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Business Law-assignment
2nd Semester2006/2007
John, a newsagent, wishes to sell his business which includes the goodwill and the lease of
the business premises. In January 2005 he enters into negotiations with Peter who has just
arrived in Hong Kong with his life savings. John tells him that the profits over the last 5 years
have averaged $2M per annum. John offers to allow Peter to inspect the annual accounts, but
Peter declines to do this. The negotiations go on for a further 3 months, during which time the
business has diminished to such an extent that it is likely that the profit for the year will be
approximately $300,000. On the 1 May 2005 John states that, in his opinion, the business has

2. an extremely profitable future. On the 1 June 2005 Peter enters into a contract with John
whereby the business, including the goodwill and the lease of the premises, are transferred to
Peter for $20M. Peter buys a flat in the neighbourhood for $10M, and pays the first month’s
rent and rates of $20,000 on the business premises. On the 14 June 2005 Peter realizes the
true state of affairs. He also discovers that the average profit for the previous 5 years was
only $1M per annum.
(a) Has Peter a remedy:
(i) for a breach of contract;
(ii) for misrepresentation?
(b) Assuming Peter can establish either a breach or a misrepresentation, what would be
the likely remedy?
(a)(i) Has Peter a remedy for breach of contract?
Based on the facts of the case, Peter has no remedy against John for breach
of contract. A breach of contract means that the non-performance of insufficient
performance of a party to the contract of his material obligations as set forth in the

3. contract or the prevention of one party for the other party to fulfill his obligations for
the purpose of defeating the purpose of the contract[1]. This implies several things.
First is the existence of a valid contract, a term or the terms have been
breached. To determine the existence of valid contract, the essential elements
should arise. The essential elements of a contract are: 1) existence of an agreement
that arises when one party makes and offer, the terms of which are completely or
substantially accepted by the other party to give rise to a ‘meeting of the minds’; 2)
presence of consideration, which pertains to the mutual promises given by the
parties relative to the agreement; 3) intention to engage in legal relations, with the
terms of the contract and the fulfillment of the obligations intended towards legal
consequences; 4) form such as oral or in writing depending upon the object of the
contract; 5) capacity of the parties to engage in a contract such as rightful ownership
of the thing being appropriated or age; 6) provision of consent, which means that the
parties to the contract engaged in the agreement freely; and 7) legality of the
agreement so that there cannot be a valid contract for the commission of a crime or
other objects deemed unconscionable or against public policy.[2] The lack of one or
more of these elements has the effect of rendering the contract as unenforceable,
voidable or void; with each having their respective to the validity and continuity of the
contract[3].
From the facts of the case, a valid contract was created when Peter agreed to
the offer of John after months of negotiation and despite the refusal of John to show

4. Peter the books of account of the company to create a ‘meeting of the minds’.
Without any proof to the contrary, Peter appears to have engaged in the contract on
his own free will and offered his consent freely. It appears that the parties also had
the capacity to engage in the contract, the form was in order, and the sale of the
company is for a legal purpose.
Second is a breach of the terms of the contract. There are different types of
breach with differing consequences. One is minor breach, which is either comprised
of a partial or immaterial breach of the contractual terms. Due to the minor
characteristic of the breach, this does not substantially affect the validity or fulfillment
of the contract. The party disadvantaged by the minor breach may file an action to
claim appropriate damages. Another type of breach is material breach, which
pertains to the failure of a party to the contract to perform or permit the contractual
party to perform obligations under the contract. The result is the inability of one party
to fulfill his obligations or the inability of the other party to comply with obligations
due to the intervention of party he contracted with. This entitles the disadvantaged
party to claim for damages or ask the court to order the other party to comply with his
obligations or allow the accomplishment of contractual obligations. Another type of
breach is fundamental breach, which pertains to the inability to comply with
fundamental terms of the contract making the contract of no use to the aggrieved
party. This provides the aggrieved part with the remedy to terminate contractual
performance together with claim for damages. Another type is anticipatory breach,
which refers to the existence of an unequivocal indication that one contracting party
would likely fail to perform obligations when these become due or an impending

5. situation that makes it impossible for one or both contracting parties to fulfill their
obligations. If the immediacy or imminence of the anticipated breach is clearly
proven, this supports the remedy of the aggrieved party to terminate the agreement
as well as file a court action to claim for damages even if the breach has not yet
been actualized. The award of damages would depend upon the court’s
consideration of the material facts of the case.
Based on the facts of the case, after the contract has been formed between
Peter and John with Peter accepting the terms of John, there was no breach of the
terms of the contract since even if John stated that the company is earning $2 million
per annum, there was no indication that the company to be transferred should be
earning $2 million for the past five years. The terms which are apparent only cover
the transfer of ownership of the company and the purchase price that were delivered
by John as fulfillment of his obligation to in the contract. Since there no apparent
breach of contract appears in the facts of the case, Peter cannot claim breach of
contract even if he discovered later on that the company was really earning less than
what John previously stated.
(a)(ii) Has Peter a remedy for misrepresentation?
Misrepresentation refers to the situation where a party to the contract
provides false statement of facts to the other party so that even if this is not a

6. contractual term, the other party is induced by the statement to engage in the
contract[4]. The effect of the provision of a false statement is to make the agreement
voidable and give the aggrieved party the remedy to rescind the agreement or claim
damages[5]. The definition of misrepresentation then implies several things. First is
that the misrepresentation should constitute false statement of facts and not merely
opinions or future expectations. One case distinguishes misrepresentation and mere
statements of fact by providing that merely stating an opinion is not considered as
misrepresentation[6]. However, other cases[7] provides that if the person uttering the
statement holds the position to know or learn of true facts and there is proof that the
person providing the statement could not have validly held such statement, the
information provided will be considered as fact. There are also cases providing that
statements on future expectations are not considered as misrepresentation except
only if the statement is incorporated into the terms of the contract[8]. However, this
involves the qualification that if the person uttering the statement regarding future
expectations holds knowledge that the expectation would not be actualized in the
future, then the statement becomes a misrepresentation[9].
Second the misrepresentation should have induced the other party to engage
in the contract so that the misrepresentation need to be material and this should be
relied upon by the aggrieved party[10]. In the case of the materiality of the
misrepresentation, this depends upon the facts of the case as there is no objective
criterion for determining the materiality of the misrepresentation except the
reasonableness test[11]. This applies with the court considering the effect of the
misrepresentation to a reasonable person, especially whether a reasonable person

7. hearing the statement would have been induced to believe it and enter into a
contract by virtue of the statement[12]. Apart from the reasonableness test, the court
should be able to adduce that the recipient of the statement relied upon the
statement to support the decision of engaging in the contract[13]. This means that a
case cannot be brought based on misrepresentation when the decision to engage in
the contract was primarily based on his personal judgment[14]. This further implies
that even if one party gave a false statement but the other party checked the
accuracy of this statement and found out about its falsity but engaged in the contract
nonetheless, then there is no misrepresentation.
Based on the two major elements of misrepresentation, it appears in the facts
of the case that there was misrepresentation because Peter was the recipient of
false statement of facts from John and Peter was obviously induced by the statement
to engage in the contract. The false statements uttered by John include the fact that
the company has been earning an average of $2 million every year for the past five
years, which in the industry is a good profit level but as it turned out the company
was only earning $1 million per annum. John also said that that the company should
expect to have a profitable future. Although this is a statement of future expectations,
John was in the position to know the probable future performance of the company
which is a downturn due to the decrease in profitability over just a span of months.
Peter obviously relied upon John’s false statements in finally deciding to engage in
the contract. It was also clear that the basis for Peter in agreeing to the terms is the
expected returns from operating the company. Even if Peter asked for financial
reports, John refused to provide him with copies and there was no indication that

8. Peter learned of the true status of the company before entering into the contract.
This means that Peter is entitled to the remedy for misrepresentation.
(b) Assuming Peter can establish either a breach or a misrepresentation, what
would be the likely remedy?
Since Peter was able to prove the existence of misrepresentation in the
formation of the contract, he is entitled to three remedies. First is rescission of the
contract, which has the effect of setting aside the agreement[15]. The underlying
principle in rescission is to place the parties in the same position they were before
their engagement in the contract. Rescission is accomplished by giving notice to the
other party or any action that indicates rescission such as the filing of a case against
the party that communicated the misrepresentation[16]. However, rescission is
deemed as an equitable remedy to be awarded based on the discretion of the court
so that in some instances a party may lose the right to the remedy when the
aggrieved party has affirmed the contract even after learning of the
misrepresentation[17]; reasonable time has elapsed from the time that the aggrieved
party learned of the misrepresentation[18]; it is impossible for the parties to revert
back to their original positions[19]; and a third party obtains the rights under the
contract[20]

9. Second remedy is indemnity[21] contained in a court order covering money
paid by the party committing the misrepresentation equivalent to the expenses
incurred by the aggrieved party due to the misrepresentation[22]. This is a
discretionary award from the court and an indemnity order and the corresponding
amount depends upon the circumstances of the case such as the contributory action
of the aggrieved party[23].
Third remedy is damages[24]. In fraudulent misrepresentation as in the given
case, the claim for damages may be based on deceit. In applying remoteness test in
deceit, the aggrieved party is entitled to recover direct losses incurred due to
fraudulent misrepresentation. Lost opportunity cost may also be claimed as
damages. Any other damages resulting from the misrepresentation may also be
claimed by aggrieved party to be awarded based on court discretion.
In the given case, Peter has the remedy of informing John of rescission or
going directly to court to file an action for rescission based on John’s commission of
misrepresentation during the formation of the contract together with claims for
indemnity or damages. Evidence will be presented in court to support the claims.
Upon perusal of the evidence, the court will then decide on whether rescission is in
order and if so make an order for the payment of indemnity and/or damages
whichever is relevant in the given case.
Read more: http://ivythesis.typepad.com/term_paper_topics/2009/08/case-study-contract-
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