
• A sub-contractor cannot sue the employer on the main
• Law in Hong Kong is clear: ‘only a person who is
contract obligations in relation to payment for the
a party to a contract can sue on it’ (see Dunlop
works
Pneumatic Tyre Co Ltd endorsed in B+B
Construction) (See Morison, Son & Jones (Hong Kong) Ltd v Yiu
Wing Construction Co Ltd [1989] and Shui On
Construction Co Ltd v Moon Yik Co [1987])
Insurance Contract
Main Contractor
Privity of contract No privity of contract
Sub-Contractor Insurer
Privity of contract
• The Main Contractor cannot enjoy privity of contract
with the subcontractor’s insurers and cannot claim
under the insurance policy (see Otis Elevator
Company (HK) Limited v Wide Project Engineering &
Construction Company Limited [1985])
7