Memoranda on legal and business issues and concerns for multiple industry and business communities Some Basic Principles Of Contract Law Lina Lau & Terrence Choo Boon Liang Rajah & Tann 4 Battery Road #26-01 Bank of China Building Singapore 049908 Tel: 65 6535 3600 Fax: 65 6538 8598 E-mail: eoasis@sg.rajahandtann.com Website: http://www.rajahandtann.com
Some Basic Principles Of Contract Law FORMATION AND SCOPE OF CONTRACT Offer And Acceptance Offer Vs Invitation To Treat An offer is a statement by one party of a willingness to enter into a contract on stated terms, provided that these terms are, in turn, accepted by the party or parties to whom the offer is addressed. There is generally no requirement that the offer be made in any particular form, it may be made orally, in writing or by conduct. However, there are statutory rules that require the form of specific types of contract to be made or evidenced in a certain way. For example: Under section 53 of the Conveyancing and Law Of Property Act (Chapter 61), a conveyance of any estate or interest in land (other than a lease for a period not exceeding 7 years) rent shall be void at law unless it is by deed in the English language. Section 6 of Civil Law Act (Chapter 43) provides that: No action shall be brought against... any defendant upon any special promise to answer for the debt, default or miscarriage of another person;...unless the promise or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person lawfully authorised by him. (Emphasis added). An invitation to treat is simply an expression of willingness to enter into negotiations which it is hoped will lead to the conclusion of a contract at a later date. The distinction between the two is primarily one of intention. Did the maker of the statement intend to be bound by an acceptance of his terms without further negotiation or did he only intend for his statement to be part of the continuing negotiation process? In practice, the distinction is sometimes difficult to make. Acceptance An acceptance is an unqualified expression of assent to the terms proposed by the offeror. There is generally no rule as to the form in which the acceptance must be made. It can be by words or by conduct. Page 1
A purported acceptance which does not accept all the terms and conditions proposed by the offeror but which in fact introduces new terms, is not an acceptance but a counter-offer. Where the offeror clearly prescribes a specific method for acceptance, the general rule is that the offeror is not bound unless the terms of his offer are complied with. With respect to silence and inaction, the general rule is that acceptance of an offer will not be implied from mere silence on the part of the offeree. Further, an offeror cannot impose a contractual obligation upon the offeree by stating that unless the latter expressly rejects the offer, he will be deemed to have accepted it. Termination Of Offer An offer may terminate in one of the following ways: withdrawal of offer brought to the attention of the offeree; rejection by the offeree; lapse of time; upon the occurrence of an event; and death of offeror. Consideration General Principles A promise is, as a general rule, not binding as a contract unless it is supported by consideration. Consideration is also required whenever there is a variation of a contract. The orthodox interpretation of consideration is that it is based upon the idea of 'reciprocity'; that a promisee should not be able to enforce a promise unless he has given or promised to give something in exchange for the promise or unless the promisor has obtained (or has been promised) something in return. It is commonly said that one party can establish consideration if he can show: that he had conferred a benefit on the other party in return for which that party's promise was given; or that he himself had incurred a detriment for which the promise was to compensate. Page 2
Consideration must be sufficient but need not be adequate. Examples of insufficient consideration include: public duty imposed upon plaintiff by law; and plaintiff bound by existing contractual duty to defendant. Past Consideration Is Not Good Consideration Past consideration is an issue which often arises when a bank takes security for a loan already disbursed. See for instance: Overseas Union Bank v Lew Keh Lam [1999] 3 SLR 393 (CA). In Lew Keh Lam s case, OUB granted facilities to a borrower company ( Borrower ), backed by security which included a joint and several guarantee of its two directors. Subsequently, one of the directors was replaced by Lew and Lew signed a guarantee in favour of OUB. The Borrower defaulted and OUB sued all three directors. The decision deals with the suit against Lew. One of Lew's arguments was that when he signed the guarantee, the facilities to the Borrower had already been disbursed. There was therefore no consideration for the guarantee. The Court held that there was consideration for the guarantee. One of the grounds was that OUB had the right to demand repayment of the facilities and its forbearance to do so was valid consideration. Deed The requirement for consideration does not apply for agreements executed by deed. Simply put, a deed is an instrument which is signed, sealed and delivered. An example of the use of deed is in the case of Development Bank of Singapore v Yeap Teik Leong [1988] 3 MLJ 443, where the judge said: The argument here was that as the $3m temporary overdraft was already drawn under the letter of offer of 23 February 1982 before the execution of the second guarantee and as the further $1m temporary overdraft was also drawn pursuant to the letter of offer of 30 November 1982 before the second guarantee was activated, it was tainted by past consideration. But the simple answer was that the guarantee was executed under seal. Accordingly, there was no merit in this point. PRIVITY AND PARTIES The doctrine of privity consists of two general rules. The first is that a third party cannot be subject to a burden by a contract to which he is not a party. For example, a non-party to a loan agreement, such a guarantor for the loan, is not bound by the terms of the loan agreement. Page 3
The second is that a person who is not a party to a contract cannot claim the benefit of it, even though the contract was entered into with the object of benefiting that third party. Note: UK has enacted a piece of legislation titled Contracts (Rights of Third Parties) Act 1999 which creates an exception to this general rule. Singapore has introduced a similar legislation, namely, The Contract (Rights of Third Parties) Act, which is in identical terms to the UK Act. CONTENTS OF CONTRACT Terms Of The Contract The terms of a contract comprise: (i) express terms, ie the terms which the parties agreed upon, and (ii) implied terms which are not specifically agreed by the contracting parties but which are implied into the contract by the courts or statute. Express Terms Where there is a formal written contract embodying all the terms of the contract, it is not difficult to determine what the express terms of the contract are. The only issue then would be the construction of the terms, which would be dealt with below. Difficulties arise when the contract is oral or partly oral and partly written. Some considerations with respect to Express Terms: The Parol Evidence Rule As a general rule, parties to a contract cannot adduce extrinsic evidence to add to, vary or contradict the written document and the document is the sole depository of the terms of the contract. However, this is not an absolute rule and it is subject to wide exceptions that reduces the significance of the rule substantially. Bound by one's signature The general rule is that a person is bound by a document which he signs, whether he reads it or not (see L'Estrange v F. Graucob Ltd [1934] 2 KB 394). This rule is subject to the defence of non est factum which means this is not my deed. It was originally applied to a case where an illiterate person signed a deed which had been read to him incorrectly by another person. However, the scope of this defence may be limited today since the courts give considerable weight to the idea that a third party should be able to rely on the signature of a contracting party. Page 4
Incorporation of terms If a contracting party intends to incorporate a set of written terms into a contract, three hurdles have to be overcome before such terms can be incorporated: notice of the terms must be given at or before concluding the contract; the terms must be contained or referred to in a document which was intended to have contractual effect; and reasonable steps must be taken to bring the terms to the attention of the other party. Oral representation Not everything that is said during negotiations constitutes a term of the contract. There are certain statements that are treated as mere puffs with no legal effect or a mere representation. The distinction between a term and a representation is important since if a statement is held to be a term of the contract, a failure to comply will amount to a breach of contract. On the other hand, if it is a mere representation, the innocent party can only seek to set aside the contract or claim damages for misrepresentation. Some contracts contain a merger clause, the purpose of which is to exclude oral statements made in the course of negotiating a contract, eg: This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and shall supersede all oral statements and prior writings with respect thereof. Implied Terms Generally, terms can only be implied if they are not inconsistent with the express terms. Besides terms expressly agreed between the parties, certain terms may have been implied into the contract. Such terms may be implied from any of the following three sources: statute for examples, please refer to Appendix 1; custom; and at common law - Courts would usually imply a term into a contract if it is necessary in a business sense, to give efficacy to the contract. Page 5
Overriding Oral Warranties One should be cautious of making certain oral representations after a written agreement is concluded where the oral representations are inconsistent with the terms of the agreement. This is because such oral representations may override the written terms. Limitation Of Terms Generally, parties are free to agree to any terms. However not all terms, including express ones, are enforceable. Some of the reasons may include: the enforceability of an obligation may be affected by statutes of limitation, public policy, estoppel and similar principles or by laws concerning insolvency, bankruptcy, liquidation, reorganisation, receivership, judicial management, unfair preference and undervalue transactions; claims may become barred under laws relating to limitation of actions in Singapore or may be or become subject to defences of set -off or counterclaim, by estoppel, waiver or similar principles; the validity or enforceability of the obligation or document may be limited by general principles of equity; provisions in documents relating to liquidated damages / the payment of interest would be unenforceable if the provision were held to constitute a penalty and not a genuine and reasonable pre-estimate of the loss likely to be suffered as a result of the default in payment of the amount in question. See for example Hong Leong Finance v Tan Gin Huay & Anor [1999] 2 SLR 153. In the above case, Hong Leong Finance ( HLF ) granted a term loan to the defendant, Tan, to be secured by a mortgage of Tan's stall in a food centre. Interest under the term loan was 5.5% for the first two years and 6.75% thereafter. The default interest rate was 1.5% per month (18% per annum). The Court of Appeal held that a default interest at 18% per annum was manifestly extravagant and out of proportion in comparison with the maximum loss which HLF could possibly suffer from the breach by Tan. It was therefore a penalty and held to be unenforceable; the courts may still enquire into calculations, determinations or certifications despite a provision that such calculations, determinations or certificates will be conclusive and binding; any term in an agreement may be amended orally by all the parties notwithstanding a provision to the contrary in the agreement; Page 6
a term in a contract providing for the severance of any provision which is illegal, invalid or unenforceable may not be binding as it depends on the nature of the illegality, invalidity or unenforceability in question. This would be determined by the court at its discretion; and some of the terms in an agreement may be unenforceable if they are caught by the Unfair Contract Terms Act (Chapter 396) ( UCTA ). The UCTA deals generally with exemption clauses and lays down guidelines on the enforceability of such clauses. For example: (i) (ii) it is not possible to exclude or restrict liability in negligence for personal injury or death; and losses or damage arising from negligence other than personal injury or death are subject to the test of reasonableness. VITIATING FACTORS Misrepresentation Definition Misrepresentation may be defined as an unambiguous, false statement of fact which is addressed to the party misled and which materially induces the contract. Types Of Misrepresentation The following are the different types of misrepresentation possible: fraudulent misrepresentation; negligent misstatement; and innocent misrepresentation. Remedies The remedies available where there is an actionable misrepresentation are: Rescission The general rule is that the effect of a misrepresentation is to make the contract voidable which means that the contract remains in effect until it is set aside by the representee. Page 7
Damages A contractual claim for damages does not lie for misrepresentation unless the misrepresentation has been subsequently incorporated into the contract as a term in which case damages can be claimed for breach of contract. However, damages are recoverable in tort where the misrepresentation was made fraudulently or negligently. Section 2(2) of the Misrepresentation Act (Chapter 390) also provides for a victim of an innocent misrepresentation to be awarded damages in lieu of rescission if the court in its discretion considers it equitable to do so. Duress Duress can be shown to exist where the consent of the victim has been obtained by illegitimate pressure. Undue Influence The traditional approach is to divide undue influence into two distinct categories: presumed and actual undue influence. To set aside contract on this ground, it is necessary to demonstrate that the contract was manifestly disadvantageous to the person seeking to set it aside (National Westminister Bank plc v Morgan [1985] AC 686). Actual Undue Influence The alleged victim must prove that there was some unfair and improper conduct on the party alleged to have exercised undue influence. Presumed Undue Influence In this group of cases, the relationship between the parties plus manifest disadvantage gives rise to a presumption of undue influence and the onus of proof switches to the recipient to show the absence of undue influence. The types of relationships falling in this category include solicitor and client, doctor and patient and religious adviser and disciple. Alternatively, if the aggrieved party can show that the relationship between the aggrieved party and the wrongdoer was one of trust and confidence, the aggrieved party may be able to assert presumed undue influence. Undue Influence And Third Parties The usual case involving banks and undue influence occurs when a person agrees to be a guarantor / surety under the (actual or presumed) undue influence of a borrower. Page 8
In such cases, the ability of the aggrieved party to set aside the transaction would depend on whet her the bank, (as a third party to the undue influence) has actual notice of the undue influence or would have discovered it had it taken proper steps (constructive notice). Case Study: Barclays Bank plc v O'Brien [1994] 4 All ER 417 Mr and Mrs O'Brien were joint owners of their matrimonial home. Mr O'Brien wanted to increase the overdraft limit for his company and he agreed to guarantee the company's indebtedness and to secure his liability as a guarantor with a charge on the matrimonial home. As co-owner, the charge required Mrs O'Brien's consent and signature. The documents were sent to another branch for execution by the O'Briens. In his note to the other branch, the bank manager gave instructions that the O'Briens should be advised as to the nature of the documents they were to sign and if they were in doubt, they should be advised to take independent legal advice. However, those instructions were not followed. Mrs O'Brien, accompanied by Mr O'Brien, signed the charge without reading it and the bank officers did not explain the documents to Mrs O'Brien nor did they suggest that she take independent legal advice. She also signed, without reading, a side letter which said that the bank recommended that she should obtain independent legal advice before signing. The House of Lords held that if the creditor has actual or constructive notice of any undue influence or misrepresentation by the guarantor's husband, then the guarantee can be set aside. When a wife offers to provide a guarantee of her husband's debts, a creditor is put on inquiry by the combination of two factors: the transaction is on its face not to the financial advantage of the wife; and there is a substantial risk that in procuring the wife to act as his surety, the husband has committed a legal or equitable wrong, entitling the wife to have the transaction set aside. The creditor must then take reasonable steps to satisfy himself that the wife's agreement to stand as surety has been properly obtained. This the creditor can do by: taking steps to inform the wife of the risk she is running as a surety; and advising her to take independent advice. The House of Lord suggested that the creditor should: (i) insist that the wife attend a private meeting with one of the creditor's representatives, in the absence of the husband, so that she can be informed of Page 9
the extent of her liability as a surety, be warned of the risks she is running as a surety; and (ii) be urged to take independent legal advice. In rare cases where the creditor is aware of additional facts which render the presence of undue influence and misrepresentation not only possible but probable, the creditor is expected to go further by insisting that the wife be independently advised. In practice, banks should advise guarantors to seek independent legal advice and should avoid advising guarantors to use the bank's legal counsel. CAPACITY OF PARTIES Minors The age of majority in Singapore is the same as under the common law, ie, 21 years. The general common law rule is that a contract made with an infant is voidable at his option, except for the following two types of contracts: contracts for necessaries; and beneficial contracts of service. Capacity Of Persons Mental Disorder The first question to ask is whether the party at the time of contracting was suffering from such a degree of mental disability that he was incapable of understanding the nature of the contract. The next question is whether the bank knew or ought to have known that the person of unsound mind was mentally disordered and had no contractual capacity. Drunkenness The general opinion of academics is that the contractual capacity of a drunken person is the same as that of one who is mentally afflicted. Companies The capacity of a company is limited by its memorandum and articles. If the company acts beyond its objects set out in its constitutional documents, the act is considered as ultra vires, that is to say, the company has acted beyond its capacity. A statutory exception to this general rule is section 25 of the Companies Act (Chapter 50). Page 10
JOINT AND SEVERAL OBLIGATIONS When two or more persons join in making a promise, in the absence of an express provision, the presumption is that liability for performance is joint. To enforce performance, all the promisors have to be joined as defendants in the enforcement proceedings. If the liability between two or more persons is several, then the liability is owed by each person separately and each can be sued separately. The most favourable option for a recipient of an undertaking given by two or more persons, is where the promisor s liability is a joint and several one. This gives the recipient the flexibility to decide who to sue and from whom to obtain satisfaction of the undertaking. Page 11
Appendix 1 Sections 24 & 25 of the Conveyancing and Law of Property Act are set out below Power incident to estate or interest of mortgagee 24. (1) A mortgagee, where the mortgage is made by deed, shall have the following powers, to the like extent as if they had been in terms conferred by the mortgage deed, but not further: (a) (b) (c) a power, when the mortgage money has become due, to sell, or to concur with any other person in selling, the mortgaged property, or any part thereof, either subject to prior charges, or not, and either together or in lots, by public auction or by private contract, subject to such conditions respecting title, or evidence of title, or other matter, as the mortgagee thinks fit, with power to vary any contract for sale, and to buy in at an auction, or to rescind any contract for sale, and to resell, without being answerable for any loss occasioned thereby; a power, at any time after the date of the mortgage deed, to insure and keep insured against loss or damage by fire any building, or any effects or property of an insurable nature, whether affixed to the freehold or not, being or forming part of the mortgaged property, and the premiums paid for any such insurance shall be a charge on the mortgaged property, in addition to the mortgage money, and with the same priority, and with interest at the same rate, as the mortgage money; and a power, when the mortgage money has become due, to appoint a receiver of the income of the mortgaged property, or of any part thereof. (2) The provisions of this Act relating to the foregoing powers, comprised either in this section, or in any subsequent section regulating the exercise of these powers, may be varied or extended by the mortgage deed, and, as so varied or extended, shall, as far as may be, operate in the like manner and with all the like incidents, effects and consequences, as if such variations or extensions were contained in this Act. (3) This section shall apply only if and as far as a contrary intention is not expressed in the mortgage deed, and shall have effect subject to the terms of the mortgage deed and to the provisions therein contained. (4) This section shall apply only where the mortgage deed is executed on or after 1st August 1886. Regulation Of Exercise Of Power Of Sale 25. A mortgagee shall not exercise the power of sale conferred by this Act unless Page 12
(a) notice requiring payment of the mortgage money has been served on the mortgagor or one of several mortgagors, and default has been made in payment of the mortgage money or part thereof for 3 months after the service; (b) some interest under the mortgage is in arrears and unpaid for one month after becoming due; or (c) there has been a breach of some provision contained in the mortgage deed or in this Act, and on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon. Rajah & Tann is one of the largest law firms in Singapore. It is a full service firm and given its alliances, including US premier firm Weil, Gotshal & Manges, is able to tap into a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this newsletter is correct to the best of our knowledge and belief at the time of writing. Specific professional advice should be sought before any action is taken. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or e-mail the Knowledge Management team at eoasis@sg.rajahandtann.com Rajah & Tann Knowledge Management. All rights reserved. Page 13