Chapter 3
Legal Processes and Institutions
3.1
Introduction
3.2–3.3
The Constitution and the Three Governing Arms
3.4–3.8
3.9–3.11
The Legislature
The Parliamentary Law-making Process
3.12–3.15
The Executive
3.16
3.17–3.19
3.20–3.28
3.29
3.30–3.31
3.32
3.33–3.35
3.36
3.37–3.49
3.50
3.51–3.53
The Judiciary
The Common Law Tradition
The Doctrine of Judicial Precedent
Common Law and Other Legal Concepts
(1) Common law versus equity
(2) Common law versus written law
(3) Civil law tradition versus common law tradition
(4) Civil law versus criminal law
The Court Structure and Hierarchy in Singapore
Technology and the Courts
Interpretation of Written Law
3.54–3.61
The Legal Profession, Legal Education and Other Professional
Bodies
3.62
Conclusion
Principles of Singapore Business Law
INTRODUCTION
3.1
Following a brief historical sketch of the Singapore legal system in Chapter 2,
this chapter seeks to provide a contemporaneous and positivist account of the
process of law-making, its implementation and adjudication by the various legal
institutions and bodies in Singapore. Apart from exploring the structure, composition and functions of these legal institutions, we will also briefly examine in
the last section legal education and the legal profession, as well as other related
professional bodies in Singapore. As the alternative dispute resolution mechanisms have already been discussed in Chapter 2, they will not be pursued here.
THE CONSTITUTION AND THE THREE GOVERNING ARMS
3.2
Let us begin with the most fundamental legal document within the Singapore
legal system — the Constitution. The Constitution is the supreme law of
Singapore. Article 4 of the Constitution provides that any law enacted by the
Legislature after the commencement of the Constitution that is inconsistent
with the Constitution shall, to the extent of the inconsistency, be void.
Consistent with the hallmark of constitutional supremacy, it “breathes” life
into the three main arms of the state, viz, the Legislature (the Parliament), the
Executive (the Government) and the Judiciary, and at the same time, delineates
their respective powers, roles and responsibilities within the legal system. According to the Constitution, the main role of the Legislature is to enact written
laws, the Executive to implement and enforce the laws and the Judiciary to
adjudicate disputes between the litigating parties based on its interpretation
of the laws (see Figure 3.1).
CONSTITUTION
Executive
Elected President
(Head of State)
+
Prime Minister
(Head of Government
and Cabinet)
Implements and
enforces the
enacted laws
(and promulgates
subsidiary legislation)
Figure 3.1
Legislature
Judiciary
Executive
Supreme Court
+
Members of
Parliament
+
Subordinate Courts
Law-making body:
Makes written law
= Parent legislation
= Statute
= Act of Parliament
Adjudicates disputes
between litigants.
Judges’ decision
= Case law
The Constitution and the three governing arms of State
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Chapter 3: Legal Processes and Institutions
3.3
Apart from imposing duties on the above legal institutions, the Constitution
entrenches certain fundamental rights, such as the freedom of religion,
freedom of speech and equal protection under the law. These individual rights
are not absolute but qualified by public interest such as the maintenance
of public order, morality and national security. In addition to the general
protection of racial and religious minorities, the special position of Malays,
as the indigenous people of Singapore, is constitutionally mandated. The
provisions of the Constitution may be amended by the votes of two-thirds
of the total number of elected Members of Parliament. As and when Article
5(2A) of the Constitution comes into force, the specific constitutional
amendments seeking to amend the provisions on fundamental liberties will
require, in addition, at least two-thirds of the total number of votes cast by
the electorate in a national referendum.
THE LEGISLATURE
3.4
The Legislature serves as the major law-making body in Singapore. It
comprises the elected President and the Parliament. The law-making
machinery operates via a unicameral (single-house) system. The Singapore
Parliament, as the embodiment of representative democracy, consists of the
Members of Parliament (“MPs”) and the parliamentary proceedings are
presided over by the Speaker of Parliament.
3.5
The elected MPs are drawn from candidates who have won in the general
elections held every four to five years. Following the recent general elections
in 2011, the composition of the Parliament continues to be dominated by
the ruling People’s Action Party (“PAP”) with a total of 81 seats whilst the
opposition Workers’ Party holds six seats. The elected MPs are drawn from a
combination of single-member constituencies as well as Group Representation
Constituencies (“GRCs”).
3.6
According to the Constitution, each GRC consists of three to six members,
at least one of whom must be of a minority race. One official aim of the
GRC scheme was to entrench multi-racialism in Singapore politics. This
GRC scheme is, in practice, tied to the establishment of Town Councils,
whose role is to manage the housing estates under the Housing &
Development Board at the local level. A Town Council is usually formed
from a grouping of constituencies under the GRC scheme. Candidates who
have won in the general elections via the GRC ticket have often banded
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Principles of Singapore Business Law
together to form a Town Council in order to achieve greater economies
of scale.
3.7
In contrast to the elected MPs, the non-elected MPs do not enjoy voting
rights on constitutional amendments, money bills and votes of noconfidence in the Government. They consist of two separate categories: the
Non-Constituency Members of Parliament (“NCMPs”) and the Nominated
Members of Parliament (“NMPs”). To offer an alternative political voice in
Parliament, NCMPs are appointed from the candidates who have polled the
highest percentage of votes amongst the “losers” in the general elections, up
to a maximum of nine NCMPs. The actual number of NCMPs will be nine
minus the total number of opposition MPs elected to Parliament (s 52(1)
Parliamentary Elections Act (Cap 218, 2001 Rev Ed)). Following the 2011
general elections, three NCMPs (Yee Jenn Jong and Gerald Giam Yean Song
from the Workers’ Party as well as Lina Loh Woon Lee from the Singapore
Peoples’ Party) were appointed. The NMPs, on the other hand, are nonpoliticians who have distinguished themselves in public life and have been
nominated to provide a greater variety of non-partisan views in Parliament.
The Constitution stipulates that NMPs shall not exceed nine in number.
The 12th Parliament comprises nine NMPs who took their oath of office on
14 February 2012.
3.8
For the purposes of providing a more in-depth discussion of specific public
issues or Bills, the Select Committee, whose members are nominated by
the MPs, scrutinises legislation and submits reports on its findings to the
Parliament. One example of such a Select Committee hearing concerned the
constitutional amendments on the establishment and roles of the Elected
President (“EP”) in 1990. The Government Parliamentary Committees,
formed at the initiative of the PAP and drawn exclusively from the PAP,
focus on specific or specialised topics (such as education or transport) with
a view to engendering greater debate in Parliament.
The Parliamentary Law-making Process
3.9
The law-making process begins with a Bill, normally drafted by the
Government legal officers. Private member’s Bills are rare in Singapore. One
exception was the private member’s Bill initiated by NMP Walter Woon in
1994 which eventually led to the enactment of the Maintenance of Parents
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Chapter 3: Legal Processes and Institutions
Act (Cap 167B, 1996 Rev Ed). Subsequent amendments to the Maintenance
of Parents Act were made in 2010 in order to emphasise conciliation and
streamline the processes for claiming maintenance and enforcing maintenance
orders pursuant to a Bill tabled by MP Seah Kian Peng and a group of
ten MPs (at http://app1.mcys.gov.sg/MCYSNews/AmendmentstoMPAPassed.
aspx).
The Bill is initially introduced in Parliament at the First Reading. During
the Second Reading, the Ministers usually outline the objectives of the Bill,
defend the Bill and answer queries raised by the backbenchers. The Speaker
of the Parliament is tasked to regulate the proceedings and enforce the
Standing Orders of Parliament. The MPs may, in some cases, decide to refer
the Bill to a Select Committee for scrutiny. If the report is favourable or the
proposed amendments to the Bill are approved by the Parliament, the Bill is
accepted by the Parliament at the Third Reading and is passed.
3.10
The Presidential Council for Minority Rights (“PCMR”), established under
the Singapore Constitution and presently chaired by the Honourable Chief
Justice, has been tasked, except for certain exempted Bills, to scrutinise
Bills for any measures which may be disadvantageous to persons of any
racial and religious communities without being equally disadvantageous
to persons of other such communities, either by directly prejudicing persons
of that community or indirectly by giving advantage to persons of another
community. If the report of the PCMR is favourable or a two-thirds majority
in Parliament has been obtained to override any adverse report of the PCMR,
the Bill proceeds, as a matter of course, for the assent by the EP.
3.11
Upon the assent by the EP, the Bill is formally enacted as “written law”. The
legislation does not, however, come into force until the date of its publication
in the Government Gazette or the commencement date specified in the
legislation or the Gazette notification (s 10 Interpretation Act (Cap 1, 2002
Rev Ed)). The enacted law is known as primary or parent legislation (or
an Act of Parliament). An Act of Parliament may stipulate that a particular
Ministry or agency has powers to promulgate subsidiary legislation to
implement the statutory provisions, provided such subsidiary legislation is
not inconsistent with the Act of Parliament. The subsidiary legislation is
usually published in the Government Gazette.
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Principles of Singapore Business Law
THE EXECUTIVE
3.12
The Executive consists of the EP and the Cabinet in whom executive
powers are vested. The head of the Executive is the EP, who is currently his
Excellency President Tony Tan Keng Yam. He was appointed following the
2011 presidential elections. The qualifications for the presidential office are
fairly stringent. Apart from integrity, good character and other requirements,
the presidential candidate must have held one of the following positions for
not less than three years:
° as a Minister, Chief Justice, Speaker of Parliament, Attorney-General,
Chairman of Public Service Commission, Auditor-General, AccountantGeneral or Permanent Secretary;
° as chairman or chief executive officer of a statutory board;
° as chairman of the board of directors or chief executive officer of a
company with a paid-up capital of at least S$100 million; or
° a “similar or comparable position of seniority and responsibility” in an
organisation or department of equivalent size or complexity (whether in
the public or private sector) which has given him or her the requisite
experience and ability in managing financial affairs so as to handle the
responsibilities of the job of the EP.
The Presidential Elections Committee has been set up to ensure the
requirements are adhered to. The EP is elected for a six-year term. He or she
shall act in accordance with the advice of the Cabinet in discharging the EP’s
constitutional functions except in specified areas. The areas in which the EP
may act in his discretion are as follows:
° the veto against the government’s attempts to draw on past reserves (eg,
in relation to a guarantee or loan given or raised by the government
and the budgets of specified statutory boards and government companies
that draw on past reserves);
° the appointment of the Prime Minister, specified constitutional appointees
(eg, the Chief Justice and the Attorney-General) and other key civil
service appointments (eg, Commissioner of Police);
° the concurrence with the Director of Corrupt Practices Investigation
Bureau to make any inquiries or to carry out any investigations into
any information received by the Director, notwithstanding the Prime
Minister’s refusal to consent;
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Chapter 3: Legal Processes and Institutions
° the withholding of concurrence to the detention of persons under the
Internal Security Act (Cap 143, 1985 Rev Ed);
° the exercise of certain powers pertaining to restraining orders made
under the Maintenance of Religious Harmony Act (Cap 167A, 2001 Rev
Ed) where the Cabinet’s advice is contrary to that of the Presidential
Council for Religious Harmony.
There are also counter-checks on the presidential discretion (eg, Parliament
overruling, via a two-thirds majority of the total number of elected MPs, the
presidential decision in certain instances). In discharging certain specified
constitutional functions, the President is required to consult the Council of
Presidential Advisers, a body set up under the Singapore Constitution. In
other cases, the Elected President may in his discretion consult the Council
of Presidential Advisers.
3.13
The Cabinet, consisting of Ministers under the helm of the Prime Minister
(currently Lee Hsien Loong), is collectively responsible to the Parliament
under the Westminster system. The Prime Minister is someone appointed
by the EP who, in the latter’s judgment, is likely to command the confidence
of the majority of the MPs. There is no complete separation of powers
between the Executive and Legislature in Singapore. In terms of composition,
members of the Cabinet are typically drawn from the MPs. Parliamentary
Secretaries are further appointed from amongst the MPs to assist the
Ministers. Moreover, as mentioned above, the Ministers and the relevant
Government agencies possess some “law-making” powers in the promulgation
of subsidiary legislation in order to implement the parent legislation passed
by the Parliament.
3.14
Each Minister is usually responsible for all government matters pertaining
to one or more portfolios (such as education or trade and industry). In
Parliament, the responsible Minister will have to justify the policies
implemented by his or her Ministry, and is thus accountable to the
Parliament. For the purposes of this chapter, one significant Ministry
which should be mentioned is the Ministry of Law, which comprises the
statutory boards of the Intellectual Property Office of Singapore and the
Singapore Land Authority. Some important departments and bodies under
the responsibility of the Ministry of Law include the Legal Aid Bureau,
Insolvency and Public Trustee’s Office, Appeal’s Board (Land Acquisition)
and the Copyright Tribunal.
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Principles of Singapore Business Law
3.15
The Government is advised and represented by the Attorney-General and
the Solicitor-General in both civil and criminal matters. The AttorneyGeneral possesses wide prosecutorial discretion, that is, to institute, conduct
or discontinue any proceedings for any offence (Article 35(8) Constitution).
The prosecutorial discretion is not absolute or unfettered but subject to
constitutional provisions on fundamental rights of the individual (Law
Society of Singapore v Tan Guat Neo Phyllis (2008)). However, the AttorneyGeneral is not obliged to disclose the reasons for his prosecutorial decision in
a particular case (Ramalingam Ravinthran v The Attorney-General (2012)).
The Attorney-General is appointed by the EP if the latter, acting in his or her
discretion, concurs with the advice of the Prime Minister. The Honourable
Attorney-General Steven Chong was appointed with effect from 25 June 2012.
There are also special divisions within the Attorney-General’s Chambers
(www.agc.gov.sg) dealing specifically with the drafting of legislation, law
reforms, economic crimes and international affairs. The Attorney-General’s
Chambers is staffed by State Counsel and Deputy Public Prosecutors who
belong to the Singapore Legal Service.
THE JUDICIARY
3.16
The primary role of the courts in Singapore is to adjudicate disputes
between the litigating parties and serve as an independent check on the
Legislature and the Executive within the adjudicative process. The Judiciary
is empowered, for instance, to review the constitutionality of legislation as
well as to review the decisions and actions of administrative authorities.
As stated by the Court of Appeal (at [86]) in Chng Suan Tze v Minister of
Home Affairs and others and other appeals (1988), “the notion of a subjective
or unfettered discretion is contrary to the Rule of Law. All power has legal
limits and the Rule of Law demands that the courts should be able to
examine the exercise of discretionary power.”
According to the Constitution, judicial power is vested in the judges of the
Supreme Court and the Subordinate Courts. The judge is the sole arbiter
of both facts and the law, the jury system having been entirely abolished
in Singapore since 1970. In the course of adjudication, the judge would
be required to interpret and apply various sources of law such as the
Constitution, legislation and prior court decisions in order to distil the legal
rule or principle to be applied to the particular facts of the case.
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Chapter 3: Legal Processes and Institutions
Box 3.1
Reflecting
on the law
What is your verdict on the jury system?
Some of the common criticisms of the jury system are as follows:
•
•
•
•
Juries tend to decide on legal liability or conviction based on prejudiced or
stereotypical views and/or moral opinions.
There is a danger that juries may be overly influenced by a lawyer’s glib
tongue.
The lack of availability of competent jurors.
The costs in instituting and maintaining the jury system.
On the other hand, supporters of the jury system and trials have raised the following
arguments:
•
•
•
The right to jury trial should be regarded as a significant human liberty.
Jury trials are important in directly involving the ordinary man in the
administration of justice.
The “strength in numbers” argument: for very serious offences such as
capital offences, the legal system should be slow to convict an accused
based on the decision of one single judge, as compared to the majority
decision of the jury panel.
Question: Do you think there should be a right to jury trial in the first place? If so, to
what extent, if at all, should there be restrictions to the right to jury trial?
The Common Law Tradition
3.17
Under the common law tradition, the judge is required to consider the
relevance and effect of previous court decisions in order to decide the
outcome of the case in accordance with the doctrine of judicial precedent.
The common law tradition is one of the major legal traditions in the
world, apart from the civil law, socialist and other religious legal traditions.
Singapore has its roots in the English common law tradition and enjoys
the concomitant advantages of stability, certainty and internationalisation
of the British system. Whilst Singapore shares with countries such as India,
Malaysia, Myanmar and Brunei the English common law roots, the actual
application and workings of the traditions will vary in each country.
3.18
Historically, the English common law tradition arose out of a need for
England to develop laws to be applied equally to litigants in similar disputes.
As a result, assize and later, circuit judges, who were sent to various parts
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of England to adjudicate disputes, applied the same laws to the resolution
of the disputes before them. Further, these laws would be the same (or at
least similar) regardless of the provinces or geographical areas in which the
disputes took place. As a result, a “common” law developed throughout the
whole of England.
3.19
The strong influence of the English common law on the development of
Singapore law is generally more evident in certain traditional common law
areas (such as contract, tort and restitution) compared to other statutebased areas (such as criminal law, company law and the law of evidence).
With respect to the latter, other jurisdictions such as India and Australia
have influenced the approach towards and interpretation of these statutes.
However, the Singapore courts have, in recent times, significantly departed
from the English common law in specific areas such as in the law of contract
and torts. There is now a greater recognition of local jurisprudence in the
development of the common law in Singapore.
The Doctrine of Judicial Precedent
3.20
The doctrine of judicial precedent is integral to a common law jurisdiction
such as Singapore. The doctrine of judicial precedent (also known as
stare decisis, which means “standing decision”) requires judges to abide
by the previous decisions made by the superior courts within the court
hierarchy.
3.21
The doctrine promotes firstly uniformity and consistency of decisions within
the court hierarchy as judges are not permitted to reach a decision in
a dispute based merely on his or her whim or fancy, but on prior court
decisions. Second, the resulting uniformity and consistency also lend a
measure of certainty to the law for potential litigants. Third, the doctrine is
consistent with the respect accorded to the hierarchy within the court system,
which is usually based on the experience and seniority of the judges.
3.22
How is a judicial decision reached? A judicial decision is simply a conclusion
that resolves a legal dispute; such a conclusion is invariably based on a legal
principle applied to the particular facts of the dispute. For instance, the
legal principle may be that “a man who commits a criminal act cannot profit
from the criminal act”. The facts of the dispute are that X has committed
a criminal act and seeks to recover the “rewards” obtained from the
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Chapter 3: Legal Processes and Institutions
commission of the criminal act. Hence, the judge may, applying the legal
principle to the facts of the case, conclude that X shall not be entitled to
recover the “rewards”.
3.23
Where it is apparent from the conclusion of the judge as to the legal
principle(s) upon which the conclusion of the case is based, we refer to such
a legal principle as the ratio decidendi (or “the reason for the decision”).
Hence, in the above example, the legal principle that “a man who commits a
criminal act cannot profit from the criminal act” is the ratio decidendi for the
decision of the judge to disallow recovery by X. Obiter dictum, on the other
hand, means a statement “made by the way” (or, if you like, a “peripheral” or
an “incidental” statement). Obiter dictum refers to a legal principle or judicial
statement that is not directly applied to arrive at the outcome in a case.
3.24
The determination of the ratio decidendi and the obiter dictum can be
significant. If the particular legal principle or statement in a previous
decision is regarded as ratio decidendi, then the judge has to abide by
the ratio decidendi of the prior decision, assuming that the previous
decision is made by a higher court within the court hierarchy. In legal
parlance, we say that the ratio decidendi in the previous decision by a
higher court is “binding” on a lower court. If, however, the legal principle
in a previous decision is merely regarded as obiter dictum, the judge is not
required to apply the obiter dictum in the present case, even if the previous
decision is made by a higher court within the hierarchy. In legal parlance,
we say that the obiter dictum is merely “persuasive”, and is not binding on
the judge.
3.25
The doctrine of judicial precedent applies only to court decisions within the
same court hierarchy. Hence, prior court decisions from England and foreign
Commonwealth jurisdictions (such as Australia, Malaysia, India, Brunei and
Canada) are not binding on Singapore courts. In practice, however, Singapore
courts do treat relevant decisions from English and such Commonwealth
courts as “persuasive”, though not “binding”. For instance, decisions from
the UK Supreme Court (formerly the House of Lords in England) and the
High Court of Australia respectively are generally “persuasive” precedents for
Singapore judges adjudicating a similar dispute.
3.26
A situation may arise where the facts in the previous decision upon which
the ratio decidendi is based may be materially different from those in the
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present case. Hence, the judge may regard the facts in the prior decision as
being so materially different that the ratio decidendi of that previous decision
should not be followed or applied in the present case. In legal parlance,
we say that the judge has “distinguished” the prior decision from the
present case.
3.27
In summary, under the doctrine of stare decisis, the ratio decidendi contained
in the previous decision by a higher court binds the judge in his or her
adjudication of the present dispute. However, the doctrine does not apply to
bind the judge where:
° the facts of the present dispute can be materially “distinguished” from
the facts in the previous decision of the higher court so as to render the
ratio decidendi of the previous decision inapplicable; or
° the legal principle embodied in the previous decision of the higher court
and sought to be applied to the dispute at hand was merely obiter dictum,
and hence not binding on the lower court.
3.28
The proper functioning of the doctrine of stare decisis depends on the
publication of judicial precedents in a form accessible to the courts,
lawyers and perhaps even laypersons. Hence, law reports containing prior
court judgments are vital for the development of the common law in
Singapore. Currently, the Singapore Law Reports is the main law reporter for
Singapore. This was first published in 1992; prior to that, reports of
local cases were published in the Malayan Law Journal since 1932. The
judgments of the Singapore courts can also be accessed via LAWNET
subscription at www.lawnet.com.sg. Recent judgments of the Supreme
Court and the Subordinate courts can also be accessed free of charge
at Singapore Law Watch (at http://www.singaporelawwatch.sg/slw/index.
php).
Common Law and Other Legal Concepts
3.29
To avoid confusion, we should note that the term “common law” may
be used as a contrast to or comparison with other legal concepts such
as equity, written law, the civil law tradition and criminal law. For
completeness, we also discuss the differences between civil and criminal laws
in para 3.36.
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Chapter 3: Legal Processes and Institutions
(1) Common law versus equity
3.30
Historically, in England, equity as a body of principles of fairness or justice
was employed by the courts to ameliorate the defects or weaknesses inherent
in the rigid common law system. In order for a claimant to bring a claim
under the common law in England, he or she had to file a form known
as a “writ” in the English courts according to rigid prescriptions. A case
which could not fit into the inflexible categories under the writ was thus
thrown out. This meant that the claimant had no remedy. Hence, the
Lord Chancellor was tasked to provide new writs to cover claims which
could not fit into the rigid categories under the then prevailing common law
writs. Despite initial complaints about the perceived abuses of discretionary
power conferred on the Lord Chancellor, the rules and practices of equity
utilised by the Chancery Courts gradually became more formalised and
institutionalised.
3.31
According to the Singapore Civil Law Act (Cap 43, 1999 Rev Ed), the
Singapore courts are empowered to administer the common law as well as
equity concurrently. The practical effect is that a claimant can seek both
common law remedies (damages) and equitable remedies (injunctions and
specific performance) (see Chapter 18) in the same proceedings before the
same court. It should also be noted that equity has played a decisive role
in the development of specific doctrines in the law of contract, including
the doctrines of undue influence (see Chapter 14) and promissory estoppel
(Chapter 8).
(2) Common law versus written law
3.32
The concept of “common law” can also be contrasted with the notion of
“written law”. In Singapore, “written law” refers to the Constitution, Acts
and subsidiary legislation, whilst “common law”, in this context, refers to
judge-made law or case law. The written laws of Singapore can be accessed
either via the website of the Attorney-General’s Chambers (www.agc.gov.sg)
or via LAWNET (http://www.lawnet.com.sg). The law-making process by the
Legislature has been discussed in paras 3.9–3.11.
(3) Civil law tradition versus common law tradition
3.33
The common law system in Singapore bears material differences from that
in some Asian countries which have imbibed the civil law tradition (the
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People’s Republic of China, Vietnam and Thailand) or those with a mixture
of civil and common law traditions (the Philippines).
3.34
Firstly, the civil law systems generally place relatively less weight on prior
judicial decisions and do not abide by the doctrine of stare decisis, unlike the
common law system as described in paras 3.20–3.28. Second, the common
law courts of Singapore generally adopt an adversarial approach in litigation
between the disputing parties, whilst the civil law judges tend to take a more
active role in the finding of evidence to decide the outcome of the case.
Third, whilst numerous legal principles have been developed by common
law judges, civil law judges are more reliant on general and comprehensive
written codes governing a wide spectrum of areas.
3.35
Having said that, the divergence between the common law and civil law
systems is now less marked than in the past. Common law jurisdictions have,
for instance, embarked upon legislative programmes to fill the perceived gaps
of the common law. In this regard, Singapore has enacted various statutes to
govern many specific areas of law, such as the Contract (Rights of Third
Parties) Act (Cap 53B, 2002 Rev Ed), Competition Act (Cap 50B, 2006 Rev
Ed), Consumer Protection (Fair Trading) Act (Cap 52A, 2009 Rev Ed) and
Workplace Safety and Health Act (Cap 354A, 2009 Rev Ed).
(4) Civil law versus criminal law
3.36
A criminal case is prosecuted by the State against the accused person,
whereas a civil lawsuit is initiated by one party (the plaintiff) against the
other disputing party (the defendant). Second, the general purpose of civil
law is to compensate the innocent party for the damages or losses which he
or she has suffered or incurred arising from the alleged wrongdoing of the
other party. However, in criminal law, the primary purpose is to “punish” or
deter potential criminals from committing offences. Third, we speak in terms
of “remedies” in civil law to compensate the innocent party. In criminal law,
the offender may suffer the consequences of a jail term or a fine by the state
or both; there is generally no direct compensation from the wrongdoer to
the victim for the crime committed under the criminal law (but note that
s 359 Criminal Procedure Code (No 15 of 2010) now requires the court to
“consider” whether to make victim compensation orders upon conviction).
Finally, in a criminal trial, the prosecution has to prove beyond reasonable
doubt that the accused has committed the offence as charged (Teo Keng
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Chapter 3: Legal Processes and Institutions
Pong v Public Prosecutor (1996)). In a civil lawsuit, however, the plaintiff
has to prove his or her case against the defendant merely on a balance of
probabilities.
The Court Structure and Hierarchy in Singapore
3.37
The Singapore Judiciary consists of the Supreme Court and the Subordinate
Courts (see Figure 3.2). The great efficiency and strength of the Singapore
Judiciary have won her several accolades and a strong international reputation
as evidenced by the published rankings of the world’s legal systems by the
Political and Economic Risk Consultancy (“PERC”) and the Institute for
Management Development. Under the leadership of the former Chief Justice
Yong Pung How and the former Registrar of the Supreme Court Chiam Boon
Keng, strict case management and alternative dispute resolution (“ADR”)
methods (see Chapter 2) have reduced drastically the problems associated
with the backlog of cases in the early 1990s. Chan Sek Keong, Singapore’s
third Chief Justice, who was appointed to head the Judiciary from 11 April
2006 to 5 November 2012, implemented various programmes with a view
to enhancing access to justice and substantive jurisprudence in Singapore,
including the establishment of community courts and the appointment of
specialist judges to handle complex cases within the Subordinate Courts. The
present Chief Justice, Sundaresh Menon, took over the helm on 6 November
2012.
Court of Appeal
Supreme
Court
Constitutional
Tribunal
High Court
Subordinate
Courts
District Courts
(including the
Family Courts)
Figure 3.2
Coroners’
Courts
Magistrates’
Courts
Juvenile
Courts
The judicial hierarchy in Singapore
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Small Claims
Tribunals
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3.38
The Supreme Court comprises both the High Court and the Court of
Appeal (Supreme Court of Judicature Act (Cap 322, 2007 Rev Ed)). As of
6 November 2012, there were 17 judges and judicial commissioners in the
Supreme Court, including three female judges. Within the Supreme Court,
a Constitutional Tribunal has also been set up to hear questions referred
to the tribunal by the Elected President on the effect of provisions of the
Constitution. The administration of justice in the Supreme Court is assisted
by the Registrar and his or her team of deputy registrars, senior assistant
registrars and assistant registrars. Since 1991, Justices’ Law Clerks have been
appointed to provide research assistance to the Supreme Court judges.
3.39
Following the abolition of appeals to the Privy Council since 1994, the
Singapore Court of Appeal is the highest court in the land. The Court of
Appeal enjoys both appellate civil and criminal jurisdiction arising from
the decisions of the High Court and the Subordinate Courts. The Court of
Appeal comprises the Honourable Chief Justice and Judge(s) of Appeal. As of
6 November 2012, there were three Judges of Appeal: the Honourable Justices
Chao Hick Tin, Andrew Phang, and V K Rajah. As the highest court of
the land, the Court of Appeal is instrumental in maintaining and enhancing
the administration of justice as well as the jurisprudential development of
Singapore law.
3.40
The Practice Statement on Judicial Precedent issued by the Supreme Court
on 11 July 1994 outlined the relevance of prior Privy Council and Court
of Appeal decisions in Singapore. It stated that the Court of Appeal should
not be bound by its own previous decisions and those of the Privy Council
which, prior to 8 April 1994, were binding on it, “where adherence to such
prior decisions would cause injustice in a particular case or constrain the
development of law in conformity with the circumstances of Singapore”.
Thus, the Court of Appeal will continue to treat such prior decisions as
normally binding but will, whenever it appears right to do so, depart from
such prior decisions. Bearing in mind the danger of retrospectively disturbing
contractual, proprietary and other legal rights, this power to depart from
prior Privy Council decisions will be exercised sparingly.
3.41
Apart from hearing cases at first instance, the High Court also hears civil
appeals from the District and Magistrates’ Courts as well as other tribunals
as prescribed by the written law. It also has appellate criminal jurisdiction
over criminal appeals from the District and Magistrates’ courts and in
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respect of points of law reserved by special cases submitted by the District
and Magistrates’ courts.
3.42
Under the doctrine of judicial precedent, the Singapore High Court is bound
by the prior decisions of the Court of Appeal, unless the High Court judge is
able to show that either of the exceptions stated in para 3.27 apply. However,
it is not bound by the previous decisions of the High Court.
3.43
The High Court judges enjoy security of tenure, whilst Judicial Commissioners
are appointed on a short-term contract basis. Both, however, enjoy the
same judicial powers and immunities. Their judicial powers comprise both
original and appellate jurisdiction over both civil and criminal matters. In
line with the enhanced complexity of commercial disputes, the Judiciary
has since 2002 established three specialist courts: the Admiralty, Intellectual
Property and Arbitration Courts which are presided by Judges and Judicial
Commissioners with domain expertise in those areas.
3.44
The Subordinate Courts (consisting of the District, Magistrates’, Coroners’
and Juvenile Courts as well as the Small Claims Tribunals) have also been set
up within the Singapore judicial hierarchy to administer justice amongst the
people (Subordinate Courts Act (Cap 321, 2007 Rev Ed)). The administration
of justice within the Subordinate Courts is aided by a team consisting of the
Registrar and deputy registrars.
3.45
The District Courts and the Magistrates’ Courts share the same powers over
specific matters such as contractual or tortious claims for a debt, demand or
damage, and actions for the recovery of monies. However, the jurisdictional
monetary limits in civil matters for the Magistrates’ Courts and District
Courts are $60,000 and $250,000 respectively. The courts also differ in
terms of criminal sentencing powers. Imprisonment terms imposed by the
Magistrates’ Courts are limited to three years whilst the limit imposed on the
District Courts is ten years (s 303 Criminal Procedure Code (No 15 of 2010)).
3.46
With the increased sophistication in business transactions and law, the
Commercial Civil and Criminal District Courts have recently been
established within the Subordinate Courts to deal with more complex cases.
Law academics and practitioners with the relevant expertise have also been
appointed as specialist judges on an ad hoc basis to deal with specific
complex cases.
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Principles of Singapore Business Law
3.47
We should also briefly mention the main roles and functions of the other
Subordinate Courts. The Family Court, which is a District Court, deals with
divorces, maintenance, custody, adoptions and applications for protection and
exclusion orders in family violence cases. The Juvenile Court, presided over
by a Magistrate, hears cases involving offences committed by young persons
and children. The conduct of inquiries to determine whether the deceased
person(s) died of unnatural causes is within the purview of the Coroners’
Court. The Small Claims Tribunals (“SCTs”) offer a speedy, cost-effective and
informal process (without legal representation) for the disposition of small
claims with a monetary limit of only $20,000, provided the disputing parties
consent in writing. The SCTs hear claims in respect of contracts for the sale
of goods and the provision of services, tort claims in respect of property
damage (excluding those arising out of or in connection with the use of a
motor vehicle) and disputes relating to leases of residential premises for a
lease period of two years or less.
3.48
Other existing courts include the Subordinate Military Courts which hear
cases at first instance involving military offences. Appeals against the
decisions of the Subordinate Military Courts are heard by the Military
Court of Appeal. The Industrial Arbitration Court has been established to
conduct arbitration proceedings with respect to trade disputes involving
trade unions and employers. The Syariah Court administers Muslim law in
specific personal legal matters governing marriages, divorces, the nullity of
marriages, judicial separations, disposition or division of property on divorce
or nullity of marriage in respect of Muslims or parties married under
Muslim law. The High Court, however, has concurrent jurisdiction with
the Syariah Court on specific matters relating to maintenance, custody and
division of property, subject to the parties obtaining leave of the Syariah
Court prior to commencing proceedings in civil courts.
3.49
The Community Court was established in 2006 to deal with particular
types of cases (youthful offenders, offenders with mental disabilities,
neighbourhood disputes, attempted suicide cases, family violence, carnal
connection offences by youthful offenders, abuse and cruelty to animals and
cases impacting race relations). One important purpose of this court is to
allow such offenders to reintegrate more successfully into the community
via the use, in appropriate cases, of long-term community-based treatment
rather than imprisonment. Subsequent legal reforms in 2009 have also
enabled the Community Court to utilise more graduated sentencing
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options (such as community service orders and day reporting orders) to deal
with minor offences.
Technology and the Courts
3.50
The Singapore Judiciary as a whole has taken big strides in imbibing information technology. Certain technologically enabled courtrooms (Technology
Courts) were, for instance, set up to enable the sharing of information by
lawyers and judges and the giving of evidence by witnesses via video
conferencing. The Supreme Court’s Digital Transcription System allows for
the digital audio recording of court hearings with near real-time transcription.
Moreover, the Electronic Queue Management System provides a fair and
orderly queue system in the Supreme Court for chamber hearings before the
Registrars. It notifies lawyers, on a first-come-first-served basis, as to when
their cases will be heard via display screens located within its premises.
The Electronic Filing System (“EFS”), a joint project by the Judiciary,
Singapore Network Services and the Singapore Academy of Law, has, in
the past, enabled the filing, extraction and service of court documents as
well as the tracking of case information by electronic means. Pursuant to an
EFS review in 2003, the EFS has since been reconstituted as the Electronic
Litigation Systems (“ELS”) in order to further integrate technology into
the litigation process. Information technology innovations have also been
utilised to facilitate and streamline various criminal processes (including the
payment of traffic fines and information flow and exchange between the
Subordinate Courts and Home Team agencies). New technologies (such
as 3G mobile services) are being tested and employed to further enhance
the delivery of court IT services, reflective of the incessant drive by the
Judiciary to harness technological advancements.
Interpretation of Written Law
3.51
The judge, during the course of adjudication, may be required to interpret the
Acts of Parliament and subsidiary legislation as applicable to reach a decision
in a particular case. A few general approaches to statutory interpretation
have been used by judges for this purpose:
° literal rule: the words in the statutory provisions should be construed
according to their plain and ordinary meaning;
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Principles of Singapore Business Law
° golden rule: the literal rule should be followed unless it leads to an absurd
result;
° mischief rule (also known as the rule in Heydon’s case (1584)): the words
should be considered in the light of the mischief which the enactment of
the legislation was attempting to remedy; and
° purposive rule: the purpose or object underlying the statute should be
examined to ascertain the meaning of the words (see s 9A Interpretation
Act (Cap 1, 2002 Rev Ed)).
3.52
Some of these approaches have been encapsulated in the Interpretation Act
(Cap 1, 2002 Rev Ed). According to s 9A Interpretation Act, the judge can
refer to, inter alia, the explanatory statement to the Bill, the speech made
by the Minister in Parliament as well as the Parliamentary debates for the
following purposes:
° to confirm the ordinary meaning of the provision of the written law,
taking into account its context in the written law and the purpose or
objective underlying the written law (ie, a combination of the literal rule
and purposive rule); and
° to ascertain the meaning of the provision of the written law if:
3.53
–
the provision is ambiguous or obscure; or
–
the ordinary meaning of the provision would lead to a result that is
manifestly absurd or unreasonable (ie, the golden rule).
There are also various specific technical rules which judges have used to
interpret the written law, including:
° ejusdem generis rule: where general words follow specific words (eg,
pens, pencils, erasers and “any object whatsoever”), the meaning of
the general words will be confined to the class given by the preceding
specific words;
° noscitur a sociis: this involves gathering the meaning of words from its
context, that is, via association with its neighbouring words (eg, buses,
“vehicles” and taxis); and
° expressio unius est exclusio alterius: words that are expressly mentioned
in a statute suggest an intention to exclude those which have been
omitted.
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Chapter 3: Legal Processes and Institutions
THE LEGAL PROFESSION, LEGAL EDUCATION AND OTHER
PROFESSIONAL BODIES
3.54
The legal profession in Singapore is “fused”. This means the Singapore
lawyer may act as both an advocate (to represent clients in the courts) as
well as a solicitor (to assist clients in out-of-court work such as preparing
and negotiating legal documentation). The Singapore lawyer is a versatile
creature: he or she may serve as a legal or judicial officer in the Singapore
legal service, an in-house counsel of a company or practise law in a local
or international law firm. Within the local set-up, the lawyer may handle
litigation, corporate work, conveyancing and intellectual property work.
Outstanding litigators, practitioners and law academics have been appointed
as Senior Counsel in recognition of their lofty professional standards.
Leading Singapore lawyers have been consistently cited in Legal 500, Asia
Pacific 500 and Chambers Global in one or more areas of expertise. The
legal profession has, like the courts, undergone increased specialisation of
functions in recent years as we find more lawyers involved in esoteric areas
such as biotechnology and asset securitisations.
3.55
For the lawyer in private (legal) practice, one prominent feature of the legal
landscape has been the proliferation of vehicles for the setting up of legal
practices and the facilitation of tie-ups amongst the law practices. Apart
from the sole proprietorships and partnerships, the legal profession has
also seen the creation of the law corporation with the associated benefits of
limited liability. The subsequent introduction of limited liability partnerships
(“LLPs”) in Singapore has offered another vehicle for legal practice. There
also exists the avenue of forming joint law ventures (“JLVs”) and formal law
alliances (“FLAs”) between a Foreign Law Practice (“FLP”) and Singapore
Law Practice (“SLP”) (subject to the approval of the Attorney-General) with
the attendant advantages of marketing the venture or alliance as a single
service provider and centralised billing for clients. FLPs licensed as Qualified
Foreign Law Practices (“QFLPs”) are entitled to practise Singapore law in
certain permitted areas via Singapore-qualified solicitors employed by them.
In addition, the legislative amendments in 2012 will enable the foreign lawyers
within the SLP to take an increased profit and equity share in the SLP up to a
maximum of 33 per cent as well as encourage greater collaborations between
the SLPs and the FLPs. For example, the recent reforms allow concurrent
partnerships between SLPs and FLPs of a JLV and permit QFLPs to enter
into FLAs and JLVs whilst still retaining their QFLP licences.
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3.56
A sound legal education is instrumental to the birth and subsequent development of the Singapore lawyer. The Singapore Institute of Legal Education
(at http://www.sile.org.sg) was established in May 2011 to maintain and
improve the standards of legal education in Singapore. To be admitted to
the Singapore Bar, an aspirant has to first attain the status of a “qualified
person” by obtaining a law degree from the National University of
Singapore (“NUS”), the Singapore Management University (“SMU”) or
one of the approved overseas universities of the United Kingdom, United
States, Australia, Canada and New Zealand. In addition to the Bachelor of
Laws (“LLB”) programme, SMU offers a Juris Doctor (“JD”) programme for
graduates with a first degree from other disciplines as well as law graduates
from civil law jurisdictions and non-gazetted universities in common law
jurisdictions. Apart from a four-year LLB programme, NUS also offers a
three-year graduate LLB programme for graduates with a first degree.
3.57
Law graduates from the approved foreign universities will be required to pass
Part A of the Bar Examination (after an optional and shorter conversion
course offered by NUS) in place of the former one-year Diploma of Singapore
Law. Overseas graduates with Lower Second Class honours from approved
universities are eligible to take the Bar Examination. Law graduates from
NUS and SMU are not required to undertake Part A of the Bar Examination.
The law graduates from both the local and approved foreign universities
would have to undergo and pass the full-time Preparatory Course leading
to Part B of the Singapore Bar Examinations. Finally, the law graduate may
serve a practice training period with a Singapore law practice pursuant to
a practice training contract or through work as a Legal Service officer or
under the supervision of a qualifying legal officer. Upon fulfillment of the
above requirements, he or she can be admitted to the Singapore Bar.
3.58
Foreign-qualified lawyers may apply for a Foreign Practitioner Certificate
from the Attorney-General to practise in limited areas of Singapore law such
as banking and finance, mergers and acquisitions, and intellectual property
law subject to passing the Foreign Practitioner Examination (“FPE”). One
prerequisite for taking the FPE is that the foreign lawyer must have at least
three years of relevant legal practice or work in Singapore or overseas.
Queen’s Counsel from the United Kingdom were previously admitted on an
ad hoc basis for non-criminal cases provided the court was satisfied that
the matter was of sufficient difficulty and complexity and the applicant
had special qualifications or experience for purpose of the case (s15 Legal
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Profession Act (Cap 161, 2009 Rev Ed); Re Millar Gavin James QC (2004)).
In Re Joseph David QC (2012), admission was granted to a Queen’s
Counsel for a commercial arbitration case. With a view to providing greater
diversity in legal representation particularly for commercial disputes, the
recent legislative reforms in 2012 have given the Chief Justice discretion in
specifying the considerations as to whether to grant ad hoc admissions to
foreign advocates. The impact of the recent overtures remains to be seen.
3.59
The Singapore Institute of Legal Education administers a mandatory
Continuing Professional Development (“CPD”) scheme for lawyers, which
commenced in April 2012. In its initial phase, the CPD scheme is targeted at
young lawyers in legal practice (ie, those with less than five years’ experience)
but it is expected that the scheme will, in the near future, also apply to the
more experienced lawyers.
3.60
Apart from the law schools, the Singapore Institute of Legal Education, and
local and foreign law practices, two other important professional bodies — the
Law Society of Singapore and the Singapore Academy of Law — should be
specifically mentioned. The Law Society (www.lawsociety.org.sg), comprising
primarily lawyers in legal practice, continues to uphold and advance the
interests of the practising lawyers as well as to promote access to justice.
In respect of criminal matters, the Law Society of Singapore operates the
Criminal Legal Aid Scheme (“CLAS”) for needy accused persons. The Pro
Bono Services Office of the Law Society of Singapore, established in 2007,
coordinates and administers pro bono initiatives including CLAS, Project
Law Help for voluntary welfare organisations, Community Legal Clinics at
the Community Development Councils as well as initiatives to raise public
awareness of the law. Apart from the Law Society, the Singapore Legal Aid
Bureau, a government department established under the Legal Aid and
Advice Act (Cap 160, 1996 Rev Ed), provides civil legal aid to the needy
based on “merits” and “means” tests.
3.61
The Singapore Academy of Law (“SAL”) (www.sal.org.sg), established by an
Act of Parliament in 1988, seeks to advance the legal profession as a whole.
Its members include practising lawyers, in-house counsel, government legal
officers and law academics. The President of the SAL is the Honourable Chief
Justice. Current and significant projects of the SAL include the promotion
of Singapore law in the Asian region, the continuing legal education of
its members, law reform initiatives, the promotion of alternative dispute
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resolution (see Chapter 2) and the publication of law journals and case
law in the Singapore Law Reports. Academy Publishing, set up under the
auspices of the Singapore Academy of Law, has significantly contributed
to the development of local jurisprudence with the publication of various
Singapore law books including contract law, tort law and constitutional law.
CONCLUSION
3.62
The maintenance and development of the legal institutions and their
processes in Singapore are likely to be influenced by a combination of
factors: economic pragmatism and efficiency, values of fairness and equity,
local circumstances and evolving external conditions. In view of the relative
youth of these legal institutions, the willingness to adapt and innovate,
undergirded by fundamental principles such as the Rule of Law, will be
important. Whilst the laws and practices of other jurisdictions remain a
veritable source of knowledge in this age of globalisation, the Singapore
legal institutions will inevitably have to, in at least some cases, develop
and modify their own solutions and processes to tackle particular legal,
socio-economic, political and cultural issues appropriate to their unique
circumstances.
64
Chapter 6
Negligence
6.1–6.2
Introduction
6.3–6.4
The Legal Requirements
6.5
6.6–6.12
6.13–6.14
6.15–6.27
6.28–6.30
6.31–6.35
6.36–6.42
6.43–6.44
6.45–6.49
6.50–6.54
6.55
6.56–6.59
6.60–6.63
6.64–6.66
6.67–6.68
6.69
6.70–6.74
6.75–6.76
6.77–6.80
6.81–6.82
6.83–6.84
Duty of Care
The Main Judicial Formulations for Duty of Care
The Meaning of “Foreseeability”, “Proximity” and “Fair, Just and
Reasonable” or Public Policy
The Singapore Position
Duty of Care: Various Scenarios
(1) Negligent act or omission causing personal injury or physical
damage
(2) Negligent misstatements causing economic loss
(3) Negligent misstatements causing physical damage
(4) Negligent acts or omissions causing economic loss
(5) Negligent acts or omissions causing nervous shock or
psychiatric harm
Breach of Duty of Care
Factors to Determine the Standard of Care
Standard of Care Relating to Professionals and Professional
Standards and Practice
Use of Expert Evidence in Determining the Standard of Care
Res Ipsa Loquitur
Causation of Damage
Factual Causation
(1) “But for” test
(2) Material contribution to damage
(3) Material contribution to risks of damage
(4) Loss of chance
Legal Causation
Principles of Singapore Business Law
6.85–6.88
6.89–6.90
Remoteness of Damage
General Principles
Special Circumstances of the Plaintiff
6.91
Mitigation of Damage
6.92–6.93
Assessment of Damage
6.94–6.96
6.97–6.99
6.100
6.101–6.102
Defences
Ex Turpi Causa
Volenti Non Fit Injuria
Exemption of Liability
Contributory Negligence
6.103
6.104–6.106
6.107–6.108
6.109
6.110–6.112
Other Issues
Vicarious Liability
Director’s Liability for Company’s Negligence
Concurrent Liability in the Tort of Negligence and in Contract
Limitation Periods
6.113
Conclusion
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Chapter 6: Negligence
INTRODUCTION
6.1
In the previous chapter, we examined a category of torts known as business
torts that dealt primarily with trade and economic interests arising from the
intentional conduct of the defendants. In this chapter, we deal with the tort
of negligence which is concerned with the legal liability and consequences
arising from negligent conduct. The terms “negligent” or “negligence” connote,
in layman’s language, conduct or acts performed carelessly or without proper
care. However, not all forms or types of negligent conduct, acts or omissions
will attract legal liability under the tort of negligence. There are legal rules
that define the appropriate parameters relating to the range of potential
defendants and the scope of liability. In this regard, they serve as control
mechanisms or devices to delineate the circumstances in which a careless act
or omission that causes harm may result in legal liability under the tort of
negligence.
6.2
The situations in which the tort of negligence may feature in our lives
and society are varied and, at times, complex. They include the typical car
accident arising from the negligence of the driver, the negligent advice given
by a professional such as an auditor or lawyer, the negligent construction or
design of a structure, and the negligent acts and omissions of manufacturers
and distributors of products. The list is by no means exhaustive and the
categories of negligence are not closed.
THE LEGAL REQUIREMENTS
6.3
The legal requirements necessary for the plaintiff to establish an action in
the tort of negligence are as follows:
° the existence of a duty of care owed by the defendant to the plaintiff;
° the defendant must have breached his or her duty of care to the plaintiff;
and
° the defendant’s breach must have caused the damage suffered by the
plaintiff. In addition, the resulting damage cannot be too remote.
With respect to the quantification of damages, we also need to ascertain if
the plaintiff had failed to take reasonable steps to mitigate its losses, in which
case the plaintiff cannot claim that portion of the damages to the extent that
it was not duly mitigated.
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6.4
If the above legal requirements are met, the plaintiff would succeed in his
action in negligence against the defendant unless the defendant can avail
himself or herself of valid defences. The defences covered in this chapter are
as follows:
° illegality (ex turpi causa);
° voluntary assumption of risk (volenti non fit injuria);
° exemption of liability; and
° contributory negligence.
If either of the first two defences is proved, the defendant is not legally
liable at all to the plaintiff under the tort of negligence. If the defence of
contributory negligence is proved, the defendant will only be partially
liable to the plaintiff. As for exemption of liability, it depends on whether
the purported exemption entirely excludes or merely limits the extent of
liability.
DUTY OF CARE
6.5
The starting point for an action in the tort of negligence is the duty of
care issue. Lawyers and judges have had to grapple with this thorny and
complex concept since the landmark English decision of Donoghue v
Stevenson (1932). This chapter will attempt to summarise, in chronological
order, the development of what are generally regarded as the main judicial
formulations or tests for establishing the duty of care in the tort of negligence. This is followed by an explanation of the legal jargon used in the
judicial formulations, the tests involved and an analysis of the Singapore
position.
The Main Judicial Formulations for Duty of Care
6.6
We begin with Lord Atkin’s dictum in the abovementioned case of Donoghue
v Stevenson (1932). In this case, the friend of a purchaser of a bottle of
ginger beer that contained the decomposed remains of a snail had suffered
gastro-enteritis upon consuming the contents. Obviously, there was no
contractual relationship between the consumer and the manufacturer in
this instance. Nonetheless, a claim for personal injury under the tort of
negligence was brought by the ultimate consumer of the ginger beer against
the manufacturer. With respect to duty of care, Lord Atkin raised the
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question “Who is my neighbour?” and proceeded to outline the “neighbour
principle” as follows (at p 580):
You must take reasonable care to avoid acts or omissions which you can
reasonably foresee would be likely to injure your neighbour … persons
who are so closely and directly affected by my act that I ought reasonably to
have them in contemplation as being so affected when I am directing my
mind to the acts and omissions which are called in question. [emphasis
added]
6.7
About 45 years later, in Anns v Merton London Borough Council (1978), the
lessee of a flat claimed against the council for the latter’s negligent failure
to carry out inspections which resulted in inadequate foundations of the
structure. The question which arose was whether a duty of care existed
between the plaintiff (lessee) and the defendant (council). Lord Wilberforce
(at pp 751–752) applied a general and broad two-stage test to establish a
duty of care:
(1) “whether, as between the alleged wrongdoer and the person who
has suffered damage there is a sufficient relationship of proximity
or neighbourhood such that, in the reasonable contemplation of the
former, carelessness on his part may be likely to cause damage to the
latter”?
(2) If the answer to the above is “yes”, are there “any considerations which
ought to negative, or to reduce or limit the scope of the duty or the class
of persons to whom it is owed or the damages to which the breach of it
may give rise”? [emphasis added]
6.8
In England, the Anns test was subsequently perceived by the courts as likely
to result in overly expansive liability. There were doubts as to whether the
scope of duty of care could be stated in the broad and general legal principle
contained in the Anns two-stage test (Yuen Kun Yeu v Attorney-General of
Hong Kong (1988); Governors of the Peabody Donation Fund v Sir Lindsay
Parkinson & Co Ltd (1985)). The English courts interpreted the first limb
of the Anns test above as based on reasonable foreseeability alone which
was, according to the courts, easily satisfied in any particular case. This
meant that the courts had to determine the existence of a duty of care based
largely on the second limb by resorting to public policy grounds which are
more uncertain.
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6.9
It should be noted that such an interpretation of Anns has not been
universally accepted. Even so, the above criticisms prompted a “retreat”
from Anns in England. A three-part test in the House of Lords decision of
Caparo Industries plc v Dickman (1990) was subsequently formulated. In this
case, the plaintiff, an existing shareholder of a company, bought additional
shares in the company in reliance on the defendants’ audit report. It was
alleged that the accounts of that company were negligently audited by the
defendants (auditors). The plaintiff lost monies as a result of the purchase of
shares and claimed that the defendants, who were engaged by the company,
owed a duty to the plaintiff to take reasonable care in auditing the accounts
of the company. With respect to duty of care, Lord Bridge in Caparo (at
pp 617–618) stated:
What emerges is that, in addition to the foreseeability of damage, necessary
ingredients in any situation giving rise to a duty of care are that there
should exist between the party owing the duty and the party to whom
it is owed a relationship characterised by the law as one of “proximity”
or “neighbourhood” and that the situation should be one in which the
court considers it fair, just and reasonable that the law should impose
a duty of a given scope upon the one party for the benefit of another.
[emphasis added]
The above test in Caparo for establishing a duty of care thus consists of the
following three elements:
° foreseeability of damage;
° relationship of proximity or “neighbourhood” between the plaintiff and
defendant; and
° whether it is fair, just and reasonable to impose a duty.
Moreover, the House of Lords preferred an incremental (and cautious)
approach to developing new categories of negligence via an analogy to the
established categories instead of the general and broad formula of Lord
Wilberforce in Anns.
6.10
For the sake of completeness, it should be mentioned that there are other
contending tests for determining the existence of a duty of care. These
include the test of “assumption of responsibility” as a standalone test without
resorting to policy considerations (per Lord Goff in Henderson v Merrett
Syndicates Ltd (1995)), the standalone incremental approach, the wholly
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policy-based test of Lord Denning MR in the Spartan Steel case (1973) as
well as the multi-factorial approach in the Australian court decision in Perre
v Apand (1999).
6.11
It is suggested that the above tests are not very persuasive. The standalone
“assumption of responsibility” test may be criticised as being overly narrow
in focus as it overlooks other relevant factors that impact on the duty of care
equation. It is argued that, instead of treating “assumption of responsibility”
as a standalone test for duty of care, the criterion of “assumption of
responsibility” should serve merely as a relevant factor for determining
“proximity” together with several other guiding factors such as reasonable
reliance by the plaintiff, parties’ expectations and the precise relationship of
the parties. Further, Lord Denning MR’s policy-based approach in Spartan
Steel lends itself to excessive subjectivity and vagueness, which is unlikely
to be conducive for a principled development of the tort of negligence. In
the author’s view, the standalone incremental approach in itself also lacks
any firm legal basis but appears largely to reflect the general “common law”
approach of drawing analogy from prior precedents. Lastly, the multi-factorial
approach of McHugh J in Perre v Apand (1999), which relies on a mix of
factors to determine the existence of a duty of care (namely, reasonable
foreseeability of loss, indeterminacy of liability, autonomy of the individual,
vulnerability to risk and knowledge of the risk and magnitude), appears to
focus more on the factual context of a case rather than the conceptual and
legal foundations for determining duty of care in future cases.
6.12
One broad question remains: does the solution lie in a combination of
tests as opposed to the selection of one appropriate test for any particular
negligence case? Proponents of the former approach involving a combination
of tests argue that each test will yield the same result and that each test
may be used as a cross-check of the other tests (see the English Court
of Appeal in Commissioners for Customs and Excise v Barclays Bank plc
(2005)). The Singapore Court of Appeal in United Project Consultants
Pte Ltd v Leong Kwok Onn (trading as Leong Kwok Onn & Co) (2005),
however, does not appear to endorse such an eclectic approach. It stressed
that the law must be “sufficiently clear and capable of guiding parties in the
regulation of their affairs” and that “it would be undesirable for a court to
refrain from coming down in favour of any particular test when faced with
various alternative approaches” (at [33]). Even in the UK, the decision of the
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House of Lords in Commissioners for Customs and Excise v Barclays Bank
plc (2006), which overruled the decision of the English Court of Appeal,
also appeared to cast doubt on the eclectic approach. As we shall see below,
Singapore courts have adopted a single test for determining duty of care
in negligence.
The Meaning of “Foreseeability”, “Proximity” and “Fair, Just and
Reasonable” or Public Policy
6.13
We should briefly analyse the elements mentioned in the above judicial
formulations and tests. This is not, by any means, an easy task since the
elements and the associated terms are not always used with precision or in
the same fashion by all judges.
° Foreseeability: This refers to the foreseeability that one’s negligent act or
omission is likely to result in the damage suffered by the plaintiff. The
focus here is on the foreseeable harm and the class of persons who may
be affected by the negligent act or omission.
° Proximity: The focus here is on the precise relationship between the
plaintiff and the defendant. This element was used in both the two-stage
Anns test and the three-part Caparo test. Lord Oliver in Caparo (at p
633) said that “proximity is no more than a label which embraces not a
definable concept but merely a description of circumstances from which,
pragmatically, the courts conclude that a duty of care exists”. In the
Canadian Supreme Court decision in Cooper v Hobart (2001), the court
took the view that the word “proximity” encompassed expectations,
representation, reliance and property or other interests involved. As we
shall examine below, the Singapore Court of Appeal has, unlike Caparo,
sought to infuse meaning into the concept of proximity.
° Fair, just and reasonable or public policy: The terms “public policy” and
“fair, just and reasonable” (in Caparo) are generally used interchangeably.
Public policy considerations may apply differently from country to
country. The public policy ground arose primarily from a concern for
“indeterminate liability in an indeterminate amount for an indeterminate
time to an indeterminate class” (Cardozo CJ in Ultramares Corporation v
Touche (1931) at p 179). The above problem of indeterminacy, the need
to preempt potentially defensive behaviour of defendants, public benefit
and ensuring consistency between common law and statutory purposes
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are examples of policy considerations employed by judges in deciding
negligence cases.
6.14
It should be noted that these elements of foreseeability; proximity; and
fairness, justice and reasonableness/policy considerations overlap. In most
cases, it is observed that the more foreseeable the harm, the more likely the
courts will find there is “proximity”; in turn, it is more likely the courts will
hold that policy considerations will result in, or that the notions of “fairness,
justice and reasonableness” call for, the imposition of a duty of care.
The Singapore Position
6.15
Bearing in mind the above English developments, it is now timely to analyse
the Singapore approach to duty of care. In the past, the Singapore courts have
applied both a two-stage process akin to Lord Wilberforce’s two-stage test in
Anns as well as the Caparo three-part test. The current Singapore approach
is now encapsulated in the Court of Appeal decision in Spandeck Engineering
(S) Pte Ltd v Defence Science & Technology Agency (2007) (“Spandeck”).
The case involved a claim by a contractor against a superintending officer
for negligently undervaluing and under-certifying works carried out by
the contractor. There was a building contract between the contractor and
the employer, and the superintending officer was engaged by the employer
to administer and supervise the building project. However, there was no
contractual relationship between the contractor and the superintending
officer. One issue was whether the superintending officer owed the contractor
a duty of care in the absence of a contractual relationship.
6.16
The Court held (at [89]) that a single test was preferred to determine the
scope of duty of care in negligence cases, regardless of the type of damages
claimed. This single test is the two-stage test premised on proximity and
policy considerations and the application of the test is to be preceded by a
preliminary requirement of factual foreseeability. According to the Court (at
[115]), the threshold requirement of “factual foreseeability” would likely be
fulfilled in almost all cases.
6.17
With respect to the first stage of the test, the concept of “proximity” focuses
on the relationship between the plaintiff and defendant, including physical,
circumstantial as well as causal proximity and encompasses the twin criteria of
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voluntary assumption of responsibility and reliance (at [78]). If the proximity
requirement is satisfied, a prima facie duty of care arises (at [83]). At the
second stage, the court will consider whether there are any considerations
that ought to negative or limit the duty that has arisen under the first
stage. These policy considerations involve the “weighing and balancing of
competing moral claims and broad social welfare goals” (at [85]).
6.18
In addition, the Court stated (at [73]) that the single test should be applied
“incrementally” (ie, when applying the test in each stage, judges ought to
refer to decided cases in analogous situations). In a novel situation, the judge
is not precluded from extending liability where it is “just and fair to do so”,
taking into account the relevant policy considerations against indeterminate
liability (at [73]).
6.19
The Court reiterated (at [69]) that there should not be a general exclusionary
rule against recovery of all economic losses. Instead of focusing on the type
of damages in order to determine duty of care, the court suggested (at [67])
that the circumstances in which the economic loss arises would be more
important. The problem of indeterminate liability does not rear its ugly head
in all pure economic cases such as in RSP Architects Planners & Engineers
v Ocean Front Pte Ltd (1996) (“Ocean Front”) and RSP Architects Planners
& Engineers v Management Corporation Strata Title Plan No 1075 (1999)
(“Eastern Lagoon”) below). Thus, there should not be different tests for pure
economic loss cases as distinct from physical damage.
6.20
The Court decided, on the facts, that the superintending officer did not owe
any duty to the contractor. Although it was foreseeable that the negligent
certification of the works would deprive the contractor of the moneys he was
entitled to, the proximity requirement was not satisfied. This was because
the building contract between the employer and contractor stated that in the
event of a dispute or difference related to the contract or the works, either
the employer or contractor may refer to an arbitrator for resolution. Due to
the presence of the arbitration clause and the contractual matrix, no duty of
care arose (see also Pacific Associates Inc v Baxter (1990) based on a similar
arbitration provision).
6.21
Prior to Spandeck, the courts in two Singapore cases, Ocean Front and Eastern
Lagoon (see the discussion of the above two cases in para 6.47) formulated
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a two-stage process (ie, proximity qualified by policy). This two-stage
process is well-encapsulated in the following extract from Eastern Lagoon
(at [31]):
The court first examines and considers the facts and factors to determine
whether there is a sufficient degree of proximity in the relationship
between the party who has sustained the loss and the party who is said
to have caused the loss which would give rise to a duty of care on the
part of the latter to avoid the kind of loss sustained by the former …
Next, having found such degree of proximity, the court next considers
whether there is any material factor or policy which precludes such duty
from arising. [emphasis added]
6.22
As can be seen, the two-stage process of proximity qualified by policy in
Eastern Lagoon is substantially similar to Lord Wilberforce’s two-stage
test in Anns (as observed by the Singapore High Court decision in Sunny
Metal & Engineering Pte Ltd v Ng Khim Ming Eric (2007) at [87]) and the
Spandeck test.
6.23
The tests in Ocean Front and Eastern Lagoon were examined in Man B&W
Diesel SE Asia Pte Ltd and another v PT Bumi International Tankers and
another appeal (2004). The respondent (“Bumi”) was the owner of a vessel.
A contract was entered into between Bumi and the builder (“MSE”).
The engines for the vessel were supplied by the appellant sub-contractor
(“MBS”). There was no contract between MBS and Bumi for the supply
of engines. The engines subsequently broke down and Bumi sued MBS for
economic losses under the tort of negligence. The trial judge in PT Bumi
International Tankers v Man B&W Diesel SE Asia Pte Ltd (2003) held that
there was sufficient proximity between Bumi and MBS. As such, there was
a duty of care subsisting between Bumi and MBS. In deciding so, the trial
judge applied the principles enunciated in Ocean Front and Eastern Lagoon.
However, the decision was overruled by the Court of Appeal.
6.24
The Court of Appeal held (at [33]–[34]) that the Bumi case should be
distinguished from the Ocean Front case. It regarded the relationship between
the developer and the management corporation in Ocean Front to be “as
close to a contract as could reasonably be”. It was a “special case” which
should, thus, be confined to the facts. The contract between Bumi and MSE
essentially stated that MSE should be fully responsible for the work performed
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by its sub-contractors and for their acts and omissions. In addition, the
contract also provided that nothing in the contract shall create a contractual
relationship between the sub-contractor and Bumi. On that basis, the Court
of Appeal opined (at [48]) that Bumi, by directly contracting with MSE,
had deliberately chosen to seek redress from MSE (instead of MBS) should
the engines break down. In addition, extending a remedy to Bumi against
MBS in tort would be in conflict with its express contractual relationship
with MSE.
6.25
Apart from the two-stage process of proximity qualified by policy, the threepart test in Caparo was applied by the Singapore courts in several cases (such
as Ikumene Singapore Pte Ltd v Leong Chee Leng (1993)). The application
of the Caparo test must now be doubted in light of Spandeck. Nonetheless,
prior cases, insofar as the treatment of the elements of foreseeability,
proximity and policy considerations is concerned, remain relevant under the
Spandeck “incremental” approach. In the well-publicised case of TV Media
Pte Ltd v De Cruz Andrea Heidi and another appeal (2004), the Caparo
test of foreseeability, proximity and fairness was applied to determine the
duty of care owed by the sole distributor of a product (slimming pills) to
the consumer in the promotion, endorsement and advertisement of the
pills. The damage consisted of personal injury (liver damage) arising from
the consumption of the pills. With respect to the proximity element, the
Singapore Court of Appeal also referred to the seminal decision of Donoghue
v Stevenson (1932) on negligence liability for physical damage due to the
manufacturer’s defective products and stated (at [49]) that the principle
should be extended to distributors and wholesalers as well.
6.26
In the same vein, the Caparo test was applied in the Singapore Court of
Appeal decision in United Project Consultants Pte Ltd v Leong Kwok Onn
(trading as Leong Kwok Onn & Co) (2005). The defendant, as the auditor
and tax agent of the plaintiff company, attended to the filing of the plaintiff ’s
tax returns. At the same time, the defendant was acting as the tax agent
and handling the personal income tax returns of the plaintiff ’s managing
director. The plaintiff failed to make proper tax returns to the Inland Revenue
Authority (“IRAS”) in respect of certain declared fees payable to its directors
and a penalty sum was imposed by IRAS. The plaintiff thus claimed damages
for pure economic loss against the defendant for the latter’s alleged negligent
failure to discharge his duties as auditor and tax agent.
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6.27
The Court of Appeal held that the defendant owed a duty of care to the
plaintiff. It was found (at [39]) that the defendant, who was handling the
plaintiff ’s managing director’s personal tax returns, acquired actual knowledge
that the plaintiff ’s directors were under-reporting their director’s fees to the
IRAS. As such, the defendant ought to have foreseen the loss to the plaintiff.
Moreover, the defendant, as a professional tax agent for the plaintiffs, had
assumed responsibility in respect of the tax filing. The court ruled (at [41])
that the defendant was thus under a duty to warn of inaccuracies in the
filing of tax returns and the tax consequences. In addition, the Court of
Appeal was also satisfied that there were no policy reasons why such a duty
ought not to be imposed. In this regard, the court stated (at [42]) that it
was “common sense” that a tax agent who is a certified public accountant
should warn his client of possible penalties imposed by IRAS in the event
of incorrect submissions of tax returns. It bears repeating that the existence
of a duty of care in negligence should now be determined pursuant to the
Spandeck test instead of the Caparo test or any other tests.
Duty of Care: Various Scenarios
6.28
Though the Spandeck test applies regardless of the type of damage, this
does not necessarily mean that all types of damage arising from negligent
conduct are equally recoverable. For example, physical damage and property
damage arising from positive acts are generally recoverable as compared to
pure economic losses. Notwithstanding the single test for duty of care in
Spandeck, the law is generally more restrictive in imposing liability arising
from pure economic loss (ie, financial loss not associated with any personal
injury, physical or property damage) due to the fear of opening the floodgates
and indeterminacy of liability. Further, claims in negligence for psychiatric
harm are normally more restrictive than a similar claim for personal injuries
arising from the defendant’s negligent acts.
6.29
“Physical damage” in this context refers to actual physical damage suffered,
and does not include future or potential (physical) damage. Thus, mere
defects in construction or functionality (eg, inadequate foundations of a
house or an engine) are not generally treated as “physical damage”, but as
economic loss. This is because such defects may or may not subsequently
lead to actual physical damage.
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6.30
To illustrate the distinction between physical damage, economic loss consequent upon physical damage and pure economic loss, we should examine
the case of Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd (1973).
The defendants (building contractors) negligently cut electricity cables leading
to the plaintiff ’s steelworks. The electricity was cut off for a few hours and
the plaintiff ’s furnace stopped operating. As a result, the steel in the furnace
was ruined. It was held by the court that the loss of profit for subsequent
batches of steel which might have been produced if electricity had not been
halted (pure economic loss) was not recoverable. However, damages for the
materials used in processing the particular batch of steel at the time when
the accident occurred (direct physical loss) and the loss of profit on that
batch of steel (consequential economic loss) were held to be recoverable.
(1) Negligent act or omission causing personal injury or physical damage
6.31
In cases where personal injury is caused by the positive act of the defendant,
establishing a duty of care is generally unproblematic and uncontroversial.
This is because the physical damage that arises from the defendant’s positive
act is fairly direct and obvious. The requirement of “reasonable foreseeability”
would normally be satisfied. In addition, there is unlikely to be a “floodgates”
problem associated with indeterminate liability and indeterminate scope of
potential defendants. Examples of such cases are the typical car accident
where the plaintiff suffers personal injury (or damage to property) arising
from negligent driving as well as personal injuries from the consumption of
foods negligently manufactured by the defendant.
6.32
Not all cases pertaining to physical damage are straightforward and clear,
as illustrated by the case of The Sunrise Crane (2004). The plaintiff ’s
steel tanker, the Pristine, was destroyed due to the transfer of nitric acid
contaminated by hydraulic oil from the defendant’s vessel, the Sunrise Crane.
No one on board the Sunrise Crane provided information that the substance
was contaminated nitric acid which had to be disposed of by alternative
means. There was also no contractual relationship between the plaintiffs
and defendants. The defendants had requested the vessel’s Protection &
Indemnity (“P & I”) Club for assistance, and the Club appointed a surveyor.
The surveyor then engaged a contractor (Pink Energy) for the disposal job
who, in turn, engaged another sub-contractor (Pristine Maritime) to remove
the contaminated cargo. Neither the sub-contractor (Pristine Maritime) that
carried out the disposal nor the plaintiff was informed of the nature of the
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cargo. The Court of Appeal held by a majority (Prakash J dissenting) that
the Sunrise Crane owed a duty of care in the tort of negligence to inform
the Pristine of the nature of the cargo immediately prior to the transfer of
the contaminated acid. The very dangerous nature of the cargo appeared to
be a significant factor in the majority decision. The fact that the defendant
had informed the contractor (Pink Energy) of the nature of the cargo was
insufficient to fulfil the duty of care.
6.33
The decision in Bumi (2004) (see paras 6.23–6.24), which denied recovery
for pure economic loss, was distinguished on the basis that direct property
damage was caused. The court in The Sunrise Crane (2004) appeared (at [73])
to have applied the Caparo three-part test. With respect to the proximity
element, it referred to the physical proximity of the two vessels which were
moored alongside when the disposal operation was in progress (at [77]),
and to the fact that the act of transferring the contaminated cargo “directly
affected” the plaintiff (at [50]). There was also a statement in the judgment,
albeit without elaboration, that it was not unfair or unjust to impose a duty
of care in the instant case (at [41]).
Box 6.1
Reflecting
on the law
Controversy in The Sunrise Crane
The dissenting judgment in The Sunrise Crane is significant and should be briefly
mentioned. Similar to the approach of the majority judges in The Sunrise Crane, Prakash
J applied the Caparo test. However, Her Honour arrived at a different conclusion. The
learned judge ruled that the defendant could not have foreseen that the tanker sent
to collect the cargo (Pristine) would not have been told of its nature, after having
provided the contractor (Pink Energy) the requisite information. In a fairly unusual
stance, Her Honour conceded that, despite the absence of foreseeability, physical,
circumstantial and causal proximity were present in the case. With respect to the
fairness element, the learned judge was of the view that it is not fair or reasonable or
just to impose on a party, who engages a qualified person to undertake a task, the
duty to countercheck, before the task commences, that the person actually sent to
complete the task is aware of the task at hand and the equipment required. Imposing
a duty would, according to the learned judge, make the employer responsible for
carrying out the duty of the contractor (Pink Energy) to inform the sub-contractor
of the nature of the cargo and thus, open the floodgates to claims against a whole
new class of parties.
Do you agree with the majority judgment or the dissenting judgment in The
Sunrise Crane?
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6.34
In contrast to positive acts, there is generally no duty of care arising from
mere omissions. There is, for example, no legal duty placed on a passer-by to
rescue a drowning man. One underlying reason for the current legal position
against imposing a duty of care is that the law should not unduly interfere
with a person’s liberty by requiring him to save another person with whom
there is no prior relationship. The performance of altruistic (or heroic) acts
may be laudable, but is generally not legally mandated. Further, there is the
potential difficulty of ascertaining in (at least) some cases the particular
defendant responsible where there are others who might have been able to
effect the rescue.
6.35
The general principle of non-liability for the defendant’s omission to prevent
the plaintiff from harming himself or to prevent a third party from harming
the plaintiff is subject to certain exceptions. These exceptions include
the following: where there is a special relationship between the plaintiff
and defendant based on a voluntary assumption of responsibility by the
defendant towards the plaintiff, or control by the defendant over the third
party conduct; and where the defendant knew or ought to know that the
third party has created a source of danger on the defendant’s premises and
the defendant failed to take reasonable steps to prevent the danger from
damaging the plaintiff ’s property (see Smith v Littlewoods Organisation
Ltd (1987)).
(2) Negligent misstatements causing economic loss
6.36
One notable case on negligent misstatements is Hedley Byrne & Co Ltd v
Heller & Partners Ltd (1964). Here, the plaintiffs (advertising agents) wished
to do some advertising work for a company called Easipower. The defendants
(bankers for Easipower) negligently provided to the plaintiffs a reference on
the creditworthiness of Easipower. The plaintiffs subsequently claimed for
financial losses when Easipower went into liquidation. On the facts, there
was a valid disclaimer clause that the bank’s statement was made “without
responsibility on the part of the bank or its officials”. Thus, the defendant
bank was not liable for the negligent misstatement. However, if not for the
disclaimer clause, the House stated that a duty of care would have been owed
by the defendant bank to the plaintiff to take reasonable care in making
statements which others could reasonably rely upon. The judgments of the
law lords indicated that the following factors should be considered when
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determining whether a duty of care had arisen between the plaintiff and the
defendant bank:
° the skill and expertise of the maker of the statement;
° whether the maker of the statement knows or ought to know that the
other person will rely on the statement; and
° whether the maker of the statement voluntarily undertakes or assumes
responsibility for making the statement.
Further, where the relationship between the maker of the statement and the
recipient is akin to contract, a duty of care is likely to arise.
6.37
The rationale for the above additional requirements in respect of negligent
misstatements (as compared to negligent acts causing physical damage
discussed at para 6.31) is that words are more “volatile” than deeds, whilst
damage by negligent acts to persons or property is more “visible and obvious”
(see p 534). For example, statements made to a particular party may be
conveyed or transmitted by the recipient to a third party or parties, whose
identities may not be known to the maker of the statements, and the impact
of those statements on the recipients may not have been contemplated by the
maker. On the other hand, the effects of physical injury or property damage
arising from one’s negligent acts (such as negligent driving) are normally
more obvious and direct.
6.38
The following statements of Lord Devlin (at p 529) are instructive as to the
relevance of payment or lack thereof for the advice:
Payment for information or advice is very good evidence that [the advice]
is being relied upon and that the informer or adviser knows that it is.
Where there is no consideration, it will be necessary to exercise greater
care in distinguishing between social and professional relationships and
between those which are of a contractual character and those which are
not. It may often be material to consider whether the adviser is acting
purely out of good nature or whether he is getting his reward in some
indirect form. [emphasis added]
6.39
Another important case on negligent misstatements, Caparo Industries plc v
Dickman (1990), held that there was no duty of care owed by the defendant
auditors to the plaintiff (purchaser of additional shares in a company) in
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respect of the defendant’s negligent misstatement concerning the audited
accounts of the company. The general principle is that no duty of care is
owed by the auditors of a company to individual members of the public at
large (including the plaintiff) who rely on the information to buy shares
in the company (see p 627). It was held that the statutory accounts of
the company were to be used at the general meeting for shareholders as
a whole and were not intended for use by individual shareholders. This
principle has been extended to preclude claims in negligence by lenders and
guarantors (of credit facilities to audited companies) against auditors for
negligently prepared audited statements (see also Standard Chartered Bank
& another v Coopers & Lybrand (1993); Ikumene Singapore Pte Ltd v Leong
Chee Leng (1993)).
6.40
In a similar vein as the decision in Hedley Byrne, the court in Caparo outlined
(at p 638) some important requirements for establishing a duty of care:
° the purpose (general or specific) was made known to the adviser at the
time of the advice;
° the adviser knows or ought to know that his or her advice will be
communicated to the plaintiff (specifically or as a member of an
ascertainable class) for the above purpose;
° the adviser knows or ought to know that his or her advice will be acted
upon by the plaintiff without independent inquiry; and
° the advice was acted upon by the plaintiff to his or her detriment.
6.41
The House of Lords decision in Spring v Guardian Assurance plc (1994)
provides an interesting factual twist. It concerned a written reference given
by the defendants (Guardian Assurance) to Mr Spring’s prospective employer.
Mr Spring failed to get the job with the prospective employer and sued
Guardian Assurance for negligent misstatement in respect of the reference.
The House held that a duty of care was owed by Guardian Assurance to
Mr Spring, its ex-employee. Lord Goff in that case appeared to have applied
Hedley. However, it is noted that Hedley concerned a claim in negligence by
the recipient of the bank’s advice. In Spring, it was not the recipient of the
reference (prospective employer) but the subject of the reference (the plaintiff
employee) who had sued for damages. Thus, it is suggested that the decision
in Spring might be construed as an extension of the Hedley principle.
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6.42
The tort of negligence may be compared with the action based on negligent
misrepresentation under the Misrepresentation Act (Cap 390, 1994 Rev Ed)
(“MA”) (see Chapter 13). The MA typically applies to a scenario where a
representee relies on a negligent representation made by the representor and
enters into a contract with the representor (as opposed to a third party as
in Hedley). According to s 2(1) MA, the representee would only need to
show that the representation was false and the burden of proof would shift
to the representor to show that he had reasonable ground to believe and
did believe, up to the time the contract was made, that the facts represented
were true. Hence, the burden of proof on a plaintiff in an action based
on s 2(1) MA is considerably lighter than the plaintiff suing for negligent
misstatement in tort. Further, based on the case of Royscot Trust Ltd v
Rogerson (1991), the representee claiming pursuant to s 2(1) MA might be
able to recover damages which are quantified based on the fraud measure,
rather than the negligence measure in the tort of negligence. With respect
to the fraud measure, damages are recoverable so long as causation is
established, notwithstanding that the loss might be too remote, unlike in a
typical negligence action. Thus, the representee in such a scenario would
generally find it advantageous to sue pursuant to s 2(1) MA rather than the
tort of negligence.
(3) Negligent misstatements causing physical damage
6.43
Claims for physical damage arising from negligent misstatements are, as one
can imagine, relatively uncommon. In Marc Rich & Co AG v Bishop Rock
Marine Co Ltd (1996), the issue was whether a classification society (a nonprofit organisation) owed a duty of care to the owner of cargo on a vessel
in respect of the society’s negligent certification of a vessel’s seaworthiness.
It transpired that the ship sank and the cargo was physically damaged as a
result. The House of Lords (Lord Lloyd dissenting) held that there was no
duty of care. In disallowing recovery, the House appeared to have emphasised
the policy requirements at the expense of the proximity requirement. Their
Lordships outlined the following public policy reasons against recovery: the
higher costs of insurance to the classification society which might be passed
on to the ship owners; the fact that cargo owners already have contractual
claims against the ship owners pursuant to the Hague-Visby Rules, which
provide for the limitation of the ship owners’ liability to the cargo owners;
the onerous duty of the classification society to promote the “collective
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welfare”, namely to ensure the safety of ships and lives; if the classification
society were to be held liable, it might, as a result, adopt a defensive
position and useful resources may be diverted elsewhere; and the fact that
the classification society had no protection at all via limitation provisions,
unlike the ship owners.
6.44
In another case involving negligent certification resulting in physical harm,
Perrett v Collins (1998), however, the English court held that an association
that was approved by a civil aviation authority to issue the certification owed
a duty of care to a passenger on an aircraft in respect of the personal injuries
he suffered. The court noted that the defendant had voluntarily assumed
responsibility for issuing the certification and the certification was for the
protection of members of the public.
(4) Negligent acts or omissions causing economic loss
6.45
Pure economic losses which arise as a result of a negligent act or omission
in the context of building defects are generally not recoverable in England.
This is illustrated by the English decision of Murphy v Brentwood (1991)
in relation to liability for the construction or approvals of construction of
houses or buildings. The purchaser of a flat claimed against the council,
which approved the foundations, for the diminution in the value of his
flat. The House of Lords held that no duty of care existed and consciously
departed from the Anns two-stage test. The House in Murphy was concerned
about extending the liability of potential defendants (eg, builders and
manufacturers of chattels).
6.46
It should be noted that the UK Defective Premises Act 1972 already protects
homeowners by imposing legal liability on architects, builders and others
taking on work for or in connection with the provision of a dwelling-house
if they fail to carry out work in a workmanlike or professional manner and
the building is rendered unfit for habitation as a result. Hence, it might not
be as necessary or crucial in England, in view of the statutory protection,
to develop common law negligence liability in building construction cases.
Singapore does not have a similar legislation.
6.47
As indicated earlier, Singapore has departed from the English position in
Murphy v Brentwood (1991). In Ocean Front, a duty of care existed based
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on the proximity between the management corporation (the plaintiffs) and
the developers (the defendants). Further, there were no public policy reasons
against the existence of a duty of care. In that case, it was found that there
was a determinate amount of recovery, a determinate class of persons and no
transmissible warranty. Similarly, in Eastern Lagoon, a duty of care existed
based on the proximity between the management corporation (the plaintiffs)
and the architects (the defendants). It was found that there was sufficient
reliance and assumption of responsibility to establish a duty of care. In
addition, there were public policy reasons for supporting such a duty. These
cases concern real property, which translates into greater financial investment
and possesses permanence of structure as opposed to chattels, especially in
the context of land-scarce Singapore. In fact, it should be noted that these
factors were also applied in the Australian case of Bryan v Maloney (1995),
a case involving a subsequent purchaser of a house (ie, not the first owner)
claiming against the builder, though Bryan discussed the above policy factors
in the context of the proximity element (see also the discussion on the Bumi
case at paras 6.23–6.24).
6.48
In Animal Concerns Research & Education Society v Tan Boon Kwee
(2011) (decided post-Spandeck), the criteria of voluntary assumption of
responsibility and reliance were applied under the proximity requirement of
the Spandeck test. A non-profit society engaged a company as contractor to
construct a shelter for animals. The contractor appointed Tan, director of the
company, as clerk of works for the building project. Under the contract, the
contractor was obliged to level the site by using surplus earth (a process
known as “backfilling”) but instead used materials which resulted in the
pollution of the environment. As a result, the society had to excavate the
contaminated portions of the site and thereby incurred economic losses.
In the claim in negligence against Tan for the economic losses, the court
held that the clerk of works owed a legal duty to the society to supervise
the backfilling.
6.49
Applying the Spandeck test, the Court opined (at [35]) that it was reasonably
foreseeable that the society would suffer some loss or damage if Tan did not
take care in supervising the backfilling. On the proximity requirement, there
was clearly physical proximity as the society was lessee of the site and the
clerk of works was obliged to be physically present at the site to carry out
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his duties. Tan, in procuring the contractor to appoint himself as clerk of
works, was adjudged (at [63]) to have voluntarily assumed the responsibilities
of a clerk of works and held himself out as having the qualifications and
skills necessary to fulfil the role of a clerk of works. In addition, Tan, in
declaring in a form submitted to the Building and Construction Authority
that he was not linked to the contractor, knew or ought to have known that
the society would rely on him to act in the society’s interests as the clerk of
works (see [64]).
(5) Negligent acts or omissions causing nervous shock or psychiatric harm
6.50
This applies only to recognised psychiatric illnesses, not mere mental distress,
anxiety or disappointment not associated with any physical injury suffered
by the plaintiff arising from a negligent act or omission of the defendant.
6.51
In the case of Page v Smith (1996), the House of Lords held that the
plaintiff, who was a primary victim, can recover for psychiatric injury as
long as some form of personal injury was foreseeable flowing from the
negligent act. The plaintiff in this case was a “primary victim” of a car crash
due to the negligence of the defendant. The plaintiff ’s car was damaged
but the plaintiff did not suffer any physical injury. Instead, he suffered a
condition known as chronic fatigue syndrome. The House of Lords (Lord
Keith and Lord Jauncey dissenting) decided that as physical injury was
foreseeable in such car accidents, it was not necessary for the plaintiff to
show that the psychiatric injury was also foreseeable in order to recover for
psychiatric injuries.
6.52
The above case of Page v Smith has been doubted by the Singapore Court
of Appeal in Ngiam Kong Seng v Lim Chiew Hock (2008). According to the
court in Ngiam Kong Seng (at [95]), there should not be any distinction
between a primary victim as in Page and a secondary victim (eg, one who
witnessed the car accident caused by the defendant’s negligence and suffered
psychiatric illness as a result). Instead, there should be a single test applying
to both primary and secondary victims. A duty of care would arise only if
the plaintiff satisfies the three proximity requirements stated in Ngiam Kong
Seng (at [101]–[103]). The proximity requirements are as follows:
° the closeness of the relationship between the plaintiff and the primary
victim, such as parent–child and husband–wife relationships, though
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this does not necessarily exclude the other types of relationships
(circumstantial proximity);
° proximity of the plaintiff to the accident in time and space (ie, through
sight and sound of the event or its immediate aftermath) (physical
proximity); and
° the means by which the shock is caused (causal proximity).
6.53
With respect to the first proximity requirement, Lord Wilberforce in
McLoughlin v O’Brian (1983) had stated (at pp 421–422) that “[t]he closer
the tie (not merely in any relationship, but in care) the greater the claim
for consideration”. In McLoughlin, the plaintiff did not attend the scene of
the car accident but saw her injured family members at the hospital soon
after the accident. It is observed that when the plaintiff met them at the
hospital, the family members were still in pain. Thus, the House allowed
recovery. However, it is not clear how the first proximity requirement would
apply to a case of a plaintiff who suffered psychiatric harm arising from a
near collision with a negligent driver. In such a case, there does not seem
to be any relational or circumstantial proximity to speak of, as opposed
to the case of a plaintiff who witnessed his loved one colliding with the
negligent driver.
6.54
Instead of negligent driving causing psychiatric harm, the Singapore decision
of Pang Koi Fa v Lim Djoe Phing (1993) involved medical negligence that
eventually culminated in the death of the plaintiff ’s daughter. Upon applying
McLoughlin, the first proximity requirement was clearly satisfied on the basis
of a mother–daughter relationship. With respect to the second and third
proximity requirements, the court observed that there was no accident or
aftermath witnessed by the plaintiff in Pang Koi Fa, unlike in McLoughlin.
Nevertheless, the court held that the plaintiff in Pang Koi Fa was proximate
in both time and space to the tortious event (ie, the death of her daughter)
as the plaintiff had witnessed throughout the effects of the defendant
doctor’s negligent diagnosis, negligent operation and negligent postoperative treatment. In addition, the learned judge regarded her (at [62])
as a “percipient witness in terms of the elements of immediacy, closeness
of time and space, visual and aural perception”. His Honour added (at [76])
that the above legal analysis and outcome in the case should be confined to
medical negligence cases.
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Box 6.2
Reflecting
on the law
Wrongful birth and wrongful life claims
Where a doctor negligently fails to discharge his or her duty of advising a pregnant
woman the risks of bearing an abnormal child, and, as a result, the mother does not
have the opportunity to terminate the pregnancy, can the parents sue the doctor in
the tort of negligence in a claim for “wrongful birth”? In addition, can the child who
is born with disabilities sue the doctor for damages in a claim commonly known as
“wrongful life”?
These are complex issues which have excited and troubled, not merely legal
minds, but also those with philosophical, scientific and ethical inclinations. This is
indeed a real medical negligence problem in the light of the advanced contraception
or sterilisation methods and genetic tests available today. In fact, such actions are not
necessarily limited to the negligent conduct of doctors, but may extend to genetic
testing laboratories or manufacturers of contraceptives and sterilisation methods.
Claims for damages for pain and suffering of the mother due to the pregnancy
and childbirth based on “wrongful birth” by the parents of the abnormal child have
generally been successful. In some cases, damages for the additional costs of raising
the disabled child have been recovered by the parents (see Cattanach v Melchior
(2003); Parkinson v St James and Seacroft University Hospital NHS Trust (2002)).
In contrast, claims based on “wrongful life” for the damages suffered by the
disabled child are generally not recoverable. In the Singapore case of JU v See Tho
Kai Yin (2005), it was alleged that the defendant (obstetrician and gynaecologist)
had negligently failed to advise a pregnant woman of the increased risks of having a
baby with chromosomal abnormalities due to the woman’s age. As a consequence,
the woman claimed that she was prevented from exercising her option to abort
the baby. The child was born with Down’s Syndrome. With respect to the claim
for “wrongful life” by the disabled child, the High Court ruled that such an action
would be contrary to public policy as it violates the sanctity of human life. Thus,
in Singapore, there is no cause of action for wrongful life. The learned judge also
observed that this common law position has been adopted by the English (eg,
McKay v Essex Area Health Authority (1982)), Canadian and Australian courts. The
majority of the High Court of Australia adopted this common law position against
recovery of claims based on wrongful life in Waller v James; Waller v Hoolahan (2006)
and Harriton v Stephens (2006).
BREACH OF DUTY OF CARE
6.55
In this section, we are concerned with the “standard of care” expected of the
defendant in question. If the defendant’s conduct falls below that standard of
care, we say that he has “breached” the duty of care. Generally, the standard of
care is the objective standard of a reasonable person using ordinary care and
skill. This will normally be the case even if the defendant is inexperienced in
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performing the activity or task in question (such as driving a car) (Nettleship
v Weston (1971); Imbree v McNeilly (2008)).
Factors to Determine the Standard of Care
6.56
The standard of care, based on the test of the objective reasonable man, is
dependent on what was reasonably foreseeable as measured by the prevailing
knowledge at the material time of the event in question, and not after (Roe
v Minister of Health (1954); PlanAssure PAC v Gaelic Inns Pte Ltd (2007);
JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (2007)). Factors such as the
likelihood of the injury, the severity of the injury as well as the costs of
avoiding the injury are relevant in determining the standard of care.
6.57
Where the likelihood of injury to the plaintiff is extremely low or remote,
a high standard of care is not required to prevent the injury. In Bolton v
Stone (1951), the plaintiff was injured by a cricket ball hit from a cricket
ground that was surrounded by a high fence. It was found that the chance of
a cricket ball hitting a person such as the plaintiff outside the grounds was
very low. In the circumstances, it was held that the defendant (the cricket
club) did not breach its duty of care to the plaintiff to prevent the accident
occurring. Conversely, where the likely injury is serious, a higher standard
of care would be required. In Paris v Stepney Borough Council (1951), the
House of Lords held that the defendant employer should have reasonably
taken into account the risk of greater injury to the plaintiff employee (who
was already injured in one eye) by providing goggles for his work as a garage
hand. The disability of the plaintiff employee increased the risk of the injury
becoming more serious (ie, blindness) as compared to a normal person.
Thus, the defendant employer had breached its duty in not providing goggles
to the plaintiff.
6.58
The costs of avoiding injury on the part of the defendant is also a relevant
factor, and this is to be balanced against the risk of harm occurring. In
Latimer v AEC Ltd (1953), the plaintiff tripped and fell on the floor of
a factory owned by the defendant and sued for negligence. The House
determined that the defendant did not breach its duty of care. Based on the
facts, the risk of injury to the plaintiff resulting from the slippery floor due
to flooding did not justify the closure of the factory. The defendant in this
case had already taken reasonable steps to remove the effects of the flood and
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it was unreasonable to expect them to close the factory. The Wagon Mound
(No 2) (1967) case further illustrates this balancing exercise to determine
the standard of care issue. It was stated that a reasonable man would only
neglect a small risk provided he had some valid reason for doing so, for
example, because it would involve considerable expense to eliminate the risk.
He would weigh the risk against the difficulty of eliminating it.
6.59
Other factors determining the standard of care include the following: the
presence of potential hazards or dangers posed to the plaintiff (eg, the
contaminated nitric acid in The Sunrise Crane); the presence of industrial
standards and regulations (eg, in the context of employer’s duties to
employees: see Chandran a/l Subbiah v Dockers Marine Pte Ltd (2010));
the level of the plaintiff employee’s experience, training and skills (eg, Zheng
Yu Shan v Lian Beng Construction (1988) Pte Ltd (2009)); and the level
of knowledge and commercial sophistication of the plaintiff clients (in the
context of investment advice given by banks: see Go Dante Yap v Bank
Austria Creditanstalt AG (2011)).
Standard of Care Relating to Professionals and Professional
Standards and Practice
6.60
With regard to professionals, the standard of care is that which is reasonably
expected of a reasonably competent professional with respect to a particular
field. That is, a specialist must exercise the ordinary skills of his specialty
(Maynard v West Midlands Regional Health Authority (1984); see also Yeo
Peng Hock Henry v Pai Lily (2001) discussed below at para 6.71). In the
English case of Bolam v Friern Hospital Management Committee (1957), the
court stated that the test is based on the standard of the ordinary skilled
man exercising and professing to have that special skill. A man need not
possess the highest expert skill at the risk of being found negligent. It is
sufficient if he exercises the ordinary skill of an ordinary competent man
exercising that particular art. The level of experience of the professional
is not relevant in determining the standard of care (Wilsher v Essex Area
Health Authority (1988)).
6.61
What if the professional had acted consistent with the professional standards
or practice of the professional body to which he or she belonged? It
appears that the professional may still be found liable under the tort of
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negligence. The professional standards serve, at the most, as a guideline of
what is expected of a reasonably competent professional. In the context of
lawyer’s negligence, the courts have opined that the real issue is not the
professional practice but the extent of the legal duty in a given situation
which is a question of law (Edward Wong Finance Co, Ltd v Johnson, Stokes
and Master (1984); Fong Maun Yee v Yoon Weng Ho Robert (1997); Yeo Yoke
Mui v Ng Liang Poh (1999)).
6.62
In Fong Maun Yee, the plaintiffs wished to purchase a piece of property and
had paid monies in reliance on the defendant’s negligent misrepresentation
that the latter had authority to act for the purported vendor. The defendant
lawyer had obtained from a property agent an option to purchase and a
resolution purportedly passed by the vendor’s directors authorising the sale
of the property. The defendant did not know the purported vendor or its
directors personally. Yet, the defendant did not verify his instructions to
act for the purported vendor, though the defendant carried out a company
search and confirmed to the plaintiffs that the persons who had signed the
resolution and option were directors at the material time. As it turned out,
the signatures on the resolution and option were forgeries and the property
agent absconded with the plaintiff ’s monies.
6.63
At the trial of the action in negligence, evidence was adduced from a
conveyancing lawyer that it was not the practice in Singapore for lawyers
to verify their instructions. Nonetheless, the Singapore Court of Appeal
held that the defendant lawyer had breached his duty of care and skill
to the plaintiffs. Applying the test in Edward Wong Finance Co Ltd, the
Court of Appeal held that, in failing to verify his instructions, there was
clearly a foreseeable risk that the defendant would be acting without
authority. The court observed that the defendant could have avoided the
risks by taking steps to confirm his authority to act or if he could not do
so, to at least warn the plaintiffs of the risk that he could be acting without
authority.
Use of Expert Evidence in Determining the Standard of Care
6.64
The court would generally determine the standard of care expected of
professionals based on the evidence of experts within the same or similar
profession. With respect to the standard of care expected of medical doctors,
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for instance, it was held that a doctor is not guilty of negligence if he has
“acted in accordance with a practice accepted as proper by a responsible body
of medical men skilled in that particular art … Putting it the other way
around, a man is not negligent, if he is acting in accordance with such a
practice, merely because there is a body of opinion that takes a contrary
view” (Bolam v Friern Hospital Management Committee (1957) (at p 587).)
[emphasis added]
6.65
The Bolam test was confirmed in the decision of Bolitho v City and Hackney
Health Authority (1998) with some refinements. The judge hearing the
medical negligence case had to be satisfied that the medical opinion had
a logical basis which would involve weighing the risks against the benefits
to reach a “defensible conclusion”. Lord Browne-Wilkinson in Bolitho stated
thus (at p 243):
In the vast majority of cases the fact that distinguished experts in the
field are of a particular opinion will demonstrate the reasonableness
of that opinion. In particular, where there are questions of assessment
of the relative risks and benefits of adopting a particular medical
practice, a reasonable view necessarily presupposes that the relative
risks and benefits have been weighed by the experts in forming
their opinions. But if, in a rare case, it can be demonstrated that the
professional opinion is not capable of withstanding logical analysis, the
judge is entitled to hold that the body of opinion is not reasonable
or responsible.
6.66
The above Bolitho test was endorsed in the Singapore case of Dr Khoo
James v Gunapathy d/o Muniandy (2002). With respect to the meaning
of “defensible conclusion”, the Singapore court took the view (at [65])
that the medical opinion must be internally consistent on its face. At the
same time, it must not ignore or controvert known medical facts or
advances in medical knowledge. Significantly, the court also observed (at
[3]) that whilst judges are eminently equipped to deal with the practice
and standards of the legal profession, the same cannot be applied to the
intricacies of medical science. Subsequently, the Bolam and Bolitho tests have
also been applied to assess the standard of care of auditors (PlanAssure PAC
v Gaelic Inns Pte Ltd (2007); JSI Shipping (S) Pte Ltd v Teofoongwonglcloong
(2007)).
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Res Ipsa Loquitur
6.67
The legal burden of proof is generally on the plaintiff to show on a balance
of probabilities that the defendant had breached the duty of care. In some
circumstances, however, the plaintiff may experience difficulties in adducing
direct evidence of the negligent act or omission. In such an instance, the
doctrine of res ipsa loquitur (“the thing speaks for itself ”) may be used in aid
of the plaintiff. To establish the applicability of the doctrine, three criteria
must be satisfied, namely:
° the defendant must have been in control of the situation or thing which
resulted in the accident;
° the accident would not have happened, in the ordinary course of things,
if proper care had been taken; and
° the cause of the accident must be unknown to the plaintiff.
However, it should be noted that the defendant can displace the effect of the
doctrine by giving evidence to show that he or she was not negligent.
6.68
A few illustrations shall suffice here. In Scott v London & St Katherine Docks
Co (1865), sacks of sugar under the control of the defendant fell from a
crane at the defendant’s warehouse. It was held that the doctrine of res ipsa
loquitur applied as the accident could not, in the ordinary course of events,
have occurred without the negligence of the defendant. The Singapore case of
Teng Ah Kow and another v Ho Sek Chiu and others (1993) held that res ipsa
loquitur is a rule of evidence. Thus, upon the fulfilment of the three criteria
listed above, the effect of res ipsa loquitur results in the shift of the evidential
burden of proof to the defendant to show that he or she was not negligent
(see Ooi Han Sun v Bee Hua Meng (1991) and Awang bin Dollah v Shun
Shing Construction & Engineering Co Ltd and other appeals (1997) in the
context of occupier’s liability). However, the doctrine of res ipsa loquitur does
not apply to a case where the accident could have happened via a number of
permutations, some consistent with the plaintiff ’s negligence, the defendant’s
negligence or a combination of the negligence of both parties (Cheong Ghim
Fah v Murugian s/o Rangasamy (2004)).
CAUSATION OF DAMAGE
6.69
The third legal requirement to establish an action in negligence is that the
damage suffered by the plaintiff must have been caused by the defendant’s
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breach. Causation is analysed by considering both factual and legal causation.
Factual causation focuses on the causal link between the defendant’s negligent
conduct and damage according to the laws of physics and natural science.
There are two primary tests to determine the issue of factual causation of
damage subject to certain exceptions (see paras 6.70–6.76). In addition
to factual causation, the courts would have to consider the issue of legal
causation (namely, to which cause should we ascribe legal responsibility). In
this regard, the impact of a novus actus interveniens (or a “new intervening
act”) of the plaintiff or a third party or even a natural event on the issue of
causation will be assessed (see paras 6.83–6.84).
Factual Causation
(1) “But for” test
6.70
This test involves the question of whether the plaintiff would have suffered
harm if the defendant had not been negligent. If it is found that the plaintiff
would still have suffered harm notwithstanding that the defendant was not
negligent, we can conclude, based on the “but for” test, that the defendant’s
alleged negligence did not cause the harm suffered by the plaintiff. In Barnett
v Chelsea & Kensington Hospital (1969), a patient who had suffered from
persistent vomiting was taken to hospital. The doctor negligently refused to
examine the patient and the latter died of arsenic poisoning. It was found,
based on the evidence adduced, that even if the correct medical treatment
had been given by the doctor at the relevant time, death to the patient would
have taken place anyway. Thus, the court ruled that the doctor’s negligent
omission in that case did not cause the death.
6.71
The “but for” test of causation may not be fulfilled due to the presence of
certain variables which cannot be established by the plaintiff on a balance of
probabilities. In Yeo Peng Hock Henry v Pai Lily (2001), the plaintiff (patient)
consulted the defendant (general medical practitioner) and complained of
fever, cough, cold as well as blurred vision and spots on her left eye. The
defendant doctor suspected the plaintiff of having a detached retina and
urinary tract infection but did not advise the plaintiff to consult an eye
specialist or go to a hospital immediately. The plaintiff claimed damages
for negligence on the grounds that as she was not advised to see an eye
specialist or go to the hospital immediately, she had lost the chance of an
earlier diagnosis by a specialist which would have prevented her from losing
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her sight. In this regard, the court held that the defendant had fallen short
of the standard of care required of a competent general practitioner.
6.72
The more controversial issue in the case relates to causation, that is, whether,
if the plaintiff had been properly advised by the defendant, the plaintiff
would have immediately gone to the hospital and saved her sight. In this
case, the plaintiff did not in fact suffer from a detached retina but a rare
infection known as endogenous klebsiella endophthalmitis (“EKE”) which
resulted in her loss of vision. The klebsiella bacteria grows at an exponential
rate within 24 hours. It was clear that such a rare disease could not have
been detected by a reasonably competent general practitioner. Based on
the evidence of expert witnesses, the court observed that whether the
plaintiff ’s eye could be saved was subject to three qualifications, namely
(1) the correct diagnosis by the doctor at the hospital at the material time;
(2) the appropriate treatment administered; and (3) the response of the eye
to the treatment. The court concluded that the plaintiff had not proven,
on a balance of probabilities, that had the defendant advised her to go to
the hospital immediately and had she done so as advised, the plaintiff ’s eye
would have been saved.
6.73
The requirement of the “but for” test to determine causation of damage does
not appear to be applicable in the context of a medical practitioner’s failure
to warn of risks of surgery to the patient. In Chester v Afshar (2005), the
House of Lords decided, by a majority of 3:2, that the medical practitioner
would be liable for a negligent omission to warn of risks to the plaintiff,
notwithstanding that there is insufficient evidence to show that, even if duly
warned, the plaintiff would not have undergone the surgery. In this instance,
the “but for” test for causation of damage was not satisfied; yet the defendant
doctor was held liable for the risks of surgery which eventuated. The
majority judges (Lord Steyn, Lord Hope and Lord Walker) premised their
decisions largely on the justice of the case, the doctrine of informed consent
of the patient as well as the significance of the patient’s right of autonomy
and dignity. The minority judges (Lord Hoffman and Lord Bingham) were,
however, reluctant to depart from the traditional requirements of causation.
We note that the majority position in Chester is consistent with that of the
majority judges of the High Court of Australia in Chappel v Hart (1998)
involving a doctor’s failure to advise the patient of the risks inherent in the
treatment, which would deprive the patient of the right to choose a more
experienced doctor.
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6.74
It is also noted that the application of the “but for” test may lead to
incongruous results in certain multiple causation cases. For instance, assume
that there are two fires which resulted in the damage to the plaintiff ’s
property. Let us also assume that each fire, on its own, would have been
sufficient to cause the property damage. What is the cause of the property
damage here? If one applies the “but for” test, strictly speaking, fire #1
would not be regarded as the cause of the damage on the basis that but for
fire #1, the property damage would still have occurred (ie, due to fire #2).
Based on similar reasoning, fire #2 would not be regarded as the cause of
the property damage. Such an outcome, that neither fire is the cause of the
property damage, would clearly be absurd. In such a situation, it is submitted
that the second test below, namely whether each of the fires #1 or #2 had
materially contributed to the property damage, is the preferred approach.
(2) Material contribution to damage
6.75
This test considers the question as to whether the breach materially
contributed to the damage. To satisfy this test, it is not necessary for the
breach to be the sole or dominant cause of the plaintiff ’s loss or damage.
6.76
In Bonnington Castings Ltd v Wardlaw (1956), the plaintiff suffered
pneumoconiosis, alleging that the defendant employer failed to install a
safety equipment to prevent exposure to silicone dust. He was exposed to
silicone dust at the employer’s premises. Science could not demonstrate the
precise proportions of the source of dust due to the employer’s negligence
and another non-tortious source. But there is scientific evidence that severity
of the illness was proportionate to the level of exposure to the dust. The court
thus concluded that the defendant’s negligence had materially contributed
to the plaintiff ’s pneumoconiosis. In a similar case, Holtby v Brigham &
Cowan (Hull) Ltd (2000), where there were two or more employers, each
employer was liable to the plaintiff employee for a portion of the damage
proportionate to the relative time of exposure to the agent of harm (in that
case, asbestos).
(3) Material contribution to risks of damage
6.77
Where there are several potential causes of harm, some of which are tortious
and some of which are natural, the basic rule is that the plaintiff can succeed
only if he proves on a balance of probabilities that the damage in question is
attributable to the tort (Wilsher v Essex Area Health Authority (1988)).
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6.78
There is, however, an exception to the general rule in Wilsher. In the
landmark decision of Fairchild v Glenhaven Funeral Services Ltd (2003),
where several defendants consecutively expose the plaintiff to the same
risk involving the same agent of harm, the defendants may be jointly and
severally liable, even when it is impossible to determine scientifically which
of them actually caused the plaintiff ’s damage. In this case, the worker had
contracted mesothelioma after being exposed to asbestos dust at different
times by more than one employer or occupier of the premises. According to
the state of scientific knowledge in Fairchild, it was not possible for a plaintiff
to prove on a balance of probabilities that the damage suffered was caused
by the employer or occupier’s conduct, though each had materially increased
the risk that the plaintiff would contract mesothelioma. It was clear that the
plaintiff had contracted mesothelioma. The House of Lords held that, in the
circumstances, the exception applied and hence, the defendant’s conduct had
caused the damage. The decision to provide the plaintiff in the case with a
remedy was based on grounds of fairness.
6.79
The prior decision in McGhee v National Coal Board (1973) was generally
regarded as illustrative of the Fairchild exception. It was held in McGhee that
in circumstances where a defendant has sole control over the agent of harm,
he may be liable even if the plaintiff can establish only that the defendant
negligently increased the risk of harm. The court found that the defendant’s
(employer’s) failure to provide showers for the plaintiff (employee) to wash
away the brick dust that the plaintiff was exposed to whilst working in a
kiln had materially increased the risk of the plaintiff developing dermatitis.
This was despite the fact that scientific knowledge could not establish that
the dermatitis was caused by brick dust during the period of the defendant’s
failure to provide the showers. Yet, the defendant was held to have caused
the damage.
6.80
In Barker v Corus (UK) plc (2006), another asbestos-related mesothelioma
case, the House had to decide on the scope of the Fairchild exception. The
facts in Barker were slightly different from those in Fairchild. In Barker,
the first two exposures were due to breaches of duty by employers, similar
to Fairchild. However, the last exposure in Barker involved a failure by
the plaintiff himself to take reasonable care for his own safety during the
period of his self-employment. Would the Fairchild exception nevertheless
be applicable here? Notwithstanding the different facts, the answer, according
to the House of Lords in Barker, was “yes”. However, the House of Lords
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(Lord Rodger dissenting) decided that, unlike in Fairchild, the defendants
are not jointly and severally liable, but are liable only for an aliquot share,
apportioned according to their respective contributions to the risks (but see
subsequent UK Compensation Act 2006 which entitles the claimant to make
a claim in full from a single defendant). The relevant factors for determining
the appropriate apportionment may include the duration of exposure, the
intensity of exposure and the type of asbestos involved.
(4) Loss of Chance
6.81
It is fairly common for doctors as expert witnesses to assess the degree of
likelihood of recovery or the extent of the illness developing in a particular
case. In the case of Hotson v East Berkshire Health Authority (1987), the
plaintiff fell and injured his knee. The doctor was negligent in his diagnosis.
If the doctor had properly diagnosed the injury, there was only a 25 per
cent chance that the injury would have healed and that the complications of
avascular necrosis would not have developed. The court in Hotson held that
causation was not, in this case, proved on a balance of probabilities and the
defendants were not liable.
6.82
In Gregg v Scott (2005), there was a negligent delay by the defendant doctor
in the diagnosis and treatment of the plaintiff suffering from cancer. This
delay increased the latter’s chances of a premature death from 25 to 42 per
cent. However, there was no evidence that the delay would, on a balance
of probabilities, have caused premature death. The House of Lords (Lord
Nicholls and Lord Hope dissenting) held, consistent with Hotson, that the
plaintiff could not recover damages in respect of the alleged additional
chance that he would suffer premature death caused by the delay.
Legal Causation
6.83
In determining the issue of causation, one should also take note of the
potential effect of a novus actus interveniens (“new intervening act”). This
novus actus interveniens might be an act of the plaintiff or third party
or even a natural event that takes place between the defendant’s alleged
negligence and the damage that ensued. Where an act or omission is of
such a nature as to constitute a wholly independent cause of the damage, the
intervening conduct may be regarded as a novus actus interveniens (Muirhead
v Industrial Tank Specialities Ltd (1986); TV Media Pte Ltd v De Cruz Andrea
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Heidi and another appeal (2004)). If there is a novus actus interveniens which
is sufficient on the facts to break the chain of causation, the defendant’s
breach would not be regarded as the cause of the plaintiff ’s damage. Cases
in which the alleged novus actus interveniens was sufficient to break the
chain of causation normally involve intervening acts that are unreasonable,
deliberate, reckless or unforeseeable (McKew v Holland & Hannen Cubitts
(Scotland) Ltd (1969); Wright v Lodge (1993); Poh Kim Ngoh v Yap Chwee
Hoe (1968–1970)).
6.84
Another legal causation issue involves situations where one tort is followed
by another tort or a natural event. In Baker v Willoughby (1970), the plaintiff
injured his left leg in a road accident. He was later shot in the left leg by an
armed robber. It was held that the defendant remained liable for the injury,
even though the effects of his negligence had been wiped out by the second
tort. However, where the second event is a natural cause which wipes out the
physical effects of the first tort, the tortfeasor’s liability ceases at the point
when the natural supervening condition manifests itself (Jobling v Associated
Dairies (1982)). Otherwise, the defendant would be liable for damage which
would have occurred naturally as part of the “vicissitudes of life”. The
Singapore Court of Appeal decision in Salcon Ltd v United Cement Pte Ltd
(2004) stated that the Baker approach should not be adopted for commercial
disputes and appeared to prefer the Jobling approach.
REMOTENESS OF DAMAGE
General Principles
6.85
The test for remoteness of damage was originally embodied in the old case of
Re Polemis and Furness Withy & Co (1921). In that case, the plaintiff ’s ship
was destroyed by a plank falling into a hold. The hold contained some petrol
vapour, which ignited due to a spark created by the falling plank. Though
the presence of petrol vapour in the hold was not foreseeable, the fire caused
was a direct consequence of the defendants’ breach of duty in allowing the
plank to fall into the hold.
6.86
The test of “reasonable foreseeability” in the case of Overseas Tankship (UK)
Ltd v Morts Dock & Engineering Co Ltd (or Wagon Mound (No 1)) (1961)
later superseded the test of “direct consequence” in Re Polemis. According
to Wagon Mound (No 1), the loss would not be too remote where the type
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of loss which actually occurred was reasonably foreseeable, notwithstanding
that the precise extent of the loss was not foreseeable. On the facts of Wagon
Mound (No 1), the defendants (charterers of ship) breached their duty in
spilling fuel oil which spread to the plaintiff ’s wharf, thereby causing damage
to the wharf. The molten metal from the plaintiff ’s welding works on the
wharf had set fire to the cotton waste floating on the oil. Though the fire
damage was a direct consequence of the defendants’ breach, the plaintiff ’s
claim in negligence failed. This was because the Privy Council determined
that it was not foreseeable that the fuel oil would burn in water.
6.87
In the subsequent case of Wagon Mound (No 2) (1967), the facts were
largely similar except that the plaintiffs in that case were the shipowners.
The defendants were found liable in Wagon Mound (No 2) due primarily
to the evidence of the ship’s chief engineer that there was a real risk that
fire will result. The court decided that the defendants could not neglect
the risk if it was easy in the circumstances to eliminate those risks (see
para 6.58).
6.88
To further illustrate the concept of foreseeability as to the type of damage, let
us examine the House of Lords decision in Jolley v Sutton London Borough
Council (2000). The plaintiff, a schoolboy, suffered spinal injuries when an
abandoned boat left on the grounds of a block of council flats owned by
the defendant fell on the plaintiff. On the facts, the plaintiff and his friend
were attempting to repair the boat that was propped up with a car jack
by the boys. Unfortunately, the boat fell on the plaintiff, causing severe
injuries. The Court of Appeal took the view that whilst it was foreseeable
for the boys to be attracted to the abandoned boat and engage in “normal
play”, it was not reasonably foreseeable that they would repair it and thereby
sustain severe injuries due to its collapse. The House of Lords disagreed.
Lord Steyn in Jolley stated that the boys’ activities were no different from
normal play and can take the form of “mimicking adult behaviour”. His
Lordship also cited the case of Hughes v Lord Advocate (1963) for the
proposition that as long as the cause of the accident was a “known source
of danger”, the defendant would be liable even if the accident was caused in
a way which could not have been foreseen. Lord Hoffman in Jolley added
that the actual injury was within the trial judge’s broad description of the
risk that the children would “meddle with the boat”. Hence, the defendants
were liable.
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Special Circumstances of the Plaintiff
6.89
The general rule is that the defendant has to take the plaintiff as he or
she is, with existing predispositions (known as the “eggshell skull rule”). In
Smith v Leech Brain & Co Ltd (1962), the plaintiff burnt his lip due to the
defendant’s negligence. As the plaintiff had a pre-cancerous condition, the
lip became cancerous due to the burn. The defendant was held to be liable
for the entire damage.
6.90
However, will a defendant be liable for additional damage which the plaintiff
suffers due to its impecuniosity? In the old English case of Liesbosch
Dredger v SS Edison (1933), the plaintiff ’s ship sank due to the defendant’s
negligence. As the plaintiff could not purchase another ship due to its
poor financial condition, it had to hire a ship instead at a higher rate. It
was in fact cheaper to purchase a ship than to hire one. The English court
decided that the plaintiff could not later recover from the defendants the
additional costs of the hire that were due to the plaintiff ’s impecuniosity.
This decision appears to run counter to the doctrine of mitigation as the
plaintiff would have been obliged to take reasonable steps, as he had done,
to obtain a substitute ship in order to reduce his losses. It should also be
noted that the Liesbosch Dredger principle is inconsistent with the eggshell
skull rule described above. The position in Liesbosch Dredger has also been
doubted in the case of Alcoa Minerals of Jamaica Inc v Broderick (2002)
which allowed a claim for increased costs in repairing the plaintiff ’s roof
notwithstanding that the repair could not be undertaken earlier due to the
plaintiff ’s impecuniosity, and was subsequently overruled by the House of
Lords in Lagden v O’Connor (2004). More importantly, the Singapore Court
of Appeal has recently confirmed that the Liesbosch Dredger principle should
not be applied in Singapore (Ho Soo Fong and another v Standard Chartered
Bank (2007)).
MITIGATION OF DAMAGE
6.91
It is the defendant’s burden to show that the plaintiff ought to have taken
reasonable steps to prevent or reduce the plaintiff ’s loss. If the defendant
is able to discharge its burden, the loss claimable by the plaintiff would be
reduced accordingly.
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ASSESSMENT OF DAMAGE
6.92
The main purpose of damages in the tort of negligence is to compensate for
losses suffered (ie, to restore the plaintiff as far as possible to the position he
or she would have been if not for the defendant’s negligence).
6.93
In personal injury cases, the plaintiff can claim for general damages such as
pain and suffering, loss of amenities (eg, the loss of capacity due to the loss
of a limb) and future loss of earnings. In addition, special damages such as
loss of earnings (pre-trial) and medical expenses that have been reasonably
incurred may, subject to proof, be recovered. In death cases, a claim for
bereavement expenses may be made for the benefit of certain specified
dependents (s 21 Civil Law Act (Cap 43, 1999 Rev Ed)). The quantum of
damages for property damage is normally based on the costs of repair or
diminution in value of the property. Assessment of damages in economic
loss cases is intimately connected to the ascertainment of the precise scope of
duty of care in a particular case (eg, whether the duty was merely to supply
information or to advise on a purported transaction) which may result in
quite different quantifications of damages.
DEFENCES
Ex Turpi Causa
6.94
The phrase ex turpi causa non oritur actio means that no action ought to be
founded on a wicked act. As a defence, it has a limited application in the tort
of negligence. The fact that the plaintiff is involved in some wrongdoing does
not of itself provide a good defence to the defendant. For instance, a plaintiff
who does not have a work permit to work in Singapore does not prevent him
from claiming damages against the defendant who had negligently caused
the plaintiff ’s injuries: Ooi Han Sun v Bee Hua Meng (1991). However, as
stated by the court in Ooi Han Sun, public policy dictates that the plaintiff
in such a case cannot be compensated on the basis of what he might have
earned by working illegally in Singapore.
6.95
For the defence of ex turpi causa to arise, the plaintiff ’s wrongdoing must be
sufficiently connected with the damage he suffered, and the damage caused
by the defendant should be proportionate to the plaintiff ’s wrongdoing. The
English courts have allowed the defence in fairly exceptional cases such
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as Ashton v Turner (1981) (where the plaintiff suffered the injury in the
course of committing a crime together with the defendant) and Clunis
v Camden and Islington Health Authority (1998) (in which the plaintiff
claimed against the health care authority for the latter’s negligent omission
to provide him with psychiatric care which, it was alleged, resulted in the
plaintiff killing a person). In Stone & Rolls Ltd v Moore Stephens (2009),
the liquidator of the plaintiff company claimed that the auditors were
negligent in failing to detect the fraud committed by S, a director and
shareholder of the company against certain banks. S was the sole directing
mind and will of the company and thus the fraud was imputed to the
company. The auditors were adjudged not liable due to the defence of ex
turpi causa.
6.96
In the recent Singapore decision of United Project Consultants Pte Ltd v
Leong Kwok Onn (trading as Leong Kwok Onn & Co) (2005) (see para
6.26 for the facts), the court opined that the defence of ex turpi causa
could include, apart from criminal offences, other forms of reprehensible
or grossly immoral conduct. On the facts of the case, the defence of ex
turpi causa did not apply to defeat the action in negligence. The court
found that the plaintiff had not connived to cheat the IRAS and thus did
not engage in an act so culpable as to attract the defence. The plaintiff had
merely committed the statutory offence under the Income Tax Act (Cap
134, 2008 Rev Ed) of making incorrect tax returns which was not criminal
in nature, reprehensible or grossly immoral. This was sufficient to deny the
defence of ex turpi causa but the Court of Appeal went a step further.
It observed that the defendant was engaged by the plaintiffs precisely to
avoid the economic loss (namely, the penalty imposed by the IRAS) suffered
by the plaintiffs. Thus, the defendant should not be allowed to rely on a
consequence (ie, the penalty imposed by the IRAS) that was directly caused
by the defendant’s own failure in the first place, in order to absolve the
defendant from liability.
Volenti Non Fit Injuria
6.97
The issue is whether the plaintiff had acted freely and voluntarily with full
knowledge of the nature and extent of the risks of the defendant’s negligence
and consented, whether expressly or impliedly, to those risks that resulted in
the tort. If this is the case, the defendant has a complete defence.
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6.98
The defence is generally applicable to absolve negligence liability for injuries
suffered in the context of participation in sporting activities involving
decisions and actions that have to be taken swiftly in the “agony of the
moment”, though it is unlikely to cover intentional and reckless behaviour of
the defendant (see Wooldridge v Sumner (1963)). The defence applied where
the plaintiff was aware of the nature and extent of the risks and consented
to those risks in the participation of inherently dangerous activities in
deliberate breach of his employer’s orders and statutory regulations (ICI v
Shatwell (1965)). The defence did not, however, apply where the plaintiff
took conscious risks to effect rescue in emergency circumstances that had
arisen from the defendant’s negligent conduct (Haynes v Harwood (1935)).
The court may take into consideration the brave acts of the plaintiff in such
rescue cases.
6.99
Section 2 Unfair Contract Terms Act (Cap 396, 1994 Rev Ed) (“UCTA”)
provides that a person’s agreement to or awareness of a term or notice
purporting to exclude or restrict liability does not necessarily constitute a
voluntary acceptance of the risks. Full knowledge of the nature and extent of
the risks and consent would have to be shown by the defendant in order to
successfully raise the volenti defence.
Exemption of Liability
6.100
In this section, we examine clauses or notices which seek to exempt the
defendant from negligence liability. These exemption clauses or notices might
either attempt to exclude liability entirely or to merely limit the liability of
the defendant. For the defendant to rely on exemption clauses or notices to
exempt liability, he would first have to show that these exemption clauses
have been incorporated into the contract with the plaintiff or in a notice
that the defendant had taken reasonable steps to bring to the attention of
the plaintiff. Secondly, the defendant would have to show that the language
of the clause or notice covers the situation in question. For instance, did
the contract or notice sufficiently exclude liability for damages arising from
the defendant’s negligence? Thirdly, the exemption clause or notice must
not be rendered unenforceable by the UCTA. A defendant cannot exclude
or restrict its liability for negligence which results in personal injury or
death (s 2(1) UCTA). In respect of damage outside of personal injury or
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death (eg, property damage and financial losses), the effectiveness of the
exclusion or limitation clause is subject to satisfying the requirements of
reasonableness (s 2(2) UCTA) (see also Smith v Eric S Bush (1990)).
Contributory Negligence
6.101
As indicated earlier, the doctrine of contributory negligence serves only as
a partial defence. In this regard, s 3 Contributory Negligence and Personal
Injuries Act (Cap 54, 2002 Rev Ed) reads:
(1) Where any person suffers damage as the result partly of his own fault
and partly of the fault of any other person or persons, a claim in respect
of that damage shall not be defeated by reason of the fault of the person
suffering the damage, but the damages recoverable in respect thereof shall
be reduced to such extent as the court thinks just and equitable having
regard to the claimant’s share in the responsibility for the damage:
Provided that —
(a) this subsection shall not operate to defeat any defence arising under
a contract;
(b) where any contract or written law providing for the limitation of
liability is applicable to the claim the amount of damages recoverable
by the claimant by virtue of this subsection shall not exceed the
maximum limit so applicable. [emphasis added]
6.102
A plaintiff ’s negligence will result in a reduction of damages only where
it is causally relevant to the damage which he or she has sustained. The
apportionment of liability as between the plaintiff and the defendant
depends on their respective causative potency and blameworthiness.
Where the defendant’s liability in contract is concurrent with an identical
tortious duty, the defendant could avail himself or herself of the defence
of contributory negligence (Fong Maun Yee v Yoong Weng Ho Robert
(1997); Forsikringsaktieselskapet Vesta v Butcher (1989); Jet Holding Ltd
and others v Cooper Cameron (Singapore) Pte Ltd and another and other
appeals (2006)). To reduce damages based on contributory negligence,
there is no need for the defendant to show that the plaintiff had been
in breach of a legal duty of care (Khoo Bee Keong v Ang Chun Hong and
another (2005)).
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OTHER ISSUES
6.103
We should examine the following issues related to the tort of negligence:
vicarious liability, director’s liability for a company’s negligence, concurrent
liability in tort and contract as well as the limitation periods for bringing an
action in negligence.
Vicarious Liability
6.104
Employers are vicariously liable for the torts committed by their employees
in the course of their employment. This means that an employer is legally
liable to the third party who suffers harm due to the employee’s negligence in
the course of employment. Vicarious liability is based on various rationales:
the employer has deeper pockets, exercises control over the employee and
benefits from the employee’s work.
6.105
One criterion of vicarious liability is the existence of an employer–employeee
relationship. Apart from any relevant terms of the contract between the
parties, the precise relationship depends on the degree and extent of control
by the employer over the employee’s method of work, whether the worker
is sufficiently integrated into the organisation of the employer and whether
the employee is acting on behalf of the employer or on his own account.
The other important criterion (ie, “in the course of employment”) relies on
the test of “close connection” between the nature of the employment and the
tort committed as well as several policy considerations (eg, compensation
for vulnerable victims of the tort and deterrence against employers)(see
Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific
Breweries (Singapore) Pte Ltd (2011)).
6.106
If the worker who committed the tort is not an employee of the defendant
but merely an independent contractor, the defendant is not vicariously
liable. It is nevertheless possible to claim against the defendant directly if
the latter was negligent in engaging the independent contractor and that the
negligence resulted in the plaintiff ’s loss. The employer may, in certain
circumstances, be under a duty, where the working conditions are inherently
dangerous, to exercise a significant degree of supervision and control over
the independent contractors (see dicta in Mohd bin Sapri v Soil-Build (Pte)
Ltd (1996)).
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Director’s Liability for Company’s Negligence
6.107
The director of a company is not generally liable for the company’s negligent
conduct. The director is regarded in law as a separate entity from the
company and hence the tortious acts or omissions of the company cannot
normally be imputed to the directors. However, where the director in
question is clearly the “controlling mind and spirit” of the company, the
director may be personally liable for authorising, directing or procuring the
company’s negligent acts, as was the case in TV Media Pte Ltd v De Cruz
Andrea Heidi and another appeal (2004). In that case, the director was also
a principal shareholder of the company. Based on the above, the corporate
veil was lifted. The Singapore Court of Appeal in the TV Media case also
stressed that a director would be found liable in negligence for the company’s
negligent acts only in exceptional circumstances and, as such, the decision
would not open the floodgates of litigation.
6.108
Apart from the above case, a director may be personally liable in negligence
if he is shown to have voluntarily assumed personal responsibility to the
plaintiff, and the assumption of responsibility was reasonably relied upon by
the plaintiff. Whether such assumption arises in a particular case depends on
the parties’ conduct, words and the surrounding circumstances objectively
construed (Williams v Natural Life Health Foods Ltd (1998)).
Concurrent Liability in the Tort of Negligence and in Contract
6.109
The oft-cited case on concurrent liability is Henderson v Merrett (1995). In
that case, shorn of the detailed facts, the issue was whether the plaintiff,
who had a contractual relationship with the defendants, could nevertheless
sue the defendants in tort to avail himself of the more favourable limitation
period for tort claims (as compared to contractual claims). The House of
Lords gave an affirmative answer. The plaintiffs could select the tortious
remedy which was more advantageous in the circumstances. The tort remedy
would be applicable unless it is limited or excluded by the agreement of the
parties concerned.
Limitation Periods
6.110
According to s 6(a) Limitation Act (Cap 163, 1996 Rev Ed) (“LA”), an
action founded on a tort shall not be brought after the expiration of six
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years from the date on which the cause of action accrued. In the context
of negligence, this date refers to the date that the damage occurred. This
section is, however, subject to other provisions in the Act, namely, s 24A,
which provides that, with respect to a negligence claim for damages for
personal injuries, the action shall not be brought after the expiration of:
(1) three years from the date on which the cause of action accrued; or
(2) three years from the earliest date on which the plaintiff has the
knowledge required for bringing an action for damages in respect of the
relevant injury, if that period expires later than the period mentioned in
paragraph (1).
For other claims for damages in negligence (eg, property damage and
financial loss), the relevant limitation periods are six years from the date of
the accrual of action and three years from the date of acquisition of both the
knowledge required for bringing an action in respect of the relevant damage
and knowledge of a right to bring such an action (s 24A(3) LA). (Note
that there is an overriding time period of 15 years from the “start date” for
actions in damages for negligence, nuisance and breach of duty: see s 24B
LA. This means that the action cannot be brought after the expiry of the
overriding time period even if the cause of action had not yet accrued: see
s 24B(3) LA).
6.111
Under s 24A, an action may not be time-barred if it can be shown that
the action was instituted within three years from the earliest date in which
the plaintiff had acquired knowledge of his rights to bring a claim for the
damage. In Chia Kok Leong and another v Prosperland (2005), as the action
was instituted in May 2002, the plaintiff has the burden to show that it
had acquired the relevant knowledge on or after May 1999. The onus on
the defendants, on the other hand, is to show knowledge on the part of the
plaintiff at an earlier date.
6.112
Knowledge of the factual essence of the complaint (as opposed to the details
of the claim or whether the plaintiff had a legal claim in negligence) would
suffice. It must be shown that the plaintiff possessed knowledge of material
facts about the damage that would lead a reasonable person to consider it
“sufficiently serious” to invoke legal proceedings (Lian Kok Hong v Ow Wah
Foong (2008)).
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CONCLUSION
6.113
The tort of negligence has grown from its humble beginnings in Donoghue
v Stevenson to be a very significant fault-based tort today. It is clearly
instrumental in regulating business and other conduct and activities in
Singapore. As we have seen, the courts have utilised legal mechanisms
such as duty, breach, damage and defences to shape the contours of this
expanding area of the common law whilst safeguarding the physical, mental,
proprietary and economic interests of a person from the negligent conduct
of another. In doing so, the courts should endeavour to strike a suitable
balance between the application of concrete legal principles and the exercise
of judicial discretion and policy to depart from those principles if and when
such departure facilitates the proper development of tort law and where
fairness and justice requires it.
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Chapter 7
Offer and Acceptance
7.1–7.2
Introduction to the Law of Contract
7.3–7.5
7.6–7.7
Basic Terminology
Offer and Acceptance
7.8–7.10
7.11–7.13
7.14–7.17
7.18–7.24
7.25–7.29
7.30–7.31
7.32–7.33
7.34
7.35–7.42
7.43–7.45
7.46–7.47
7.48–7.50
7.51
7.52–7.53
7.54–7.56
7.57–7.63
7.64–7.71
7.72–7.76
7.77–7.79
7.80
7.81–7.86
Offer
Definition and Nature of Offer
Offers to Public at Large
Offer Distinguished from Invitation to Treat
(1) Advertisements
(2) Displays of goods for sale
(3) Auction sales
(4) Tenders
Termination of Offer
(1) Introduction
(2) Revocation
(3) Rejection and counter-offer
(4) Lapse of time
(5) Failure of a condition
(6) Death
Acceptance
Definition and Nature of Acceptance
General Principles
(1) Acceptance must be final and unqualified
(2) Acceptance must be communicated to offeror
(a) General rule
(b) Exception: The postal acceptance rule
(c) Acceptance by silence?
(d) Ignorance of offer
(e) Cross-offers
(f) Battle of forms
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7.87–7.100
7.101–7.104
7.105
Some Issues Relating to Offer and Acceptance
Certainty and Completeness
Artificiality of Offer and Acceptance Rules
Conclusion
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INTRODUCTION TO THE LAW OF CONTRACT
7.1
In Part II we learnt about the two important branches of law, namely, criminal
law and civil law. As regards the former, we dealt with the law relating to
business crimes, and as regards the latter, we dealt with the law of torts. We
now turn our attention to another important branch of civil law, the law of
contract. In Part III we shall consider as to what is a contract, its formation,
contents, termination and the remedies for breach of contract.
7.2
What is a contract? A contract is a legally binding agreement. For an
agreement to be so binding, however, it must satisfy certain requirements of a
valid contract. These are, first, there must be a meeting of the minds between
the parties (consensus ad idem) as manifested through offer and acceptance
(Chapter 7); second, there must be consideration and the intention to create
legal relations (Chapter 8); third, parties must have the capacity to contract
(Chapter 9); and fourth, the parties must freely consent to the agreement.
The factors that may vitiate their free consent are mistake (Chapter 12),
misrepresentation (Chapter 13), and duress and undue influence (Chapter 14).
Further, a contract must not suffer from illegality (Chapter 15).
BASIC TERMINOLOGY
7.3
Before we proceed, it is necessary to understand some of the terms that recur
in the law of contract. In the paragraph above we referred to a “valid” contract
as being an agreement that satisfies all the legal requirements. In this context
there are other terms, namely, void, voidable and unenforceable contracts. A
contract is said to be void when the law treats a contract as nullity, that is,
as though it never existed at all, on account of some serious flaw, such as
fundamental mistake. A contract is said to be voidable where the law treats
the contract as valid when made but one of the parties to the contract has
the right to avoid it, for example, on the ground of misrepresentation. In
such a case, only the party who was induced to enter into a contract through
misrepresentation can avoid it, but not the other party. The party entitled to
avoid it can also opt to continue with the contract. Lastly, an unenforceable
contract is one where there is a valid and legally binding contract but it
cannot be enforced, for example, because of a provision of law. As an
example, one cannot recover the debt after six years from the time when it
was due because of the law of limitation.
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7.4
Then there are bilateral and unilateral contracts. All contracts are bilateral
in the sense there must always be at least two parties to a contract. There
must be mutual promises between the parties before an agreement between
them can emerge. One party cannot impose his or her proposal on the other
however persuasive or determined he or she may be, if the other party is
unwilling to enter into an agreement with him or her. The main feature
of a bilateral contract is that the offeror makes a promise in return for a
promise on the part of the offeree. On the other hand, the term unilateral
means one-sided. However, there is no such thing as a one-sided contract,
as one party cannot enter into a contract with himself or herself. What it
really means is that one party to a prospective contract has already done all
that he or she is required to do under the contract, leaving only the other
party to do his or her part. Thus, in a unilateral contract, the offeror makes
a promise in return for an act to be performed by the offeree. Performance
of this act by the offeree constitutes both the acceptance of the offer as
well as consideration. Thus, where a person advertises a reward for finding
a lost purse all that the other party has to do is to find the purse, and
claim the reward. A contract arising from such an offer to the public at
large is usually a unilateral contract but such offers may also be made to
individuals.
7.5
Lastly, a word about the types of contracts. There are two categories of
contracts, simple contracts and special contracts. Most contracts that are
entered into for business and in everyday life are simple contracts. A
reference to contract in this book is a reference to a simple contract, unless
the context indicates otherwise. Simple contracts can be oral (also known
as “parol contracts”) or in writing, or partly oral and partly in writing.
Special contracts are formal contracts by deed or contracts under seal.
Unlike simple contracts, they do not require consideration (see Chapter 8,
para 8.44). They are used in a more formal setting such as a grant of a gift
or purchase of land.
Offer and Acceptance
7.6
We now turn to consider offer and acceptance. A contract is an agreement
where the parties strike a bargain for themselves. It happens when one
party makes an offer which the other party accepts. This may look simple
in everyday contracts like boarding a bus or buying a loaf of bread but
may be difficult to establish in more serious contracts involving long-drawn
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negotiations. Yet for the contract to exist, it must be established that there
was a meeting of minds (consensus ad idem) between the parties whereby
they have thought about the same thing in the same manner before reaching
an agreement. Since it is not possible to look into the minds of parties, it
will be impossible to ascertain their subjective intentions. Indeed subjective
intentions are irrelevant. The test of agreement is determined objectively,
that is, by the external manifestation of their intentions through their actions
as they may be reasonably understood by the other party. The Singapore
High Court in Norwest Holdings Pte Ltd (in liquidation) v Newport Mining
Ltd (2010) stated (at [34]) that the law is predominantly concerned with
objective intentions of a party, and not his subjective or actual intentions.
Specifically, the objective approach determines a party’s intentions by
looking at all of his words and conduct directed towards his counterparty
from the perspective of a reasonable man versed in business. Similarly, in
Destiny 1 Ltd v Lloyds TSB Bank (2011) the English Court of Appeal noted
(at [15]) that “communications, whether oral or written, are to be understood
in the way that the reasonable person in the position of the recipient would
have understood them”.
7.7
Consensus ad idem is established by applying the rules of offer and acceptance.
Once the acceptance of a valid offer takes effect, a contract comes into
existence provided other requirements are met. Both the parties will then be
bound by their mutual promises. As to offer and acceptance in the context
of electronic contracts, these are considered in Chapter 24.
OFFER
Definition and Nature of Offer
7.8
An offer has been defined as “an expression of willingness to contract on
specified terms, made with the intention that it is to become binding as soon
as it is accepted by the person to whom it is addressed” (see Edwin Peel,
Treitel: The Law of Contract (13th ed, 2011) at p 8). It is “an intimation, by
words and conduct, of a willingness to enter into a legally binding contract,
and which in its terms expressly or impliedly indicates that it is to become
binding on the offeror as soon as it has been accepted by an act, forebearance
or return promise on part of the person to whom it is addressed” (see
J Beatson, A Burrows and J Cartwright, Anson’s Law of Contract (29th ed,
2010) at p 33). Put in another way, “An offer, capable of being converted into
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an agreement by acceptance, must consist of a definite promise to be bound
provided that certain specified terms are accepted” (see M P Furmston,
Cheshire, Fitfoot and Furmston’s Law of Contract (16th ed, 2012) at p 43).
7.9
Thus an offer is a proposal by one party indicating his willingness to be
bound by certain terms provided they are unconditionally accepted by the
other. The party making the offer is the “offeror” and the party to whom
the offer is made is the “offeree”. The offer thus contains: (1) a proposal of
the terms of the exchange; and (2) an expression of willingness to be bound
as soon as the offeree manifests acceptance. An offer puts the offeror at risk:
it confers a power on the offeree to bind the offeror at the precise moment of
acceptance; thereafter the offeror loses his ability to withdraw from or further
negotiate the arrangement (see Mindy Chen-Wishart, Contract Law (4th ed,
2012) at p 47). An offer may be made orally, in writing or by conduct.
7.10
The critical issue in this context is whether there is an intention to be bound.
An objective approach is used in ascertaining whether there is an intention
to be bound. As stated by the English High Court, an apparent intention
to be bound may suffice where an alleged offeror by his words or conduct
induces a reasonable person to believe that he intends to be bound, even
though in fact he has no such intention (Maple Leaf Macro Volatility Master
Fund v Rouvroy (2009)). This test embodies the principle of convenience
because, as mentioned in para 7.6, it is not possible to read a person’s mind
to ascertain his subjective intentions.
Offers to Public at Large
7.11
In most cases an offer will be made to a particular person and only that person
may accept the offer and no one else, for example, an offer of employment.
However, an offer may also be made to a group or to the whole world. In
such a case any member of that group or any member of the public, as the
case may be, may accept the offer. An example of the latter is where the
owner of a lost purse offers a reward to anyone who finds and returns it.
7.12
The principle that an offer can be made to the whole world was laid down
by the English Court of Appeal in the famous decision in Carlill v Carbolic
Smoke Ball Company (1893). The defendants were the manufacturers and
vendors of the Carbolic Smoke Ball which they claimed could prevent
influenza. They advertised in the newspapers stating that if anyone used
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their smoke ball three times daily for two weeks and in accordance with
the printed directions supplied with each ball and still caught influenza,
they would pay that person £100. To prove that they were serious about
their claim, they said they had deposited £1,000 with their bankers. Carlill
bought the smoke ball and used it as directed and yet caught influenza. She,
therefore, claimed the £100 but the defendants refused to pay.
7.13
The court had to settle a number of issues in coming to a decision. First
was the argument that the advertisement was a mere puff and that there
was no intention to create legal relations. The court rejected this argument
on the ground that the advertisement itself stated that the defendants had
deposited £1,000 with the bank which showed that they were serious about
their promise. Second, whether the apparent promise by the defendants was
indeed an offer since it was not made to any specific person or group of
persons but to the world at large. The court held that an offer could indeed
be made to the world at large. Third, whether the plaintiff should nevertheless
fail in her claim on account of her failure to notify her acceptance to the
defendants. The court rejected this argument also on the ground that no
such notification was required since this was a unilateral contract. Lastly, the
contract was supported by consideration.
Offer Distinguished from Invitation to Treat
7.14
Sometimes one party, instead of making an offer, may invite others to make
an offer. This is known as an invitation to treat. It is simply an expression of
willingness to enter into negotiations with the other party. At this stage there
is no intention to be bound. The distinction between the two is important in
that if the proposal is an offer, a binding contract will come into existence
without further negotiation upon its acceptance. Thereafter any attempt to
escape from the contract would amount to a breach of contract. On the
other hand, if it is an invitation to treat, and if the response of the other
party amounts to an offer, the person inviting it may accept or reject the
offer.
7.15
The wording is not conclusive — a statement may be an invitation to treat,
although it contains the word “offer” (Spencer v Harding (1870)). Likewise in
Datec Electronic Holdings Ltd v United Parcels Service Ltd (2007) an “offer” of
carriage subject to certain restrictions was regarded as an invitation to treat.
Had it been regarded as an offer in the strict sense, there would have been
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no contract when the shipper tendered goods that did not comply with the
restrictions. Hence it was held that the offer was made by the shipper which
was accepted by conduct by the carrier. As stated in Maple Leaf above (see
para 7.10), in deciding whether or not one party made an offer to another,
the court will objectively determine the intention of the party making the
proposal, that is, whether a reasonable person in the shoes of the recipient of
the proposal, observing the words and conduct of the first party, could have
concluded that an offer had been made. Singapore law tracks English law in
this regard.
7.16
In Soon Kok Tiang and others v DBS Bank Ltd and another matter
(2012), a plaintiff investor made an application for a declaration that the
series of notes known as “DBS High Notes 5” (“HN5”) was void at the time
of their issuance and an order that the defendant bank repay each of the
plaintiffs the principal amounts they had invested in HN5. In refusing the
application, the Singapore High Court could not be persuaded to hold that
the launch of HN5 was an offer (at [19]). Although the launch of HN5 was
termed an “offering” and the period for application called the “Offer Period”,
the launch of HN5 was not an offer capable of being accepted to form a
contract in law. The defendant bank retained the right to reject or accept
any application without the need to give reasons. The launch of HN5 was
thus an invitation to treat. It was the individual investor who, by submitting
the application form, made an offer to the defendant to buy into HN5.
The HN5 contract came into existence with the defendant’s acceptance of
that offer.
7.17
There are situations in everyday life when what appears to be an offer
is held by law to be an invitation to treat. In many such established
situations, the courts have already decided whether there is an offer or an
invitation to treat by treating certain situations as indicating the presence
or absence of the intention to be bound. Some of these situations are dealt
with below.
(1) Advertisements
7.18
It is now common for businesses to advertise in the media including
newspapers and magazines, TV, radio and the Internet. Also in the
same category are catalogues, brochures and price lists. Generally, these
advertisements are considered to be invitations to treat.
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7.19
The case often cited for this is Patridge v Crittenden (1968). Patridge
advertised in a magazine, “Bramblefinch cocks and hens, 25s each”. He
was charged with “offering for sale” a wild bird contrary to the provisions
of the Protection of Birds Act 1954 and was convicted at the Magistrates’
Court. However, his conviction was quashed on appeal on the grounds that
his advertisement was not an offer but an invitation to treat. According
to Lord Parker, “when one is dealing with advertisements and circulars,
unless they come from manufacturers, there is business sense in their being
construed as invitations to treat and not as offers for sale”. Advertisements
placed in newspapers and magazines are usually considered invitations to
treat on the basis that people who read the advertisements may want to
negotiate further. Further, the intending seller may have limited number of
items to sell, with the result that he may not be in a position to sell to all
who might respond to the advertisement.
7.20
Similar principles apply to electronic trading on the Internet or e-commerce.
Advertisements posted on a website generally amount to invitations to treat
(see s 14 Electronic Transactions Act (Cap 88, 2011 Rev Ed) discussed in
Chapter 24, paras 24.15–24.16). Here the customer is said to be making the
offer which the seller may accept or reject. So if a seller makes a mistake
by quoting a ridiculously low price for the goods, he could refuse to sell
the goods at the advertised price. It would be absurd if the seller were to
honour all such “contracts”. It has long been established that a party cannot
snap up an offer which he knows to be mistaken (Hartog v Colin & Shields
(1939)).
7.21
This principle was applied in the Singapore case of Chwee Kin Keong and
others v Digilandmall.com Pte Ltd (2004). The defendant advertised on its
website laser printers for sale. On account of an employee error, the price
quoted was $66 each, instead of the correct price of $3,854 each. The six
plaintiffs spotted the bargain and quickly placed orders on the website for
1,606 printers in total at $66 each. Upon receiving the orders, the defendant’s
automated response system sent emails to the plaintiffs confirming each
purchase. When the defendant realised its error, it promptly removed the
advertisement from the website. It informed all who had placed orders that
the price was a mistake, and that it would therefore have to decline all orders.
The plaintiffs sued, insisting that the confirmed orders were binding on the
defendant.
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7.22
In the Singapore High Court, V K Rajah JC (as he then was) considered
whether existing contract principles applied to Internet contracts and said
they could. However, he cautioned against applying them the same way as
they applied to traditional contracts. In his view, Internet merchants have to
be cautious as to how they present an advertisement, since this determines
whether the advertisement will be construed as an invitation to treat or a
unilateral contract. Loose language may result in inadvertently establishing
contractual liability to a much wider audience (purchasers) than resources
permit. The case was eventually decided in favour of the defendant on
appeal on the basis of unilateral mistake. However, the High Court’s views
on Internet contracts mentioned above were not disputed and remain
pertinent.
7.23
Hence, despite the general rule, the possibility cannot be ruled out where an
advertisement on the Internet may constitute an offer itself rather than an
invitation to treat. This is especially so where the buyer is guided on screen
step by step by the seller until he clicks “I accept” and pays the purchase
price online. The key element in such cases is the intention of the parties to
be gathered from the circumstances of the particular case.
7.24
Nevertheless there are certain cases where an advertisement may amount
to an offer rather than an invitation to treat. This was the case in Carlill
v Carbolic Smoke Ball Co (see para 7.12). In that case, the court found an
intention to be bound. Similarly in an American case, Lefkowitz v Great
Minneapolis Surplus Store (1957), the advertisement stated: “Saturday,
9 am sharp; 3 brand new fur coats, worth $100, first come first served,
$1 each”. The plaintiff was the first customer to present himself at the
appointed time but the defendant refused to sell the coat to him. He
successfully sued for breach of contract and the Supreme Court of Minnesota
held that the advertisement amounted to an offer. Thus, in relation to
advertisements, the question whether there is an offer or merely an invitation
to treat turns on whether there is an intention to be bound.
(2) Displays of goods for sale
7.25
Are the goods on display with price tickets on the supermarket shelves or
in shop windows offers or invitations to treat? Holding it as the one or the
other will result in a different outcome. If it is the former, the mere picking
up of such goods might result in a binding contract. If it is the latter, there
would be no contract since it is the customer who makes the offer.
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7.26
The general principle is that all such displays are regarded as invitations to
treat rather than offers. This was affirmed in Fisher v Bell (1960), where the
defendant had displayed flick knives in his shop window and was convicted of
the criminal offence of offering such knives for sale. However, his conviction
was quashed on appeal. The court held that the display of goods with a price
ticket attached in a shop window is an invitation to treat and not an offer
to sell.
7.27
The leading case in this regard is Pharmaceutical Society of Great Britain v
Boots Cash Chemists (1953). The defendants were charged with the offence of
selling drugs which could be sold only under the supervision of a qualified
pharmacist. They operated a self-service shop where the goods for sale
were displayed on shelves in packaging with the prices marked on them.
Customers entering the shop picked up whatever goods they wished to buy
and took them to a cashier near the exit. There was no pharmacist present
near the shelves but a registered pharmacist was present near the cash desk
and could prevent a customer from buying any listed drug. The Court of
Appeal in this case had to identify the precise time when a contract was
concluded. This required them to decide whether the display of goods on
the open shelves in a self-service store amounted to an offer of goods for
sale or an invitation to treat. The court held that the display of goods was
an invitation to treat. The customer made the offer to buy at the cash desk
and the sale was completed when the cashier accepted the offer. If it were
otherwise, then the customer concerned would be unfairly bound once the
article was placed in the basket and would not be able to change his mind
to substitute it with another. The shopkeeper also would be in deep trouble
if he ran out of stock.
7.28
Two practical consequences of this rule are that, first, the shop does not have
to sell the goods at the marked price especially where it has misquoted the
price, and second, the buyer cannot insist upon buying a particular item on
display even if the shop has run out of stock.
7.29
The court’s reasoning, however, is not without criticism. Legal commentators
have argued that a modern store or a supermarket is not a place for
bargaining. There is also no reason to hold that the customer will be
prejudiced by being automatically bound if he were to pick up priced
goods, as that act in itself is too equivocal to constitute an act of acceptance.
Lastly, the argument that the shopkeeper would be unfairly bound if he were
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to run out of stock was not tenable. He could overcome this difficulty by
holding that his “offer” was open only “while stocks last”.
(3) Auction sales
7.30
At an auction sale, the call for bids by the auctioneer is an invitation to treat.
The bids made by those present at the auction are offers. The auctioneer
selects the highest bid and the contract is completed by the fall of the
hammer. It follows from this that until the hammer fell, a bidder is free
to withdraw his offer. This is now confirmed by s 57(2) Sale of Goods Act
(Cap 393, 1999 Rev Ed).
7.31
It has been held that where an auction is advertised, that by itself does not
constitute an offer. Therefore, a prospective bidder who travels to an auction
to find that the advertised lot was subsequently withdrawn cannot recover
damages for breach of contract (Harris v Nickerson (1873)). However,
advertising that an auction will be “without reserve” amounts to an offer
by the auctioneer that once the auction has commenced the lot will be sold
to the highest bidder however low the bids may be (Warlow v Harrison
(1859)).
(4) Tenders
7.32
Large businesses and public authorities often award contracts by inviting
interested parties to tender for the business. Such an invitation to tender
is an invitation to treat and not an offer (Spencer v Harding (1870)). The
offer is made by the person who submits the tender. The acceptance takes
place when the person inviting the tender accepts one of them. However,
the English Court of Appeal has held that an invitation to tender could give
rise to a binding contractual obligation to consider tenders conforming to
the conditions of the tender (Blackpool and Flyde Aero Club Ltd v Blackpool
Borough Council (1990)).
7.33
There are circumstances where the courts have held that the invitation to
tender was, in fact, an offer. In Harvela Investments Ltd v Royal Trust Co of
Canada (1986), the House of Lords had to consider whether an invitation to
tender for the purchase of shares which stated that the vendor would accept
the highest “offer” was itself an offer to sell. The first defendants decided to
dispose of shares in a company by sealed competitive tender. They invited
the two parties most likely to be interested in the shares to submit tenders,
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promising to accept the highest offer. The plaintiff ’s bid was higher but the
second defendants’ lower bid was accompanied by a clause which stated
“or $100,000 in excess of any other offer”. The first defendants accepted the
second defendants’ bid to be the higher of the two. The House of Lords
held that given the expressed intention of the vendor to sell to the highest
bidder, the invitation to tender was a contractual offer. It held that the
second defendants’ “referential bid” was invalid. The purpose of competitive
tendering was to secure a sale at the best possible price. If both parties had
submitted a referential bid it would have been impossible to conclude the
contract.
Termination of Offer
(1) Introduction
7.34
Where an offer has been accepted, a binding contract comes into existence
and the offer ceases to exist. Thereafter, any attempt to disclaim the
obligations therein will amount to a breach of contract. However, if an offer
is terminated prior to its acceptance no contract can come into existence.
There are five ways in which an offer may be terminated.
(2) Revocation
7.35
The offeror can revoke his offer at any time before it is accepted by the
offeree. Once revoked, the offer ceases to exist and it is no longer possible
for the offeree to accept it. In order to be effective, however, revocation
must be communicated to the offeree. In Byrne v Van Tienhoven (1880),
the defendants, a Cardiff company, mailed a letter on 1 October to New
York offering to sell to the plaintiffs 1,000 boxes of tinplates. The plaintiffs
received the letter on 11 October and immediately accepted by telegram and
confirmed by a letter posted on 15 October. (Acceptances by telegram are
effective as soon as they are sent; see the postal rule at paras 7.64–7.71).
Meanwhile, on 8 October, the defendants had sent a letter revoking the offer
which reached the plaintiff on 20 October. The court held that there was
a binding contract. The revocation was not effective since the contract had
come into existence nine days before the letter of revocation reached the
plaintiff.
7.36
However, it appears from case law that the revocation of an offer does not
have to be communicated by the offeror himself; communication may be
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made by some other reliable source. Dickinson v Dodds (1876) appears to
suggest that an implied revocation is possible. If the offeree comes to know
of the revocation of the offer by the offeror through a third party, that would
be sufficient to terminate the offer. In this case, the defendant offered to sell
a house to the plaintiff, the offer “to be left open until Friday, June 12, 9 am”.
But on 11 June he sold the house to someone else. The plaintiff heard about
the sale from his property agent the same day. Nevertheless he purported to
accept the defendant’s offer by forwarding a written acceptance before 9 am
on 12 June. The English Court of Appeal held that the defendant had validly
withdrawn his offer and that the withdrawal was validly communicated to
the plaintiff through a third party.
7.37
In a Singapore case, Overseas Union Insurance Ltd v Turegum Insurance Co
(2001), the plaintiff company had entered into reinsurance contracts with the
defendants. Owing to certain claims relating to the reinsurance contracts,
the plaintiff decided to negotiate with the defendants on the reduction of the
plaintiff ’s liability under these contracts. In March 1999, the defendant offered
to accept a sum of US$220,000 from the plaintiff to reduce its outstanding
liability. On 21 October 1999, the plaintiff purported to accept this offer.
However, the defendant claimed that the offer had since been withdrawn
by the defendant’s letter of demand for payment by the plaintiff of its full
liability made on 5 October so that it was no longer capable of acceptance.
The plaintiff insisted that the parties had entered into a binding agreement
on 21 October. The Singapore High Court agreed with the defendant that the
offer had been revoked. The court held that the maker of an offer is free to
withdraw it at any time before it is accepted. Notice of withdrawal must be
given and must actually reach the offeree to be effective. It is not necessary,
however, that the notice of withdrawal be explicit. It was enough if the
offeree is given information which would show that the offeror has changed
his mind and no longer wants to proceed with the offer. This information
need not even come directly from the offeror.
7.38
Although it is clear that the revocation must be brought to the attention of
the offeree, there is uncertainty about the exact point at which it comes to
his attention. For example, if revocation is made by post, revocation could
be effective when the letter reaches his business or when he actually reads
it. There is no clear authority on this point, but in The Brimnes (1975) the
English Court of Appeal held that, in the case of a notice of withdrawal of
a vessel sent by telex during ordinary business hours, the withdrawal was
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effective when it was received on the telex machine. There was no requirement
that it actually be read by any particular person within the organisation.
7.39
There is no legal obligation on the part of the offeror to keep the offer open
for a specified period even if he had promised to do so. In Routledge v Grant
(1828), the defendant offered to buy the claimant’s house, giving the claimant
six weeks to consider the proposal. The court held that he could withdraw
the offer at any time before acceptance, even though the deadline had not yet
expired. The claimant could not accept the offer after it had been withdrawn.
This is on the basis that an offeree cannot enforce an offeror’s promise to keep
his offer open unless there is a separate contract supported by consideration.
Such contracts are called “options”. A legally binding option will be created
if the offeree provides some consideration in return for the offeror’s promise
to keep the offer open. Thus in Mountford v Scott (1975), the purchaser of a
house paid the seller £1 for an option to buy, exercisable within six months.
The Court of Appeal held that the seller could not withdraw the offer before
the option expired.
7.40
An offer may be revoked when it is replaced by a subsequent offer. The
second offer must stipulate that it supersedes the earlier offer, so that it can
no longer be accepted (Pickfords Ltd v Celestica Ltd (2003)).
7.41
The rule that revocation is effective only when it is communicated to
the offeree causes some difficulty in unilateral contracts. In such cases
acceptance is by performance of an act. The offeror is not aware if anyone
has accepted or has started to accept the offer by looking for the lost item
or by performing the act as required by the offeror. Under the usual rules
of offer and acceptance, the offeror can always revoke the offer at any
time before the offer is accepted. With regard to unilateral contracts, two
issues need to be considered: first, the means by which revocation is to
be validly effected, and second, whether a unilateral offer can be revoked
once performance has begun. As to the first, it seems to be enough for the
offeror to take reasonable steps to bring the withdrawal to the attention of
such persons. Thus if the offer of a reward for finding a lost item was made
through a newspaper advertisement, it would suffice to place another similar
advertisement withdrawing the offer, although there is no guarantee that
everyone concerned will see it. The second question poses some difficulty.
One possible approach may be to proceed on the basis of there being two
offers — a main offer and an implied offer not to revoke the main offer.
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Box 7.1
Reflecting
on the law
Is it possible to revoke a unilateral offer once performance has started?
Despite the traditional rule that an offeror can withdraw his offer any time before it
is accepted, in the case of unilateral contracts, there is potential unfairness to people
who may have spent considerable time and effort in response to an advertisement
offering a reward for the recovery of a lost pet and in performing the conditions
required in the advertisement. An alternative approach is that, if an offeree begins
to perform his obligations within a reasonable time from the making of the offer,
the offeror cannot revoke the offer. This is known as the “two-offer” approach.
Here the offeror impliedly undertakes not to revoke the main offer once the offeree
has commenced performance within a reasonable time. Yet another suggested
approach is to allow the offeror to withdraw his offer at any time before full
performance of the required act subject to compensation being paid to the offeree
who has commenced performance by way of a suitable sum for his trouble in
quantum meruit. The law in Singapore is not settled and the pros and cons of each
approach need to be considered in deciding on the appropriate default approach
to take on this matter.
7.42
The “two-offer” approach was endorsed by the English Court of Appeal in
Daulia Ltd v Four Millbank Nominees Ltd (1978). Goff LJ said as obiter dicta,
that the offeror is entitled to require full performance of the condition which
he has imposed, and short of that, he is not bound. This is, however, subject
to one important qualification which stems from the fact there must be an
implied obligation being satisfied on the part of the offeror not to prevent
the condition being satisfied, an obligation that arises as soon as the offeree
starts to perform within a reasonable time. Until then the offeror can revoke
the whole thing, but once the offeree has embarked on the performance, it is
too late for the offeror to revoke his offer. In Singapore, Chan Sek Keong JC
(as he then was) approved of this approach obiter in Dickson Trading (S) Pte
Ltd v Transmarco Ltd (1989).
(3) Rejection and counter-offer
7.43
An offer is terminated when the offeree rejects it. This may be done either
expressly as when the offeree states that he has no interest in the offer, or
impliedly, where he purports to accept the offer with conditions attached or
makes a counter-offer. A counter-offer has two distinct effects. As the facts of
Hyde v Wrench (1840) illustrate, first, it acts as a rejection of the original offer
and accordingly, the original offer lapses; and second, it stands as a new offer
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capable of being accepted by the offeror. In this case, the defendant offered
to sell his farm to the plaintiff for £1,000. The plaintiff made a counter-offer
of £950 which the defendant refused. The plaintiff then purported to accept
the original offer to buy for £1,000. It was held that there was no contract.
The counter-offer had the effect of rejecting the defendant’s original offer
causing it to lapse.
7.44
However, sometimes it may be difficult to decide whether the offeree is
making a counter-offer or is merely asking for additional information on
the offer. In the latter case, there is no rejection of the offer. In Stevenson
v McLean (1880), the defendant offered to sell a quantity of iron to the
claimants for cash. The claimants asked whether they could have credit
terms. When there was no reply to their enquiry, they accepted the terms
of the original offer. However, the defendant sold the iron to someone
else. It was held that the enquiry was a request for more information
and not a rejection of the offer. Hence the defendant was liable for breach
of contract.
7.45
The difference between the two situations discussed above is that a counteroffer seeks to introduce a new term, while a request for information merely
seeks to clarify what the offer is.
(4) Lapse of time
7.46
Where the offeror has specified a time limit by which the offer must be
accepted, the offer will lapse if not accepted within that time. This is subject
to the offeror’s right to revoke it earlier unless he has agreed to keep the
offer open (see paras 7.35–7.37). However, if it is clear from the offeror’s
conduct and other evidence that the terms of the supposedly lapsed offer
continue to govern the relationship after the specified period, then the offer
is still valid and capable of acceptance after the deadline (Panwell Pte Ltd &
Anor v Indian Bank (No 2) (2002)).
7.47
Where the offeror has not specified a time limit, the offer will lapse after a
reasonable period of time. What is a reasonable period of time would depend
on the circumstances of each case. Thus in dealing with commodities whose
prices fluctuate daily, the period will be shorter. In Ramsgate Victoria Hotel v
Montefiore (1866), the defendant applied for shares in the plaintiff company
in June and paid a deposit into their bank. Having heard nothing from the
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company for five months, he was then informed in November that shares
had been allotted to him, and asked for the balance due on them. He refused
to pay. The court upheld his argument that five months was not a reasonable
time for acceptance of an offer to buy shares, as the price of shares fluctuates
rapidly.
(5) Failure of a condition
7.48
An offer may be made subject to conditions which may be stated expressly
by the offeror or implied by courts from the circumstances of the case. If
such conditions are not satisfied, the offer is not capable of being accepted.
For example, when a person offers to buy goods, it is implied that the offer
is conditional on the goods remaining in the same condition as when the
offer was made until acceptance. If goods are damaged before acceptance,
then the offer will cease to exist.
7.49
In Financings Ltd v Stimson (1962), the defendant saw a car at the premises of
a dealer on 16 March which he decided to buy. He signed a hire-purchase
form provided by the plaintiff which stated that the agreement would be
binding only when signed by the finance company. The defendant took
possession of the car and paid the first instalment on 18 March. On
20 March, he returned the car because he was not satisfied with it. On
24 March, the car was stolen from the car dealership, but was later
recovered badly damaged. On 25 March the finance company signed the
hire-purchase agreement, unaware of what had happened. The defendant
argued that he was not bound by the contract and refused to pay the
instalments and was sued for the breach of the hire-purchase agreement.
The English Court of Appeal held that the hire-purchase agreement was not
binding because the defendant’s offer to obtain the car on hire-purchase was
subject to an implied condition that the car would remain in substantially
the same state until acceptance. Since the implied condition had not been
fulfilled at the time the finance company purported to accept, no contract
had come into existence.
7.50
In Dysart Timbers Ltd v Roderick William Nielsen (2009) the New Zealand
Supreme Court held that as a rule of law an offer can lapse if there has
been a fundamental change in the basis of the offer. The court held that an
offer to settle a case had not lapsed when the offeror’s leave to appeal was
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granted just before the offer was accepted. The change of circumstances was
not sufficiently fundamental.
(6) Death
7.51
Death of the offeror or the offeree may in some cases terminate the offer.
However, the law is not entirely clear in this regard. It appears that the offer
will terminate if the offeree knows that the offeror has died; it will not if the
offeree has no notice of it (Bradbury v Morgan (1862)). His acceptance may
be valid if made in ignorance of the death of the offeror, depending on the
nature of the contract. If the offer involved personal services of the offeror
(eg, to paint a portrait), it cannot be accepted. Other offers may survive and
be accepted and binding on the personal representatives of the deceased. If
the offeree dies before accepting the offer, the offer made to him is no longer
capable of acceptance. This is especially so if the offer is made only to the
offeree and is not capable of acceptance by the deceased offeree’s estate or his
personal representatives.
ACCEPTANCE
Definition and Nature of Acceptance
7.52
An acceptance is a final and unqualified expression of assent to the terms
of an offer (see Edwin Peel, Treitel: The Law of Contract (13th ed, 2011) at
p 17). It is an unconditional agreement to all the terms of the offer which
bring a contract into existence, making both parties legally bound. Thereafter
neither party can get out of the contract nor vary its contents. Acceptance
can be signified orally, in writing or by conduct. An acceptance must be
made when the offer is still open and it must be absolute and unqualified.
Acceptance in a contractual setting must be ascertained objectively. When
there is a history of negotiations and discussions, the court will look at the
whole continuum of facts to decide whether a contract exists (VK Rajah JC,
as he then was) in Midlink Development Pte Ltd v The Stansfield Group Pte
Ltd (2004) at [48]).
7.53
The mode of acceptance depends on the type of contract. As mentioned
above (see para 7.4), in the case of an unilateral contract, the acceptance is
through the offeree’s performance of an act in return for a promise, while in
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the case of a bilateral contract it is through the offeree’s promise in return for
a promise.
General Principles
(1) Acceptance must be final and unqualified
7.54
The offeree must agree to all the terms contained in the offer. Any attempt
on his part to introduce new terms would result in a counter-offer. As noted
above (see paras 7.43–7.44), a counter-offer destroys the original offer and
simultaneously constitutes a new offer on his part.
7.55
Sometimes when parties carry on lengthy negotiations it may be hard to
say exactly when an offer has been made and accepted. In such cases the
court must look at the whole correspondence and decide whether, on its true
construction, the parties have agreed to the same terms. In Allianz Insurance
Co (Egypt) v Aigaion Insurance Co SA (2008) the parties in an insurance
contract had previously agreed upon a warranty, but an insurance slip was
emailed by the reinsured without a reference to the warranty. The appearance
of “finality” in the reinsurer’s emailed reply took effect as an acceptance and
there was a contract which omitted the warranty.
7.56
The requirement that the acceptance must be unqualified does not, however,
mean that there must be precise correspondence between offer and acceptance
so long as there are no new terms. The question is whether what has been
introduced would have been regarded by a reasonable offeror as introducing
a new term into the bargain rather than acceptance of the offer (Midgulf
International Ltd v Group Chimique Tunisien (2010)).
(2) Acceptance must be communicated to offeror
(a) General rule
7.57
The general rule is that before a binding contract can come into existence,
the acceptance must be communicated to the offeror. The acceptance is
generally said to be validly communicated when it is actually brought to the
notice of the offeror. A mere mental assent is insufficient. Where an offeror
has prescribed that the offer can only be accepted in a specified way, he
would not, in general, be bound unless the acceptance is made in that way.
An offeror can waive any requirement as to the form of acceptance if the
stipulation as to form is solely for his benefit. But if the stipulation is for
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the benefit of both parties it must be clear that both parties have waived the
stipulation (MSM Consulting Ltd v Tanzania (2009)).
7.58
Apart from the direct oral or written communication, acceptance can take
place through conduct. In Brogden v Metropolitan Railway (1877), Brogden
had supplied the railway company with coal for many years without any
formal agreement. The parties then decided to formalise their relationship
and the railway company sent Brogden a draft agreement. Brogden filled
some blanks, including the name of an arbitrator, marked it “approved”
and returned it to the company. The company’s employee put the draft in
his desk drawer where it remained for the next two years without anything
being done about it. Meanwhile, Brogden continued to supply coal under the
terms of the “agreement” and the railway company paid for it. Eventually,
a dispute arose between the parties and Brodgen refused to supply coal to
the company holding that there was no binding contract between them. The
House of Lords held that a contract had been concluded between them.
Brogden’s amendments to the draft agreement amounted to an offer which
was accepted by the company either when the first order was placed under
the terms of the agreement or at the latest when the coal was supplied. The
parties had indicated their approval of the agreement by their conduct.
7.59
The general rule set out above applies to all modes of instantaneous
communications including face-to-face negotiations and communications by
telephone, telex and fax. It is likely that email and text messaging will be
categorised as instantaneous forms of communication. In Olivaylle Pty Ltd
v Flottweg AG (No 4) (2010), a decision of the Federal Court of Australia,
Logan J noted (at [25]) that experience suggests that email is often, but
not invariably, a form of near instantaneous communication. In cases of
instantaneous communications the rule is that the communication must
actually be received by the offeror. This important principle was established
in Entores Ltd v Miles Far East Corporation (1955). The plaintiffs in London
telexed an offer to buy copper cathodes from the defendants in Amsterdam.
The defendants telexed acceptance back to London. Later, when sued for
breach of contract in England, the defendants argued that the English courts
had no jurisdiction because the contract was concluded in Holland when
they typed the acceptance on their telex machine. The plaintiffs, on the other
hand, argued that the acceptance was not effective until it was printed out
in London. The court held that the English courts had jurisdiction because
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where a contract is made by instantaneous communication the contract is
complete only when the acceptance is received by the offeror.
7.60
As explained by Lord Denning in the above case, suppose the offeror shouts
an offer to the offeree who is across the river and just as the offeree shouts
back an acceptance a noisy aircraft flies over preventing the offeror from
hearing the offeree’s reply; no contract has been made. The same would apply
if the contract was made by telephone and the offeror failed to hear what the
offeree said because of the interference on the line; there is no contract until
the offeror knows that the offeree is accepting the offer. The main reason
for this rule is that in the alternative people might be bound by a contract
without knowing that their offers have been accepted, which would lead to
future difficulties. It should, however, be noted that the general rule will
not apply strictly if the offeror is at fault, for example, where he failed to
maintain his equipment in a proper condition. To hold it otherwise would
not be fair to the offeree (see also dicta of Lord Wilberforce in Brinkibon’s
case reproduced in para 7.63).
7.61
The decision in Entores was approved by the House of Lords in Brinkibon
Ltd v Stahag Stahl und Stahlwarenhandels GmbH (1983). The facts were
similar except for the location. In Brinkibon, the offer was made by telex
from Vienna to London, and accepted by a telex from London to Vienna.
The House of Lords held that the contract was therefore made in Vienna.
In both cases, the telex machines were in the offices of the parties, and
the messages were received during the normal working hours. However,
the House of Lords in Brinkibon said that a telex message sent outside
working hours would not be considered instantaneous in the circumstances
described in para 7.63 below. In these circumstances, the time at which
acceptance of an offer is considered received should be decided by reference
to the factors laid down by Lord Wilberforce in his dicta reproduced in
para 7.63.
7.62
Do the rules relating to instantaneous communication apply to email?
Though it may appear to be a mode of instantaneous communications as
mentioned above (see para 7.59), there are doubts that in fact it may not be
so since it is conveyed in “packets” (see Chapter 24, para 24.20, and Table
24.2). It is also said to be no different from the normal post. The position
with regard to it thus is not fully conclusive.
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7.63
Lord Wilberforce in Brinkibon observed that though the general rule as to
instantaneous communications may be sound, it is not necessarily a universal
rule. He canvassed the possible exceptions to the general rule, even in the
context of instantaneous communications, when he observed as follows (at
p 42):
Since 1955 the use of telex communication has been greatly expanded,
and there are many variants of it. The senders and recipients may not
be the principals to the contemplated contract. They may be servants
or agents with limited authority. The message may not reach, or be
intended to reach, the designated recipient immediately: messages may
be sent out of office hours, or at night, with the intention, or on the
assumption, that they will be read at a later time. There may be some
error or default at the recipient’s end which prevents receipt at the time
contemplated and believed in by the sender. The message may have been
sent and/or received through machines operated by third persons. And
many other variations may occur. No universal rule can cover all such
cases; they must be resolved by reference to the intentions of the parties,
by sound business practice and in some cases by a judgment where the
risks should lie …
This position was accepted in Singapore in Transniko Pte Ltd v Communication
Technology Sdn Bhd (1996).
(b) Exception: The postal acceptance rule
7.64
The postal rule of acceptance is an exception to the general rule that
acceptance must be communicated to the offeror. Instead, acceptance takes
place at the time when the letter of acceptance is posted and it is complete
regardless as to when the letter reaches the offeror or whether it reaches
him at all. This exception applies equally to telegrams although this mode of
communication is now hardly in use.
7.65
The postal rule was laid down in Adams v Lindsell (1818). On 2 September
1818, the defendants wrote to the plaintiffs offering to sell wool and
requiring an answer by return of post. In the normal course the letter would
have reached the plaintiffs on 3 September but since the defendants did
not address the letter correctly, it was delivered to them on 5 September.
The plaintiffs posted their acceptance the same evening and it reached the
defendants on 9 September. If the defendants had not misdirected the letter,
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then the reply by return of post would have come by 7 September. Since
they did not hear from the plaintiffs by this date, they sold the wool to a
third party on 8 September. The court held that the contract was concluded
on 5 September when the letter of acceptance was posted.
7.66
It makes no difference to the rule even if the letter of acceptance is lost
in the post. In Household Fire and Carriage Accident Insurance Co v Grant
(1879), the defendant by his letter agreed to buy 100 shares in a company. He
paid 5 per cent of the price of £100. A letter accepting his offer was posted
but he never received it. The company subsequently went into liquidation
and a demand was made for payment of the balance of £95. The English
Court of Appeal held that a contract was formed when the letter was posted
and therefore he was obliged to pay the balance. However, where a letter
of acceptance is lost or delayed because it bears a wrong, or incomplete,
address such misdirection will be due to the carelessness of the offeree and
the postal rule should not apply to such cases (LJ Korbetis v Transgrain
Shipping BV (2005)).
7.67
The rationale for the postal acceptance rule is historical as it dates back to
19th century England when the communication through post was slower
and less reliable than it is today. It was then, as it is now, easier to prove that
the letter has been posted than to prove that it has been received. The rule
continues to apply in England and has been applied in Singapore (Lee Seng
Heng v Guardian Assurance Co Ltd (1932)).
7.68
The postal rule of acceptance will apply subject to two conditions. First, it
will apply only where it is reasonable to do so. An offer made by post may
generally be accepted by post, but in some circumstances it may be reasonable
to accept through post offers made in other ways. The offeror is at liberty to
prescribe the mode of acceptance and it is open to him to expressly exclude
the application of the postal rule. Second, the letter of acceptance must be
properly stamped and addressed as noted above in para 7.66.
7.69
Can a postal acceptance be recalled or revoked before it reaches the offeror?
There are two sides to this issue. As we have seen before, a valid acceptance
of an offer results in a contract. Thus, if the postal rule applies, a contract
comes into existence immediately upon the posting of the letter of acceptance.
In such a case, the offeree has no acceptance to revoke. Besides, it would not
be fair to the offeror if the offeree were allowed to have the best of both
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worlds — to avail of the postal acceptance rule if it suited him, or to revoke
his acceptance if it did not. On the other hand, it is possible to argue that
there is no prejudice to the offeror if he is unaware of the acceptance, and
the letter of acceptance can be intercepted by faster means. In any case, the
offeror had the choice of the medium. If he chooses the postal medium, he
must bear the consequences.
7.70
Should the postal rule of acceptance apply in Singapore? As mentioned
above, the reasons for the origin of the postal rule of acceptance in England
are historical under the prevailing conditions of the 19th century. Given
Singapore’s small size and its efficient communications infrastructure it is
worth considering whether this rule is relevant in the context of the local
conditions.
7.71
Does the postal acceptance rule apply to communications via email? It depends
on whether email is considered a mode of instantaneous communication or
not (see para 7.62). If it is the former, then the general rule would apply. If
it is the latter, the postal acceptance rule would apply. Email resembles the
post in some respects but is more often than not, an instantaneous mode of
communication. Consequently, the position remains inconclusive.
(c) Acceptance by silence?
7.72
Since acceptance is complete only when communicated to the offeror, it
follows that acceptance must take some form of objective manifestation of
his intention through positive action. Mere mental assent on the part of
the offeree is insufficient. Thus, it follows that silence cannot normally be a
mode of acceptance. In Felthouse v Bindley (1862), the plaintiff who wanted
to buy his nephew’s horse wrote to him: “If I hear no more about him, I
shall consider the horse mine at £30 15s.” The nephew wanted to sell to
the uncle at this price but did not reply to this letter. However, he did ask
the auctioneer, whom he had engaged to sell his farming stock, not to sell
the horse as he had sold it to his uncle. The auctioneer sold the horse to a
third party by mistake and the uncle sued him for the tort of conversion for
selling his property. For this purpose it was necessary to establish whether
there was a concluded contract between the uncle and the nephew. The court
held that there was no contract and therefore the ownership of the horse had
not passed to the uncle. Although the nephew had mentally accepted the
offer, some form of positive action was required for a valid acceptance.
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7.73
The issue of acceptance by silence was only raised in this case indirectly in
the context of a tortious action. The policy behind the decision seems to
be that no one should be able to force a contract upon an unwilling party.
However, the facts in this case make it amply clear that the nephew indeed
wanted to sell the horse to his uncle. It may well be asked as to whether
his silence amounted to his acceptance through conduct. However, the
justification for the rule in this case appears to be that there are many
situations in which it would be undesirable and confusing for silence to
amount to acceptance.
7.74
At the same time, it would not be prudent to totally preclude the use of
silence as a mode of acceptance. This is particularly so where there are
special circumstances. The final determination thus must depend on the
special facts of the particular case.
7.75
A strong case for inferring that the offeree wants his silence to be regarded
as acceptance is where he says so. In Re Selectmove Ltd (1995) the English
Court of Appeal found that it was in fact the offeree who had undertaken
that he would communicate with the offeror if he did not desire to conclude
the contract. The difference between this decision and the one in Felthouse
v Bindley discussed above is that in this case, it was the offeree who was
seeking the possibility of acceptance by his silence while in the latter, it was
the offeror who was seeking to impose on the offeree the term of acceptance
by his silence. However, the present case was inconclusive on this issue for
other reasons.
7.76
In Singapore, the proposition that silence can in certain exceptional
circumstances be construed as acceptance was recognised in Southern Ocean
Shipbuilding Co Pte Ltd v Deutsche Bank AG (1993) (at [46]–[47]) and
in Midlink Development Pte Ltd v The Stansfield Group Pte Ltd (2004) (at
[50]–[52]).
(d) Ignorance of offer
7.77
The general rule is that a person cannot accept an offer of which he has no
knowledge. In such a case it is not possible to reach an agreement resulting
in a binding contract. A case which appears to be contrary to this principle
is Gibbons v Proctor (1891). In this case, a reward had been advertised for
information leading to the arrest or conviction of a criminal. The plaintiff
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attempted to claim the reward, even though he had not originally known of
the offer. He was allowed to receive the money. However, the case does not
shed much light on the problem as although he did not originally know of
the offer of reward, he did know of it by the time the information was given
on his behalf.
7.78
The Australian High Court decision of R v Clarke (1927) is a leading case in
support of the general principle. In this case, a reward had been offered by
the Australian Government for information leading to the conviction of the
murders of two policemen. There was also a promise of free pardon to an
accomplice giving such information. Clark, who was an accomplice, gave the
required information to obtain pardon without any thought of the reward at
that time. He subsequently claimed the reward. The court held that he could
not claim the reward as he was ignorant of it at that crucial time.
7.79
However, it appears that the motive of the person claiming the reward is
irrelevant so long as he has knowledge of the reward. In the American case
of Williams v Cawardine (1833), a reward had been offered for information
leading to the discovery of the murderer. The plaintiff knew about the reward,
but when she gave the information it was not in order to receive the money.
She did it to ease her conscience. The court held that she was entitled to
the reward. The general principle was affirmed in another US case, Fitch
v Snedaker (1868), where it was held that a person who gives information
without knowledge of the offer of a reward cannot claim the reward.
(e) Cross-offers
7.80
The general principle is that there is no contract in the case of cross-offers
(Tinn v Hoffmann & Co (1873)). Cross-offers happen when two parties send
offers to each other in identical terms and at about the same time, and
their letters cross each other in transit. For example, A offers to purchase
B’s antique clock for $5,000 and B offers to sell to A his antique clock for
$5,000 and both offers are put into the post at the same time. The obvious
reason would be that there is no meeting of the minds between them. Under
the rules applicable to offer and acceptance, there can be no valid acceptance
since the offeree has no knowledge of the offer at the relevant time. However,
there is an alternative view. It has been pointed out that in such a situation,
each party does in truth contemplate legal relations upon an identical basis,
and each is prepared to offer his own promise as consideration for the
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promise of the other. There is not only a coincidence of acts, but if this is
thought to be relevant, a unanimity of minds. (see M P Furmston, Cheshire,
Fiftoot and Furmston’s Law of Contract (16th edition, 2012) at p 74).
(f) Battle of forms
7.81
Instead of negotiating terms each time a contract is made, businesses
often enter into agreements using their standard forms of contract. This is
convenient as it saves effort, time and money. Understandably, both parties
would like to conclude the contract upon their own terms. Since the terms
and conditions on these standard forms can be incompatible with each
other, this will sometimes lead to offers and counter-offers. If counteroffers are constantly being made in a particular transaction, no concluded
contract can ensue as each counter-offer destroys the original offer and itself
constitutes a new offer. This could lead to an endless exchange resulting
in no contract. This situation is popularly known as the “battle of forms”
where the contract is ultimately formed on the terms of the party who fires
the last shot.
7.82
The leading decision in this respect is that of the English Court of Appeal
in Butler Machine Tool Co v Ex-Cell-O Corporation (England) Ltd (1979).
On 23 May 1969, the plaintiffs offered to sell to the defendant buyers a
machine, delivery to be made in ten months. The offer was made on the
plaintiff ’s terms and conditions which included a price variation clause
and stated that these terms and conditions were to prevail over any terms
and conditions in the buyer’s order. On 27 May the defendants ordered
the machine on their order form that excluded the price variation clause.
At the foot of the order form was a tear-off slip which stated, “We accept
your order on the Terms and Conditions stated thereon.” On 5 June the
plaintiffs signed the slip and sent it back to the defendants with a covering
letter that stated that the order “is being entered in accordance with our
revised quotation of 23rd May”. The machine was delivered. There was, in
fact, a subsequent rise in costs, and the plaintiffs invoked the price variation
clause but the defendants resisted such a claim. The court held that the
contract was concluded on defendants’ terms. Their letter of 27 May was a
counter-offer which had been accepted by the plaintiffs on 5 June. Though
the plaintiff ’s covering letter did refer to the offer of 23 May the court held
that it was only intended to identify the price and the identity of the
machine. The majority of the judges in this case adopted the traditional offer,
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counter-offer and acceptance approach. Here, the acceptance is complete only
when a particular party finally concedes by way of unqualified acceptance as
opposed to a mere counter-offer.
7.83
The English Court of Appeal reaffirmed this rule in Tekdata Interconnections
Ltd v Amphenol (2009). The parties to this dispute were in a long-term
business relationship and were part of a chain of suppliers to Rolls Royce
as ultimate purchasers. Rolls Royce bought engine control systems for
installation in their aero engines from a company called Goodrich who
themselves bought the components from Tekdata Interconnections Ltd
(“Tekdata”), who in turn bought them from Amphenol Ltd (“Amphenol”).
The dispute arose between Tekdata and Amphenol in which Tekdata claimed
that certain connectors were delivered late and were not fit for the purpose
or of merchantable quality. They claimed that the contract of purchase was
on the terms of their purchase orders. Amphenol, on the other hand, claimed
that the contracts were on the terms of their (Amphenol’s) acknowledgment
of the purchase orders and that those terms excluded or limited their liability
for any breaches of contract. The Court of Appeal acknowledged (at [21])
that it is possible, particularly in the context of long-term and multiple-party
relationship, that the traditional offer and acceptance rules could be displaced
where the parties clearly intended to do so. However, the Court held that
such an intention was not proved in this case and accordingly Amphenol’s
terms applied.
7.84
In a situation where both sides insist on having the last word, a contract
will not come into existence as agreement will never be reached. In such a
situation, it is possible for the court to conclude that there is a contract but on
neither party’s terms. In GHSP Inc v AB Electronic Ltd (2010) the claimant’s
terms imposed unlimited liability on the seller while the defendant’s terms
effectively excluded such liability. The issue was as to whose terms applied.
The court noted that there was a deadlock but nevertheless it was clear
that a contract existed and had been performed. The court filled the gap
by implying the term contained in s 14(2) of the Sale of Goods Act 1979
concerning the quality of the goods supplied.
7.85
Lord Denning MR, in Butler Machine Tool Co, while endorsing the traditional
approach, advocated a relatively more radical alternative approach which
requires looking at all the documents passing between the parties and glean
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from them and from the conduct of parties on whether they had reached
agreement on all material points despite the differences between the terms
and conditions printed on the back of them. Lord Denning’s approach
was endorsed by the Singapore Court of Appeal in Projection Pte Ltd v
The Tai Ping Insurance Co Ltd (2001), which in turn was cited with approval
by the Singapore High Court in Overseas Union Insurance Ltd v Turegum
Insurance Co (2001) on this specific issue.
7.86
However, though Lord Denning’s approach might give the judges flexibility,
it has generally not found favour with the English courts, probably because
it is too vague and may result in uncertainty. Thus the law in this area
continues to be along the traditional lines as discussed above.
SOME ISSUES RELATING TO OFFER AND ACCEPTANCE
Certainty and Completeness
7.87
A contract will come into existence as a result of offer and acceptance only
if the terms of that agreement are both certain and complete. It should be
possible to determine with certainty what exactly has been agreed upon
between the parties. The court will not make a contract for the parties
but rather decide through objective criteria as to whether the agreement is
reasonably certain. Despite negotiations between the parties there may be no
enforceable contract if the agreement is conditional, incomplete or vague. We
will briefly consider these situations below.
7.88
Sometimes parties may enter into agreements “subject to contract” or “subject
to a formal contract being drawn up by our solicitors”. These words postpone
liability until such a document has been drafted and signed. On account of
this, the general view is that no binding contract has been concluded (Winn
v Bull (1877); Thomson Plaza (Pte) Ltd v Liquidators of Yaohan Department
Store Singapore Pte Ltd (2001); Norwest Holdings Pte Ltd (in liquidation) v
Newport Mining Ltd and another appeal (2011)). In Norwest, the Singapore
Court of Appeal noted (at [24]–[28]) that the question whether there was
a binding contract between parties should be determined by considering
all the circumstances, including what was communicated between the
parties by words or conduct, not just the inclusion of the stock phrase
“subject to contract”. In the instant case, the documentary evidence of the
communication between the parties contained several indications to an
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objective observer that they had not intended to be contractually bound
until a formal Sale and Purchase Agreement was negotiated and executed.
The objective indications were that the parties had intended to negotiate the
terms and conditions of a Sale and Purchase Agreement. Even if the essential
terms of a contract had been agreed upon and thus needed no further
negotiation regarding those terms, parties who entered into an agreement
expressly “subject to contract” might be taken to have intended for legal
relations to be deferred until the execution of a formal contract, unless there
was strong and exceptional evidence to the contrary. Hence there was no
binding contract between the parties.
7.89
Sometimes the parties themselves may stipulate in their agreement that “terms
and conditions will be agreed upon later”. It is clear that in such cases there
is no contract. However, the particular facts as well as the language utilised
are crucial. The presumption of unenforceability attached to such expressions
is rebuttable by clear evidence to the contrary. If, in other words, the actual
facts and/or language merit it, the court will hold that a valid and binding
contract has been concluded. In the English decision of RTS Flexible Systems
Ltd v Molkerei Alois Muller GMBH (2010) the parties entered into a contract
through a “letter of intent” while they were negotiating for a full formal
contract. A draft of the final contract was produced, which stipulated that it
would be effective only when executed, but was never executed. Meanwhile
the plaintiff carried out substantial work at the defendant’s factory after the
expiry of the letter of intent and claimed for the work done. The Supreme
Court (previously known as the House of Lords) found clear evidence of the
existence of a contract because, among other things, it made no commercial
sense to say that the parties agreed to the work without any relevant contract
terms. The principle laid down in this case that the parties can by their
conduct waive reliance on the “subject to contract” term was cited with
approval by the Singapore Court of Appeal in Norwest (at [24]). See also the
English case of Benourad v Compass Group plc (2010) for further guidelines
in this regard.
7.90
It is not necessarily decisive to establish that the parties had orally agreed to
the terms of an intended agreement since written agreements are typically
preceded by oral agreements on the terms between the parties. Ultimately
that issue must be determined by reference to the objective evidence before
the court. Where it had been agreed that there would be a “Supplemental
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Agreement to be executed to effect necessary changes” but the bank failed
to do so before the expiry of the time limit, the Singapore High Court in
OCBC Capital Investment Asia Ltd v Wong Hua Choon (2012) held that
there was no contract. The evidence showed that the objective intention of
the parties, including the bank, was not to be bound prior to the formal
execution of the written agreement (at [2]).
7.91
As regards completeness, though the courts will avoid making contracts for
the parties, they are willing to uphold contracts where possible by filling the
gaps. For this purpose, the court may avail of a definite formula if there is
one (Brown v Gould (1972)). The other factors that the court may take into
consideration include a previous course of dealing between the parties or a
trade practice. In Sudbrook Trading Estate v Eggleton (1983), a lease gave the
tenant an option to buy the land absolutely, “at such price, not being less
than £12,000, as may be agreed upon by two valuers one to be nominated
by the lessor and the other by the lessee and in default of such agreement
by an umpire appointed by the … valuers …”. The tenant exercised the
option to purchase but the landlord refused to appoint a valuer. The House
of Lords held that even if one of the parties refused to appoint a valuer as
provided for under the terms of the contract, the court could nevertheless
treat the agreement as if it were one to pay a reasonable price which was to
be reached by applying objective standards. If the machinery set up by the
parties for that purpose failed, the court would substitute its own machinery
to find a fair and reasonable price. The Singapore High Court followed this
decision in Tan Yeow Khoon v Tan Yeow Tat (No 1) (2000).
7.92
In Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank
International), Singapore Branch v Motorola Electronics Pte Ltd (2011),
the Singapore Court of Appeal affirmed (at [46]) that contracts might in
certain cases be implied from a course of conduct or dealings between the
parties or from correspondence or all relevant circumstances. Where it was
alleged that an implied agreement existed, the court ought to scrutinise the
evidence before it carefully to determine whether the existence of a contract,
compliant with all the requirements for contract formation, had been proven
on a balance of probabilities (at [47]). Indeed, all the requirements for the
formation of a contract, viz, offer and acceptance, consideration, intention
to create legal relations, and certainty of terms had to be satisfied before the
court would imply the existence of a contract (at [50]).
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7.93
Once an agreement has started to be performed, the courts are much more
likely to hold that there is a contract. In such cases, where necessary, the
court may imply terms to give effect to the contract. The topic of implied
terms will be considered in Chapter 10. However, even where this is not
possible, the party who has received valuable benefit under the agreement
could be ordered to pay on the basis of quantum meruit.
7.94
Vagueness sometimes overlaps with incompleteness since the agreement may
be so vague on a particular matter as to be incomplete. In Scammell and
Nephew Ltd v Ouston (1941), Ouston wanted to acquire a new van on hirepurchase. The agreement stated that “this order is given on the understanding
that the balance of the purchase price can be had on hire-purchase terms
over a period of two years”. After some disagreements, Scammells refused to
supply the van. They argued that the agreement was not certain enough to
amount to a contract. The House of Lords held that there was no contract
between the parties because the agreement on hire-purchase terms was so
vague that it could not be given a definite meaning. For instance, it left open
such questions as whether payments would be made on a weekly, monthly or
yearly basis; whether there would be an initial deposit; and what the interest
rate would be. Hence the parties would need to reach further agreement
before there could be a completed contract.
7.95
In such situations, as mentioned above, courts have tended to uphold a
contract by taking a practical approach by filling the gaps. Thus in Hillas
v Arcos (1932) where the buyer had an option to buy additional softwood
goods, the seller sought to escape the option by alleging that no enforceable
meaning could be deduced from what was agreed. The court held that the
option was binding. The court resolved the uncertainty by reference to the
parties’ previous dealings, the custom of the timber trade and the standard
of reasonableness.
7.96
In Foley v Classique Coaches (1934), the court upheld the contract on the
basis of fairness between the parties. In this case, Foley sold a piece of land
to a bus company on the understanding that they would enter into a second
agreement to buy petrol from him. The bus company agreed to buy petrol
“at a price to be agreed by the parties in writing and from time to time”.
The court enforced the agreement as a binding contract to buy petrol at a
reasonable price. It took into consideration the fact that the bus company
had bought petrol from Foley for three years before denying the agreement.
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The refusal to enforce the contract would be substantially unfair to him as
by entering into the contract he had suffered detriment with regard to the
selling price of his land. As stated in RTS Flexible Systems (see para 7.89),
an agreement is not incomplete merely because it calls for some further
agreement to be arrived at between the parties. Even if certain terms of
economic or other significance to the parties have not been finalised, the
objective appraisal of their words and conduct may lead to the conclusion
that they did not intend agreement of such terms to be a pre-condition to a
concluded and legally binding agreement.
7.97
As to vagueness, the courts will as far as possible try to give effect to the
contract particularly where the parties have acted on the agreement and
will do their best to avoid striking it down on the ground that it is too
vague. To declare it void for uncertainty is a last resort conclusion (Shaw v
Lighthousexpress Ltd (2010)).
7.98
Another relevant issue in this context is the status of an agreement to
negotiate between the parties on a particular matter with a view to reaching
agreement (“lock-in” agreement), or an agreement not to negotiate with third
parties with regard to it (“lock-out” agreement). Both these aspects figured in
the leading House of Lords decision in Walford v Miles (1992). In this case,
the plaintiffs entered into negotiations (subject to contract) to purchase the
defendants’ company and its premises. Since there was another interested
buyer, the plaintiffs obtained an oral undertaking from one of the defendants.
The parties agreed that if the plaintiffs provided a comfort letter from their
bank confirming their financial resources to pay the defendants’ asking price,
the latter would not deal with any third party and would deal exclusively
with the plaintiffs. The plaintiffs complied with the agreement but the
defendants continued to negotiate with the third party and later withdrew
from negotiations with the plaintiff and ultimately sold their interest to the
rival third party. The plaintiffs then brought legal action. Since there was no
concluded contract, the plaintiffs relied on a collateral contract, which they
claimed had been formed.
7.99
The House ruled in favour of the defendants. They held that agreement to
negotiate (“lock-in” agreement) was unenforceable for uncertainty. There
was in this case no duty to negotiate in good faith. The agreement not
to negotiate with third parties (“lock-out” agreement) also failed for
uncertainty as it did not specify for how long it was to last. A “lock-out”
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agreement may be enforceable if there is a time limit on its duration. An
instance where a “lock-out” agreement might exist, for instance, is where
a specific “try-out” time for negotiations is agreed upon. The subsequent
English Court of Appeal decision of Pitt v PHH Asset Management Ltd
(1993) in fact held that the “lock-out” agreement in that particular case
was valid.
7.100
The Singapore High Court in Climax Manufacturing Co Ltd v Colles Paragon
Converters (S) Pte Ltd (2000) took note of the decision in Walford v Miles
(at [32]) and followed it in Grossner Jens v Raffles Holdings Ltd (2004) (at
[43]) and Sundercan Ltd v Salzman Anthony David (2010) (at [25]).
Artificiality of Offer and Acceptance Rules
7.101
As we have seen above, a contract comes into existence through consensus
between the parties as manifested through offer and acceptance. Yet this
theoretical framework may not neatly fit all contract situations. Strict
adherence to this framework may result in artificiality.
7.102
Lord Wilberforce in New Zealand Shipping Co Ltd v AM Satterthwaite &
Co Ltd (The Eurymedon) (1975) gave some examples of these situations,
such as sales at auctions, supermarket purchases, boarding a bus, buying a
train ticket, tenders for supply of goods, offers of rewards, acceptances by
post, warranties of authority by agents, manufacturers’ guarantees, gratuitous
bailments and bankers’ commercial credits. He went on to say, “These are
all examples which show that English law, having committed itself to rather
technical and schematic doctrine of contract, in application takes a practical
approach, often at the cost of forcing the facts to fit uneasily into marked
slots of offer, acceptance and consideration.”
7.103
Although the courts will ordinarily apply the settled legal rules to given
situations, at times they have resorted to “backwards” reasoning to achieve
justice between the parties. In such a situation the court may have a desirable
solution in mind and will reason back to “find” the presence or absence of the
labels of offer and acceptance in order to justify that solution. In this context
see the two cases on exception clauses discussed in Chapter 11, Chapelton v
Barry Urban District Council (1940) and Thornton v Shoe Lane Parking Ltd
(1971). In these cases the respective courts held that the exception clauses
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were not part of the contract as they were introduced after the contract had
been concluded.
7.104
Difficulties with the offer and acceptance model sometimes arise because of
the courts’ attempt in achieving multiple objectives at the same time. These
include the court’s wish to give effect to the intention of the parties, their
desire to achieve a just result on the facts of the case and the need to establish
a clear rule which can be applied to all cases in future. The courts’ utilisation
of the concepts of offer and acceptance, despite occasional artificiality, has in
general, aided in achieving a just result.
CONCLUSION
7.105
We started this chapter by defining a contract as a legally binding agreement
and introduced various terms that are used in the context of the law of
contract. We then considered the requirements of a valid contract, and noted
that the first and foremost of these is the consensus ad idem, that is, the
meeting of the minds. This is ascertained objectively through the requirements
of offer and acceptance. We noted how each of these have their particular
rules that may be easy to state in theory but may sometimes be difficult to
ascertain in practice. We rounded off the chapter with a consideration of the
courts’ approach to such practical difficulties in determining the existence
of the offer and acceptance especially where the agreement appears to be
conditional, incomplete or vague.
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Chapter 8
Consideration and Intention to
Create Legal Relations
8.1–8.2
Introduction
8.3–8.9
Consideration
8.10
Consideration Must be Requested for by the Promisor
8.11–8.17
Consideration Must Not be Past
8.18–8.19
Consideration Must Move from the Promisee
8.20–8.22
8.23–8.24
8.25–8.26
8.27–8.28
8.29
8.30–8.39
8.40–8.43
8.44
8.45
8.46
8.47–8.48
8.49–8.60
8.61–8.62
8.63–8.64
8.65–8.68
Consideration Must be Sufficient
Concept of “Sufficiency”
Intangibles and Moral Obligations
Forbearance and Compromise
Existing Public or Legal Duty
Existing Contractual Duty
(1) Owed to third party
(2) Owed to the promisor
(a) In return for a promise for more
(b) In return for a promise for less
When Consideration is Not Required: The Exceptions
Contract by Deed
Promissory Estoppel
(1) Meaning and origin
(2) Elements of promissory estoppel
(a) Clear and unequivocal promise
(b) Reliance
(c) Inequitable to go back on promise
(d) Shield, not sword
(3) Effect of promissory estoppel: Suspensive or extinctive?
Principles of Singapore Business Law
8.69–8.70
Intention to Create Legal Relations
8.71–8.74
Social and Domestic Agreements
8.75–8.79
Business and Commercial Agreements
8.80–8.82
Conclusion
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INTRODUCTION
8.1
In Chapter 7, we considered the circumstances in which the law would
recognise that parties have come to an agreement. However, the law does not
enforce all agreements. Generally, ideas of fairness, the concern to give effect
to the intention of parties to the agreement (thus facilitating “free market”
economy) and general public policy concerns are relevant in deciding which
agreements to enforce.
8.2
Hence, two other elements (in addition to the presence of an agreement) are
required for the formation of a contract: consideration and intention to create
legal relations. In this chapter, we shall consider the following questions for
each of these legal requirements:
° What are these legal requirements and the rationale or justification for
them?
° When, if at all, are these requirements not necessary for the enforcement
of an agreement (“the exceptions”) and what are the justifications for
allowing such exceptions?
° Is the law on these legal requirements and exceptions coherent and
satisfactory?
CONSIDERATION
8.3
The general rule is that a promise is only enforceable if it is supported by
consideration, that is, where the promise is given in exchange for something
of value. Such reciprocity is said to be the reason and justification for
the enforcement of the promise. However, the reader should note that
exceptions to the general rule exist and will be discussed in detail later (see
paras 8.44–8.68).
8.4
So what exactly is consideration? Consideration is defined as something
that has value in the eyes of the law and given in exchange for a promise.
Traditionally, the “benefit–detriment analysis” is used to explain consideration
(Currie v Misa (1875) at p 162):
A valuable consideration, in the sense of the law, may consist either
in some right, interest, profit, or benefit accruing to the one party, or
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some forbearance, detriment, loss, or responsibility given, suffered, or
undertaken by the other.
8.5
Take the example where A agrees to purchase B’s car at the price of $50,000
(see Figure 8.1). As is typical of most agreements, there are two promises.
There is A’s promise to purchase B’s car at $50,000 and B’s promise to transfer
ownership and possession of his car to A. For each promise to be enforceable,
the recipient of the promise must provide consideration in exchange. The
law refers to the maker of a promise as the “promisor” and the recipient
of a promise as the “promisee”. To determine if each promise is supported
by consideration and therefore enforceable, the benefit–detriment analysis
is used as follows:
° In return for A’s promise: B provides consideration in the form of either
a benefit conferred upon A (ie, A obtains the right to ownership and
possession of the car) or a detriment suffered by B (ie, B having to part
with the car).
° In return for B’s promise: A provides consideration either by conferring
upon B a benefit (ie, the promise to pay B the purchase price), or by
suffering a detriment (ie, A having to part with his money).
Several observations can be made from the above example:
° In return for a promise, a promisee may often have conferred a benefit
as well as suffered a detriment. However, the law only requires either a
benefit or detriment to satisfy the requirement of consideration (see para
8.29 for an example where only a benefit exists to support a promise
without a detriment being suffered by the promisee).
° In any one agreement, a party may be both a promisor and a promisee
depending on the promise under discussion. Thus, it is important to
specify the promise that is sought to be enforced when we are trying to
decide if consideration exists to support that promise.
[Promisor]
A
[Promisee]
[Promisee]
A PROMISES to purchase and pay $50,000 for B’s car
B Promises to sell and deliver his car to A
Figure 8.1
Two sets of promises in an agreement
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B
[Promisor]
Chapter 8: Consideration and Intention to Create Legal Relations
8.6
Consideration may also be defined as the price for purchasing a promise.
In the example above, A can be said to have bought B’s promise of sale
and delivery of the latter’s car at the price or consideration of $50,000.
Conversely, B can be said to have bought A’s promise of payment at a price
or consideration equivalent to the car.
8.7
Consideration must be distinguished from a condition to which a promise is
subject. If A says to B “I will buy you a car when you attain the age of 21”,
the question is whether A is promising a gift subject to the fulfilment of a
condition or making a contractual promise to be accepted by a reciprocal
promise by B. In the example above where the fulfilment of the condition
is not within the control of the promisee, the promise is likely to be a mere
conditional gift. However, where the fulfilment of the condition involves the
performance of some act by the promisee, it is not as clear.
8.8
The difficulty is illustrated by the differing views between the majority and
minority judges in Chappell & Co Ltd v Nestlé Co Ltd (1960). The defendant
company, Nestlé, offered to sell records of the tune “Rockin’ Shoes” for a
nominal cash price and three wrappers of their chocolate bars. The court had
to decide whether the chocolate wrappers formed part of the consideration
for the purchase of the records. The majority of the House of Lords thought
so as Nestlé had (indirectly) benefited from the receipt of the chocolate
wrappers since its chocolate sales might have increased in connection with
the promotion. Alternatively, the purchaser had suffered a detriment having
been put to the trouble of purchasing the chocolate bars in order to purchase
the record. The minority judges, however, disagreed as they felt that the
requirement for the wrappers was merely a condition which a purchaser had
to fulfil before he could purchase the records.
8.9
The definition of consideration is also significant in other ways (see Figure
8.2). First, consideration is defined as something given in exchange for a
promise. The idea of exchange or reciprocity is said to indicate that the law
will only enforce bargains as opposed to gifts. Thus gratuitous promises,
that is, promises to confer some thing or service for nothing in return, are
generally not enforceable (see exception in para 8.44). It also underlies other
rules concerning consideration:
° a benefit or detriment must have been requested by the promisor in order
to constitute a valid consideration;
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° past consideration is no consideration; and
° consideration must move from the promisee.
Second, consideration is defined as something that has value in the eyes of
the law. What the layman may consider factually to be a benefit or detriment
may not be accepted by the law as consideration. The law only recognises
consideration which it deems to be sufficient (and it does not concern itself
with the adequacy of the consideration). Thus whether consideration (and
the related concepts of benefit and detriment) exists is a legal inquiry rather
than a factual one. The reader is cautioned that the notion of consideration
is far from simple and commentators have suggested that consideration is
actually about the policy reasons that justify the enforcement of a promise
(see R Halson, Contract Law (2001) at p 160).
CONSIDERATION DEFINED:
Something of value in the eyes of the law given in exchange for a promise
“Benefit–Detriment”
“Price of promise”
Consideration must
be requested by
promisor
Figure 8.2
Exchange
Consideration
must not be past
Consideration
must move from
promisee
Value in eyes of law
Consideration
must be
sufficient; need
not be adequate
Significance of the definition of consideration
CONSIDERATION MUST BE REQUESTED FOR BY THE PROMISOR
8.10
The idea of exchange requires that the benefit conferred or detriment suffered
by the promisee must be requested by the promisor. Thus, in Combe v Combe
(1951), the plaintiff was unsuccessful when she sued her ex-husband for
breach of a promise to pay her an annual maintenance of £100 after their
divorce. Although she had, in reliance on her ex-husband’s promise, refrained
from applying to the court for maintenance (and thus arguably conferred
a benefit on her husband), the court held that the defendant ex-husband’s
promise was not supported by any consideration as he had not requested her
to so refrain.
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CONSIDERATION MUST NOT BE PAST
8.11
An act done prior to and independently of a promise cannot be regarded as
valid consideration for the promise since it is not done in exchange for the
promise. Hence, if A voluntarily washes B’s car and thereafter, B, impressed
by A’s kindness, promises to pay $50 to A, the promise is not enforceable as
the “consideration” provided by A occurred prior to B’s promise. Such past
acts are conveniently referred to as “past consideration”.
8.12
Past consideration must be distinguished from executed consideration. To
appreciate this distinction, we must understand the concepts of executory
and executed consideration. For example, B promises to sell his car to A
and deliver it in a month’s time in return for A’s promise to make payment
on delivery. At the time the contract is formed, both A and B’s promises
have yet to be performed. They are executory in nature but are still valid
consideration for each other’s promise. If, at the time of agreement, A hands
the purchase price to B, who delivers his car to A simultaneously, both parties
have furnished executed consideration; the consideration is performed at the
time the contract is formed.
8.13
Typically, executed consideration is also the acceptance of an offer in a
unilateral contract. In Carlill v Carbolic Smoke Ball Co (1893) (see Chapter 7,
para 7.12), the plaintiff was held to have accepted the defendant’s unilateral
offer by taking the smoke ball thrice daily for two weeks. This act of acceptance
is also consideration for the defendants’ promise as the defendants benefited
from the sale of the smoke ball while the plaintiff suffered a detriment by
using the smoke ball as instructed. Thus the consideration provided by the
plaintiff was executed at the time the contract was formed.
8.14
Executed consideration is therefore an act or forbearance undertaken in
return for the promisor’s offer unlike past consideration, which involves an
act or forbearance undertaken without any reference to the promisor’s offer.
8.15
Are all acts or forbearance occurring before the promise invalid consideration
for the promise? This may not be so. In Pao On v Lau Yiu Long (1980), the
plaintiffs had agreed, at the defendants’ request, not to sell the shares of a
company for a period of one year. Subsequently, the defendants agreed to
indemnify the plaintiffs for any loss which they might suffer as a result of
their earlier promise not to sell the shares. Eventually, the plaintiffs did suffer
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losses and sued the defendants on the indemnity. In defence, the defendants
argued that their promise to indemnify the plaintiffs was not enforceable as
it was not supported by consideration; the plaintiff ’s promise not to sell the
shares was given before the indemnity and was therefore past consideration.
8.16
The Privy Council rejected the defendants’ argument and held that the
indemnity was enforceable. Even though the plaintiffs’ promise to hold
the shares was given before the defendants’ promise to indemnify, it was
nonetheless good consideration as it satisfied all the conditions below:
° the act was done at the promisor’s request;
° there was an understanding between the parties, at the time the request
was made, that the act would be compensated by payment or some other
benefit conferred; and
° such compensation would be enforceable if it had been promised in
advance.
This decision is often regarded as an exception to the rule that past
consideration is no consideration and has been endorsed in Singapore (Sim
Tony v Lim Ah Ghee (1995); Rainforest Trading Ltd and another v State Bank
of India Singapore (2012)).
8.17
The first and second conditions are easy enough to understand. The third
condition is best explained as a safeguard against enforcing a promise that
would not have been enforceable for any reason under contract law (eg, due
to the lack of an intention to create legal relations or the presence of vitiating
factors, etc) even if the problem of past consideration is overcome by virtue
of the first and second conditions being satisfied.
Box 8.1
Reflecting
on the law
Pao On’s decision — a true exception?
If payment was contemplated by both parties at the time the act was requested,
it would be more accurate to say that the promisee’s act was executed for a
payment to be fixed in the future (ie, the promisee’s act is executed and not past
consideration for the promised payment). Indeed, a strictly chronological view of the
events should not be taken in deciding if an act is in fact past consideration. Rather,
the more important question is whether the preceding act and the subsequent
promise are in substance part and parcel of one and the same transaction.
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CONSIDERATION MUST MOVE FROM THE PROMISEE
8.18
A person can only enforce a promise if the consideration for the promise
is furnished by him. Hence, in Tweddle v Atkinson (1861), A and B, the
respective fathers of a married couple, entered into a contract where each
undertook to pay a sum of money to C (the husband). When C tried to
enforce the contract against the estate of B after B’s death, he failed as the
consideration for the promise was furnished by A and not by him. This
decision can also be explained on a different ground; that C was unable to
enforce the contract because he was not a party or not privy to the contract
(on privity of contract, see Chapter 9, para 9.50 onwards).
8.19
While consideration must move from the promisee, it does not have to move
to the promisor. Hence, if A promises to pay B $50 if B washes C’s car, the
consideration provided by B is valid even though it does not confer a direct
benefit on A, the promisor (see Figure 8.3).
[Promisor]
A
A promises to pay $50 to B if
C
[Promisee]
B
B washes C’s car
[Third party]
Figure 8.3
Consideration moving from promisee to third party
CONSIDERATION MUST BE SUFFICIENT
Concept of “Sufficiency”
8.20
As mentioned, consideration must be sufficient but need not be adequate.
The term “sufficient” refers to “legal validity”, that is, something having
value in the eyes of the law. Once an act or forbearance is deemed sufficient
consideration at law, it is not necessary to show that it is also adequate
— that it has a value comparable to the value of the promise. The rationale
is that contracting parties are taken to be perfectly able to assess the merits
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of their own bargains and the court’s role is to ascertain whether a bargain
has been made, not whether it is a good bargain. This is consistent with
the free market philosophy of minimal state interference into bargains that
are freely and voluntarily made by its citizens. Hence, if A agrees to sell
his car to B for $20,000 although it has a market value of $50,000, B’s
payment of $20,000 is sufficient consideration even if it may not be a fair
price for A’s car. A more extreme example can be found in Chappell &
Co Ltd v Nestlé Co Ltd (1960) (see para 8.8), where it was held that even
used chocolate wrappers which were discarded on receipt could constitute
sufficient consideration for the sale of records. Thus a nominal consideration
can be sufficient consideration as long as parties freely consented to it.
8.21
Sometimes, a grossly inadequate consideration may indicate that the promisor
did not freely and willingly consent to a bargain but was in fact coerced or
improperly influenced into such agreement. In such situations, the contract
may be set aside on the ground of duress or undue influence. The relevant
legal principles will be considered in Chapter 14.
8.22
How then do we identify “value in the eyes of the law”? Clearly, where the
consideration is given in monetary terms or is readily measured in economic
terms, such consideration is sufficient in the eyes of the law. This is so in
most commercial contracts, where consideration is furnished in the form of
monetary payment or the provision of goods or services (with ascertainable
market prices). Where such price tags cannot be readily ascertained, identifying such “value” becomes a much more difficult task. Table 8.1 provides a
list of what may be considered sufficient or insufficient consideration and the
underlying rationale.
Intangibles and Moral Obligations
8.23
Would natural love and affection, as well as other motives of a purely
sentimental nature be sufficient consideration in return for a promise? The
answer is generally not. The rationale is that such motives lack certainty
for purposes of enforcement. Also there is the policy concern that love and
affection should not be held at ransom in return for a promise.
8.24
Would the promisee’s promise of an act which he is already under a moral
obligation to perform be sufficient consideration in support of a promisor’s
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promise? In White v Bluett (1853), a father who was wearied by his son’s
frequent complaints that he had distributed his assets unfairly among
his children, agreed to release his son from his debt obligation under a
promissory note if he would cease complaining. It was held that the father
was not bound by his promise — it was his right to distribute the property as
he wished and the son had no right to complain. In ceasing his complaints,
the son was only doing what he was morally obliged to do and that was
no consideration for his father’s promise. As a matter of policy, the law
would not allow moral obligations or good behaviour to be used to extort
a favourable promise from the other party.
Forbearance and Compromise
8.25
Where a party has a claim against another, he may agree to refrain from
enforcing the claim for a promise given by the latter and such an agreement
is described as a forbearance. Similarly, the parties to a dispute may consider
it more beneficial to enter into a compromise whereby one party agrees
to surrender his claim in consideration for the other’s payment or other
promises, as costly and time-consuming litigation to enforce the claim can
be avoided. In both instances, the promisor’s agreement not to pursue a
claim is good consideration for the promises given in exchange.
8.26
Where a person promises not to enforce an invalid claim and it is shown
that he knew such claim to be invalid at the time of his promise, such
forbearance is no consideration (see Wade v Simeon (1846)). The rationale
is that the surrender of a groundless claim is neither a benefit to the other
party nor a detriment to the one purporting to give up the claim. However,
it is not necessary for the person surrendering his claim to show that he
has given up a valid claim. It is sufficient if he could establish, first, that
he has reasonable grounds for his claim; and secondly, that he honestly
believes that he has a fair chance of success; and finally, that he has not
concealed from the other party any fact which he knows may affect the
validity of the claim (see Callisher v Bischoffsheim (1870)). This means that
the consideration furnished lies not in giving up a valid claim, but rather, in
giving up a right to claim. This makes practical sense as most compromises
and settlements relate to doubtful claims, the validity of which could not be
ascertained without a complete trial.
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Existing Public or Legal Duty
8.27
In general, where A makes a promise to B in consideration for B’s promise
to do something which B is already legally obliged to do, B’s promise is not
good consideration. The rationale appears to be that an act obliged by law is
neither a benefit to A nor a detriment to B. Also, such a rule is said to be
necessary to prevent public officers from extorting money for services which
they were legally bound to render.
8.28
Where the act or conduct in question exceeds the requirements of the legal
duty, it may constitute good consideration. In Glasbrook Bros v Glamorgan
County Council (1925), the appellant mining company agreed to pay the
respondent police authority to maintain a stationary troop at its mine to
protect workers returning to work during a strike. Later, the appellant refused
to make the promised payment and argued that the police authority had
provided no consideration for the promise as they were merely discharging
their legal duty to protect life and property. The House of Lords rejected
this argument; holding that the police were only legally obliged to provide a
mobile force in the circumstances, and by providing a stationary force, had
gone beyond their legal duty.
Existing Contractual Duty
(1) Owed to third party
8.29
The performance of, or the promise to perform, an existing contractual
duty owed to a third party is sufficient consideration for a promise given in
exchange. In Scotson v Pegg (1861), A contracted with X to deliver goods to
X or his nominee and X nominated B to accept the goods. B later contracted
with A that if A would deliver the same goods to B, B would unload them
from the ship at a fixed rate. B did not honour his promise and A sued
for breach of contract. B contended that A had provided no consideration
because in delivering the goods, A was merely performing his existing
contractual duty to X. The court disagreed. When A promised B to perform
an existing contractual duty which A owed to X, such a promise benefits B
by conferring on B the personal right to enforce that promise. Note that A
would not have suffered a detriment in performing the act as A is already
contractually obliged to X to so perform. However, it should be recalled that
the law only requires either a benefit conferred or a detriment suffered to
constitute consideration.
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(2) Owed to the promisor
(a) In return for a promise for more
8.30
What if the alleged consideration lies in the performance, or a promise
to perform, an existing contractual duty owed to the promisor? The
traditional view is that such a promise is generally not regarded as sufficient
consideration — the promisor derives no benefit from a performance to
which he is already entitled and the promisee suffers no detriment for doing
what he is already bound to do. In Stilk v Myrick (1809), the captain of a
ship, unable to replace two crewmen who had deserted in the course of a
voyage, promised to divide the wages of the deserters equally among the
rest of the crew if they would work the ship safely back to London. One
of the seamen sued to enforce this promise after the completion of the
voyage. The court rejected the claim, holding that the seamen were already
bound under the terms of their existing contracts to complete the voyage
and hence a subsequent promise to do the same was no consideration for
the captain’s promise.
8.31
It has been suggested that the rationale behind Stilk v Myrick’s decision is to
discourage seamen from holding their employer to ransom by threatening to
breach their contracts and aggravating the perils of seafaring. A party should
not be encouraged to extort further concessions from the other party after
having already concluded a contract.
8.32
However, any performance which is over and above the promisee’s existing
contractual duty is sufficient consideration for a promise given in exchange.
In Hartley v Ponsonby (1857), the remaining crewmen were also promised
additional wages to continue on a voyage which had become too hazardous
after the desertion of 17 (out of 36) sailors. The promise was held to be
binding because in such circumstances, the remaining crew members were
no longer bound to complete the voyage and in agreeing to do so, they
have done more than what was required under their original contractual
undertakings.
8.33
Stilk v Myrick should be contrasted with the controversial case of Williams v
Roffey Bros & Nicholls (Contractors) Ltd (1991). The defendants (Roffey Bros)
were building contractors who were awarded a contract to refurbish 27 flats.
For that purpose, they engaged the plaintiff (Williams) as sub-contractor to
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carry out the carpentry work for £20,000. Shortly after commencing work,
the plaintiff got into financial difficulty; the agreed price of £20,000 was too
low to enable him to carry out the work satisfactorily and this was aggravated
by the slow progress of the work due to his own inadequate supervision. The
defendants, being aware of the plaintiff ’s problems, were concerned that if
the plaintiff did not complete the carpentry work on time, the defendants
would incur a delay penalty under the main contract. After some negotiation,
the defendants agreed to pay the plaintiff an additional sum of £10,300 at
the rate of £575 for each flat completed. Thereafter, the plaintiff resumed
work and substantially completed the work on eight more units but received
only one further payment of £1,500 from the defendants. The plaintiff then
ceased works and brought an action to enforce the defendants’ promise of
additional payment.
8.34
Relying on Stilk v Myrick, the defendants resisted the plaintiff ’s claim on
the ground that no consideration was furnished for the defendants’ promise
of additional payments — the plaintiff was already bound to complete the
carpentry work under the original sub-contract. However, the English Court
of Appeal disagreed. Clearly, the defendants had agreed to the additional
payment because they considered it advantageous to do so. They stood to
enjoy practical or factual benefits from the plaintiff ’s promise to complete
the work on time such as avoiding the need to engage another subcontractor and, more importantly, the avoidance of liability for delay to the
owners under the main contract. Such practical or factual benefits were held
to be sufficient consideration for the defendants’ promise. The result of this
decision is that the promise to perform an existing contractual duty owed to
the promisor may constitute sufficient consideration if the promisor derived
“practical benefits” from the performance. As summarised by Glidewell LJ
(at pp 15–16):
(1) if A has entered into a contract with B to do work for, or to supply
goods or services to, B in return for payment by B; and
(2) at some stage before A has completely performed his obligations under
the contract, B has reason to doubt whether A will, or will be able to,
complete his side of the bargain; and
(3) B thereupon promises A an additional payment in return for A’s promise
to perform his contractual obligations on time; and
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(4) as a result of giving his promise, B obtains in practice a benefit, or
obviates a disbenefit; and
(5) B’s promise is not given as a result of economic duress or fraud on the
part of A; then
(6) the benefit to B is capable of being consideration for B’s promise, so that
the promise will be legally binding.
8.35
Clearly, Williams v Roffey marks a significant departure from the traditional
position represented by Stilk v Myrick. The defendant in Stilk v Myrick had
also benefited from the crew’s promise to sail the vessel back to the destined
port, yet such benefit was not held to be sufficient consideration. These
two decisions are (despite denials of the judges in Williams v Roffey to the
contrary) clearly inconsistent with each other. At present, the inconsistency
remains unresolved.
8.36
Williams v Roffey has been endorsed in two local decisions with, unfortunately, dissimilar suggestions as to its ambit. In Sea-Land Service Inc v
Cheong Fook Chee Vincent (1994), the defendant employer issued a 30-day
termination notice to the plaintiff employee stating that his severance benefit
included an enhanced severance payment of $14,340 (which was not an
existing contractual entitlement). Subsequently, after serving out the notice
period, the defendants refused to pay the enhanced severance payment but
offered an ex gratia allowance of $4,780 instead. The plaintiff sued to enforce
the enhanced severance payment, arguing that the defendants had in fact
benefited from his services during the last month of his employment which
constituted consideration for the promised payment.
8.37
The Court of Appeal disagreed. It regarded Williams v Roffey as a “limited
exception” (see [11]–[14]) and held that in this case, the defendants derived
no benefit from the plaintiff ’s work in the last month because a company
would only retrench employees who were no longer essential to its operations
and hence the value of such employee’s work in the final month was at best
minimal. This reasoning suggests that the concept of “practical benefits”
ought to be understood narrowly such that only a real and significant benefit
(and not just any benefit) would constitute sufficient consideration under the
principle established in Williams v Roffey (see J Carter, A Phang and J Poole,
“Reactions to Williams v Roffey” (1995) 8 Journal of Contract Law 248).
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8.38
In Sharon Global Solutions Pte Ltd v LG International (Singapore) Pte Ltd
(2001) (see Chapter 14, paras 14.21–14.22) however, the concept appears
to be interpreted more broadly. In this case, the defendant agreed to make
additional payments to the plaintiff in exchange for the latter’s promise to
deliver goods, which it was already bound to do under its existing contract
with the defendant. The Singapore High Court applied Williams v Roffey to
enforce the defendant’s promise. It found that the defendant had benefited
from the timely delivery of the goods and avoided “negative commercial
consequences” such as the damage to its reputation arising from its failure
to meet its customers’ orders. However, no attempt was made to reconcile
Williams v Roffey’s approach with that in Stilk v Myrick nor was the previous
Court of Appeal decision of Sea Land Services referred to. The law in
Singapore thus remains equally unsettled.
8.39
The Sea Land Services decision has been subsequently referred to by the
Singapore High Court in Teo Seng Kee Bob v Arianecorp Ltd (2008) and the
principle in Williams v Roffey applied; again without any discussion as to its
scope of application. Despite remaining ambiguities, the Williams v Roffey
exception is part of Singapore law. Indeed, the Singapore Court of Appeal in
Gay Choon Ing v Loh Sze Ti Terence Peter and another appeal (2009) affirmed
as much (at [118]), in observing that a diluted doctrine of consideration
represents the current state of Singapore law. The traditional role played
by the doctrine of consideration in guarding against extortionate behaviour
is diluted if practical or factual, as opposed to legal, benefit is accepted as
sufficient consideration in return for a promise for more (see “Implications
of Williams v Roffey” in Box 8.2).
Box 8.2
Reflecting
on the law
Implications of Williams v Roffey
(1) Doctrine of Consideration
Theoretically, the captain in Stilk v Myrick could sue the sailors for breach if they
decided to discontinue the voyage, but the practical value of such action is minimal
compared to the loss, expense and inconvenience which could result from a delayed
or abandoned voyage. Thus the sailors’ promise to sail the ship to the destined
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Box 8.2 (Continued )
port was undoubtedly a factual benefit. But the court appears to have construed
consideration as a legal rather than a factual concept.
By accepting “practical benefits” as sufficient consideration, the court in Williams
v Roffey has shifted the focus of enquiry from “Has the promisee provided something
that has value in the eyes of the law?” to “Did the promisor in fact benefit from
the promisee’s promise?” This is a broader and more flexible understanding of the
concept of consideration which arguably accords with commercial reality — parties
do often agree to pay more for the same goods or services (or render more services
for the same price) where it is beneficial to do so.
Yet, if the slightest benefit could constitute consideration, almost all modifications
of (especially commercial) contracts will be upheld as the promisor would almost
always benefit more from the promisee’s continued performance than a breach of his
contractual duty. In practice, this will mean that the requirement for consideration
will cease to have a meaningful role in defining the kinds of agreements which
are enforceable at law.
(2) Contract Modification and Economic Duress
The inconsistency between these two cases is also reflective of the tension between
two legitimate concerns when deciding whether a contract modification is valid and
enforceable. On the one hand, there is concern that such modification might have
resulted from one party’s exploitation of the other’s weaker bargaining position.
In Stilk v Myrick, the court dealt with such risks by insisting on the presence
of consideration, the assumption being that where fresh consideration has been
furnished, the variation is less likely the result of duress or coercion. However, a
counter argument is that a freely agreed modification should be upheld even in the
absence of consideration. If one party encounters problems in the performance of
his contractual obligations, should he not seek a solution by negotiating with the
other party for a modification of the contract terms? Such self-help methods are
likely to be more time and cost effective than formal dispute resolution processes
such as litigation.
Indeed, some commentators have argued that the concept of consideration
is no longer necessary to curb such risks, as this function is more aptly performed
by the doctrine of economic duress (see Chapter 14, Box 14.1). See R Halson,
“Sailors, Sub-Contractors and Consideration” (1990) 106 Law Quarterly Review 183;
A Phang, “Whither Economic Duress? Reflections on Two Recent Cases” (1990)
53 Modern Law Review 107; and A Phang, “Consideration at the Crossroads”
(1991) 107 Law Quarterly Review 21. They argue that instead of depending on the
presence or absence of consideration, such modification is valid as long as it can
be shown that both parties intended to be bound by the modification and that no
improper pressure has been applied on the promisor in the bargaining process.
This reasoning is persuasive in that, if accepted, it will bring the law closer to
commercial reality.
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Table 8.1
Promises/Acts
proffered as
consideration in
return for a promise
Of nominal value
Sufficiency of Consideration Proferred and Rationale
Is it
sufficient?
Intangibles
Moral obligation
Existing public duty
Going beyond
existing public duty
Existing contractual
duty owed to third
party
Existing contractual
duty owed to
promisor
?
Rationale
The law does not interfere with bargains freely
entered into by private citizens in a free market
economy.
Too uncertain for purposes of enforcement.
Policy not to encourage extortionate behaviour
(eg, holding of love and affection at ransom).
Policy not to encourage extortionate behaviour
(ie, holding moral/good behaviour at ransom).
Policy not to encourage extortionate behaviour
by public officials. No benefit to promisor nor
detriment to promisee.
No risk of extortionate behaviour by public
officials. Benefit to promisor and detriment to
promisee exist.
No risk of extortionate behaviour by promisee.
Benefit conferred to promisor although promisee
suffers no detriment.
Insufficient: Stilk v Myrick (traditional view)
Policy not to encourage extortionate behaviour
by contracting parties once a contract is
concluded. No benefit to promisor nor detriment
to promisee.
Sufficient: Williams v Roffey (“practical
benefits” enjoyed by promisor)
Gives effect to commercial reality.
Problem: Threatens to derail the traditional role
of the doctrine of consideration.
Going beyond
existing contractual
duty
No risk of extortionate behaviour by contracting
parties. Benefit to promisor and detriment to
promisee exist.
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(b) In return for a promise for less
8.40
A owes B $1,000. A pays $700 to B, which B accepts as complete discharge
of A’s debt. Can B later sue A for the unpaid balance of $300? In other
words, can A hold B to his promise to accept $700 as complete discharge of
A’s debt? In this situation, A does not rely on B’s promise to seek additional
payment (unlike the case in Stilk v Myrick) but to avoid part of his liability.
8.41
The general rule laid down in Pinnel’s case (1602) is that the payment of a
lesser sum is not a complete satisfaction of the debt. The rationale is that a
promisor is not bound by his promise to forego the unpaid portion of the
debt as the promisee has not furnished any consideration for the promise
— in making part payment, the promisee has done no more, and in fact, less
than what he is contractually bound to do. Thus, such contract modifications
are not enforceable in the absence of consideration, and in the example
above, B may insist on the full repayment of A’s debt despite his promise to
the contrary. The rule in Pinnel’s case has been affirmed and applied by the
House of Lords in Foakes v Beer (1884).
8.42
The rule in Pinnel’s case does not apply where the debtor has provided
something different to the creditor, at the creditor’s request. Thus if A owed
B $1,000 and B agreed to treat the debt as discharged in full if A washes
B’s car, or make partial payment of $500 and washes B’s car, the rule in
Pinnel’s case would not apply since A would have furnished consideration
for B’s promise to forgive the debt or forgo the balance. Alternatively, partial
repayment of a debt at a different place or on an earlier date would suffice
as fresh consideration for the creditor’s promise.
8.43
The rule in Pinnel’s case has been criticised on the ground that it runs counter
to the ordinary expectations of the business community. As Lord Blackburn
observed in Foakes v Beer (at p 622):
All men of business, whether merchants or tradesmen, do every day
recognise and act on the ground that prompt payment of a part of their
demand may be more beneficial to them than to insist on their rights
and enforce payment of the whole. Even where the debtor is perfectly
solvent, and sure to pay at last, this often is so. Where the credit of the
debtor is doubtful it must be more so.
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Thus, it is reasonable to ask whether the principle in Williams v Roffey should
apply to contract variations resulting in a promise to accept less. In other
words, why should the practical benefit of receiving a partial payment not be
accepted as good consideration for the promise to forgive the whole debt?
In Re Selectmove Ltd (1995), the English Court of Appeal acknowledged the
force of this argument but did not extend the principle in Williams v Roffey
to situations involving partial payment of debts as that would in effect be
overruling the House of Lords decision in Foakes v Beer, which the Court of
Appeal had no power to do. The court thus correctly adhered to the doctrine
of precedent but unfortunately left the inconsistency between Williams v
Roffey and Foakes v Beer unresolved. In principle, it is difficult to see why
the law should differentiate between these two situations as the practical
benefits which a promisor may derive from the receipt of part payment
is no less real than the benefits of receiving a promised performance (see
J Carter, A Phang and J Poole, “Reactions to Williams v Roffey” (1995)
8 Journal of Contract Law 248). The law in Singapore on this point also
remains unresolved.
WHEN CONSIDERATION IS NOT REQUIRED: THE EXCEPTIONS
Contract by Deed
8.44
An exception to the legal requirement of consideration are contracts by deed,
that is, formal documents in writing which have been signed by the parties
before a witness or witnesses, sealed and delivered. A gratuitous promise
made by deed may be enforced (see, eg, Development Bank of Singapore
Ltd v Yeap Teik Leong (1988); Hong Leong Finance Ltd v Tay Keow Neo
(1991)). The rationale for exempting such contracts from the requirement
of consideration is that having gone through such elaborate steps, the party
making the gift would be well aware of what he is doing and would seriously
intend to be legally bound to make the gift.
Promissory Estoppel
(1) Meaning and origin
8.45
An important exception to the rule in Pinnel’s case, the equitable doctrine
of promissory estoppel prevents a person from going back on his promise
even though the promise is not supported by consideration. The origin of
this doctrine is often traced to Denning J’s (as he then was) obiter remarks
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in Central London Property Trust Ltd v High Trees House Ltd (1947). In
that case, a 99-year lease was granted by the plaintiffs to the defendants
in 1937 for a block of flats at a rent of £2,500 per year. In January 1940,
the plaintiffs agreed to halve the rent as the defendants were encountering
difficulty securing sub-tenants for the flats owing to the war conditions then
prevailing. The defendants thereafter paid the reduced rent. However, the
flats were again fully let by early 1945 and the plaintiffs sought to restore
the rent to £2,500 from mid-1945. Denning J held that the plaintiffs were
entitled to do so as the reduced rent was intended to apply only while the
adverse conditions persisted. More importantly, Denning J observed that if
the plaintiffs had claimed for the full rent for the period prior to 1945, they
would have been estopped from doing so as they could not go back on a
promise that was intended to be binding and which was in fact relied upon
by the defendants as it would have been inequitable for them do so under
the circumstances.
(2) Elements of promissory estoppel
8.46
To successfully invoke the doctrine, all of the following elements must be
present:
° a clear and unequivocal promise by the promisor not to insist upon his
original contractual rights;
° reliance by the promisee;
° such that it is inequitable for the promisor to go back on his promise;
and
° the doctrine is invoked as a shield, not a sword.
Each of these elements, as well as the effects of promissory estoppel, will be
considered.
(a) Clear and unequivocal promise
8.47
The promisor must have made a clear and unequivocal promise which is
intended to affect the future conduct of the parties’ relationship. Obviously,
the clearer the promise, the more likely it is that the promisee will act in
reliance on it and render it inequitable for the promisor to retract his promise.
Whether a promise is sufficiently clear and certain is judged objectively, that
is, it is sufficient if a promisee could reasonably have been so induced in the
circumstances.
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8.48
Silence or mere inaction would not generally constitute a clear promise as
it lacks certainty. Thus, a mere failure to enforce a contractual obligation
does not amount to a promise to abandon such a right of enforcement.
However, a promise does not have to be express but can be implied by words
or conduct. In Hughes v Metropolitan Railway Company (1877), a landlord
gave his tenant six months’ notice to repair the premises but thereafter, the
parties commenced negotiations for the sale of the lease to the landlord. The
tenant had indicated that he would not effect the repairs whilst negotiations
continued. And in fact, in the course of negotiations, the landlord raised the
state of disrepair of the premises as a reason for objecting to the tenant’s
asking price for the lease. Soon after, the negotiations broke down and the
landlord sought to forfeit the lease as the tenant had not carried out the
repairs on the expiry of the original six months’ notice. It was held that
he could not do so as it could reasonably be inferred from his conduct in
entering into negotiations with the tenant that the notice period would not
run while the negotiations continued and would only continue to run after
the negotiations ended.
(b) Reliance
8.49
The second requirement is that the promisee must have acted in reliance on
the promise. Generally, such reliance is evidenced by the promisee’s change
of position on the faith of the promise, that is, by doing or omitting to do
something which he would otherwise not have done or omitted to do.
8.50
Is it sufficient for the promisee to merely alter his course of action in
reliance on the promise made, or must he also have suffered some detriment
or disadvantage as a result? Some cases suggest that detrimental reliance is
necessary. The rationale is that only where the promisee has suffered such
detriment would it be inequitable for the promisor to go back on his word
(see paras 8.61–62).
8.51
The English position does not require detrimental reliance. In W J Alan &
Co Ltd v El Nasr Export and Import Co (1972), Lord Denning rejected the
suggestion that a promisee must adduce evidence of detriment in order to
invoke promissory estoppel; all he needed to demonstrate was that he had,
in reliance on the promise, acted differently from what he otherwise would
have done. Similar observations were made in Société Italo-Belge pour le
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Commerce et l’Industrie SA v Palm and Vegetable Oils (Malaysia) Sdn Bhd,
The Post Chaser (1982) by Goff J (as he then was) (at p 27):
To establish such inequity, it is not necessary to show detriment; indeed,
the representee may have benefited from the representation, and yet it
may be inequitable, at least without reasonable notice, for the representor
to enforce his legal rights. Take the facts of [the High Trees case] … the
representation was by a lessor to the effect that he would be content to
accept a reduced rent. In such a case, although the lessee has benefited
from the reduction in rent, it may well be inequitable for the lessor
to insist on his legal right to the unpaid rent, because the lessee has
conducted his affairs on the basis that he would only have to pay rent at
the lower rate.
8.52
The English position was endorsed by the Singapore High Court in Abdul Jalil
bin Ahmad bin Talib v A Formation Construction Pte Ltd (2006). In that case,
Judith Prakash J commented (at [44]) that “the better view is that detriment
of the kind required for the purpose of estoppel by representation is not an
essential requirement and all that is necessary is that the promisee should
have acted in reliance on the promise in such a way as to make it inequitable
to allow the promisor to act inconsistently with it”. Under this approach, the
question whether the promisee has suffered any detriment would only be
a factor to be taken into account when considering the last element of the
doctrine, that is, whether it is in fact inequitable for the promisor to retract
his promise in all the circumstances (see para 8.61). When the case went up
on appeal, this point was not challenged and the Court of Appeal (at [48])
chose not to rule on the correctness of Judith Prakash J’s approach without
the benefit of arguments (see Abdul Jalil bin Ahmad bin Talib and others v
A Formation Construction Pte Ltd (2007)).
8.53
The issue of detrimental reliance was finally clarified in Lam Chi Kin
David v Deutsche Bank AG (2010) by the Singapore High Court whose
position appears to have been implicitly endorsed by the Court of Appeal
(see Lam Chi Kin David v Deutsche Bank AG (2011)). Of further interest
is the novel approach introduced by the Court of Appeal in Lam Chi Kin
to establish promissory estoppel in the absence of “detrimental reliance”.
This will be explained in para 8.59 but first, the issue of detrimental reliance
is elucidated.
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8.54
In Lam Chi Kin, the Singapore High Court, upon a short survey of the
law, noted (at [55]–[56]) that conflicting views on the requirement of
detriment arose because some courts used the word “detriment” in a narrow
sense while others used it in a broad sense. The narrow sense was used
in situations where the promisee was put to some trouble in acting (or
relying) upon the promisor’s promise and thus already suffered a detriment
prior to any indication that the promisor wished to resile from his promise.
For example, the promisee had to incur expenditure of money (see, eg,
Yokogawa Engineering Asia Pte Ltd v Transtel Engineering Pte Ltd (2009))
or time, or was placed in a position of disadvantage such as incurring
legal obligations (see, eg, Fenner v Blake (1900)). The broad sense was
used in situations where the promisee did not suffer any immediate trouble
or disadvantage in acting (or relying) on the promisor’s promise; instead,
the promisee might have enjoyed a benefit from doing so. “Detriment”
or disadvantage to the promisee would only arise if the promisor was
permitted to go back on his promise (see, eg, Hughes v Metropolitan Railway
Company (1877) and WJ Alan Co Ltd v El Nasr Export and Import Co
(1972)).
8.55
The facts of Hughes v Metropolitan Railway Company (see para 8.48) may be
used to illustrate the difference. Relying on the landlord’s implied promise not
to insist on repairs to the leased premises during the period of negotiations
for the sale of the lease, the tenant did not effect the repairs within the
notice period. Was there detrimental reliance? There was no “detriment”
in the narrow sense of the word — the promisee-tenant did not suffer any
detriment in relying on the promise. Instead, the tenant enjoyed the benefit
of not being put to the trouble and expense of effecting repairs, which might
be rendered unnecessary (and wasted) had the negotiations resulted in a
successful sale of the lease. Nevertheless, “detriment” in the broad sense
existed — the tenant’s reliance on the implied promise to suspend the notice
period for repairs had resulted in a change of the tenant’s position; the
tenant-promisee would suffer detriment, that is, the prospect of eviction for
failing to effect repairs within the original notice period, if the landlord was
permitted to go back on his word.
8.56
Steven Chong JC (as he then was) rejected a technical approach of dwelling on
the narrow or broad sense of detriment in establishing promissory estoppel.
Instead, the learned judge distilled (at [57]) an overarching principle that ran
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through the decided cases in which the doctrine of promissory estoppel had
been applied:
The overarching principle … is that the doctrine has consistently been
held to apply in circumstances when it was inequitable either in the
narrow or broader sense of “detriment” for the promisor to resile from
his promise and to enforce his strict legal rights.
Applying the principle to the facts of Lam Chi Kin, the learned judge
concluded that it was not inequitable to allow the promisor to go back on
the promise — no detriment was suffered by the promisee in reliance on
the promise to justify preventing the promisor from insisting on their strict
legal rights.
8.57
On appeal, while the Court of Appeal disagreed with the High Court’s
conclusion, they appear to have implicitly approved of the identified principle
(see, however, A Phang (general ed), The Law of Contract in Singapore (2012)
at para 04–082 where doubt is expressed on whether the Court of Appeal
has embraced the “overarching principle”). What is clear is that the Court of
Appeal’s focus of inquiry into the existence of detriment was on establishing
the last element, that is, that it will be inequitable to allow the promisor to
go back on his promise (see [38]). Detriment suffered by the promisee is
therefore relevant towards justifying the inequity of allowing the promisor
to resile from his promise.
8.58
As mentioned, the Singapore Court of Appeal reached a conclusion opposite
to that of the High Court on the facts of Lam Chi Kin. The brief facts are:
Deutsche Bank promised to extend a “48-hour grace period” to Lam Chi
Kin (“Lam”), their private banking client, to respond to a “margin call” in
the course of complex foreign exchange trades. The “grace period”, a more
generous time allowance than that permitted under the original contract term
governing the parties, was valuable given the volatility of foreign exchange
rates and the financial impact they would have on Lam’s investments. The
Court of Appeal found (at [38]) that various actions taken by Lam resulted
in a change of his position: Lam provided additional business to the bank
by obtaining from them a credit line of USD200 million to carry on foreign
exchange trades, placed large cash deposits with the bank as collateral for
the credit line and entered into risky leveraged foreign exchange trades to
the tune of multiple millions of several currencies, something Lam would
not have done if not for the promised grace period. On this basis, the Court
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of Appeal concluded that Lam relied on the bank’s promise and thereby
suffered sufficient detriment to make it inequitable to permit the bank to
resile from their promise.
8.59
In an interesting turn, the Court of Appeal went on to introduce a novel
approach to establish promissory estoppel. The Court held that in the
absence of detrimental reliance, Lam could rely on an alternative principle
(a “broader principle”) to establish promissory estoppel. Chan Sek Keong CJ
(delivering the judgment of the court) said, at [40]:
Furthermore, in our view, even if it is arguable that there was no
detrimental reliance on the facts of this case, we would hold that the
appellant is entitled to succeed in this appeal on the broader principle
set out at V.5.17 of Bower ([33] supra), where it is stated:
However, even adopting such a broad definition of detriment, an
exception may be suggested to the rule that detriment is required. It
is strongly arguable that a representor may be stopped from denying
a representation because it is inequitable for the representor to resile
from it, although the representee has suffered no detriment, where the
representor has obtained an advantage by the reliance of the representee
on the representation, as had been held in relation to constructive trusts,
by reasoning equally applicable to the doctrine of estoppels. [emphasis
in the original]
Emphasising the particular relevance of the “broader principle” to the facts
of Lam Chi Kin, Chan CJ stated, at [40]:
We are of the view that this principle is particularly relevant in the
context of private banking where if banks and financial intermediaries
engaged in the business of wealth management cannot be trusted with
their words, they should not allowed to be in this business. The courts
should not allow a bank to claim that “my word is not my bond”, and
should be sufficiently astute to find inequity, and where it is possible to
do so within legal limits, to hold the promisor to his word in a case,
such as the present, where the respondent has obtained an advantage
from his promise at the expense of the promisee.
Applied to the facts, the court found that the bank’s promise of a grace period
enabled them to attract and induce Lam to use their wealth management
services. Since the bank had benefitted considerably as a result of Lam’s
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reliance on their promise, the court concluded that it was inequitable for the
bank to resile from their promise.
8.60
Various observations on the “novel approach” are pertinent. First, the status
of the “broader principle” is unclear — the Court had already decided
the case on the “detriment” analysis and the novel approach would likely
be obiter. However, the language used by the Court (in [40] reproduced
above and the summary of findings in [48]) seems to suggest that it could
be an alternative ratio decidendi. This remains to be clarified by the Court
of Appeal. Second, the focus of the broader principle is on the attainment
of an advantage (or benefit) by the promisor as a result of the promisee’s
reliance on the promise — and whether this circumstance makes it
inequitable for the promisor to resile from his promise. This is in stark
contrast to the traditional focus on whether the promisee had suffered a
detriment as a result of his reliance on the promise. Traditionally, promissory
estoppel is used to protect the promisee from disadvantage in relying on
the promisor’s promise and not to prevent the promisor’s advantage as a
result of such reliance. Third, the “broader approach” raises a number of
interesting questions: What sort of “advantage” will trigger the operation
of promissory estoppel? Will it result in greater availability of the doctrine
constrained only by the need to link the promisor’s enjoyment of advantage
to the resulting inequity if the promisor is to go back on his promise?
It may be fair to say that a promisor would enjoy an advantage or benefit
in not insisting on his original contractual rights in most, if not all,
voluntary contract modification scenarios. Indeed, academics have
commented, inter alia, that the Court of Appeal’s novel approach is likely
to further dilute the role played by the doctrine of consideration (see, eg,
Yeo Tiong Min, “The Future of Promissory Estoppel in Singapore Law”
Fifth Yong Pung How Professorship of Law Lecture, Singapore Management
University, 16 May 2012).
(c) Inequitable to go back on promise
8.61
Consistent with promissory estoppel being an equitable doctrine, an essential
element is that it must be inequitable for the promisor to go back on his
word. Inequity or injustice is a broad concept and overlaps substantially with
the concept of “detrimental reliance” (see para 8.50 onwards above). Where
a promisor makes a promise upon which the promisee relies and suffers
detriment as a result, these facts would render it inequitable to allow the
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promisor to recede on his word. Notably, in The Post Chaser (see para 8.51)
although the court held that detriment was not necessary, it nonetheless
held that it was not inequitable for the promisor to recede on his promise
because the lapse of two days between the time of the promisee’s reliance
and the time at which the promisor retracted his promise was too short
to have caused any prejudice to the promisee. Thus, even if one accepts as
correct the English position that detriment is unnecessary, detriment remains
an important factor in the general assessment of whether it is just and
equitable to permit the promisor to go back on his word, a point implicitly
acknowledged by the Singapore High Court in Lam Chi Kin. Additionally,
the Court of Appeal in Lam Chi Kin signalled that it is pertinent, in the
absence of detriment, to examine if the promisor has obtained an advantage
or benefit as a result of the promisee’s reliance to decide if such inequity is
made out.
8.62
Ultimately, the issue of inequity must be determined by taking into account
all the relevant circumstances. Any factor that could tip the balance one way
or the other must be considered. D&C Builders v Rees (1966) is a useful
illustration. The defendant owed the plaintiffs £482 but offered, through
his wife, to pay £300 in full settlement of the account, stating in effect that
the plaintiffs would get nothing if they did not accept the lesser sum. The
plaintiffs were then on the verge of bankruptcy and the defendant’s wife was
well aware of that fact. For lack of a real option, the plaintiffs accepted the
payment but subsequently brought an action to recover the balance of the
debt. Lord Denning held that it was not inequitable for the plaintiffs to resile
from their promise as the defendant had improperly procured the plaintiffs’
agreement by taking advantage of their weak financial position.
(d) Shield, not sword
8.63
The principle of promissory estoppel is often metaphorically described as one
which acts only as a shield but not as a sword. This means that the principle
may only be invoked to defend or resist a claim, but it cannot be used to create
a new cause of action where none existed before. In Combe v Combe (1951)
(see para 8.10), the plaintiff could not enforce her ex-husband’s promise as
she had not furnished consideration for the promise and thus no contract
existed between them in the first place. The court also rejected her further
argument that the defendant was estopped from breaking his promise since
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to do otherwise would amount to creating a contractual relation between
them when none existed before.
8.64
One may question why the doctrine of promissory estoppel is limited to
operate only as a shield but not as a sword. If the rationale is to protect
reasonable reliance placed on a promise, why should such protection be
allowed only by way of a defence but not as a cause of action? Some other
jurisdictions such as Australia have allowed the doctrine to be used as a
sword. Neither Singapore nor English courts have thus far adopted this
bold approach.
(3) Effect of promissory estoppel: Suspensive or extinctive?
8.65
A number of cases suggest that promissory estoppel merely suspends the
enforcement of an obligation such that it may be revived by the promisor
upon giving due notice to the promisee. This is observed in the High Trees
case (see para 8.45), where the court held that it was possible to restore
payment of the full rent for the future and in the Hughes case (see para
8.48), where the tenant’s obligation to repair is not lost but is resurrected
upon the giving of notice and more time. What constitutes sufficient notice
in each case would depend on its particular facts. An express notice is
not necessary and precise time need not be specified for it to take effect.
Generally, it would suffice if the promisor has by his conduct made clear his
intention to withdraw his concession and the promisee is given a reasonable
time to make the necessary adjustments thereafter.
8.66
It should be noted, however, that in the High Trees case, the court was
prepared only to allow a restoration of the landlord’s rights to future rental
at the full rate. Lord Denning was of the view that the landlords would not
have been able to recover the full rent for the war years. This indicates that
the payment obligations falling within the duration of the suspension were
actually extinguished. This is inconsistent with the view that promissory
estoppel is suspensory in nature.
8.67
Perhaps a better view is to determine the effects of the doctrine by reference
to the nature, intent and circumstances of the promise made. In exceptional
circumstances, an obligation may be extinguished because the reliance
placed on the promisor’s assurance makes it impossible for the promisee to
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perform his original obligation or highly inequitable for him to do so (see
GH Treitel, “Contract: In General”, in A Burrows (ed), English Private Law
(Oxford: OUP, 2nd ed, 2007, at [8.54]).
8.68
In cases such as High Trees, which involved periodic payments, a distinction
may have to be drawn between the payments which accrued before the
notice and those accruing thereafter. Where it is not possible to recover the
former payments, the right to these payments is therefore extinguished; but
the general right to future payments is merely suspended and may be revived
upon reasonable notice. The suspensory effect is justifiable by the fact that
the promises were given in response to acute and temporary circumstances
and thus it is likely that the said promises were only intended to be binding
while the extenuating circumstances lasted. In the case of one-off payments,
where a creditor accepts a lesser sum in satisfaction of a larger debt, the
effect of promissory estoppel should ultimately depend on whether the
creditor’s intention (objectively determined) is to forgive the entire debt or
merely to allow the debtor more time to pay.
INTENTION TO CREATE LEGAL RELATIONS
8.69
Even where an agreement is supported by consideration, it is not necessarily
enforceable unless the parties intended the agreement to be legally binding.
Whether the parties to an agreement did intend to create legally binding
relations is a question to be determined by the facts of the case on an
objective basis. The parties are said to have the intention to create legal
relations if an objective view of the relevant facts suggests that such an
intention exists, even if one of the parties should assert the contrary. In
Norwest Holdings Pte Ltd (in liquidation) v Newport Mining Ltd (2010), the
Singapore High Court reiterated this principle, stating the rationale and
highlighting an implication of (or exception to) the objective approach.
Belinda Ang J observed (at [34]) thus:
… in finding an intention to enter into legal relations, ... the law is
predominantly concerned with the objective intentions of a party, and
not his subjective or actual intention. … Specifically, the objective
approach determines a party’s intentions by looking at all of his words
and conduct directed towards his counterparty from the perspective of
a reasonable person versed in business. The obvious rationale for the
objective approach is to enable parties to deal in reliance with each
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others’ manifest intentions. It follows from this rationale that there is
an exception to the objective approach where a party’s actual intention
differs from his apparent intention, and this is actually known to his
counterparty.
8.70
Generally, the agreements are analysed under two broad categories:
agreements made in social and domestic contexts and agreements arising
in business and commercial contexts.
SOCIAL AND DOMESTIC AGREEMENTS
8.71
For social or domestic arrangement, there is a presumption that the parties
do not intend the agreement to be legally binding. In Balfour v Balfour
(1919), the defendant husband who was leaving for an overseas assignment
promised to pay his wife, the plaintiff, a monthly sum of £30 until she joined
him overseas. The defendant later failed to honour his promise and the
plaintiff sued for breach of contract. The court held that the agreement was
motivated mainly by the parties’ natural love and affection for each other
and not the intention to create legal obligations and thus the plaintiff ’s claim
failed. Atkin LJ was also of the view that the courts should not interfere
with domestic agreements because the parties do not usually intend such
agreements to have legal consequences and that to do so would unduly
overload the judicial system.
8.72
In Jones v Padavatton (1969), a mother’s agreement to maintain her adult
daughter on the condition that the latter studied to become an advocate
was also held not to be enforceable as it was merely an informal family
arrangement where each party depended on the other’s good faith for the
performance of the promises.
8.73
However, the presumption against contractual intent can be rebutted by
clear evidence of the parties’ intention to create legal obligations. In Merritt
v Merritt (1970), a husband who had deserted his wife agreed to pay her a
monthly maintenance of £40 and to transfer the house to her when she had
fully repaid the outstanding mortgage as well as other expenses related to the
house. At the wife’s insistence, the husband wrote the agreement on a piece
of paper and signed against it. The court held that in these circumstances, the
presumption against creating legal relations did not apply and the agreement
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was binding. Unlike the facts of Balfour v Balfour, where the couple were
living in amity at the time of the agreement, the couple in Merritt v Merritt
was estranged when the agreement was made. As such, they were clearly
making a serious bargain and not merely relying on the other’s affection and
good faith for the fulfilment of the promises.
8.74
As the issue of contractual intent is a question of fact, all the surrounding
facts of a case are relevant in considering whether the presumption against
contractual intent has been displaced. It is not possible to list all the relevant
factors but cases have shown that two factors are of particular significance.
The first is the certainty of the terms of the agreement. The more certain
the terms, the more likely that the parties would have carefully considered
the content and effects of the agreement. Conversely, vague and imprecise
terms are likely to be construed as evidence of lack of contractual intent.
The second factor is the actual reliance placed on the agreement; evidence of
such reliance will tend to suggest that the parties intended the agreement to
be binding. Both factors were present in Merritt v Merritt; the court found
that the agreement was written with sufficient certainty and that the wife
had acted in reliance on the husband’s promises in settling the mortgage
loan and other related expenses.
BUSINESS AND COMMERCIAL AGREEMENTS
8.75
Where business and commercial agreements are concerned, the presumption
is that the parties intend to create legally enforceable obligations. The burden
of rebutting the presumption is a heavy one and lies on the party who asserts
the absence of contractual intent.
8.76
It is not uncommon for parties to expressly state in their agreement that they
have no intention to create legal relations. Where this is done in clear terms,
the presumption is effectively rebutted. In Rose & Frank Co v J R Crompton
& Bros Ltd (1923), the parties included the following clause (commonly
known as an “honour clause”) in their agreement:
This arrangement is not entered into as a legal or formal agreement, and
shall not be subject to legal jurisdiction in the Law Courts but is only
a definite expression of and record of the purpose and intention of the
parties concerned to which they each honourably pledge themselves.
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The court held that the arrangement was not enforceable as a contract as it
was clear from the honour clause that they did not intend the agreement to
have any legal consequence.
8.77
The issue of contractual intention frequently arises in relation to a letter
of comfort. Typically, such letters are issued by a parent company or a
substantial shareholder to encourage a financial institution to extend a loan
facility to its subsidiary or investee company. The precise legal effect of a
comfort letter depends on the intention of the parties as evidenced by the
surrounding circumstances and the text of the letter.
8.78
In Kleinwort Benson Ltd v Malaysia Mining Corp Bhd (1989), the defendant
parent company issued a comfort letter which contained the statement that
“It is our policy to ensure that the business of [our subsidiary] is at all times
in a position to meet its liabilities to you under the above arrangements.”
Upon examining the wording of the letter, the English Court of Appeal held
that the statement did not amount to a contractual promise. In contrast, the
Australian Supreme Court upheld a letter of comfort containing a similarly
worded statement as having contractual force in Banque Brussels Lambert
SA v Australian National Industries Ltd (1989). In the latter case, Rogers
CJ disapproved of the English court’s approach in attempting to resolve a
commercial dispute with excessive emphasis on the text of a document.
Rogers CJ also took the view that generally commercial agreements which
resulted from hard bargaining should be given significant weight and not be
lightly reduced to a “merely honourable engagement” except in the clearest
of circumstances.
8.79
Significantly, the Singapore High Court has declined to give legal effect to
a letter of comfort in the case of Hongkong and Shanghai Bank Corporation
Ltd v Jurong Engineering Ltd (2000). Though the court acknowledged that
the letter of comfort should, as a commercial document, be presumed to
have legal effect, it nonetheless held that the presumption was displaced by
two important considerations. First, the evidence showed that the parties did
not seriously place any reliance on the comfort letter; and secondly, the text
of the letter was not sufficiently certain to support the creation of binding
obligations. This decision suggests that our courts may be more inclined
towards a restrictive approach in interpreting letters of comfort, such that
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documents of this nature are unlikely to be given contractual force except
where there is irrefutable evidence of such intention.
CONCLUSION
8.80
The reader should realise by now that much uncertainty still surrounds the
concept of consideration and in particular, the necessity for such a concept.
Though consideration is unlikely to be abandoned, its role in contract law
has been considerably whittled down.
8.81
A traditional argument in favour of consideration is that it is good evidence
of the contracting parties’ intention to create legal relations. This has been
challenged on the basis that where other circumstantial evidence evinces
such intention, there is no reason why agreements should be denied legal
validity simply for lack of consideration. Indeed, it is often the need to give
effect to the parties’ intention in such situations that prompted judges to
“invent” consideration. In Chwee Kin Keong and others v Digilandmall.com
Pte Ltd (2004), V K Rajah JC (as he then was) observed at [139], obiter, in
the Singapore High Court thus:
The modern approach in contract law requires very little to find the
existence of consideration. Indeed, in difficult cases, the courts in several
common law jurisdictions have gone to extraordinary lengths to conjure
up consideration. (See for example the approach in Williams v Roffey
Bros & Nicholls (Contractor) Ltd …).
The learned judge went on to suggest (at [139]), obiter, that:
Indeed, the time may have come for the common law to shed the
pretence of searching for consideration to uphold commercial contracts.
The marrow of contractual relationships should be the parties’ intention
to create a legal relationship.
8.82
Perhaps the fate of the doctrine of consideration lies more tellingly in the
comments of the Singapore Court of Appeal (comprising Judges of Appeal
Chao Hick Tin, Andrew Phang Boon Leong and VK Rajah) in Gay Choon
Ing v Loh Sze Ti Terence Peter and another appeal (2009). Andrew Phang JA
(delivering the judgment of the court) observed, at [117], that the doctrine
of consideration has survived much criticism and remains an established
part of Singapore and the common law; albeit reform is still necessary as
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theoretical incoherence and practical difficulties in application exist. On
controversies surrounding the determination of which contractual promises
to enforce, the court opined (at [118]), obiter, that having available a range
of legal options — a diluted doctrine of consideration and alternative
doctrines such as promissory estoppel, economic duress, undue influence
and unconscionability — is the most practical approach towards achieving
a fair and just result in any given case. The learned judge proffered this
provisional view upon noting that, currently, no one doctrine is itself free
of difficulties.
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Capacity and Privity of Contract
9.1–9.4
9.5
9.6–9.13
9.14
9.15–9.23
9.24
9.25–9.27
Introduction
Incapacity
9.28–9.30
9.31
9.32–9.33
9.34–9.38
9.39
Minors
Binding Contracts
(1) Beneficial contract for necessaries
(a) Loans for necessaries
(2) Beneficial contract of employment, apprenticeship or education
and analogous contracts
Voidable Contracts
Ratified Contracts
Remedies Against a (Protected) Minor
(1) Section 3(1) Minors’ Contracts Act
(2) Section 2 Minors’ Contracts Act
9.40–9.44
Mental Incapacity
9.45–9.49
Corporations
9.50–9.54
Privity of Contract and Third Parties
9.55
9.56–9.57
9.58–9.62
9.63
9.64
9.65–9.66
9.67
Third Party Enforcement of Benefits under Contract:
Techniques to Get Around the Privity Rule
Statutory Techniques
(1) Contracts (Rights of Third Parties) Act (Cap 53B, 2002 Rev Ed)
(a) Scope of application
(b) Rights of third party to enforce contractual term
(c) Remedies available to a third party
(d) Variation and rescission of contract
(e) Other provisions
(2) Other statutes
Principles of Singapore Business Law
9.68–9.76
9.77
9.78–9.80
9.81
9.82
9.83
9.84
9.85
9.86
9.87
9.88
Common Law Techniques
(1) Action by promisee on behalf of third party
(2) Collateral contracts
(3) Himalaya clause
(4) Assignment
(5) Tort of negligence
(6) Agency
(7) Law of trusts
(8) Other common law techniques
Imposing Burdens on Third Parties:
Techniques to Get Around the Privity Rule
Sub-bailment Contracts
Land Law
Unlawful Interference with Contractual Rights
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INTRODUCTION
9.1
Having considered the legal ingredients necessary for the formation of a
contract, we go on to examine the questions of who has the right to sue
and enforce promises under the contract, and who is liable to be sued. In
this chapter, we will be looking at two separate and distinct situations. The
first involves an individual or corporation who is a party to the contract but
whom the law regards as lacking the legal capacity to contract. The second
concerns an individual or corporation who is not a party to the contract.
9.2
Generally, parties to a contract are entitled to sue and, conversely, are liable
to be sued in respect of promises made under the contract. However, the
law seeks to protect certain individuals, namely minors (in Singapore, some
minors but not all) and the mentally incapacitated (by mental disorders or
intoxication), whom it regards as being too vulnerable to fully appreciate
what they are committing themselves to in a contract. Thus, the law limits
their capacity to enter into contracts. Where corporations are concerned, the
law seeks to protect the owners’ investment in a corporation by placing limits
on the corporation’s capacity to contract. Such limits generally result in the
individual or the corporation not being liable under contracts entered into.
Exceptions to the general rule exist to ameliorate any unfairness that may be
caused to parties dealing in good faith with the individual or corporation.
9.3
As mentioned, only parties to a contract are entitled to sue and are liable to
be sued under a contract. It follows then that an individual or corporation
who is not a party or, in legal parlance, not privy to a contract cannot sue or
be sued under that contract. Such an individual or corporation is also known
as a “third party”. However, strict adherence to the “privity of contract” rule
may result in unfairness to the third party especially where a term or terms
of the contract confer a benefit to the third party. Hence, various techniques
have been utilised to get around the privity rule.
9.4
In this chapter, we shall first consider the effect of incapacity upon an
individual’s or corporation’s ability to sue or be sued under a contract to
which it is a party. We shall then go on to consider the ability of an individual
or corporation (ie, the third party) to sue or be sued under a contract to
which it is not a party and some of the common techniques employed to get
around the privity rule.
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INCAPACITY
9.5
In a free market system, the law provides certainty to commercial dealings
when contracts are upheld. Nevertheless, this ideal has to be counterbalanced against the need to protect the inexperienced and/or vulnerable
individuals who may not be able to protect their own interests in the
commercial arena. Investors in a corporation also deserve protection against
their investment being applied towards unintended purposes by the persons
running the corporation. But what of the interest of the party who dealt
fairly with the individual or the corporation? A fine balancing act is
required between these equally valid concerns. As will be observed, however,
the law on incapacity, especially that concerning minors, is not entirely
satisfactory and is considered by many textbook writers as requiring
reform.
MINORS
9.6
Minors comprise one of the groups considered vulnerable and requiring
legal protection against improvident contracts. The premise is that they lack
experience in commercial matters and maturity of judgment. The general
common law approach is to deem minors as lacking the legal capacity to
enter into contracts so that young people below the age of majority are
protected. Some examples of countries that adopt this approach are the UK,
Hong Kong and Malaysia.
9.7
In the UK, Hong Kong and Malaysia, the age of majority is 18 years (see
s 1 UK Family Law Reform Act 1969; s 2 read with s 4 Malaysian Age of
Majority Act 1971; and s 2 read with ss 3 & 4 Hong Kong Age of Majority
(Related Provisions) Ordinance 1990). In the past, Singapore adopted a
similar approach — that is, extending protection to all who are below the
age of majority. However, the age of majority in Singapore is 21 (see Bank
of India v Rai Bahadur Singh and another (1994)). This had the curious
result of young people in Singapore aged 18 to 20 being regarded as still
requiring legal protection in contracting while their counterparts in the UK,
Hong Kong and Malaysia were not. Whether or not Singapore law actually
reflected reality on the ground (then) was never verified by any empirical
study. Regardless, the “anomaly” in Singapore law was removed in 2009.
Legal amendments that took effect on 1 March 2009 decoupled the age of
contractual capacity in Singapore from the age of majority. In other words,
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the age from which contractual capacity is conferred is no longer the age
of majority. Instead, s 35(1) Civil Law Act (Cap 43 Rev Ed 1999) (“CLA”)
provides that the age of contractual capacity is 18 years for most contracts.
Legal protection is no longer extended to all minors in Singapore; only
minors below 18 years of age are protected.
9.8
There remain some contracts all minors continue to lack legal capacity to
enter into. These exceptions are stipulated in s 35(4)(a) to (d) CLA. For
example, minors, as a whole, continue to lack capacity to enter into contracts
dealing with interests in land (except for contracts for leases of land of
3 years or less) and for the sale or use as collateral of a minor’s beneficial
interest under a trust (see s 35(4)(a) to (c) CLA).
9.9
Notably, the 2009 legal amendments only lowered the age of contractual
capacity but left unchanged the general law pertaining to minors’ contracts.
The sole impetus behind the amendments was to encourage and facilitate
entrepreneurship among the young in Singapore. As already alluded to, the
existing law on minors’ contracts is not wholly satisfactory. As such, the
limited scope of the 2009 amendments have prompted some criticism for,
inter alia, failing to consider holistic reform (see Loo Wee Ling, “Use of
Age for Conferment of Capacity” (2010) Singapore Journal of Legal Studies
pp 328–351).
9.10
Singapore law on minors’ contracts generally tracks the English common
law. Thus in the sections to follow, English case authorities are highlighted
in the discussion of the scope of law on minors’ contracts. However, the
reader is cautioned that as the UK still confers contractual capacity from
the age of majority, English cases inevitably refer to parties lacking legal
capacity as minors (as a whole) and to their raising the defence of minority.
The reader should bear in mind the crucial difference that, in Singapore,
only some minors (those under 18 years) as opposed to minors as a whole,
may raise the “defence of minority”.
9.11
What is the significance of a lack of contractual capacity? The general
rule is that contracts entered into by one who lacks capacity are not
enforceable against him. This means that the other contracting party (“the
counterparty”) will not be able to sue the party lacking capacity for breach
of contract and obtain remedies for breach (eg, claims for the price of
goods or services provided, damages or equitable remedies). Thus, generally,
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a minor in Singapore is not liable under a contract entered into while he is
under 18 years of age.
9.12
A (relevant) minor is only allowed to set up his minority as a “defence”
to a claim by the counterparty while his obligation is still executory, that
is, where the minor has yet to perform his obligations under the contract.
Hence, where the minor has already performed (executed) his obligations,
he cannot plead his minority in order to recover any money paid or goods
delivered unless there has been a total failure of consideration on the part
of the counterparty. In Steinberg v Scala (Leeds) Ltd (1923), a minor applied
for and was allotted shares in a company. She made partial payment for the
shares but thereafter decided to terminate the contract on the ground of her
minority and to claim the return of the partial payment. The court rejected
her claim. Although she was allowed to terminate the contract and therefore
free herself from liability to pay the balance of the price of the shares, she
was not allowed to claim back the amount paid as there was no total failure
of consideration. She received her shares and thus got something in return
for her money.
9.13
Even if a contract cannot be enforced against a minor, the minor is
nevertheless entitled to enforce the contract against the counterparty, that
is, the counterparty is always bound under the contract. Obviously, this
may result in unfairness towards the counterparty and certain rules have
evolved through case law and statute to provide the counterparty with
remedies against the minor (see discussion under the heading “Remedies
Against a (Protected) Minor” at para 9.32 onwards). Certain exceptions
to the general rule on the incapacity of minors have also evolved not only
to prevent unfairness to the counterparty but also to shield minors from
being prejudiced by, ironically, the very protection accorded to them.
Traders may be deterred from contracting with minors given their lack
of legal capacity but minors still have need for essentials such as food,
clothing and employment. These exceptions are discussed under the three
headings below:
° binding contracts
° voidable contracts
° ratified contracts
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Binding Contracts
9.14
The law recognises some contracts to be fully binding and enforceable
against a (protected) minor. The types of contract that fall within this
category are: beneficial contracts for necessaries, beneficial contracts of
employment, apprenticeship and education, and contracts analogous to the
latter category.
(1) Beneficial contracts for necessaries
9.15
The rationale behind the binding effect of a contract for necessaries is said
to be that unless the minor is bound, traders will not give the minor credit
for necessaries. Necessaries can comprise either goods supplied or services
rendered. However, the question whether the goods or services contracted
for are necessaries is not a straightforward one. Rather it is a question of
law and fact. Two considerations are pertinent: first, are the goods or
services in question capable of being “necessaries” at law? Second, does
the minor, in fact, have actual need for the goods or services? The supplier
bears the burden of proving both in the affirmative. To be binding, the terms
of the contract for necessaries must also, on the whole, benefit the minor.
9.16
In relation to goods, s 3(3) UK Sale of Goods Act (applicable in Singapore
by virtue of the Application of English Law Act (Cap 7A, 1994 Rev Ed) and
reprinted locally as Cap 393, 1999 Rev Ed) (“SGA”) defines necessaries to
be “goods suitable to the condition in life of the minor … concerned and
to his actual requirements at the time of the sale and delivery”. This is a
codification of the common law definition. It should be noted that s 3(1)
SGA provides that “the capacity to buy and sell is regulated by the general
law concerning capacity to contract and to transfer and acquire property”.
Thus, all references to a minor in s 3 SGA are to be understood as referring
to a minor below 18 years of age.
9.17
At common law, items capable of being necessaries (at law) are “such articles
as are fit to maintain the particular person in the state, station and degree …
in which he is” (see Peters v Fleming (1840) at p 46) while, as noted above,
s 3(3) SGA makes reference to “goods suitable to the condition in life of the
minor”. These definitions indicate that necessaries encompass more than just
the basic necessities of life and that the social status of the minor is relevant
in its determination. Thus what may be necessaries for a “prince” may not be
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necessaries for a “pauper”. To illustrate, English cases have held the following
items, supplied to minors from well-to-do families, to be capable of being
necessaries at law: rings, pins and a watch-chain (Peters v Fleming) and a
servant’s uniform (Hands v Slaney (1800)). However, articles of mere luxury
cannot be necessaries although luxurious articles of utility may sometimes
be (see Chapple v Cooper (1844) at p 258).
9.18
Obviously, what may be considered suitable or fit to the condition in life of
a minor would change with the times and the old English cases may now be
of limited use as a guide. It is also not easy to distinguish articles of mere
luxury from luxurious articles of utility. This led to a suggestion that the real
question is “whether it was reasonable for the minor, however rich, to be
supplied with articles of the kind in question” (see Edwin Peel, Treitel: The
Law of Contract (13th ed, 2011) at para 12–006).
9.19
As mentioned, the supplier has the unenviable task of proving both that the
goods or services supplied are capable of being “necessaries” at law and that
the minor has actual need of them before he can successfully claim against
the minor. If the minor is already adequately supplied, then he will not be
liable for the price even though the supplier did not know this (see Barnes
& Co v Toye (1884)). In Nash v Inman (1908), a Savile Row tailor failed in
his claim against a minor (a Cambridge undergraduate and the son of an
architect of good position) for payment of eleven fancy waistcoats supplied
by him. The minor’s father had given unrefuted evidence that the minor
was already adequately supplied with clothes at the time of sale and delivery.
The burden placed on the supplier to prove the minor’s actual need has
been criticised as being unduly harsh as such facts would usually not be
within the supplier’s knowledge (see Edwin Peel, Treitel: The Law of Contract
(13th ed, 2011) at para 12–006).
9.20
Even if the supplier succeeds in proving that the contract with the minor is
for necessaries, the contract only binds the minor if it contains terms that,
overall, benefit the minor. Thus, in Fawcett v Smethurst (1914), it was held
that a contract for the hire of a car for the transport of a minor’s luggage
did not bind the minor even though it was a contract for necessary services.
It contained a harsh term making the minor liable for damage to the car
“in any event”, that is, regardless of whether he was at fault. The court held
that the contract, as a whole, was not to the minor’s benefit.
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9.21
An unsettled question is whether a contract for necessaries that remains
executory on the part of the counterparty binds the minor. These are cases
where the counterparty has yet to perform his obligations under the contract,
for example, he has not delivered goods or rendered services contracted for.
For necessary goods, s 3(2) SGA provides that “[W]here necessaries are
sold and delivered to a minor … he must pay a reasonable price for them”
[emphasis added]. As the minor’s obligation to pay arises upon both sale
and delivery, the minor is thus only liable when the contract for necessaries
is executed (for other arguments for and against this conclusion, refer to
Box 9.1).
Box 9.1
Reflecting
on the law
Should executory contracts for necessaries bind the minor?
Where the supplier has yet to perform his obligations under a contract for necessaries,
the question is whether the minor is bound so that he cannot repudiate the contract
on the ground of his minority. A plain reading of s 3(2) SGA appears to suggest that
an executory contract for necessary goods would not bind a minor. Proponents of
this view argue that a minor is liable for the price not because he has contracted
(“contractual basis”) but because he has been supplied (“restitutionary basis”). That
is why a minor is only liable to pay a reasonable price instead of the contracted price
for necessary goods (see s 3(2) SGA).
However, there is conflicting dicta on the basis of a minor’s liability (see Nash v
Inman where Moulton LJ (at p 8) held that a minor’s liability rests upon restitution
as he is incapable of making a contract, while Buckley LJ (at p 12) opined that a
minor had the capacity to make a contract for necessaries). Arguments in favour
of a restitutionary basis have also been challenged. Barring very young children,
a minor is capable of giving true consent and is thus capable of contracting. And
payment of a reasonable price does not conclusively point to a restitutionary basis:
the law’s interference with the terms of a transaction does not necessarily strip it of
its contractual nature (see Edwin Peel, Treitel: The Law of Contract (13th ed, 2011)
at para 12–008 and Chitty on Contracts Vol 1 (30th ed, 2008) at paras 8–011 to
8–012).
Further, although most textbook writers agree that the different approaches
to contracts for necessary goods (ie, executory contracts are not binding) and to
contracts for necessary services (ie, executory contracts are binding) are hard to
reconcile, different solutions have been suggested to rationalise the law (see Edwin
Peel, Treitel: The Law of Contract (13th ed, 2011) at para 12–008 and A Phang,
Cheshire, Fifoot and Furmston’s Law of Contract (2nd ed, 1998) at p 752). The issue is
still unsettled.
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9.22
For necessary services, the position is governed by common law and it has
been held that executory contracts for services bind the minor, at least where
contracts for education are concerned. In Roberts v Gray (1913), a minor had
contracted to learn the occupation of a professional billiards player from a
famous professional by going with him on a world tour and playing billiards
with him during the tour. The court held that the contract was for necessary
services in that it was a contract for teaching and instruction, and one which
bound the minor even though it was still partly executory on the part of
the professional when the minor repudiated the contract. Hence, the minor’s
repudiation was wrongful and he was held liable for damages for breach
of contract. As an aside, it is pertinent to note that contracts for education
that equip a minor with necessary skills to earn a livelihood are considered
contracts for necessaries. However, given the overlap, they are often also
discussed under the category of contracts of employment, apprenticeship or
education and contracts analogous thereto (see paras 9.25 to 9.27).
9.23
Where indeed the contract is one for necessaries, in relation to necessary
goods, s 3(2) SGA provides that the minor need only pay a reasonable price.
This suggests that the minor may not have to pay the price agreed in the
contract. There is no statutory equivalent in relation to necessary services
and case law would govern, which appears to require payment of a reasonable
price (see Chapple v Cooper (1844)).
(a) Loans for necessaries
9.24
Generally, a contract to lend money to a minor for the purchase of necessaries
is unenforceable against the minor at common law (see Darby v Boucher
(1694)). The rationale is probably that a loan can be easily misapplied to
other purposes unlike an actual supply of necessaries. In equity, the lender
can recover such part of the loan as is actually used for the purchase of
necessaries (see Marlow v Pitfield (1719)).
(2) Beneficial contract of employment, apprenticeship or education and
analogous contracts
9.25
Contracts of employment, apprenticeship or education are binding on a
minor as they provide him a means of earning his livelihood. Again, such
contracts only bind a minor if the terms are, on balance, beneficial to the
minor. Thus in Clements v L & NW Ry (1894), a minor was held bound by
his contract of employment in which he agreed to relinquish his statutory
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rights to personal injury benefits and to join his employer’s own insurance
scheme. The insurance scheme conferred the minor some rights which were
more advantageous than his statutory rights and some rights which were
less so. Nevertheless, taken as a whole, the court found that the insurance
scheme was still to his benefit. But not every contract that is beneficial to a
minor binds him. For example, a minor’s trading contracts do not bind him
no matter how beneficial they may be. In Cowern v Nield (1912), a minor
trading in hay and straw failed to deliver a consignment of hay to a buyer
despite having already been paid. The buyer’s claim to recover the price paid
failed.
9.26
This principle of beneficial contracts of employment, apprenticeship or
education has been extended to analogous contracts. Examples of these
include a contract to grant a publisher exclusive rights to publish a minor’s
memoirs (see Chaplin v Leslie Frewin (Publishers) Ltd (1966)), a contract
between a professional boxer (who is a minor) and the British Boxing Board
of Control in which he agreed to abide by the rules of the Board as he could
not earn his living as a boxer otherwise (see Doyle v White City Stadium
Ltd (1935)), and a contract where a group of musicians, the members of
which were minors, appointed a company to be their manager and agent
(see Denmark Productions Ltd v Boscobel Productions Ltd (1967)).
9.27
A decision that provides an interesting contrast to the Denmark Productions
case is Proform Sports Management Ltd v Proactive Sports Management Ltd
(2007). In Proform Sports Management, an issue arose whether a representation
contract for a soccer player, entered into when the player was a minor, was a
contract analogous to a contract of “employment, apprenticeship or education”
and thus binding on the minor. The case involved a famous English soccer
player, Wayne Rooney, who entered into a representation contract when he
was aged 15 with Proform Sports Management Ltd (“the company”). Under
the contract, the company would act as Rooney’s executive agent and manage
Rooney’s career as a professional footballer, provide advice and negotiate on
Rooney’s behalf the terms of, inter alia, any contract of transfer from one
football club to another. The court held (at [40]) that the representation
contract was not a contract analogous to a contract for employment,
apprenticeship or education on the ground that the company did not deal
with matters essential to Rooney’s training or livelihood, unlike music group
managers who “organise matters essential to the very business of the musical
artiste”. The company did not provide Rooney training to hone his skills and
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enable him to earn a living as a professional footballer or to begin to do
so. Rooney was already receiving such training under his contract with the
Everton Football Club.
Voidable Contracts
9.28
At common law, under this exception to the general rule, a contract is binding
and enforceable against a minor unless the minor avoids or repudiates the
contract during his minority or within a reasonable time after he attains
the age of majority. In Singapore, where contractual capacity does not take
reference from the age of majority but is conferred from age 18 onwards,
this exception will mean that the contract is binding on the minor under 18
unless he avoids it while below 18 or does so within a reasonable time of
turning 18. In other words, the contract is voidable by the minor within the
stated period. The types of contract within this category are:
° contracts to lease or purchase land;
° contracts to subscribe for or purchase shares in a company;
° partnership agreements; and
° marriage settlements.
It is unclear if these are the only contracts that are capable of falling within
this category but the usual rationale given for the effect of this category of
contracts on a minor is that they concern interest in property of a permanent
nature and involve recurring obligations. As such, a minor who retains the
interest should, in fairness, be held liable for the obligations. However,
the stated rationale has been criticised as vague and does not provide a
satisfactory explanation for the inclusion of certain types of contracts within
the category or the exclusion of others (see Edwin Peel, Treitel: The Law of
Contract (13th ed, 2011) at para 12–025). For example, it is unclear what is
meant by “permanent” and it has been held that a hire purchase contract for
a car, though involving recurrent obligations on the part of the minor to pay
instalments, does not fall within this class of contracts (see Mercantile Union
Guarantee Corp Ltd v Ball (1937)). As such, the need for such a class of
contracts has been questioned (see Edwin Peel, Treitel: The Law of Contract
(13th ed, 2011) at para 12–026).
9.29
As mentioned, in Singapore, unless the minor repudiates whilst he is below
the age of 18, he will have to do so within a reasonable time of turning 18.
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What will be considered a reasonable time would depend on the facts of the
particular case. In this regard, an English case has held that taking nearly five
years after attaining the age of majority to repudiate a marriage settlement
was not reasonable even though for most of that time the minor concerned
did not know of his right to repudiate (see Edwards v Carter (1893)).
9.30
Upon repudiation, the minor ceases to be bound by future obligations
under the contract. However, the law is unclear as to whether he remains
bound by outstanding obligations that have accrued prior to repudiation.
For example, a minor, upon repudiating a lease of a flat, will no longer be
bound to pay future rent but what about the rent for the past months that
has yet to be paid? There are conflicting dicta and views by textbook writers
on this question although the general view seems to be that a minor remains
bound by obligations that have arisen prior to his repudiation of the contract
(see Sutton and Shannon on Contracts (8th ed) at p 220 and Salmond and
Winfield, Principles of the Law of Contracts at p 461 cited by A Phang,
Cheshire, Fifoot and Furmston’s Law of Contract (2nd ed, 1998) at p 759,
footnote 106. For an alternative view, see A Phang, as above, at p 759, which
also cites in support of the opposing view Salmond and Williams, Principles
of the Law of Contracts at p 300 in footnote 106). Finally, as mentioned in
para 9.12, the minor cannot recover monies paid or goods delivered to the
other party prior to the repudiation unless there has been a total failure of
consideration (see Steinberg v Scala (Leeds) Ltd (1923)).
Ratified Contracts
9.31
At common law, a contract that does not fall under the previous two
exceptions to the general rule may still be binding and enforceable against
a minor if the minor ratifies the contract upon attaining the age of
majority. In the Singapore context, this exception will operate such that a
contract ratified when a minor turns 18 will be enforceable and binding on
that minor.
Remedies Against a (Protected) Minor
9.32
Unless a contract with a minor falls within the exceptions discussed above,
the counterparty will not be able to enforce the contract against the minor.
This is the case even if the counterparty did not know that he was dealing
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with a (protected) minor. Thus, to protect a supplier who has dealt fairly
with the minor, a number of remedies exist at common law and equity, and
under the Minors’ Contracts Act (Cap 389, 1994 Rev Ed) (“MCA”). This is
an English Act introduced in 1987. It is applicable in Singapore by virtue of
the Application of English Law Act 1993.
9.33
A thorough discussion of the remedies under common law and equity is
beyond the scope of this chapter. It is sufficient to note that these remedies are
very much restricted on account of the courts’ fear of diluting the protection
given to the minor. They are thus insignificant in comparison to the remedy
under the MCA which generally improves a supplier’s access to restitution of
benefits transferred under a contract that is unenforceable against the minor.
Hence, even though the MCA specifically preserves the counterparty’s rights
against the minor at common law and equity (see s 3(2) MCA), it is unlikely
that the counterparty will resort to those remedies. For the purposes of this
chapter then, the focus will be on the remedies under the MCA with a brief
mention of the remedies under common law and equity mainly for purposes
of comparison.
(1) Section 3(1) Minors’ Contracts Act
9.34
Section 3(1) MCA provides:
Where —
(a) a person (the plaintiff) has [after the commencement of the Act]
entered into a contract with another (the defendant); and
(b) the contract is unenforceable against the defendant (or he repudiates
it) because he was a minor when the contract was made,
the court may, if it is just and equitable to do so, require the defendant
to transfer to the plaintiff any property acquired by the defendant under
the contract, or any property representing it.
9.35
The section expressly provides for a remedy for the counterparty to the
contract in circumstances where the contract does not bind a minor by virtue
of his minority. This would include all situations where the contract is not
for necessaries and where the minor has not ratified, and where the contract
falls within the class of “voidable contracts” that has been repudiated by the
minor. Examples of where the counterparty may be able to obtain a remedy:
the tailor in Nash v Inman could probably claim back the eleven fancy
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waistcoats from the Cambridge undergraduate; and in Steinberg v Scala,
if the shares had been allotted without any payment having been made yet
when the minor chose to repudiate the contract, then the company would
probably be able to claim back the shares allotted.
9.36
Under s 3(1) MCA, the nature of the remedy is restitutionary, that is, the
court may order the minor to restore property acquired under the contract
or “any property representing it” to the supplier. This is in contrast to the
position at common law and equity. At common law, a claim for damages
may be made against a minor, except for very young children, in tort. But
the tortious remedy will be withheld if to grant it would be tantamount to
enforcing the contract against the minor. In R Leslie Ltd v Sheill (1914), a
minor lied about his age to obtain a loan. The court held that the minor
cannot be sued for a breach of contract as such a contract is unenforceable
against a minor. Neither could the minor be sued in the tort of deceit
because the effect of granting damages against the minor would result in an
indirect enforcement of the contract of loan. At equity, however, a restricted
restitutionary remedy is available — the minor may be compelled to restore
property but only if the minor had obtained them fraudulently, for example,
by misrepresenting his age. Under s 3(1) MCA, the remedy of restitution
is available in the absence of fraud. Further, while s 3(1) MCA expressly
provides for restoration of “any property representing [the original acquired
property]”, it is unclear if the remedy in equity extends to this.
9.37
Thus, under s 3(1) MCA, where the minor still has within his possession the
original goods supplied by the counterparty, he may be ordered to return
these goods to the counterparty. Moreover, if the minor has exchanged
the original goods for other goods in a barter trade, the minor could be
ordered to transfer to the counterparty these substitute goods. If the minor
has consumed the goods, for example, he has eaten the caviar purchased
from the counterparty, or given away the caviar as a gift, then he is no
longer in possession of the property acquired under the contract and
no order under s 3(1) may be possible. But what if the minor has sold
the original goods for cash? The problem here is that the MCA does not
provide a definition of the word “property” and it is unclear if “property”
encompasses money. Most textbook writers, however, are of the view that
money can be considered “property” under the MCA and thus the minor
can be ordered to transfer cash representing the original goods to the
counterparty (see, eg, Edwin Peel, Treitel: The Law of Contract (13th ed,
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2011) at para 12–041 and Chitty on Contracts Vol 1 (30th ed, 2008) at
para 8–055).
Box 9.2
Reflecting
on the law
“Any property representing [the original acquired property]” under s
3(1) MCA — further complications
Consider the situation where the original goods are sold for cash which is used to
partially pay for other goods purchased from another party, or where the cash is
deposited into the minor’s savings account, mixed with his other savings, and then
withdrawn to purchase other goods. In such situations, can the “other goods” be
said to represent the original goods and be liable to be surrendered to the supplier
of the original goods?
It has been suggested that the difficulty in identifying the proceeds of sale
of the original acquired property into these subsequently acquired goods
should be considered by the court when exercising its discretion under s 3(1).
Certainly, an order to restore property that does not clearly represent the original
acquired property will increase the risk of an indirect enforcement of the minor’s
contract, which in turn, will undermine the protection of minors under 18 (see
Edwin Peel, Treitel: The Law of Contract (13th ed, 2011) at para 12–042 for a fuller
discussion).
9.38
It should be borne in mind that the remedy under s 3(1) MCA is
discretionary and not available as of right. The court will make an order
only “if it is just and equitable to do so”. The MCA is silent on the factors
to be considered by the court in the exercise of its discretion. However,
the difficulty in determining if the minor has in his possession property
representing the original goods would probably be an important one. The
fairness of the original contract may be another. Hence, whether the supplier
tried to take advantage of the minor’s vulnerability is relevant as is the
minor’s appearance (whether it is mature or not) in the absence of any
representation as to his age. Finally, the need to avoid an indirect enforcement
of the minor’s contract may also be considered in the exercise of the court’s
discretion.
(2) Section 2 Minors’ Contracts Act
9.39
It has been mentioned that loans for the purchase of necessaries are not
binding on a (protected) minor. Financial institutions therefore would not
grant such loans unless repayment of the loan and interest is guaranteed by a
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party with contractual capacity. Where such guarantee is furnished, s 2 MCA
reiterates that the guarantee is indeed enforceable against the guarantor:
Where —
(a) a guarantee is given in respect of an obligation of a party to a
contract made [after the commencement of the Act]; and
(b) the obligation is unenforceable against him (or he repudiates the
contract) because he was a minor when the contract was made,
the guarantee shall not for that reason alone be unenforceable against the
guarantor.
MENTAL INCAPACITY
9.40
A person may be mentally incapacitated in two ways: mental retardation or
intoxication. The general rule is that contracts entered into by the mentally
incapacitated bind them unless and until they choose to avoid or repudiate
the contracts. In other words, the contracts are rendered voidable (see, for
the mentally unsound, Che Som bte Yip and another v Maha Pte Ltd and
another (1989); and for the drunk, Gore v Gibson (1843)). The law affords
protection to those under a mental disability if:
° the mental incapacity prevents the person under such a disability from
understanding what he is doing; and
° the other party knows or should have known about the incapacity at the
time of entering into the contract. The burden of proving such knowledge
is on the party seeking to avoid the contract.
9.41
The second requirement of knowledge can be contrasted with the law on
protected minors which does not require knowledge by the counterparty of
the minor’s lack of legal capacity. This has been the subject of criticism (see
Hudson (1986) “Mental Incapacity Revisited”, The Conveyancer and Property
Lawyer 178).
9.42
Though the mentally incapacitated may avoid the contract if the two
requirements mentioned above are satisfied, the counterparty to the contract
is always bound. However, if the counterparty does not know or, in the
circumstances of the case, it cannot be shown that he ought to have known
of the incapacity, he may enforce the contract against the person under the
disability.
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9.43
In any event, in the case of a contract for the sale of goods, s 3(3) SGA
provides that “where necessaries are sold and delivered to a person who by
reason of mental incapacity or drunkenness is incompetent to contract, he
must pay a reasonable price for them”. Hence, a contract for necessary goods
would be an exception to the general rule on contracts with the mentally
incapacitated. Even if the person under the mental impairment can prove
that he did not understand what he was doing and that this was known to
or ought to have been known by the other party, he will still have to pay
a reasonable price for necessary goods that have been sold and delivered
to him.
9.44
A contract will become absolutely binding on a person of unsound mind if
he ratifies the contract when he is cured (see Manches v Trimborn (1946)).
In the same way, a contract will absolutely bind a drunk if he ratifies after he
becomes sober (see Matthews v Baxter (1873)).
CORPORATIONS
9.45
When a company is incorporated, the common law confers upon it a legal
personality in the sense that it is considered a separate legal entity from
its owners (the shareholders) and has capacity to enter into contracts like
any human being (see Chapter 21, paras 21.22–21.23). Issues relating to its
capacity to enter into contracts arise in the two situations discussed below.
9.46
The first relates to the doctrine of ultra vires. The doctrine was originally
introduced to protect shareholders who had invested in a company on the
understanding that their money would be applied for certain purposes stated
in the objects clause (a clause that states the purpose for which a company
is incorporated) contained in a document of incorporation of the company,
the memorandum of association. For example, if the objects clause states
that the company was set up to carry on the business of selling men’s shoes,
any contract entered into by the company to purchase designer watches
will be considered ultra vires, that is, beyond the capacity of the company,
and therefore, under common law, is null and void. However, while the
doctrine protects the shareholders, it operates harshly upon innocent third
parties who dealt in good faith with the company. Thus, steps were taken to
provide some protection to third parties via s 25 Companies Act (Cap 50,
2006 Rev Ed) (“CA”).
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9.47
Section 25 CA prevents a contract that is ultra vires from being rendered
null and void automatically. Instead, restraint or the setting aside of the
ultra vires contract will only be ordered by the court, upon application by a
member or a debenture holder of the company, if the court considers it just
and equitable to do so. Otherwise the contract is valid and binding on the
company. Significantly, s 23 CA now allows the incorporators of a company
a choice as to whether to include an objects clause in the memorandum of
association or to omit it altogether. If it is omitted, the doctrine of ultra vires
will no longer be relevant. For a detailed discussion of the doctrine of ultra
vires see Chapter 21, para 21.17 onwards).
9.48
The second situation where the company’s capacity to contract may be in issue
relates to pre-incorporation contracts. Prior to a company’s incorporation,
contracts may need to be entered into to set into motion the process of
incorporation. For example, lawyers may need to be engaged to draft the
company’s constitutional documents: the memorandum of association and
articles of association. However, at this stage, the company has not come
into existence and, at common law, is incapable of contracting or to ratify a
contract after its incorporation.
9.49
Section 41 CA changes the position. Section 41(1) allows contracts entered
into prior to a company’s formation to be ratified by the company after its
incorporation and to bind the company thereafter. In the absence of such
ratification by the company, s 41(2) provides for persons who acted in the
name of or on behalf of the company in entering into pre-incorporation
contracts to be personally bound by the contract unless there is express
agreement otherwise. Reference may be made to a discussion of s 41 CA in
Chapter 20, para 20.21.
PRIVITY OF CONTRACT AND THIRD PARTIES
9.50
As mentioned, under the doctrine of privity of contract, only parties to a
contract can sue and are liable to be sued in respect of rights and obligations,
respectively, under the contract. Two rules emanate from this doctrine: first,
a third party to a contract cannot enforce a benefit promised under that
contract; and second, the contracting parties cannot, by a contract between
them, impose a burden on a third party. The first rule operates to protect
the rights of parties to a contract insofar as it does not allow interference
from third parties, while the second protects unsuspecting third parties from
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being involuntarily burdened by obligations under a contract to which they
are not privy.
9.51
The second rule is wholly understandable and uncontroversial. However,
the first has worked harshly against third parties whom the contracting
parties clearly intend to benefit under the contract. This is illustrated in the
case of Beswick v Beswick (1968). Peter Beswick sold his coal business to his
nephew, John Beswick, in return for a weekly payment of £6 10s from his
nephew for the rest of his life, and if he died leaving his wife a widow, she was
to receive £5 a week from the nephew for the rest of her life. John Beswick
honoured the agreement until his uncle’s death whereupon he then made
only one payment of £5 to his aunt. The widow claimed against the nephew
for specific performance of the rest of the payments. She claimed in her own
name as well as in her capacity as administratrix of her husband’s estate. The
court held that she could not personally claim against the nephew as she was
not privy to the contract between her husband and the nephew. However,
her claim as administratrix of her husband’s estate succeeded because, here,
she was claiming on behalf of her dead husband, and he had been privy
to the contract. In this case, the widow’s ability to sue as administratrix of
her husband’s estate “saved the day” for had she not been able to do so, she
would have been left without a remedy.
9.52
The first rule has also caused commercial inconvenience where it prevents
third parties, say employees, from being able to rely on “limitation of liability”
clauses contained in contracts between their employers and the claimants
(see Scruttons Ltd v Midland Silicones Ltd (1962)). Such limitation clauses
may well be a reasonable and legitimate way of allocating business risks and
the burden of insurance between the employer and the claimant.
9.53
As a result, there have been many judicial and ad hoc statutory attempts at
evading this first rule. The repeated calls for reform were finally answered
with the legislation of the Contracts (Rights of Third Parties) Act (Cap 53B,
2002 Rev Ed)) (“CRTPA”) in 2001. The CRTPA is closely modelled on the
English Act of the same name. A significant difference between these Acts is
that the Singapore CRTPA expressly dispels the possibility of any argument
based on the doctrine of consideration being raised to defeat a third party’s
claim (see s 2(5) which ends with the additional words “and such remedy
shall not be refused on the ground that, as against the promisor, the third
party is a volunteer”).
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Box 9.3
Reflecting
on the law
Privity of contract and consideration — a single or two distinct rules?
The doctrines of privity of contract and consideration are closely connected. This
is illustrated in Tweddle v Atkinson (1861) (see also, Chapter 8, para 8.18). The
respective fathers of a bride and groom contracted with one another, each promising
to pay a sum of money to the groom upon the couple’s marriage. The contract also
conferred upon the groom full power to sue the contracting parties for the sums
promised. The bride’s father failed to pay and upon his death, the groom sued his
estate for the sum. The groom’s action failed as he did not provide any consideration
for the promise. Although the privity rule was not used to explain the decision, it is
clear that the groom’s action would also have failed for lack of privity.
The relevant rule of consideration here is that “consideration must move from
the promisee”. The groom, being a third party to the contract between his and
his bride’s father, was neither a promisee nor had he provided consideration for
the promises. This is the paradigm situation where third parties are conferred
benefits under a contract and raises the question whether the doctrines of privity
and consideration are one and the same or whether they are distinct concepts that
present two separate hurdles to the enforcement of a third party benefit.
Since the House of Lords decisions in Beswick v Beswick (1968) and Scruttons Ltd
v Midland Silicones Ltd (1962), it is clear that consideration and privity are distinct
doctrines. A simple example supports this position: A contracts with both B and C
to supply C with a limited edition book in return for B’s promise to pay A $100.
Should A fail to supply C with the book, C’s action against A may still fail, not for
lack of privity, since he is a joint-promisee, but for lack of consideration moving from
him. [Note: If the “joint-promisee doctrine” discussed in the Australian case of Coulls
v Bagot’s Executor and Trustee Co Ltd (1967) is applied, C would be able to enforce
A’s promise as B is deemed to have supplied consideration on behalf of the jointpromisee C. The joint-promisee doctrine presupposes that consideration and privity
are distinct doctrines (for a fuller discussion of the doctrine, see A Phang, Cheshire,
Fifoot and Furmston’s Law of Contract (2nd ed, 1998) at pp 160–163).
It has also been argued that consideration and privity are distinct doctrines as
each performs a different function: the former relates to the types of promises that
can be enforced and the latter to who is entitled to sue (see, eg, D Beyleveld and
R Brownsword, “Privity, Transitivity and Rationality” (1991) 54 Modern Law Review
48 at p 61). Nevertheless, it has been astutely observed that the close connection
between the doctrines makes it is impossible to reform one without reforming the
other (see Ewan McKendrick, Contract Law (9th ed, 2011) at p 119). One or the
other may still prove a stumbling block to the enforcement of third party benefits.
9.54
The CRTPA does not override the existing common law or ad hoc statutory
techniques for evading the privity rule (s 8(1)) nor does it prevent new
techniques from being created. Thus, it is still necessary to consider, albeit
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briefly, some of the more common judicial and statutory techniques that
existed prior to the introduction of the CRTPA. The CRTPA and these
existing techniques will be discussed before we look at the techniques of
getting around the second rule; that of not imposing burdens on third parties.
THIRD PARTY ENFORCEMENT OF BENEFITS UNDER CONTRACT:
TECHNIQUES TO GET AROUND THE PRIVITY RULE
Statutory Techniques
(1) Contracts (Rights of Third Parties) Act (Cap 53B, 2002 Rev Ed)
9.55
Of the techniques to evade the privity rule, the CRTPA is the most important.
It provides a “general and wide-ranging exception to the [privity] rule” (as is
described of its UK counterpart in the UK Law Commission Report (1996)
at para 5.16). Due to constraints of space, only certain provisions not already
mentioned will be highlighted below.
(a) Scope of application
9.56
The CRTPA automatically applies to contracts entered into from 1 July 2002
(s 1(2)). Between 1 January and 30 June 2002, the CRTPA applies only if
the contract expressly provides for its application (s 1(3)). However, certain
contracts are specifically excluded from the scope of the CRTPA. These
are contracts on bills of exchange, promissory notes or other negotiable
instruments (s 7(1)), registration documents of a limited liability partnership
under the Limited Liability Partnerships Act 2005 or any such partnership
agreement under the Act (s 7(2A)), and any contract binding on a company
and its members under s 39 Companies Act (s 7(2)). For certain other
contracts, the CRTPA only confers limited rights to third parties. A third
party will not acquire a right under the CRTPA to enforce a term in a contract
of employment against an employee (s 7(3)), and the third party may only
acquire the right to enforce an exemption clause in contracts of carriage of
goods by sea, rail or road, or air which are subject to their respective rules
of international transport conventions (s 7(4)).
9.57
Apart from these specific exceptions and limitations, contracting parties are
at liberty to exclude or impose conditions precedent upon the application
of the CRTPA by inserting an express term to this effect in their contract
(s 2(4)).
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(b) Rights of third party to enforce contractual term
9.58
To acquire a right to sue in his name to enforce a term of a contract, a third
party must satisfy two requirements:
(1) He must have been either “expressly identified in the contract by name,
as a member of a class or as answering a particular description but
need not be in existence when the contract is entered into” (s 2(3)). The
groom in Tweddle v Atkinson (see Box 9.3) and the widow in Beswick v
Beswick (see para 9.51) will have satisfied this requirement having been
expressly identified. A subsequent purchaser of a property would come
within this requirement, although not identified by name, if the contract
between the property developer and the original purchaser provides that
the developer shall be liable to the original and subsequent purchasers
for defects in the development.
(2) The third party must fall within either one of the following situations:
9.59
°
the contract expressly states that he may enforce the term (s 2(1)(a)).
Thus, for example, s 2(1)(a) would enable the groom in Tweddle v
Atkinson to sue his father-in-law’s estate for payment as the contract
expressly conferred on him the right to sue; or
°
a term in the contract purports to confer a benefit on him (s 2(1)(b)).
This is subject to any contrary intention of the contracting parties
(not to allow third party enforcement of the term) as can be gleaned
from a proper construction of the terms of the contract (s 2(2)).
The scope and application of ss 2(1)(b) and 2(2) were considered in the
Singapore Court of Appeal decision of CLAAS Medical Centre Pte Ltd v
Ng Boon Ching (2010). The facts of the case are complicated; so only facts
relating to the issue of third party enforcement of a contract term will
be set out. Ng Boon Ching (“Ng”) was a doctor who had for many years
run his own successful private practice in aesthetic medicine and his own
distributorship business dealing in machines used in aesthetic medicine
(laser and intense pulse light machines) and skin care products. In 2004, six
doctors inexperienced in aesthetic medicine persuaded Ng to enter into a
joint-venture to help them establish an aesthetic medical practice. Ng agreed
and in 2005, the six doctors incorporated CLAAS Medical Centre Pte Ltd
(“CLAAS”) with all six as its shareholders. Ng subsequently also became a
shareholder. Ng incorporated a holding company as a sole shareholder and
transferred his private practice and distributorship business to the company.
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CLAAS then purchased 60 per cent of Ng’s shares in the holding company
and was given a 2-year-option to purchase the remaining 40 per cent. CLAAS
exercised the option about 7 months later in November 2005 whereupon
Ng entered into a shareholders’ agreement with the other six doctors. The
shareholders’ agreement contained, inter alia, the following terms:
° Clause 11: a restraint of trade clause prohibiting any of CLAAS’
shareholders from being engaged in any business in Singapore which
is in competition with the business of [CLAAS] and/or engage in the
practice of Aesthetic Medicine while still a shareholder of CLAAS and
for three years after ceasing to be one;
° Clause 11(c): a liquidated damages clause specifying that if Ng breached
Clause 11, he is liable to pay damages of $1 million to CLAAS while the
other doctors would, upon breach, have to pay CLAAS $700,000 each;
° Clause 12.1(ii): a termination clause allowing the shareholders’ agreement
to be brought to an end if all parties agreed to do so in writing; and
° Clause 14.5: a prohibition of assignment clause restricting the assignment
of rights and benefits under the agreement by any party without the
prior written consent of the other parties to the agreement.
In the following year, relations soured between Ng and the other doctors (the
original six and a new doctor-shareholder). Ng sold all his shares in CLAAS
to one of the original six doctors, resigned as director of CLAAS and the
holding company and left. Almost a month later, Ng set up his own general
and aesthetic medical practice at another location in Singapore. Significantly,
CLAAS was not a party to the shareholders’ agreement. A dispute therefore
arose as to whether CLAAS was entitled to rely on s 2(1)(b) CRTPA to
enforce the restraint of trade clause (Clause 11) against Ng.
9.60
Chao Hick Tin JA, delivering the judgment of the court, made some
illuminating observations and clarifications on the purpose and application
of ss 2(1)(b) and 2(2) CRTPA as follows:
° The intent behind ss 2(1)(b) and s2(2) was to distinguish between intended
and incidental beneficiaries to a contract — incidental beneficiaries were
not entitled to sue under the contract (at [29]).
° Section 2(1) only required proof of a purpose to benefit a third party;
it was not necessary to show a predominant purpose or intent to benefit
(at [28]).
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° The party of the contract who invoked s 2(2) bore the burden to prove
that a proper construction of the contract indicated that the parties
did not intend the term concerned to be enforceable by the third party
(at [29]).
° A proper construction of the contract under s 2(2) would involve an
objective approach to contractual interpretation (at [37]). Background
facts were relevant but only if they were part of the factual matrix upon
which the contract was entered into (at [37] and [41]). Further, mere
failure to expressly state in the contract that the third party had a right
to enforce the term did not of itself prevent a third party from acquiring
such a right under s 2(1). The absence of such an express statement in
the contract was also not proof that the parties did not intend to enable
the third party to enforce the term under s 2(2) (at [37]).
9.61
On the facts, the Court found (at [28]) that Clause 11 was clearly intended to
benefit the third party (CLAAS). The Court was satisfied that a presumption
that CLAAS was intended to be able to enforce Clause 11 was made out
since Clause 11(c) had expressly provided for liquidated damages for breach
of Clause 11 to be paid to CLAAS. As to whether the presumption was
rebutted, that is, whether a proper construction of the contract showed that
the parties to the agreement (the shareholders) did not intend to enable the
third party (CLAAS) to enforce the benefit under the contract under s 2(2),
the court held (at [33]) that the mere existence of Clause 12.1(ii) did not
rebut the presumption. Section 3(3) CRTPA spelt out the exact manner by
which parties to the agreement could override the third party’s rights (see
para 9.64). Clause 12.1(ii) provided for the shareholders to have a right to
terminate the agreement but failed to expressly provide for the right to be
exercisable without CLAAS’ consent, as would have been required by s 3(3)
in order to override CLAAS’ rights. Section 3(3) CRTPA would be rendered
superfluous if the mere presence of Clause 12.1(ii) was sufficient to rebut the
presumption. The court was further of the view (at [35]) that Clause 14.5
was not inconsistent with an express conferment of a benefit to a third
party — such conferment of benefit was not an assignment of the benefit.
As such, the existence of a clause which restricted assignments of benefits
did not rebut the presumption. The court also disagreed that the mere fact
that the third party was a corporate entity, and thus a distinct entity in law
from the shareholders, was not intended to be able to enforce a term in the
agreement that was entered into for the benefit the shareholders. The court
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found this argument to be senseless given that the shareholders had chosen
the corporate vehicle to “advance and protect their interests” and further
provided in their agreement for liquidated damages to be paid not to the
shareholders but to the corporate vehicle (at [39]).
9.62
The CRTPA expressly provides that a benefit enforceable by the third party
includes his being able to avail himself of the protection of an exemption
clause in a contract between the original contracting parties (s 2(6)) as long
as he would have been able to do so if he had been a party to the contract
(s 4(6)). An example is a contract between A and B in which A excludes or
limits his liability in the tort of negligence towards B and further states that
the term is also for the benefit of A’s servants, agents and sub-contractors
who may enforce the term. In this case, A’s sub-contractor may rely on
the clause to exclude or limit his liability when sued by B in the tort of
negligence, provided the exemption clause is valid and enforceable at law
(on exemption clauses, see Chapter 11).
(c) Remedies available to a third party
9.63
A third party who is entitled to enforce a term of the contract shall have
available to him remedies for breach of contract as if he is a party to
the contract (see, eg, Carriernet Global Ltd v Abkey Pte Ltd (2010)). The
contractual remedies include damages, specific performance and injunction,
and the usual rules governing the availability of these remedies apply (s 2(5))
(see Chapter 18 for the governing rules).
(d) Variation and rescission of contract
9.64
Where the third party acquires a right to enforce a term under s 2, and
the third party has either communicated his assent to the term to the
promisor (the contracting party against whom the third party would enforce
the term), or if he has relied on the term and this is known to or can
reasonably be expected to have been foreseen by the promisor, the contract
cannot be varied or rescinded so as to remove or alter the third party’s right
without his consent (s 3(1)). But this limitation may be pre-empted by the
contracting parties’ insertion of an express term reserving their right to vary
or rescind their contract without the third party’s consent (s 3(3)(a)). Indeed,
the contracting parties may, by an express term, even specify that the third
party’s consent is required in circumstances other than those stated above
(s 3(3)(b)).
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(e) Other provisions
9.65
Some other relevant provisions are as follows. A third party’s right of
enforcement is subject to defences or set-offs available to the promisor (s 4).
The promisor is also protected against double liability if sued by both the
third party and the other contracting party (“the promisee”) (s 6) as the
promisee’s right to enforce any term of the contract, including the term
which confers a benefit on the third party, is preserved (s 5) (see Figure 9.1
for who is a “promisor” and “promisee”).
PROMISEE of
Third party
Benet
A
A promises to, eg, sell his business to B
C
PROMISOR of
Third party
Benet
B
B promises to pay
$X to C in return for
A’s promise
THIRD PARTY
Figure 9.1
9.66
Promisor and promisee of the third party benefit
Under s 8(2), a third party is precluded from challenging an exemption
clause relied upon by the promisor (in his defence to a suit against him
by the third party) on the basis of s 2(2) Unfair Contract Terms Act (Cap
396, 1994 Rev Ed) (“UCTA”). Thus, if the promisor negligently fails to
honour the term conferring a benefit on the third party and this resulted in
loss or damage to the third party other than death or personal injury, the
third party cannot require that the promisor’s exemption clause be subject
to the test of reasonableness under UCTA. Not surprisingly, this provision
has been the subject of heavy criticism. Amongst others, it produces the odd
result that a third party suing a promisor under the CRTPA is denied
the safeguard of s 2(2) UCTA while it is possible that such a safeguard
is available if he were to mount an action in the tort of negligence (see
J Adams, D Beyleveld and R Brownsword, “Privity of Contract — The
Benefits and Burdens of Law Reform” (1997) 60 Modern Law Review 238 at
pp 258–263).
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(2) Other statutes
9.67
Prior to the enactment of the CRTPA, legislation had been introduced on an
ad hoc basis to deal with specific situations where it was felt that a third party
should be entitled to enforce a benefit conferred upon him. For example, s
9(2) Motor Vehicles (Third-Party Risks and Compensation) Act (Cap 189,
2000 Rev Ed) entitles a third party injured in a motor accident to claim
payment of the judgment sum awarded against the insured motorist directly
from the insurance company in certain circumstances. Another example is s
2 Bills of Lading Act (Cap 384, 1994 Rev Ed) which provides that the lawful
holder of a bill of lading — a shipping document — shall “have transferred
to and vested in him all rights of suit under the contract of carriage [of
goods by sea] as if he had been a party to that contract”.
Common Law Techniques
(1) Action by promisee on behalf of third party
9.68
If the privity rule prevents a third party from suing the promisor directly
to enforce the promised benefit, can the promisee sue on the third party’s
behalf? This avenue of recovering a third party’s loss is highly dependent
on the willingness of the promisee to do so. Technically, the promisee is
entitled to sue the promisor for a breach of any term of the contract. The
real issue is the type of remedies recoverable on behalf of the third party.
The remedy of specific performance would compel the promisor to do what
he has promised to do in the contract and hence will be effective to enforce
a third party’s benefit (see, eg, Beswick v Beswick). However, unlike damages,
specific performance is not available as of right upon a breach of contract.
It is a discretionary remedy and if damages are an adequate remedy, specific
performance will not be ordered. Thus, if specific performance is unavailable
but the promisee is willing to claim on behalf of the third party, can the
promisee claim substantial damages in respect of the third party’s loss?
9.69
The general rule is that a promisee is entitled to sue for breach of contract
to recover substantial damages in respect of the promisee’s own loss. Thus,
where the promisee himself has suffered no loss upon a breach of a term, for
example, to solely benefit a third party, the promisee will only be entitled to
nominal damages (possibly only $1). Lord Denning made a radical attempt
to introduce an exception to the general rule in Jackson v Horizon Holidays
(1975). Mr Jackson (“the promisee”) had contracted for a holiday for himself
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and his family (“the third parties”) but the holiday turned out to be below
the standard promised by Horizon Holidays (“the promisor”) who was clearly
in breach of contract. The promisee sued and was awarded £1,100 of which
£500 was for “mental distress”. The promisor appealed against the award as
excessive but the appeal was dismissed. While the majority judges felt that the
award was solely for the promisee’s loss (perhaps because his loss increased
on witnessing the disappointment of his family), Lord Denning alone held
that the award covered both the promisee and the third parties’ loss. His
Lordship felt that in certain contracts, such as where a host contracts with
a restaurant for dinner for himself and his friends or where a vicar books a
coach outing for the church choir, the contracting party-promisee should be
allowed to claim for the loss of the third parties. However, Lord Denning’s
approach was disapproved by the House of Lords in Woodar Investment
Development Ltd v Wimpey Construction UK Ltd (1980) which reiterated that
a promisee cannot recover damages on behalf of a third party. Interestingly,
the House also tentatively suggested that certain types of contracts might
warrant special treatment: contracts for family holidays, for meals in a
restaurant for a party or for hiring a taxi for a group. This suggestion has yet
to be applied as law.
9.70
Another controversial exception to the general rule was introduced by Lord
Browne-Wilkinson in Linden Gardens Trust v Lenesta Sludge Disposals (1994).
In this case, a building contractor (“promisor”) was in breach of its contract
with the owner of a site (“promisee”) for the development of the site into
offices, shops and flats. However, the particular difficulty in this case was that
defects appeared in the building works only after the development had been
sold to a third party. When the original owner-promisee sued the contractorpromisor for loss suffered by the third party in rectifying the defects, the
promisor argued that the promisee was only entitled to nominal damages
as they were no longer owners of the development and had not themselves
suffered any loss. The House of Lords held that the promisee was entitled to
claim in respect of the third party’s loss by applying a principle summarised
by Lord Diplock in The Albazero (1977) (at p 437e–f) as follows:
[I]n a commercial contract concerning goods where it is in the
contemplation of the parties that the proprietary interests in the goods
may be transferred from one owner to another after the contract has
been entered into and before the breach which causes loss or damage
to the goods, an original party to the contract, if such be the intention
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of them both, is to be treated in law as having entered into the contract
for the benefit of all persons who have or may acquire an interest in the
goods before they are lost or damaged, and is entitled to recover by way
of damages for breach of contract the actual loss sustained by those for
whose benefit the contract is entered into. [emphasis added]
The majority of the House of Lords felt it appropriate to extend this
principle (the “Albazero exception”) to cover cases involving real property
(ie, land and building) but not to cases where the third party had a direct
right of action against the promisor. On the facts, the House found that the
promisor and promisee contracted with knowledge that the development
would be occupied and, possibly, sold to third parties. The prohibition on
the promisee’s ability to assign the contract to a third party without the
promisor’s consent prevented the third party from suing on the contract (as
the promisor refused consent). This led the House to conclude that it must
have been the intention of the contracting parties that the promisee should
be entitled to claim for the third party’s loss due to the promisor’s defective
performance.
9.71
This approach was confirmed by the majority of the House of Lords in
Alfred McAlpine Construction Ltd v Panatown Ltd (2000): it was held that
the existence of a direct right of action by the third party (development
owner) against the promisor (building contractor) conferred by a “duty of
care deed” prevented the Albazero exception from being applied to enable
the promisee (employer who contracted for the building works) to sue for
the third party’s loss. Subsequent to the Linden Gardens case, the Albazero
exception was also extended to cover a situation where the promisee (an
employer who contracted for the building works) did not originally own the
property which was the subject of the building contract with the promisor
(building contractor) but nevertheless the promisee was held to be entitled
to claim in respect of the loss of the third party (development owner) for
defects in the property (see Darlington Borough Council v Wiltshire Northern
Ltd (1995)).
9.72
The Albazero exception, as extended by the House in Linden Gardens, came
to be known as the “narrow ground” of the Linden Gardens decision. The
Albazero exception (or “narrow ground”) applies only if there exists a “legal
black hole” that needs to be filled. The quaint metaphor refers to a situation
where a party with the legal right to sue had not suffered substantial loss
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while the one who did has no such right for lack of privity of contract —
precisely the situation that prevailed on the facts of the Linden Gardens case.
There is no legal black hole to fill if the party suffering substantial loss has
a right to sue. This explains why the House of Lords in Panatown found no
room for the application of the Albazero exception (or “narrow ground”) as
the third party concerned had a direct right to sue the promisor by virtue of
the “duty of care deed”.
9.73
Lord Griffiths in Linden Gardens disagreed with the majority decision (based
on the “narrow ground”) and preferred to characterise the third party loss
as being the promisee’s own loss, that is, the loss of his performance interest
in the contract because he did not receive what he bargained for (“the
broad ground”). The analogy he used (at pp 96–97) to illustrate his point is
illuminating:
In everyday life contracts for work and labour are constantly being
placed by those who have no proprietary interest in the subject matter
of the contract. To take a common example, the matrimonial home is
owned by the wife and the couple’s remaining assets are owned by the
husband and he is the sole earner. The house requires a new roof and
the husband places a contract with a builder to carry out the work. The
husband is not acting as agent for his wife, he makes the contract as
principal because only he can pay for it. The builder fails to replace the
roof properly and the husband has to call in and pay another builder
to complete the work. Is it to be said that the husband has suffered no
damage because he does not own the property? Such a result would in
my view be absurd and the answer is that the husband has suffered loss
because he did not receive the bargain for which he had contracted with
the first builder and the measure of damages is the cost of securing the
performance of that bargain by completing the roof repairs properly by
the second builder.
In Panatown, again, the minority judges, Lords Goff and Millet, were in
favour of Lord Griffiths’ approach and in fact held that the promisee could
claim for defects to the property as being his own loss. The “broad ground”
also received the qualified support of the majority judges in Panatown.
9.74
Locally, the “narrow ground” (or Albazero exception) has been applied by
the Singapore Court of Appeal in Chia Kok Leong and another v Prosperland
Pte Ltd (2005). Briefly, the facts of Chia Kok Leong are as follows: the claimant
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was the developer of a condominium. The claimant initiated legal proceedings
for breach of contract against (i) the main contractor for defective works in
the construction of the condominium; and (ii) the architects for failure to
exercise due care in the design and supervision of the building project. In
this instance, the claimant was the “promisee” and, the main contractor and
architects were the “promisors” in the respective contracts. However, legal
action was only commenced after the individual units in the condominium
had been sold to third parties and ownership of the common areas had
been taken over by the management corporation of the condominium (“the
MCST”), also a third party. The defects to the common areas (de-bonding
of tiles of external wall façade and damaged glass bricks at the lobbies and
stairways) only appeared after the claimant had ceased to be owner. At the
time of the claim, the claimant had not incurred expenditure to rectify the
defects and the MCST had yet to sue the claimant. As mentioned, the Court
of Appeal applied the “narrow ground” or Albazero exception to allow the
claimant (the promisee) to claim for substantial damages against the main
contractor and architects (the promisors), on behalf of the MCST (the third
party). This was despite the fact that the third party concerned, the MCST,
had a direct action against the promisors in the tort of negligence (as to
which, see Chapter 6, para 6.47). The Court of Appeal held (at [45]) that only
an express contractual “provision of a direct entitlement” of claim against
the promisor, such as the “duty of care deed” in Panatown will prevent the
application of the Albazero exception. The third party’s right of action in tort
did not completely remove the legal black hole as a claim in tort was subject
to the third party being able to establish elements of the tort (as to the tort
of negligence, see, generally, Chapter 6) and subject to certain defences.
9.75
Significantly, the Court of Appeal went on (at [48]–[59]) to consider and
approve the “broad ground” as being more consistent with principle (at
[52]). The Court held (at [59]) that, in principle, the promisee was entitled
to claim substantial damages on the broad ground. The Court agreed (at
[53]) with the rationale for the broad ground, that is, a promisee should
be entitled to claim because he did not receive what he had bargained and
paid for. The Court further agreed that the right to claim should not depend
on: (1) whether the promisee had ownership in the property, the subject
matter of the contract (at [53]); or (2) whether the third party had a direct
right to claim against the promisor, that is, whether there was any legal black
hole that needed to be filled (at [54]). Problems that might arise such as
double recovery against the promisor could be guarded against by the court
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exercising its discretion to join the third party to the proceedings brought by
the promisee under Order 15 rule 6 of the Rules of Court (Cap 322, Section
80, R5, 2006 Rev Ed) (at [56]). Additionally, the court opined (at [57]) that
there should not be a pre-requisite that the promisee must show that he
had carried out repairs or intended to do so before he was allowed to claim
substantial damages. The Court would scrutinise the reasonableness of each
claim in view of all relevant circumstances in any particular case.
9.76
Later, in Family Food Court v Seah Boon Lock and another (2008), the
Singapore Court of Appeal had occasion to restate its views on the general
scope of application of the “broad” or “narrow” grounds and to consider
whether they could apply where an agent was seeking to claim substantial
damages in the context of an undisclosed principal. The Court of Appeal’s
comments were entirely obiter — the Court of Appeal, disagreeing with the
High Court, had held the claimant to have contracted as a principal and not
as an agent. Nevertheless, they provide useful indications of the Court’s likely
approach to future cases. Essentially, the Court affirmed its endorsement of
both the “broad” and “narrow” grounds and the views expressed in relation
to each ground in Chia Kok Leong (while noting that the views on the “broad
ground” were obiter (at [51])). Additionally, the Court observed as follows:
° The loss recoverable under the “broad ground” must be genuine and
is subject to an objective test of reasonableness to prevent the promisee
from obtaining a windfall (at [53]).
° Losses recoverable for breach of contract, whether under the “broad”
or “narrow” ground, are subject to the usual legal controls on recovery,
that is, the need to satisfy the requirements of causation, remoteness,
mitigation and certainty (as to which, see Chapter 18, para 18.38
onwards) (at [55]).
° The “broad” and “narrow” grounds cannot be applied simultaneously as
they are conceptually inconsistent (at [56]).
° Where an agent is seeking to claim substantial damages on behalf of an
undisclosed principal, the “narrow ground” is inapplicable. The Albazero
exception applies only if the parties, at the time of contract, contemplated
that the proprietary interest in the subject matter of the contract would
be transferred by the promisee to a third party after the contract was
made but prior to any breach. Such contemplation is absent where a
party contracts with an agent without knowledge that the other party is
acting as an agent and that a principal exists (at [58]).
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° In the context of an undisclosed principal, the law is unsettled as to
whether the “broad ground” applies. The Court chose not to decide
the matter conclusively but noted that potential problems concerning
the amount of damages recoverable by the agent could be resolved by
joining the principal as a party to proceedings initiated by the agent (at
[62]).
(2) Collateral contracts
9.77
Sometimes, the courts are prepared to circumvent the privity rule through
the implication of a collateral contract. This method has been criticised as
being rather artificial. An oft-cited example of its use is Shanklin Pier LD
v Detel Products LD (1951). The defendants were paint manufacturers who
had assured the plaintiffs, the pier owners, that their paint would last for
seven to ten years. On the basis of this assurance, the plaintiffs instructed
the contractors whom they engaged to paint the pier, to purchase paint from
the defendants for that purpose. As instructed, the contractor contracted to
buy the defendants’ paint. But the paint was not as durable as represented;
in fact, it only lasted three months. The plaintiffs sued the defendants and
succeeded even though there was no express contract entered into between
them. The court held that on the facts, it was able to imply a collateral
contract in which the defendants had promised that their paint would last
for seven to ten years and in consideration of this promise, the plaintiffs
had requested their contractors to purchase and use the defendants’ paint for
their pier.
(3) Himalaya clause
9.78
Another method to evade the privity rule is illustrated in the cases of
Scruttons Ltd v Midland Silicones Ltd (1962) and New Zealand Shipping
Co Ltd v AM Sattherwaite & Co Ltd (The Eurymedon) (1975). This technique
is applicable only to enable a third party to rely on an exemption clause in a
contract to which they are not privy. The technique emerged in the context
of the shipping industry in which a carrier of goods by sea sought to extend
the benefit of an exemption clause in their contract of carriage with the owner
of goods (“cargo owner”), to third parties (usually the stevedores employed
by the carrier to unload the cargo owner’s goods from the carrier’s vessel).
Such an exemption clause is usually negotiated as a method of allocating
business risks and the burden of insurance between the parties involved. In
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the two cases mentioned above, the stevedores had negligently damaged the
goods in the course of unloading and thus were sued by the cargo owners
in the tort of negligence. In defence, the stevedores sought to rely on the
exemption clause contained in the contract of carriage to which they were
not privy.
9.79
Perhaps in recognition of the commercial convenience of upholding such a
clause, if it was a legitimate one under the law, Lord Reid (at p 474) in the
Scruttons case was prepared to allow the third party stevedores to rely on the
exemption clause if the following four conditions were satisfied:
[T]he bill of lading [the contract of carriage of goods by sea] makes it
clear that the stevedore is intended to be protected by the provisions in
it which limit liability, the bill of lading makes it clear that the carrier,
in addition to contracting for these provisions on his own behalf, is also
contracting as agent for the stevedore that these provisions should apply
to the stevedore, the carrier has authority from the stevedore to do that,
and that any difficulties about consideration moving from the stevedore
were overcome.
These conditions are not easily satisfied. In fact, the clause in Scruttons itself
failed to meet the four conditions as, amongst others, the clause made no
reference to the stevedores at all.
9.80
The four conditions were found to be satisfied in the subsequent case of The
Eurymedon. The exemption clause involved was lengthy and elaborate and is
now known as the “Himalaya Clause”. The clause provides:
It is hereby expressly agreed that no servant or agent of the carrier
(including every independent contractor from time to time employed by
the carrier) shall in any circumstances whatsoever be under any liability
whatsoever to the shipper, consignee or owner of the goods or to any
holder of this bill of lading for any loss or damage or delay or whatsoever
kind arising or resulting directly or indirectly from any act neglect or
default on his part while acting in the course of or in connection with
his employment and, without prejudice to the generality of the foregoing
provisions in this clause, every exemption, limitation, condition and
liberty herein contained and every right, exemption from liability,
defence and immunity of whatsoever nature applicable to the carrier
or to which the carrier is entitled hereunder shall also be available and
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shall extend to protect every such servant or agent of the carrier acting
as aforesaid and for the purpose of all the foregoing provisions of this
clause the carrier is or shall be deemed to be acting as agent or trustee
on behalf of and for the benefit of all persons who are or might be his
servants or agents from time to time (including independent contractors
as aforesaid) and all such persons shall to this extent be or be deemed to
be parties to the contract in or evidenced by this bill of lading.
In The Eurymedon, the defendant stevedores were able to satisfy the first
three conditions laid down by Lord Reid in Scruttons. The Himalaya Clause
above, contained in the contract of carriage of goods by sea evidenced by
the bill of lading, did clearly state that the exemption is also to protect any
servant or agent of the carrier including any independent contractor from
time to time employed by the carrier. The stevedores obviously fell within
this category. The clause also made clear that the carrier contracted for the
exemption clause as agent on their behalf. As the carrier in this case was a
wholly owned subsidiary of the stevedores, they had the authority to act on
behalf of the stevedores. The court, however, engaged in some strained and
rather artificial reasoning in finding that the fourth condition was satisfied.
They held that there was a unilateral collateral contract between the cargo
owners and the stevedores analysed as follows: When the cargo owners
entered into the contract of carriage of goods with the carrier, they made
a unilateral offer to extend the benefit of the exemption clause to anyone
who unloaded their goods at the port of destination. The stevedores’ act of
unloading their goods thus constituted both the acceptance of the offer as
well as the consideration in return for the benefit of the exemption clause.
And this contract is collateral to the main contract of carriage of goods
between the cargo owners and the carrier. Given that the provision under
s 2(6) CRTPA (and under s 7(4)(a) where an exemption clause contained
in a contract of carriage of goods by sea is concerned) now enables a third
party a more direct method of enforcing an exemption clause in a contract
to which he is not privy, there may no longer be a need to resort to this
complicated technique.
(4) Assignment
9.81
If A assigns or transfers his right(s) under his contract with B to a third
party, the third party will be able to enforce those rights in his own name
against B. In Singapore, a legal assignment can be effected under s 4(8)
Civil Law Act (Cap 43, 1999 Rev Ed) through an absolute assignment of the
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right(s) in writing, signed by the assignor (A), and where written notice of
the assignment has been given to the other party to the contract (B). The
consent of B to the assignment is unnecessary. The main disadvantage of
this technique to get around the privity rule is that the third party assignee
takes “subject to equities”; any claim made by the third party upon B is
subject to such valid defences as B may raise against A. An assignment
that does not satisfy all the requirements under s 4(8) above may still be
effective as an equitable assignment if there is clear evidence that the assignor
clearly intended the assignee to have the benefit of his right(s) under the
contract.
(5) Tort of negligence
9.82
A common technique to get around the difficulty of mounting an action in
contract is to make a claim in tort. Specifically, third parties have sought
to base their claim in the tort of negligence to get around the privity
rule. For example, a subsequent purchaser of a condominium unit finds
defects appearing in the property and seeks to claim against the developer
in respect of his loss. The privity rule would prevent a claim in contract
against the developer as the subsequent purchaser is a third party to
the contract between the developer and original purchaser. For the
requirements to successfully mount an action in the tort of negligence, see
Chapter 6.
(6) Agency
9.83
An agent is a person authorised by his principal to enter into a contract with
another on the principal’s behalf. The agent is the party who negotiates and
concludes the contract with the intention that his principal (the ostensible
third party) should be entitled to the rights and obligations under the
contract. Where the other party is well aware that he is negotiating with an
agent, no problem of privity arises for the ostensible third party principal.
However, where the agent fails to disclose that he is acting for a principal,
the principal may, in certain circumstances, still assert his rights under the
contract with the other party. Here, the law of agency appears to permit the
privity rule to be circumvented by the third party undisclosed principal (see
Chapter 20, paras 20.35–20.37 for a fuller discussion). This is not so much a
technique employed to get around the privity rule as an incident of the law
of agency.
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(7) Law of trusts
9.84
Where a trust has been constituted for a third party’s benefit, the law of
trusts will enable the third party to enforce the benefit against a contracting
party. The third party’s right of enforcement is not based on contract law but
the specialised area of the law of trusts which is beyond the scope of this
chapter.
(8) Other common law techniques
9.85
To conclude this part, the technique introduced by the Canadian Supreme
Court in London Drugs Ltd v Kuehne & Nagel International Ltd (1993) should
be mentioned. The majority of the court, eschewing the analysis adopted by
The Eurymedon (see para 9.80), held that third party employees were able
to avail themselves of an exemption clause contained in a contract between
their employer and the claimants provided:
° the benefit of the exemption clause was expressly or impliedly extended
to these employees; and
° the employees seeking to rely on the exemption clause had been, at
the time the loss and damage occurred, acting in the course of their
employment and performing the very services undertaken in the said
contract.
IMPOSING BURDENS ON THIRD PARTIES:
TECHNIQUES TO GET AROUND THE PRIVITY RULE
Sub-bailment Contracts
9.86
Typically, a bailment arises when an owner of goods (“bailor”) parts with
the possession of his goods by delivering them to another person (“bailee”)
to hold for a time or to have something done to them before returning
possession of the goods to the bailor. An example is where jewellery is taken
to jewellers for repair. A sub-bailment arises when the bailee, in turn, bails
the same goods to a sub-bailee. The relevant question is whether a third
party (the bailor) is burdened by an exception clause contained in the
sub-bailment contract between the contracting parties (the bailee and subbailee). The answer is that if the third party bailor has expressly or impliedly
consented to the terms of the sub-bailment, then the bailor can indeed be
bound (Morris v CW Martin & Sons Ltd (1966)).
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Land Law
9.87
A third party may be bound by a restrictive covenant contained in a contract
for the sale of land between the contracting parties (see Tulk v Moxhay
(1848)). This principle is unique to land law which is beyond the scope of
this chapter.
Unlawful Interference with Contractual Rights
9.88
If a third party knows that A and B have contracted with one another, the
third party is under an obligation (burden) not to induce either A or B to
breach his contract with the other. This is an obligation imposed by the law
of tort (tort of inducing a breach of contract, discussed in Chapter 5) rather
than by the contracting parties and as such, is not strictly a technique to
evade the privity rule.
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Chapter 10
Terms of the Contract
10.1–10.7
Introduction
10.8–10.22
The Parol Evidence Rule and the Interpretation of Contracts
10.23–10.26
10.27
10.28–10.29
10.30
10.31
10.32–10.35
Terms and Representations
Introduction
Request to Verify
Importance of the Statement
Timing of the Statement
Oral Statements and Written Contracts
Special Skill and Knowledge
10.36–10.39
10.40–10.43
10.44–10.47
10.48–10.56
Relative Importance of Terms
Warranties, Conditions and Innominate Terms
Differentiating between Conditions and Warranties
The “Hong Kong Fir Approach”
The New Singapore Approach: A Synthesis between the Condition–
Warranty and Hong Kong Fir Approaches
10.57–10.61
10.62–10.68
10.69–10.72
10.73–10.74
10.75–10.76
Implied Terms
Terms Implied in Fact
Terms Implied in Law
Terms Implied by Statute
Terms Implied by Custom
10.77
Conclusion
Principles of Singapore Business Law
INTRODUCTION
10.1
Parties who acknowledge that there is a contract between them may disagree
about the contents of the contract. The law on contractual terms provides rules
on how to resolve this disagreement. This area of the law provides rules on
how the precise obligations of the parties to a contract are to be ascertained,
and once these have been ascertained, the manner in which such obligations
should be categorised to determine the remedies available upon breach of
such obligations. Judges have developed most of these rules. But important
statutes, such as the Sale of Goods Act (Cap 393, 1999 Rev Ed), also contain
rules on the subject that have been further clarified by judges who have to
interpret such legislation. The law on contractual terms attempts to achieve
several objectives designed to promote contractual efficacy without violating
the principles, first, that courts do not make contracts for the parties and,
second, that the various technical rules are designed to find out and give
effect to the intentions of the parties on an objective basis.
10.2
In order to improve contractual efficacy, the first objective is to promote
certainty and to fill the gaps relating to matters in the contract that were not
addressed by the parties. Rules designed to separate contractual obligations
from statements that are not part of the contract, rules for protecting
written contracts from being undermined by extrinsic evidence and rules
for implying terms in circumstances not envisaged by the parties are all
designed to foster predictability.
10.3
The second objective is to integrate social and public interest policies in
certain types of contracts so that these contracts will be performed in
conformity with such policies. The next chapter discusses the circumstances
under which the law intervenes to limit the scope of terms that attempt to
relieve one party from liability for loss or damage caused to the other party.
Finally, the law acknowledges the truism that some terms of a contract are
so important that if they are breached, the innocent party will be deprived of
a substantial benefit under the contract and that he or she should therefore
be allowed to terminate the contract. On the other hand, there are other
terms that are not so important and if breached, the contract must still be
performed by the innocent party who can be compensated with damages
for that breach. There may also be terms which, upon breach, result in the
innocent party being deprived of a substantial benefit in some cases but not
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in others. It is of course open to the parties to structure their bargain in
such a way that even the smallest infraction of an obligation could give the
innocent party the right to terminate the contract. Conversely, the parties
could agree explicitly that a breach of an important obligation does not
give the innocent party the right to terminate the contract. In practice,
this rarely happens and the courts have generally used rules to ascertain
the contracting parties’ intentions as to the importance of the terms to
determine the appropriate remedy for the innocent party upon a breach
of any particular term. Not infrequently, the parties complicate matters
by loosely referring to the “terms and conditions of the contract” and the
courts have to separate the layperson’s usage of language from legal usage.
Accordingly, the law of contractual terms attempts to promote contractual
efficacy by creating a hierarchy of obligations within the contract itself
so that breaches of a minor obligation and/or of a minor nature will not
permit the destruction of the transaction by authorising the innocent party
to terminate the contract.
10.4
In the thousands of contracts made every day, the parties explicitly agree
only on a few main terms. A buyer-consumer and a supermarket-seller of
a product usually engage in a sales transaction without considering critical
issues such as the quality of the product and the seller’s title to the goods.
Likewise, a householder-buyer and a home-repair services contractor could
agree on the scope of the repair, the payment to be made and the completion
date but leave out other important features in this type of contract. This is
often the way it should be. If the parties to a contract try to anticipate and
iron out every possible situation over which a dispute may arise, they will
squander precious time and probably not agree on a contract. Moreover, the
vast numbers of people who make contracts have not studied contract law
and should not be expected to know everything that could go wrong in a
particular transaction. Accordingly, the law allows people to contract freely,
and what they explicitly agree on, the law refers to as “express terms”. After
this, the law steps in and fills in the blanks, if and when necessary, by terms
referred to as “implied terms” and the process of such gap-filling will be
different depending on whether the terms to be implied are those which the
courts would regard as terms implied in fact or implied in law.
10.5
In some cases, the parties enter into a contract after lengthy negotiations
involving not only themselves but also their advisors such as lawyers and
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accountants. During these negotiations, each side will try to persuade the
other of their point of view and a seller will naturally make various claims
for products or services that are the subject of the transaction. Because of
their context, these negotiations could give rise to two sets of problems. First,
when the parties enter into a written contract, one party may later allege
that the written contract does not faithfully and comprehensively contain the
entire agreement. This party may demand the right to introduce evidence of
terms, whether they are a statement of fact or promises, not contained in the
written contract. To deal with these situations, the law has a rule, the parol
evidence rule, which excludes extraneous evidence meant to contradict or
vary the language of a written contract except in limited circumstances (see
para 10.8 onwards). Second, one party may allege that during the negotiation
phase, the other party induced her to enter into the contract by making a
statement of fact that became part of the contract. After the contract was
concluded, she finds that the statement was untrue and wishes to sue for
breach of contract. A court would examine her claim by finding out if the
statement was a representation or a term and will allow her to sue for a
breach of contract only if it was the intention of the parties to make the
statement a term of the contract. If, on the other hand, the court finds that
the statement is not a term but a representation that is false, the party who
relied on that statement might have a possible action for misrepresentation
(see, generally, Chapter 13).
10.6
Finally, even where the terms of a contract have been ascertained and precisely
defined, the law does not treat all the terms as being of equal weight. As
observed earlier, it is open to the parties to specify certain obligations as so
important that their breach would give rise to a right of termination and to
specify yet other obligations that do not give rise to a right of termination but
only damages whereby the innocent party is required to continue performing
her obligations under the contract and be satisfied with the damages given for
the breach of the less serious obligation. However, in practice, parties rarely
make such distinctions and a court must categorise the type of obligations
the breach of which would give rise to different rights. For instance, in a
computer sales contract, a small scratch on the casing of the CPU is not as
serious as a defective hard disk.
10.7
The discussion that follows addresses four groups of circumstances, broadly
illustrated below, that typically give rise to disputes over contract terms:
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(1) The parties A and B, who engaged in pre-contractual negotiations,
concluded a contract in writing. Party A discovers that what she
thought had been orally agreed with Party B is missing from the written
contract or some other clause contradicts what she thought was a verbal
understanding. May Party A prove the oral agreement to contradict, vary
or add to the written contract? Additionally, what meaning should be
given to the terms of a written contract, that is, how should the terms
be interpreted? May Party A or B ask the court to consider matters
not contained in the written contract, such as statements made in the
pre-contractual negotiations or earlier drafts of the written contract, to
decide what the parties had agreed on?
(2) During the negotiations that preceded the contract, one party made
certain claims in respect of the product or service to be sold. After the
contract is concluded, the other party finds that the claim with regard to
the product or service that she regarded as important proves to be false.
May this other party allege that such statement is a part of the contract
and sue the party who made the statement for breach of contract?
(3) The terms of the contract do not carry equal weight. How does a court
determine which terms give rise to extensive remedies upon breach and
which do not? What factors or circumstances are relevant in the process
of determination?
(4) Where the contract does not provide for a particular eventuality, how do
the courts “fill in the blanks” and what principles do they use to do so?
THE PAROL EVIDENCE RULE AND THE INTERPRETATION OF CONTRACTS
10.8
The Singapore Evidence Act (Cap 97, 1997 Rev Ed) (“EA”) has codified the
parol evidence rule, a rule that originated from the English common law, and
some but not all, of the exceptions to the rule found at common law. The
parol evidence rule states that when the parties have reduced their contract
to writing, either party may not attempt to show by extrinsic evidence that
the terms in the written contract must be changed, added to, or contradicted.
Contract law attempts to reduce uncertainty wherever possible. The parol
evidence rule supports this outcome by adopting the position that where
the parties have taken the step of putting their contract in writing, none
of these parties should be allowed the opportunity to displace the contents
of the written contract by reference to evidence of anything not within the
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written contract (ie, extrinsic evidence). Technically, “parol” evidence refers
to evidence of any “oral” agreement or statement. In practice, the parol
evidence rule has also been applied to exclude evidence not orally made, for
example, evidence of terms recorded in another document not specifically
referred to in the written contract. A little reflection shows why practical
considerations require this rule. Without this rule, the written contract may
not be worth the paper it is written on. Moreover, third parties, such as
banks, that were induced to lend money to one party in reliance on the
written contract may find that the cash flow anticipated under the written
contract will be disrupted because of the operation of terms not found in the
written contract.
10.9
Applied rigidly, however, the parol evidence rule can produce great injustice
that could outweigh the benefits of certainty. In England, judges have devised
certain exceptions to reduce injustices that may flow from an unwavering
application of the parol evidence rule. The need for some of these exceptions
is, on examination and reflection, quite obvious as they are based on avoiding
injustice while other exceptions are based on technical contract rules. The
main English common law exceptions are as follows:
° A party may dispute the validity of the written contract by showing,
through extrinsic evidence, that the contract was the result of mistake, a
lack of consideration, or of misrepresentation (see, eg, Edwin Peel, Treitel:
The Law of Contract (13th ed, 2011) at para 6–015 and cases referred to;
see also the equivalent in Singapore law — proviso (a) to s 94 EA).
° A party may show by extrinsic evidence a mistake in the written contract
and prove what the contract should have read instead of its disputed
term. For example, a written agreement to sell a recent model of a
luxury car may refer to a selling price of $500. The seller will be allowed
to introduce evidence to show that the real price agreed upon was
$500,000. Reference may also be made to Joscelyne v Nissen (1970), where
a daughter’s undertaking to pay utility bills, although not included in the
written contract between father and daughter, was held enforceable.
° A party may also adduce extrinsic evidence to show that the written
contract has not yet come into existence or that it is no longer in
operation. Sometimes, parties agree that their contract would come into
existence only upon the occurrence or non-occurrence of a certain event
by a certain date, or that if something has not occurred by a certain
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date the contract would cease to exist. For example, in a contract of
employment, the parties may verbally agree that the contract would come
into existence only if the employee obtains her professional qualification
by a certain date, or the contract would end if the employee did not
obtain the qualification by a certain date. Reference may also be made
to Pym v Campbell (1856) where extrinsic evidence was allowed to the
effect that the obligation to buy shares in an invention contained in a
written agreement was conditional upon a third party approving the
invention, of which the approval had not been received (see also the
local equivalent in proviso (c) to s 94 EA).
° A party may be allowed to offer extrinsic evidence to demonstrate that
a particular custom of the trade must be implied into, and therefore
become part of, the written agreement. See, for example, Smith v Wilson
(1832), where evidence of local custom to show that “1,000 rabbits” in
the written contract really meant “1,200 rabbits” was allowed.
10.10
In England, the numerous common law exceptions together with the
English courts’ shift to the contextual approach to interpretation of terms
in a written contract have stirred debate over whether the parol evidence
rule still survives. Briefly, the contextual approach allows evidence of matters
not within the written contract to be admitted in court to prove the factual
context in which the contract was made to shed light on the meaning to be
given to a term (see further, para 10.16 onwards). In Singapore, however, the
Court of Appeal in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior
Design & Construction Pte Ltd (2008) has declared (at [111]) that the parol
evidence rule “lives on in s 94 of the [Singapore] Evidence Act”.
10.11
In Singapore, ss 93 and 94 EA codify the parol evidence rule and its major
common law exceptions. Section 93 states that where the parties have
reduced their contract to writing, “no evidence shall be given in proof of the
terms of such contract … except the document itself, or secondary evidence
… in which secondary evidence is admissible under the provisions of this
Act”. Thus if parties have drawn up a written contract with the intention
that the written document should embody the entire agreement between
the parties, s 93 makes clear that parties may only prove the terms of their
agreement by producing the written document alone. Secondary evidence
merely refers, inter alia, to certified, electronic or other types of copies of
the original document (see s 65 EA) and is not extrinsic evidence excluded
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by the parol evidence rule. Section 94 states that where a written contract
is shown to exist, no oral evidence shall be admitted “for the purpose of
contradicting, varying, adding to, or subtracting from its terms” subject to
certain exceptions.
10.12
In Zurich Insurance, VK Rajah JA (delivering the judgment of the court)
explained the interplay between ss 93 and 94 EA thus (at [71]):
Section 94 complements s 93 by ensuring that where the sole evidence
of a contract consists of “the document itself ” (per s 93), that contract
is not varied, contradicted, added to or subtracted from unless the
circumstances described in one or more of the six accompanying
provisos (ie, provisos (a)–(f) to s 94) are satisfied. Put another way, it
is often said that s 93 makes documentary evidence exclusive while s 94
makes it conclusive …
[emphasis in the original]
10.13
While s 94 EA enumerates six sets of circumstances in which extraneous
evidence could be used to vary the terms of a written contract, the English
common law recognises more exceptions — some of which are inconsistent
with the exceptions in s 94 EA. For example, the common law exception
relating to collateral contracts allows terms in the oral collateral contract to
override inconsistent terms contained in the main written agreement (see, eg,
the English High Court decision of City and Westminster Properties (1934) Ltd
v Mudd (1959)). The facts of Mudd provide a good illustration of a collateral
contract and the operation of this exception. In Mudd, a tenant had lived on
the rented premises for some years. When it was time to renew the lease,
the landlord wanted to insert a new term in the written lease to restrict the
use of the premises to “showrooms, workrooms and offices only”. The tenant
objected to the new term but the landlord insisted on its inclusion because
of alleged rent control concerns. Thus, before agreeing to sign the new lease,
the tenant sought assurance from the landlords that they would not object
to his continuing to live on the premises. It was only upon receiving the
landlord’s oral assurance that the tenant signed the lease. Years later, the
landlords sued the tenant for breach of the restriction of use term. The court
held that the tenant was not in breach as the term in the written lease (the
main contract) had been overridden by the landlord’s oral assurance (in the
collateral contract). The special circumstances of the case led the court to
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imply that a collateral contract existed that ran alongside the main contract.
The terms of the collateral contract were the landlord’s oral promise given in
return for the tenant agreeing to enter into the main contract.
10.14
In contrast, proviso (b) to s 94 EA states:
[T]he existence of any separate oral agreement, as to any matter on
which a document is silent and which is not inconsistent with its terms,
may be proved; in considering whether or not this proviso applies, the
court shall have regard to the degree of formality of the document.
[emphasis added]
Thus, in Latham v Credit Suisse First Boston (2000), the Singapore Court of
Appeal refused to admit extrinsic evidence of an oral agreement pertaining
to a guaranteed bonus, alleged to have been made during prior negotiations,
to contradict the written employment contract which provided for a
discretionary bonus.
10.15
An issue that has been raised in Singapore is whether it is possible to invoke
exceptions from the English common law that are not reflected in the provisos
to s 94 EA. In China Insurance Co (Singapore) Pte Ltd v Liberty Insurance
Pte Ltd (2005), Phang JC (as he then was) reiterated (at [39]–[41] and [45])
the views he expressed as a legal academic, obiter, that the common law
exceptions to the parol evidence rule insofar as they are consistent with the
EA continue to be applicable as they are not expressly excluded by s 2(2) EA.
Section 2(2) EA states that all “rules of evidence not contained in any written
law, so far as such rules are inconsistent with any of the provisions of this
Act, are hereby repealed” [emphasis added]. In response to the learned
judge’s call for legislative reform to clarify this issue (among others, at [44]
and [66]), the Law Reform Committee of the Singapore Academy of Law
(“LRC”) reviewed the parol evidence rule and recommended in substance
that the judge’s view be adopted (see LRC Report 2006 at [93] and [114]).
10.16
Another issue the learned judge thought needed clarification and reform
was the applicability of the common law principle permitting extrinsic
evidence to be admitted to determine facts surrounding the making of the
contract to aid in the interpretation of the terms of the written contract —
the contextual approach (see China Insurance at [46]). Specifically, whether
the contextual approach was embodied by proviso (f) to s 94 EA and that
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extrinsic evidence was admissible under proviso (f) without a prerequisite
of ambiguity in the written terms in the first place. Some Court of Appeal
decisions had indicated a need for such a prerequisite in the past (see Citicorp
Investment Bank (Singapore) Ltd v Wee Ah Kee (1997) and Tan Hock Keng
v L & M Group Investments Ltd (2002)). The LRC has since recommended
not imposing a prerequisite of ambiguity before extrinsic evidence can be
admitted under proviso (f) to s 94 EA. Significantly, the Zurich Insurance
decision has clarified beyond doubt that the contextual approach applies in
Singapore by virtue of proviso (f) to s 94 EA without any prerequisite of
ambiguity.
10.17
VK Rajah in Zurich Insurance clarified the law in Singapore on “whether,
when and to what extent extrinsic evidence may be admitted for the purposes
of interpreting a written contract …” (see [109]). His summary of the law is
as follows (at [132]):
(a) A court should take into account the essence and attributes of the
document being examined. The court’s treatment of extrinsic evidence
at various stages of the analytical process may differ depending on
the nature of the document. In general, the court ought to be more
reluctant to allow extrinsic evidence to affect standard form contracts
and commercial documents …
(b) If the court is satisfied that the parties intended to embody their entire
agreement in a written contract, no extrinsic evidence is admissible to
contradict, vary, add to, or subtract from its terms (see ss 93–94 of
the Evidence Act). In determining whether the parties so intended, our
courts may look at extrinsic evidence and apply the normal objective test,
subject to a rebuttable presumption that a contract which is complete on
its face was intended to contain all the terms of the parties’ agreement …
(c) Extrinsic evidence is admissible under proviso (f) to s 94 to aid in the
interpretation of the written words. Our courts now adopt, via this
proviso, the modern contextual approach to interpretation, in line with
the developments in England in this area of the law to date. Crucially,
ambiguity is not a prerequisite for the admissibility of extrinsic evidence
under proviso (f) to s 94 …
(d) The extrinsic evidence in question is admissible so long as it is relevant,
reasonably available to all the contracting parties and relates to a clear
or obvious context [surrounding the making of the contract] ... However,
the principle of objectively ascertaining contractual intention(s) remains
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paramount. Thus, the extrinsic evidence must always go towards proof
of what the parties, from an objective viewpoint, ultimately agreed upon.
Further, where extrinsic evidence in the form of prior negotiations and
subsequent conduct is concerned, … there should be no absolute or
rigid prohibition against evidence of previous negotiations or subsequent
conduct, although, in the normal case, such evidence is likely to be
inadmissible for non-compliance with the requirements [that the evidence
relates to a clear and obvious context and proves what parties objectively
intended] … (We should add that the relevance of subsequent conduct
remains a controversial and evolving topic ...)
(e) In some cases, the extrinsic evidence in question leads to possible
alternative interpretations of the written words (ie, the court determines
that latent ambiguity exists). A court may give effect to these alternative
interpretations, always bearing in mind s 94 of the Evidence Act. In
arriving at the ultimate interpretation of the words to be construed, the
court may take into account subjective declarations of intent …
(f) A court should always be careful to ensure that extrinsic evidence is
used to explain and illuminate the written words, and not to contradict
or vary them. Where the court concludes that the parties have used the
wrong words, rectification may be a more appropriate remedy …
10.18
To illustrate the application of some of these principles, the facts and decisions
of a few cases are considered. In Zurich Insurance, Mediacorp Pte Ltd
(“Mediacorp”) contracted with B-Gold Interior Design and Construction Pte
Ltd (“B-Gold”) to carry out maintenance, repair, addition and alteration works
at Mediacorp’s premises as and when required for a stated period. A term of
the contract requires B-Gold to obtain “policies of insurance indemnifying
Mediacorp, the Contractor [ie, B-Gold] and all its sub-contractors against
damage to persons and property, for Workmen’s Compensation and fire”.
Yeo, a director of B-Gold, contacted Lee, a general insurance agent with
American International Group (“AIG”) to obtain a quote for the necessary
cover. Lee told Yeo that AIG does not provide such cover and advised Yeo
to approach other insurance companies. Yeo requested Lee’s help to do this.
Lee contacted Long, an ex-colleague who was then an insurance agent with
Zurich Insurance (Singapore) Pte Ltd (“ZI”), to inquire if ZI provided such
cover. Upon Long’s positive reply, Lee faxed initial instructions to ZI through
Long and provided B-Gold’s contract documents with Mediacorp. Lee later
faxed an undated note to Long requesting, inter alia, a Contractor’s All
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Risks (“CAR”) policy cover although the type of policy required of B-Gold
was not specified in its contract with Mediacorp. Long then confirmed to
Lee that ZI could offer the requested cover and this led to the issue of a
CAR policy to B-Gold. The salient terms of the policy were:
° Section II which covered third party liability, that is, the damages
B-Gold becomes liable to pay third parties upon “accidental loss or
damage to third parties’ property”.
° Clause 4(b) (listed under the heading “SPECIAL EXCLUSION TO
SECTION II”) excluded coverage of B-Gold’s “liability consequent upon
loss of or damage to property belonging to or held in care, custody or
control of the Contractor(s), the Principal(s) [ie, Mediacorp] or any
other firm connected with the project …”
B-Gold’s subcontractor negligently caused a fire at Mediacorp’s premises.
Mediacorp successfully claimed against B-Gold in respect of its losses and
B-Gold initiated third party proceedings against ZI under the policy for an
indemnity of the damages it had to pay to Mediacorp.
10.19
The District Court held that clause 4(b) clearly applied to exclude ZI from
liability to indemnify B-Gold. On appeal, the High Court disagreed, holding
that although a literal reading of clause 4(b) indicated that it excluded ZI
from liability, the clause should not be given effect to. The High Court (at
[47] and [55]) took into account the factual context surrounding the issuance
of the policy — the fact that B-Gold had been required to obtain insurance
cover under its contract with Mediacorp and that the specific coverage had
been made known to ZI when the contract documents were sent to ZI. Since
B-Gold had depended on ZI to provide the cover it required, the High Court
felt (at [56]–[60]) that it had to deny effect to an exclusion clause which
purported to exclude the precise cover that B-Gold expected to obtain.
On further appeal to the Court of Appeal, the High Court’s decision was
overturned. VK Rajah JA held that:
° since the parties to the policy did not dispute that the policy document
contained their complete agreement, the parol evidence rule in s 94 EA
applied and no extrinsic evidence was admissible to contradict, vary, add
to or subtract from the terms of the policy (at [134]).
° in denying effect to a whole exclusion clause, the High Court had done
the impermissible, that is, to vary the terms of the policy — “There is a
conceptual difference between attributing a meaning to words or phrases
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that might strain the contours of their penumbral meaning and simply
ignoring a provision altogether” (at [134]).
° even if the High Court was relying on proviso (f) to s 94 EA to apply
the contextual approach to the interpretation of clause 4(b), the extrinsic
evidence to be taken into account had to be relevant, reasonably
available to all contracting parties and relate to a clear and obvious
context (at [135]). Lee and Long’s evidence on how the policy came to
be issued was tendered as sworn statements and they were not present to
testify or be cross-examined in court. Based on their sworn statements
alone, the court found that the context surrounding the issuance of the
policy was far from clear and obvious: it was unclear what was actually
communicated between Lee and Long as to the kind of insurance cover
required — indeed, the court found it puzzling why Lee requested for a
Contractor’s All-Risks policy when it had not been called for under the
contract between B-Gold and Mediacorp (at [135]). Given this, it was
wrong for the High Court to allow the said extrinsic evidence to affect
his interpretation of clause 4(b) (at [139]).
10.20
If an “entire agreement clause” is inserted into a written contract, this is an
express indication that the parties intend the written document to embody
their complete contract. In Lee Chee Wei v Tan Hor Peow Victor and others
and another appeal (2007), the entire agreement clause read as follows: “This
Agreement sets forth the entire agreement and understanding between the
Parties in connection with the matters dealt with and described herein” (see
[21]). VK Rajah JA in the Singapore Court of Appeal made some interesting
observations, obiter, pertaining to the effect of an entire agreement clause:
° An entire agreement clause may be worded in many ways and its effect
is ultimately a matter of contractual interpretation taking into account
its precise wording and context (at [25]). For example, whether the
effect of the clause is merely to confirm that parties’ intention that the
written document contain all the terms of the agreement (a prerequisite
to the application of the parol evidence rule) or whether it also excludes
the exceptions to the parol evidence rule from applying altogether (see
[30]–[35]).
° Such clauses promote certainty as they “define and confine the parties’
rights and obligations within the four corners of the written document
thereby precluding any attempt to qualify or supplement the document
by reference to pre-contractual representations” (at [25]).
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° However, they will not usually prevent a court from looking at extrinsic
evidence in order to aid in ascertaining the meaning of particular terms
in the written contract — that is, a court may still apply a contextual
approach to interpretation of the written terms despite the presence of
an entire agreement clause. This is subject to the theoretical possibility
that the clause could expressly forbid it without being considered an
unreasonable exclusion clause under the Unfair Contract Terms Act
(Cap 396, 1994 Rev Ed), if the Act applies (at [41]).
10.21
An illustration of how extrinsic evidence may reveal a latent ambiguity in
the meaning of an otherwise ostensibly clear written term of the contract
can be found in the Singapore Court of Appeal decision in Sandar Aung v
Parkway Hospitals Singapore Pte Ltd (trading as Mount Elizabeth Hospital) and
another (2007). Sandar Aung’s mother was admitted to hospital to undergo
a medical procedure called an angioplasty. On admission, Sandar Aung
signed an estimate of hospital charges which indicated a total estimated cost
of $15,227.30 for the angioplasty procedure. She also signed the hospital’s
standard form contract that contained the hospital’s policies and terms of
service and an undertaking agreeing to be jointly and severally liable with
the patient for “all charges, expenses and liabilities incurred by and on
behalf of the patient” (“the Undertaking”). As it turned out, unexpected
complications developed as Sandar Aung’s mother was recovering from the
angioplasty which inflated the final medical expenses to a sum much higher
than that indicated in the estimate of charges. The issue before the court
was whether, under the Undertaking, Sandar Aung was liable for all medical
expenses incurred or merely for expenses that related to the angioplasty.
10.22
Andrew Phang JA (delivering the judgment of the court) explained the rationale for a contextual approach to interpretation of contract terms (at [29]):
No contract exists in a vacuum and, consequently, its language must be
construed in the context in which the contract concerned has been made.
We would go so far as to state that even if the plain language of the
contract appears otherwise clear, the construction consequently placed on
such language should not be inconsistent with the context in which the
contract was entered into if this context is clear or even obvious, since
the context and circumstances in which the contract was made would
reflect the intention of the parties when they entered into the contract
and utilised the (contractual) language they did. It might well be the
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case that if a particular construction placed on the language in a given
contract is inconsistent with what is the obvious context in which the
contract was made, then that construction might not be as clear as was
initially thought and might, on the contrary, be evidence of an ambiguity.
It was argued that a plain reading of the phrase in the Undertaking “all
charges, expenses and liabilities incurred by and on behalf of the patient”
clearly referred to all charges for medical services rendered. However, the
court, after considering extrinsic evidence pertaining to the factual context in
which the Undertaking was signed — in this instance the estimate of charges
for the angioplasty — concluded that the phrase in the Undertaking could
well also mean all charges, expenses and liabilities in respect of the angioplasty
procedure. The court thus held (at [18]) that the narrower interpretation of
the phrase was warranted given the clear context in which the Undertaking
was signed in the first place.
TERMS AND REPRESENTATIONS
Introduction
10.23
In many transactions, the parties first discuss aspects of the transaction
before they conclude a contract. One party may think that something said
by the other during these discussions is part of the deal that they agree on,
while that other party may consider the statement as not involving a promise
of any sort. Where the parties have reduced their contract to writing, the
parol evidence rule could be used to exclude extraneous material but most
contracts are made verbally. In the latter category of contracts, it becomes
necessary to determine what statement or promise is part of the contract and
what is not. Contract law makes this determination by drawing a distinction
between terms and representations.
10.24
The courts will examine the pre-contractual negotiations and sift what was
said into three categories. The first category consists of the puff, the normal
exaggeration and grandstanding that is a part of contract negotiation. For
example, a claim that the product is “the best beer in the world!”. The law
regards claims such as these as legally insignificant because they are not
meant to be taken seriously. Often, though not always, these statements will
be on the borderline of opinion and a statement of fact. The second category
consists of representations while the third category consists of terms. When
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one party makes a statement of fact to another party with the intention of
inducing the other party to enter into a contract and that factual statement
does in fact induce the other party to enter into the contract but it cannot
be said that the statement was intended by the parties to form part of
the contract, a representation has been made. The critical feature of the
representation is that it induces the contract but if it turns out to be false,
the person who relied on it cannot sue for breach of contract. For example,
if A tells B that she would sell a necklace to B for $1,000, the price may
induce B to buy the necklace but the price is also a part of the contract
and hence is a term of the contract. But, if in addition, A tells B that
the necklace belonged to a celebrity, this statement may induce B to buy
the necklace but it is uncertain whether it becomes a part of the contract
(a term) such that B can sue A for breach of contract if she discovers, after
making the purchase, that the necklace was never owned nor used by the
celebrity in question.
10.25
By virtue of the Application of English Law Act (Cap 7A, 1994 Rev Ed),
the UK Misrepresentation Act of 1967 (reprinted locally as Cap 390, 1994
Rev Ed), applies in Singapore and a literal reading of s 2(1) of this Act
would expose a maker of a misrepresentation, who cannot prove that he
had objectively reasonable grounds for making that misrepresentation, to the
same liability as the maker of a fraudulent representation. See the English
Court of Appeal decision of Royscot Trust Ltd v Rogerson (1991) which,
“although subject to criticism, holds sway” according to the UK Court of
Appeal in HIH Casualty & General Insurance Ltd v Chase Manhattan Bank
(2001). In Ng Buay Hock v Tan Keng Huat (1997), the Singapore High Court
referred to the decision in Royscot but held (at [31]) that the plaintiff ’s claim
relieved him of making “a choice in regard to the measure of damages
such as was made in the Royscot case”. His comments about Royscot must
therefore be regarded as obiter dicta. As it is possible that Royscot might
be accepted as good law in Singapore, the proper characterisation of a
pre-contractual statement as a term or a representation will be of critical
importance in terms of the types of remedies available under contract law
or the Misrepresentation Act to both the maker of the statement and the
other party who relied on the statement (see further, the discussion of
misrepresentation in Chapter 13).
10.26
Whether something said by one party to another during a pre-contractual
negotiation is a representation or a term depends on the intention of the
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parties and is thus a question of fact. This means that if the parties disagree
about the status of the statement and go to court, the judge will examine
the specific facts of the particular case to determine, on an objective basis,
whether the parties intended the statement in question to be a representation
or a term. In making this determination as to the intention of the parties,
however, the judge will apply to the specific facts certain guidelines, discussed
in the following sections, that the courts have developed over a hundred
years. However, not all guidelines may apply to a particular scenario and
no one guideline (even if it applies) can be said to be conclusive as to the
intention of the parties. Ultimately, a conclusion can only be reached after a
consideration of all relevant facts.
Request to Verify
10.27
During a negotiation prior to the contract, when one party tells the other
party something and then qualifies that statement by telling that party to the
effect “don’t take my word for it, get an independent verification and satisfy
yourself ”, the court will probably hold that the party made a representation.
In Ecay v Godfrey (1947), the seller told the buyer of a boat that the boat
did not have any flaws but then went on to invite the buyer to have the boat
inspected. The buyer did not have the boat inspected and after the sale, the
buyer found flaws in the boat. He sued for breach of contract. The court
rejected this claim, holding that the seller’s statement about the lack of flaws
was a representation and not a term. On the other hand, the court in Schawel
v Reade (1913) held that the seller’s statement was a term. Here, the seller
told the buyer, who wished to buy the seller’s horse for stud purposes, that
the horse was perfectly sound and that the buyer need not look for anything
that could be the matter with the horse. The buyer successfully sued the
seller for breach of contact upon discovering that the horse was totally unfit
for stud purposes.
Importance of the Statement
10.28
If it appears to the court that the statement in question is so important to
one party that they would not have entered into the contract but for such
statement having been made, the court will likely hold that statement is
intended to be a term and not a representation. In Bannerman v White (1861),
the buyer asked the seller whether the hops that the seller offered had been
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treated with sulphur. The buyer emphasised that he would not even bother
to ask the price if the hops had been treated with sulphur. This exchange
clearly showed that the buyer would only buy sulphur-free hops. The seller
assured the buyer that no sulphur had been used on the hops. When, after
the purchase the buyer found that sulphur had been used, he sued the seller
for breach of contract. The court held that the assurance about the hops
being free of sulphur was a term of the contract and not a representation.
10.29
A statement asserting a feature of intrinsic significance in relation to the
subject matter of the contract is likely to be a term of the contract. In
Darwish M K F Al Gobaishi v House of Hung Pte Ltd (1995), the plaintiff
purchased some gemstones from the defendants. The defendants had stated
that “all the gemstones the plaintiff agreed to purchase were genuine, natural,
without flaws and not treated in any way” prior to the purchase. However,
some of the gemstones purchased — beryls — turned out to be flawed as
their colour faded when exposed to light and heat. The Singapore High Court
held (at [80]) that the statement was a term of the main contract of sale
and purchase and need not be treated as a term of a collateral contract. The
court found that the subject matter of the contract, as intended by both the
plaintiff and defendants, were gemstones (at [87]). Thus the subject matter
had to have the properties of “gemstones” which included permanence or
stability of colour (at [87]), a “very necessary feature in the jewellery trade”
(at [88]).
Timing of the Statement
10.30
If one party makes a statement about the subject matter of the contract to
the other party shortly before they enter into the contract, the courts would
probably hold that this statement is a term and not a representation. The
relevant time frame would depend on the type of contract. For example,
in a contract of employment over which the parties have negotiated for
several months, a statement made during the start of the negotiations would
probably be a representation and not a term. On the other hand, in a routine
buy and sell transaction, there might be so much haggling that it would
justify a court finding that a statement made just a week before the contract
is a representation and not a term. Thus, in Routledge v McKay (1954),
the seller had consulted the registration book of the motorcycle to be sold
and told the buyer that the vehicle was a 1942 model. One week later, the
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parties signed the contract. The buyer found that the motorcycle, far from
being a 1942 model, was a 1930 model. The court rejected the buyer’s claim
for a breach of warranty holding that the statement about the year of the
model was not a term of the contract. This case illustrates the point made
earlier that whether a statement is a term or a representation is eventually a
question of the intention of the parties, a fact to be determined by looking at
the surrounding circumstances. In a country like Singapore, where vehicles
are expensive and the parties are choosy and sensitive to the Certificate of
Entitlement (“COE”) issues such as the scrap value of the vehicle, the courts
may decide a similar case differently. The court might consider any statement
about the model year to be so important that it would qualify as a term
because it would be reasonable to hold that, in the context of automobile
purchases in Singapore, the parties intend the year of manufacture to be a
term and not a mere representation.
Oral Statements and Written Contracts
10.31
Where the parties, after negotiations, put their agreement in writing, the
courts would probably hold that what they say during the pre-contractual
negotiation that is not put in writing, is a representation and not a term.
Normally, the parol evidence rule would shut out such statements. However,
in special circumstances, the court might hold that the parties entered into a
contract that was partly written and partly oral.
Special Skill and Knowledge
10.32
If a statement is made by or to a party on a matter about which that party
has special knowledge or skill, that special knowledge or skill will be relevant
in determining whether the statement is a representation or a term. This is
because it is reasonable to assume that it is not the intention of a person
making the statement, who has little or no expertise in the area, to someone,
who has expertise in the area, to expose herself to a breach of contract
action in case the representation proves false. Two contrasting English cases
that deal with a statement on the model of the car that was the subject of
the contract illustrate this approach.
10.33
In Oscar Chess Ltd v Williams (1957), the plaintiff, a hire-purchase firm,
agreed with the defendant that he could trade in his car as a part of the
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hire-purchase transaction. The defendant, who was not in the car business,
consulted his registration book and told the plaintiff that the car was a 1948
model whereas in fact the car was a 1939 model. The defendant made this
false statement in good faith and it was later found that some unknown
person had fraudulently altered the particulars in the registration book.
Because the plaintiff believed the defendant’s statement that the car was
a 1948 model, the defendant received more credit than he would have if
the plaintiff knew that the car was a 1939 model. The remedy of rescission
was available if the false statement was an innocent misrepresentation. The
plaintiff could not set aside the contract by the remedy of rescission since
this relief must be sought in a timely manner, and the plaintiff had delayed
in bringing the action. Not being able to bring an action to rescind the
contract because of the delay, the plaintiff sued for breach of contract on
the ground that the false statement was a term of the contract. The court
disallowed the plaintiff ’s action for a breach of warranty. It reasoned that the
defendant who was not a car dealer was not in a position to give a warranty
on the year or the model, whereas the plaintiffs, a hire-purchase firm that
dealt in automobiles, had the technical knowledge to protect themselves.
10.34
The roles were reversed in Dick Bentley Productions Ltd v Harold Smith
(1965). Here, it was the seller who dealt in cars. The odometer of the car
showed that it had done only 30,000 miles after a replacement engine had
been fitted. In fact, the car had done 100,000 miles. The buyer successfully
sued the seller–dealer for breach of warranty.
10.35
These two cases demonstrate that where the knowledge of the person who
receives the statement is about the same or superior to that of the party
making the statement, the courts would likely hold that such statement is
intended as a representation and not a term of the contract. Even so, in
Eian Tauber Pritchard v Peter Cook (1998), the English Court of Appeal
held that the statements made by a seller of a rally motor car pertaining to
the specifications for the car to be terms of the contract even though the
seller had less technical knowledge of the car in comparison with the buyer.
The buyer was a motor trader, a keen and experienced rally driver who had
previously owned at least three cars similar to the one he bought in this
case while the seller was a dealer in motorcycle clothing and accessories and
collector of classic cars. The seller did not have personal knowledge of the
technical specifications of the car he advertised to sell but had with him a
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copy of the specifications he obtained from Rally Engineering Development
(“RED”), the company he had purchased the car from. Nevertheless the
seller indicated in his advertisement that the specifications were available
on request and had photocopied the specifications onto paper bearing his
company letterhead before showing them to the buyer when the buyer
requested to see them during his visit to inspect the car. The buyer had
then checked the car against the specifications for accuracy as far as
he could. The conduct of the parties led the court to find that both the
seller and the buyer regarded the specifications as important — the seller
had mentioned them in his advertisement and the buyer had requested for
them and checked the car carefully against them. Further, that the seller
had made the specification the basis of the sale when he photocopied the
specifications on his own letterhead and did not disclaim responsibility for
their accuracy by asking the buyer to check with RED instead. Based on
the totality of facts, the court concluded that the specifications had become
terms of the contract regardless of the seller’s relative lack of expertise. This
case clearly illustrates that all relevant facts need to be considered before a
conclusion can be reached as to the status of any statements made in the
course of negotiations.
Box 10.1
Reflecting
on the law
Impact of the Misrepresentation Act on pre-contractual
misrepresentations
The Misrepresentation Act (Cap 390, 1994 Rev Ed) has supplemented the common
law relating to pre-contractual misrepresentation (see Chapter 13) and the continued
relevance of old case law providing guidelines to determine whether a statement is
a term or a representation must be assessed in the context of a growing body of
consumer protection law, the pervasive influence of hyper-advertising in a mediasaturated culture on a sceptical consumer public and the possibility that a party
who makes a misrepresentation whether innocent or negligent could be liable to
the same extent as a person making a fraudulent misrepresentation unless the party
making the representation had objectively reasonable grounds to believe and did
believe up to the time the contract is made that the facts represented are true. In
other words, the Act imposes legal liability on the party making the representation
not to state facts during the course of contractual negotiations that they cannot
prove that he or she had reasonable grounds to believe that the representation is
true (see Howard Marine v Ogden & Sons (1978)). Advertisers and their clients who
are averse to exposure to liability under the Act might opt to influence buyers with
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Box 10.1 (Continued )
meaningless sounds and images that cannot be characterised as representations
instead of providing information that are of a representational nature and thus attract
potential liability under the Act. It should also be borne in mind that jurisdiction over
most consumer disputes is now vested in the Small Claims Tribunals that use as a
part of their procedure a mandatory mediation process. Insisting on the niceties of
legal distinctions between representations and terms and invoking remedies under
the Misrepresentation Act may not be an easy exercise in the specific context of
effective consumer dispute resolution.
RELATIVE IMPORTANCE OF TERMS
Warranties, Conditions and Innominate Terms
10.36
Once a court finds that the contents of a contract include a statement, that
is, the statement is a term and not a representation, the court has to decide
on the remedy to accord the innocent party (ie, the party not in breach)
for a breach of the term. Singapore law had traditionally tracked English
law in this matter. However, the Singapore Court of Appeal has prescribed a
somewhat different approach in its obiter statements in RDC Concrete PL v
Sato Kogyo (S) Pte Ltd (2007) and Sports Connection Pte Ltd v Deuter Sports
GmbH (2009). The English (traditional) approach will be explained before
the new approach is considered. Under the traditional approach, the court
typically classifies a term as a “condition”, a “warranty” or an “innominate
term”. Where one party fails to perform a condition, the innocent party
may claim damages in compensation for losses suffered. Additionally, the
innocent party is given a choice as to whether he wishes to treat the contract
as at an end (ie, to terminate the contract). If the breach is in respect of a
warranty, the innocent party may seek damages but not termination. Thus if
the innocent party mistakes a breach of warranty for a breach of condition,
purports to terminate the contract because of this mistaken characterisation,
and enters into another contract for the performance of the same obligation
with a third party, that innocent party will be liable in damages as a result
of the wrong assessment of the nature of the term. An innominate term is
a term that, by its very nature, is difficult to classify as either a condition or
a warranty. The remedy for breach of such a term would depend upon the
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nature and consequences of the breach. A breach that deprives the innocent
party of substantially the whole benefit he is intended to receive under the
contract will entitle the innocent party to the same remedy as is given for
a breach of condition. A breach that results in trivial consequences (ie, it
does not result in substantial deprivation of benefit) will entitle the innocent
party to the same remedy as is given for a breach of warranty.
10.37
Accordingly, the court’s first task is to assess the objective language of the
contract to determine whether the parties intended the term in question to
be a condition, an innominate term or a warranty. The parties are free to
agree expressly that a particular term in a contract will be regarded as a
condition the result of which, if there is a breach of this term, the innocent
party can terminate the contract regardless of how minor the consequence
of the breach was. Sometimes, however, the court may conclude that, when
the parties characterised a term as a “condition”, they did not intend that
technical meaning (see L Schuler AG v Wickman Machine Tool Sales Ltd
(1974)). Where there is no express characterisation of a term, the courts
will look:
at the contract in the light of the surrounding circumstances, and then
[make up its mind] whether the intention of the parties, as gathered from
the instrument itself, will best be carried out by treating the promise as
a warranty sounding only in damages or as a condition precedent by the
failure to perform which the other party is relieved of his liability
(per Bowen LJ in Bentsen v Taylor, Sons & Co (1893) at p 281). Sometimes,
previous cases examining a standard term in a generic contract would
conclude that the term was a condition, and confronted with such a term
in the same type of contract, a court may conclude that the term was a
condition (see Maredelanto Compania Naviera SA v Bergbau-Handel GmbH,
The Mihalis Angelos (1971)). Sometimes, a statute will classify a particular
term as a condition and it will not usually be open to the parties to designate
it as a warranty. However, if after examining the term in question, the court
decides that it is not a condition but also concludes at the same time that
the breach of the term “may be attended by trivial, minor or very grave
consequences”, it will characterise the term as an innominate term and not
as a warranty (see per Lord Scarman in Bunge Corporation, New York v
Tradax Export SA Panama (1981) (at p 717)).
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10.38
The words “conditions” and “warranties” as they appear in contracts also
have secondary meanings that are quite different from the meanings given
above. Thus the word “condition” as used above, also known as “promissory
condition”, differs from “contingent condition”. As its name implies, a
contingent condition is a term in the contract that specifies an event or
events that must occur if the contract is to come into force or remain in
force. These “conditions precedent” and “conditions subsequent” are terms
but are not “conditions” in the specialised sense used above. Rather, they
are “conditions” in the layperson sense of the word as in “conditional”. Thus
a sub-contract to build a garage in a house between the sub-contractor and
the main contractor may contain a condition precedent to the effect that
the contract will come into force only when the owner awards the building
contract to the main contractor. Likewise, there might be a “condition
subsequent” to the effect that the sub-contract to build the garage will remain
in force only insofar as the main building contract remains in force. In
L Schuler AG v Wickman Machine Tool Sales Ltd (1974), the majority of the
judges in the House of Lords concluded that the characterisation of a term
as a “condition” in the contract under review was not meant in the technical
sense but in the layperson sense. However, if they had concluded that the
parties knew what they were doing when they stated that a particular term
was a condition, then they would have treated that term as a condition in
the technical sense without regard to whether or not the term contained an
objectively important obligation.
10.39
The word “warranty” is frequently used in consumer contracts for the sale of
goods or of services. The meaning here is different from the technical term
“warranty” when used to differentiate a term that is not a condition or an
innominate term. In the consumer context, for example, a seller of a hand
phone may give a warranty for a certain period. This usually just means that
the seller or dealer of the hand phone will replace any faulty components
and provide repairs free of charge during this warranty period.
Differentiating between Conditions and Warranties
10.40
Because termination of the contract is an option for the innocent party
where a condition in a contract has been breached and this could have
serious consequences for both parties, it has been observed that courts
should not be too ready to characterise terms as conditions (see Cehave
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NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) (1976)). However,
parties to commercial contracts place a high value on certainty and certain
terms in mercantile contracts, for example, those relating to time, have been
regarded as conditions in the absence of evidence to the contrary. A number
of possible guidelines as to when a term might be classified as a “condition”
have already been examined in para 10.37. Prior to the English Court of
Appeal decision in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha
Ltd (1962), if the term is not a “condition”, it would be a “warranty”, thus not
taking into account the concept of “innominate term” (as to which, see para
10.44 onwards). Bearing these observations in mind, just two of the classic
cases, because of similar “factual matrixes”, may be considered. In these two
leading cases, opera singers on contract failed to honour the terms of their
contracts but one failure was regarded as a breach of condition while the
other was held to be a breach of warranty.
10.41
In Poussard v Spiers (1876), Madame Poussard had contracted to sing in an
opera, the first performance of which was due to take place on 28 November
1874. The singer fell ill on 23 November 1874, and the illness prevented her
from being able to sing until 4 December 1874. The defendant company had
engaged a substitute who had insisted upon being offered the role for the
complete engagement. The defendant agreed to this requirement and hired
the substitute for the complete engagement. Madame Poussard presented
herself for the role on 4 December 1874, and the defendant refused to
engage her. She sued the defendant for breach of contract. The court rejected
her suit holding that her failure to appear on opening night was a breach
of a condition entitling the defendant to repudiate the contract and treat it
as discharged.
10.42
Bettini v Gye (1876) provides a useful contrast to the Poussard case. Here,
too, the plaintiff, an opera singer, had agreed to sing. She had agreed to sing
in England for a period commencing 30 March 1875, and to be in London
for rehearsals for six days before the engagement. The plaintiff singer fell ill
and arrived in England only on 28 March 1875, late for the rehearsals but
in time for opening night. The defendant company rejected the singer’s
services and treated the contract as terminated. The court upheld the plaintiff ’s
action for breach of contract despite the fact that it was she who did not
appear for the rehearsals on time. It held that the obligation to participate in
rehearsals was not a condition because participating in rehearsals was merely
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ancillary to the main purpose of the contract. The principal purpose of the
contract was for the singer to engage in the actual performance, a task that
she was able to perform.
10.43
These cases show that where the term goes to the root of the contract and
deals with an obligation or statement of fact, the absence of which would
have persuaded the innocent party not to enter into the contract in the first
place, the term in question will be treated as a condition. On the other hand,
if the term relates to a matter, the non-performance of which will not impair
the substance of the bargain expected by the innocent party, the term will be
regarded as a warranty.
The “Hong Kong Fir Approach”
10.44
Although the distinction between conditions and warranties (the condition–
warranty approach) has existed for more than a century, the characterisation
of another class of terms, the innominate term, took place in the case of
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962),
particularly in the judgment of Diplock LJ (as he then was). However, in a
later case, Bunge Corporation, New York v Tradax Export SA Panama (1981)
(at p 717), Lord Scarman observed that Hong Kong Fir case represented
merely a rediscovery and reaffirmation of a type of term that was neither
a condition nor a warranty, while Lord Wilberforce called Diplock LJ’s
judgment “seminal” and his analysis “classical”. Lord Diplock, the judge who
authored the judgment in the Hong Kong Fir case, gave an account of his
thinking as follows:
This case arose out of the contractual obligations of a ship-owner under
a charterparty to provide a vessel that was seaworthy and to maintain
it in that state … there has been no previous decision binding on
the Court of Appeal that has assigned this obligation to the category
either of “condition” or “warranty”. This gave the Court an opportunity
of recognising that it was too simplistic an approach to categorise so
broad a stipulation ab initio as a condition, any breach of which,
however minor, would entitle the charterer to terminate the charter, or
as a warranty no breach of which, however serious, would entitle him to
terminate the charter but only to recover monetary compensation for the
loss the breach had caused him. There is no reason for supposing that,
as sensible commercial men, such was the intention of the parties when
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they entered into a contract. Some breaches of the stipulation might be
so serious as to deprive the charter of substantially the whole benefit
contemplated by the parties to be derived from the charter, others
so minor or so temporary as scarcely to disadvantage him at all. The
breakthrough in Hong Kong Fir was the recognition of a third category
of contractual stipulations which were neither conditions nor warranties
but innominate terms some breaches of which would deprive one party
of substantially the whole benefit contemplated by the parties to be
derived from the performance of the contact, but other breaches would
not. If a breach of the former kind occurred a rational and equitable law
of contract would recognise the injured party’s right to be excused from
further performance of his own obligations under it; but it would not
if the breach were only the latter kind. Monetary compensation for any
loss sustained would be fair enough.
Andrew Phang JA had argued that the use of the phrase “Hong Kong Fir
approach” to this type of term is more appropriate since the term is of a type
radically different from the normal “condition” and “warranty” because of its
focus on the nature and consequences of the breach of the term rather than on
the intention of the parties (see A Phang, International Encyclopaedia of Laws
— Contracts (Singapore) (2000) at para 465).
10.45
Innominate terms are those terms that, not explicitly characterised by the
parties as “conditions”, cannot be immediately categorised as conditions
or warranties simply by looking at their content because it is possible to
envisage both serious as well as extremely trivial breaches of the term. An
innominate term could operate either as a condition or a warranty depending
on the nature and consequences of the breach. If the breach is serious, given
the context of the contract, the courts will regard the breach as if it were
a breach of condition with all the consequences that such a breach entails.
In other words, in the event of a dispute, the task of the court will be to
decide whether the parties, if they had been asked what would happen if the
breach in question would occur, would have replied, “it goes without saying
that, if that happens, the contract is at an end” (see Bunge Corporation, New
York v Tradax Export SA Panama (1981) at p 717). On the other hand, if
the breach were not serious when applying the foregoing criterion, then the
court would hold that the breach was as if it were a breach of warranty
with the consequence that the innocent party must continue performing the
contract and seek only damages. To illustrate, contracts to rent ships, known
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Principles of Singapore Business Law
as charterparty contracts, frequently contain a term that the ship must be
seaworthy. If the owner delivers the ship with a nail missing, they would be
in breach of the term of seaworthiness, and would also breach the term if
they delivered a ship whose engines did not work. Obviously, the two types
of breaches, although in relation to the same term, are not the same. The
absence of a nail would not lead to serious consequences while the defective
engines would certainly lead to serious consequences.
10.46
In Bunge Corporation, New York v Tradax Export SA Panama (1981), the
court held that applying the “Hong Kong Fir approach” involves a twostep process. First, the court must determine whether the language of the
term requires it to be classified as a condition according to the traditional
condition–warranty approach. Second, it is only after determining that the
term is not a condition or a warranty but, rather, an innominate term,
must the court consider whether in the circumstances of the case, the
breach has deprived the innocent party of substantially the entirety of the
benefit of the contract it was intended that the innocent party should have,
in which case the consequences of a breach of a condition would follow.
In the Bunge Corporation case, the House of Lords emphasised that it is
always possible for the parties to agree that a particular term should be
regarded as a condition even though the consequences of its breach could
be minor, and if that were to happen, the court would accord such a term
the status of a condition. This means that however minor the consequences
of the breach may be, the innocent party would be allowed to terminate
the contract.
10.47
This alternative approach leads to useful commercial results since it avoids
the rigid dualistic classification and allows a court to achieve a pragmatic
outcome with regards to terms that are worded in such general and wide
language so as to admit minor and major breaches. It would work hardship
on the parties if a minor infraction of such terms were to entitle the
innocent party to treat the contract as discharged, and conversely, if a serious
infraction prevents discharge by the innocent parties. Some critics argue
that adopting such an approach could cause problems where an innocent
party mistakenly terminates the contract because they thought that the
breach of the innominate term was sufficiently serious. As they made this
mistake, they could be liable for wrongfully repudiating the contract. While
this possibility exists, the “Hong Kong Fir approach” may help to promote
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Chapter 10: Terms of the Contract
justice as illustrated by the case of The Hansa Nord (1974). Here, the buyers
of citrus pulp rejected the shipment on the ground that it was not in good
condition, but thereafter bought the shipment through one of their agents
at more than a 60 per cent discount, and used the pulp for the purpose for
which the buyers originally purchased the pulp. The court categorised the
term relating to quality as an innominate term and found that the slight
consequences of the breach did not justify termination. Instead, the buyers
had to be content with damages.
The New Singapore Approach: A Synthesis between the
Condition–Warranty and Hong Kong Fir Approaches
10.48
In RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd (2007), the Singapore
Court of Appeal conducted an extensive analysis of the case law and the
academic literature relating to the development of the law on conditions and
warranties and the modern classification of the various types of terms and
the remedies for their breach. Andrew Phang JA (delivering the judgment
of the court) proposed, obiter, a comprehensive approach to when, and on
what grounds, an innocent party could terminate a contract on account
of a breach of term by the other party (summarised in a table (at [113]).
See Table 10.1 for a description of the proposal. The principal difference
between the approach proposed in RDC Concrete and the traditional English
approach relates to the method by which the court decides if the innocent
party should be entitled to a right of termination for breach of a term that
was not intended by the contracting parties to be a condition (see Table 10.1,
Situations 3(a) and 3(b)). The intent behind the RDC Concrete proposal was
to synthesise the condition–warranty and Hong Kong Fir approaches. Phang
JA was of the view (at [105]) that the two approaches, as defined, could not
co-exist but that each made sense in its own way:
[A]n intermediate term is defined as one which is neither a condition
nor a warranty simply because a breach of it could give rise to either
very substantial or to very trivial consequences. Unfortunately, however,
such an approach effectively and practically obliterates the distinction
between a condition and a warranty because the breach of virtually
any term could give rise to either very substantial or to very trivial
consequences … In other words, a wholesale adoption of the Hongkong
Fir approach in the manner just described would result in its complete
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Principles of Singapore Business Law
eclipse of the condition–warranty approach. We are of the view, however,
that this should not be the case. There is an appropriate legal role for
both approaches.
[emphasis in the original]
10.49
To rationally synthesise both approaches in a way that achieves a judicious
balance between fostering certainty and predictability of contract on the one
hand, and fairness on the other (see [109]), the Court suggested as follows
(at [106]–[107]):
106 In determining whether an innocent party is entitled to terminate
a contract upon breach, the foremost consideration is (and must be)
to give effect to the intentions of the contracting parties. If so, then the
condition–warranty approach must take precedence over the Hongkong
Fir approach because … it is premised on the intentions of the
contracting parties themselves. Thus, in Bunge (at 716), Lord Wilberforce
expressly cautioned that the Hongkong Fir approach would be unsuitable
in cases where the parties had evinced an intention that the contractual
obligation was to have the force of a condition. In such cases, regardless
of the consequences of the breach, the innocent party would be entitled
to terminate the contract.
107 If, however, the term breached is a warranty, we are of the view
that the innocent party is not thereby prevented from terminating the
contract (as it would have been entitled so to do if the condition–
warranty approach operated alone). Considerations of fairness demand,
in our view, that the consequences of the breach should also be examined
by the court, even if the term breached is only a warranty (as opposed
to a condition). There would, of course, be no need for the court to
examine the consequences of the breach if the term breached was a
condition since … the breach of a condition would … entitle the innocent
party to terminate the contract in the first instance. Hence, it is only in a
situation where the term breached would otherwise constitute a warranty
that the court would, as a question of fairness, go further and examine
the consequences of the breach as well. In the result, if the consequences
of the breach are such as to deprive the innocent party of substantially
the whole benefit that it was intended that the innocent party should
obtain from the contract, then the innocent party would be entitled to
terminate the contract, notwithstanding that it only constitutes a warranty.
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Chapter 10: Terms of the Contract
If, however, the consequences of the breach are only very trivial, then
the innocent party would not be entitled to terminate the contract.
[emphasis in the original]
10.50
The Court recognised (at [108]) that by the approach advocated, a term that
is not a condition would necessarily be treated as an innominate term, thus
obliterating the concept of the warranty for there would “virtually never
be a situation in which there would be a term, the breach of which would
always result in only trivial consequences.” However, this very result became
the subject of academic criticism (as to which, see Chapter 16, paras 16.44–
16.46). Subsequently, in Sports Connection Pte Ltd v Deuter Sports GmbH
(2009), the Court of Appeal responded (at [57]) to the criticisms by adding
a qualification to the approach it prescribed in RDC Concrete:
We would therefore reaffirm the approach laid down in RDC Concrete
…, subject to the extremely limited exception that, where the term itself
states expressly (as well as clearly and unambiguously) that any breach of
it, regardless of the seriousness of the consequences that follow from that
breach, will never entitle the innocent party to terminate the contract,
then the court will give effect to this particular type of term (viz, a
warranty expressly intended by the parties).
[emphasis in the original]
The reader should therefore bear in mind that the approach of RDC Concrete
summarised in Table 10.1 is subject to the limited exception laid down in
Sports Connection. See Chapter 16, Figure 16.1 for a diagram that highlights,
inter alia, the RDC Concrete approach as qualified by Sports Connection.
10.51
The RDC Concrete approach has been applied by the Singapore Court of
Appeal in the case of Man Financial (S) Pte Ltd v Wong Bark Chuan David
(2008) (see [152]–[158]) and Sports Connection (2009) (at [23]–[26] and [65])
and in a number of other Court of Appeal and lower court decisions (see, eg,
the High Court decisions in LTT Global Consultants v BMC Academy Pte Ltd
(2011) and Cousins Scott William v The Royal Bank of Scotland plc (2010)).
The RDC Concrete approach is thus a part of Singapore law. What remains
obiter is the qualification of a “limited exception in the case of an express
warranty” on which certain criticisms remain (as to which, see Chapter 16,
para 16.47).
321
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Table 10.1
The RDC Concrete approach to situations entitling an innocent party to terminate the contract at common law prior to
the qualification in Sports Connection
Chapter 10: Terms of the Contract
10.52
Notably, the traditional English approach continues to apply for the purpose
of determining whether or not a given term is a condition. The focus of
inquiry is “on ascertaining the intention of the contracting parties themselves
by construing the actual contract itself (including the contractual term
concerned) in light of the surrounding circumstances as a whole” (see Man
Financial at [161]). Emphasising that there is no magical formula and that
much depends on the actual factual matrix of the particular case (at [174]),
the Court of Appeal in Man Financial (at [162]–[173]) highlighted four
familiar non-exhaustive factors (see para 10.37) that might, if applicable, be
taken into account:
° Whether a statute classifies the term as a condition
° Whether the term itself expressly states that it is a condition although
this factor is not conclusive as the word “condition” might have been
used in the lay rather than the legal sense
° Whether a prior precedent is available
° Whether the contractual term is given in the context of a mercantile
transaction
10.53
On the facts of Man Financial, none of the four factors applied. The Court
thus proceeded to construe the term and the contract against its factual
backdrop to decide if it was a condition. The brief facts are: Wong Bark
Chuan (“Wong”) was the CEO of Man Financial (S) Pte Ltd (“MF”).
Wong expressed a wish to step down as CEO and was asked to resign
with immediate effect so that a newly appointed CEO would not be in the
awkward position of performing in the presence of a former CEO. Wong
was put on “garden leave” while serving out a three-month notice period.
Concurrently, negotiations began on a Termination Agreement between
Wong and MF. After many rounds of negotiation, the Termination Agreement
was finalised and executed. It contained clause C.1 which prohibited
solicitation by Wong of MF’s “officer, director, representative or employee”
and Clause C.3 which prohibited Wong from, inter alia, rendering advice to
any business in competition with MF. The Agreement provided for Wong to
receive compensation of approximately S$1 million if he did not breach the
terms. Subsequently, MF discovered that Wong had breached both Clauses
C.1 and C.3 and refused to pay the compensation. The trial judge found
on the evidence that both Clauses C.1 and C.3 were breached but held that
they were unreasonable restraint of trade clauses and unenforceable (see
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generally, Chapter 15 para 15.29 onwards on restraint of trade clauses). Thus
MF could not rely on breaches of the clauses to discharge itself from its
obligation to pay Wong the promised compensation. On appeal, the Court
of Appeal upheld (at [15]–[16]) the trial judge’s decision on Clause C.3 but
reversed the decision on Clause C.1, holding that Clause C.1 was a reasonable
restraint of trade clause. To decide if a breach of Clause C.1 entitled MF
to discharge itself from the Termination Agreement, the Court of Appeal
applied the RDC Concrete approach. Taking account of the circumstances
leading to the conclusion of the Termination Agreement, the court found
Clause C.1 to be a condition. Specifically, the court found (at [179]) that the
correspondence exchanged between the parties in finalising the Agreement
demonstrated their intention pertaining to the contract and the importance
attached to Clause C.1. They showed the trouble Wong took to ensure that
the Clause C terms (which included Clause C.1) were acceptable to him by
negotiating to reduce the period of restraint from twelve to seven months
(at [188]). Further, they showed that MF had redrafted a clause to insert
an italicised qualification indicating that the compensation was not payable
upon a breach of any term in the Agreement, and that this was accepted by
Wong (at [189]–[190]).
10.54
Another illustration of how the intention of parties pertaining to the nature
of a term is ascertained can be found in Sports Connection. Additionally,
the Court of Appeal clarified the precise steps involved in determining if a
breach deprived an innocent party of substantially the whole benefit he was
intended to obtain under the contract. The case involved a Distributorship
Agreement (“Agreement”) between Sports Connection Pte Ltd (“Sports”) and
Deuter Sports GmbH (“Deuter”). Sports had been the exclusive local and
regional distributor of Deuter’s products from 1992 to 2005 with a number
of written agreements for renewal of distributorship entered into during that
period. In 2002, for the first time, an Agreement entered into included a
clause prohibiting Sports from selling competing products without Deuter’s
prior written consent (“the Non-Competition clause”). Sports and Deuter had
an understanding that the Non-Competition clause would not be activated as
long as Sports purchased US$1 million worth of Deuter’s products annually.
When Sports failed to do so in 2004, Deuter activated the Non-Competition
Clause and subsequently terminated the Agreement in early 2005 for a breach
of the clause. Sports commenced legal action against Deuter for wrongful
repudiation (termination) of the Agreement. The Singapore High Court held
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Chapter 10: Terms of the Contract
in favour of Deuter finding that the Non-Competition clause was breached
in a way that deprived Deuter of substantially the whole benefit Deuter was
entitled to receive under the Agreement — that is, to ensure that Deuter’s
exclusive distributor should continue to look after its interests that included
market penetration and brand building for its products. The High Court had
implicitly decided that the term was not a condition.
10.55
On appeal, the Court of Appeal applied the RDC Concrete approach and
found that the Non-Competition clause was not a condition. To determine
this, the court considered the background facts and noted (at [69]) that
Deuter had always known that Sports sold competing products both before
and after the Non-Competition clause was inserted in the 2002 Agreement,
and had no intention of treating the Non-Competition clause as a strict
prohibition. This was especially evident from an email sent by Deuter’s
export manager to Sports’ managing director three days after the signing
of the 2002 Agreement stating “As you know we are dependent on you for
good sales success in southeast Asia. So far it has worked with you selling
competitive brands and we are not saying that we want you to stop. Potentially
it poses a risk and could cause [Deuter] to lose what it has gained. That is
why we want the benefit of you asking our approval …” (at [69], emphasis in
original). This finding, together with the fact that parties understood that the
Non-Competition clause would not be triggered unless the annual purchase
target of US$1 million was not met, persuaded the court that the parties
never intended the clause to be a condition (at [72]).
10.56
The next step involves determining whether the breach resulted in the
innocent party being deprived of substantially the whole benefit he was
intended to obtain. Emphasising that this question also depended very much
on the precise factual matrix (at [64]), the court went on to highlight a twostep process. First, it must be ascertained “what exactly constituted the benefit
that it was intended the innocent party should obtain from the contract”
and second, the actual consequences of the breach that had occurred at the
time the innocent party purported to terminate the contract must be closely
scrutinised (at [62]). On the facts, the Court of Appeal agreed with the High
Court’s identification of the benefit Deuter was to receive under the clause.
However, the court found that the actual consequences of the breach at the
time Deuter purported to terminate the contract — the drop in purchases by
Sports from US$1 million to US$788,031.45 and the potential compromise
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Principles of Singapore Business Law
of market penetration and brand position of Deuter products — did not
substantially deprive Deuter of the benefit it was intended to obtain for the
following reasons:
° the drop in sales, though not insignificant, did not by itself result in
substantial deprivation of benefit (at [78]);
° the objectives of market penetration and brand positioning may be
achieved by aggressive promotional activities — sales of Deuter’s products
was not the sole means to achieve these objectives (at [81] and [82]);
° Sports’ reduced purchases of Deuter’s products did not mean that there
had been little or no market penetration and brand position achieved
— Deuter’s export manager acknowledged success in sales in his email
despite Sports selling competing products (at [81]);
° the long and successful business relationship between Deuter and Sports
which did not rely on a Non-Competition clause in the earlier period
suggested that Deuter was aware of and accepted Sports’ business strategy
of selling competing products to maximise sale of Deuter’s products
(at [82]);
° Deuter’s allegations in its Termination Notice indicated that Deuter did
not really regard the sale of competing products by Sports to be the
cause of failure to achieve market penetration and brand positioning
(at [83]–[85]).
Deuter was thus not entitled to terminate the Agreement upon breach of
the Non-Competition clause. In wrongfully doing so, Deuter was itself in
breach of the Agreement and Sports was entitled to claim damages against
Deuter (at 91)).
IMPLIED TERMS
10.57
The express terms of a contract, that is, those terms that the parties
explicitly incorporate in their contract, can hardly envisage and provide for
all eventualities, especially in complex transactions. Sometimes, the parties
envisage eventualities but prefer not to address them to save time or to
avoid a disagreement from preventing the formation of the contract. The law
supplements the express terms of a contract by a category of terms known
as implied terms. This category of implied terms can itself be divided into
sub-categories depending on how the term is implied.
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10.58
First, there is the category of terms implied in fact. The theory here is that for
whatever reason the parties had certain intentions that they did not express.
The idea here is to give effect to this unexpressed intention. Hence, when
confronted with a gap in the contract that needs to be filled in order to
resolve the dispute before it, the court asks itself what the parties would have
unequivocally agreed upon had they addressed their minds to the problem
or alternatively the court tries to supply a term that would give business
efficacy to the contract.
10.59
Second, there is the category of terms implied by law or, to use computer
terminology favoured by Lord Steyn in Malik v Bank of Credit and Commerce
International SA (1998) (at pp 108–109) called “default terms”. This category
concerns specific types of contracts, usually defining relationships between
the parties such as landlord and tenant or employer and employee, where
the courts imply a term not because of the presumed intention of the parties
but because the implied term gives effect to policies intended to make the
relationship work in that particular category of contract. Thus, for example,
in employment contracts, the courts will presume that certain terms apply
unless the parties negate those implied terms by other terms.
10.60
Third, there is a category of terms that must be implied in some types of
contract pursuant to a law passed by Parliament. The Sale of Goods Act
furnishes the best example of this category.
10.61
Finally, there is a category of terms pertaining to contracts relating to
specialist subjects such as the sale of commodities. These contracts take
place in the context of trade associations and practices that have developed
rules on how the contract is to be performed and expands on the obligations
of the parties.
Terms Implied in Fact
10.62
While the courts have frequently declared that they are unwilling to make
contracts on behalf of the parties, they are willing to imply a term into a
contract when the term to be implied is obvious or where the implication is
necessary in order to give business efficacy to the contract. Frequently, there
is an overlap in these standards.
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10.63
A court would imply a term in a contract if it is satisfied that the parties,
if they had been asked by an officious bystander whether they would have
included the term to be implied as an express term, would both testily answer
“Oh, of course!” (per Mackinnon LJ in Shirlaw v Southern Foundries (1926)
Ltd (1939) at p 124). Because the term to be implied must be so obvious as
to not admit possible disagreement, if there are different possible answers or
answers with qualifications, the implication may not take place.
10.64
The courts would also imply terms to inject business efficacy into the
contract. In The Moorcock (1889), the defendants were the owners of a jetty
in the Thames River. They contracted with the plaintiff to have the plaintiff ’s
boat, The Moorcock, docked at the jetty. Both parties knew that when the
tide was low, the vessel would lie on the riverbed. During the low tide, the
vessel settled on a ridge of hard ground beneath the mud and was damaged.
The defendants had not given a warranty to the effect that the place was safe
and that the ship could rest on it without damage. Despite this omission, the
court held that there was an implied warranty by the defendants to this effect
and therefore were liable for damages caused by the breach of warranty. The
court observed that the warranty was implied from the presumed intention
of the parties. The purpose of the implication was to give business efficacy to
the transaction that both parties must have intended. The alternative, which
was unacceptable, was to impose on one party all the risks of the transaction
or to free the other side from all chances of failure.
10.65
It may be asked if the “officious bystander” test is different from the “business
efficacy” test. The relationship between the two tests was not very clear.
Andrew Phang J (as he then was) dealt with this question in the Singapore
High Court case of Forefront Medical Technology (Pte) Ltd v Modern-Pak
Pte Ltd (2006). The learned judge opined (at [40]) that the logical approach
would be to treat the two tests as tests that complement one another and not
as two different tests. The “officious bystander” test is merely the practical
method by which the “business efficacy” test is implemented. In support, the
learned judge cited (at [35]) Scrutton LJ’s observation in the English Court
of Appeal case of Reigate v Union Manufacturing Company (Ramsbottom),
Limited and Elton Copdyeing Company, Limited (1918), at p 605:
A term can only be implied if it is necessary in the business sense to give
efficacy to the contract; that is, if it is such a term that it can confidently
be said that if at the time the contract was being negotiated some one
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had said to the parties, “What will happen in such a case,” they would
both have replied, “Of course, so and so will happen; we did not trouble to
say that; it is too clear.” Unless the Court comes to some such conclusion
as that, it ought not to imply a term which the parties themselves have
not expressed.
[emphasis added by Andrew Phang J (as he then was)]
10.66
The learned judge also helpfully clarified (at [41]) that that any term implied
in fact for a particular contract does not set a precedent for future contracts
of the same type:
In other words, the court is only concerned about arriving at a just and
fair result via implication of the term or terms in question in that case
— and that case alone. The court is only concerned about the presumed
intention of the particular contracting parties — and those particular
parties alone.
[emphasis in the original]
10.67
There have been scores of cases that have expanded on the criteria for
implying terms in fact. In BP Refinery (Westernport) Pty Ltd v Shire of
Hastings (1977), the Privy Council, a court that hears appeals from some
Commonwealth countries, enumerated the following conditions that must be
present in order for a term to be implied:
° the term to be implied must be reasonable and equitable;
° the term implied must be necessary to give business efficacy to the contract. Thus, no term will be implied if the contract is effective without it;
° the term implied must be so obvious that “it goes without saying”;
° it must be capable of clear expression; and
° it must not contradict any express term of the contract.
10.68
The criterion of “reasonable and equitable” implication (in the quotation at
para 10.67), while vague, merely provides a ground for refusing implication
where the term sought to be implied is manifestly unfair or unreasonable.
However, unlike “terms implied in law” (considered in the following paragraph), the criterion of reasonableness alone is insufficient; what is required,
rather, is the stricter criterion of necessity, which (as we have seen) is
embodied within both the “business efficacy” and “officious bystander” tests.
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Terms Implied in Law
10.69
As Lord McLaren said in William Morton & Co v Muir Brothers & Co (1907)
at p 1224:
The conception of an implied condition is one with which we are familiar
in relation to contracts of every description, and if we seek to trace any
such implied condition to their source, it will be found that in almost
every instance they are founded either on universal custom or in the
nature of the contract itself. If the condition is such that every reasonable
man on the one part would desire for his own protection to stipulate
for the condition, and that no reasonable man on the other part would
refuse to accede to it, then it is not unnatural that the condition should
be taken for granted in all contracts of the class without the necessity of
giving it formal expression.
The foregoing observation provides the pragmatic reason as to why courts
imply terms in certain types of contracts. Often these contracts are those
that establish a relationship between the parties such as an employer and
an employee. The advantages of having such standardised terms are that
certainty is promoted, risk can properly be estimated and important social
policies can be given effect to. For instance, a human resources manager in
a company can find out what terms the law will imply in the employment
relationship and can provide for risks by taking insurance. Likewise, a lessor
will know what duties will be implied in a lease and can adjust the rent to
be charged in order to pay for the costs associated with discharging those
duties. Borrowing a term from computer technology — “default printer”
— the House of Lords has referred to these terms as “default terms” because
they will apply unless overridden by the parties to the particular transaction
(see, eg, Malik v Bank of Credit and Commerce International SA (1998)).
10.70
In the leading case of Liverpool City Council v Irwin (1977), a landlord of
a block of apartments was held to be under an implied obligation to take
reasonable care of the common areas and keep them in a reasonable state
of repair, and in Scally v Southern Health and Social Services Board (1992),
employees who had been represented by a union that had negotiated certain
pension rights for them, were able to obtain damages from the employer
who had failed to notify them of these rights because the court implied a
term requiring the employers to bring this to the notice of the employees.
The House of Lords reasoned that since these rights were derived from a
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Chapter 10: Terms of the Contract
collective bargain, the employees could not be expected to become aware of
them on their own. In Lister v Romford Ice & Cold Storage Ltd (1957), the
court implied a term of faithful service by the employee in the contract of
employment. The implied term also required the employee to indemnify his
employer where the employee caused losses to the employer in the course
of employment. In Malik v Bank of Credit and Commerce International
SA (1998), the court held that there was an implied term in employment
contracts, that the relationship between employer and employee was one
of trust and confidence and that neither party would do anything, without
good cause, that would damage this relationship.
10.71
The courts are also willing to imply a term in order to facilitate global
commerce and the smooth functioning of arbitral agreements. Thus, it is an
implied term of an arbitration agreement that the parties will perform the
award issued by the arbitral tribunal (see Associated Electric & Gas Insurance
Services Ltd v European Reinsurance Company of Zurich (2003)).
10.72
Andrew Phang J (as he then was) in Forefront highlighted (at [42]) that in
contrast to a term implied in fact, any term implied in law will result in the
same term implied in all future contracts of that particular type. As a result,
the learned judge opined (at [44]) that the court should exercise the same, if
not a higher degree, of caution in implying a term in law as when implying
a term in fact.
Terms Implied by Statute
10.73
A statute may imply terms in a particular type of contract. When a statute
implies terms in a contract, it is not trying to anticipate and provide for
the intentions of the parties. Instead, the implication is on grounds of
public policy with Parliament believing that such contracts must contain
these implied terms unless explicitly dislodged by the parties. Perhaps, the
most well-known instance of terms implied by statute is the sales of goods
legislation contained in the UK Sale of Goods Act (“SGA”), applicable in
Singapore pursuant to the Application of English Law Act, and the United
Nations Convention on Contracts for the International Sale of Goods
(“CISG”), which has been made a part of Singapore law (Sale of Goods
(United Nations Convention) Act (Cap 283A, 1996 Rev Ed)). The terms
implied by sale of goods legislation attempt to provide coherence and a
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framework to a type of contract that is entered into thousands of times a
day. These implied terms allow the seller to price goods by reference to the
risk exposure created by the implied terms and allow the buyer and seller
to routinely engage in sales without wasting time in hammering out details.
The following illustrations of terms implied by SGA show that the content
of what is implied is necessary for the smooth functioning of a sale of
goods system in a country. For example, s 12(1) SGA implies a condition
that the seller has a right to sell the goods. Section 12(2) implies a warranty
that the goods are free from charges or encumbrances in favour of third
parties. Section 13(1) implies a condition that goods sold by description will
correspond with their description and s 15(2) that goods sold by sample will
correspond with their sample. Section 14(2) provides that where a seller sells
goods in the course of his business, there is an implied condition that the
goods supplied under the contract are of a satisfactory quality.
10.74
By incorporating this “shorthand” in sale of goods transactions, the SGA
allows the seller and the buyer to focus on the main elements of the
transaction and not be distracted by the need to cross the “t”s and dot
the “i”s. This in turn, reduces transaction costs and frees up time for the
parties to engage in more productive economic transactions. Thus, a grocery
store manager may work on managing the store without having to meet
customers and assure them on these matters while they stand in line at the
checkout queue.
Terms Implied by Custom
10.75
Contracts are rarely divorced from their surroundings and context. A
particular trade practice, the features of the market and even the customs
of the locality may be relevant to the operation of the contract. Accordingly,
where a party engages in contracting within a particular trade, for example,
the coffee trade, that party will be bound by the usage in that trade if the
usage is well-known, certain, reasonable and legal (see Nelson v Dahl (1879)).
In Hutton v Warren (1836), the dispute centred on a tenant farmer’s claim to
a fair share for seeds and allowance. The plaintiff farmer gave the landlord
notice of his intention to quit farming the land. However, the lease required
the farmer to continue to plant during the notice period. He would no
longer be in a contractual relationship when harvest time came around. The
issue was whether the farmer was entitled to a fair allowance even though
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Chapter 10: Terms of the Contract
the crop had not been harvested. The court reasoned (at p 475) that this was
a type of contract where “the parties did not express in writing the whole
of the contract by which they intended to be bound but to contract with
reference to known usages”. If it can be shown that those doing business in
a particular community had a generally accepted custom and that anyone
inquiring would have been told about that custom, then this custom would
bind the parties even if both of them were ignorant of its existence (see
Chan Cheng Kum v Wah Tat Bank Ltd (1971)).
10.76
To be implied in a contract, a custom must be a usage that is sufficiently
uniform and accepted by the relevant community as controlling in the
absence of express agreements. Pointing to the impact of rapid globalisation
and industrialisation in Singapore, it has been argued that the emergence
of significant local custom that could be implied in Singapore contracts
is remote (see A Phang, International Encyclopaedia of Laws — Contracts
(Singapore) (2000) at para 358). For a diagrammatical illustration of express
and implied terms and their characteristics, see Figure 10.1.
Content of contract: Terms
EXPRESS
Oral
IMPLIED
Written
Fact
Court
Statute
Law
Terms implied in fact by Court
v “Ofcious bystander” test — the practical method
to implement the “business efcacy” test
v Terms implied depends on facts of case — does
not set a precedent — same term will not
necessarily be implied in all other contracts of
the same type
v Term will not be implied if it is contrary to
expressed intention of contracting parties
Usage/Custom
Eg, Sale of Goods
Act implied terms
Terms implied in law by Court
v Terms implied to promote certainty and
give effect to important social policies
v Terms implied set a precedent
— same term will also be implied in
all other contracts of the same type
v “Default terms” — that is, terms that
apply unless expressly overridden by
contracting parties
Figure 10.1 Express and implied terms
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CONCLUSION
10.77
Communications technologies have made telex and facsimile communication
obsolete and have replaced these with email, short message services (“sms”)
and voicemail. In a commercial context, the result is an abundance of
material, scattered in various formats and places, that provides evidence of
negotiations and agreement. Sifting through this material to ascertain what
part is puff, what part are terms and what part are representations can be a
challenging task for a lawyer. A “writing” could now be an email and it may
be necessary to determine whether the contract has been reduced to writing
so as to trigger the parol evidence rule. In a teleconference negotiation, a
visual and audio record of what was said would be available. In determining
whether a particular statement was a term or a representation, a judge
may have to consider not only the traditional rules found in the cases but
visual cues and other pointers generated by advances in communications
technology. As technology advances, the law relating to contractual terms
would have to respond not only in a pragmatic way but also in a way that is
theoretically coherent.
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Chapter 11
Exemption Clauses
11.1–11.5
Introduction
11.6
11.7–11.12
11.13
11.14
11.15–11.16
11.17–11.19
11.20–11.22
11.23–11.24
Incorporation
Incorporation by Signature
Incorporation by Notice
(1) Type of document
(2) Time of notice
(3) Adequacy of notice
(4) Effect of the clause
Incorporation by Previous Course of Dealing
11.25–11.26
11.27–11.29
11.30–11.35
11.36–11.40
Construction
Contra Proferentem Rule
Rule in Cases of Negligence Liability
Doctrine of Fundamental Breach
11.41–11.43
Statutory Limitations on the Use of Exemption Clauses: Unfair
Contract Terms Act
Contracts to Which UCTA Does Not Apply
Applicability of UCTA to “Business Liability”
Applicability of UCTA to Negligence Liability
Applicability of UCTA to Breach of Contract
UCTA and Sale or Supply of Goods
UCTA and Consumer Contracts
Test of Reasonableness
11.44–11.45
11.46
11.47–11.49
11.50–11.51
11.52–11.53
11.54–11.55
11.56–11.65
11.66–11.70
Exception Clauses and Consumer Protection Legislation in
Singapore
11.71–11.72
Conclusion
Principles of Singapore Business Law
INTRODUCTION
11.1
Exemption clauses, which are sometimes also known as exclusion clauses or
exception clauses, form part of the terms of the contract that we dealt with
in the previous chapter. They are terms that seek to exclude or limit the
liability of one of the parties in the event of a breach of contract. Such terms
are common in everyday commercial contracts, especially the standard form
contracts. They seek to exclude or limit liability arising from the contract
or common law liability that might arise independently of the contract, for
example, tort liability for loss or damage by negligence. From a functional
point of view, exemption clauses can be divided into three types:
(1) exemption (or exclusion) clauses that seek to exclude the liability
completely;
(2) limitation of liability clauses that seek to limit the liability (eg, to a
certain money amount); and
(3) indemnity clauses that seek to pass liability (or the risk thereof) to a
third party.
The reference to “exemption clauses” in this chapter includes all three types.
It may be noted here that though the first two types of exemption clauses
are essentially similar, the courts are likely to interpret the clauses excluding
liability more strictly than the clauses limiting the liability (see para 11.29).
11.2
A review of the law relating to exemption clauses must take into account two
developments: first, the idea of freedom of contract where the parties to the
contract have unrestrained rights to enter into contracts of their choosing
and second, the subsequent intervention by the courts and the legislature to
control its excesses.
11.3
Under the concept of freedom of contract, the parties must be free to
negotiate their mutual rights and obligations under the contract without the
interference from the courts or the legislature. This would enable the parties
to allocate the risks and divide the responsibilities, and where they deal on
the basis of a standard form contract, it will help them to reduce the costs of
negotiation by mass producing the contracts. Theoretically the parties are at
liberty to make their own bargains when they negotiate on an equal footing.
However, often this may not be so, especially in the case of standard form
contracts. A supplier of goods and services may want to exclude his potential
liability by the use of his own pre-printed standard form of contract, and he
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Chapter 11: Exemption Clauses
may assert that he will contract on his own terms and no other. This “take
it or leave it” situation affords no choice for the customer. Either he must go
without the goods or services, or take them subject to the exemption clause.
It is apparent that such contracts are not freely negotiated.
11.4
While it may be acceptable for parties with equal bargaining power to impose
exemption clauses, the courts and Legislatures have been reluctant to allow
them when imposed by a stronger party on a weaker party. The courts have
disapproved such clauses and have been sympathetic towards the weaker
party by interpreting the exemption clauses narrowly and by providing for
certain requirements for their validity. The Legislature has intervened by
introducing the UK Unfair Contract Terms Act 1977, made applicable in
Singapore by the Application of English Law Act (Cap 7A, 1994 Rev Ed) and
reprinted locally as Cap 396, 1994 Rev Ed, and provisions in other statutes.
11.5
This chapter will first deal with the courts’ approach to exemption clauses.
For an exemption clause to be valid, it must satisfy the requirements laid
down by the courts concerning incorporation and construction. The chapter
will then consider the statutory limitations on the use of exemption clauses
under the Unfair Contract Terms Act (“UCTA”).
For an exemption clause to be valid it must satisfy the following requirements:
° it must be properly incorporated into the contract;
° it must be properly construed; and
° its operation must not be excluded or restricted by statute, namely,
UCTA.
INCORPORATION
11.6
The courts will require the person relying on an exemption clause to show
that the other party agreed to its incorporation into the contract at the time
of or prior to the contract: otherwise, it will not be part of the contract. An
exemption clause is incorporated into the contract in three ways:
(1) by signature;
(2) by notice; and
(3) by a previous course of dealing.
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Incorporation by Signature
11.7
Where a contract is made in writing, the general rule is that the person
signing the contract is bound by everything contained in the document,
whether he has read it or not. Thus a person signing a pre-printed standard
form contract cannot later complain that he did not read it before signing.
In L’Estrange v F Graucob Ltd (1934), the plaintiff signed a hire-purchase
agreement for a cigarette vending machine. The contract contained, “in
regrettably small print”, a clause that provided that “any express or implied
condition, statement or warranty … is hereby excluded”. Although the
plaintiff had not read the document, it was held that the clause bound her,
and she had no remedy when the machine proved defective. Scrutton LJ
said (at p 403), “When a document containing contractual terms is signed,
then in the absence of fraud … or … misrepresentation, the party signing
it is bound, and it is wholly immaterial whether he has read the document
or not.” In Press Automation Technology Pte Ltd v Trans-Link Exhibition
Forwarding Pte Ltd (2003) the Singapore High Court held (at [39]) that the
fact that the incorporating clause was contained in a document that was
signed by the plaintiff resulted in the conditions being incorporated as part
of the contract between the parties notwithstanding that the plaintiff did
not have a copy of them and had not read them. In another case, Tjoa Elis
v United Overseas Bank Ltd (2003), the plaintiff disputed that the signatures
on instructions to the bank were hers. The Singapore High Court held
(at [64]) that even if the signatures on the disputed instructions were not
hers, the signatures were appended to those instructions with her authority
either before each instruction was sent or thereafter and hence were binding
on her.
11.8
There are four exceptions to this general rule:
° where non est factum is relied on;
° where there is misrepresentation;
° where an express warranty that has become part of the contract overrides
an exemption clause; and
° where a statement overriding an exemption clause is not part of the main
contract but which is enforced by way of a collateral contract.
These are discussed below.
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11.9
A party may be able to avoid a contract that he has signed if he can bring
himself within the doctrine of non est factum (“it was not my deed”). This
narrow doctrine is available especially to vulnerable persons (eg, the blind or
illiterate) who sign documents under a mistaken belief as to their nature or
effect (Saunders v Anglia Building Society (1971)).
11.10
The general rule does not apply where there is any misrepresentation as
to the nature of the document signed. In Curtis v Chemical Cleaning and
Dyeing Co (1951), the plaintiff took a wedding dress for cleaning, and
was asked to sign a document that exempted the cleaners from liability
“for any damage howsoever arising”. When she queried the document, the
defendant’s employee told her that the clause simply meant that the cleaners
would not accept any responsibility for any sequins and beads. She then
signed the document. When she collected the dress, it had a stain which was
not there before, but the cleaners, relying on the exemption clause, denied
liability. The English Court of Appeal held that even though the plaintiff had
signed the document, the cleaners could not rely on the exemption clause
since their employee had misrepresented to her the effect of the exemption
clause.
11.11
As regards the express warranty, the Singapore Court of Appeal considered
the issue in Anti-Corrosion Pte Ltd v Berger Paints Singapore Pte Ltd and
another appeal (2012). Anti-Corrosion (“A”) was a painting subcontractor
for building projects. Berger Paints (“B”), a paint manufacturer, contracted
to supply A with paint on four occasions. B initially gave a paint plan
according to which it was not necessary to apply a sealer coat to the surface
to be painted. In response to the concerns expressed by A, it was alleged
that B gave assurances that a sealer coat would not be necessary and gave a
five-year warranty on the paint to be used on any project which was based
on their paint plans. Three projects were completed successfully but on the
fourth occasion, there was serious discolouration of the internal surfaces of
the building project that were painted. A eventually sued for its losses and B
counterclaimed for the balance sum due on the paint sold to A. The Court
found (at [22]) on the evidence that B had verbally assured A that a sealer
coat was unnecessary and that a warranty would be provided and noted
(at [24] and [25]) that since B’s tax invoices and delivery orders did not
comprise the entire contractual relationship between the parties, the parol
evidence rule did not prevent B’s verbal assurances (the express warranty)
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from forming part of the contract. This raised the question as to whether
B was still entitled to rely upon the exemption clauses contained in their
tax invoices and delivery orders that conflicted with the express warranty to
limit their liability to A. The court held that the exemption clauses were not
effective in the light of the express warranty. The court said (at [46]) that it
was well established that an exemption clause contained in a written contract
can be overridden by an express warranty given at or before the time the
contract was concluded.
11.12
In the situation discussed above the oral assurances given by one of the
parties had become part of the contract thereby overriding the exemption
clauses. We now go on to consider situations where such assurances were
given at the time of entering into the contract but for some reason they
did not form part of the (main) contract. In such cases a court may give
effect to them by implying a collateral contract which may override the
written contract. It is sometimes possible that an oral undertaking given at
the time of signing a written contract may overshadow the written contract
and neutralise the exemption clause in the written contract. In such a case,
the oral undertaking creates a second or subsidiary contract — the collateral
contract (see Chapter 10, para 10.13). A collateral contract may be implied
by court and runs parallel to the main contract. A collateral contract does
not violate the English parol evidence rule (see the collateral contract
exception to the English parole evidence rule in Chapter 10, para 10.13)
and may vary the terms of the written main contract and render ineffective
an exemption clause contained in it. In Evans (J) & Son (Portsmouth) Ltd
v Andrea Merzario Ltd (1976), the plaintiff imported Italian equipment
regularly and engaged the defendant as its forwarding agent on standard
written contracts. The equipment was always stored below deck during the
voyage to avoid corrosion. When the defendant started using containers in
1967, he orally assured the plaintiff that their goods will be stored below
deck. Based on this assurance, the plaintiff continued to engage the defendant.
But, contrary to the assurance, the written contract in fact specified that the
plaintiff ’s equipment may be carried on deck. One shipment was lost when
the equipment stored on deck was lost at sea. On being sued, the defendant
sought to rely on the exemption clause in the written contract. The English
Court of Appeal held that the oral assurance created a collateral contract that
neutralised the exemption clause and the printed conditions in the written
contract. However, the collateral contract exception to the parol evidence
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rule laid down in proviso (b) to s 94 of the Singapore Evidence Act (see
Chapter 10, para 10.14) does not permit evidence of any oral undertaking in
a collateral contract that is inconsistent with the terms of the main written
contract to be proved (see the Singapore Court of Appeal decision in Latham
v Credit Suisse First Boston (2000)). This exception would thus not apply in
the Singapore context.
Incorporation by Notice
11.13
Where the contract is not written or where the terms are in an unsigned
document, the exemption clause may still be incorporated into the contract.
In such a case, the person seeking to rely on it must show that the other
party knew, or ought to have known that the document was one which
could be expected to contain such terms. He must also show that he has
done everything reasonable to give sufficient notice of the exemption clause
to the other party. The guiding principle was laid down in Parker v South
Eastern Railway (1877). The plaintiff left a bag in the station cloakroom and
obtained a ticket in return. On the front of the ticket were printed details
such as the opening hours of the office, and also the words “See Back”. On
the back was a clause limiting the liability of the company to £10 for the loss
of any item left with them. When the plaintiff returned to claim the bag, it
had been lost. He claimed the worth of the bag which was £24.10s, but the
company maintained that their liability was limited to £10. The Court of
Appeal held that a party could be deemed to have had reasonable notice if
he knew of the clause, or if reasonable steps were taken to bring the clause
to his notice. As to what makes a notice reasonably sufficient is a question
of fact. Some of the factors to consider are the type of document, the time
of notice, the adequacy of notice, and the effect of the clause. These are
discussed below.
(1) Type of document
11.14
An exemption clause will not be part of the contract if it is contained in
an unsigned document where a reasonable person would not be expected
to find contractual terms, for example, tickets, receipts and vouchers. Thus
in Chapelton v Barry Urban District Council (1940), Chapelton hired two
deck chairs from the defendant at Brighton beach. There was a notice near
the stack of chairs which requested customers to obtain tickets from the
attendant and retain them for inspection. Chapelton obtained the ticket and
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put it into his pocket without reading it. When he sat on one of the chairs,
it collapsed under him. He sued the Council for damages for his injuries, but
it sought to rely on the exemption clause printed on the ticket. The English
Court of Appeal held the Council liable. It held that the clause that was
printed on a ticket was not a term of contract because the ticket in this case
was not a contractual document. No reasonable person would expect to find
contractual terms on such a ticket since it would be regarded simply as a
receipt for money paid. In most cases, such a ticket would be received after
the hirer had sat in the chair.
(2) Time of notice
11.15
For the exemption clause to be effective, the notice must be given before or
at the time of the contract. A notice given after the contract was made is
ineffective. Thus, in Olley v Marlborough Court Ltd (1949), a couple rented a
hotel room for one week and paid in advance. Upon entering the bedroom
they saw a notice containing an exemption clause that exempted the hotel
from liability for loss or theft of articles, unless they had been given to the
management for safe custody. Later, their property was stolen. They sued the
hotel who then sought to rely on the exemption clause. The English Court
of Appeal held that the clause was not incorporated into the contract. The
contract was already concluded at the reception desk when the hotel agreed
to take the couple as guests, and therefore, the notice given on the bedroom
door was too late.
11.16
A similar issue arose in Thornton v Shoe Lane Parking Ltd (1971). Thornton
parked his car in the defendant’s automated car park. There was a notice
at the entrance which stated: “All cars parked at owners’ risk”. Upon entry,
a machine issued a ticket which contained printed words that referred to
conditions displayed in another part of the car park. Thornton did not see
the conditions, which included an exemption clause denying liability for
damage to property and personal injury. Thornton suffered an injury due
to an accident while collecting his car. He sued and the defendant sought
to rely on the exemption clause. The English Court of Appeal held that
the defendant had failed to prove reasonable sufficiency of notice. The
contract was formed when Thornton paid his money into the machine
which later issued the ticket. For the exemption clause to be incorporated,
there must have been reasonable sufficiency of notice prior to or at the
time of contract. A notice on the ticket would be too late. Similarly, a
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notice located at a different section of the car park would be too late. The
following statement by Lord Denning MR (at p 689), which is obiter dicta,
is very instructive:
The customer pays his money and gets a ticket. He cannot refuse it. He
cannot get his money back. He may protest to the machine, even swear
at it; but it will remain unmoved. He is committed beyond recall. He was
committed at the very moment when he put his money into the machine.
The contract was concluded at that time. It can be translated into offer
and acceptance in this way. The offer is made when the proprietor of the
machine holds it out as being ready to receive the money. The acceptance
takes place when the customer puts his money into the slot. The terms
of the offer are contained in the notice placed on or near the machine
stating what is offered for the money. The customer is bound by those
terms as long as they are sufficiently brought to his notice beforehand,
but not otherwise. He is not bound by the terms printed on the ticket
if they differ from the notice, because the ticket comes too late. The
contract has already been made.
(3) Adequacy of notice
11.17
The person relying on the exemption clause must show that he did take
reasonable steps to bring the notice to the attention of the other party.
This means, among other things, that the notice must be sufficiently
conspicuous and legible. There is no need to show that the injured party had
actual notice of it. In Thompson v London, Midland and Scottish Railway
Co (1930), the English Court of Appeal held that the test of reasonably
sufficient notice had been satisfied. The plaintiff, an illiterate, asked her
niece to purchase a railway excursion ticket for her. On the face of the ticket
were the words, “For conditions see back”. On the back of the ticket were
the words to the effect that the ticket was issued subject to the conditions
set out in the defendant company’s time table. Thompson suffered an injury
and sued the defendants. The court held that reasonably sufficient notice
had been given. In this context the ticket was a common form of contractual
document. Since it did refer to the time table, the clause was held to be an
integral part of the contract. The fact that Thompson could not read was
not material, since “illiteracy is a misfortune, not a privilege”. However, the
decision does seem wrong because it is arguable whether the steps taken by
the defendant to bring the exemption clause to the notice of the plaintiff
were adequate.
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11.18
A different outcome may result where the party relying on the exemption
clause knows from the very beginning that the injured party is under some
disability. In Geier v Kujawa, Weston & Warne Bros (Transport) Ltd (1970),
Geier, who could not understand English, was a passenger in a taxi where
there was a notice in English containing an exemption clause. The driver
realised that Geier did not understand English though he pointed to the
exemption clause. In an action by Geier, the defendant sought to rely on the
exemption clause. The court held that there was no reasonable sufficiency of
notice, since the driver knew of Geier’s disability but did not take reasonable
steps to translate the notice. This suggests that in Singapore, with its
multi-racial and multi-lingual population, extra steps may be needed to bring
the clause to the notice of persons known not to understand the language
of the clause.
11.19
Adequacy of notice was again the issue in a Singapore case, Jet Holding Ltd
and others v Cooper Cameron (Singapore) Pte Ltd and another (2005). The
plaintiff, the owner of the oil exploration drill ship, Energy Searcher, sued the
defendant for breach of contract when the ship’s slip joint manufactured by
the defendant broke into two. The defendant tried to rely on standard form
exemption clauses that it claimed had been incorporated into the contract
by way of a separate provision in a sales quotation. The exemption clauses
were not printed on the reverse of the quotation but were merely referred
to in the notes to the quotation. The Singapore High Court noted (at [112])
that there was difficulty in establishing what exactly were the terms and
conditions of sale that formed part of the sales quotation. Accordingly the
court held (at [114]) that no adequate notice was given as the standard
form clauses involved should have been brought fairly and reasonably to
the plaintiff ’s attention “by pointing them out, more so when the terms and
conditions were not printed on the reverse of the quotation.” Consequently,
the exemption clauses were not incorporated into the contract.
(4) Effect of the clause
11.20
This issue is related to the issue of adequacy of notice discussed above. The
case law indicates that the more onerous or unusual the clause, the greater
the degree of notice required to incorporate it. Such clauses cannot be
incorporated simply by handing over or displaying a document containing
the clause; the party seeking to rely on it must take special steps to draw
attention to it. This principle formed part of the reasoning in Thornton v Shoe
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Lane Parking Ltd (1971) (see para 11.16). Although it was fairly common
for car park conditions to exclude liability for damage to cars, exclusion
of liability for personal injury was not a term that motorists would usually
expect in such a transaction. Thus, though steps taken by the proprietor
might have been sufficient to exclude or limit liability for property damage,
they could not be deemed to have given sufficient notice of the more unusual
term concerning personal injury.
11.21
This issue was highlighted again in Interfoto Picture Library v Stiletto Visual
Programmes Ltd (1989). The defendants were an advertising agency who had
hired photographic transparencies from the plaintiffs. Stiletto had not dealt
with Interfoto before but, on request, the latter delivered 47 photographs,
along with a delivery note. This stated that the pictures should be returned
within 14 days, and included a list of conditions. One of the conditions
was that if the pictures were kept longer than 14 days, they would be
charged a holding fee of £5 per picture per day until they were returned.
Stiletto, apparently without reading the conditions, decided that the pictures
were not suitable for their purpose, and put them aside. When they returned
the pictures almost a month later, Interfoto submitted an invoice for
£3,783.50 towards the holding fee. The English Court of Appeal held that
Stiletto was not contractually bound to pay the charge. The daily charge was
much higher than what would usually be charged. The term was merely
printed on the plaintiff ’s standard terms, whereas due to its particularly
onerous nature, it called for a greater degree of notice. The court quoted,
with approval, Lord Denning’s statement in Spurling v Bradshaw (1956)
(at p 466) to the effect that:
Some clauses are so onerous they would need to be printed in red ink
on the face of the document with a red hand pointing to it before notice
could be held to be sufficient … onerous or oppressive clauses must
be drawn clearly to the other party’ notice, otherwise they will not be
incorporated.
In the instant case, the court allowed Interfoto to recover £3.50 per week
for each transparency returned late, as being a reasonable sum due on a
quantum meruit.
11.22
The Interfoto case was applied by the English Court of Appeal in O’Brien v
MGN Ltd (2001). Here the plaintiff had won a substantial amount in prize
money in a scratchcard game promoted by a newspaper. Due to an error
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on the part of someone in the newspaper a large number of people were
informed that they had won. On the cards was printed “Full rules and how
to claim see Daily Mirror”. Rule 5 provided: “Should more prizes be claimed
than are available in any prize category for any reason, a simple draw
will take place for the prize”. Consequently a special draw was held and
an additional prize of the same amount was shared by other winners. The
claimant got a small amount of the latter and brought an action to recover
the full prize. The issue was whether the contract between the parties
incorporated the newspaper’s rules of the game. The Court of Appeal held
that they were. The test was whether the newspaper could be said fairly
and reasonably to have brought the rules to the notice of the claimant and
whether those rules were particularly onerous or outlandish. The court held
that they were not. In the particular context of the game, the court was
satisfied that the newspaper had done just enough to bring the rules to the
claimant’s attention.
Incorporation by Previous Course of Dealing
11.23
Where the parties have previously made a series of contracts, and those
contracts contained an exemption clause, that clause may have been
incorporated in a subsequent contract even though neither party made a
reference to it at the time. In Spurling v Bradshaw (1956), the parties had
been doing business together for many years. The defendant delivered
eight barrels of orange juice to the plaintiffs, who were warehousemen,
for storage. He received a document from them, acknowledging the receipt
of the barrels. Words on the front of the document referred to clauses
printed on the back. One of them exempted the plaintiffs “from any loss or
damage occasioned by the negligence, wrongful act or default” of themselves
or their employees. When the defendant went to collect the barrels, they
were empty. He consequently refused to pay the storage charges and the
plaintiffs sued for recovery. He counter-claimed for negligence and the
plaintiffs sought to rely on the exemption clause. The defendant argued
that the clause was not applicable because it was only sent to him after the
contract had been concluded. However, he admitted that he had received
similar documents earlier but he had never bothered to read them. The
court held that the clause was incorporated into the contract by previous
course of dealing.
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11.24
In order for a term to be incorporated on the basis of a course of dealing
between the parties, the course of dealing must be well established. In
Hollier v Rambler Motors (AMC) Ltd (1972), the plaintiff had taken his car
for repair at the defendants’ garage three or four times in the previous five
years. Each time a form containing an exemption clause had been signed.
The clause contained the words: “The company is not responsible for damage
caused by fire to customers’ cars on the premises.” The plaintiff made an
oral contract to have the car repaired. The car was destroyed by fire, owing
to the defendant’s negligence. Although no form had been signed on this
occasion, the defendants argued that this clause was incorporated into the
contract by previous course of dealing. The English Court of Appeal held
that the previous course of dealing in this case was not sufficient to justify
the inclusion of the exception clause.
CONSTRUCTION
11.25
The incorporation of an exemption clause into a contract does not
automatically exempt the relying party from liability. Once it is established
that the clause is part of the contract, the next step is to construe or interpret
it to determine whether it actually covers the breach that has occurred. The
construction is important because it determines the effectiveness of the
clause. The scope of protection available to the relying party depends on how
broadly the clause is interpreted.
11.26
In trying to limit the scope and applicability of exemption clauses, the English
courts have used different approaches in the construction of contractual
terms. These include the following:
° the contra proferentem rule;
° the rule in cases of negligence liability; and
° the doctrine of fundamental breach.
Contra Proferentem Rule
11.27
Contra proferens means, against the maker. Traditionally, the courts have
construed exemption clauses contra proferentem if there is ambiguity or
doubt, that is, in the manner least favourable to the person who inserted
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them into the contract. If there is any doubt as to the meaning and scope
of the exemption clause, the ambiguity will be resolved against the party
who had inserted the exception clause into the contract and who is now
relying on it. In Houghton v Trafalgar Insurance Co (1954), an insurance
policy excluded claims in cases where the car was carrying “any load in
excess of that for which the car was constructed”. The car was a five-seater,
but was carrying six people at the time of the accident. The English Court
of Appeal held that the word “load” should be given a narrow interpretation,
referring to goods and not people. The word could refer to weight as well
as the number of passengers and hence was ambiguous. Consequently, the
clause did not exclude the insurer’s liability.
11.28
Similarly in Middleton v Wiggin (1996) a narrow interpretation was given
to an exemption clause in an insurance policy. The rotting waste on the
claimant’s landfill produced gases which caused an explosion and destroyed
a nearby house. The claimant had to pay damages to the home owner and
claimed this expense from the insurers. The insurance company refused
to pay, relying on the exemption clause which excluded liability for loss
arising from the disposal of waste material. The English Court of Appeal
rejected this argument as the accident had not occurred from the disposal of
waste, but from the unforeseen escape of gas resulting from the process of
decomposition. The Singapore Court of Appeal applied the contra proferentem
rule in Tay Eng Chuan v Ace Insurance Ltd (2008).
11.29
Since the passing of the UCTA, the courts have been somewhat more
restrained in applying the rules of construction, such as the contra proferentem
rule, to regulate the use of exemption clauses. Though technically the contra
proferentem rule applies to all exemption clauses, the courts have tended
to apply it less rigorously to those that merely limit liability rather than
exclude it completely. Thus, in Ailsa Craig Fishing Co Ltd v Malvern Fishing
Co Ltd and Securicor (Scotland) Ltd (1983), Securicor had contracted to
provide security services for certain ships moored in Aberdeen harbour. As
a result of their default, two ships sank. A clause in the contract limited
Securicor’s liability to £1,000. The shipowners claimed that the clause was
ambiguous and should therefore be interpreted in their favour. The House
of Lords upheld Securicor’s reliance on the clause, stating that limitation
clauses need not be construed as strictly as exclusion clauses. Limitation
clauses are more likely to express the genuine intentions of the parties, and
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to be considered as part of the bargain than exclusion clauses. The Singapore
High Court followed Ailsa Craig in “The Neptune Agate” (1994) (at [57] and
[59], Rapiscan Asia Pte Ltd v Global Container Freight Pte Ltd (2002) (at
[63]); and PT Soonlee Metalindo Perkasa v Synergy Shipping Pte Ltd (2007)
(at [76] and [79].
Rule in Cases of Negligence Liability
11.30
In cases of negligence, the party relying on the exemption clause to escape
liability must show that clear words in the clause fully cover the facts that
have occurred. Where the clause does not clearly cover negligence, the
courts have held that the exemption clause is inapplicable. In White v John
Warrick & Co Ltd (1953), White hired a bicycle from the defendants. While
he was riding it, the saddle tilted forward and he was injured. The contract
of hire stated that “nothing in this agreement shall render the owners liable
for any personal injury”. If the term had not been inserted the defendants
might have been liable on two grounds, namely, for negligence in tort and
in contract. The English Court of Appeal held that the term was ambiguous
and applied the contra proferentem rule. It held that the clause only excluded
liability for breach of contract, and therefore the defendants were not
protected if they were found to be negligent in tort. Likewise, in Hollier v
Rambler Motors (AMC) Ltd (1972) (see para 11.24), where the plaintiff ’s car
was damaged by fire caused by the defendants’ negligence, the defendants
argued that this fell within the scope of the exemption clause. The English
Court of Appeal disagreed. It held that the clause was not sufficiently clear
and unambiguous to cover negligence since it was possible to interpret the
clause as attempting to exclude liability for fire damage caused, both by and
in the absence of negligence.
11.31
It is perhaps arguable that there is no longer a need for the courts to apply
such strict interpretation, given that UCTA now deals specifically with
attempts to exclude or limit liability for negligence. Further, it is possible to
make the language of the clause clear and unambiguous by use of appropriate
words.
11.32
While it is possible for a contracting party to exclude liability for his
own negligence by use of clear words, the courts are also aware that it is
inherently unlikely that one party will readily agree to allow the other to
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exclude liability for his own negligence. In view of such situations, the courts
have evolved certain rules of construction. In Canada Steamship Lines Ltd v
R (1952), the court set out the following guidelines:
(1) If a clause contains language which expressly exempts the party relying
on the exemption clause from the consequences of his own negligence
then effect must be given to the clause;
(2) If the first rule is not satisfied, then the court will proceed to apply the
second and third rule. Under the second rule, the court must consider
whether the words are wide enough, in their ordinary meaning, to cover
negligence on the part of the party relying on the exemption clause. If
there is any doubt as to whether the words are wide enough to cover
negligence, the doubt must be resolved against the party relying on the
clause; and
(3) If the second rule is satisfied, the court must apply the third rule and
consider whether the exemption clause may yet cover some kind of
liability other than negligence. If there is such a liability, the clause will
then apply to such liability and will not extend to negligence.
These statements of the Privy Council have since been applied as guidelines
for construction, rather than as strict rules of law in cases of negligence
liability.
11.33
In National Westminster Bank plc v Utrecht-America Finance Co (2001), a
term excluding negligent and even fraudulent non-disclosure was upheld.
Here there was no scope for applying Canada Steamship rules because the
contract was between large banks dealing at arm’s length and advised by
commercial lawyers. The term was not unfair as it operated both ways.
11.34
The House of Lords in HIH Casualty and General Insurance v Chase
Manhattan Bank (2003) affirmed the general authority of these rules and
said that the court’s primary task was to give effect to the intention of the
parties.
11.35
The Singapore Court of Appeal considered these rules in Marina Centre
Holdings Pte Ltd v Pars Carpet Gallery Pte Ltd (1997). In this case Pars Carpet
Gallery (“the lessee”) leased certain premises from Marina Centre Holdings
(“the lessor”) under a lease agreement. During the term of the lease, water
seeped through the ceiling above the premises and damaged the lessee’s
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goods. The claim for damage was met by the insurers who sued the lessor in
the lessee’s name in exercise of their right of subrogation. The lessee claimed
that the lessor was in breach of the covenants, and that it was negligent at
common law. The lessor denied the breach and negligence and argued that
it was in any event absolved from any liability by the exemption clauses
contained in the lease. In particular the lessor relied on cl 36.1(b), which
stipulated that the lessor and its officers, servants, employees and agents
should not be liable or in any way responsible for any injury or damage to
persons or property or any consequential loss resulting from an entire list
of events “unless caused by the willful misconduct of [the lessor] or [its]
officers, servants, employees or agents”. The trial judge dismissed the lessee’s
claim on the ground that cl 36.1(b) exempted the lessor from all heads of
liability. On the lessee’s appeal to the High Court, it was held that the clause
did not absolve the lessor from liability for negligence. The lessor then
appealed to the Court of Appeal. Like the courts below, the Court of Appeal
applied (at [7]) the guidelines laid down by the Privy Council in Canada
Steamship. The court held (at [13]) that the cl 36.1(b) did not satisfy the first
test as it did not expressly exempt the lessor from liability in negligence, nor
did it contain the word “negligence” or any synonym for it. As to the second
test the court held (at [21]) that the qualifying words at the end of cl 36.1(b),
namely, “unless caused by wilful misconduct of the Landlord or its officers”
clearly implied that negligence liability is excluded. Under the third test the
question was whether there are other heads of damage founded on liability
other than that for negligence which are covered by cl 36.1(b). In this case,
it was suggested (at [38]) that apart from negligence there could be liability
(a) for breach of the covenants for quiet enjoyment and for repair, (b) for
nuisance, and (c) under the rule in Rylands and Fletcher. The court held (at
[47]) that cl 36.1(b) on a true construction was not apt to cover any of these
heads of damage or loss. Thus Lord Morton’s second and third tests were
satisfied and the clause was effective to exclude liability in negligence. The
lessor was entitled to rely on the clause to absolve itself from such liability
to the lessee.
Doctrine of Fundamental Breach
11.36
Can an exemption clause defeat the main purpose for which the contract was
entered into? Can it go against the core or fundamental term of the contract
to render it totally different from what the contract contemplated? There was
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a general presumption that the parties do not intend an exemption clause
to defeat the main purpose of the contract. Hence it was thought that such
a clause would be ineffective where there was a breach of a fundamental
term.
11.37
In such cases, the courts earlier had a choice between two possible rules: to
treat it as a rule of law or to treat it as a rule of construction (interpretation).
If it is the former, as a matter of law, a fundamental breach cannot be
excluded or limited by an exemption clause even if the wording of the clause
clearly covered the breach that had occurred. Thus the earlier court decisions
generally took it to be a rule of law whereby in the event of a fundamental
breach, the exemption clause was automatically rendered ineffective. On the
other hand, if it is a rule of construction, whether or not a fundamental breach
could be so excluded or limited depended upon the proper interpretation of
the exception clause. Thus, while no exclusion or limitation of loss flowing
from the fundamental breach was allowed under the first rule, it was possible
to do so under the second rule.
11.38
The House of Lords in Suisse Atlantique Societe d’Armement Maritime
SA v NV Rotterdamsche Kolen Centrale (1967) rejected the doctrine of
fundamental breach and stated obiter that there was no rule of substantive
law that an exclusion clause could never excuse liability for such a breach.
They unanimously favoured the second rule, that is, that it was a matter
of construction. Whether the clause covered the breach in question would
always be a question of fact involving the interpretation of the contract.
However, as mentioned, the House of Lords’ endorsement was made obiter
and there was a lack of unanimity amongst five judges.
11.39
This approach was later confirmed by the House of Lords in Photo Productions
Ltd v Securicor Transport Ltd (1980) when they held the doctrine to be a
rule of construction. If the parties are of equal bargaining power, the clause
will be examined in the context of the contract as a whole. If the exemption
clause is clear and comprehensive, the courts will uphold it even in cases
of fundamental breach. In Photo Productions, Securicor contracted to guard
the plaintiff ’s factory. A clause in their contract provided that “under no
circumstances shall the company [Securicor] be responsible for any injurious
act or default by any employee of the company”. One night, a guard lit a
small fire inside the factory that accidentally got out of control and destroyed
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the factory. The Court of Appeal held that the exemption clause was invalid
because the breach by Securicor was a fundamental breach. However, on
appeal, the House of Lords unanimously construed the exemption clause to
be valid and protecting Securicor from the fundamental breach. The House
of Lords reaffirmed that there was no rule of law that fundamental breach
could not be covered by an exemption clause. In commercial contracts, the
parties were likely to be of roughly equal bargaining power and able to cover
their own risks by insurance. Therefore, there was no need for a doctrine of
fundamental breach. The decision in Photo Productions was affirmed by the
Singapore Court of Appeal in Sun Technosystems Pte Ltd v Federal Express
Services (M) Sdn Bhd (2007) (at [20]).
11.40
However, this does not cover deliberate repudiatory conduct by one party.
Thus in Internet Broadcasting Corp Ltd v MAR LLC (2009) it was held that
the defendant’s deliberate abandonment of the contract was not covered by
the exemption clause because no reasonable person could have intended it to
cover such an act.
As for consumer contracts, the UCTA now regulates the use of exemption
clauses in such contracts.
STATUTORY LIMITATIONS ON THE USE OF EXEMPTION CLAUSES:
UNFAIR CONTRACT TERMS ACT
11.41
With the proliferation of exemption clauses, it was only a matter of time
before some parties sought to abuse them by inserting unfair terms in
contracts. The most effective way to remedy this situation was by legislation.
The legislature in the UK intervened by passing the Unfair Contract Terms
Act 1977. As mentioned, this Act is now part of the law of Singapore by
virtue of the Application of English Law Act, 1993 (Cap 7A, 1994 Rev Ed)
and is published locally as Cap 396, 1994 Rev Ed, although some sections
have been excluded from the Singapore law. Contracts that are governed by
Singapore law that contain exemption clauses, therefore, may be subject to
the limitations imposed by the UCTA.
11.42
The UCTA will apply to contracts and to exemption clauses that fall within
its scope. In this context, it should be noted that the title UCTA is somewhat
misleading in two aspects. First, UCTA applies to exemption clauses not
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only in contract but also in non-contractual situations like tort (as in s 2).
Second, despite its title, UCTA does not aim to provide a general standard of
fair and unfair contract terms. It does not deal with all the unfair terms in
a contract, only unfair exemption clauses. Most of the provisions of UCTA
apply to “business liability” (defined in s 1(3)) or to “consumer” transactions
(defined in s 12).
11.43
The primary focus of UCTA is to protect the parties, especially the
consumers. Additionally, UCTA will apply even in non-consumer or
non-business situations where exemption clauses are invoked in cases of
misrepresentation. In pursuing this objective, the UCTA does not purport
to change the common law relating to exemption clauses. It is therefore
necessary to consider the applicability of the exemption clause under
common law (as discussed above), and if found applicable to the case, to
then examine the effect of UCTA on that clause. Where an exemption clause
falls within the scope of UCTA, one out of two possible outcomes will ensue.
Either the clause is rendered totally inoperative, or it is subject to the test of
reasonableness. In the latter case, it will be inoperative if it fails the test of
reasonableness.
Contracts to Which UCTA Does Not Apply
11.44
The First Schedule to the UCTA lists contracts to which ss 2–4 (which are
primary sections applicable to exemption clauses that attempt to exclude or
restrict liability) will not apply. Under para 1 First Schedule, these include
contracts of insurance. Sections 2–4 are also inapplicable insofar as certain
contracts deal with the following stated matters, viz, contracts relating to the
creation, transfer or termination of rights or interests in land or intellectual
property; contracts relating to the formation or dissolution of a company,
or to its constitution or the rights and obligations of the corporation or
its members; and contracts relating to the creation or transfer of securities
or any rights or interests therein. Paragraph 2 First Schedule provides that
where marine salvage or towage contracts, ship or hovercraft charterparties,
or contracts for the carriage of goods by ship or hovercraft are concerned, ss
2(2)–4 and 7 will not apply to these contracts except in favour of a person
“dealing as a consumer”. Further, in relation to contracts involving the carriage
of goods by ship or hovercraft, where the means of carriage are concerned,
para 3 of the First Schedule excludes the applicability of ss 2(2)–4 as well,
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again except in favour of a person “dealing as a consumer”. Paragraph 4 First
Schedule provides that s 2 will not apply to clauses excluding or restricting
negligence liability in contracts of employment, except in favour of the
employee.
11.45
Lastly, s 26 UCTA excludes from its purview certain international supply
contracts. In Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd
(2009) where certain aircraft leases excluded Trident Turboprop’s liability
for misrepresentation, the English Court of Appeal held that the clauses fell
within the scope of s 3 Misrepresentation Act 1967 which, as substituted by
s 8 Unfair Contract Terms Act 1977, ordinarily imposed a requirement of
reasonableness on terms excluding liability for misrepresentation. However,
the court held that the lease agreements were international supply contracts
for the purposes of s 26 of the 1977 Act and therefore the normal requirement
as to reasonableness did not apply.
Applicability of UCTA to “Business Liability”
11.46
The UCTA provides that ss 2–7 apply in the case of both contract and tort
only in cases where the exemption clause concerns a “business liability”
(s 1(3)). Such liability is explained in the sub-section as “liability for breach
of obligations or duties arising from things done or to be done by a person in
the course of a business (whether his own or another’s)”. “Business” includes
a profession and the activities of any Government department or local or
public authority (s 14). It is thus clear that ss 2–7 cannot be relied upon by
a party to exclude or limit liability under an exemption clause where such
liability arises other than in the course of business.
Applicability of UCTA to Negligence Liability
11.47
“Negligence” is defined in s 1(1) UCTA as either the breach of “any
obligation, arising from the express or implied terms of a contract, to take
reasonable care or exercise reasonable skill in the performance” of that
contract or the breach of “any common law duty to take reasonable care
or exercise reasonable skill (but not any stricter duty)”. It is apparent from
this definition that the UCTA, despites its name, also applies to cases of
negligence that arise other than in the context of contract. Section 2 confirms
this view.
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11.48
Section 2(1) UCTA states that a person cannot exclude or restrict his liability
for death or personal injury resulting from negligence “by reference to
a contract term or to a notice given to persons generally or to particular
persons”. The inclusion of the word “notice” implies that this provision of
UCTA would operate also in non-contractual cases of negligence. Section 14
reinforces this view, as it provides, inter alia, that the word “notice” “includes
an announcement, whether or not in writing, and any other communication
or pretended communication”.
11.49
Section 2(2) UCTA deals with damage other than death or personal injury,
for example, property damage. The sub-section provides that in cases of
such loss or damage, a person cannot exclude or restrict his liability for
negligence except “in so far as the term or notice satisfies the requirement
of reasonableness”. The requirement of reasonableness is dealt with in s 11
UCTA (see paras 11.56–11.65).
Applicability of UCTA to Breach of Contract
11.50
Section 3 UCTA applies in cases of breach of contract that includes claim
of a contractual performance that is “substantially different” or of nonperformance. The section applies only where the contracting party against
whom the exception clause is being relied upon either “deals as consumer
or on the other’s written standard terms of business”. The issue as to when a
party “deals as consumer” is discussed further at para 11.54.
11.51
Section 3(2) deals with the effect of an exemption clause in a consumer
contract or a standard form contract. In such contracts, the party relying
on the exemption clause, when he himself is in breach of a contract, cannot
exclude or restrict liability in respect of this breach or claim to be entitled
“to render a contractual performance substantially different from that which
was reasonably expected of him; or … in respect of the whole or any part
of his contractual obligation, to render no performance at all”. Thus, the
section covers the whole range of breach of contract situations. In such
instances, the party relying on the exemption clause in the contract will
only be permitted to do so “in so far as … the contract term satisfies the
requirement of reasonableness”. To illustrate how ss 2 and 3 operate, see
Figure 11.1.
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Step 1
Does contract fall within scope of UCTA?
(see First Schedule)
No
Yes
Step 2
UCTA has no effect on EC
Only common law restrictions
apply.
Does EC fall within scope of UCTA?
Yes
Does EC exempt or limit “business liability”?
(see s 1(3))
No
Yes
UCTA has no effect on EC
Only common law restrictions
apply.
UCTA applies
Step 3
Which relevant section(s) regulate(s) EC?
This diagram only shows regulation of EC under ss 2 and 3.
Other regulating sections (eg, ss 4–7) not shown.
EC excludes or restricts liability
due to negligence (see s 2)
Negligence
results in death or
personal injury
EC is not
allowed
(see s 2(1))
EC excludes or restricts liability between
contracting parties where (see s 3(1)):
• one of them “deals as a consumer”
(see s 12); OR
• one of them deals on the other’s written
standard terms of business
And/Or
Negligence results in
other damages
EC allowed if it satisfies test
of reasonableness under
s 11 (see s 2(2))
Where EC is used by a contracting party against a
consumer and/or party dealing on the first contracting
party’s written standard terms of business to:
• exclude or restrict liability in respect of breach of
contract; OR
• claim to be entitled:
(i) to render a substantially different contractual
performance from that reasonably expected of
him; OR
(ii) to render no performance at all for the whole or
part of his contractual obligations
EC allowed if it satisfies test of
reasonableness under s 11
(see s 3(2))
Figure 11.1 Regulation of exemption clauses (“EC”) under ss 2 and 3 UCTA:
An illustrative framework
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UCTA and Sale or Supply of Goods
11.52
Section 6 deals with the contracts of sale and hire-purchase. Section 6(1)
provides that a seller’s implied undertaking as to title (under s 12 Sale of
Goods Act (Cap 393, 1999 Rev Ed) (“SGA”) and under s 6(1) Hire-Purchase
Act (Cap 125, 1999 Rev Ed) (“HPA”)) cannot be excluded or restricted by
reference to any contract term. In the case of consumer contracts (where
the buyer is “dealing as a consumer”), s 6(2) prohibits the exclusion or
restriction of liability by the seller relating to his implied undertakings as
to conformity of goods with their description or sample or their quality
or fitness for a particular purpose (under ss 13, 14 or 15 SGA and ss 6(2)
and (3) HPA). However, such liability can be excluded or restricted in nonconsumer contracts subject to the test of reasonableness (s 6(3)).
11.53
Where a contract is not governed by the law of sale of goods or hire-purchase
as regards the passing of ownership or possession of goods as discussed in
para 11.52, s 7 UCTA states that the same principles apply to such contracts
(ss 7(2) and 7(3)). The section further provides that liability for breach of
obligations arising under s 2 Supply of Goods Act (Cap 394, 1999 Rev Ed)
cannot be excluded or restricted (s 7(3A)). However, s 7(4) provides that the
right to transfer the liability in respect of the ownership of goods or give
possession or assurance of quiet possession can be excluded or restricted
subject to the test of reasonableness.
UCTA and Consumer Contracts
11.54
As noted above, the UCTA makes a distinction between two types of
contracts, viz, consumer contracts and non-consumer contracts. A consumer
contract is one where one party to the contract “deals as consumer”. Under s
12(1) a party deals as a consumer where:
(a) he “neither makes the contract in the course of business nor holds
himself out as doing so”;
(b) the other party makes the contract in the course of a business; and
(c) in the case of contract for sale of goods or hire-purchase, the goods in
question “are of a type ordinarily supplied for private use or consumption”.
However, a buyer in a sale by auction or competitive tender is not regarded
as dealing as consumer (s 12(2)). The burden of proof is upon the party who
claims that the other party does not deal as consumer (s 12(3)).
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11.55
Merely because a party is a business does not necessarily prevent it from
“dealing as a consumer”. In R & B Customs Brokers Co Ltd v United
Dominions Trust Ltd (1988), the plaintiffs were a shipping company owned
and controlled by a Mr and Mrs Bell. The company bought a second-hand
car from the defendants for business and personal use. They had made
two or three similar purchases in the past. The UCTA provision on which
they sought to rely would only apply if they were dealing as consumers.
Despite the fact that the purchase was made by the company and the
car would be used partly for business, the English Court of Appeal held
that the Bells were dealing as consumers. Dillon LJ made the following
helpful observations as to what would not constitute “dealing as consumer”
(at pp 330–331):
… there are some transactions which are clearly integral parts of the
businesses concerned, and these should be held to have been carried
out in the course of those businesses; this would cover, apart from
much else, the instance of a one-off adventure in the nature of trade,
where the transaction itself would constitute a trade or business.
There are other transactions, however, … which are at highest only
incidental to the carrying on of the relevant business; here a degree of
regularity is required before it can be said that they are an integral part
of the business carried on, and so entered into in the course of that
business.
Test of Reasonableness
11.56
The requirement of reasonableness underlies the provisions of UCTA. Section
11(1) UCTA gives a broad definition of reasonableness. It provides that, for
contractual terms, the test of reasonableness requires that “the term shall
have been a fair and reasonable one to be included having regard to the
circumstances which were, or ought reasonably to have been, known to or
in the contemplation of the parties when the contract was made”.
11.57
As regards exception clauses covered by ss 6 and 7, s 11(2) refers to a set
of guidelines given in the Second Schedule. It would thus appear that there
might be a difference between the concepts of reasonableness envisaged in
ss 11(1) and 11(2). However, in practice the courts generally refer to the
guidelines given in the Second Schedule in every case.
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11.58
The Second Schedule lists the following as matters that may be relevant:
° the strength of the bargaining positions of the parties relative to each
other and whether there were any alternative means for meeting the
customer’s requirements;
° whether the customer received an inducement to agree to the exemption
clause or could have entered into a similar contract without the need for
such a term;
° whether the customer knew or ought to have known of the existence
and extent of the term, having regard to any custom of the trade or a
previous course of dealing;
° where the term excludes or restricts any relevant liability for non-
fulfillment of a condition, whether it was reasonable at the time of the
contract to expect that the compliance with that condition would be
practicable; and
° whether the goods in question were manufactured, processed or adapted
to the special order of the customer.
Any of the abovementioned factors insofar as they appear to be relevant are
“matters to which regard is to be had in particular” (Second Schedule, UCTA).
However, these are only guidelines and are not limited to those enumerated
above. Case law has considered other factors to be relevant. Thus in Smith
v Eric Bush (1990) the court considered the following factors to be relevant,
viz, whether it would have been reasonably practicable to obtain advice from
an alternative source having regard to the time and cost involved; whether
the liability in question was for a difficult task or obligation that may impose
additional burden on the performing party; and the practical consequences
of determining whether or not the clause is in fact reasonable (eg, whether it
would have been open to either party to protect themselves against the risk
by taking insurance).
11.59
Reasonableness is a very factual enquiry and the guidelines merely assist the
courts in the enquiry. For example, in George Mitchell (Chesterhall) Ltd v
Finney Lock Seeds Ltd (1983), where a firm contracted to sell winter cabbage
seeds but delivered autumn seeds of inferior quality. The House of Lords held
that the exemption clause was unreasonable because, among other things,
the buyer could not discover the breach until the plants grew whereas the
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seller was at all times in a position where it should have known whether the
wrong seed was supplied.
11.60
In Motours Ltd v Euroball (West Kent) Ltd (2003) the defendant who
provided telephone services to the plaintiff, a travel agency, sought to
exclude all liability for all consequential loss howsoever arising. Although it
was a commercial bargain between businessmen, the court found the term
to be unreasonable. They considered the following factors to be relevant: the
exclusion for negligence could not have been within Motour’s contemplation;
exclusion clauses were common in the industry so that Motour had no
choice; the term was not negotiated; and the unequal bargaining position of
the parties whereby Motours was not in a position to negotiate and Euroball
could adopt a “take it or leave it” attitude.
11.61
In Regus (UK) Ltd v Epcot Solutions Ltd (2008), Regus hired serviced office
accommodation to Epcot. Epcot sought substantial damages for loss of
business due to faulty air-conditioning. A standard term in the contract
excluded any liability for loss of business, profits, anticipated savings, third
party claims or any consequential loss, or loss of or damage to data. The
English Court of Appeal found the clause to be reasonable. It held so
on the basis that Epcot could still sue for defective air-conditioning; the
exclusion did not cover fraud, or willful, reckless or malicious damage which
would be unreasonable; Regus reasonably limited its liability to the higher of
125 per cent or £50,000; Regus advised its customers to protect themselves
by insurance for business losses; and there was no inequality of bargaining
power.
11.62
The UCTA test of reasonableness came up for consideration in a number of
Singapore cases. In Consmat Singapore (Pte) Ltd v Bank of America National
Trust & Savings Association (1992), Consmat sued Bank of America for
amounts paid by the bank under forged cheques. The bank relied on
an exemption clause in its standard contract. Although UCTA was held
inapplicable on the facts, the High Court found that, were it to be applicable,
the clause in question would have been reasonable. The court noted the fact
that both parties were commercial entities who entered into the contract
freely; Consmat had had a choice of banks; the parties entered into the
contract freely; and the clause contained a grace period for Consmat to
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challenge any alleged discrepancies, and as a business entity, it had the
resources to verify its bank statements within this period.
11.63
In the subsequent case of Kenwell & Co Pte Ltd v Southern Ocean Shipbuilding
Co Pte Ltd (1999), the High Court held that the defendant failed to adduce
evidence of reasonableness and hence the clause could not be relied upon.
Whether a particular exemption clause is reasonable or not depends on the
facts of the particular case. A clause which is reasonable in one context may
be unreasonable in another. In particular, an exemption clause commonly
used in the industry may still be unreasonable under the UCTA. Moreover,
the more unreasonable an exemption clause, the greater is the burden upon
the party relying upon it to establish reasonableness. In passing, it was noted
that the fact that the parties entered into the contract willingly does not
prevent one party from later questioning the reasonableness of an exemption
clause. The Kenwell case was followed as clear authority and applied in
Press Automation Technology Pte Ltd v Trans-Link Exhibition Forwarding
Pte Ltd (2003).
11.64
In Lee Chee Wei v Tan Hor Peow Victor and others and another appeal
(2007) the Court of Appeal considered, obiter, the test of reasonableness
in the context of an “entire agreement” clause. The court stated that the
effect of an entire agreement clause was essentially a matter of contractual
interpretation and necessarily depended upon its precise wording and
context. Generally, such clauses were conducive to certainty as they defined
and confined the parties’ rights and obligations within the four corners
of the written document, thereby precluding any attempt to qualify or
supplement the document by reference to pre-contractual representations
(at [25]). However, the court cautioned and emphasised (at [37]) that the
intent and purport of the clause, in certain contracts, may find itself subject
to the strictures of the reasonableness test as provided for in the UCTA if
the contract is embraced by it. Moreover, it is only when the nature of the
liability which the clause is seeking to exclude or restrict has been ascertained
that it is possible to inquire whether the term was a fair and reasonable
one having regard to the circumstances which were or ought reasonably
to have been in the contemplation of the parties when the contract was
made. The court found the first four guidelines in the Second Schedule
of the UCTA to be relevant in assessing the reasonableness of the entire
agreement clause. The court noted (at [39]) that the entire agreement
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clauses perform a useful role as legitimate devices for the allocation of risk
between the parties, subject to an overriding judicial right to police clauses
which are oppressively employed against consumers or parties of unequal
bargaining power.
11.65
In Jiang Ou v EFG Bank AG (2011) the issue before the High Court was
the reasonableness of the conclusive evidence clauses. Mdm Jiang Ou
opened an account with EFG Bank in June 2008 and deposited nearly S$5
million. Between August 2008 and April 2009 without any instructions,
written or verbal, from her an employee of the bank and her relationship
manager executed a series of 160 high volume and/or high risk leveraged
foreign exchange and securities transactions purportedly on her behalf. As
a result her account suffered a loss of about S$2.3 million. She claimed
that prior to August 2009 she did not receive any of the 160 transaction
confirmation slips or bank statements except for 18 documents received
from 29 July 2008 to 5 January 2009. The bank denied liability for the loss
on the premise that Mdm Jiang was precluded from challenging the
correctness of the transaction documents by reason of the conclusive
evidence clauses in the bank’s documentation. Clause 4 of the General
Conditions of the account opening documents gave rise to a presumption
of delivery of the transaction documents to Mdm Jiang. Conclusive
evidence clauses, such as cll 3.1 and 3.2 imposed two concurrent duties on
customers: first, it placed the onus on the customers to verify their bank
statements and second, it required customers to notify the bank if there
was any discrepancy. If the customer failed to do so within the stipulated
time, he or she would be precluded from challenging the correctness
of the statement. The court held (at [56]) that the bank had failed to
discharge its burden of proof that the transaction documents were sent to
Mdm Jiang and therefore the presumption of delivery as provided in cl 4
of the General conditions did not arise. This alone rendered cll 3.1 and 3.2
to be ineffective. The court stated further (at [108]) that the risk of fraud
by the bank’s employee is a unique risk that typically resides with the bank.
If EFG Bank had intended to shift such risk to its customers, nothing
short of express reference in the relevant clause to such risk would have
sufficed. Clauses 3.1 and 3.2 clearly did not expressly or impliedly cover
unauthorised transactions carried out fraudulently by its employee in the
absence of instructions. In any event, conclusive evidence clauses which
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purport to exclude liability for the fraud of banks’ employees would stand
contrary to public policy and would run foul of the reasonableness test
under UCTA.
EXCEPTION CLAUSES AND CONSUMER PROTECTION LEGISLATION
IN SINGAPORE
11.66
Singapore has enacted the Consumer Protection (Fair Trading) Act (Cap
52A, 2009 Rev Ed) which came into force on 1 March 2004. The Act
defines a “consumer” as an individual who, otherwise than exclusively in
the course of business, receives or has a right to receive goods or services
from a supplier; or has a legal obligation to pay the supplier for goods or
services. A “consumer transaction” means the supply of goods or services
by a supplier to a consumer as a result of a purchase, lease, gift, contest
or other arrangement; or an agreement between a supplier or consumer for
that purpose (but excluding the transactions specified in the First Schedule)
(s 2(1)).
11.67
Section 4 of the Act refers to “unfair practices”. It is an unfair practice for
a supplier, in relation to a consumer transaction, to do or say something,
or omit to do or say anything, if, as a result, a consumer might reasonably
be deceived or misled; to make a false claim; to knowingly take advantage
of a consumer, where the consumer is not in a position to protect his own
interests or is not reasonably able to understand the character, nature,
language or effect of the transaction; or to do certain other acts specified
in the Second Schedule (such as misrepresenting the price of a product, the
sponsorship, benefits, standard or quality thereof).
11.68
A consumer who has entered into a consumer transaction involving an
unfair practice is entitled to go to court against the supplier (s 6(1)). The
Act also gives a consumer the right to cancel certain contracts within a
cancellation period (s 11(1)). However, a person who, in the ordinary
course of his business “prints, publishes, distributes, broadcasts or telecasts
an advertisement in good faith” on behalf of a supplier is exempted from
liability (s 16).
11.69
The consumer protection given by the Act is in addition to any right or
remedy that the consumer may have apart from this Act (s 15(1)). Further, it
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is not possible to contract out of the provisions of the Act (s 13). This would
mean that any exemption clause would be invalid if and to the extent that it
is inconsistent with the provisions of the Act.
11.70
The Act was amended by the Consumer (Fair Trading) Amendment Bill
passed by Parliament in March 2012 and came into force on 1 September
2012. The new law (termed in the media as “Lemon Law”) seeks to give
consumers added protection against defective goods that do not conform
to the contract of sale of goods (including a contract for the transfer of
goods and a hire-purchase agreement) at the time of delivery. The law will
apply if three criteria have been met: (i) the transferee deals as a consumer;
(ii) the goods do not conform to the applicable contract; and (iii) the contract
was made on or after 1 September 2012. Where a consumer is able to rely
on this law he may have the right to require the seller to repair or replace
the goods at seller’s discretion. Where it is not feasible to do so, then the
consumer will be entitled to require the seller to reduce the amount to be
paid by an appropriate amount or to rescind the contract. For further details
see Chapter 22, paras 22.131–22.138.
CONCLUSION
11.71
We noted at the beginning of this chapter that while it is essential to ensure
freedom of contract on one hand, it is equally important on the other to
control its excesses so that they do not lead to unfairness. The courts played
an important part as to the latter by assisting the weaker party through
various devices. These included first, the requirement for the stronger
party to prove incorporation of the exemption clauses into the contract.
An exemption clause could be incorporated into the contract by signature,
notice or by a prior course of dealing. Second, the courts would then decide
on its validity by employing various rules of construction such as the contra
proferentem rule, the rule in cases of negligence liability and the rule in cases
of fundamental breach. However, over time the courts’ intervention proved
to be insufficient and the legislature had to step in. The legislature in the
UK intervened by passing the Unfair Contract Terms Act 1977 which is now
part of the Singapore law as Cap 396, 1994 Rev Ed.
11.72
Another development to be noted in this context is the growth of consumer
protection legislation in tandem with the law on exemption clauses. Singapore
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enacted the Consumer Protection (Fair Trading) Act (Cap 52A, 2009 Rev
Ed) in 2004 which was in turn amended in 2012. The enactment of this
legislation regulating fair trading in Singapore has provided an additional
avenue for legal redress for consumers. As a result of this Act, the practice
of using restrictive or one-sided exemption clauses, at least with respect to
consumer transactions, are likely to be curtailed. Although the Act, unlike
UCTA, does not specifically provide that certain exception clauses are invalid,
it does permit an aggrieved consumer to sue a supplier and be awarded
restitution of the money he has paid or damages for loss he has suffered as a
result of the supplier’s unfair trading practices. This legislation thus seeks to
achieve fairness between the parties, the same objective that has guided the
development of the law relating to exemption clauses.
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Chapter 13
Misrepresentation
13.1–13.5
13.6
13.7
13.8
13.9
13.10–13.11
13.12
13.13–13.14
13.15–13.19
13.20–13.21
13.22
13.23–13.24
13.25–13.28
Introduction
Operative Misrepresentation
Elements of Misrepresentation
Statement of Fact
(1) Puffs
(2) Opinions
(3) Intentions
(4) Law
Representation by Conduct
(1) Express representations
(2) Implied representations
(3) Silence
Ambiguity and Falsity
Materiality
Inducement
Addressed to the Other Party
13.34
13.35
13.36
13.37–13.38
13.39
Types of Misrepresentations
Introduction
Fraudulent Misrepresentation
Negligent Misrepresentation
(1) Negligence at common law
(2) Section 2(1) of the Misrepresentation Act
(3) Measure of damages
(4) Burden of proof
Innocent Misrepresentation
13.40–13.41
Representation as a Term
13.42–13.44
13.45
13.46
Rescission
General
(1) Restitution impossible
(2) Affirmation
13.29
13.30–13.33
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13.47
13.48
13.49
13.50
13.51
13.52–13.53
(3) Lapse of time
(4) Third party rights
Section 2(2) of the Misrepresentation Act
(1) General
(2) Types of misrepresentation
(3) Where right to rescind is lost
(4) Measure of damages
13.54–13.60
Exclusion of Liability
13.61–13.62
Conclusion
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INTRODUCTION
13.1
The aim of a business is to sell a product or a service and, sometimes, in a
bid to secure a sale, much more is said than should have been said. If an
untrue statement is part of the contract, the innocent party has his rights
for breach of contract. But if the statement is not part of the contract, the
innocent party may still have rights under the law of misrepresentation.
13.2
The law of misrepresentation is found in the common law, equity and
statute. Originally, at common law, there was liability for misrepresentation
only if the misrepresentation was fraudulent or formed part of the contract.
Subsequently, after the House of Lords decision in Hedley Byrne & Co Ltd
v Heller & Partners Ltd (1964) (referred to at para 13.34), there was also,
possibly, liability for negligent misrepresentation. Non-contractual statements
which were neither fraudulent nor negligent did not give rise to a claim
for damages although the representee could seek, in equity, rescission and,
possibly, an indemnity.
13.3
The UK Misrepresentation Act 1967 was made applicable by the Application
of English Law Act (Cap 7A, 1994 Rev Ed) and reprinted locally as Cap 390,
1994 Rev Ed. Under this Act, a representee could claim damages for negligent
misrepresentation in the same way as he could claim had the representation
been fraudulent (see para 13.35). Compared to the common law claim under
the Hedley Byrne case, this species of statutory negligence is easier to mount
as a cause of action.
13.4
It should be mentioned that the law of misrepresentation straddles the
two broad areas of contract law and tort law. As such, in a situation of
misrepresentation, the innocent party may have rights under both contract
and tort. The concurrent existence of duties in contract and tort was
confirmed by the House of Lords in Henderson v Merrett Syndicates Ltd
(1995).
13.5
As a final introductory remark, it may be observed that misrepresentation
sometimes overlaps with breach of contract. Indeed, where a representation
is or becomes part of the contract, the innocent party may have remedies
in both misrepresentation and breach, and s 1 of the Act makes it clear that
a person is not to be deprived of the right to rescind for misrepresentation
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merely because the representation has become part of the contract. In
general, there are some broad similarities between the liabilities and remedies
for misrepresentation and those for breach. For example, in each area, the
innocent party generally has remedies of termination and damages. However,
as one goes into the details, there are significant differences between these
two areas of law.
OPERATIVE MISREPRESENTATION
Elements of Misrepresentation
13.6
A misrepresentation is a false statement of fact made by one party to another
party, which induced the other party to enter into the contract. The statement
must be one of a past or an existing fact, not a commendatory puff, an
opinion, a statement of intention or a statement of law (see Figure 13.1).
It has been said that a statement will be treated as true if it is substantially
correct and the difference would not have induced a reasonable person to
enter into the contract (per Rix J in the English decision of Avon Insurance
v Swire Fraser (2000)).
Statement made during negotiations
Puff
Term
Representation
No legal effect
True
False
Representee can sue if there was:
• False representation of fact
• Made by one contracting party to the
other
• Which induced the other to enter into
the contract
No problem
Figure 13.1 Classification of pre-contractual statements and elements of an
operative misrepresentation
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Statement of Fact
(1) Puffs
13.7
It is usual for salespersons to use glowing terms to describe their product,
such as “best value money can buy”, “excellent product” or “very fast car”.
In general, such commendatory expressions or puffs are harmless and are
regarded as mere sales talk, to which the law attaches no legal liability.
However, as the statements get more detailed or precise, they are more
likely to be representations, for example, going beyond saying a car is fast to
asserting that it has a top speed of 200 kmh.
(2) Opinions
13.8
In general, a statement of opinion which turns out to be unfounded does
not give rise to liability. But there are exceptions. First, a statement of
opinion can be a statement of fact in that the representor impliedly stated
that he held the opinion. If he did not hold the opinion or could not, as a
reasonable man having his knowledge, honestly have held it, there would be
a misrepresentation. The misrepresentation here would be one concerning
his state of mind, and it has been said that the state of a person’s mind is
“as much a fact as the state of his digestion” (per Bowen LJ in Edgington
v Fitzmaurice (1885)). Likewise, a statement of another person’s opinion
involves an assertion that the latter holds that opinion. Secondly, a statement
of opinion may carry with it the implication that the representor had an
objectively reasonable basis for his opinion, for example, that he had the
handbook which contained the information.
(3) Intentions
13.9
A statement of intention is an expression as to the future and does not
involve any past or existing fact. However, as with opinions, if the intention
was not so held, there would be a false statement of fact. Likewise also, a
person who states his intention to do something may be impliedly asserting
that he has reasonable grounds for thinking that he has the capacity to do it.
(4) Law
13.10
The traditional view is that a statement of law cannot be a misrepresentation.
As with opinions and intentions, a statement of law can be a misrepresentation
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if the representor did not hold that opinion or belief of the law, or if the
statement carries an implication of fact which is untrue. Where the statement
involves both fact and law, the tendency of the courts is to regard it as a
statement of fact.
13.11
The House of Lords in Kleinwort Benson v Glasgow City Council (No 2)
(1997) allowed a restitutionary claim for money paid under a mistake of
law, jettisoning the traditional distinction between payments made under a
mistake of fact and those made under a mistake of law. One can expect
that in the near future, the distinction may also be abandoned as regards
misrepresentation.
Representation by Conduct
(1) Express representations
13.12
The most obvious form of express representation is the spoken or written
word. But expression can also be through a picture, a photograph, a drawing,
a chart or any other visual media.
(2) Implied representations
13.13
An express statement may also contain an implied representation. For
example, it was argued in Cassa di Risparmio della Repubblica di San Marino
SpA v Barclays Bank Ltd (2011) that a statement that a financial product
carried an “AAA” rating contained an implied representation that the product
was of low risk. The test is whether a reasonable person in the position of
the representee would have understood that an implied representation was
being made.
13.14
Representation can also be through a person’s conduct. For example, a person
who sits down in a restaurant and orders a meal impliedly represents that he
has the ability to pay for the meal. Likewise, a nod of the head may signify
agreement, just as a shake of the head may show disapproval. So long as it is
intended to induce the other party to believe in a certain state of facts, the
gesture or conduct can amount to a representation (see Walters v Morgan
(1861)). In the situations just discussed, the conduct is intended to convey a
certain message. Sometimes, the conduct may be intended to conceal certain
facts. A very simple example is where a fruit seller deliberately sticks the
label on the part of the fruit that is damaged. In principle, such conduct
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would also amount to a representation. In the case of the fruit seller, the
implied representation is that the fruit is undamaged.
(3) Silence
13.15
The general rule is that silence in itself does not amount to a representation;
some active conduct is required. Under general contract law, one party does
not have a duty to disclose to the other party material facts which the former
knows may influence the latter’s decision whether or not to enter into the
contract. This rule is subject to several exceptions.
13.16
The first is where the silence makes what has been said a half-truth or
an untruth. For example, to say that a pop group currently comprises five
named individuals without going on to say that one of them will be leaving,
is a misrepresentation (see Spice Girls v Aprilia World Service (2002)). While
a contracting party has no duty to make statements, once he begins, he must
make full and frank disclosure.
13.17
Secondly, where a statement (which the representor knows is false) is
made by the representor or by a third party to the representee while the
representor listens in silence, his reticence may amount to tacit confirmation
of the truth of the statement (see Pilmore v Hood (1838)). By keeping silent,
he is impliedly representing that the statement is true.
13.18
The law regards a representation as having a continuing effect until the
contract is concluded. For this reason, if a statement, which though true
when made to the representor’s knowledge, ceases to be true before the
contract is concluded, the representor is required to inform the representee
of the change in circumstances. The representor has a duty to ensure that his
representation remains true up to the time of the contract (see, eg, With v
O’Flanagan (1936) and Spice Girls v Aprilia World Service (2002)).
13.19
Finally, in certain contracts, the law imposes a duty of utmost good faith.
The prime example of this is the insurance contract, where the law imposes
on the proposed insured the duty to disclose to the insurer all material facts
that may influence the insurer’s decision whether or not to insure. Such
non-disclosure entitles the insurer to avoid the contract of insurance. The
rationale for this is that often the special facts and risks are known to the
insured but not the insurer.
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Ambiguity and Falsity
13.20
Sometimes, a statement may be ambiguous and may bear two (or more)
meanings, one of which is true and the other(s) false. Whether such a statement by a contracting party amounts to a misrepresentation depends on two
things. First, the representee must prove that he understood the statement in
the sense which is in fact false. Secondly, the representor must have intended
the statement to be understood in the sense that is false; he is not liable if he
honestly intended it in the sense that is true. This is so even if the sense in
which the representee understood the statement is the one which, on its true
construction, it ought to bear (see Akerhielm v De Mare (1959)).
13.21
There has been the suggestion (see, eg J Cartwright, Misrepresentation
(2002) at para 4.18) that an ambiguous statement can amount to fraudulent
misrepresentation but not negligent or innocent misrepresentation. The
logicality of such dichotomy is not so evident. The representor’s intention is
relevant for determining the type of misrepresentation: fraudulent, negligent
or innocent. Whether or not there is falsity (as opposed to culpability) should
be an objective matter.
Materiality
13.22
There is doubt whether the law requires a misrepresentation to be material
in the sense that a reasonable man would have been influenced by it to enter
into the contract. Is there misrepresentation if the representee was induced
by a misstatement which a reasonable man would have ignored? While there
are some judicial statements which support a requirement of materiality, the
position is not settled. Certainly, a representee who is induced by an immaterial
misrepresentation will have difficulty persuading the court that he was so
induced. But it is another matter to deny a representee who was truly induced
by the misrepresentation. Commentators are divided on this issue. Edwin Peel,
Treitel: The Law of Contract (13th ed, 2011) at para 9–016 confidently asserts
that materiality is a requirement. The issue is debatable. For an alternative
viewpoint, see eg, Chitty on Contracts, Vol 1 (30th ed, 2008) at para 6–037.
Inducement
13.23
In order for a misrepresentation to be operative, it must induce the representee
to enter into the contract. Stated another way, the representee must have
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relied on the representation. This requirement is an obvious and logical one.
There are several scenarios where the representee is not induced by the false
statement. The first is where he was not even aware of the representation.
Secondly, the representee may have been aware of the representation but
knew it was untrue or did not believe it to be true. The third situation is
that he simply was not influenced by it, as where he would have entered
into the contract even if he had known the true facts. In all these situations,
there is no inducement and therefore no operative misrepresentation. The
misrepresentation need not be the sole cause that induced the representee
to enter into the contract. It is sufficient that, in deciding whether to enter
into the contract, he was materially influenced by the misrepresentation, as
where the representee was induced by a misrepresentation as well as by his
own mistaken belief (see Edgington v Fitzmaurice (1885), followed by the
Singapore Court of Appeal in Panatron v Lee Cheow Lee (2001)).
13.24
Sometimes, the representee has the opportunity to verify or ascertain the
truth for himself. Generally, the fact that a representee had the opportunity
to discover the truth but did not use the opportunity does not disentitle
him of relief (Redgrave v Hurd (1881)). But where it is reasonable to expect
the representee to avail himself of the opportunity to discover the truth,
the legal position is less clear. In Panatron v Lee Cheow Lee (2001), Yong
CJ held (at [24]) that once inducement is proved, it is no defence that the
representee failed to take the steps which a prudent man would have taken
to verify the truth. Panatron was followed by the Court of Appeal in JTC v
Wishing Star (No 2) (2005), where it was held (at [113]) that a representee
who chooses “to act carefully but fails, through negligence or otherwise” to
discover the fraud, is nonetheless, regarded as having been induced (see Box
13.1). But the Redgrave principle is now open to doubt. In Peekay Intermark
Ltd v ANZ Banking Group Ltd (2006), the UK Court of Appeal accepted the
notion that where a representee signs a written contract inconsistent with,
and subsequent to, earlier oral representations, he may have been induced
not by the oral representation but by “his own assumption” that the subject
matter of the contract corresponded to the description that he had previously
been given. This aspect of Peekay was cited, it would seem with approval, by
the Singapore Court of Appeal in Orient Centre Investments Ltd v Societe
Generale (2007) (at [51]–[53]). Edwin Peel, Treitel: The Law of Contract
(13th ed, 2011) at para 9–024 suggests that a claim for misrepresentation,
other than for fraud, may be defeated where it is reasonable to expect the
representee to make use of the opportunity to discover the truth.
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Box 13.1
Reflecting
on the law
Misrepresentation and the representee’s own inquiry
It is quite often asserted by the representor that the representee was not induced
by the representation but rather by his own inquiry. In JTC v Wishing Star (No 2)
(2005), JTC was a developer of the Biopolis, a large research complex, and was
assisted by JCPL, its consultant. The tender for façade works for the complex was
awarded to WSL. Three months later, the contract was terminated for inter alia,
misrepresentation as to the satisfaction of the tender evaluation criteria. The trial
court found that although there had been misrepresentation, JTC had relied not
upon the misrepresentation but on JCPL’s own evaluation.
The Court of Appeal allowed the appeal and held that JTC was induced by the
misrepresentation even though it partly relied on JCPL’s evaluation and expertise.
Woo Bih Li J was of the view (at [113]) that a person who has made a false
representation cannot escape its consequences just because the innocent party has
made his own inquiry or due diligence but failed, whether due to negligence or
otherwise, to discover the fraud. So long as the innocent party does not learn of the
misrepresentation, the misrepresentation remains operative.
The Court of Appeal’s stance reinforces the position taken in earlier English
and Singapore cases. From the policy standpoint, the position makes sense — the
representee should not be penalised for choosing to make an inquiry; neither
should a contracting party be encouraged to make false statements. It should
be noted, however, that the representations in Wishing Star were fraudulent.
Where the misrepresentation is a negligent one, the case becomes less compelling.
After all, in principle, contributory negligence is a partial defence to a negligence
claim.
Addressed to the Other Party
13.25
Generally speaking, it is the direct addressee or recipient of a representation
who may bring an action for misrepresentation. It should be noted that a direct
recipient can be a person who is a member of a class of persons to whom
the representation is addressed, such as through a media announcement.
There are situations, however, where one who is not a direct recipient may
have recourse.
13.26
The first is where the representation is made to the representee’s authorised
agent. Here, there are two possible scenarios. In the first scenario, the
recipient, to the representor’s knowledge, is only an agent for passing on
the representation to his principal. In the second, the representor intends
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that both the agent and principal will be influenced by the representation,
as in the case of partners of a firm. In the first, the principal is the
representee, while in the latter, both the principal and the agent are
representees.
13.27
The second situation is where, even though there is no agency between
the direct recipient and the indirect recipient, the representor intended
or reasonably expected the representation to be passed on to the indirect
recipient. Thus, where A by a misrepresentation induces B to buy an item
and B later induces C by a similar misrepresentation to buy it from B, C
could rely on the misrepresentation as against A if A knew that B intended
to resell and was likely to repeat the misrepresentation (see Gross v Lewis
Hillman (1970)).
13.28
It should be noted that an indirect misrepresentation arises either through
agency or through the intention or knowledge of the representor. In the past
two decades, there has been, in the context of guarantees and mortgages
by spouses, substantial development on the issue of the extent of a bank’s
liability for misrepresentation (and other misconduct) of the principal
debtor. In essence, the position is that the bank is affected by the principal
debtor’s misrepresentation to the guarantor if either the principal debtor may
be regarded as the bank’s agent or the bank had constructive notice of the
misrepresentation. For the detailed rules as to when a bank would be put on
inquiry and the reasonable steps it would then have to take, see the House
of Lords decision in Royal Bank of Scotland plc v Etridge (No 2) (2002).
TYPES OF MISREPRESENTATION
Introduction
13.29
As mentioned above, it is now clear that there can be three types of
misrepresentation and that they are, on a scale of diminishing culpability,
fraudulent misrepresentation, negligent misrepresentation and innocent
misrepresentation. Broadly speaking, the remedies of rescission and damages
(indemnity, in the case of innocent misrepresentation) are available for
all three. As we shall see, however, there are differences in the respective legal positions insofar as the recovery of damages is concerned (see
Figure 13.2).
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Fraudulent
Statement made:
• knowing it is untrue
• not believing it to be true
• recklessly, not caring
if it is true or not
Negligent
Statement made:
• with no reasonable
ground to believe it
is true (s 2(1) MA)
Innocent
Statement made:
• honestly, and
• with reason to
believe it is true
Remedy: innocent party may rescind or affirm contract
+
Damages
Court may order damages instead of
rescission (s 2(2) MA)
+
Damages
+
Indemnity
Figure 13.2 Types of misrepresentations and remedies
Fraudulent Misrepresentation
13.30
At common law, fraud is defined quite narrowly, as a charge of fraud “is
such a terrible thing as to bring against a man that it cannot be maintained
unless it is shown that he had a wicked mind” (per Lord Esher in Le Lievre v
Gould (1893) at p 498). In Derry v Peek (1889), the House of Lords held that
a fraudulent statement is one made knowingly, without belief of its truth, or
recklessly — not caring whether it is true or false. A person who deliberately
shuts his eyes to the facts or purposely abstains from investigating the facts
does not have an honest belief in its truth. Where there has been a fraudulent
misrepresentation, the representee may recover damages in an action under
the tort of deceit. Damages are awarded to compensate the representee for
all the losses which can properly be said to have been caused by his reliance
on the fraudulent misrepresentation (as contrasted with the contract measure
of expectation loss). (See the House of Lords decision in Smith New Court
Securities v Scrimgeor Vickers (Asset Management) (1997)). Further, in such
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an action, contributory negligence is not a defence (see Standard Chartered
Bank v Pakistan National Shipping (No 2) (2002)).
13.31
The motive of the representor is irrelevant. It is not necessary that he had a
bad motive or intended to cause loss to the representee; it suffices that the
false statement was made knowingly with the intention that the representee
should act upon it (see Standard Chartered Bank v Pakistan National
Shipping (No 2) (2002)). It is also immaterial that the representor thought
the statement irrelevant or unimportant.
13.32
Where the responsibility for a statement is shared between a principal and
an agent, or between two agents, the position is more complex. If an agent
knowingly makes a false statement within the scope of his authority, the
principal is liable for fraudulent misrepresentation. Likewise, if an agent
knowingly makes a false statement to another agent intending that agent to
pass the statement on to a third party, the first agent is liable to the third
party for the misrepresentation of the second agent.
13.33
If the agent makes a statement which he honestly believes is true but which
the principal knows is untrue, then the position depends on the culpability
of the principal. If the principal was aware that the statement will be or
had been made and did not intervene, the principal is liable for fraudulent
misrepresentation. If he was not aware that the statement will be or had been
made, he is not liable (see Armstrong v Strain (1952)).
Negligent Misrepresentation
(1) Negligence at common law
13.34
A negligent misrepresentation is one which is made carelessly or without
reasonable grounds for believing it to be true. Prior to and apart from
the Misrepresentation Act, a misrepresentation would not be considered
negligent unless the representor owed a duty of care to the representee. A
“special relationship” must have existed between the parties before such duty
of care can arise (Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)).
The law on negligent misstatements was further developed and qualified by
subsequent cases (see, generally, Chapter 6, para 6.36 onwards). So far as
negligent misrepresentation is concerned, the importance of these refinements
is largely eclipsed by the Misrepresentation Act.
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(2) Section 2(1) of the Misrepresentation Act
13.35
Section 2(1) Misrepresentation Act (Cap 390, 1994 Rev Ed) (“MA”) provides
as follows:
Where a person has entered into a contract after a misrepresentation has
been made to him by another party thereto and as a result thereof he
suffered loss, then, if the person making the misrepresentation would
be liable to damages in respect thereof had the misrepresentation been
made fraudulently, that person shall be so liable notwithstanding that
the misrepresentation was not made fraudulently, unless he proves that
he had reasonable ground to believe and did believe up to the time the
contract was made that the facts represented were true.
The uninitiated reader may find the above paragraph at best awkward and at
worst incomprehensible. Adopting what has been termed a “fiction of fraud”,
the provision first says indirectly that a non-fraudulent misrepresentation
carries the same liability as a fraudulent misrepresentation. It then gives the
qualification that the representor will not be liable if he proves that he had
reasonable grounds to believe that his statement was true. In effect, what the
section does is to provide that a negligent misrepresentation (ie, one where
the representor does not have reasonable grounds to believe his statement is
true) attracts the same liability as a fraudulent misrepresentation.
(3) Measure of damages
13.36
There is much debate as to the correct basis for measuring damages for
negligent misrepresentation. One view is that the contract measure — to put
the representee into the position he would have been had the representation
been true — should apply. Another view is that the tort measure is the
appropriate one. In tort, the claimant is to be put in a position he would
have been if the tort (the misrepresentation) had not been committed. If the
tort measure is the correct one, there is a further complication: should the
deceit (fraud) measure or the negligence measure be applied? In cases of
fraud, losses may be recoverable even though they were not of a foreseeable
kind; this is not the case for negligence. There are no easy answers to this
problem. For further discussion of these issues, see A Phang, Cheshire, Fifoot
& Furmston’s Law of Contract (2nd ed, 1998) at pp 488–489 and Edwin
Peel, Treitel: The Law of Contract (13th ed, 2011) at paras 9–059 to 9–060.
It was recently said that the words of s 2(1) MA do not necessarily compel
the conclusion that the liability in damages for negligent misrepresentation
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under s 2(1) is to be the same as that for fraud (see Cassa di Risparmio della
Repubblica di San Marino SpA v Barclays Bank Ltd (2011) at [223]).
(4) Burden of proof
13.37
At common law, a representee who alleges fraudulent misrepresentation
bears the burden of proving fraud and the onus is a heavy one. Upon
reading s 2(1) MA, it is clear that for negligent misrepresentation, the
burden is reversed. Once the representee proves that the statement was
false, the burden shifts to the representor to prove that he had reasonable
grounds to believe that the statement was true. In effect, the representor has
to show that his misrepresentation was not negligently made. In this respect,
negligent misrepresentation is a more favourable option for the representee
than fraudulent misrepresentation.
13.38
Although the use of the words “reasonable grounds” may give rise to the
argument that negligent misrepresentation, like negligent misstatement at
common law, requires the representee to establish a duty of care and a special
relationship, it is clear from the case judgments that this is not so (see
Howard Marine & Dredging v Ogden & Sons (Excavations) (1978) and Ng
Buay Hock v Tan Keng Huat (1997)). On the contrary, it is the representor’s
responsibility to show that he was not “negligent”. Whether a representee’s
claim for damages for negligent misrepresentation in principle should be
reduced by the representee’s contributory negligence is more debatable (see
Chitty on Contracts, Vol 1 (30th ed, 2008) at para 6–074).
Innocent Misrepresentation
13.39
The least culpable type of misrepresentation is innocent misrepresentation.
Here, the false statement is made honestly and with care. The common law
provided no remedies for an innocent misrepresentation but, in equity, the
representee is entitled to rescission and, possibly, an indemnity. The latter
remedy allows the representee to be indemnified against all obligations
necessarily created by the contract (see Whittington v Seal-Hayne (1900)).
REPRESENTATION AS A TERM
13.40
A representation is a statement made before or at the time of the contract,
which induced the representee to enter into the contract. It is conceivable,
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perhaps even likely, that such a statement could be a term of the contract.
There are several guidelines for determining whether a pre-contractual
statement is a term. For one, the statement is unlikely to be a term if the
representor asks the representee to verify its truth (Ecay v Godfrey (1947)).
Another consideration is the relative abilities of the parties: if the representee
is in a better position, for instance through special knowledge or experience,
to ascertain the truth, the representation is unlikely to be a term (Oscar Chess
Ltd v Williams (1957)). Finally, the importance of the statement is relevant.
If the statement is so important that the representee would not have entered
into the contract had the statement not been made, the statement is likely to
be a term of the contract (Bannerman v White (1861)).
13.41
A representation may, however, be precluded from being a term of contract
by the parol evidence rule (see Chapter 10, para 10.8 onwards). The rule
basically says that where a contract is in writing, extrinsic (including oral)
evidence cannot be used to add to, vary or contradict the terms of the written
agreement. An exception to this is the collateral contract. The argument
here is that there are two agreements: the main (written) agreement and the
collateral oral contract. A representation may amount to a collateral contract
upon which the representee may bring an action.
RESCISSION
General
13.42
An operative misrepresentation makes the contract voidable at the option
of the representee. The representee is entitled to rescind the contract, that
is, to terminate it ab initio (ie, from the beginning) as if the contract never
existed. In contrast, where a contract is rescinded for a breach of contract,
the contract is terminated as regards the future; while the parties are released
from obligations that have not fallen due, they are still liable for obligations
which had accrued before the repudiation.
13.43
The right to rescind for a misrepresentation is one which existed prior to
the MA. At common law, a representee had a right to rescind for fraudulent
misrepresentation while, in equity, rescission was available for innocent misrepresentation and, presumably, negligent misrepresentation. With s 2(1) MA,
it is now certain that rescission is available for negligent misrepresentation.
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However, with regard to negligent and innocent misrepresentation, the right
to rescind is subject to the court’s discretion to award damages in lieu of
rescission under s 2(2) MA (see para 13.49).
13.44
As the effect of rescission can be quite severe for the representor or for
third parties, the law puts some bars or restrictions on its availability: where
restitution is impossible, where there has been affirmation or lapse of time,
where third party rights are affected, and where the court exercises its
statutory discretion under s 2(2) MA to give damages in lieu of rescission.
(1) Restitution impossible
13.45
Rescission contemplates the representee terminating the contract and
returning what he received under the contract. For example, a buyer who
wishes to rescind for misrepresentation and recover his purchase money
must return the goods to the seller. If such restoration or restitution is not
possible, it makes sense that rescission should not be permitted. However,
what is required is not precise restitution but substantial restitution; equity
allows a representee to rescind if he returns the subject matter in its altered
state and makes an allowance for any diminution in its value or accounts for
any benefit he derived from using it. Equity seeks to make such adjustments
as are necessary to do practical justice between the parties. Where substantial
restitution is not possible, the representee is not barred from rescinding if
the diminution is due either to the very defect in the subject matter which it
was represented not to have or to external causes, such as damage caused by
a third party.
(2) Affirmation
13.46
Upon discovery of the misrepresentation, the representee may elect either to
affirm or to rescind the contract. Upon affirmation, the right to rescission is
lost. Affirmation can be express or implied by conduct (though very clear
evidence is required). An example of the latter is where the representee
uses the goods after knowing of the misrepresentation. However, before an
election can be made, the representee must have knowledge not only of the
untruth but also that the law gives him a right to rescind; and where an
election is conditional, upon the failure of the condition, the right to rescind
re-emerges (JTC v Wishing Star (No 2) (2005)).
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(3) Lapse of time
13.47
If, subsequent to the discovery of the truth, a reasonable period of time has
passed and the representee still does not exercise his right to rescind, his
inaction may be evidence of affirmation. Apparently, for innocent and, it
would appear, negligent misrepresentation, the lapse of reasonable time may
be a bar to rescission even if the representee has not discovered the truth (see
Leaf v International Galleries (1950)). Such a position is somewhat disconcerting since there can be no affirmation without knowledge of the untruth.
So far as fraudulent misrepresentation is concerned, lapse of time without
discovery of the truth would not prevent a representee from rescinding.
(4) Third party rights
13.48
Misrepresentation makes a contract voidable, not void. If before a representee
avoids (rescinds) a contract, an innocent third party (that is, one who acts
in good faith and gave consideration) has acquired an interest in the subject
matter, the right to rescission is lost.
Section 2(2) of the Misrepresentation Act
(1) General
13.49
Section 2(2) provides as follows:
Where a person has entered into a contract after a misrepresentation has
been made to him otherwise than fraudulently, and he would be entitled,
by reason of the misrepresentation, to rescind the contract, then, if it
is claimed … that the contract ought to be or has been rescinded, the
court … may declare the contract subsisting and award damages in lieu
of rescission, if of opinion that it would be equitable to do so, having
regard to the nature of the misrepresentation and the loss that would
be caused by it if the contract were upheld, as well as to the loss that
rescission would cause to the other party.
Essentially, the provision fetters the representee’s right to rescission for
negligent and innocent misrepresentation. It gives the court the discretion
to declare that the contract subsists and to award damages in place
of rescission. In deciding whether to exercise the discretion and the amount
of damages, it gives regard to the nature of the contract, the loss that
upholding the contract would cause as well as the loss that rescission would
cause.
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(2) Types of misrepresentation
13.50
The subsection does not apply to fraudulent misrepresentation; the representee’s right at common law to rescission and to damages is unaffected. As for
negligent misrepresentation, the representee’s right to rescission and damages
is affected in that the right to rescission is now subject to the court’s power
to give damages instead. Technically speaking, the representee to a negligent
misrepresentation may get two sets of damages: he may claim damages as of
right (under s 2(1)) and may also be awarded damages in lieu of rescission
(s 2(2)). As for innocent misrepresentation, the representee’s rights in equity
to rescission and indemnity are now qualified by the court’s power to award
damages in lieu of rescission.
(3) Where right to rescind is lost
13.51
There is substantial controversy as to whether s 2(2) allows a court to award
damages in lieu where the representee has lost the right to rescind. For
example, he may have affirmed the contract or third party rights may have
intervened. A purely linguistic interpretation suggests that the entitlement to
rescind must still be available in order for damages to be given in lieu (see
Government of Zanzibar v British Aerospace (Lancaster House) (2000)).
(4) Measure of damages
13.52
There is uncertainty as to how damages under s 2(2) are to be assessed. Two
possibilities are the tortious measure and the contractual measure, respectively.
The tortious measure seems inappropriate for innocent misrepresentation
since no tort has been committed. For negligent misrepresentation, the
further complication is whether the tortious measure, assuming it is to apply,
is the fraud measure or the negligence measure (see para 13.36).
13.53
Section 2(3) goes on to provide that damages may be awarded under subs (2)
whether or not the representor is liable to damages under subs (1), and that
any damages awarded under subs (2) will be taken into account in assessing
the damages under subs (1).
EXCLUSION OF LIABILITY
13.54
Contracting parties sometimes seek to exclude the consequences of
misrepresentation by inserting a clause to that effect in the contract. At
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common law, apart from where the representor is fraudulent, such a
clause is valid and is subject to the normal rules of construction applicable
to exemption clauses. This freedom to include exclusion clauses is now
circumscribed by statute.
13.55
Section 3 MA, as amended by s 8 Unfair Contract Terms Act, reads:
If a contract contains a term which would exclude or restrict (a) any
liability to which a party to a contract may be subject by reason of
any misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of
such a misrepresentation, that term shall be of no effect except in so far
as it satisfies the requirement of reasonableness as stated in s 11(1) of
the Unfair Contract Terms Act, and it is for those claiming that the term
satisfies that requirement to show that it does.
In essence, the provision invalidates exclusion clauses that exclude or restrict
any liability or remedy for misrepresentation unless they are reasonable.
It should be noted that the burden of proving that an exclusion clause is
reasonable lies with the party seeking to rely on it.
13.56
For exclusion clauses in general, a distinction can be drawn between clauses
which exclude liability and those which seek to prevent liability from arising
by negativing one or more of the elements of liability, with the former
attracting the operation of the UCTA provision but not the latter. As regards
misrepresentation, examples of the former would include one which expressly
seeks to exclude liability, such as “All liabilities for and all remedies in
respect of any misrepresentations made are excluded” and one which states
that the contract is not cancellable or voidable by either party. It should be
noted that clauses which seek to limit rather than altogether exclude liability,
for example, by limiting liability to a certain sum of money, are viewed less
stringently by the courts (Ailsa Craig Fishing v Malvern Fishing (1983)). On
exemption clauses generally, see Chapter 11.
13.57
Overbrooke Estate v Glencombe Properties (1974) provides a good example of
a clause which seeks to prevent misrepresentation liability from arising. In
that case, the defendants were successful bidders for a property. A few days
before the auction, they made enquiries with the auctioneers and received
inaccurate answers. The terms of the sale included a clause which stated that
“neither the auctioneers nor any person in the employment of the auctioneers
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has any authority to make or give any representation or warranty”. The court
held that the provision was not an exclusion clause but a limitation on the
apparent authority of the auctioneers.
13.58
Other clauses which seek to negative the elements of misrepresentation
include clauses stating that no representation has been made or that
neither party has relied on any representation. The general approach of the
law is that if the clause is genuine, that is, that there really had been no
representation, or no reliance, or no authority (as the case may be), then
the clause is effective to prevent misrepresentation liability from arising (see,
eg, Government of Zanzibar v British Aerospace (Lancaster House) (2000)).
The clause should not avail, for example, where the party seeking to rely
on the clause is well aware that representations have in fact been made (see
Cremdean Properties Ltd v Nash (1977)). Even so, where both parties to the
contract are sophisticated, commercial entities of similar bargaining power,
courts have been willing to find that even clauses falling within the latter
category are reasonable (see, eg, Raiffeisen Zentralbank Osterreich AG v Royal
Bank of Scotland plc (2010)).
13.59
Generally, in deciding whether a clause excluding liability for misrepresentation is reasonable, a relevant factor is the relative knowledge or access
to knowledge of the parties (see South Western General Property v Marton
(1982)). If, for example, the facts on which the representation is based are
only within the knowledge of the representor, the clause is likely to be
unreasonable. The guidelines set out in Second Schedule of the UCTA, such
as the relative bargaining power, are also generally applicable (see, generally,
Chapter 11, para 11.58).
13.60
In recent times, such exclusionary clauses have been challenged from another
angle — that they operate to estop (or prevent) a representee from alleging
misrepresentation. Two forms of estoppel have been pleaded — estoppel
by representation and contractual estoppel. The requirements for estoppel
by representation were laid down by Diplock J (as he was then) in Lowe v
Lombank (1960) as follows:
° there must be a clear and unambiguous statement (here, the statement
that there has been no representation, or no reliance, etc);
° the maker of the statement intended the recipient to rely on the statement;
and
° the recipient believed the statement and was induced by it.
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In contrast, contractual estoppel, which is a recent doctrine, merely requires
that there was a clear and unambiguous statement. Although contractual
estoppel has gained acceptance in the English Court of Appeal (see Peekay
Intermark Ltd v ANZ Banking Group Ltd (2006) and Springwell Navigation
Corp v JP Morgan Chase Bank (2010)), the doctrinal basis of this new species
of estoppel is seriously doubted. For a discussion of the legal developments
in this important and complex area, see Raiffeisen Zentralbank Osterreich AG
v Royal Bank of Scotland plc (2010) and Low Kee Yang, “Misrepresentation
and Contractual Estoppel: The Raiffeisen Clarifications” (2011) 23 SAcLJ 390.
CONCLUSION
13.61
The law of misrepresentation performs the important function of providing
rights and remedies against false statements in the contractual context,
especially if these statements do not find their way into the written agreement.
The elements of an operative misrepresentation are clear enough, apart from
the nagging doubt regarding materiality. Although misrepresentation provides
a drastic remedy in the form of rescission, its availability is moderated by
sensible restrictions. This is especially the case for negligent and innocent
misrepresentation, where the court has discretion to award damages in lieu
of rescission. The protection which the law of misrepresentation provides is
further safeguarded by the legislative requirement that any attempt to exclude
or restrict liability for misrepresentation must be reasonable to be valid.
13.62
Fundamental to understanding the law of misrepresentation is an appreciation
of the Misrepresentation Act provisions — what they mean to say and
how they modify the previous position. The manner by which negligent
misrepresentation is established as a recognised concept is unfortunate.
Indeed, the indirect approach of using the “fiction of fraud” results in
confusion and several legal issues still remain debatable and speculative,
though in recent times courts have been challenges by the use of estoppel
to defeat misrepresentation claims. However, taking a holistic view of the
subject, one may conclude that the law of misrepresentation does provide a
reasonably satisfactory regime for ensuring accountability for the making of
pre-contractual statements.
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Chapter 15
Illegality and Public Policy
15.1–15.3
Introduction
15.4–15.7
15.8–15.10
Statutory Illegality
Situations Where There is No Statutory Prohibition
15.11
15.12–15.13
Illegality at Common Law
Introduction
Types of Common Law Illegality
15.14–15.15
15.16
15.17–15.20
15.21–15.23
15.24–15.28
Consequences or Effects of Illegality
Introduction
Recovery of Benefits Conferred Under Illegal Contract (Restitution)
(1) Recovery where parties are not in pari delicto
(2) Timely repudiation or repentance
(3) Recovery when plaintiff does not rely on the illegal contract
15.29–15.32
15.33–15.38
15.39–15.52
15.53–15.54
15.55–15.57
Contracts in Restraint of Trade
Introduction
Validity of “Restraint of Trade” Clause
Employment Contracts
Sale of a Business
Other Categories
15.58
15.59
15.60–15.63
Severance
Introduction
Severance of Entire Clauses
Severance within Covenants: “Blue Pencil Test”
Principles of Singapore Business Law
INTRODUCTION
15.1
The general rule that no action will arise from a wrong done is derived from
the Latin phrase “ex turpi causa non oritur actio”. This means that the courts
will not assist a person whose action is based on a contract which is tainted
by illegality or is contrary to public policy. Accordingly, such contracts may
be totally or partially unenforceable. If both parties are before the courts
with a contract that is illegal or contrary to public policy then the court
through its own observation of the presence of either of these features will
decline enforcement of the contract. The spirit of this area of law is in the
refusal of the courts to allow a party to benefit from his wrongdoing and to
have that rule so manifestly stated that it discourages illegal contracts and
contracts that are contrary to public policy. It is important to note at the
outset that the party who tries to rely on illegality will be the party who does
not want to observe his contractual obligations.
15.2
In Holman v Johnson (1775), Lord Mansfield provided (at p 343) this
extremely useful perspective:
The objection that a contract is immoral or illegal as between plaintiff
and defendant sounds at all times very ill in the mouth of the defendant.
It is not for his sake, however, that the objection is ever allowed; but
it is founded in general principles of policy, which the defendant has
the advantage of, contrary to the real justice, as between him and the
plaintiff, by accident if I may say so.
In the interest of the greater public good, the courts are prepared to override
the contractual rights of the parties. In almost all situations concerning
illegality of contracts or contracts that are otherwise contrary to public
policy, the general rule is that the loss will lie where it falls. In other words,
the courts will not aid any of the parties since to do so would be to enforce
a contract that has already been adjudged to be against the greater public
good. The issue thus is the enforceability of such contracts and inaction
appears to be the order of the day. There are exceptions to this general rule
which will be dealt with later.
15.3
There are two broad categories that this area is divided into:
° statutory illegality; and
° illegality at common law.
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Statutory illegality is as controversial as the concept of public policy. This is
because there is no clear theoretical framework for it. In addition, there are
difficulties when the courts are required to try and discover the legislative
intention of the provisions before them.
STATUTORY ILLEGALITY
15.4
Statutory illegality can only arise when there has been a contravention of
the statute in question. The key focus is whether the object of the statute is
only to prohibit the conduct that is the subject of the statutory penalty or is
the object also to prohibit the making of such contracts. Where the legislative
intention is clear on the face of the provision, there will be no need to resort
to interpreting the statute to decipher the legislative intention. Accordingly,
in the Professional Engineers Act (Cap 253, 1992 Rev Ed), s 11 provides that:
Subject to the provisions of this Act, no person shall employ as a
professional engineer any person who is not a registered professional
engineer.
The section thus prohibits the engaging of persons as professional engineers
who have not been duly registered.
15.5
Where a statute expressly prohibits certain contracts and contracts of such
nature are entered into, then the result will clearly be an illegal contract
which is unenforceable and the innocence of either or both parties would
be irrelevant. An illustration of this can be found in the English Court of
Appeal decision of Phoenix General Insurance Co of Greece SA v Administratia
Asiguralor de Stat (1988). By statute, proper authorisation was required
before a person could carry on the insurance business. There were criminal
sanctions for non-compliance. It was held that the statute prohibited the
conduct of insurance contracts without authorisation. It is important to
note that the prohibition affected both the business of effecting contracts
of insurance and the business of carrying out contracts of insurance. It is
thus both the contracts and the performance of them that are prohibited
by statute.
15.6
Another interesting case illustrating an express prohibition by statute is
Re Mahmoud and Ispahani (1921). The Defence of the Realm Regulations
prohibited the sale or purchase of linseed oil without a licence. The seller
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had the requisite licence and was assured by the buyer that he, the buyer,
had the licence as well. The buyer subsequently refused to accept delivery
and pleaded that his lack of licence rendered the contract illegal. It was held
that the language of the statute was plain irrespective of guilt or innocence,
knowledge or otherwise; a contract for the purchase of linseed oil without
the necessary licence was prohibited. Unfair though it may appear from the
innocent party’s perspective, the general rule requires that the courts are not
to enforce an illegal contract. The innocent party could have found a way
of getting what he wanted without relying on illegality but if he insists on
relying on the illegal contract to found his action, he will meet a dead end.
15.7
Where the legislative intention is not clear from the plain wording of the
relevant provision, statutory interpretation is necessary to discern if the
provision impliedly prohibits the contract. This will entail a consideration of
the objective(s) for introducing the provision in the first place, that is, the
mischief for which the provision is to prevent. An example of an implied
prohibition by a statute can be found in the case of Cope v Rowlands
(1836). Statute made it an offence for persons to act as a broker in the City
of London without a licence, with a penalty of £25 for such offences. The
plaintiff sued the defendant for his services as a broker although he did not
have the necessary licence. Parke, B held (at p 159):
The legislature had in view, as one object, the benefits and security
of the public in those important transactions which are negotiated by
brokers. The clause, therefore, which imposes a penalty, must be taken
… to imply a prohibition of all unadmitted persons to act as brokers,
and consequently to prohibit, by necessary inference, all contracts which
such persons make for compensation to themselves for so acting.
However, as observed by Kerr LJ (at p 273) in the Phoenix General
Insurance:
[W]here a statute merely prohibits one party from entering into a
contract without authority and/or imposes a penalty on him if he does
… it does not follow that the contract itself is impliedly prohibited so
as to render it illegal and void. Whether or not the statute has this
effect depends on considerations of public policy in the light of the
mischief which the statute is designed to prevent, its language, scope and
purpose, the consequences for the innocent party, and any other relevant
consideration.
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Box 15.1
Reflecting
on the law
Contracts illegal per se vs contracts illegal in performance — a useful
distinction?
There is a distinction that is sometimes made between contracts which are illegal
per se and contracts which are lawful but performed in a way that attracts criminal
liability. Where a contract is illegal per se both parties will be implicated with the
wrongdoing. On the other hand, if a contract is performed in an illegal manner it is
not always the case that both parties will be implicated.
An example of the former can be found in s 3 Residential Property Act
(Cap 274, 2009 Rev Ed) where the statute expressly forbids foreigners from
purchasing residential property without the necessary approvals and expressly
declares agreements in contravention of the Act void (see Cheng Mun Siah v Tan
Nam Sui (1980–1981) and Lim Xue Shan and another v Ong Kim Cheong (1990)).
Often it is the case that a statute may require a licence or permit before
certain contracts can be performed and it is silent on the effect of non-compliance
on the contractual rights of parties to such agreements. An example will be a
permit to commence building works which is required by legislation (see, eg, s 5
Building Control Act (Cap 29, 1999 Rev Ed)). The commencement of building
works without the requisite permit may not render the contract illegal. However,
in performing the contract without the said permit the statute will be contravened.
The question that arises is whether the statute prohibited the making of such
contracts or whether an otherwise lawful contract is illegal because its performance
involves the breach of a statute.
The difficulty with the distinction between contracts which are illegal per se
and those that are legal but performed in a way that attracts criminal liability becomes
patent with this example. The approach neglects the central issue of whether the
legislature intended that such contracts should be prohibited, bearing in mind that
even if the legislature did not intend such a result directly that there may be public
policy considerations which may still render the contract illegal. Taking the example
above, in the case where there is a contractual term to commence building works
without a permit, the contract would be illegal.
Situations Where There is No Statutory Prohibition
15.8
As a general rule, in cases where there are no prohibitions affecting a contract,
the contract is enforceable. This would be the situation if the statute merely
imposes a penalty and does not deprive the parties of their contractual rights.
In which case, both parties would be entitled to sue on the contract. In
St John Shipping Corporation v Joseph Rank Ltd (1957), in contravention of the
Merchant Shipping (Safety and Load Line Conventions) Act 1932 a ship was
overloaded. The master of the ship was prosecuted, convicted and fined. The
defendant and another cargo owner withheld a sum equivalent to the freight
on the additional cargo by which the ship had been overloaded. The plaintiff
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sued for the balance of the freight. The Court of Appeal held that the plaintiff
could recover the freight in full because all the statute did was to impose a
criminal penalty for overloading. It did not render the contract unenforceable.
15.9
The exception to the general rule focuses on the intention or knowledge
of one or both of the contracting parties. The exception applies if both
parties enter into a contract with the intention of contravening a statute.
The consequence of the “guilty intent” of both parties is that neither of them
will be able to enforce the contract. The English Court of Appeal decision
of Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd (1973) conveys the
last point clearly. The plaintiff manufactured two 25-ton loads of goods and
engaged the defendants, a small road haulage firm, to transport them to the
port of shipment. The plaintiff company’s transport manager was present
when the goods were being loaded. He witnessed the contravention of s 64(2)
Road Traffic Act 1960, which specified that the maximum weight laden was
not to exceed 30 tons for the lorry, but did not object in any way. On the
journey, the lorry overturned and the plaintiff ’s goods were damaged. The
defendants claimed that the transportation contract was void for illegality. It
was held that although the contract was lawful in its inception, it had been
performed in an unlawful manner. Lord Denning said (at p 832):
Not only did the plaintiff ’s transport manager know of the illegality. He
participated in it by sanctioning the loading of the vehicle with a load
in excess of the regulations. That participation in the illegal performance
of the contract debars [the plaintiff] from suing [the defendant] on it or
suing [the defendant] for negligence.
15.10
If only one party has such an intention or knowledge, then that party, being
the guilty party, will be not be able to enforce it. To actually become the
“guilty party”, some degree of participation is necessary. As shown in the case
of Archbolds (Freightage) Ltd v S Spanglett Ltd (1961), the innocent party will
be able to sue successfully. In Archbolds v Spanglett, the plaintiffs engaged
the defendants to carry their goods, namely whiskey, from Leeds to London.
Unknown to the plaintiffs, the defendants did not have the necessary licence.
The goods were stolen while they were being transported. The plaintiffs’
action for damages for breach of contract succeeded because the contract
was legal when formed and although it was performed in an illegal manner
by the defendants, the plaintiffs were unaware and did not participate in
the illegality.
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ILLEGALITY AT COMMON LAW
Introduction
15.11
The previous segment dealt with statutory illegality, where the source of the
illegality is a statute enacted by parliament and on a true construction of
the statute it prohibits the making of such contracts or, exceptionally, where
parties or a party enter into a contract with the intention of contravening a
statute. In contrast, in this segment, the source of the illegality lies in general
principles propounded in case law which have evolved through decisions of
judges and is generally referred to as the common law. In such cases, the
principles of the illegality have been identified in case law as being capable
of tainting the contract, and it is important to realise that it may apply in the
context of a prohibition even in a statute.
Types of Common Law Illegality
15.12
The following are the various heads of public policy developed by the
common law:
° Contracts prejudicial to administration of justice. Examples under this
category can be found in contracts to either stifle prosecution or perhaps
to give false evidence in a court of law.
° Contracts to deceive public authorities. In Alexander v Rayson (1936),
the plaintiff leased a flat to the defendant. There were two separate
agreements. The first agreement was a lease for the sum of £450 per
annum, including services to be rendered by the plaintiff. The second
agreement was for the same services as the first agreement but for the
sum of £750 per annum. The defendant refused to pay an instalment
due under the agreements and argued that the object of the agreements
was to deceive the local authority into reducing the rateable value of
the flat by only disclosing the lease document to them. It was held that
the agreements were for an illegal purpose and the plaintiff could not
enforce either of them.
° Contracts to oust jurisdiction of the courts. This is where a contract or
agreement deprives a party of the right to seek the redress of the courts.
An example would be a separation agreement in which a wife undertakes
not to apply for maintenance. In Hyman v Hyman (1929), it was held
that the courts’ power to award maintenance could not be ousted by
such an agreement.
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° Contracts to commit (or involving) a crime, tort or fraud. A contract to
commit a crime is clearly illegal. A crime is also committed at the time
the agreement takes place as it amounts to a criminal conspiracy such as
for example, to commit a murder. A contract to commit a civil wrong
or tort can also be illegal. In the case of fraud, it has both criminal
and civil consequences. So, in Taylor v Bhail (1996), the headmaster of
a school agreed with a builder that the builder will submit an inflated
estimate for repair works necessitated by storm damage so as to defraud
the insurance company. The builder completed the work and sued for
payment of the balance. The Court of Appeal held that the contract was
tainted by fraud. The builder could not recover any further payment, nor
could the headmaster recover what he had paid out.
° Contracts prejudicial to public safety. An apparent example under this
segment will be trading with the enemy.
° Contracts promoting sexual immorality. In Pearce v Brooks (1866), the
plaintiffs hired out an ornamental brougham to the defendant woman
for the purposes of prostitution. The plaintiffs’ cause of action for the
recovery of sums due for the hire failed as they were fully aware of the
defendant’s intention to use the brougham for an illegal purpose.
° Contracts which are liable to corrupt public life. An agreement to buy
public office or to get a person of influence in the civil service to use his
position to obtain benefits would come within this category.
15.13
In many of the cases falling within the various heads mentioned above, there
was no statute that had been contravened. Instead these agreements were for
an illegal purpose and they were unenforceable for that reason.
CONSEQUENCES OR EFFECTS OF ILLEGALITY
Introduction
15.14
As mentioned earlier, the general rule is that no action will arise from a
wrong done. It offends the dignity of the court to have anything to do with
a contract tainted by illegality or one that is contrary to public policy. In
fact, the general rule could, arguably, aim to deter parties from entering
into illegal contracts. Accordingly, such contracts are unenforceable and
the loss lies where it falls. The significance of the general rule is also that a
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party trying to claim any rights, including the right to damages for breach
of contract, will be unsuccessful. The consequences and remedies that
normally follow the non-performance by one of the parties to the contract
will not apply.
15.15
Having said that, there are circumstances under which money paid or
property transferred under an illegal contract can be recovered. Benefits in
some form or other may have passed under the illegal contract and really
here we are dealing with a form of restitution. Recovery under this latter
category is clearly restrictive as there is no question of recovering the full
contractual losses.
Recovery of Benefits Conferred Under Illegal Contract (Restitution)
15.16
The general rule is that money paid or property transferred under an
illegal contract is not recoverable. The Latin maxim “in pari delicto potior
est conditio defendentis” applies. Thus, where both parties are at fault the
law favours the defendant and the result is that gains and losses remain
where they have accrued or fallen. It signifies the law’s refusal to grant any
assistance whatsoever. There are several exceptions to the general rule.
(1) Recovery where parties are not in pari delicto
15.17
This exception applies where one of the parties is deemed, in law, not to
be equally at fault. There are three examples where it could apply. First, the
parties are certainly not in pari delicto when one party is guilty of fraud. In
Hughes v Liverpool Victoria Legal Friendly Society (1916), the plaintiff took
out a life insurance policy, on the advice of the insurance agent, on the life
of a person in whom he had no insurable interest. The contract was therefore
illegal. It was held that the plaintiff could recover the money he paid as he
entered into the contract as a result of a fraudulent misrepresentation.
15.18
Second, the parties cannot be said to be equally at fault if there has been
oppression by one party on the other. In Kiriri Cotton Co Ltd v Ranchhoddas
Keshavji Dewani (1960), the plaintiff paid his landlord, who was committing
an offence by accepting it, a premium for a flat. The statute that rendered
such contracts illegal, namely the Rent Restriction Ordinance, did not provide
that such premiums were recoverable. It was held that the plaintiff was not
to blame for evading the legislation but his landlord was. The landlord was
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using his property rights to exploit those in need of a roof over their heads
and in that sense there was oppression.
15.19
As Lord Mansfield said (at p 792) in Browning v Morris (1778):
Where contracts or transactions are prohibited by positive statutes, for
the sake of protecting one set of men from another set of men; the one
from their situation and condition being liable to be oppressed and
imposed upon by the other; there the parties are not in pari delicto; and
in furtherance of these statutes the person injured after the transaction is
finished and completed, may bring his action and defeat the contract.
15.20
Lord Mansfield provides the third example of where a statute is a class
protecting statute, that is, the statute protects one group of people against
another. This exception is also illustrated on the facts of the Kiriri case
where the statute protects tenants from landlords who seek to obtain inflated
rental.
(2) Timely repudiation or repentance
15.21
This exception applies when one party repudiates in time. Before an illegal
contract is performed it is open to either party to repent while the contract is
still executory. In a sense, the law provides the parties with an “opportunity
of repentance” and encourages the parties to pull out of the illegal contract.
In the case of Taylor v Bowers (1876), the plaintiff fraudulently assigned some
machinery to X to prevent it falling into the hands of his creditors. He then
had several meetings with his creditors but failed to reach a settlement with
them. The plaintiff then claimed the machinery from the defendant who had
obtained it from X knowing of the fraudulent scheme. It was held that the
plaintiff could recover the machinery as the illegal purpose had not been
carried out.
15.22
In contrast is the case of Kearley v Thomson (1890). The plaintiff agreed with
the defendants, a firm of solicitors, to pay them if they did not appear at
his friend’s public examination, and did not oppose his friend’s discharge of
bankruptcy. He paid them the money. The defendants entered into such a
contractual arrangement as the bankrupt’s estate, from which their costs were
to be paid, lacked the requisite funds. The defendants did not appear at the
public examination. However, before the friend was discharged, the plaintiff
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sought to recover the money paid. It was held that the plaintiff could not
recover the money because the contract was partly performed.
15.23
As demonstrated by the case of Bigos v Boustead (1951), there must be
genuine repentance for this exception to apply. This was a case of statutory
illegality. In contravention of a statute, the defendant agreed to supply the
plaintiff with Italian currency. As security for the loan, the plaintiff deposited
a share certificate with the defendant. The defendant failed to supply the
Italian currency and the plaintiff sued for recovery of the certificate. It was
held that the plaintiff was not entitled to succeed. The plaintiff ’s repentance
was not genuine or voluntary. The plaintiff ’s change of heart was a result of
the scheme having failed.
(3) Recovery when plaintiff does not rely on the illegal contract
15.24
Under this category, recovery is allowed because the plaintiff relies upon a
basis that is separate and independent of the illegality. There are two main
categories of recovery under this particular approach: in tort and under a
collateral contract.
15.25
When a person wants to assert his rights to goods, especially his rights of
ownership, against a person who has the goods, that person will usually rely
on the tort of conversion. For example, if A owns a car and it is stolen and
sold by the thief to B, A will rely on the tort of conversion in an action
against B. There are many ways in which the tort of conversion can be
committed. It can be committed by doing either of the following:
° wrongfully taking possession of goods;
° wrongfully disposing of them; or
° wrongfully refusing to give them up when demanded.
15.26
In a contract of bailment, although there is the delivery of goods by A to B,
the goods still belong to A. The owner is the bailor and the possessor is the
bailee. A striking example of a contract of bailment is when a car is hired. In
Bowmakers Ltd v Barnet Instruments Ltd (1945), it was held that in an illegal
contract of bailment, the bailor/owner can recover the goods as he is relying
on his proprietary rights and not on the contract of bailment.
15.27
The Court of Appeal in Strongman (1945) Ltd v Sincock (1955) allowed
recovery by way of a collateral contract despite the main contract being
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tainted by illegality. In that case, a builder carried out renovation works after
being assured that the owner would obtain the necessary licences for the
works. The owner refused to pay for the works which were not covered by
licences and relied on the illegality of the contract. The Court of Appeal held
that the assurance given by the owner that he would obtain the necessary
licences gave rise to a collateral contract. The builder was thus entitled to
damages for breach of the collateral contract.
15.28
The contradiction posed by this route of recovery, is the fact that if recovery
is permitted by way of a collateral contract, the plaintiff would be allowed
to recover what could not otherwise be recovered under the illegal contract
which precludes all recovery whatsoever. The Court of Appeal stressed that
only in exceptional circumstances will recovery be allowed by way of a
collateral contract for failure to observe a statutory obligation.
CONTRACTS IN RESTRAINT OF TRADE
Introduction
15.29
Covenants in contracts in restraint of trade are very common and take many
forms. Such covenants restrict the freedom of contracting parties in one
way or another. Literally, restraint of trade covenants curtail the freedom of
trade. However, in employment contracts, it not only attempts to prevent
an employee from leaving the employment, it usually seeks to prevent the
employee from working for the employer’s competitor. Employers use these
covenants to protect the investment they have made in terms of training
an employee. In addition, they also use it to protect other interests which
include trade secrets and their clientele. In some cases, where the employee
has brought in skills which are integral to the employer’s business, the
employer may try to use these covenants to hold back the employee.
15.30
When faced with a covenant in restraint of trade, the courts usually bear in
mind two competing public policy considerations. First, it is in the interest
of society to encourage competition and such clauses are not in the interest
of society generally as they prevent competition. However, it is also equally
important and in the interest of society that covenants voluntarily entered
into should be upheld. Initially, the courts supported the first consideration
and held that all covenants in restraint of trade are absolutely void.
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15.31
This approach was rather restrictive and ignored commercial practicalities,
such as the fact that the salary paid may have taken into account the
restrictive covenants that the employee had willingly accepted. Although it
may be argued that employees very often do not have sufficient bargaining
power to negotiate favourable terms in view of the restrictive clause, they
are nonetheless not compelled to enter into such agreements. In fact, even
though an employee has agreed to the restrictive covenants, he is not
precluded from arguing later that the covenants are restrictive (see the cases
of TSC Europe (UK) Ltd v Massey (1999) and National Aerated Water Co
Pte Ltd v Monarch Co Inc (2000)). However, in the situation where the
employee proposes a period of restraint in return for a not inconsiderable
payment, it has been held that the employee cannot argue later that the
duration was unreasonable especially where his entitlement to receive the
payment is in return for the clause in restraint of trade (See Man Financial
(S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v
Wong Bark Chuan David (2007) (“Man Financial”)).
15.32
In addition to the points made earlier, it is also in society’s interest to
encourage the sale and purchase of businesses and the transfer of knowledge
from employers to employees. These considerations required recognition
by the courts that certain interests can be protected through the voluntary
agreement of the parties.
Box 15.2
Reflecting
on the law
Nature of “restraint of trade” clauses
“Restraint of trade” clauses are obligations undertaken voluntarily and are not
themselves illegal in the sense that an offence has been committed by having
such undertakings. Such clauses necessarily involve some element of “restraint”
on the part of the employee. The employer will seek to enforce the covenants in
“restraint” by requiring the ex-employee to observe the restraining obligations he
had undertaken by, for example, not working for competitors. The employee will
try and argue that it should not be enforced on the ground of illegality in relation
to some aspect of the clause which is against the interest of the public. Hence,
the illegality hinges on public policy considerations, the freedom to trade being
at the crux of it.
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Validity of “Restraint of Trade” Clause
15.33
The validity of a “restraint of trade” clause hinges on two requirements.
First, there must be a legitimate interest that the party relying on the
clause is seeking to protect. Second, the clause has to be reasonable,
having regard to the interest of the parties and the public generally.
Accordingly, Lord Macnaghten in the significant House of Lords decision
in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894), set the
balance between the competing interests in perspective when he said (at
p 565):
The public have an interest in every person’s carrying on his trade freely:
so has the individual. All interference with individual liberty of action in
trading, and all restraints of trade of themselves, if there is nothing more,
are contrary to public policy, and therefore void. This is the general rule.
But there are exceptions: restraints of trade … may be justified by the
special circumstances of the particular case. It is a sufficient justification,
and indeed it is the only justification, if the restriction is reasonable —
reasonable, that is, in reference to the interests of the parties concerned
and reasonable in reference to the interests of the public, so framed
and so guarded as to afford adequate protection to the party in whose
favour it is imposed, while at the same time it is in no way injurious
to the public.
15.34
In view of the Nordenfelt decision, the general rule is that all covenants in
restraint of trade are prima facie void and unenforceable, and may only be
valid if it is reasonable both in the interests of the parties and in the interests
of the public. The measure of reasonableness is viewed from the standpoint
of both the public and the parties.
15.35
The legal test of whether a restrictive covenant is in unreasonable restraint
of trade is well settled by the Singapore Court of Appeal decision of Man
Financial and can be summarised as follows:
1. The court conducts a preliminary inquiry as to whether or not there
was a legitimate proprietary interest to be protected by the restrictive
covenant, over and above the mere protection of the employer from
competition by way of a bare and blatant restriction of the freedom
to trade ((at [79]); See also the Court of Appeal decisions of CLAAS
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Medical Centre Pte Ltd v Ng Boon Ching (2010) (at [44]) and Smile Inc
Dental Surgeons Pte Ltd v Lui Andrew Stewart (2012) (“SMILE”) (at [19]).
2. If the answer to the preliminary inquiry is affirmative, then the
court applies the twin tests of reasonableness (at [70]) enunciated in
Nordenfelt:
ii. is the restrictive covenant reasonable in reference to the interests of
the parties; and
ii. is the restrictive covenant reasonable in reference to the interests of
the public.
15.36
In SMILE, Phang JA (at [19]) made it clear that the application of twin
tests of reasonableness assumes that there is a legitimate proprietary interest
meriting protection in principle in the first place, and as such, the court will
enforce the covenant only if it goes no further than necessary to protect
legitimate proprietary interests.
15.37
In line with the general rule, that such covenants are prima facie
unenforceable, the burden of proof is on the party seeking to rely upon the
covenant in restraint of trade to show that the covenant was reasonable at
the time at which the contract was made. Although there are several factors
that influence a court’s decision on the reasonableness of such covenants it
is important to bear in mind that none of them are entirely conclusive. For
example, the courts do take into consideration the expanse that the restraint
covers in terms of geographical area and the duration of time.
15.38
In terms of geographical range, Singapore is unique and this was recognised
by G P Selvam in Heller Factoring (Singapore) Ltd v Ng Tong Yang (1998)
when he said (at [22]):
[A]s to the geographical limit, the area must be no more than adequate
for the protection of the plaintiffs. This in effect means the area where
the plaintiffs’ customers are situated. In the case of Singapore, a small
country, a prohibition applicable for the whole country would be
necessary in the context of the factoring industry. Customers would be
spread all over the island and it would be well nigh impossible to specify
pockets to which the clause should be restricted. Further, a competitor of
the plaintiffs could be situate anywhere in Singapore. For these reasons
the space limit is also eminently reasonable.
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Employment Contracts
15.39
There have been several recent decisions of importance on restrictive
covenants relating to employment contracts. SMILE is the most recent Court
of Appeal decision and Phang JA provides a seminal decision in which he
states that the courts adopt a stricter approach when considering restrictive
covenants in the context of a contract of employment as compared to a
sale of a business. This is because of the differing nature of the legitimate
proprietary interest to be protected and also because of the greater inequality
of bargaining power in an employment context (see Man Financial (at [48])
and SMILE (at [20])). In addition, the public policy reason in construing
restrictive covenants more strictly in the employment context is that “every
man shall be at liberty to work for himself, and shall not be at liberty to
deprive himself or the state of his labour, skill, or talent, by any contract that
he enters into.” (see Herbert Morris Ltd v Saxelby (1916) (at p 701) and
SMILE (at [21])).
15.40
When an employee leaves an employer, the employer would have obtained
whatever it has paid for in terms of the employee’s services (see Man
Financial (at [48]) and SMILE (at [20])). Therefore, in order to justify a
covenant in restraint of trade, the employer must have some proprietary
interest that requires protection. Trade secrets and business connections are
clearly owned by the employer and are considered legitimate interests that
an employer can protect with a suitably drafted covenant. The maintenance
of a stable workforce can be a legitimate interest that an employer may
seek to protect with a restrictive clause (see Man Financial (at [121])). In
the context of business connections or clientele, the employee must have
personal knowledge of and influence over the customers of the employer
(see Faccenda Chicken Ltd v Fowler (1987)). However, where an employee
has acquired additional skill and knowledge of a trade or profession in the
course of his employment it belongs to the employee and the use of it will be
extremely difficult to inhibit by an employer (see Mason v Provident Clothing
and Supply Co Ltd (1913)).
15.41
In the leading House of Lords decision of Mason v Provident Clothing and
Supply Co Ltd (1913), the covenant provided that the employee, a canvasser,
will not work in any similar business for three years within 25 miles of
London. It was held that the employee’s duties were confined to Islington
and that the clause was wider than reasonably necessary to protect the
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employer’s legitimate interest. It was stated that the success of the employee
was predominantly due to the employee’s natural gifts and that the training
provided by the employer was of lesser significance. See also the similar case
of Herbert Morris Ltd v Saxelby (1916) where the restrictive covenant was
also wider than necessary for the protection of the employer’s interest.
15.42
In the House of Lords decision of Fitch v Dewes (1921), a solicitor’s managing
clerk covenanted that he would not be engaged in solicitors’ work within seven
miles of the town hall in the place where he worked. The House upheld the
covenant as being reasonable, even though it was for an unlimited duration.
Clearly, the severely restricted scope of the clause in terms of locality was a
significant factor that influenced their decision.
15.43
In Buckman Laboratories (Asia) Pte Ltd v Lee Wei Hoong (1999), the
Buckman Group dealt in speciality chemicals used by many industrial
sectors including industries dealing in pulp and paper, leather and water
treatment. Lee was employed for four years as a technical services specialist
mainly for specialty chemicals for the pulp and paper industry in Singapore.
His employment contract contained a “restraint of trade” clause. When Lee
left Buckman in 1998, he joined EEC International, one of three global
competitors of Buckman in respect of specialty chemicals for the pulp and
paper industry. Buckman sought an injunction to enforce the “restraint of
trade” covenant. The Singapore High Court refused to grant the injunction
as the clause was too wide. The legitimate interest was not specified and the
width of the clause led to the inference that it was intended primarily to
stifle competition. The geographical scope of the clause was also too wide
as it sought to protect not only Buckman’s actual but potential business in
regions where they were merely trying to establish a permanent presence.
Buckman should have limited the business scope of the clause to the pulp
and paper industry. Instead the clause covered all products and services of
Buckman and associated companies.
To determine the interest intended to be protected by a restraint of trade
covenant, the court must first of all construe the contractual wording to
determine whether it indicates what that interest is. Where the wording of a
restriction does not specifically state the interest of the employer which it is
intended to protect, the court is entitled to look both at the wording and the
surrounding circumstances for the purpose of ascertaining that interest by
reference to what appear to have been the intentions of the parties. But if the
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employer states specifically what interest the covenant is intended to protect,
the employer cannot thereafter seek to justify it by reference to a separate
interest which has not been specified.
15.44
In Stratech Systems Ltd v Nyam Chiu Shin (alias Yan Qiuxin) and others
(2005), the Singapore Court of Appeal found that the court would never
uphold a restrictive covenant which served only to protect an employer from
competition from a former employee. There had to be some subject matter
which an employer could legitimately protect by a restrictive covenant.
15.45
In Man Financial, the High Court was faced with a post-employment
termination agreement which contained restrictive clauses. The plaintiff was
the managing director and chief executive officer of the defendant company.
He was asked to resign and placed on garden leave for three months from
13 June 2005. The plaintiff and defendant entered into a termination
agreement. The termination agreement provided for the plaintiff to receive
benefits if he did not breach the terms of the agreement, which included
restrictive covenants. The defendant refused to pay the benefits on the
ground that the plaintiff had breached certain restrictive covenants.
Clause C.1 prohibited him from soliciting the employment of employees
of the defendant and Clause C.3 prohibited him from participating in or
rendering advice to a competitor which the court found that he had
breached. However, the High Court held that the defendant had not
discharged their burden of establishing the interests that were meant to be
protected by the restrictive covenants and the reasonableness of the same.
As such, the plaintiff was held to be entitled to receive the benefit in terms
of compensation under the agreement. The defendant appealed. In a
significant judgment by Phang JA, the Court of Appeal allowed the appeal
and found, inter alia, as follows:
° Generally, the doctrine of restraint of trade applies to settlement
agreements. However, the doctrine would not apply to settlement
agreements when: (1) the settlement agreement related to the settlement
of a prior dispute over a clause in restraint of trade in an existing
contract; and (2) the settlement itself was not tainted by one or more
vitiating factors (at [65]).
° Given the nature of the appellant’s business, there was a legitimate
proprietary interest in the appellant maintaining a stable, trained workforce and that was a fortiori the case in the light of the respondent’s
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access to and use of confidential knowledge gained in the course of his
employment (at [136]).
° Clause C.1 was reasonable as between the parties. The terms in the
Termination Agreement (of which Clause C.1 was an integral part) were
arrived at in earnest and in good faith. Significantly, it was the respondent
who had proposed the period of seven months for the covenants to last
as a gesture of goodwill. It was therefore not open to the respondent to
later argue that the seven-month duration was unreasonable especially
since he received a not inconsiderable consideration which he was clearly
not entitled to otherwise from a legal point of view (at [137] to [139]
and [142]).
° Clause C.1 was reasonable both in the interests of the parties as well as
in the interests of the public and as such valid. A breach of Clause C.1
entitles the appellant to terminate the contract. Therefore, the respondent
could not enforce his claim for the compensation under the Termination
Agreement (at [192]).
° The Court of Appeal also observed that Clause C.3 could not be invoked
to disentitle the respondent from claiming the compensation. There
was insufficient evidence adduced by the appellant to demonstrate an
underlying legitimate proprietary interest which Clause C.3 was intended
to protect. Clause C.3 was also far too wide, particularly with regard to
the area covered (at [15]).
15.46
In the context of the medical practitioners (including dentists), solicitors and
accountants, there is ample authority to show that a legitimate proprietary
interest exists in the form of “special and intimate knowledge of the patients
of the business”. (See Routh v Jones (1947) at p 181E-H and SMILE (at [22]
and [24]); Robin M Bridge v Deacons (1984) at pp 719H–720A; and Campbell
v Park (1954) at [10], respectively).
15.47
In the interesting recent local decision of SMILE, Dr Lui was employed as
an associate dental surgeon for Smile Inc Dental Surgeons Pte Ltd (“Smile
Clinic”) located at the Forum Shopping Mall. Dr Lui and another dentist
colleague, Dr Gareth Pearson, accounted for 80 per cent of the patients at
the said clinic. On 7 January 2009, Dr Lui incorporated Dental Essence Pte
Ltd (“Dental Essence”) while still employed by Smile Clinic. On 27 February
2009, Dr Lui entered into a one-year tenancy for premises only five minutes
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away from Smile Clinic and resigned on that same day. On 19 March 2009,
Dr Pearson joined Dental Essence as a shareholder and dentist. Smile Clinic
agreed that Dr Lui’s last day of work would be 18 April 2009. Smile Clinic
experienced a significant drop in its monthly income after Dr Lui left and
received numerous requests from its patients for their dental records. Smile
Clinic later discovered that many of its patients became patients of Dental
Essence and closed down its branch in September 2009. It commenced
action against Dr Lui on 8 October 2009 basing its case on, inter alia,
Dr Lui’s breach of the following express terms (Clauses 23, 24 and 25) of
their Employment Contract:
23. Upon leaving The Practice, Dr. Lui will not seek to damage or injure
The Practice’s reputation or to canvass, solicit or procure any of The
Practice’s patients for himself or any other persons.
24. In the event that Dr. Lui leaves (whether resignation or dismissal)
The Practice, Dr. Lui shall not practice within a 3 kilometre radius
distance from the Smile Inc. Dental Surgeons practices at Suntec City
Mall and from Forum The Shopping Mall, and a 3 kilometre radius from
any other new Smile Inc. Dental Surgeons practices that have been set
up before and during his cessation of work at The Practice.
25. In the event that Dr. Lui leaves (whether resignation or dismissal) The
Practice, existing and new corporate and non-corporate contracts, as well
as existing and new patients, shall remain with The Practice. Patient data
and records, office data and records and computer software programmes
and data shall remain the property of The Practice, and such records, in
full or in part, shall not be copied manually, electronically or otherwise
be removed from the Practice.
15.48
The trial judge, Justice Woo Bih Li, found that Dr Lui had breached the
Restrictive Covenants in Clauses 24 and 25 but as there was no evidence of
solicitation, there was no breach of Clause 23. However, the learned judge
also found that the Restrictive Covenants were in unreasonable restraint
of trade and therefore void and unenforceable, mainly because they were
unlimited in duration. The Court of Appeal affirmed this reasoning when
Phang JA stated (at [29]):
A restraint of trade that operates for an indefinite period of time is
(absent the most exceptional circumstances, which are not present in
this case) necessarily void and unenforceable …
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15.49
Yet another recent local decision turned on the doctrine of restraint of
trade. In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd (2012), the Court
of Appeal in another seminal decision dealt with a covenant in restraint of
trade in a Forfeiture Provision which was contained in an Incentive Award
given at the end of each financial year. The covenant operated to restrain Mr
Singh from leaving Cargill to join a competitor, by way of a threat to forfeit
a not insubstantial financial reward which already belonged to Mr Singh if
he joined a competitor. Although the learned Justice of Appeal found that
the doctrine of restraint of trade applied to the terms and conditions of
the Incentive Award which included the Forfeiture Provision, he also found
that the Forfeiture Provision had taken away a right or entitlement that had
already vested in Mr Singh and, hence, constituted an unreasonable restraint
of trade.
15.50
In order for an employer to rely on restrictive covenants in a contract
he has to establish a valid interest. The courts have recognised that trade
secrets, business connections and the maintenance of a stable workforce can
form the basis of legitimate interests of an employer which he may seek to
protect. Having identified the employer’s interest in relation to a particular
employee, the employer will be able to protect his interest with a clause that
is reasonable as between the employer and employee and in the interest of
the public.
15.51
Often employers cannot resist the temptation of inserting the most stringent
of restraint of trade clauses in their favour. Employees rarely consider the
consequences of leaving the employer at the time when they are about to
be employed and accept such clauses rather than risk losing the opportunity
presented by the potential employment. Such stringent clauses may have
some deterrent effect on some of the employees who have signed contracts
with them. However, employers will be well advised to adopt a less stringent
approach by using a reasonable clause which can be enforced bearing in
mind that a clause intended to operate for an indefinite period of time
would, barring the most exceptional circumstances, be considered to be
unreasonable as between an employer and employee.
15.52
Clauses that operate to forfeit benefits or rights that have accrued to an
employee in return for the employee undertaking covenants in restraint of
trade would be very difficult to enforce. Employers seeking to introduce such
clauses may want to introduce some new element of benefit to the employee
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in return for a clause which is reasonable as between the parties and in the
interest of the public. The new element need not necessarily be monetary, it
could be a new position or additional paid leave or generally better terms of
employment.
Sale of a Business
15.53
Restraint of trade clauses in contracts for the sale of a business are more
readily upheld by the courts than in employment contracts. Sale-and-purchase
agreements that deal with a business will usually include a restrictive covenant
protecting the goodwill of the business. In addition, there is also more likely
to be equality of bargaining power between the vendor and purchaser in
the sale of business. As with “restraint of trade” clauses that are found in
employment contracts, the purchaser of a business must be protecting a
legitimate proprietary interest which will generally include the goodwill of
the business.
15.54
Consequently, in Vancouver Malt and Sake Brewing Co Ltd v Vancouver
Breweries Ltd (1934), the sellers held a brewer’s licence which entitled them
to brew beer in their premises. In fact, they only brewed sake (Japanese
wine). The buyers held a similar licence and did engage in brewing
beer. The sellers purported to sell the goodwill of their brewer’s licence,
except in relation to sake, but agreed not to manufacture beer for the next
15 years. It was held since the sellers were not brewers of beer: they had
no proprietary interests to transfer under the contract to which the restraint
of trade could apply.
Other Categories
15.55
There are other categories which are outside the scope of this chapter.
One worthy of mention is the case where there is extreme inequality
between the parties. The case most often cited is the House of Lords
decision in A Schroeder Music Publishing Co Ltd v Macaulay (1974). The
plaintiff, an unknown song writer at that time, entered into a standard form
contract with the defendants, who were music publishers. The agreement
was extremely unfair and totally unfavourable to the plaintiff. The plaintiff
assigned full copyright of his existing works and in his future works for
the next five years. The five years was to be extended to ten if his royalties
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exceeded £5,000. The defendants on the other hand had no corresponding
obligations to develop the plaintiff ’s works. If they did not do so, the
plaintiff could not do anything even after he had terminated the contract.
The House of Lords held that the agreement was contrary to public policy
and thus void.
15.56
Another category is the solus agreement or the exclusive purchasing agreement. By such an agreement, a retailer (garage owner) undertakes, amongst
others, to purchase motor spirit for a specified period from the wholesaler
and not to purchase motor spirit from any other wholesaler usually in return
for a loan from the wholesaler to finance the purchase or development of the
garage premises. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd
(1968), the defendants owned two garages and entered into solus agreements
with the plaintiff. They agreed to buy all their fuel requirements from the
plaintiff for four years and five months for one garage and for 21 years for
the other garage (there was a 21-year mortgage to the plaintiff in return
for a loan of £7,000 in relation to this garage). They also agreed that if
they sold the garages, they would procure from the buyer similar solus
agreements. In addition, they had agreed to keep the garage open at all
reasonable hours. The House of Lords held that both agreements were
contracts in restraint of trade. They also held that the contract with the
tie for less than five years was reasonable, while the other for 21 years
was unreasonable and unenforceable. The tie of less than five years was
found to be reasonable and adequate in protecting the plaintiff ’s legitimate
interest of maintaining a stable system of distribution. The tie of 21 years
went beyond any period necessary to protect the legitimate interest of the
plaintiff. Apart from the loan the garage owner appears to get no greater
advantage from the longer tie than the five-year tie. The plaintiff failed to
establish some advantage to them for which a shorter period would not have
been adequate.
15.57
However, in Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd (1985),
the Court of Appeal upheld as reasonable a tie for 21 years. It was found,
inter alia, that the plaintiff had received £35,000 for the tie, something which
was undoubtedly beneficial and that there was a clause that allowed the
plaintiff to terminate the tie after seven years. Therefore, it is a question of
looking at all the terms in the agreement and the factual matrix to determine
the enforceability of a solus agreement.
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SEVERANCE
Introduction
15.58
The doctrine of severance is used to save a contract which would otherwise
be illegal or contrary to public policy, by excising or cutting away the illegal
portion. Deletion could be of whole terms or clauses or alternatively, of
portions within clauses, if appropriate. Man Financial recognised two forms
of severance of contractual terms (at [126]): (1) severance of entire or whole
clauses in a contract; and (2) severance via the “blue pencil test”.
Severance of Entire Clauses
15.59
In order to remove an entire covenant, the test that is applied is whether the
covenants in restraint of trade constitute the whole or main consideration for
the promise sought to be enforced. If that is not the case, then the doctrine
of severance may be applied. A remarkable example of the former position
can be found in the case of Wyatt v Kreglinger & Fernau (1933). Here, a
retired employee was given a pension on the basis that after he retired he
was at liberty to engage in any other trade except the wool trade which if
he did the pension would cease. The Court of Appeal held that the former
employee was not entitled to the arrears of the pension as he had provided
no consideration for the promise except his agreement to or performance of
an invalid provision in restraint of trade.
Severance within Covenants: “Blue Pencil Test”
15.60
Severance of portions of a covenant is also possible in order to save it. The
general guideline is that such excision is permissible so long as the “blue
pencil” running through and striking out the objectionable words in the
covenant concerned does not alter the meaning of the covenant and does
not “mutilate” the covenant to the point where it does not make any sense.
Chao Hick Tin JA in CLAAS Medical Centre Pte Ltd v Ng Boon Ching (2010)
clarified (at [70]) what is meant by “not altering the meaning of the covenant”
as follows:
… “not altering the meaning” does not mean that the original version
of the clause and the modified clause (after running the blue pencil
through) must mean the same. … The phrase “not altering the meaning”
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just means not altering the sense of what remains of the clause after
running the blue pencil through. All it means is that the obnoxious
portion must be capable of being removed without the necessity of
adding to or modifying the wording of what remains …
15.61
A striking example of the application of the doctrine of severance can
be found in the English decision of Goldsoll v Goldman (1915). In that
case, the seller was a London dealer in imitation jewellery. On selling the
business, he covenanted not to compete with the buyer as “a dealer in real
or imitation jewellery in … any part of the United Kingdom … the United
States of America, Russia or Spain”. The covenant was clearly unreasonable
in extending the restraint to real jewellery and to competition outside the
United Kingdom. It was held that the words “real or” and the listed places
outside the United Kingdom could be struck out leaving only a reasonable
clause which could be enforced.
15.62
“Cascading clauses” have originated in Australia in order to take advantage of
the doctrine of severance and the use of the “blue pencil” test. Such clauses
provide for a variety of durations or geographical scopes. These clauses have
been held to be valid by the New South Wales Court of Appeal decision
in Hanna v OAMPS Insurance Brokers Ltd (2010). As stated in SMILE (at
[31]), such cascading clauses are engineered specifically to accommodate
the “blue pencil” test, in order that the court may strike out provisions for,
for example, unreasonably long durations of restraint, whilst preserving the
restrictive covenant concerned if at least one of the durations passes the tests
of reasonableness.
15.63
However, it may be argued that the cascading clauses are conflicting to the
extent that they fail to provide a clear basis on which agreement had been
reached by the parties on the nature and duration of a restrictive covenant.
Applying the doctrine of severance and using the blue pencil test would give
the employer the benefit of enforcing one of the covenants in restraint of
trade even though the employee did not know which one was applicable
to their contract. In that regard, if any of the cascading clauses are to be
enforced, it is arguable that the clause least favourable to the employer should
apply so that the employer does not receive the benefit of the ambiguity he
has created with the contrasting clauses on the same issue.
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Performance, Breach and Agreement
16.1
Introduction
16.2
16.3
16.4
16.5–16.6
16.7–16.8
16.9–16.16
Discharge by Performance
Strict and Relative Obligations
Precise Performance and De Minimis Defects
Personal Obligations or Vicarious Performance
Alternative Modes of Performance
Time of Performance
16.17
16.18
16.19
16.20–16.22
16.23
16.24–16.30
16.57–16.65
Discharge by Breach of a Promissory Obligation
Lawful Excuses for Breach of Contract
(1) Discharge by agreement
(2) Contractual provision for termination
(3) Frustration of contract
(4) Promissory and contingent obligations, interdependent and
independent obligations
Manner and Timing of Breach of Contract
(1) Repudiatory breaches (“I won’t do it”)
(2) Making performance impossible (“I won’t let you do it”)
Effects of a Breach of Contract
(1) Actual breach giving rise to right of discharge
(a) Effect of election to discharge contract for actual breach
(b) Effect of election to affirm contract despite an actual
breach
(2) Anticipatory repudiatory breach
(a) Effect of election to discharge contract for anticipatory
repudiatory breach
(b) Effect of election to affirm contract despite an anticipatory
repudiatory breach
Limits on Right of Election to Affirm Contract
16.66–16.69
Partial Performance and Discharge by Breach
16.31–16.32
16.33–16.35
16.36–16.39
16.40
16.41–16.48
16.49
16.50–16.51
16.52
16.53–16.54
16.55–16.56
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16.70–16.73
16.74–16.75
16.76–16.78
16.79–16.82
16.83–16.85
Entire Obligations and Substantial Performance
Apportionment Act
Quantum Meruit
(1) Quantum meruit on a contractual basis
(2) Quantum meruit on a restitutionary basis
16.86–16.87
Severable or Divisible Obligations and Substantial Performance
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INTRODUCTION
16.1
A contract may be brought to an end or “discharged” by any one of the
following means:
° full performance by all parties to a contract of their mutual rights and
obligations (“discharge by performance”);
° breach of a term of the contract by one party (the “party-in-breach”)
which gives the other party not in breach (the “innocent party”) the
power to end the contract (“discharge by breach”);
° mutual agreement between the parties (“discharge by agreement”)
or operation of a contract clause (“contractual termination”). (These
two types of discharge are not usually problematic if the terms of the
agreement or the termination clause have been clearly drafted. The issues
encountered in such cases are therefore related to the construction of the
relevant terms); or
° an unforeseeable event beyond the control of any party to the contract
occurs, making performance of the contract impossible or, at the very
least, essentially different from that originally envisaged by parties to
the contract (“discharge by frustration”). (This type of discharge arises
through no fault of any of the parties to the contract and raises distinct
and complicated issues of its own which are discussed in Chapter 17.)
In this chapter, we will focus on the issues encountered in contracts
discharged by performance or breach.
DISCHARGE BY PERFORMANCE
16.2
When all the obligations in a contract are fully and precisely performed, the
contract is brought to an end or “discharged” by performance. Sometimes, this
may not be obvious and the contract terms may need careful interpretation
to see just what, precisely, had been contractually promised, how each
contractual promise was to be performed, and when it was supposed to
be performed. These are questions of construction of the contract’s terms
which cannot be discussed fully in the abstract. However, in construing or
interpreting the terms, note may be taken of the concerns set out in the
following sections.
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Strict and Relative Obligations
16.3
Most contracts will provide that the performance of its terms must be “strict”.
A contract to paint the exterior of a house for $5,000 is only performed
when the house has been painted. Painting the house part of the way will
not do. On the other hand, in certain kinds of contracts, such strict terms
are unrealistic, for example, in contracts to provide professional advice.
Unless the advisor is also insuring the advisee against loss, the contract will
most likely only require the advisor to provide advice with “reasonable care”,
“due diligence” or some similar formula.
Precise Performance and De Minimis Defects
16.4
“Precise” or “exact” performance is required by most contracts. As the House
of Lords case of Arcos, Ltd v E A Ronaasen & Son (1933) noted (at p 479):
If the written contract specifies conditions of weight, measurement and
the like, those conditions must be complied with. A ton does not mean
about a ton, or a yard about a yard. Still less when you descend to minute
measurements does an inch mean about an inch …
However, as Lord Atkin went on to note (at p 480):
No doubt there may be microscopic deviations which business men
and therefore lawyers will ignore … But apart from this consideration,
the right view is that the conditions of the contact must be strictly
performed.
So some degree of “microscopic” or “de minimis” shortfall in performance
will be ignored — it will be treated as if no breach had occurred at all.
Personal Obligations or Vicarious Performance
16.5
Many contracts are concerned only that the contractual performance be
provided by someone, not necessarily the promisor, although the promisor
remains contractually liable to ensure that the contracted-for performance
is provided in accordance with the contract terms. So, in a contract for
renovation of a house, the house owner is usually just concerned to ensure
that the renovation works are completed by someone, not necessarily the
renovation contractor he has entered into the contract with, though the
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renovation contractor would still be responsible should the end-result fall
below the standard and requirements set out in the contract. Where the
contractual obligations are not “personal”, the renovation contractor may
engage sub-contractors to handle those parts of the work which might more
efficiently be “out-sourced”. In such contracts, therefore, though the promisor
remains liable for any defects in the performance of his sub-contractors,
the promisee cannot object to such “vicarious” performance if it otherwise
causes no loss — such vicarious performance may still amount to full
performance if the end-result fulfils the contracted-for standard.
16.6
However, there are some contracts where this is not the case. For example,
in many situations, employment contracts are said to be “personal” as the
obligations (particularly those of the employee) are undertaken in light
of the unique capabilities and attributes of the employee. Usually, if an
employer discovers that the work for which a particular employee has been
employed to do is, in fact, being provided for by someone else, such vicarious
performance would not satisfy the requirements of the contract and would
amount to a breach.
Alternative Modes of Performance
16.7
Some contracts provide for alternative modes of performance. For example,
a contract for the painting of a house may give the painters a choice as to
which brand of paint to use, “so long as it is white”. This is not problematic
where the contract states clearly which party is empowered to exercise the
choice. Where the contract does not, however, difficulties may arise.
16.8
Care should also be taken where it is alleged that a particular “alternative
mode of performance” is the payment of a sum of money instead of the
contracted-for performance. Such a clause may be construed to be a form of
“liquidated damages” clause and will then be analysed as such (see Chapter
18, paras 18.10–18.12), instead of a clause permitting an alternative mode
of performance. But, as the Singapore Court of Appeal has observed (in the
context of a contract for the sale and purchase of an HDB flat):
The court must always construe the contractual provision in question to
determine whether it is intended by the parties to provide the vendor
with a choice of an alternative method of performance, or whether it
is intended by the parties to be a true liquidated damages clause that
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sets out the question of damages in the event of the vendor’s nonperformance of the contract (Tay Ah Poon v Chionh Hai Guan (1997),
per Karthigesu JA, at [17]).
Time of Performance
16.9
Many contracts will expressly stipulate when the various contractual obligations undertaken by the contracting parties are to be performed. Where a
date is set for delivery of goods sold by a vendor, the vendor must complete
delivery by the end of that day to claim that he has performed his obligation.
Where no date or timing for performance is expressly specified, it is likely
that a term requiring performance to be provided within a reasonable time
from the formation of contract will be implied.
16.10
Generally, time is not of the essence unless it has been either expressly
or impliedly made to be so (ie, making the time of commencement or
completion of performance a condition of the contract). If the requirement
as to timing of performance is a condition such that time has been made of
the essence, failure to comply with the time stipulations will entitle the other
party to choose to discharge the contract for breach. If there is neither an
express nor implied provision at the time of formation of contract, time may
be made of the essence if, following undue delay by one party, the other party
gives notice that the contract will be treated as at an end unless performance
is completed within a reasonable space of time: see Charles Rickards Ltd v
Oppenheim (1950) and Lee Christina v Lee Eunice (Executors of the Estate of
Lee Teck Soon) (1993).
16.11
But the timing of performance may also be set by reference to other
contingent events. A good example is the obligation of an insurer to pay the
sum insured on a residential property in the event that it is destroyed by
fire: until the property is destroyed by fire, the insurer is under no obligation
to pay any such sum. The destruction of the property by fire is therefore a
contingent condition.
16.12
Most contracts will impose obligations on both contracting parties. In many,
there will be a sequence to the performance of these obligations. Such
obligations may be interdependent and concurrent, or interdependent and
consecutive.
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16.13
For example, in a contract for the sale and purchase of a television set, the
contract may provide that the purchaser’s obligation to pay will only arise
when the vendor delivers the television set (“payment on delivery”). But
conversely, the vendor’s obligation to deliver and give the ownership of the
television set to the purchaser only arises when the purchaser pays the price.
These two obligations are therefore interdependent and concurrent (in the
case of the sale of goods, this is now statutorily provided for by s 28 Sale
of Goods Act (Cap 393, 1999 Rev Ed). In essence, the contract for sale and
purchase imposes on the vendor and purchaser concurrent (ie, simultaneous)
obligations of delivery and payment.
16.14
But not all interdependent obligations are concurrent. It is open to the
contracting parties to negotiate for their obligations to arise one after the
other, that is, consecutively. For example, in a contract for sale and delivery
of a television set which provides that the purchaser is to pay 40 per cent of
the purchase price on ordering the television, and then the balance 60 per
cent on delivery, the vendor’s obligation to deliver would be subsequent to
the purchaser actually paying the initial 40 per cent of the purchase price.
16.15
One point remains: it should be obvious that interdependent obligations will
usually require the cooperation of the other party for full performance to
occur. So, a contractual promise to deliver goods sold cannot be completed
unless the purchaser cooperates by taking delivery and accepting the goods.
What happens if it is not possible to complete such performance because
the other party refuses to cooperate? In the example given above at para
16.13, the vendor would not be entitled to claim for the price payable since
he cannot complete delivery without cooperation by the purchaser. Can the
vendor, however, be said to be in breach of his obligation to deliver the goods?
The law would certainly be absurd if that were the case, and the doctrine of
“tender of performance” prevents that. Simply put, if the other party to the
contract refuses to accept performance in such cases, the promisor may plead
tender as a defence to any action by the other party against him for failure
to perform. As to what amounts to “tender”, briefly, the promisor must show
that he has always been willing to perform his side of the contract, and has
done so as far as is possible given the non-cooperation of the other party. For
completeness’ sake, it should further be noted that such refusal to cooperate
may also give the promisor the option to elect to discharge the contract
(see para 16.36).
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16.16
Lastly, not all obligations are necessarily interdependent. It is open to the
contracting parties to contract on the basis that their obligations should
be independent of each other. The distinction between interdependent and
independent obligations is further discussed at paras 16.24–16.30.
DISCHARGE BY BREACH OF A PROMISSORY OBLIGATION
16.17
We have encountered the phrases “promissory” and “contingent” condition
previously (see Chapter 10, para 10.38). Obviously, it is not possible to
“breach” a contingent condition. So in our discussion of discharge for breach
of contract, we are generally concerned with instances when a promissory
condition giving rise to a promissory obligation has not been performed.
Where a promissory obligation has arisen but is not performed or is
performed defectively in a non-trivial fashion, Singapore law provides for
a variety of legal responses and remedies, depending on the nature of the
failure of performance.
Lawful Excuses for Breach of Contract
16.18
If the failure of performance is not subject to any lawful excuse, the contract is said to be “breached”. In this context, “lawful excuses” may take the
following forms.
(1) Discharge by agreement
16.19
Just as parties are free to agree to bind themselves to a contract, they are free
to negotiate the release of each other from the obligations of that contract.
Contracting parties may release themselves from the obligations of the
original contract by entering into a subsequent contract of release. Where each
contractual party is still subject to contractual obligations which have yet to
be performed, the mutual release of their outstanding obligations is generally
effective under Singapore law without the need for any further formalities
or any further consideration. However, where the party, who is owed the
obligation in question, does not have any outstanding obligations under
the original contract, the party seeking to be released from that obligation
will have to provide some form of valuable consideration in exchange for
the release. In the alternative, the release must be executed under seal to
be effective.
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(2) Contractual provision for termination
16.20
Some kinds of contract will often provide for a mechanism for the parties
to bring it to an end, even in the absence of any breach of contract. A good
example may be found in employment contracts which typically provide both
the employer and the employee with the option to bring the employment
contract to an end by giving each other a reasonable period of notice. Such
notice may be given, in most cases, as a matter of will and need not depend
on there being any basis for dissatisfaction with the other party. It is also
conceivable for a contract to be time-limited, for example, a contract to
lease premises for a fixed term. When the period of the lease runs out, the
contract simply comes to an end.
16.21
There are also instances where the contracting parties may have expressly
provided in their contract to excuse non-performance following from certain
events. A good example of this would be a force majeure clause. Typically,
such a clause will excuse the contracting parties for non-performance of
their obligations due to reasons of acts of God (such as catastrophic and
unusual weather conditions), the enactment of legislation which outlaws
the contracted performance or the outbreak of war. However, it is up to
the ingenuity (and relative bargaining power) of the contracting parties to
specify which events would qualify to “excuse” their non-performance and
each case will depend on the construction of the relevant clause.
16.22
Where a contract is brought to an end in accordance with a contractually
specified term, it is also open to the contracting parties to provide for such
issues as the return and refund of advance payments, reimbursements for
expenses incurred in preparation for the performance of the contract, and so
forth. Such provisions will generally be given effect by Singapore law.
(3) Frustration of contract
16.23
Where the reason for the failure of performance lies in events beyond
the control of the contracting parties and which neither party could have
reasonably foreseen, the contract is said to be “frustrated”. In such cases,
there are statutory rules which set out the extent to which advance payments
made before the frustrating event intervened may be refunded and work
done in preparation of the performance of the contract in advance of the
frustrating event may be reimbursed. This doctrine is further discussed in
greater detail in Chapter 17.
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(4) Promissory and contingent obligations, interdependent and
independent obligations
16.24
Sometimes, it may be that the obligation which has not been performed is
conditional upon the prior occurrence of certain specified events. These may
be contractually specified events, or some contractually specified counterperformance by the other party to the contract. To illustrate, consider the
following examples:
° A enters into a contract with B, paying B a sum of $1,000 in exchange
for B’s promise that if he decides to sell his 30,000 shares in Bravo Ltd, a
public company listed on the Singapore Stock Exchange within the next
12 months, he will offer the shares to A first for $30,000. Before the 12
months lapse, B informs A that he has decided to hold on to the Bravo
shares for the next five years. B is not in breach of the contract. Why?
° Same facts as above, except that B now informs A that he has decided to
sell the Bravo shares to C. B is in breach of contract. Why?
16.25
In the first example, B has not breached the contract because his obligation
to offer the shares to A first is contingent on B making the decision to sell.
Properly construed, B only promised to make A an offer to sell them, if he
decided to sell the shares within the 12-month period specified. Accordingly,
B did not breach any “promissory obligation” to make A any offer for sale
of Bravo shares: no such obligation ever arose, since the contingency on
which it was to arise did not occur. Furthermore, that contingency was
only a contingent condition and not a promissory one — at no point did
B promise A that he would come to a decision to sell the shares within
that period.
16.26
In contrast, in the second example, B’s obligation to make A an offer has
arisen because the contingency for it to arise — B deciding to sell the shares
— has occurred. As a result, in the second example, B’s promissory obligation
to make A an offer is now “due” and, if unperformed, will give rise to certain
legal consequences.
16.27
Next, consider the following:
° X contracts to buy Y’s car for $35,000. X pays 10 per cent up-front,
with the balance to be paid on delivery by Y in one week’s time. Y fails
to deliver the car. X refuses to pay Y the balance 90 per cent of the
purchase price. Y is in breach of contract, but X is not.
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° P contracts to rent an apartment owned by Q for three years at $1,600 per
month, the rent being due and payable on the 15th day of each month.
Q’s obligations as landlord are numerous and include an obligation to
keep the apartment in good repair. Unfortunately, Q has allowed the
apartment’s condition to deteriorate, and problems of leaking ceilings,
mould and peeling paint emerge within a few months of P moving
in. Even though P has made many complaints about the defects to Q,
Q refuses to do anything about it. P decides to withhold payment of the
rent due, even though it is already the 20th. Q is in breach of contract,
but so is P.
16.28
The difference between the two examples above, lies in the nature of the
obligations undertaken by X and P. In the case between X and Y, as in
most contracts, their obligations are interdependent. That is to say, first,
X’s obligation to pay Y the balance 90 per cent of the purchase price does
not arise until Y makes delivery (X’s obligation to pay is contingent on Y
performing his obligation of delivery), and second, X’s obligation to pay is
dependent on Y making delivery. If Y does not make delivery, so long as
X is ready, willing and able to pay Y, it is Y who is in breach and not X,
even though X does not actually perform his obligation of payment either.
Significantly, where the parties’ contractual obligations are construed to be
interdependent upon each other, that is, where performance by, say, X in our
example above, of its obligations is contingent upon due performance by the
other, Y, breach by Y could entitle X to legitimately withold performance of
its obligations on the ground that its performance was not yet due. Thus, so
long as Y fails to make delivery, X only needs to remain ready, willing and
able to pay Y – X may, however, withhold payment as X’s obligation to pay
was only to arise upon delivery by Y. This often gives the non-defaulting
party a significant amount of bargaining power to encourage the other party
to rectify its breach.
16.29
On the other hand, certain obligations are construed as being independent of
each other. One typical example is in relation to the obligations of landlords
and tenants. So, in the example of the rental agreement between P and Q,
the obligation of P to pay rent is usually construed to be independent of
the obligation of Q to keep the premises in good repair. In this example, P’s
obligation to pay rent is contingent on a contractually specified event (the
passing of time — rent is due and payable by the 15th day of each month).
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However, it is independent of and not contingent upon Q’s performance of
his obligation to keep the premises in good repair. In such a case, although
Q is in breach of his obligation, it is not enough that P is ready, willing and
able to perform his part (in relation to payment of rents due). If P does not
actually pay the rent, P would himself be in breach and would be liable to
Q for that breach.
16.30
Thus, unlike the case of interdependent obligations, where the contractual
obligations are construed to be independent of each other, breach by one
party would not excuse the other from having to perform his independent
obligations. A contracting party whose obligations are independent of the
others would, therefore, not be able to threaten to withhold performance
of his own obligations unless the other rectified his breach. Conscious of
the loss of bargaining power in such cases, when construing the terms of a
contract, the courts usually begin by assuming that the parties would have
intended the contract to impose obligations which are interdependent. That
said, in some contracts, the usual market practice inclines towards having
independent obligations (as in the rental agreement example above), and of
course, the contracting parties may have explicitly provided for it in their
agreement. Ultimately, the question is one of construction of the contract.
Manner and Timing of Breach of Contract
16.31
Broadly speaking, the contract may be breached if a party to the contract:
° completely fails to perform, or defectively performs his own obligations
under the contract, thereby breaching a condition, or breaching an
innominate term which goes to the root of the contract (“I couldn’t do
it”);
° “repudiates” his obligations under the contract (“I won’t do it”); or
° makes further performance of the obligations in the contract impossible
(“I won’t let you do it”);
unless such non-performance is de minimis (see para 16.4) or is lawfully
excused (see paras 16.18–16.30).
16.32
Obviously, all three types of discharge by breach may occur at the actual point
in time where the party in breach ought to have performed his obligations
under the contract (in which case, there will have been an “actual breach”
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of the contract). The latter two types of discharge, however, may occur while
the contract is in an “executory” stage, that is, before the actual point in
time when the obligation was supposed to have been performed. In such a
situation, the breach is said to be an “anticipatory” breach.
(1) Repudiatory breaches (“I won’t do it”)
16.33
Where the time of performance has arrived and one party has failed to
perform in compliance with the contract, that actual failure will constitute
a breach of the contract. However, it is just as much a breach of contract if
that party clearly and unequivocally informs the other party that he cannot
or will not perform any of his obligations under that contract. This may be
done orally, in writing or may be inferred from his conduct. Indeed, it is
conceivable that a repudiatory intention may even be inferred from inactivity.
So long as an intention not to be bound by the terms of the contract has been
clearly demonstrated, the contract may be repudiated and the repudiating
party will be in actual or anticipatory breach, depending on the timing of
the repudiation.
16.34
It should be kept in mind, however, that:
[N]ot every intimation of an intention not to perform or of an inability
to perform some part of a contract will amount to a renunciation. In
the case of an entire and indivisible contract, a refusal to perform any
part of the agreement will normally entitle the innocent party to treat
the contract as discharged. Otherwise, a renunciation of some but not
all the obligations under a contract will not entitle the innocent party to
rescind [ie, discharge] the contract unless the renunciation amounts to a
breach of a condition of the contract or deprive [sic] him of substantially
the whole benefit which it was the intention of the parties that he should
obtain from the obligations of the parties under the contract then remaining
unperformed [emphasis added]
(per Karthigesu JA delivering the decision of the Singapore Court of Appeal
in San International Pte Ltd v Keppel Engineering Pte Ltd (1998) at [25]).
16.35
Proof of such repudiatory intention from the parties’ actions, or, in some
cases, their failure to act, is particularly problematic. In the case of San
International Pte Ltd v Keppel Engineering Pte Ltd (1998), the Singapore
Court of Appeal appears to have accepted (at [20]) the following passage
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from Chitty on Contracts (27th ed, 1994) Vol 1 at para 24–016, as correctly
setting out the state of the law:
Short of an express refusal or declaration the test [whether the party’s
actions demonstrate a repudiatory intention] is to ascertain whether the
action or actions of the party in default are such as to lead a reasonable
person to conclude that he [the party in default] no longer intends to be
bound by its provisions … Also the party in default “may intend in fact
to fulfil (the contract) but may be determined to do so only in a manner
substantially inconsistent with his obligations” or may refuse to perform
the contract unless the other party complies with certain conditions not
required by its terms. In such a case there is little difficulty in holding
that the contract has been renounced.
(2) Making performance impossible (“I won’t let you do it”)
16.36
As mentioned in para 16.15, if one party is prevented from performing
their contractual obligations because of the refusal of the other party to
cooperate, the defence of tender is available to excuse the promisor for the
non-performance. But that refusal to cooperate can go further — it may also
give the promisor the option to elect to treat the contract as having been
discharged by breach. A contract may also be discharged by breach where the
actions of one contracting party make it impossible for the other contracting
party or parties to perform their obligations. This should not be confused
with cases where further performance is rendered impossible (or, at the very
least, “essentially different” from that which was originally contemplated) due
to the occurrence of a supervening event which is beyond the control — and
not due to the fault — of any of the parties to the contract: that results in a
discharge of contract by frustration (which is dealt with in Chapter 17).
16.37
Where the election is made and the contract is said to be discharged due to
the acts or default of a contracting party which renders performance of the
contract impossible, the aggrieved party who wants to discharge the contract
must show that further performance is in fact impossible. It is not enough
to show that a reasonable person would conclude that further performance
is impossible. This distinction can be illustrated by considering the decision
of Devlin J in the English case of Universal Cargo Carriers Corporation v
Citati (1957). Universal Cargo Carriers (“UCC”) hired a ship to Citati. Citati
agreed that he was to nominate by a certain date: (1) a location for the
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ship to be berthed, (2) someone who would provide cargo for shipment on
the vessel and (3) the cargo. Three days before that deadline, Citati had not
performed any of these obligations, although he indicated that he would be
willing to perform the contract if he could. UCC attempted to discharge
the contract and found another party to hire the vessel from them, instead
of Citati.
16.38
Devlin J held that Citati had not renounced the contract (and hence there
was no discharge by breach pursuant to the principles discussed in paras
16.33–16.37). However, UCC was still entitled to discharge the contract
because it managed to show that it was in fact impossible for Citati to
actually perform his obligations without incurring such a delay as would
negate the commercial purpose of the hire contract.
16.39
Although they are distinct, facts amounting to discharge by repudiation
may also amount to discharge by the impossibility of further performance
through the default of one of the contracting parties. Surely the argument
exists that the actions or default of one party which have made further
performance of the contract by the other impossible, also amounts to an
implied statement of repudiation of the contract (or in other words, such
action or default objectively demonstrates an intention not to be bound by
the terms of the contract any more). Indeed, where the fact of impossibility
of further performance is equivocal, great difficulty in continued performance
may well be enough in certain circumstances as to amount to an implied
repudiation.
Effects of a Breach of Contract
16.40
In the absence of any lawful excuse, whether actual or anticipatory, a breach
of contract has two significant effects.
(1) The breach may give the aggrieved party the right to bring the contract
to an end, that is, to discharge the contract for breach. Unlike judgeordered remedies, this is a “self-help” remedy: the aggrieved party may
choose to discharge the contract without needing the prior sanction or
approval of the courts.
(2) If the breach of contract by one contracting party (the “party in breach”)
causes loss to the other (the “aggrieved party”), the party in breach may
be ordered by the courts to compensate the aggrieved party a sum of
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money for those losses (“damages”). However, contractual damages
(which are compensatory and not punitive in nature) are not the only
judge-ordered or judicial remedy available. Other types of remedies may
be available instead of, or sometimes in addition to, damages. These
judicially ordered remedies will be discussed in Chapter 18.
The differences between these two types of breach will be discussed below
from paras 16.41–16.65, and a diagrammatic summary of these differences
may be found in Figure 16.1.
(1) Actual breach giving rise to right of discharge
16.41
Though some Singapore cases (the most significant of which are discussed
at paras 16.44–16.47) may have thrown the following into some doubt,
traditionally, an aggrieved party may elect to discharge the contract for
breach if the contractual term which has actually been breached is:
° a “condition”; or
° an “innominate term”, the breach of which deprives the aggrieved party
of substantially the whole of the benefit of the contract.
16.42
In either case, over and above any claim for compensation in damages for
the losses suffered as a result of the breach, an aggrieved party may elect to
discharge the contract. If it suits his purposes, however, the aggrieved party
may elect to “affirm” the contract instead.
16.43
Traditionally, the aggrieved party has no power to discharge the contract if
the contractual term which has been breached is:
° a “warranty”; or
° an “innominate term”, the breach of which does not deprive the aggrieved
party of substantially the whole of the benefit of the contract.
In such cases, unless the contract is brought to an end by some other event,
the contract is not discharged by the breach. For details as to how a contract
term may be categorised as a “condition”, a “warranty” or an “innominate
term”, see Chapter 10, from para 10.37 onwards.
16.44
The traditional position described above, however, was thought to have been
upset by the Court of Appeal when it handed down its decision in RDC
Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd (2007). The most challenging
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point made by the court (albeit by way of obiter dicta) was that even when
a warranty had been breached, it was not always the case that discharge for
such breach would be precluded. The following paragraphs of the judgment
(ie, [107] and [108]) are instructive [emphasis in original in italics, emphasis
added in bold italics]:
107 If, however, the term breached is a warranty, we are of the view
that the innocent party is not thereby prevented from terminating
the contract (as it would have been entitled so to do if the conditionwarranty approach operated alone). Considerations of fairness demand, in
our view, that the consequences of the breach should also be examined by
the court, even if the term breached is only a warranty (as opposed to a
condition). There would, of course, be no need for the court to examine
the consequences of the breach if the term breached was a condition
since, ex hypothesi, the breach of a condition would (as we have just
stated) entitle the innocent party to terminate the contract in the first
instance. Hence, it is only in a situation where the term breached would
otherwise constitute a warranty that the court would, as a question of
fairness, go further and examine the consequences of the breach as well.
In the result, if the consequences of the breach are such as to deprive the
innocent party of substantially the whole benefit that it was intended that
the innocent party should obtain from the contract, then the innocent
party would be entitled to terminate the contract, notwithstanding that it
only constitutes a warranty. If, however, the consequences of the breach
are only very trivial, then the innocent party would not be entitled to
terminate the contract.
108 It is true that the approach adopted in the preceding paragraph
would, in effect, result in the concept of the warranty, as we know it,
being effectively effaced since there would virtually never be a situation
in which there would be a term, the breach of which would always
result in only trivial consequences. In other words, if a term was not a
condition under the condition-warranty approach, it would necessarily
become an intermediate term, subject to the Hongkong Fir approach (see,
in this regard, the perceptive observations by Robert Goff J (as he then
was) in the English High Court decision of The Ymnos [1982] 2 Lloyd’s
Rep 574 at 583). In other words, the traditional three-fold classification
of contractual terms (comprising conditions, warranties and intermediate
terms, respectively) would be a merely theoretical one only. However, the
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concept of the intermediate term was itself only fully developed many
years after the condition-warranty approach (in Hongkong Fir). Further,
and more importantly (from a practical perspective), it should also be
observed that the spirit behind the concept of the warranty would still
remain in appropriate fact situations inasmuch as the innocent party
would not be entitled to terminate the contract if the consequences of
the breach were found to be trivial (although it would, as we shall see,
be entitled to damages that it could establish at law). As importantly,
this last-mentioned result, viz, the right to claim damages, is precisely
that which would have obtained, in any event, had the court found
that the term concerned was a warranty under the condition-warranty
approach.
This aspect of the decision has received some measure of criticism — see P
Koh, C H Tham & P W Lee, “Contract Law” (2007) 8 Singapore Academy of
Law Annual Review of Singapore Cases 150 at paras 10.67–10.77; J W Carter,
“Intermediate Terms Arrive in Australia and Singapore” (2008) 24 Journal
of Contract Law 226 at pp 243–245; Goh Yihan, “Towards a Consistent
Approach in Breach and Termination of Contract at Common Law: RDC
Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd” (2008) 24 Journal of Contract
Law 251.
16.45
One difficulty with the suggested approach in RDC Concrete is this: following
Hong Kong Fir, promissory terms are now accepted to be of three types; they
may be conditions, warranties or innominate terms. Indeed, this trifurcated
categorisation of promissory terms was explicitly accepted by the Court of
Appeal in RDC Concrete to be part of Singapore law.
16.46
If promissory terms may be categorised to be one of three types, a term
which has been ascertained not to be a condition may be either an
innominate term or a warranty. As noted previously in Chapter 10, what
distinguishes an innominate term from a warranty is that in the latter, the
courts are satisfied that the contracting parties intended that breach of the
term would not give rise to a discharge of the contract. But if that were the
case, the Court of Appeal’s suggestion in RDC Concrete that it might still
be open for a contracting party to elect to discharge the contract for breach
of a warranty if the effects of the breach were sufficiently severe would run
counter to what the parties originally intended.
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16.47
To some extent, this difficulty has been acknowledged by the Court of
Appeal in a subsequent decision, namely Sports Connection Pte Ltd v Deuter
Sports GmbH (2009). In this case, the Court of Appeal recognised that where
the parties had expressly provided for a promissory term to be treated as
a warranty, then breach of that “express warranty” would not attract any
possibility of discharge of the contract. However, it nevertheless maintained
that there could be instances where a term might amount to what the Court
of Appeal labelled as an “implied warranty”. Where an “implied warranty”
had been breached, the Court of Appeal maintained that discharge might
still be possible if the impact of the breach was sufficiently severe. This
seems to leave open the question as to when a promissory term might be
said to be an “implied warranty” rather than an innominate term. Arguably,
the true dichotomy is not between “express” and “implied” warranties. It
is suggested that the heart of the matter is ascertaining what the parties
intended in connection with the breach of a particular promissory term,
whether:
° the breach would entail discharge, regardless of its impact — in which
case the term would be held to be a “condition”;
° the breach would lead to discharge only if the impact was sufficiently
severe — in which case the term would be held to be an “innominate
term”; or
° breach would never lead to discharge at all.
Notwithstanding the Court of Appeal’s introduction of the concept of an
“implied warranty”, it remains to be seen if the distinction between “implied”
and “express” warranties will take root. Given that all of these statements by
the court on the nature of a “warranty” were mere obiter dicta, the true state
of the law on the point remains open for discussion and debate. Perhaps a
suitable case will arise to settle the issue more definitively, but until then,
the most that can be said is that the law is still somewhat uncertain on
this issue.
16.48
It should be noted, however, that the availability of judicial remedies such
as damages does not have any necessary relationship to the question as to
whether a contract has been discharged or affirmed, and the two sets of issues
should not be confused. That said, the question of rescission of a contract
may have an effect on the quantum of the losses which an aggrieved party
may suffer as a result of the breach of contract.
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(a) Effect of election to discharge contract for actual breach
16.49
If the aggrieved party chooses to discharge the contract on account of
an actual breach by the defaulting party, the contract is brought to an
end prospectively. Although the contract ceases to bind the parties to the
contract from the time the election is effectively communicated to the other
contracting parties, if there are any obligations which arise prior to the time
of such discharge, those obligations would continue to bind the parties to
the contract. In other words, discharge for breach has no retrospective effect.
Communication of the decision to discharge the contract may take the form
of words, acts or even (in exceptional cases) silence. Prior to receipt of such
communication, such an election may be withdrawn.
(b) Effect of election to affirm contract despite an actual breach
16.50
The aggrieved party may choose, however, not to discharge the contract.
Instead, the aggrieved party may choose to affirm it. If so, the entire contract
is kept alive and the aggrieved party loses the right to have the contract
discharged. Nevertheless, the right to sue the party in breach and recover
money damages for any losses incurred as a result of the delay in procuring
full performance will usually be retained, unless the aggrieved party also
elects to waive his or her right to compensatory money damages.
16.51
The effect of keeping the contract “on foot” by rejecting the breach may
give the party in breach a second chance to rectify the non-performance or
defective performance.
(2) Anticipatory repudiatory breach
16.52
A breach of contract may also occur anticipatorily (in advance of the time of
actual performance). If this breach is also repudiatory (where the evidence
demonstrates that one party intends not to be bound by the terms of the
contract, nor to honour his or her contractual obligations as and when they
fall due), the aggrieved party has the right to choose whether to discharge or
to affirm the contract.
(a) Effect of election to discharge contract for anticipatory repudiatory breach
16.53
A party aggrieved by an anticipatory repudiatory breach may exercise his
or her right to discharge the contract immediately without waiting until
the time of actual performance. If the aggrieved party elects to discharge
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the contract, the contract is immediately brought to an end. The aggrieved
party is then immediately entitled to sue the party in breach for damages as
compensation for any loss suffered by the aggrieved party as a result of the
non-performance of the contract.
16.54
As observed by Lord Reid in the case of Moschi v Lep Air Services Ltd (1973)
(at pp 345–346):
[W]hen a contract is brought to an end by repudiation accepted by the
other party all the obligations in the contract come to an end and they
are replaced by operation of law by an obligation to pay money damages.
The damages are assessed by reference to the old obligations but the
old obligations no longer exist as obligations. Were it otherwise there
would be in existence simultaneously two obligations, one to perform
the contract and the other to pay damages. But that could not be right.
The only legal nexus remaining is the obligation to pay the damages …
(b) Effect of election to affirm contract despite an anticipatory
repudiatory breach
16.55
On the other hand, the aggrieved party may elect to affirm the contract.
If so, the contract continues to bind all parties to the contract and the
anticipatory breach is ignored. Consequently, once the aggrieved party
affirms the contract, there can be no liability for money damages for that
anticipatory breach since it is treated as if the breach never occurred.
16.56
Unless and until an anticipatory breach is accepted by the innocent party, the
contract will stay on foot and the anticipatory breach will be ignored as if it
had never occurred. In the colourful (and oft-quoted) words of Asquith LJ
in the English Court of Appeal case of Howard v Pickford Tool Co Ltd (1951)
(at p 421):
An unaccepted repudiation is a thing writ in water and of no value to
anybody: it confers no legal rights of any sort or kind …
Limits on Right of Election to Affirm Contract
16.57
As noted above, once the election to discharge a contract for breach has
been exercised and becomes effective, the right to affirm the contract will
be lost. Apart from that, though, the aggrieved party’s right of election to
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discharge or affirm a contract following an actual or anticipatory breach is
largely unqualified.
16.58
The most significant remaining qualification, however, is set out in the
Scottish case of White and Carter (Councils) Ltd v McGregor (1962).
White and Carter (Councils) Ltd (“White and Carter”) supplied litter bins
to various local authorities in Scotland. It offered advertising space on
these litter bins for a fee. McGregor was the proprietor of a garage who
had previously placed such advertisements with White and Carter. Upon
the termination of one such contract, purporting to act on behalf of his
employer, McGregor’s sales manager entered into another contract with
White and Carter to continue advertising for another three years, although
he had no actual authority to do so. When this was discovered the next day,
McGregor informed White and Carter about the mistake and attempted to
repudiate the contract. However, White and Carter’s management decided
to continue with performance of their obligations under the contract: they
prepared the necessary plates for attachment to the bins and exhibited them
on the bins from 2 November 1957. The contract provided that the first
annual payment would become due seven days after the first display. If
unpaid for four weeks, the entire amount due for the three years (being
£196 4s) would become payable. When McGregor failed to make the first
year’s payment on time, the full price for the three years’ worth of advertising
became payable and White and Carter sued for the entire amount due,
instead of suing for the loss of profit from McGregor’s breach of contract.
White and Carter’s action failed at first instance, as did their initial appeal
to the Second Division of the Scottish Court of Session.
16.59
On further appeal to the House of Lords, though, a bare majority of their
Lordships accepted that the appellants, White and Carter, were entitled to
act as they did and allowed their claim against the respondent, McGregor.
Their Lordships were faced with a dilemma because the facts of this case
brought up two conflicting principles, namely:
° that an anticipatory breach does not discharge the contract unless the
innocent party exercises his option to do so; and
° that the innocent party has to mitigate his losses as a result of the breach
of contract.
16.60
Three out of five of their Lordships held that the appellants did not need
to mitigate and had the right to choose to perform the contract in full,
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which therefore entitled them to claim for the price from the respondent.
Consequently, Lord Reid, Lord Tucker and Lord Hodson decided that the
appellants’s claim should succeed. Indeed, Lord Hodson (with whom Lord
Tucker agreed) took the robust view (at p 445) that:
[I]t may be unfortunate that the appellants have saddled themselves
with an unwanted contract causing an apparent waste of time and
money … [T]here is no equity which can assist the respondent. It is
trite that equity will not rewrite an improvident contract where there
is no disability on either side. There is no duty laid upon a party to a
subsisting contract to vary it at the behest of the other party so as to
deprive himself of the benefit given to him by the contract. To hold
otherwise would be to introduce a novel equitable doctrine that a party
was not to be held to his contract unless the court in a given instance
thought it reasonable so to do.
In other words, there is no duty to “mitigate” or to act reasonably insofar
as the innocent party has a free choice whether to affirm or discharge
the contract (mitigation of loss is further discussed in Chapter 18, paras
18.67–18.73).
16.61
Alone of the three judges in the majority, Lord Reid suggested (at pp 430–
431) that the right to affirm the contract could (possibly) be curtailed on
the basis of some “general equitable principle or element of public policy”.
Lord Reid observed (at p 431) that:
[I]f it can be shown that a person has no legitimate interest, financial
or otherwise, in performing the contract rather than claiming damages,
he ought not to be allowed to saddle the other party with an additional
burden with no benefit to himself. If a party has no interest to enforce
a stipulation, he cannot in general enforce it: so it might be said that, if
a party has no interest to insist on a particular remedy, he ought not to
be allowed to insist on it. And, just as a party is not allowed to enforce
a penalty, so he ought not to be allowed to penalise the other party
by taking one course when another is equally advantageous to him.
[emphasis added]
16.62
The difficulty with this limitation is that it is unclear when and where such
an interest may be found. In the passage above, Lord Reid suggests that
the legitimate interest could include the financial interests of the parties.
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However, in the very same paragraph, he appears to contradict himself by
observing (at p 431):
If I may revert to the example which I gave of a company engaging an
expert to prepare an elaborate report and then repudiating before anything
was done, it might be that the company could show that the expert had
no substantial or legitimate interest in carrying out the work rather than
accepting damages: I would think that the de minimis principle would
apply in determining whether his interest was substantial, and that he
might have a legitimate interest other than an immediate financial interest.
But if the expert had no such interest then that might be regarded as a
proper case for the exercise of the general equitable jurisdiction of the
court. [emphasis added]
16.63
Lord Reid also observed (at p 431) that the respondent:
[D]id not set out to prove that the appellants [White and Carter] had no
legitimate interest in completing the contract and claiming the contract
price rather than claiming damages; there is nothing in the findings of
fact to support such a case, and it seems improbable that any such case
could have been proved. [emphasis added]
The above extracts pose a number of interesting points. First, it would
appear that the party seeking to prevent the other party from affirming the
contract must establish that the other party had no legitimate interest to do
so. Second, Lord Reid also suggested that in his view, given the facts before
him in that case, the respondent would not have successfully established this
negative proposition that there was no legitimate interest in performance of
the contract, even if he had contested the point. In other words, whatever
might be the threshold requirements to establish that there had been no
legitimate interest, the facts and circumstances in White and Carter were
insufficient to cross that threshold. This case, therefore, provides no guidance
as to what would be enough to establish the absence of legitimate interest
in performance.
16.64
Locally, the scope of Lord Reid’s requirement of “legitimate interest” has
been the subject of further discussion by Selvam J in the Singapore High
Court case of MP-Bilt Pte Ltd v Oey Widarto (1999). This case involved a
dispute over the payment of a second instalment of $486,039.80 by Oey
for the purchase of a condominium unit being developed by MP-Bilt. One
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of the issues raised was whether MP-Bilt was under a duty to mitigate or
to act reasonably in exercising its option to discharge the contract or to
affirm it. Applying White and Carter (1962), Selvam J had no hesitation in
holding that there was no such duty. Of greater interest, however, are his
observations on the doctrine of “legitimate interest” raised by Lord Reid in
White and Carter (1962).
16.65
Accepting that the doctrine of “legitimate interest” was part of Singapore
law, Selvam J observed (at [37]–[39]) that it was subject to the following
restrictions:
First, it [the requirement of “legitimate interest”] cannot apply retrospectively to accrued debts. Accrued debts can be sued for even after
acceptance of repudiation. Next, it does not apply where the innocent
party can reasonably perform his obligation without the co-operation of
the contract-breaker … Thirdly and more importantly, the doctrine was
conceived in the context of the innocent party rejecting the repudiation
by the other party and exercising his right to complete performance when
the former has a legitimate interest to protect. A fortiori, the doctrine
cannot apply when the innocent party is under a legal obligation or
practical compulsion to complete performance of the contract in question
and other contracts he has entered into on the basis of the contract in
question. [emphasis in original]
The first two limitations set out by Selvam J are fairly self-explanatory.
However, the third of these restrictions is a little puzzling as Selvam J appears
to have accepted that it would not be permissible to prevent an innocent
party from electing to affirm a contract if it were “under a legal obligation
or practical compulsion to complete performance of the contract in question
and other contracts he has entered into on the basis of the contract in
question.” The difficulty, though, is that Selvam J did not elaborate what he
meant by a “legal obligation or practical compulsion”.
PARTIAL PERFORMANCE AND DISCHARGE BY BREACH
16.66
Consider the facts of the following case:
° A is engaged by B to renovate his home for a total sum of $20,000. Forty
per cent of the price is paid up-front, and the balance is to be paid on
completion of all the works. Among the works to be carried out, the
501
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Principles of Singapore Business Law
Chapter 16: Performance, Breach and Agreement
contract clearly spells out that it is a condition of the contract that each
room is to be given four coats of paint.
° Unfortunately for A, although he completes each and every item of
work in the contract, he puts only two coats of paint in the rooms. This
would have been indiscernible to anyone, except that in a moment of
unguarded frankness, A admitted that he had only partially performed
the contract, admitting that he had not painted the rooms as many times
as the contract had specified.
° In the meantime, B has moved in and has no complaints about the work
done, and even though the paintwork in the rooms is not as contractually
specified, this has not affected his enjoyment of the property, or its
market value. Putting on the additional two coats of paint in each room
would have cost a further $100.
–
Is B entitled to discharge the contract for A’s breach of condition?
If he does, can A insist on being paid the balance of the price
outstanding?
–
Do you think this is fair?
16.67
In cases such as Hoenig v Isaacs (1952) and H Dakin v Lee (1916), the English
courts have been faced with a problem similar to that above. On the one
hand, it is clear that the aggrieved party ought to be entitled to discharge
the contract for breach. But, on the other, it seems rather disproportionate to
permit the aggrieved party to completely withhold payment of the outstanding
sum from the party in breach, particularly in circumstances where the
partial performance appears to afford the aggrieved party substantially what
was sought in the first place, because it seems as if the aggrieved party has
obtained a benefit for which he has not had to pay.
16.68
In contrast, consider the following counter-example:
° X has a large extended family. For her mother’s 100th birthday (which
will come to pass in six months’ time), X thinks it would be nice to
present her with a family portrait. Y, a well-known artist who works
from photographs of his subjects and paints in a “super photo-realistic”
style, is engaged by X to paint this. Y agrees to do it for $10,000 (to be
paid on completion), and promises to complete and deliver the portrait
one week before X’s mother has her 100th birthday. X impresses on Y
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that the deadline is crucial and provides Y with photographs of each
family member. One day prior to the deadline, though, the portrait is
still incomplete — it is still missing one member.
16.69
–
Is X entitled to discharge the contract?
–
Is this fair? How is this different from the example above?
This, in fact, was the problem facing the English courts in the case of Cutter
v Powell (1795). In that case, Cutter was employed as second mate in a vessel
sailing from Jamaica to Liverpool. It was agreed that he would be paid 30
guineas upon the completion of the entire voyage. However, Cutter passed
away 19 days before the vessel reached Liverpool. Cutter’s widow attempted
to recover a proportion of the agreed fee of 30 guineas in her capacity as
administratrix of his estate. Unfortunately, her claim was dismissed on the
basis that Cutter had not completed his part of the bargain. The view taken
by the court was that Cutter’s completion of the journey was a condition
precedent to payment of the 30 guineas. Alternatively, Cutter’s obligation to
complete the journey was an “entire” one, the partial fulfilment of which did
not amount to any benefit.
ENTIRE OBLIGATIONS AND SUBSTANTIAL PERFORMANCE
16.70
One way to distinguish between the two examples above is to ask ourselves
whether the contractual obligation which has been partially performed by the
party in breach is an entire one. In other words, is the complete and entire
performance of the obligation a condition precedent to counter-performance
by the aggrieved party?
16.71
In the second example, the position that Y’s obligation to complete and
deliver a family portrait was an entire one is clearly defensible: a partially
painted portrait, even if it is almost completed, is not the same thing as a
fully completed portrait. But in the first example, even though the obligation
to put four coats of paint on the walls of each room was a condition, that
in itself does not seem to strongly suggest that failure to do so ought to be
treated as a failure to perform an entire obligation (with the consequences
thereof). The question, therefore, is one of construction of the obligation
which has not been fully performed.
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16.72
Assuming, then, that the obligation which has only been partially performed
is not an entire obligation, if the partial performance amounts to substantial
performance of that obligation, there is some authority to support the
proposition that the party in breach will be entitled to claim the full price
for that substantial performance. That said, he is, nonetheless, still in breach
of contract and must, therefore, compensate the aggrieved party for any loss
which she may have incurred on account of the breach. The price payable
will thus be set off against any such damages.
Box 16.1
Reflecting
on the law
Quality of performance as an entire obligation
In prior editions of the highly influential contract textbook that still bears his name,
Professor Treitel suggested that, as a matter of construction or interpretation of a
promissory term drafted in a way which seems to impose an entire obligation, one
might be able to distinguish between the quantity and the quality of the work
(G H Treitel, The Law of Contract (11th ed, 2003) at pp 787–788). That approach
could be adapted to provide another way of addressing the hypothetical problem
between A and B set out above at para 16.66. Borrowing Professor Treitel’s
suggestion, it may be possible to distinguish between the “quantity” and “quality”
of the paintwork to be supplied by A. Assuming this is possible, one might then
take the view that as a matter of construction or interpretation, though the implicit
obligation to provide a specified quality of work might be an entire one, the
express obligation to provide a specified quantity might not be. If so, in the
example involving A and B above, one might then take the view that the obligation
to put four coats of paint on each room ought to be construed as meaning that
so long as A provided paintwork of a quality equivalent to that which one would
expect with four coats of paint, he would have performed this obligation as to quality
in its entirety and would thus be entitled to payment. However, the obligation as
to the quantity of work done might be construed as being something other than
an entire obligation; if so, the breach of the obligation to put four coats of paint
on the walls of every room would entitle B to damages which could then be set-off
(or “abated”) against the price payable to A.
16.73
Assuming it can be shown that the obligation only partially performed is
not an entire obligation, apart from the doctrine of substantial performance,
various other legal arguments may be made to permit the party in breach to
recover some of the contractual price.
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Apportionment Act
16.74
Where the obligation is not entire, apportionment of the sum payable by
reference to that part of the obligation which has been completed is possible.
However, how should such apportionment be achieved? In some contexts,
legislation passed in England in the form of the Apportionment Act in 1870
addresses this issue. This English Act was incorporated into the statutes of
Singapore and takes its latest form in the similarly named Apportionment
Act (Cap 8, 1998 Rev Ed).
16.75
This Act provides in s 3 that “rents, annuities, dividends and other periodical
payments in the nature of income” (which would include most forms of
salary paid to an employee) “shall … be considered as accruing from day
to day, and shall be apportionable in respect of time accordingly”. As a
result, if the obligation to pay is of a periodic nature and is by way of
income, partial completion of work for which such income is payable will be
apportioned in accordance with the number of days for which performance
had been rendered.
Quantum Meruit
16.76
Sometimes, the tendered performance falls so far short that the doctrine of
substantial performance may not be applicable. The facts might also disallow
application of the Apportionment Act. However, it may be that the party
in breach may still recover a proportion of the contract price by using the
doctrine of quantum meruit.
16.77
As discussed and identified by the Singapore Court of Appeal case of Lee
Siong Kee v Beng Tiong Trading, Import and Export (1988) Pte Ltd (2000),
there are two varieties of quantum meruit:
° quantum meruit on a contractual basis; and
° quantum meruit on a restitutionary basis.
16.78
As with the doctrine of substantial performance though, these possibilities do not excuse any potential liability in damages for the partial
performance.
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(1) Quantum meruit on a contractual basis
16.79
Some contracts may expressly provide that payment in return for performance
will be made in proportion to the amount of work done. In the appropriate
circumstances, such a term may even be implied. If so, payment of the price
will simply be made in accordance with the manner of apportionment as
described in such a term.
16.80
The implication of a term to apportion payment on a quantum meruit basis
is particularly common in the area of sale of goods where s 30(1) Sale of
Goods Act (Cap 393, 1999 Rev Ed) provides that:
Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts the
goods so delivered, he must pay for them at the contract rate.
16.81
Therefore, in all situations of sales of goods where s 30(1) applies, it will be
a term of the contract that partial deliveries will be met with proportional
payment at the “contract rate” (or, in other words, the price per unit
measure of the goods in question). Of course, in addition to terms implied
by statutes such as the Sale of Goods Act, a term providing for quantum
meruit payment can be implied in fact at common law.
16.82
In some cases and textbooks, it has also been suggested that it may even
be possible to imply the existence of an entirely new contract with such
terms. Thus, where the innocent party “accepts” the partial performance
by the party in breach, it may be possible to infer or imply a fresh
agreement between the two parties, wherein they agree that payment will
be made for the work already done (albeit incomplete) or for the goods
already delivered (despite being short or otherwise defective). This type of
analysis also requires that the defendant must have had the option to
take or refuse the benefit of the work done, following the English decision
of Sumpter v Hedges (1898). However, in the light of the analysis taken
by the Singapore Court of Appeal in Lee Siong Kee v Beng Tiong Trading,
Import and Export (1988) Pte Ltd (2000), the better position today may
be to view this as having been subsumed and superseded by the language
and analysis of restitutionary quantum meruit (which is discussed in the
next section).
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(2) Quantum meruit on a restitutionary basis
16.83
Strictly speaking, this doctrine lies outside the law of contract. Instead, it lies
within the complex and developing realm of the law of unjust enrichment (or
law of restitution). In some texts or in very old judgments, it is sometimes
described as being part of the law of quasi-contract.
16.84
Even in the complete absence of any contractual provision, where partial
performance by one party has conferred a benefit upon another, retention
of such benefit without a corresponding payment to reflect the value of that
benefit, may be “unjust”. To use the language of the Roman civil law (as
explained and applied by Professor Birks in his seminal work, An Introduction
to the Law of Restitution (1989 Rev Ed) at p 23):
It is fair by the law of nature that nobody should be made richer through
loss and wrong to another (cum alterius detrimento et injuria).
16.85
Therefore, in certain cases, a claim may be made for a reasonable sum in
relation to the partial provision of work or services, if the party who has
received the alleged benefit of this partial performance had the option of
freely accepting or rejecting the benefit of this partial performance. This
remedy is more fully discussed in Chapter 18.
SEVERABLE OR DIVISIBLE OBLIGATIONS AND SUBSTANTIAL PERFORMANCE
16.86
A lengthy or complex agreement may consist of a number of divisible or
severable parts. A common example can be found in construction contracts,
where the main contractor will usually agree to make staggered payments
to its sub-contractors, depending on the stage of completion of the overall
project achieved by the sub-contractor. Such contracts may provide that
once the sub-contractor completes, say, the pouring of the concrete for the
foundations for the building, the main contractor agrees to pay, say, 15 per
cent of the total contract price. Employment contracts where the salary of
the employee is payable on a periodic basis (eg, every month) are yet another
common example.
16.87
If a contract may be interpreted or construed to be divisible in the manner
described above, having taken into account the terms of the contract,
customary business practices and any common understanding between the
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parties due to their past dealings with one another, complete performance
of each divisible portion of the contract will make payable that part of the
contract price apportioned to that completed part. That said, the arguments
and considerations as to what should happen where there is only partial
performance of any of these distinct parts will simply be a replication of
the discussion above (at paras 16.4 and 16.70–16.85). It is therefore possible
to argue that there may have been a de minimis breach in relation to a
particular severable part of the contract, or that that severable part has been
substantially performed, and so forth.
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Chapter 17
Frustration
17.1–17.2
17.3–17.4
17.5
Introduction
Scenario
Legal Development
Juristic Basis
17.6
17.7–17.8
17.9
17.10
17.11
Concept of Frustration
Elements of Frustration
(1) Radically different performance
(2) Neither party at fault
(3) Time of frustration
(4) Foresight and foreseeability
17.12
17.13–17.14
17.15–17.16
17.17
17.18
17.19
17.20–17.21
17.22
17.23
17.24
17.25
Classification
General Impossibility
(1) Destruction of subject matter of contract
(2) Death or incapacity
(3) Unavailability
(4) Failure of source of supply
(5) Method of performance impossible
Illegality
Radical Change
(1) Frustration of purpose
(2) Delay, unavailability
(3) Impracticability, increased costs
Frustration of a Lease/Sale of Land
17.26–17.27
17.28–17.29
17.30–17.31
Self-induced Frustration
General
Negligence
Choosing between Several Contracts
17.32–17.33
Partial Frustration
Principles of Singapore Business Law
17.34–17.35
17.36
Express Provision
General
Construction
17.37
17.38–17.40
Foresight and Foreseeability
Foreseen Events
Foreseeable Events
17.43
17.44–17.47
17.48
17.49
Effects of Frustration
Introduction
Frustrated Contracts Act
(1) General
(2) Payments, expenses, benefits
(3) Severability
(4) Ambit of act
17.50–17.52
Conclusion
17.41–17.42
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INTRODUCTION
Scenario
17.1
As with life in general, businesses and business transactions are subject to
uncertainties and unexpected events. If, after a contract has been entered
into, an event takes place which severely affects the performance of the
contract, issues arise as to the rights and liabilities of the parties in the light
of the new development. Does the contract continue or does it come to an
end? In either case, what are the respective parties’ rights and remedies?
These and other questions are dealt with by the law of frustration.
17.2
It may be observed that frustration is quite similar to common mistake (see
Chapter 12, para 12.9) in that both doctrines are concerned with unexpected
states or events which make the performance of the contract difficult or
impossible. However, whilst mistake relates to matters occurring before or
at the time of the contract, frustration deals with matters which arise subsequently; and the two doctrines have developed separately and differently.
Legal Development
17.3
At one time, the law held on to a strict theory of contractual performance,
that contractual duties are absolute and have to be carried out, supervening
events notwithstanding (see, eg, Paradine v Jane (1647)). Over time, it was
felt that such a position was too harsh and was not a satisfactory way of
allocating losses between the parties. Eventually, in 1863, in Taylor v Caldwell
(1863), which involved the accidental destruction of a music hall which was
the subject of a hire contract, the doctrine of frustration was introduced
into the common law. Through a period of development, the doctrine was
applied to other scenarios of unexpected events, such as cases of supervening
illegality and those involving the frustration of the commercial purpose.
17.4
The extension of the doctrine, however, was one which proceeded cautiously.
There are several reasons for narrowing its application. First, the doctrine
should not be used by a contracting party to escape what has turned out
to be a bad bargain. Second, parties are free to make contractual provision
with respect to eventualities. In any case, until the position was rectified by
legislation, the common law effect of frustration — that losses lie where they
fall (see para 17.41) — in many instances could hardly be considered a fair
allocation of losses as between the two parties.
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Juristic Basis
17.5
Whilst the doctrine of frustration is now well established, its legal basis
is still uncertain. Three theories, amongst others, have been put forward.
The first is the implied term theory that the parties had contracted “on the
footing that a particular thing or state of things would continue to exist”
(per Lord Loreburn in Tamplin Steamship v Anglo-Mexican Petroleum
Products (1916) at p 403). The second is that where the “foundation” of
the contract disappears, the contract itself also vanishes (Viscount Haldane
in the Tamplin case at pp 406–407). The third justification is that a court
may exercise its discretion and hold that a contract is frustrated when
justice demands it. Some commentators have observed that there does not
appear to be any practical implication as to which is the true basis of the
doctrine.
CONCEPT OF FRUSTRATION
Elements of Frustration
17.6
The classical definition of frustration was provided by Lord Radcliffe in the
leading House of Lords decision of Davis Contractors v Fareham UDC (1956)
(at p 729):
[W]ithout default of either party, a contractual obligation has become
incapable of being performed because the circumstances in which
performance is called for would render it a thing radically different from
that which was undertaken by the contract. [emphasis added]
This definition covers the “physical impossibility” scenarios, such as the
destruction of the subject matter, the cancellation of an event and the death
or illness of a performer, but it goes further. It encompasses supervening
illegality and, more importantly, cases where the commercial objective or
purpose is defeated or has disappeared. The test, simply stated, is: does the
event make the performance of the contract now radically different from
what was originally contemplated by the parties?
(1) Radically different performance
17.7
As mentioned above, the question is whether performance of the contract
in the changed circumstances would be something radically different from
that which was originally undertaken. Essentially, the court looks first at the
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contractual promise and the circumstances that existed at the time of the
contract. It then looks at the supervening event and what performance would
be like if the promise were to be enforced in the new circumstances. Finally,
it would compare the performance in the two scenarios and ask whether the
latter is radically or significantly different from the former.
17.8
In Davis Contractors v Fareham UDC (1956), the contractors agreed to build
for the Fareham local authority 78 houses within eight months for £92,425.
Without the fault of either party, inadequate labour supply delayed the
completion by 14 months and increased the contractors’ expenses by some
£17,000. The contractors argued that the contract had been frustrated and
that they could therefore claim, on a quantum meruit basis (payment of a
reasonable sum for work done), a sum higher than the contract price. The
court held that the fact that increased labour costs made the contract more
onerous did not make the contractual performance radically different from
the performance contemplated at the time of the contract.
(2) Neither party at fault
17.9
Frustration is premised upon neither party being at fault. Indeed, if a
contract is discharged by frustration, this takes place by operation of law,
as opposed to any action on the part of a contracting party. In general, if
one party is at fault, it is likely that he has breached an express or implied
term of the contract. Even in the absence of such a term, the law would not
excuse a contracting party whose conduct causes or leads to the event. This
policy finds expression in the principle that a contracting party cannot rely
on “self-induced” frustration (see para 17.26).
(3) Time of frustration
17.10
When a frustrating event occurs, the contract is discharged automatically.
The frustrating event may discharge a contract prospectively, in that the
time of performance has yet to arrive. The effect of a supervening event is
determined at the time the event occurs, or a reasonable time thereafter; one
need not, indeed should not, wait till the day of the scheduled performance in
order to see how the event would affect the performance of the contract. The
rationale for taking a reasonable view of the probable effect of a supervening
event upon or shortly after its occurrence is that the parties’ rights should
not be left indefinitely in suspense. Whether the situation is the outbreak of
war affecting a charter of ships or the onset of illness affecting an employee,
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Principles of Singapore Business Law
the contract is frustrated as soon as “a sensible prognosis of the commercial
probabilities” can be made (The Evia (No 2) (1983)).
(4) Foresight and foreseeability
17.11
The notion of frustration is somehow naturally associated with the idea of
unexpected events. It would seem that a frustrating event is one which was
not expected, foreseen or even foreseeable. But the matter is far from simple
and is quite debatable. The complexities are dealt with in paras 17.37–17.40.
CLASSIFICATION
17.12
The issue of frustration has arisen in many different settings and different
types of contracts. Perhaps the most useful means of classification, for the
purpose of analysis and understanding, is to categorise them into three major
categories: impossibility, illegality and radical change. These categories may
be divided, in turn, into sub-categories, which may raise particular problems
and issues of their own.
General Impossibility
(1) Destruction of subject matter of contract
17.13
The destruction of the subject matter of the contract is a clear and obvious
application of the doctrine of frustration. Case law examples include the
destruction of premises, the failure of a crop and the sinking of cargo.
However, total destruction may not be necessary; it suffices if the thing is so
seriously damaged that, for commercial purposes, it has become something
else; or that destruction of a part of the subject matter defeats the main
purpose of the contract. The destruction of something which is not the subject
matter of the contract but is nevertheless necessary for its performance, such
as the building in which the machinery is to be installed, will also frustrate
the contract.
17.14
In certain contracts, different rules of discharge apply. A prime example is
a contract for the sale of goods, where rules as to the passing of risk in the
goods are provided for by legislation. For instance, where goods sold are
destroyed after the risk has passed to the buyer, the buyer is not discharged
from his duty to pay the seller. There is no frustration in such a case. Another
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Chapter 17: Frustration
example concerns building contracts where, generally, the risk of damage or
destruction lies with the builder until the work is completed.
(2) Death or incapacity
17.15
Contracts of a personal nature — those where the promisor has to perform
the obligation(s) personally — are frustrated by the promisor’s death or
incapacity. Such contracts include contracts of apprenticeship, employment
and agency. The critical factor is the personal nature or character of the
contract. If the personal element is absent, the contract may still have to be
performed, albeit by another on behalf of the promisor.
17.16
In the case of incapacity, such as illness, imprisonment or conscription,
whether the contract has been frustrated depends on the likely duration
of the incapacity or unavailability, and whether the disruption would make
a radical change to the contractual performance. The sudden illness of a
performer for a one-night-only concert is certainly quite different from the
illness of an employee for a term of years. In the latter situation, the relevant
factors for determining whether the contract is frustrated include the nature
and duration of the employment, the length of past employment, and the
prospects of recovery.
(3) Unavailability
17.17
The above situation of the illness of an employee may also fall within the
sub-category of the unavailability of the subject matter or the person or
thing essential to the performance of the contract. The types of situations
and contracts in which this may occur are varied. A charterparty (contract
for chartering a ship) may be frustrated by the seizure or detention of the
ship; a contract for the sale of goods may be frustrated by the government
requisitioning the goods; the sale and purchase of a piece of property may be
frustrated by compulsory acquisition by the authorities; and so on. Whether
temporary unavailability results in frustration would again depend on various
factors such as the length of the anticipated unavailability, the period of the
contract and the commercial purpose of the contract.
(4) Failure of source of supply
17.18
Where it is expressly provided that goods are to be supplied by a particular
source, the contract may be frustrated by the failure of that source. The posi-
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Principles of Singapore Business Law
tion is similar where, though there is no express provision, both parties contemplated supply by the particular source. But where only one party intends
to use that source, failure of that source does not amount to frustration.
(5) Method of performance impossible
17.19
A contract may provide for, or the parties may have contemplated, a
particular method of performance. In such a case, if that method becomes
impossible, the contract is frustrated. But the method stipulated must have
been intended to be exclusive; otherwise, alternative methods may have to
be resorted to, so long as they are not fundamentally different from the
prescribed method. The classic illustration is the House of Lords decision of
Tsakiroglou & Co Ltd v Noblee Thorl GmbH (1960) (see Box 17.1).
Box 17.1
Reflecting
on the law
Frustration and the closure of the Suez Canal
Africa is a large continent, and any shipment of goods to or from Western Europe
on the one hand, and the Middle East and South Asia on the other, would either go
via the Cape of Good Hope or take a short cut through the narrow water channel
called the Suez Canal; the latter route, of course, saves time and expense. The
closure of the Suez Canal in 1956 and in 1967 resulted in litigation that brought
the issue of frustration to the forefront.
The leading Suez Canal case is Tsakiroglou & Co Ltd v Noblee Thorl GmbH
(1960), which involved the sale and shipment of goods from Port Sudan to
Hamburg. Though there was no express stipulation to that effect, the parties had
anticipated shipment to be via the Suez Canal. With the sudden closure of the
Suez Canal, the alternative route was via the Cape, a journey more than twice the
distance and incurring twice the expense. The House of Lords held that shipment
via the alternative route was not a substantially different performance, and that the
contract had therefore not been frustrated.
The court’s reasoning appears to be in accord with the principle of frustration as
laid down in Davis Contractors. There is, arguably, no radical change to the contract
— the sale of goods for shipment from Port Sudan to Hamburg. But one cannot
help but empathise with the sellers, especially since both parties expected the Suez
Canal to be used. Is not frustration generally understood to involve unexpected
events? Certainly, if the contract had specified shipment via the Suez Canal, the
case for frustration would have been much stronger.
However, the facts in Tsakiroglou must be borne in mind: the goods involved
were groundnuts, not perishables, there was no date fixed for delivery at Hamburg,
and there was sufficient shipping available to carry the goods via the Cape. Had the
facts been otherwise, the contract might well have been frustrated.
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Illegality
17.20
Where at the time of contract the performance is one which is already
prohibited by law, the contract is void ab initio (from the start) for illegality
(see, generally, Chapter 15). The contract is not enforceable because, as a
matter of public policy, the law will not give assistance to parties to an illegal
transaction. Similar policy considerations apply where there is supervening
illegality. Common instances of frustration brought about by supervening
illegality include wartime prohibition against trading with the enemy, and
subsequent changes in the law, such as a prohibition against exporting a
particular product, or a restriction on the movement of capital. Where the
contract is to be performed abroad and its performance has become illegal by
the law of the place of performance, the contract is generally frustrated (for
further complexities in this area, see the discussion in Chitty on Contracts,
Vol 1 (30th ed, 2008) at para 23-027).
17.21
While the doctrine of frustration can be excluded by express agreement,
frustration through supervening illegality cannot be so excluded. The reason
for this is the strong public interest of not upholding such contracts and
transactions. In a similar vein, a contract may be frustrated by supervening
illegality which was foreseeable or even foreseen but for which no express
provision has been made.
Radical Change
(1) Frustration of purpose
17.22
Sometimes, after a turn of events, the literal performance of a contractual
obligation remains possible but performance under the changed circumstances would not fulfil the original commercial purpose of the parties.
Instinctively, the “cancellation of event” cases, as in the leading English
decision of Krell v Henry (1903), which involved the hire of premises to
view the coronation procession of King Edward VII (who, unfortunately,
fell ill), come to mind. The key question is whether the enjoyment of the
event, such as a procession, a fireworks display or the eclipse of the sun, was
the common purpose of both parties. If it was, then the cancellation of the
event frustrates the contract even though the continuation of the contract
— such as the hire of premises — is physically possible. The failure of the
purpose of one party alone does not bring about frustration.
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(2) Delay, unavailability
17.23
The subject of temporary unavailability was discussed in para 17.17.
Contracts may be delayed by various causes, such as the stranding of a
ship, wartime requisitions, bad weather, labour shortages and so forth. In
order for a delay to render performance a thing “radically different”, the
delay must be so abnormal in its effect or expected duration as to fall
outside what was the reasonable contemplation of the parties at the time
of contract. Consonant with the approach as to the time of frustration
(see para 17.10), at the onset of the supervening event, or soon thereafter,
based on the evidence of what has occurred and is likely thereafter to
occur, a judgment has to be made as to whether the delay has frustrated
the contract (per Lord Roskill in the House of Lords decision of The Nema
(1982)).
(3) Impracticability, increased costs
17.24
In the US, many states recognise the doctrine of commercial impracticability
as a ground for discharge by supervening events, and this concept of
impracticability includes extreme and unreasonable difficulty, expense or
loss. The UK (and Singapore) position, however, is that impracticability in
itself is insufficient to frustrate a contract. The Tsakiroglou v Noblee Thorl
(as mentioned in para 17.19) and Davis Contractors decisions are clear
testimony of the strict approach taken by English courts. Men of business
are taken to be cognisant of the risks and vicissitudes in the business
environment, such as rises and falls in prices, interruptions in supply,
currency fluctuations, inflation and so on. Impracticability or increased
costs, in general, does not frustrate a contract. But where the supervening
impracticability is so abnormal as to be outside the ordinary range of
commercial risk (such as an astronomical rise in price), performance in the
changed circumstances may be considered radically different performance
(see per Lord Reid and Lord Hodson in Tsakiroglou & Co Ltd v Noblee Thorl
GmbH (1960)). These principles were recently endorsed by the Singapore
Court of Appeal in Holcim (Singapore) Pte Ltd v Precise Development Pte
Ltd (2011), which observed at [53] that “while a mere increase in prices of
source materials was generally insufficient, in and of itself, to constitute a
‘hindrance’ or ‘prevention’ that could invoke a force majeure clause … the
issue was open as to what the legal position would be if the increase in
prices was astronomical.”
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Frustration of a Lease/Sale of Land
17.25
For a time, there was uncertainty as to whether the doctrine of frustration
could apply to leases and other contracts pertaining to land. It was thought
that the doctrine did not apply for the reason that a lease creates not merely
a contract but also an estate. It is now quite settled that, under Singapore
law, the doctrine applies to a lease of land (see Singapore Woodcraft
Manufacturing v Mok Ah Sai (1979)). Similarly, the Singapore Court of
Appeal, in Lim Kim Som v Sheriffa Taibah bte Abdul Rahman (1994), has
held that the doctrine of frustration can apply to a contract for the sale of
land. In the case itself, it was held that the sale and purchase agreement
was frustrated by the supervening compulsory acquisition of the property
by the government. (For further discussion on the topic, see A Phang,
Cheshire, Fifoot and Furmston’s Law of Contract (2nd ed, 1998) at pp 968–
972 and the references there cited.)
SELF-INDUCED FRUSTRATION
General
17.26
A critical element of frustration is that neither party is at fault. More
specifically, frustration should not be due to the act or election of the party
seeking to rely on it. A party to a contract cannot rely on self-induced
frustration, that is, on frustration due to his own conduct or the conduct of
those for whom he is responsible. The act may be a breach of contract, but
it need not be so. The onus of proving that the frustration was self-induced
lies with the party who asserts that it is so.
17.27
Although a contracting party cannot rely on frustration induced by his own
conduct, the other contracting party is entitled to do so. So, for example,
where an employee commits an offence (not related to his employment and
therefore not amounting to a breach of contract) and is imprisoned, the
employer is entitled to rely on the circumstances as frustrating the contract
of employment (see Harrington v Kent (1980)).
Negligence
17.28
A difficult point is whether a contracting party can rely on an event brought
about by his own negligence as a ground of frustration. In principle, it seems
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correct that a party who has been negligent should not escape liability since
he is at fault. The problem is that negligence encompasses a wide spectrum
of conduct ranging from mere carelessness to gross negligence. In Joseph
Constantine v Imperial Smelting (1942), Viscount Simon (at pp 106–107)
seemed to lean towards the view that a prima donna who loses her voice
through carelessly catching a cold could plead frustration so long as
her incapacity “was not deliberately induced in order to get out of her
engagement”. At first blush, Viscount Simon’s statement of law sounds simple
and correct. Upon closer analysis, there are difficulties. The central problem
is the relationship between negligence and deliberateness. The conventional
delineation is that a person’s action is either intentional (deliberate) or
negligent. Viscount Simon’s dictum, however, seems to suggest that a person
can be deliberately careless. In this writer’s view, there is sense in what his
lordship had said.
17.29
Take the example of a singer who is considering a night walk on the eve of
her performance. She knows the air is rather cold and there is a slight chance
of her catching a chill. However, she thinks and hopes that she will not catch
a cold. In this situation, she may be careless but she does not deliberately
want to catch a cold; in fact, she does not want to catch a cold. Suppose we
change the scenario a little. She knows that there is a small risk but hopes
to catch the cold as, for some reason, she does not want to perform the next
day. In this scenario, her action is careless (but not grossly negligent since
the chance of catching the cold is slight) but, in a sense, deliberate. If she
does catch a cold and is therefore unable to perform, there is frustration in
the first scenario but not in the second.
Choosing between Several Contracts
17.30
A situation can arise whereby as a result of a supervening event, a
contracting party is in a position where he is not able to perform all of
several contracts but can perform some of them. For example, the supervening
event may have substantially reduced his supply of goods or materials.
Judicial authority (see Maritime National Fish v Ocean Trawlers (1935) and
The Super Servant Two (1990)) suggests that if the contracting party chooses
to perform some of the contracts, he cannot rely on frustration to discharge
him from the other contracts; with regard to these other contracts, the
frustration would be considered self-induced. The fairness of such a position
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is questionable as it seems harsh to fault the contracting party for making
the best of an unexpected situation. On the other hand, it may be argued
that he took the commercial risk of ending up in such an invidious
situation.
17.31
An alternative is to hold that all the contracts affected by the supervening
event are partially frustrated and that the contracting party is permitted to
pro-rate the delivery to all the parties. But this solution is problematic from
both the practical and theoretical perspectives (see para 17.32). A satisfactory
solution has yet to be found.
PARTIAL FRUSTRATION
17.32
In the preceding paragraph, we have seen that if supervening events put
a contracting party in a position where, being unable to perform all
of several contracts, he has to choose which to perform, he is not discharged
as regards the contracts which he chose not to perform. The reasoning
is that the frustration would have been self-induced. Suppose then that
the contracting party entered into one contract only and, because of a
supervening event, the contract can only be partially performed, as in
Sainsbury v Street (1972) where, as a result of crop failure, the harvest
yielded only 140 tons of barley whereas the contract quantity was 275 tons.
It was there held that the seller remained bound to deliver the 140 tons
though he was excused with regard to the remaining 135 tons. It would
seem, then, that the case is authority for a doctrine of partial frustration.
Unfortunately, the term “frustration” was not used in the judgment at all
and the decision proceeded on the basis of construction of the terms of
the contract.
17.33
The issue is a difficult one. The traditional thinking on frustration takes an
all-or-nothing approach; the contract (assuming it is not a divisible contract;
see Chapter 16, paras 16.86–16.87) as a whole ends if there is frustration
or continues if there is no frustration. If partial frustration is accepted as a
doctrine, one difficulty is whether and where a line should be drawn as to the
proportion of the contract that is performable before it can be said that the
contract is partially frustrated, thus keeping the rest of the contract intact.
The author suggests that, consistent with the law’s approach to discharge by
performance, a reasonable threshold would be whether the contract is still
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“substantially performable” in the changed circumstances. Meanwhile, the
current legal position remains unclear.
EXPRESS PROVISION
General
17.34
Frustration, it should be recalled, deals with allocation of risks. If the
parties have made their own allocation of risks with regard to possible
supervening events, generally the law would uphold their contractual
allocation. One exception, which has been mentioned earlier, is supervening
illegality. In exceptional circumstances, a court may imply a provision
excluding frustration where, for example, the nature of the contract
makes it clear that it was intended that one party assumes the risk of the
supervening event.
17.35
Express contractual provisions regarding supervening events are often called
force majeure (act of God) clauses. A force majeure clause may deal with
supervening events in a variety of ways. For example, it could put the
risks of the supervening events on one party alone, in effect making his
performance obligation an absolute one. Or, it could provide that upon
the occurrence of any of the supervening events, the contract is at an end
and the clause could provide in further detail for the legal consequences.
Alternatively, it could provide that upon the occurrence of a supervening
event, the parties will meet and negotiate as to the continuation of the
contract (see, eg, the Singapore case China Resources v Magenta Resources
(1997) where the clause provided that “[s]hould the effect of the force majeure
continue for more than 120 consecutive days, the buyer and the seller shall
discuss through friendly negotiation … their obligation to continue to
perform …”).
Construction
17.36
While an express provision can exclude frustration, the courts have tended
to construe such a provision narrowly. A force majeure clause, it is said, must
be “full and complete” (Bank Line v Arthur Capel (1919)) and intended to
cover the supervening event in question. The more devastating or catastrophic
the event, the more the courts would require particularly clear words to
be used. The supervening events which a force majeure clause purports to
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cover are not restricted to what the law would consider frustrating events.
Events which would not have frustrated a contract may also be dealt with,
and where, pursuant to such a clause, a contract is discharged following
such an event, the contract is discharged not by frustration but rather by
a contractual term either automatically or upon one party exercising his
right to cancel, as the clause so provides. The precise construction of the
clause is paramount as it would define the precise scope and ambit of the
clause itself. The court is — in accordance with the principle of freedom
of contract — to give full effect to parties’ intentions manifested through
the language of the clause, subject to commercial practicability and
commonsense (Holcim (Singapore) Pte Ltd v Precise Development Pte
Ltd (2011)). In Holcim, the Singapore Court of Appeal thus rejected a
construction of a force majeure clause that would allow one party to avail
itself to its benefit even when the supposed triggering event was selfinduced. The court also agreed (at [66]) that there was no blanket principle
that all reasonable steps should be taken before relying on the force
majeure clause.
FORESIGHT AND FORESEEABILITY
Foreseen Events
17.37
As was pointed out in para 17.11, despite the fact that frustration is implicitly
about unexpected events, the authoritative judicial definitions of frustration
omit reference to this aspect. There is much doubt and uncertainty about
whether frustration applies to foreseen or foreseeable events. For foreseen
events, the view generally adopted by commentators is that the occurrence
of such events does not frustrate a contract. The reasoning is that since the
parties had already envisaged the possibility of such an event and yet chosen
not to make any express provision regarding it, they must have contracted
with reference to the risk of such occurrence. Insofar as Singapore law is
concerned, given the position taken on foreseeable events (see para 17.38), it
may be assumed that an event foreseen by both contracting parties does not
frustrate a contract.
Foreseeable Events
17.38
Events not foreseen but nevertheless are foreseeable give rise to greater
difficulty. A foreseen event is high on the scale of likelihood of occurrence
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and, logically, should not be a frustrating event. Conversely, a very remote
contingency should qualify as a frustrating event. A foreseeable event,
however, covers a wider spectrum of likelihood. The preponderance of
academic opinion is that a foreseeable event would not lead to frustration if
the degree of foreseeability is high and is one which any person of ordinary
intelligence would regard as likely to occur (see Edwin Peel, Treitel: The Law
of Contract (13th ed, 2011) at paras 19–076 to 19–081 for a good discussion
of the subject).
17.39
The current English position with regard to foreseen and foreseeable events
remains unclear, and one is still faced with judicial dicta (see, eg, Lord
Denning MR in The Eugenia (1964)) to the effect that the essential thing is
that the event was not provided for in the contract.
17.40
Insofar as Singapore is concerned, it is quite established that an event
which is highly foreseeable cannot frustrate a contract. In Win Supreme
Investment v Joharah bte Abdul Wahab (1997), Chao J (as he then was)
held (at [33]) that frustration is inapplicable if the event was “clearly …
foreseeable”. In a similar vein, in Glahe International Expo v ACS Computer
(1999), Khoo J decided (at [39] that an event which is “reasonably
foreseeable” does not bring about frustration. In fact, Thean JA, in the
Court of Appeal in Glahe International Expo (at [26]), went so far as to
say that “the doctrine of frustration concerns the treatment of contractual
obligations upon the onset of an unforeseeable event” [emphasis added],
which may suggest that even a very low level of foreseeability would
displace the notion of frustration. If a very low level of foreseeability suffices
to negate frustration, then the application of the doctrine will be very
limited. Time will tell whether Singapore courts indeed take such a strict
approach towards frustration.
EFFECTS OF FRUSTRATION
Introduction
17.41
The effect of frustration on a contract is that it brings the contract to an end
from the time of the frustrating event. Frustration operates automatically,
without the need for any election by either party. At common law, the
effect of frustration on the parties’ remedies is summarised by the phrase
“the losses lie where they fall”. While the parties are released from future
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obligations, accrued obligations remain. Sums paid prior to the event are not
recoverable, while sums payable at the time of frustration remain payable.
17.42
Originally, it was also said that in the case of a frustrated contract, there can
be no recovery of monies for a failure of consideration. Later, following a
House of Lords decision (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe
Barbour, Ltd (1943)), such a claim was permitted. There was, however, no
such recourse where the failure of consideration was only partial. These and
other inadequacies were eventually dealt with by legislation. The Singapore
Frustrated Contracts Act (Cap 115, 1985 Rev Ed) is identical in substance to
the UK Law Reform (Frustrated Contracts) Act 1943.
Frustrated Contracts Act
(1) General
17.43
The Frustrated Contracts Act (“FCA”) alters and adds to the common law
position. The common law effect that all future obligations cease is untouched
by the Act, but the Act does alter the remedies in three respects: payments,
expenses and benefits (see Table 17.1).
Table 17.1
Changes made to the effects of frustration at common law
by the Frustrated Contracts Act
Aspects
Common Law
Released
Released
Accrued obligations
Remain
Released
Sums paid
Not recoverable
Recoverable
Sums payable
Remain payable
No longer payable
Expenses
Not applicable
Recoverable
Benet
Not applicable
Recoverable
Future obligations
Frustrated Contracts Act
(2) Payments, expenses, benefits
17.44
Section 2(2) FCA provides that all sums paid before the time of discharge
are recoverable, while all sums payable at that time cease to be so payable.
This is a reversal of the common law position.
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17.45
The subsection goes on to provide that if the party to whom the sums are
paid or payable had incurred expenses prior to the time of discharge in or
for the performance of the contract, the court may, if it considers it just
to do so, allow him to retain or recover (as the case may be) part of the
sum so paid or payable. Of course, he cannot recover more than his actual
expenses.
17.46
The third key aspect of the Act is that it recognises and compensates for
benefits enjoyed, supervening event notwithstanding. Section 2(3) FCA
provides that if a contracting party has, by reason of any act done by the
other party in performance of the contract, obtained a valuable benefit before
the time of discharge, the court may, if it considers it just to do so, allow
that other party to recover a sum (not exceeding the value of the benefit)
which is appropriate in the circumstances.
17.47
In arriving at such a just sum, the court is to have regard to the expenses
that the benefited party had incurred in the performance of the contract
as well as the payments retained or recoverable by the first party under
s 2(2) FCA (see para 17.45). The court also has to consider the effect,
if any, that the frustrating event had on the benefit. For example, the event
may have damaged the work performed so far and thereby reduced the
benefit obtained by the partial performance, whereas if the event brought
about the complete destruction of the subject matter, the benefit may be
nil (for the intricacies on the subject, see Edwin Peel, Treitel: The Law of
Contract (13th ed, 2011) at paras 19–101 to 19–103).
(3) Severability
17.48
Section 3(4) FCA provides for severable parts of a contract to be treated
separately, so that parts of a contract may be frustrated while other parts
continue unaffected.
(4) Ambit of act
17.49
The Act has general application but does not apply to contracts for the
carriage of goods by sea, insurance contracts and contracts for the sale of
specific goods where the cause of frustration is the perishing of the goods
(see s 3(5)).
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CONCLUSION
17.50
The concept of frustration is an important one and has serious implications
on the performance of contracts. The key elements are reasonably clear:
absence of fault on the part of both parties, a supervening event and
radical change in performance. Further, under Singapore law, foreseen and
reasonably foreseeable events would not frustrate a contract.
17.51
Where frustration applies, the contract comes to an end. Under the
Frustrated Contracts Act, existing payment obligations cease and sums paid
are recoverable, and the court has wide discretion to make orders, taking
into account expenses incurred and benefits received. The Act makes vast
improvements over the previous common law position and facilitates a more
equitable settlement of rights and remedies in the event of frustration.
17.52
As with many areas of contract law, the application of the doctrine of
frustration is subject to the parties’ freedom of contract. Contracting parties
may come to an agreement as to how they wish to deal with supervening
events. By and large, such wishes receive the endorsement of the courts.
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Chapter 18
Remedies for Breach of Contract
18.1–18.2
18.3
18.4–18.6
18.7
18.8–18.9
18.10–18.12
18.13
18.14–18.15
18.16
18.17
18.18–18.20
18.21–18.24
18.25–18.35
18.36–18.37
18.38
18.39–18.44
18.45–18.50
18.51
18.52
18.53–18.56
18.57–18.59
18.60–18.63
Introduction
Judicial Remedies Contrasted with Self-help Remedies
Types of Judicial Remedies
Availability of Judicial Remedies: Limitation Periods and Laches
Contract Damages at Common Law: Compensation for
Pecuniary Loss
Compensation Only
Liquidated Compared with Unliquidated Damages
Quantification and Measurement of Unliquidated Damages
(1) Quantification by reference to “expectation”, “reliance” or other
losses
(a) Expectation loss
(b) Reliance loss
(c) Other losses
(2) Placing the innocent party in the position as if contract was
fully performed
(3) Electing between different methods of quantifying loss
(a) Expectation or reliance basis: Bad bargains, overly
speculative expectation loss and pre-contract reliance
expenditure
(b) Different bases for quantifying expectation loss:
“Diminution in value” or “cost of cure”
Time of Quantification
Restrictions on Recovery of Unliquidated Damages
(1) Non-pecuniary loss
(2) Causation of loss
(3) Remoteness of loss
(a) “Naturally arising damages” and “damages arising from
special circumstances”
(b) Imputed and actual knowledge
(c) Probability of type of loss
(d) Types and extent of loss
Principles of Singapore Business Law
18.64–18.66
18.67–18.73
18.74
18.75–18.78
(e) The rationale for the rule in Hadley v Baxendale and
the role of assumption of responsibility
(4) Mitigation of loss
18.79
18.80
18.81
18.82
18.83–18.85
Action for a Fixed Sum
No Damages for Breach of an Obligation to Pay Money
Exceptions Permitting Damages for Breach of Obligation to
Pay Money
(1) Contractual provision for interest
(2) Knowledge that breach would cause losses
(3) Damages arising apart from non-payment
Timing of Claim
Where Plaintiff is in Breach of Contract
18.86–18.88
18.89–18.90
Specific Performance
Limitations on Availability of Specific Performance
18.91–18.94
Injunction
18.95–18.97
Statutory Damages in Lieu of or in Addition to Specific
Performance or Injunction
18.98–18.101
18.102–18.111
18.112–18.119
18.120–18.125
Restitutionary Awards
Benefits in Money: Total Failure of Consideration
Benefits in Kind: Quantum Meruit and Quantum Valebant
Restrictions on Recovery for Unjust Enrichment
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INTRODUCTION
Judicial Remedies Contrasted with Self-help Remedies
18.1
Following a breach of a condition of a contract, or where the breach causes
one party to be deprived of substantially the whole of the benefit of the
contract, the aggrieved party may elect to bring the contract to an end.
When this happens, as discussed in Chapter 16, both the aggrieved party
and the party in breach will be released from any outstanding obligations
under the contract.
18.2
The act of election to discharge the contract is sometimes said to be a
“self-help” remedy because the release is effected without the need for
any court approval or intervention, and in many cases, this alone may be
sufficient to bring the contractual dispute to a close without the need for any
further judicial remedy. Nevertheless, where the aggrieved party has suffered
financial losses as a result of the breach, or where release of the party in
breach from outstanding obligations will cause financial loss, discharge of
contract alone may not be an adequate remedy. Recourse to other judicial
remedies may be needed.
Types of Judicial Remedies
18.3
In relation to contract law, the following types of judicial remedies are
commonly sought:
° the common law remedy of damages;
° the common law remedy of an action for a fixed sum;
° the equitable remedy of specific performance; and
° the equitable remedy of injunction.
Outside of the law of contract, certain common law restitutionary remedies
in the law of unjust enrichment may also be available. It is important to draw
the distinction between the common law and equitable remedies because,
while the former are available as of right, the latter are discretionary. It is
also important to distinguish between remedies originating in contract and
those drawn from the law of unjust enrichment because they are each subject
to different requirements and restrictions.
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Availability of Judicial Remedies: Limitation Periods and Laches
18.4
Urgency should be the order of the day when seeking judicial remedies as
access to judicial remedies may be barred by lapse of time. This can arise
through the operation of the Limitation Act (Cap 163, 1996 Rev Ed) (“LA”),
as amended by the Arbitration Act (No 37 of 2001); or through the equitable
doctrine of laches.
18.5
Generally speaking, no action may be brought for a breach of contract after
six years have lapsed from the time when the contract was breached (s 6 LA)
(although the statute does provide that the time from which the limitation
period starts running may be postponed in certain circumstances, eg,
where the plaintiff was ignorant of the breach of contract). If the statutory
limitation period has elapsed, access to judicial remedies such as damages
for breach of contract or an action for a fixed sum due under a contract will
be barred. The LA, however, does not apply to any legal action rooted purely
in unjust enrichment (see the decision of the Singapore Court of Appeal in
Management Corporation Strata Title No 473 v De Beers Jewellery Pte Ltd
(2002) at [32]).
18.6
In relation to the equitable remedies of specific performance and injunction,
the equitable doctrine of laches applies. This doctrine is preserved by s 32
LA. Shortly put, applicants who delay in applying for such equitable relief
from the courts may be turned away where the delay is inordinate and
inexcusable such that it would be inequitable to grant such relief. An
application for an order for specific performance or an injunction to remedy
a breach of contract may be denied if the application is not made as soon
as the nature of the case might permit. Two important factors to be
considered are the length of delay (from the time the plaintiff knew he
could have brought the case to court), and whether the defendant acquiesced
in the delay.
CONTRACT DAMAGES AT COMMON LAW:
COMPENSATION FOR PECUNIARY LOSS
18.7
Contractual damages are awarded at common law to an aggrieved party in
the form of a sum of money in compensation for any pecuniary losses which
have been incurred as a result of the breach of contract.
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Compensation Only
18.8
In general, damages are compensatory in nature. As was pointed out in
the House of Lords case of Addis v Gramophone Company, Ltd (1909), the
common law does not traditionally award punitive damages in cases of
breach of contract. This may be contrasted with damages that may be
awarded in tort: it is accepted that exemplary and punitive damages may be
awarded by the courts against a wrongdoer who has committed a particularly
serious tort.
18.9
In the appropriate case, however, it seems that damages may be awarded for
breach of contract on other bases. For example, in the Canadian Supreme
Court case of Whiten v Pilot Insurance Co (2002), Mrs Whiten had a contract
of insurance with the Pilot Insurance Co (“Pilot”), insuring her home against
the risk of fire. Unfortunately, Mrs Whiten’s home was razed in a fire and
as a result, Mrs Whiten claimed on her insurance policy. Pilot contested
the claim, alleging arson on the part of Mrs Whiten or members of her
family, even though there was absolutely no evidence in support of such
an allegation. This appeared to be a cynical ploy on Pilot’s part to force
Mrs Whiten to settle her claim for a lower sum than she was otherwise
entitled to. Unsurprisingly, given the lack of any evidence to support
their claim of arson, Pilot’s defence against Mrs Whiten’s suit failed
and they were ordered to pay her a sum of around C$300,000 based
on the terms of their insurance policy with Mrs Whiten. However, Pilot
was also found to have contested her claim in bad faith, thereby breaching
their duty of good faith and fair dealing under the contract of insurance.
At the end of the trial, the jury also awarded C$1 million to Mrs Whiten
as punitive damages in denunciation of Pilot’s exceptionally reprehensible
behaviour. This decision was upheld on appeal to the Canadian Supreme
Court.
Liquidated Compared with Unliquidated Damages
18.10
In some cases, compensation for losses resulting from breach may have
been pre-agreed by the contracting parties as a term of the contract. If the
agreed sum is a genuine pre-estimate of the loss which could be suffered as
a result of a breach of the contract, the court will order that sum to be paid
in compensation as liquidated damages.
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Principles of Singapore Business Law
18.11
If, however, the sum is intended to be a penalty aimed at “punishing” the
party in breach, the court will strike down the “penalty” clause and award
unliquidated damages instead. This may, sometimes, have the somewhat
perverse result where the aggrieved party is able to recover unliquidated
damages in a sum greater than that set by the penalty clause (see Public
Works Commissioner v Hills (1906)).
18.12
The principles setting out the distinctions between a liquidated damages
clause and a penalty clause were summarised in the House of Lords case of
Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company,
Limited (1915) by Lord Dunedin (at pp 86–88) as follows:
I shall content myself with stating succinctly the various propositions
which I think are deducible from the decisions which rank as
authoritative:
1. Though the parties to a contract who use the words “penalty” or
“liquidated damages” may prima facie be supposed to mean what
they say, yet the expression used is not conclusive. The Court must
find out whether the payment stipulated is in truth a penalty or
liquidated damages. This doctrine may be said to be found passim
in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in
terrorem of the offending party; the essence of liquidated damages is
a genuine covenanted pre-estimate of damage.
3. The question whether a sum stipulated is penalty or liquidated
damages is a question of construction to be decided upon the terms
and inherent circumstances of each particular contract, judged of as
at the time of the making of the contract, not as at the time of the
breach. [emphasis added]
4. To assist this task of construction various tests have been suggested,
which if applicable to the case under consideration may prove
helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant
and unconscionable in amount in comparison with the greatest
loss that could conceivably be proved to have followed from the
breach.
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(b) It will be held to be a penalty if the breach consists only in not
paying a sum of money, and the sum stipulated is a sum greater
than the sum which ought to have been paid.
(c) There is a presumption (but no more) that it is penalty when “a
single lump sum is made payable by way of compensation, on
the occurrence of one or more or all of several events, some of
which may occasion serious and others but trifling damage”.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine preestimate of damage, that the consequences of the breach are such
as to make precise pre-estimation almost an impossibility. On
the contrary, that is just the situation when it is probable that
pre-estimated damage was the true bargain between the parties.
Quantification and Measurement of Unliquidated Damages
(1) Quantification by reference to “expectation”, “reliance” or other losses
18.13
In order to better understand the various types of losses which may be
incurred by a plaintiff due to a defendant’s breach of his contractual
obligations, it may be useful to consider the following example:
° Peter has inherited a run-down warehouse and sets up a wholesale food
and beverage business in Singapore. He starts his business with cash-inhand of $100,000 as capital.
° On 1 January, he enters into a contract (governed by Singapore law) with
David to buy 500 bottles of French wine originating from one particular
vineyard, David being a wine importer based in Singapore and the
exclusive distributor for that vineyard. David agrees that he will be paid
the contract price of $32,000 only upon delivery, which is agreed will
occur on 1 February.
° While awaiting delivery, Peter contracts to resell the wine to Tim (who
runs a number of French restaurants) for $50,000, with payment upon
delivery on 15 February. This resale contract provides that damages for
non-delivery of the wine are agreed in the liquidated sum of $10,000 (as
Tim’s usual profit margin for wine sold at his restaurants hovers around
the 20 per cent mark).
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Principles of Singapore Business Law
° The warehouse is in a suitable condition to store most types of goods.
° However, certain insulation works must be carried out to ensure that the
wine is kept cool. Peter therefore contracts with Richard to install the
insulation for the warehouse for $7,500 so it can be used to store the
wine when it is delivered on 1 February prior to its delivery to Tim on
15 February. If not for the contract with David, Peter would not have
made any renovations at all. Richard is not agreeable to delayed payment,
however, so Peter pays Richard in full, and Richard immediately starts
work (and completes it on 14 January).
° On 1 February, David delivers the wrong type of wine — instead of
the promised French wine, David delivers 500 bottles of Italian wine of
completely different description to Peter, telling Peter that he has found
a buyer who is willing to pay a much higher price for the French wine,
and he is therefore supplying the Italian wine in substitution.
° Peter refuses to accept the substitution and instead discharges the
contract due to David’s actual repudiatory breach. This releases him
from having to pay David anything, since delivery was a precondition
to payment. In turn, he regretfully informs Tim that he will be unable
to deliver the French wine as contracted, since there is no distributor for
the wine other than David.
° Tim accepts David’s anticipatory repudiatory breach and discharges their
contract, but insists on compliance with the liquidated damages clause
— so Peter pays Tim $10,000 as liquidated damages.
° Peter also incurs $3,000 in transport costs in sending the Italian wine
back to David when David unreasonably refuses to take back the
defective shipment of wine.
° Out of his initial capital of $100,000, the sum which Peter now has in
hand is $79,500:
Starting capital
Less Costs actually incurred:
(1) Cost of renovations to warehouse
(2) Liquidated damages paid to Tim
(3) Cost of transport of Italian wine
Peter’s cash in hand after the breach by David
538
$100,000
($7,500)
($10,000)
($3,000)
$79,500
Chapter 18: Remedies for Breach of Contract
(a) Expectation loss
18.14
The first type of loss that Peter can try to recover from David is his (nett)
expectation loss. This is the nett profit that Peter expects to make on the basis
that his contract with David is performed. In tabular form, this might be
derived as follows:
Expected revenue had contract with
Tim been performed
Less Costs incurred had contract with
Tim been performed:
(1) Cost of wine
(2) Cost of renovations to warehouse
Nett profit had contract with David not
been breached
$50,000
($32,000)
($7,500)
$10,500 = Nett expectation
loss
Had David performed his part of the contract, Peter would have been able
to earn a nett profit of $10,500. But David’s breach has the effect of
preventing Peter from earning this sum: it has caused Peter to lose this gain
that he expected to earn. Thus, Peter will seek to recover his nett expectation
loss of $10,500.
18.15
Care should be taken in interpreting the phrase “expectation loss”. If no
deduction were made for the expenditures needed to “earn” the revenue of
$50,000, the resulting figure may be said to be Peter’s “gross” expectation loss.
Unfortunately, the phrase “expectation loss” is sometimes used loosely on its
own without the preceding adjective in cases and secondary material. When
encountering this phrase on its own, care should be taken to verify whether
it is being used to refer to a loss calculated on a nett or gross basis.
(b) Reliance loss
18.16
In addition to the nett expectation loss calculated in the above manner,
Peter may choose to recover the $7,500 paid to Richard. This amounts to
a form of reliance loss on Peter’s part: in reliance on David performing his
side of the contract, Peter actually incurred $7,500 in renovation costs. This
label would not, however, be appropriate for the $32,000 that Peter now
does not have to pay David (since no wine was delivered and the contract
has been discharged by David’s breach). This sum does not form part of
Peter’s reliance loss since Peter has not actually incurred this expenditure.
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Principles of Singapore Business Law
(c) Other losses
18.17
Beyond “expectation” and “reliance” losses, other types of losses may
sometimes be inflicted on the victim of a breach of contract, for example,
“consequential” losses. To illustrate: on the facts of our example above,
Peter has also suffered a loss of $10,000 when he paid the liquidated
damages to Tim. This is sometimes referred to as Peter’s “indemnity loss”. As
for the $3,000 worth of transport costs in sending the wine back to David
incurred by Peter after David’s breach had come to his attention, this kind of
loss is sometimes referred to as “incidental loss”.
(2) Placing the innocent party in the position as if contract
was fully performed
18.18
The labels mentioned in the previous section are, however, purely descriptive
of the various losses which the victim of a breach of contract might incur. In
quantifying the damages which a court may award to compensate the victim
for any losses howsoever they might be described, the central principle is
this: without considering any of the many restrictions on recovery (which
will be discussed below in the sections commencing from para 18.38),
Peter’s damages will be quantified at a figure that will place him in the
position as if the contract with David had been fully performed. The general
principle, therefore, is that the court will usually quantify unliquidated
damages so as to place the aggrieved party, as far as money can do so, in
the position he or she would have been had the contract been performed
fully instead of being breached (per Parke B in Robinson v Harman (1848)
at p 855).
18.19
Peter’s losses as identified above are:
Nett expectation loss
Reliance loss
Incidental loss
Indemnity loss
Total losses suffered
$10,500 ← derived in para 18.14
$7,500
$3,000
$10,000
$31,000 = Total damages awardable
(leaving aside questions of mitigation,
remoteness of damages, etc)
Peter should therefore recover damages totalling $31,000 (being the sum of
his nett expectation loss, reliance loss, incidental loss and indemnity loss).
Taken together with the $79,500 of capital that Peter had left, assuming
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Chapter 18: Remedies for Breach of Contract
David complies with the court order in full, Peter’s cash position will then
equal $110,500.
18.20
This reflects the fundamental compensatory principle underlying recovery in
contract: that the plaintiff is to be put in the position as though the contract
was fully performed, in which case no liquidated damages would have had
to be paid to Tim, nor would any transportation costs for the Italian wine
have been incurred. On that basis, Peter would (also) have ended up with
$110,500 had David performed his part of the contract.
Peter starts out with
Expects to generate revenue from Tim
Less Expenses necessarily incurred to
fulfill contract with Tim:
(1) Cost price for wine payable to David
(2) Cost of renovations paid to Richard
Had there been no breach of contract,
Peter would have ended up with
$100,000
$50,000
($32,000)
($7,500)
$110,500 = Total damages
awarded + sum
in hand actually
left over
(3) Electing between different methods of quantifying loss
(a) Expectation or reliance basis: Bad bargains, overly speculative expectation
loss and pre-contract reliance expenditure
18.21
In general, the aggrieved party is free to choose how best to quantify his or
her losses. However, it has been established that quantification on the basis
of reliance losses may be precluded in cases where the party in breach proves
that the aggrieved party made a bad bargain such that the reliance expenditure
would have exceeded any expected gains (see, eg, the cases of C & P Haulage
v Middleton (1983) and CCC Films (London) Ltd v Impact Quadrant Films
Ltd (1985); the facts of CCC Films (London) are particularly interesting).
18.22
In the case of CCC Films, CCC contracted to pay Impact US$12,000 for a
licence allowing them to exploit, distribute and exhibit in various countries
three motion pictures. A deposit of 25 per cent was paid by CCC in
advance. When the balance 75 per cent was paid, CCC requested that the
tapes be sent by Impact to Munich via recorded delivery, together with
the appropriate insurance. In fact, Impact sent the tapes by ordinary post
without any insurance to cover their loss. The tapes never arrived at their
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destination and no replacement tapes were provided by Impact. Consequently,
CCC sued Impact for breach of contract. Since CCC could produce no
evidence of loss of profits from their inability to exhibit or otherwise exploit
the films, they pursued an alternative claim for the US$12,000 spent in
acquiring the licence. On the other hand, Impact produced no evidence
either that CCC would have failed to recoup their expenditure had there
been no breach at all, that is, that CCC had made a “bad bargain” right from
the outset.
18.23
Faced with a situation where neither party provided any evidence as to
whether CCC would have made a profit on the transaction, Hutchison J held
that a plaintiff ’s choice whether to claim loss of profits or wasted expenditure
can only be limited if the defendant is able to prove that the plaintiff would
never have recovered his expenditure in reliance on the contract, even if the
contract had been properly performed. This is a reversal of the usual burden
of proof: usually, the plaintiff has to establish every element of his claim.
However, since it was the defendant’s breach which had caused this situation
to arise, the usual burden of proof would be reversed.
18.24
But even where there is no evidence that the aggrieved party had made a
bad bargain, it may sometimes be advisable for the aggrieved party to avoid
quantifying his damages on an expectation basis where such losses are
speculative. A good example of this is the case of Anglia Television Ltd v Reed
(1972). Oliver Reed entered into a contract with Anglia Television to act in
a film to be produced by them. Reed then changed his mind and informed
Anglia Television that he no longer wished to act in the film. Prior to the
actual signing of the contract and following on from the signing, Anglia
Television had expended a significant amount of money in preparation
for the production of the film. Anglia Television sued Reed for breach of
contract. However, given the speculative nature of the likely profitability of
films, Anglia Television sought to recover its reliance losses instead of its
expectation losses from Reed. The English Court of Appeal agreed that it
was impossible to establish what profits would have been made and held
that Anglia Television could indeed recover damages on the reliance basis.
However, when it came to quantifying the amount of such reliance, Anglia
Television was permitted to recover both (1) the expenses incurred following
from the time the contract was signed and (more controversially) (2) the
expenses incurred prior to its formation, subject to satisfaction of the tests
of remoteness.
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Chapter 18: Remedies for Breach of Contract
(b) Different bases for quantifying expectation loss: “Diminution in value” or
“cost of cure”
18.25
Damages which are assessed on an expectation basis are not, however, always
straightforward. In some instances, a further choice may have to be made
whether such expectation losses are to be assessed from the viewpoint of a
“diminution in value” or from the perspective of the “cost of cure”.
18.26
An award based on diminution of value aims to give the plaintiff the
financial benefit that he would otherwise have obtained if the contract had
been performed. This may take two forms: either (1) the difference between
the market or resale value of the contractual performance and the value
as stated in the contract; or, (2) where the contractual performance entails
the production of something which the plaintiff intends to use in order to
generate a profit, the loss of user profit which ought to have been earned had
the defendant performed his obligations.
18.27
On the other hand, an award based on cost of cure aims to give the plaintiff
a sum of money to repair any defects due to the defendant’s breach of
contract. As a result, he is put in as good a position as if the defendant
had performed his part of the contract, that is, it aims to award the
plaintiff the sum which he has paid or would have to pay for substitute
performance equivalent to that which the defendant ought to have provided
under the contract.
18.28
To illustrate the difference between “diminution in value” and “cost of cure”,
consider the following example:
° Henry has bought a new house for $750,000 and would like to replace
the roof. He receives the keys to his new house on 15 January and enters
into a contract with Connie to supply materials and labour for the roof
replacement works for a total fee of $15,000.
° Connie’s staff finishes the re-roofing works on schedule. However, the
works are defective and there are leaks all over the roof. In addition,
due to the poor quality of the tiles supplied, all of the tiles have become
discoloured.
° Henry gets a quotation from a rival contractor to perform rectification
works to replace the entire roof, and is quoted $20,000. Henry also gets
a valuation from a valuer as to the market value of his property in its
current defective state, and is told that it is now only valued at $720,000
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Principles of Singapore Business Law
due to the hideous state of the roof. How much should Henry recover
in damages: $30,000 (diminution in value of the house due to Connie’s
defective work) or $20,000 (cost of cure)?
18.29
In the above example, Henry cannot recover both the diminution in value
as well as the cost of cure. He has to elect to recover one or the other. This
is strikingly demonstrated by the case of Radford v De Froberville (1977)
which also goes further to show that the cost of cure can be recovered
even if there is no diminution in value. In that case, it was agreed that the
defendant would erect a permanent wall (specified to be seven feet high,
with bricks of a specific type or alternatively, subject to the plaintiff ’s
approval) to screen off the plaintiff ’s property from a new property
development. In breach of contract, the defendant failed to build the
wall. This did not cause any change in the market value of the plaintiff ’s
property, but it could not be denied that the plaintiff had not been supplied
with what he had contracted for. In such circumstances, Oliver J observed
(at p 1270) that:
If he [the plaintiff] contracts for the supply of that which he thinks serves
his interests — be they commercial, aesthetic or merely eccentric — then
if that which is contracted for is not supplied by the other contracting
party I do not see why, in principle, he should not be compensated by
being provided with the cost of supplying it through someone else or
in a different way, subject to the proviso, of course, that he is seeking
compensation for a genuine loss and not merely using a technical breach
to secure an uncovenanted profit.
18.30
Consequently, the plaintiff ’s damages were assessed as the full cost of
erecting the wall in accordance with the very detailed specifications
contained in the agreement. The court declined to award a smaller sum
sufficient to merely build a lower cost pre-fabricated boundary fence (as was
suggested by the defendants), even though this would arguably provide the
plaintiff with an equivalent degree of security against encroaching weeds and
trespassers.
18.31
Are there any clear principles, then, that limit the plaintiff ’s choices as to
how he is to quantify his expectation loss? The cases are not completely
consistent with one another, but in Professor Burrows’ Remedies for Torts
and Breach of Contract (3rd ed, 2004), it has been suggested (at pp 209–210)
that the following factors may influence the court:
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Chapter 18: Remedies for Breach of Contract
° where the plaintiff has sought to mitigate his losses, he will recover
the cost of cure where he has, or ought to have, incurred that cost in
reasonably seeking to minimise his losses;
° where the plaintiff has cured or intends to cure the defective performance
by the defendant, the court is more likely to allow the award of damages
based on the cost of cure;
° lastly, the plaintiff ’s intentions or aims in entering into the contract
and desiring the defendant’s performance may be important. So if the
plaintiff wanted performance in order to profit from it in the sense of
making an economic gain, difference in value would more likely than
not be adequate compensation; if the plaintiff wanted performance for
other purposes, perhaps for his own use and enjoyment, difference in
value would not, or not as fully, compensate him.
18.32
These three factors provide some guidance to determine where recovery on a
cost of cure measure would be reasonable. In particular, the last issue can be
seen to have been critical in the court’s assessment of reasonableness in cases
such as Tito v Waddell (No 2) (1977), Ruxley Electronics and Construction
Ltd v Forsyth (1996), Radford v De Froberville (1977) and Dean v Ainley
(1987). In the first two cases, the courts were not satisfied that recovery
on the “cost of cure” basis would be reasonable since it was not clear that
the plaintiff intended to use such damages (if awarded) to make good the
defective performance of the defendant. Accordingly, the courts refused to
order damages based on the “cost of cure” measure. In contrast, in the third
and fourth cases, the plaintiff was able to satisfy the court that he intended to
use the damages to rectify the defendant’s defective performance — “cost of
cure” damages were therefore viewed as being reasonable, and were ordered
accordingly.
18.33
These factors, though, are really just indications as to whether it would be
reasonable to award “cost of cure” damages. As observed by Lord Jauncey in
Ruxley Electronics and Construction Ltd v Forsyth (1996) (at p 359):
[I]n the normal case the court has no concern with the use to which a
plaintiff puts an award of damages for a loss which has been established.
Thus irreparable damage to an article as a result of a breach of contract
will entitle the owner to recover the value of the article irrespective of
whether he intends to replace it with a similar one or to spend the money
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Principles of Singapore Business Law
on something else. Intention, or lack of it, to reinstate can have relevance
only to reasonableness and hence to the extent of the loss which has
been sustained.
18.34
Consequently, it is not the case that the plaintiff must demonstrate that he
intends to use the damages (if awarded) to “cure” the breach before the
court is willing to allow them. Instead, it is all a question of reasonableness
of such an award and a number of other factors may come into play. For
example, Lord Jauncey in Ruxley Electronics and Construction Ltd v Forsyth
(1996) (at p 358) appears to have also been influenced by the fact that
contractual objectives for the construction of the swimming pool had
been “achieved to a substantial extent”. Lord Mustill in the same case was
influenced (at p 361) by the perception that the “cost of cure” measure
would result in damages which were “disproportionate to the non-monetary
loss suffered by the employer [Forsyth]”. Therefore, it may well be that
even if there had been a finding of fact by the court of first instance that
Forsyth had formed the intention to rebuild the pool, or had given an
undertaking to the court that he would do so, the House of Lords would
still have refused to allow recovery on the cost of cure measure, since
Forsyth could not be allowed “to create a loss, which does not exist, in
order to punish the defendants for their breach of contract” (per Lord Lloyd
at p 373).
18.35
Interestingly, it appears that Lords Jauncey and Lloyd were both applying an
objective test as to what was reasonable or proportionate in the circumstances
so as to limit the employer’s ability to recover his loss in the context of
quantification. To put it baldly, Mr Forsyth was not allowed to recover
damages based on the cost of digging up the imperfectly built (though
perfectly safe and adequate) swimming pool and re-constructing it to the
contractual dimensions because, in the court’s opinion, such actions were
unreasonable. This may be distinguished from the more-or-less subjective
tests used in relation to establishing remoteness of damage (which will be
discussed below at length at paras 18.51–18.63), wherein the courts are
concerned with establishing the kinds of losses which are irrecoverable
because they are too remote from the contemplation of the contracting
parties, given the state of their knowledge as to each others’ affairs and the
general conduct of contractual obligations at the time of the contract.
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Chapter 18: Remedies for Breach of Contract
Time of Quantification
18.36
In most instances, unliquidated damages will be assessed as at the time
of the breach. However, this is not an inflexible rule. The court retains a
wide discretion to assess damages at later points in time if this would serve
the justice of the case better, given its particular facts and the need for
the plaintiff to mitigate his losses (see, eg, the Singapore Court of Appeal
decision of Tay Joo Sing v Ku Yu Sang (1994) which concurred with the
House of Lords decision of Johnson v Agnew (1980) in holding that where
appropriate, damages could be assessed at a point in time other than the date
of breach).
18.37
In the current edition of Treitel on the Law of Contract (13th ed, 2011), it
is suggested (at pp 1031–1048) that such flexibility may be guided by the
following:
° As a starting point, one should ascertain the damage suffered by the
plaintiff as at the time of the breach. This assumes that the plaintiff knows
of the breach once it has been committed, and is able to take steps to
mitigate his losses.
° If it was not possible for the plaintiff to know of the breach or to discover
it with reasonable diligence at the time it occurs, then the court is likely
to assess damages at the time when the plaintiff would have discovered
the breach with reasonable diligence.
° However, if at the time of reasonable discovery, it is not possible to act
on that knowledge to cut his losses (or to “mitigate” them), then the
court may delay assessment until the point at which when it is possible
for the plaintiff to do so.
° Given reasonable discovery and possibility of mitigation, if the plaintiff
can nonetheless demonstrate that he has failed to act to mitigate at
that point in time because there was a reasonable probability that the
defendant would make good his default, then the court may defer the
time of assessment until the time when it is no longer probable that this
would be the case.
° In cases of late performance (as opposed to non-performance), it appears
that the time of assessment will be the time of the late performance, and
not the time when it ought to have been performed.
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Principles of Singapore Business Law
° Lastly, in cases of an anticipatory breach which has been accepted leading
to the discharge of the contract, the court will also assess damages as
at the time when the defendant ought to have performed his part of
the bargain, and not at the point when the anticipatory breach was
accepted. This is, however, a starting point only, and there are a number
of further qualifications discussed in that text (at pp 1035–1038),
though consideration of those qualifications would take us beyond the
introductory nature of the present work.
Restrictions on Recovery of Unliquidated Damages
18.38
It is not the case, however, that unliquidated damages are available for all
losses. Recovery is subject to certain restrictions. These will be described
in the following sections, and a diagrammatic summary may be found at
Figure 18.1.
STEP 1
Causation in fact: Was the breach
an effective cause of the loss?
Apply “but-for” test
No
Damages not
claimable
Yes
STEP 2
Remoteness (or Causation at law):
Are the losses too remote? Consider
tests in Hadley v Baxendale read
with The Heron II
Yes
No
STEP 3
STEP 4
Quantification (or Assessment) of
damages: What is the sum required
to put the innocent party in a
position as though the contract
has been properly performed?
Mitigation: Have reasonable steps
been taken to minimise the loss?
No
Quantum of
damages awarded
will be reduced by
amount that could
have been saved
through mitigation.
Figure 18.1 Summary of steps to claim unliquidated damages
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Chapter 18: Remedies for Breach of Contract
(1) Non-pecuniary loss
18.39
First, non-pecuniary losses (ie, for hurt feelings, disappointment, mental
distress and so forth), are generally not compensable on policy grounds (as
Bingham LJ pointed out in the case of Watts v Morrow (1991) at p 1445).
18.40
Any loss of reputation or embarrassment suffered by the injured party because
of the breach of contract is also not recoverable (see Addis v Gramophone
Company, Ltd (1909)). This reluctance to allow recovery for such losses can
also be found in local cases, for example, the decision of G P Selvam J in the
High Court decision of Arul Chandran v Gartshore (2000).
18.41
Nevertheless, even in Addis v Gramophone Company, Ltd (1909), Lord
Atkinson accepted (at p 495) that non-pecuniary losses could be recovered
in three exceptional cases:
[1] actions against a banker for refusing to pay a customer’s cheque
when he has in his hands funds of the customer’s to meet it, [2] actions
for breach of promise of marriage, and [3] actions … where the vendor
of real estate, without any fault on his part, fails to make title.
18.42
These three “well-known” exceptions do not appear to be exhaustive. Since
1909, the courts have also allowed recovery for mental distress damages in
the following situations:
° Where there is substantial physical inconvenience or discomfort as a
result of the breach of contract (Hobbs v The London and South Western
Railway Company (1875); Bailey v Bullock (1950)).
° Where distress is directly consequent upon physical loss caused by the
breach of contract (Perry v Sidney Phillips & Son (1982): anxiety and
distress of living in a house in poor condition which had been bought
in reliance on negligence in breach of contract in a surveyor’s report;
Calabar Properties Ltd v Stitcher (1984): unpleasantness of living in
deteriorating premises until they became uninhabitable because of the
landlord’s delay in repairs).
° Where loss of reputation caused by grossly defective performance of an
employer’s obligations results in financial loss to the employee (Malik v
Bank of Credit and Commerce International SA (1998): here, the court
was willing to imply a term of implied trust and confidence between
employer and employee wherein the employer was obliged not to
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conduct its affairs in such a corrupt and dishonest way as would tarnish
the reputation of its employees).
° Where the very object or purpose of the contract is to provide enjoyment
or to prevent distress (Jarvis v Swans Tours Ltd (1973); Heywood v Wellers
(1976); Reed v Madon (1989); Farley v Skinner (2002)).
18.43
Farley v Skinner (2002) in particular, points to a possibly more expansive
view in a number of these categories. In relation to the category of physical
discomfort, Lord Scott observed (at [85]) as follows:
In my opinion, the critical distinction to be drawn is not a distinction
between the different types of inconvenience or discomfort of which
complaint may be made but a distinction based on the cause of the
inconvenience or discomfort. If the cause is no more than disappointment
that the contractual obligation has been broken, damages are not
recoverable even if the disappointment has led to a complete mental
breakdown. But, if the cause of the inconvenience or discomfort is a
sensory (sight, touch, hearing, smell, etc) experience, damages can,
subject to the remoteness rules, be recovered.
18.44
Farley v Skinner (2002) also points to a potentially more relaxed approach
where non-pecuniary losses by consumers are concerned. Lord Steyn observed
(at [20]):
I am satisfied that in the real life of our lower courts non-pecuniary
damages are regularly awarded on the basis that the defendant’s breach
of contract deprived the plaintiff of the very object of the contract,
viz, pleasure, relaxation and peace of mind. The cases arise in diverse
contractual contexts, eg, the supply of a wedding dress or double
glazing, hire purchase transactions, landlord and tenant, building
contracts, and engagements of estate agents and solicitors. The awards
in such cases seem modest. For my part what happens on the ground
casts no doubt on the utility of the developments since the 1970s in
regard to the award of non-pecuniary damages in the exceptional
categories. …
(2) Causation of loss
18.45
Common sense dictates that compensation from the defendant is due
only if the defendant’s breach of contract caused the plaintiff ’s loss. This
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is an evidential and factual enquiry. In general, however, a “but for” test
of causation is applied, and usually, this is sufficient to discriminate
between cases where causation is satisfied, and those where it is not.
18.46
Consider the following example:
° A contracts to buy B’s vintage car which is in practically mint condition
and has never been involved in an accident. Based on the successful
bid of $200,000 at a recent auction for a very similar car in a similar
“mint” condition, A agrees to pay B the same price. A anticipatorily
repudiates the contract by informing B that he has changed his mind.
B accepts this and discharges the contract. B incurs further costs
totalling $200 for another month of season car parking charges
and in having to place further advertisements. Unfortunately, while
the car is parked, an unknown vehicle backs into it and causes a bad
dent. This is repaired and the costs of repair totalling $5,000 are
taken care of by B’s insurers. But since the car is no longer in mint
condition, the market price of the car has fallen to $140,000 even
with the expert repairs which have already been done to it. Had it
been in mint condition, C would have been willing to pay $200,000
for it.
18.47
–
B suffers the following losses: (1) Additional parking charges and
advertising costs ($200) and (2) Fall in value of car ($60,000).
–
A is most likely to be found to have “caused” B’s loss in relation to
the additional $200 of parking charges and advertising costs. “But
for” A’s breach, B would not have had to pay for further parking
charges for this vehicle.
–
B may face some difficulty in relation to his claim for the fall in
the value of the car — it is debatable whether this was “caused”
by A. A’s breach of contract is certainly not the immediate cause
of this head of loss: that would have to be the driver of the
unknown vehicle which collided into the car while it was parked.
However, “but for” A’s breach, the car would not have been parked
at that spot.
As noted above, problems with causation arise where there may be more
than one sufficient cause leading to the loss. This kind of problem gives rise
to extremely difficult issues, as the House of Lords decision in South Australia
Asset Management Corporation v York Montague Ltd (1997) (sometimes
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referred to as Banque Bruxelles Lamberts SA v Eagle Star Insurance Co, or
the SAAMCO case) illustrates. But sometimes, such issues can be resolved by
considering more carefully the precise nature of the obligation undertaken
by the party in breach.
18.48
SAAMCO (1997) was a consolidated appeal from three different cases.
All were concerned with the damages which ought to be recovered by
lenders who had been advised carelessly by valuers of certain assets
which were provided as security for loans made by the lenders. In
breach of their contractual obligation to carry out such valuation with
reasonable care, the valuers over-valued the security. The lenders alleged
that this caused them to make loans which they would never have made
otherwise. After the loans were made, the general market for the assets
in question fell tremendously, and the lenders claimed that the entire loss
suffered by them following from defaults in the loans should be recovered
from the valuers.
18.49
The answer, according to the House of Lords in SAAMCO (1997), was that
the valuer’s duty of care (whether in contract or even in the tort of
negligence) did not cause all the loss claimed by the plaintiffs. Even if the
valuers had done their job properly, the general fall in the market value
would still have occurred and would still have caused loss to the vendors.
The only damage which the valuers “caused” then was the extent of the
over-valuation of the assets in question at the time of the original valuation.
The cause of any further losses was really the fall in the market.
18.50
Since the valuers were only obliged to provide one piece of information
which the lenders would take into consideration in formulating their
decision whether or not to proceed with the transaction, it was not correct
to make the valuers responsible for all subsequent market fluctuations. To
do so would amount to making the valuers insurers for the viability of
the transactions.
(3) Remoteness of loss
18.51
Losses which are too remote are not compensable — but what does it
mean to say that a loss is too remote? In brief, losses which arise in the
usual course of things as a result of the breach are not too remote, and
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are compensable. Losses which are out of the ordinary and which would
not ordinarily have been in the contemplation of either party to the
contract are not — unless the party in breach knew or ought to have
known about the possibility of such unusual losses at the time of entering
into the contract.
(a) “Naturally arising damages” and “damages arising from
special circumstances”
18.52
The distinction between these two types of damages was set out in the
seminal judgment of Alderson B in the case of Hadley v Baxendale (1854)
(at pp 354–355) as follows:
Where two parties have made a contract which one of them has broken,
the damages which the other party ought to receive in respect of such
breach of contract should be such as may fairly and reasonably be
considered either arising naturally, ie, according to the usual course
of things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the probable result of
the breach of it. Now, if the special circumstances under which the
contract was actually made were communicated by the plaintiffs to
the defendants, and thus known to both parties, the damages resulting
from the breach of such a contract, which they would reasonably
contemplate, would be the amount of injury which would ordinarily
follow from a breach of contract under these special circumstances so
known and communicated. But … if these special circumstances were
wholly unknown to the party breaking the contract, he, at the most,
could only be supposed to have had in his contemplation the amount
of injury which would arise generally, and in the great multitude of
cases not affected by any special circumstances, from such a breach of
contract. For, had the special circumstances been known, the parties
might have specially provided for the breach of contract by special
terms as to the damages in that case; and of this advantage it would be
very unjust to deprive them …
Under either limb, the knowledge of the defendant as to the probability and
nature of the losses that could be suffered by the plaintiff in the event of a
breach of contract is critical.
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(b) Imputed and actual knowledge
18.53
The first and second limbs of damages identified in Hadley v Baxendale
require different degrees of awareness of the surrounding circumstances.
This point was highlighted in the judgment of Asquith LJ in Victoria
Laundry (Windsor) Ltd v Newman Industries Ltd (1949) which distinguished
between:
° imputed knowledge — knowledge which everyone, as reasonable persons,
must be taken to know; and
° actual knowledge — knowledge which one actually has.
18.54
As noted by Asquith LJ (at p 539) in his judgment in Victoria Laundry,
(2) In cases of breach of contract the aggrieved party is only
entitled to recover such part of the loss actually resulting as was at
the time of the contract reasonably foreseeable as liable to result from
the breach.
(3) What was at that time reasonably so foreseeable depends on the
knowledge then possessed by the parties or, at all events, by the party
who later commits the breach.
(4) For this purpose, knowledge “possessed” is of two kinds; one imputed,
the other actual. Everyone, as a reasonable person, is taken to know
the “ordinary course of things” and consequently what loss is liable to
result from a breach of contract in that ordinary course. This is the
subject matter of the “first rule” in Hadley v Baxendale … But to this
knowledge, which a contract-breaker is assumed to possess whether he
actually possesses it or not, there may have to be added in a particular
case knowledge which he actually possesses, of special circumstances
outside the “ordinary course of things”, of such a kind that a breach in
those special circumstances would be liable to cause more loss. Such a
case attracts the operation of the “second rule” so as to make additional
loss also recoverable. [emphasis added]
These paragraphs were cited with approval by the Court of Appeal in
Robertson Quay Investment Pte Ltd v Steen Consultants Pte Ltd (2008) (at
[54]) and undoubtedly form part of the law in Singapore on remoteness of
loss arising from a breach of contract.
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18.55
Applying the first limb of the rule in Hadley v Baxendale, where the
plaintiff is trying to recover ordinary losses which flow naturally from
the defendant’s breach, there is no need to prove that the defendant had
any actual knowledge that this might be the result of his breach — such
knowledge will be imputed to him by the court and he is taken to know that
such damage would ordinarily result from his breach. On the other hand,
if the plaintiff is trying to recover special losses that would not ordinarily
be expected to flow from a breach, he can only recover if he can prove that
the defendant had actual knowledge of the special circumstances that gave
rise to these special losses.
18.56
How does a plaintiff satisfactorily prove that the defendant had actual
knowledge of such special circumstances? It appears that an objective test
will be imposed, as was observed by Robert Goff J in his judgment in
Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase)
(1981) (at p 183):
[H]ave the facts in question come to the defendant’s knowledge in
such circumstances that a reasonable person in the shoes of the
defendant would, if he had considered the matter at the time of
making the contract, have contemplated that, in the event of a breach
by him, such facts were to be taken into account when considering
his responsibility for loss suffered by the plaintiff as a result of such
breach[?]
(c) Probability of type of loss
18.57
But the test of remoteness entails one further point: the information
or knowledge must be within the actual or imputed knowledge of the
defendant, but what must the defendant know? In order for the plaintiff ’s
loss to be sufficiently proximate, the defendant must actually, or, by way of
imputation, reasonably contemplate that the damage in question is liable
to result from the breach. In other words, given the knowledge which the
defendant actually or imputedly possesses, a reasonable man would have
foreseen that there was an appreciable degree of likelihood that damage
would result from the defendant’s breach.
18.58
The exact degree of perceived probability as to whether the damage
will occur as a result of the breach is still a matter of some dispute.
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In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949),
Asquith LJ described (at p 540) the requisite degree of probability as
being “on the cards”. But this turn of phrase was roundly criticised by the
House of Lords in the case of Koufos v C Czarnikow Ltd (The Heron II)
(1969), where Lord Reid suggested that the degree of probability required
was that the occurrence of the damage following the breach must have been
“not unlikely”; Lord Morris of Borth-y-Gest preferred the term “liable to
result or at least … not unlikely to result”; Lord Hodson also put forward
the term “liable to result” (while rejecting the phrase “likelihood”); and
lastly, both Lord Pearce and Lord Upjohn were in favour of the terms
“serious possibility” and “real danger”. Common ground, however, may
be found in their Lordships’ acceptance that the degree of probability
required to demonstrate that contract damages are not too remote is higher
than that in tort. (The analogous test in tort only requires “reasonable
foreseeability”: see Overseas Tankship (UK) Ltd v Morts Dock & Engineering
Co Ltd (Wagon Mound) (No 1) (1961) in relation to the tort of negligence
and Overseas Tankship (UK) Ltd v The Miller Steamship Co Pty (1967) in
relation to other torts — both cases were decided by the Privy Council on
appeal from the Supreme Court of New South Wales.)
18.59
The confusion as to the precise level of probability required, post-Heron
II, has been noted by Lord Denning MR in the difficult case of H Parsons
(Livestock) Ltd v Uttley Ingham & Co Ltd (1978). In that case, the defendants
supplied the plaintiff a defective container for pig feed which caused the
nuts stored inside to become mouldy. When these mouldy nuts were fed to
the plaintiff ’s pigs, they contracted a rare intestinal disease and subsequently
died. On appeal, the English Court of Appeal held that the damage suffered
by the plaintiff in the loss of his pigs was not too remote. Lord Denning
MR, after making reference to the impossibility of dealing with the “sea of
semantic exercises” posed by the judgments of the House of Lords in the
Heron II, went on to propose (at pp 802–803) an unconventional approach
involving two tests for remoteness depending on the type of damage or loss
involved. Where the loss was physical, a more relaxed test of “reasonable
foreseeability” of the type of damage as a bare possibility (similar to that
applied in tort cases) should be applied. On the other hand, in cases
involving economic loss (eg, loss of profit) in contract, the stricter approach
of “reasonable contemplation” was more appropriate. Lord Denning MR
characterised the damage suffered by the plaintiff before him as falling
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within the first category and applied a test of “reasonable foreseeability”.
Since it was reasonably foreseeable that the defective hopper would cause
the nuts stored within it to become mouldy, and there was a foreseeable
possibility that pigs fed such nuts would fall ill, the damage suffered by the
plaintiff was not too remote.
(d) Types and extent of loss
18.60
Lord Denning’s approach in H Parsons (Livestock) Ltd v Uttley Ingham &
Co Ltd (1978) is difficult, as it requires the court to characterise the damage
suffered into “physical” and “economic” categories. This may not be as simple
as it looks. On the facts of H Parsons (Livestock) Ltd v Uttley Ingham &
Co Ltd (1978) itself, it cannot be denied that the plaintiff, ultimately, was
interested in recovering the profits that he would have made, had his pigs
survived and made it to market, as opposed to the pigs themselves.
18.61
The majority of the English Court of Appeal in H Parsons (Livestock) Ltd
v Uttley Ingham & Co Ltd (1978) distinguished between the type and the
extent of the damage. Scarman LJ proposed (at p 813) as follows:
[I]t would be absurd to regulate damages in such cases upon the necessity
of supposing the parties had a prophetic foresight as to the exact nature
of the injury that does in fact arise. It is enough if upon the hypothesis
predicated physical injury must have been a serious possibility … It does
not matter … if they [the defendants] thought that the chance of physical
injury, loss of profit, loss of market, or other loss as the case may be, was
slight, or that the odds were against it, provided they contemplated as
a serious possibility the type of consequence, not necessarily the specific
consequence, that ensued upon breach. [emphasis added]
18.62
Orr LJ agreed with Scarman LJ’s reasoning. On the majority view, the
plaintiff ’s damage (that the pigs would fall ill because of mouldy nuts caused
by the defendant’s breach of contract by the supply of a defective hopper)
was reasonably within the contemplation of the defendant as liable to occur.
This constituted a type of damage that could be reasonably contemplated as
liable to occur. The eventual death of the pigs because they had contracted a
rare intestinal disease would not have been within reasonable contemplation.
However, this was irrelevant because the outcome (death) was merely
reflective of the extent of the damage.
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Box 18.1
Reflecting
on the law
“Type” versus “extent” of loss — a practicable distinction?
Consider the facts of the case in Victoria Laundry (Windsor) Ltd v Newman Industries
Ltd (1949) itself. Victoria Laundry entered into a contract to purchase a boiler
from the defendants in order to expand their business. The defendants contracted
to deliver a certain boiler of the specified capacity on 5 June. This boiler, however,
was damaged prior to actual delivery, and was not actually delivered until
8 November. The defendants were aware of Victoria Laundry’s business and had
been informed many times before the contract was concluded that Victoria
Laundry were “most anxious” to put the boiler to use in the “shortest possible
space of time”. In light of the delay, Victoria Laundry sued to recover damages
from the defendants in respect of losses following from their inability to take
on large numbers of new customers in the course of their laundry business
(which was held by the English Court of Appeal to be recoverable as being
part of the usual loss that would follow as a matter of course and of which
everyone has imputed knowledge); and a number of highly lucrative dyeing
contracts for the Ministry of Supply (which was ultimately held to be irrecoverable
since it was an unusual loss of which the defendants had no prior actual
knowledge).
Could it not be said that the exceptional loss of profit from the potential
Ministry of Supply contracts represented merely the extent of the plaintiff’s loss;
and that such losses should be recoverable as they were of a type (loss of profit
from contracts which would have been entered into if not for the defendant’s
breach) which was reasonably within the contemplation of the defendants in
that case?
18.63
To date, Lord Denning’s approach has not been followed. On the other
hand, despite its difficulties, the approach put forward by Scarman LJ and
Orr LJ has been applied in a series of cases, including one in the 1990s, in
Brown v KMR Services Ltd (1995). Even so, these developments focusing
on “type” and “extent” of damages suggest that the apparently simple
division put forward in Hadley v Baxendale (1854) and Victoria Laundry
(Windsor) Ltd v Newman Industries Ltd (1949) between losses of ordinary
profits and losses of exceptional profits may no longer be so clear. But
leaving such difficulties aside, in summary, damage suffered by a plaintiff
may be recoverable as not being too remote if he can demonstrate that:
° the defendant can be taken to have known or actually knew of the
circumstances surrounding the plaintiff which resulted in the plaintiff ’s
loss; and
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° it would have been obvious to a reasonable man in the defendant’s shoes
that if he breached the contract, there was a significant likelihood or
serious possibility that such a breach would result in loss of the type
which the plaintiff suffered.
(e) The rationale for the rule in Hadley v Baxendale and the role of
assumption of responsibility
18.64
Having set out the rule in Hadley v Baxendale, it is appropriate at this
juncture to examine its rationale. Helpfully, this was set out by the Court
of Appeal in Robertson Quay Investment Pte Ltd v Steen Consultants Pte Ltd
(2008) at [81]–[83]:
To elaborate, damage which falls under the first limb of Hadley (which
may be termed “ordinary” damage …) ought to be well within the
reasonable contemplation of all of the contracting parties concerned.
Since everyone (including the contracting parties) must, as reasonable
people, be taken to know of damage which flows “naturally” … from
a breach of contract, the first limb of Hadley does no violence to the
original bargain between the contracting parties who, ex hypothesi,
have not expressly provided for what is to happen in the event of a
breach of their contract. However, if the contracting parties had
thought about this issue, they would, in all likelihood have agreed that
the contract-breaker should be liable in damages for all such “ordinary”
damage. …
Damage which falls under the second limb of Hadley (ie,
“extraordinary” or “non-natural” damage) is not, by its very nature,
within the reasonable contemplation of the contracting parties. In the
circumstances, it would be both unjust and unfair to impute to them
knowledge that such damage or loss would arise upon a breach of
contract. However, if the contracting parties, having had the opportunity
to communicate with each other in advance, had actual (as opposed to
imputed) knowledge of the special circumstances which resulted in the
“extraordinary” or “non-natural” damage, then they must be taken to
have agreed that should such damage occur, the contract-breaker would be
liable for such damage. …
The above extract makes it plain that the underlying rationale for the rule
in Hadley v Baxendale is based on what the parties are to be taken as
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having undertaken or agreed in terms of responsibility for loss. Insofar
as the loss which is sustained is “ordinary”, unless the parties specify
otherwise, the right inference to be drawn from the facts would be that
they had agreed that there would be liability for such “ordinary” loss.
On the other hand, if the loss were “extraordinary”, absent any provision
otherwise the right inference to be drawn as to whether the parties had
agreed that there would or would not be liability for such “extraordinary”
loss would depend on whether the promisor had actual knowledge
of the circumstances associated with the occurrence of that “extraordinary”
loss. If the promisor actually knew about such circumstances, and did not
make any provision as to such loss, then such promisor would be taken to
have agreed to be responsible for such “extraordinary” loss. However, if the
promisor had no actual knowledge of such circumstances, it would not be
appropriate to treat the promisor as if he had agreed to be responsible for
such losses.
18.65
To some extent, the analysis in Robertson Quay mirrors the analysis of Lord
Hoffman in his judgment in the House of Lords case of Transfield Shipping Inc
v Mercator Shipping Inc (The Achilleas) (2009). In that case, Lord Hoffmann
observed as follows (at [12]):
It seems to me logical to found liability for damages upon the intention
of the parties (objectively ascertained) because all contractual liability is
voluntarily undertaken. It must be in principle wrong to hold someone
liable for risks for which the people entering into such a contract in
their particular market, would not reasonably be considered to have
undertaken.
18.66
Given the above, some English academics have taken the view that these
remarks should be understood as posing an additional test that had to be
satisfied, over and above what had been set out in Hadley v Baxendale: that
one would also have to show (on an objective basis) that the defaulting
promisor had voluntarily undertaken responsibility or liability for the type of
loss which the promisee was claiming. This, however, is arguably not the case
given the rationale underlying the rule in Hadley v Baxendale as sketched
out by the Court of Appeal in Robertson Quay: assumption of liability is part
of the test in Hadley v Baxendale, not something distinct from it. Indeed, in
Singapore, this very point is now beyond doubt, given the Court of Appeal’s
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decision in MFM Restaurants Pte Ltd v Fish & Co Restaurants Pte Ltd
(2011). In that case, the Court of Appeal noted as follows (at [101]):
… it is our view that, even if … we accept Lord Hoffmann’s approach
in The Achilleas, both the limbs in Hadley would necessarily embody and
encompass the necessary criteria for ascertaining (on an objective basis)
whether or not there had been an assumption of responsibility on an
implied undertaking on the part of the defendant … If so, then, with the
greatest of respect, Lord Hoffmann has not really added anything new to
the existing law, which continues to operate based on the legal rules and
principles laid down in the seminal decision of Hadley … [emphasis in
italics in original, emphasis in bold italics added]
(4) Mitigation of loss
18.67
Losses which the aggrieved party could have taken reasonable steps to avoid,
but did not, are not compensable. As stated by Viscount Haldane LC in the
case of British Westinghouse Electric and Manufacturing Co Ltd v Underground
Electric Railways Company of London Ltd (1912) (at p 689):
I think that there are certain broad principles which are quite well
settled. The first is that, as far as possible, he who has proved a breach
of a bargain to supply what he contracted to get is to be placed, as far
as money can do it, in as good a situation as if the contract had been
performed … [B]ut this first principle is qualified by a second, which
imposes on a plaintiff the duty of taking all reasonable steps to mitigate
the loss consequent on the breach, and debars him from claiming any
part of the damage which is due to his neglect to take such steps …
[T]his second principle does not impose on the plaintiff an obligation to
take any step which a reasonable and prudent man would not ordinarily
take in the course of his business.
18.68
The duty is to take all reasonable steps to minimise or to “mitigate” one’s
loss. If, in taking objectively reasonable steps to mitigate, the aggrieved party
incurs greater loss than if no steps have been taken at all, such increased
losses will still be recoverable from the party-in-breach (see, eg, Banco de
Portugal v Waterlow & Sons Ltd (1932) (per Lord MacMillan at p 508).
These observations have been approved and followed in Singapore (eg, the
Singapore High Court decision of Tan Soo Leng David v Lim Thian Chai
Charles (1998)).
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18.69
Ultimately, as noted by Bankes LJ in Payzu, Limited v Saunders (1919)
(at p 588), everything turns on the reasonableness of the plaintiff ’s actions
to try and minimise his loss and:
[I]t is plain that the question [of] what is reasonable for a person to do
in mitigation of his damages cannot be a question of law but must be
one of fact in the circumstances of each particular case.
18.70
As to what facts might suggest that the actions taken by the plaintiff were
reasonable, some consideration might be made as to the following:
° “In certain cases of personal service it may be unreasonable to expect
a plaintiff to consider an offer from the other party who has grossly
injured him; but in commercial contracts it is generally reasonable to
accept an offer [of alternative performance] from the party in default”
(per Scrutton LJ in Payzu, Limited v Saunders (1919) at p 589);
° the plaintiff is not usually required to take steps in mitigation of its loss
which it is financially unable to afford;
° the plaintiff is not required to take steps in mitigation of its loss
which would place its commercial reputation or good public relations
at risk;
° the plaintiff is not required to take steps in mitigation of its loss which
would involve complex litigation.
Box 18.2
Reflecting
on the law
Is there a “duty” to mitigate?
Since the 1980s, there has been a view that casting mitigation as a “duty” of the
plaintiff is misleading. Hence, in the case of Sotiros Shipping Inc and Aeco Maritime SA
v Sameiet Solholt (The Solholt) (1983), Sir John Donaldson MR observed (at p 608)
that:
[a] plaintiff is under no duty to mitigate his loss, despite the habitual use by the
lawyers of the phrase “duty to mitigate”. He is completely free to act as he
judges to be in his best interests.
On the other hand, a defendant is not liable for all loss suffered by the
plaintiff in consequence of his so acting. A defendant is only liable for such part
of the plaintiff’s loss as is properly to be regarded as caused by the defendant’s
breach of duty. [emphasis added]
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Box 18.2 (Continued )
This recasting of the language of mitigation highlights the similarity between
mitigation and the issue of causation. One might then wonder, what would happen
if a mitigation attempt goes seriously wrong: does this break the chain of causation?
Some guidance may be found in the judgment of Lord Hoffmann in the SAAMCO
(1997) case (discussed earlier at paras 18.48–18.50) wherein the answer appears to
be “no”. Lord Hoffmann quoted with approval the New Zealand case of McElroy
Milne v Commercial Electronics Ltd (1993). In McElroy, a lawyer was engaged by a
property developer to prepare certain documentation relating to a lease. The lawyer
negligently failed to ensure that the lease contained a guarantee from the lessee’s
parent company. As a result, instead of being able to sell the property together
with the benefit of the lease soon after completion, the developer found himself in
dispute with the parent company. The dispute dragged on for more than two years,
during which time the market fell.
The New Zealand Court of Appeal in McElroy held that the developer was
entitled to the difference between what the property would have fetched if sold
soon after its completion with a guaranteed lease and what it eventually fetched
two years later. The lawyer had a duty to take reasonable care to ensure that
his client got a properly guaranteed lease. He was therefore responsible for the
consequences of his error, which was producing a situation in which the client
had a lease which was not guaranteed. All the reasonably foreseeable consequences
of that situation were therefore within the scope of the duty of care. The only
remaining issue, then, was whether the developer’s delay in selling the property
negatived the causal connection between that situation and the ultimate loss. The
New Zealand Court of Appeal decided this question by asking whether the client
had reacted reasonably to his predicament.
Therefore, it seems that so long as the attempt at mitigation is reasonable,
there is little to suggest that a court will find that it has broken the chain of
causation, even if the mitigation has worsened the loss.
18.71
The burden of proof remains on the defendant to show that the plaintiff
has not taken steps towards mitigation of his loss, that is, on a balance of
probability, he has not mitigated his loss. This is unlikely to be easy, since the
courts appear to be willing to find in favour of the plaintiff even in doubtful
cases (see Strutt v Whitnell (1975)).
18.72
Before leaving the issue of mitigation, a few words on where mitigation has
no application are apposite. First, the need to mitigate only arises after the
contract has been discharged, following the breach of contract. As discussed
previously in Chapter 16 at paras 16.58–16.60, the victim of a breach of
contract has the option of whether or not to accept a breach of contract so
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as to discharge the contract and mitigation has no part to play in limiting
his freedom to exercise this choice.
18.73
Second, mitigation has no relevance in relation to the manner in which
the victim of the breach seeks to have his damages quantified. As decided
by Oliver J, in the case of Radford v De Froberville (1977), a plaintiff can
be awarded damages to enable him to have performed for him what the
defendant failed to provide under their agreement, even if more cost-effective
ways of enabling him to achieve that performance can be found. Among
others, Oliver J reasoned (at p 1284) that:
[I]t [a pre-fabricated brick wall] was not what the plaintiff stipulated
for and what, in effect, he paid for when he sold the plot. I know of
no principle of damages which would dictate that a plaintiff who has
stipulated for an article of a certain quality should be fobbed off with an
inferior substitute merely because it is cheaper for a defendant who has
broken his contract to supply it.
ACTION FOR A FIXED SUM
18.74
Damages, whether liquidated or unliquidated, are not the only remedy at
common law. Where the contractual breach relates solely to an obligation
to pay a fixed sum of money, instead of damages, the court will order that
the fixed sum, due and owing, be paid. Such a claim based on an action for
payment of a fixed sum or the payment of a debt is completely distinct from
the remedy of damages and concepts such as remoteness of loss, mitigation
and even quantification of damages have no application to claims based
on an action for a fixed sum. This follows from the basis of such claims:
they simply allow the innocent party to recover what was promised to him.
As observed by G P Selvam J in the Singapore High Court case of MP-Bilt
Pte Ltd v Oey Widarto (1999) (at [19]–[20]):
Common sense and authorities affirm the principle that there is no duty
to mitigate where a debt is claimed. A creditor is entitled to recover a
debt and it is independent of his duty to mitigate damages if and when
he accepts a breach by the other party … By definition a debt is a sum
of money fixed by the contract for the completed performance of a given
obligation while the contract is alive … It follows that once a debt has
crystallised there is nothing for the creditor to mitigate. Once a debt
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always a debt. There being no claim for damages no duty to mitigate
can arise.
No Damages for Breach of an Obligation to Pay Money
18.75
The distinction between an action for a fixed sum and damages for breach
of contract is important because, in general, where the breach of contract
solely relates to an obligation to pay money, no damages can be recovered
for such a breach. Instead, the only possible remedy is an action for a fixed
sum. As observed by G P Selvam J in MP-Bilt Pte Ltd v Oey Widarto (1999)
(at [20]), “[a]fter a debt has fallen due the debtor cannot decide to dishonour
it and convert it into damages”.
18.76
This position was set out in the old House of Lords case of the London,
Chatham and Dover Railway Company v The South Eastern Railway Company
(1893) where Lord Herschell made the following observations (at p 437):
[T]he appellants contended that … interest might be given by way of
damages in respect of the wrongful detention of their debt. I confess
that I have considered this part of the case with every inclination to
come to a conclusion in favour of the appellants, to the extent at all
events, if it were possible, of giving them interest from the date of the
action … But I have come to the conclusion, upon a consideration of
the authorities, agreeing with the Court below, that it is not possible to
do so.
18.77
The above position was reviewed by the House of Lords in the case of
President of India v La Pintada Compania Navigacion SA (1985). But
although it was unanimously agreed that the rule was undesirable, the House
of Lords refused to overrule London, Chatham and Dover Railway (1893). In
coming to this decision, the House of Lords was heavily influenced by the
British Parliament’s apparent satisfaction with the status quo when it did not
accept a Law Commission proposal in 1982 for that case to be legislatively
overruled.
18.78
The view taken in these cases, however, fails to consider the commercial
reality of the time value of money. In the commercial context, it does not take
much imagination to realise that late payment costs money, either because
the payor is unable to benefit from interest upon that sum, or because he
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has to incur interest because he is not able to reduce any outstanding loans
which he might have done with the proceeds from the late payment. The law
has therefore left open some exceptions to this general rule.
Exceptions Permitting Damages for Breach of Obligation to
Pay Money
(1) Contractual provision for interest
18.79
A contract may contain terms which specify that interest should be
paid on sums due but which are late in payment. Ideally, such terms
should be expressly provided for, but on the appropriate facts, the courts
may be willing to imply such a provision (see, eg, the English Court of
Appeal case of F G Minter v Welsh Health Technical Services Organisation
(1980)).
(2) Knowledge that breach would cause losses
18.80
In the case of Wadsworth v Lydall (1981), the English Court of Appeal had
to consider whether a plaintiff could recover interest and costs incurred
from having to undertake additional financing arrangements to cover a
shortfall in his finances because of the defendant’s failure to fully honour
a money debt. The defendant and the plaintiff were informal partners
holding a tenancy of a farm on which the plaintiff lived. When the
partnership was dissolved, it was agreed that the plaintiff would give up
possession of the farm by a specified date when he would receive £10,000
from the defendant. Relying on this agreement, the plaintiff agreed to
purchase another property from a third party. This required him to
pay the £10,000, which by then he should have received, to the third
party. Unfortunately, the defendant only paid £7,600 and as a result, the
plaintiff had to take out a mortgage from the third party for the balance.
Ultimately, the plaintiff sued the defendant and tried to recover the interest
incurred on the mortgage and the transaction costs involved as special
damages. On appeal to the English Court of Appeal, Brightman LJ said
(at p 603):
If a plaintiff pleads and can prove that he has suffered special damage
as a result of the defendant’s failure to perform his obligation under a
contract, and such damage is not too remote on the principle of Hadley
v Baxendale … I can see no logical reason why such special damage
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should be irrecoverable merely because an obligation on which the
defendant defaulted was an obligation to pay money and not some other
type of obligation.
This case was subsequently approved by the House of Lords in President
of India v La Pintada Compania Navigacion SA (1985). The principles of
Hadley v Baxendale (1854) have been set out above (from para 18.52). As
for the reference to special damages used by Brightman LJ, it should be
noted that this has been clarified to refer to the second limb of Hadley
v Baxendale (1854) (not least by Lord Brandon in the La Pintada case)
relating to unusual losses which do not flow naturally from the breach. As
clarified by subsequent judges, Brightman LJ was not referring to special
damages in the context of legal pleadings (where special damages refer
to claims which must be specifically pleaded or itemised in a plaintiff ’s
statement of claim).
(3) Damages arising apart from non-payment
18.81
In many cases, loss may be incurred as a result of matters other than the
non-payment of money. Although damages are not available to compensate
for losses incurred from the late or non-payment of money per se, if it is
possible to characterise the loss as arising from matters which are distinct
from the failure to pay, the bar is lifted. In such a case, the plaintiff could
possibly recover damages as well as the fixed sum owed. Overstone Ltd v
Shipway (1962) is an example of such a case. Shipway entered into a hirepurchase contract with Overstone Ltd for the hire-purchase of a car. The
contract provided that Shipway, as hirer, should pay the sums specified in
the agreement punctually and interest on any late payments. The contract
also provided that any default in punctual payment or any breach of the
conditions would entitle Overstone Ltd to terminate the hiring and retake
possession of the vehicle. Shipway paid the deposit and took delivery of the
car but paid none of the monthly instalments. In consequence, Overstone
Ltd terminated the contract and repossessed the car. On 22 January
1960, Overstone Ltd sued and recovered the four monthly instalments
then due from Shipway in an action for debt. Meanwhile, they sold the
car for £265 and subsequently brought a second action claiming £48 15s
4d in damages, being the balance of the price they would have recovered
under the agreement if it had not been terminated, less the total of the
following items: the initial deposit (£73), the four monthly instalments
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recovered earlier in the action for debt (totalling £43 3s 8d), the proceeds
from the sale of the car (£265) and a rebate of interest charges (£23 14s).
A majority of the judges sitting in the English Court of Appeal held
that this claim for damages was not precluded by the earlier action for
debt. The majority of the English Court of Appeal accepted that, here,
Overstone Ltd rightfully accepted Shipway’s repudiatory breach in failing
to make any payments at all and terminated the contract as a result of
such breach, instead of relying on its contractual right of termination.
Following from this, Overstone was entitled to make a claim for damages
arising from that breach.
Timing of Claim
18.82
A claim based on an action for a fixed sum or for the payment of the
debt can only be successful if the sum or the debt is due — that is to say,
when the contractual obligation to pay the innocent party has arisen.
Thus, in the case of White and Carter (Councils) Ltd v McGregor (1962)
(see Chapter 16, paras 16.58–16.63), the plaintiffs only pressed their
suit for payment of the contract price for their services after they had
finished performance of the contractually stipulated obligations on their
part. Once they had done so, according to the terms of their contract
with the defendants, the defendants were obliged to pay, and when the
defendants refused, the plaintiffs were perfectly entitled to sue them to
recover the sum owed in an action for debt (subject, of course, to the possible
limitation of legitimate interest raised in White and Carter (Councils) Ltd v
McGregor (1962)).
Where Plaintiff is in Breach of Contract
18.83
What happens when the plaintiff is also in breach of contract? What if,
for example, in a contract of sale of goods between the plaintiff (vendor)
and the defendant (purchaser), the plaintiff failed to perform his part of
the bargain precisely by delivering goods which did not conform to the
contract description? Clearly, the plaintiff would be liable to pay damages
to the defendant in compensation for any losses resulting from the breach.
However, would such a breach prevent the plaintiff from making a claim for
the sums which would have been owed to him under the contract?
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18.84
Much of the following was discussed (some at greater length) in
Chapter 16 on discharge by performance, breach and agreement, and so
reference should also be made to the discussion there at paras 16.4 and
16.66–16.87. In brief:
° Where the plaintiff is himself in breach, it may be that he can still
successfully make a claim for some, if not all, of the price if the term
which is breached is not a condition or an innominate term which goes
to the root of the contract.
° First, if the plaintiff ’s breach is de minimis, that is, so inconsequential
in all the circumstances it can be regarded as being trifling, it will be
ignored and the full price is payable.
° Second, even if the plaintiff ’s breach cannot be said to be de minimis,
if he has substantially performed his part of the bargain, he may still
be entitled to recover the full price. If the defective performance has
caused the defendant loss, however, the defendant may recover damages
for such loss from the plaintiff. Therefore, where the plaintiff attempts
to sue the defendant for the price of his substantial but defective
performance, he will most probably have to set off against the price any
damages which the defendant may claim for his losses.
° Third, if the contract (expressly or impliedly) provides that payment
is to be in proportion to the amount of work done, then upon the
ascertainment of the amount of work done, the proportionate price
becomes due and may be claimed by the plaintiff as a debt. This is
sometimes referred to as a claim for quantum meruit under contract.
° Fourth, if the contract is severable, and it can be said that the plaintiff has
completely performed his obligations under each severable component,
then the price payable for each completed component can be recovered
as a separate debt. Of course, in relation to any severable parts of the
contract which have been defectively performed, the associated payment
cannot be claimed, unless arguments like those in the three preceding
paragraphs can be made for those parts, in which case partial payment
for those portions completed may be possible.
18.85
In the discussion on discharge of contract by performance in Chapter 16,
we also discussed the possibility of making a quantum meruit claim under
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the law of unjust enrichment. Such a claim is not a claim for debt. Instead,
it falls more aptly under a claim for a restitutionary award and will be
dealt with in that section below (see below, from para 18.98).
SPECIFIC PERFORMANCE
18.86
Sometimes, damages will not be an adequate remedy for a breach of
contract. In such cases, the equitable remedy of specific performance
may be sought instead: “The court gives specific performance instead of
damages, only when it can by that means do more perfect and complete
justice” (per Lord Selbourne LC in Wilson v Northampton and Banbury
Junction Railway Company (1874) at p 284).
18.87
This may be the case where the breach involves delivery of property which
is unique (such as a piece of land). In such instances, the aggrieved party
may make an application for the court to make an order of specific
performance, that is, an order to the party who is threatening to be in
breach to perform in accordance with the terms of his or her contractual
promise. Failure to obey such an order would amount to a contempt of court,
and would attract penal sanctions such as a fine, or even imprisonment.
Given that non-compliance results in such draconian penalties, equitable
remedies are not granted as a matter of course.
18.88
Specific performance is, however, not available against the Singapore
Government in any civil proceedings to which the state is a party (see s
27(1)(a) Government Proceedings Act (Cap 121, 1985 Rev Ed)).
Limitations on Availability of Specific Performance
18.89
Specific performance is a discretionary remedy. It may be withheld if it
would be inequitable to make such an order. Karthigesu JA observed in the
Singapore Court of Appeal case of Tay Ah Poon v Chionh Hai Guan (1997)
(at [19]) that “[t]he right [to seek specific performance of a contract] exists
in equity independently of any contractual provision that stipulates for its
preservation. After all whether the right will be granted or not is in the
discretion of the court”.
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18.90
As mentioned above, substantial delay in applying for such relief may be
enough to cause the court to withhold such relief due to the operation of
the doctrine of laches. Relief may also be withheld if the applicant does not
come to court with “clean hands”. The order for specific performance may
also be made on terms so as to balance the interests of the parties to the
dispute. Specific performance might also be refused in a number of other
instances, most notably where:
° the proposed order would require constant supervision by the court;
° the court is not able to specify the terms of the order which is to be
complied with;
° the proposed order would require the performance of something which
is impossible to achieve (or, perhaps, would entail the performance of
excessively burdensome and futile actions);
° the order relates to a contract of personal service because such an
order could amount to judicial compulsion of involuntary servitude;
and
° an order, if granted, would adversely affect the rights of third parties to
the contract between the applicant and the respondent.
INJUNCTION
18.91
Not all contractual obligations are susceptible to orders of specific
performance. Sometimes, the contractual obligation in question is a negative
one, where the party in breach fails to honour his or her promise not to do
something. In such circumstances, an application for a prohibitory injunction
may be made by the aggrieved party.
18.92
In the absence of factors such as those mentioned in para 18.90, prohibitory
injunctions are likely to be granted unless:
° the remedy would be inequitable or oppressive; or
° the balance of convenience does not favour making such an order.
18.93
If the breach of the negative obligation lies wholly in the past, the aggrieved
party may seek a mandatory injunction instead. Such an order requires
the party in breach to reverse the effects of the breach so as to restore the
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aggrieved party to the position he or she would have been, had the negative
obligation not been breached.
18.94
The discretion whether to issue a mandatory injunction is also generally
subject to the “balance of convenience” test. In general, injunctions will also
be refused in relation to contracts of personal service, where the practical
effect of the proposed injunction would be to compel the performance of
a contract for personal service for which no order of specific performance
would have been made in the first place.
STATUTORY DAMAGES IN LIEU OF OR IN ADDITION TO SPECIFIC
PERFORMANCE OR INJUNCTION
18.95
What happens if the court takes the view that an order of specific performance
or injunction cannot be made? If this occurs where only nominal damages
could have been recovered by the plaintiff, the plaintiff may be left without
any effective remedy. In response to this, the English courts of equity have
long been given (via statute) the power to award damages in lieu of or in
addition to an order for specific performance or injunction.
18.96
The courts in Singapore are similarly empowered under the Supreme Court
of Judicature Act (Cap 322, 2007 Rev Ed) wherein para 14 First Schedule
(read with s 18(2)) provides that the High Court has power to grant all
reliefs and remedies at law and in equity, including damages in addition to,
or in substitution for, an injunction or specific performance. These powers
are also extended to the District and Magistrates’ Courts via ss 31(1) and 52
Subordinate Courts Act (Cap 321, 2007 Rev Ed), respectively. One example
where the High Court exercised this power may be found in the case of
Ho Kian Siang v Ong Cheng Hoo (2000). This case also highlights the fact
that damages in lieu of or in addition to specific performance or injunction
are also discretionary, and hence are distinct from damages for breach of
contract (which are available as of right).
18.97
It should be noted, however, that although both common law contract
damages and statutory damages in lieu of an order for specific performance
or injunction are compensatory, there is no direct analogy in terms of the
time of assessment. Hence, in Ho Kian Siang (at [28]), Lee Seiu Kin JC
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followed the English position on the matter (as set out in para 960 of
Volume 44(1) of Halsbury’s Laws of England (4th ed, 1984) at p 388):
Where damages are awarded in lieu of specific performance, the principle
that damages should be assessed as at the date of the breach of contract
(which is the usual rule in relation to commercial contracts) does not
normally apply. The selection of the appropriate date is a matter for the
court’s discretion, but the date usually chosen is the date at which the
remedy of specific performance ceases to be available. [emphasis added]
RESTITUTIONARY AWARDS
18.98
“Restitution” is not, strictly speaking, a response to a breach of contract.
Unlike damages, which seek to provide monetary compensation for loss
suffered by a plaintiff due to a defendant’s breach of contract, restitution
seeks to reverse any “unjust enrichment” gained by the defendant at the
expense of the plaintiff. Some academic commentators (and indeed judges)
place the remedy of restitution within an entirely different legal regime: that
of the law of unjust enrichment.
18.99
The law of unjust enrichment forms a different area of the law and confers
a distinct “cause of action” with its own rules and principles (just as the law
of tort is distinct from the law of contract). It is a rapidly developing area
and much of its boundaries remain undefined. What is common ground in
this area amongst most Commonwealth academics is that the plaintiff can
establish liability for unjust enrichment so long as he can show that:
° the defendant was enriched;
° at the expense of the plaintiff;
° in circumstances such that the enrichment was “unjust”, which is to say
that there is some reason (an “unjust factor” or on some views, the lack
of any justificatory factor) within the law which would make it unfair for
the defendant to keep that enrichment; and
° there is no defence available to the defendant to resist the justice of
disgorgement of his unjust enrichment in favour of the plaintiff.
18.100
It is also commonly accepted that the law of unjust enrichment is
subservient to the law of contract. It is only when there is no contract at
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all, or perhaps, after a contract has been terminated or vitiated that the law
of unjust enrichment may be applied to determine the rights and liabilities
between parties (see, eg, the reasoning of the Singapore High Court in
Info-communications Development Authority of Singapore v Singapore
Telecommunications Ltd (No 2) (2002) at [89]).
18.101
We will now examine two areas where restitutionary remedies often intersect
with breaches of contract:
° total failure of consideration; and
° quantum meruit and quantum valebant.
Benefits in Money: Total Failure of Consideration
18.102
Money which has been paid to a defendant on the basis that he will perform
his obligations under a contract may be recovered if he fails to perform
those obligations in such a way that it can be said that the basis of the
money payment has failed. This is known as the doctrine of “total failure
of consideration” and is a clear example of the law of unjust enrichment in
action.
18.103
The terminology is deceptive and likely to cause confusion with the
concept of consideration in relation to the formation of a contract. The two
contexts in which the term “consideration” is used should be kept distinct.
As Viscount Simon LC noted in the House of Lords case, Fibrosa Spolka
Akcyjna v Fairbairn Lawson Combe Barbour, Ltd (1943) (“Fibrosa (1943)”)
(at p 48):
In English law, an enforceable contract may be formed by an exchange of
a promise for a promise, or by the exchange of a promise for an act …
and thus, in the law relating to the formation of contract, the promise to
do a thing may often be the consideration, but when one is considering
the law of failure of consideration and of the quasi-contractual right to
recover money on that ground, it is, generally speaking, not the promise
which is referred to as the consideration, but the performance of the
promise.
18.104
Therefore, “consideration” in the context of a claim in unjust enrichment
does not refer to the same “consideration” which is furnished by either party
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at the time the contract is formed. “Consideration” here refers to the actual
performance and completion of the contractual promises.
18.105
Failure of consideration can occur in many different contexts, some
contractual, some not (eg, in relation to failed gifts). However, in the
business context, the most common reason for failure of consideration is the
termination or vitiation of an otherwise valid contractual relationship.
18.106
The language of “total failure” suggests that success of such a claim depends
on the claimant being able to establish that he or she received no part of
the promised benefit. Unfortunately, the decided cases demonstrate that the
determination of exactly what was promised and what constitutes “benefit”
for this purpose is by no means clear-cut. For example, in the case of
Rowland v Divall (1923), the English Court of Appeal had to decide whether
there had been total failure of consideration by a vendor of a car when it
turned out that the vendor, through no fault of his own, had no title to it
(he had been sold the car by a fraudster who had stolen the car from the
true owner). The plaintiff purchaser of the stolen car had to return it to the
true owner, after having driven it for only two months or so, and sought a
refund of its purchase price from the defendant vendor. The English Court
of Appeal held that as the plaintiff had not been given good title to the car,
there was indeed a total failure of consideration and ordered the defendant
to refund the purchase price to him.
18.107
Even more strikingly, in Fibrosa (1943), the plaintiffs paid the defendants
to manufacture and deliver certain machinery. Advance payment of £1,000
was made but before the machinery could be completed and delivered,
the contract was frustrated by the outbreak of World War II. This case
was decided before the enactment of the English Law Reform (Frustrated
Contracts) Act 1943 and the House of Lords held that there was indeed
a total failure of consideration, despite the fact that the defendants had
expended significant sums in the manufacture of the contract machinery.
18.108
It may also be noted that this type of argument appears to be available
regardless of whether the plaintiff is in breach of its own obligations under
the contract, as can be discerned from the case of Rover International
Ltd v Cannon Film Sales Ltd (1989). For our present purposes, we are
interested in the suit within this case between Proper Film Ltd and
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Cannon Film. Proper Film contracted with Cannon Film for the right
to screen certain films on Italian television for a total of US$1,800,000,
payable in three instalments of US$360,000, US$540,000 and US$900,000.
The first two instalments were paid without incident. Unfortunately, the
rights to broadcast the most important of the films were assigned by
Cannon Film to another exhibitor. Proper Film took the view that Cannon
Film had, as a result, wilfully disabled themselves from performing the
contract, evincing thereby an intention to no longer be bound by it. Due
to the dispute over whether or not Cannon Film had breached the contract,
Proper Film did not pay Cannon Film the final instalment and offered to
pay it into a special account, pending the outcome of the litigation over
this matter. However, the contract expressly provided that the time of
payment of the instalments was of the essence. Accordingly, failure to
pay the third payment on time constituted a breach of condition entitling
Cannon Film to discharge the contract, which Cannon Film did. Cannon
Film then sued Proper Film for the final instalment of US$900,000 as a
debt owed to them.
18.109
The issue before the court was whether Cannon was entitled to recover
the final instalment even though they had discharged the contract due to
Proper Film’s breach of condition of timely payment. Proper Film argued
that if they had paid this instalment before discharge of the contract for
breach, then it would now be recoverable by them on the basis of total
failure of consideration (since at the time the contract was discharged, they
had not yet been given any films to exhibit). Consequently, and a fortiori,
since there was now no contract at all, they could not be held liable to pay
it. The English Court of Appeal agreed with Proper Film’s arguments and
dismissed Cannon Film’s claims for the last instalment to be payable to
them as a debt, although it recognised that Cannon Film could still recover
damages for Proper Film’s breach.
18.110
This part of the case is said to support the position that a contract-breaker
claimant can still have restitution because of certain observations by
the two judges who delivered the reasons for their decision (the third
agreed with both of them). Most obviously, Kerr LJ observed (at p 932)
that:
[I]n the present case it is entirely clear, in my view, that this instalment
was payable in advance of any consideration for the payment which
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fell to be provided from the side of Thorn EMI/Cannon. Indeed,
when Proper declined to pay it, it was rightly pointed out on behalf of
Cannon that nothing in the way of performance was as yet due from
their side. This instalment would accordingly have been recoverable by
Proper if it had been paid, and it is therefore irrecoverable by Cannon
for the same reason.
18.111
The basis for dismissing Cannon Film’s claim for the final instalment was
therefore total failure of consideration. If Proper Film had paid the final
instalment, since there was a total failure of consideration and Proper Film
had obtained nothing of the benefit bargained for under the contract, Proper
Film would have been entitled to a repayment. Consequently, it made no
sense to allow Cannon Film to recover the last instalment as a debt, only to
have it returned to Proper Film. Given this line of reasoning, it would have
followed that Proper Film could also have recovered the first two instalments
which were actually paid to Cannon Film. Strangely, however, Proper Film
did not pursue a claim to recover those amounts.
Benefits in Kind: Quantum Meruit and Quantum Valebant
18.112
When the basis for the payment of money has completely failed, the
common law looks to the law of total failure of consideration. What about
situations where the basis for a benefit in kind has completely failed? Is there
a doctrine that provides for restitution of non-monetary benefits (such as
goods and/or services) that mirrors total failure of consideration?
18.113
Extension of the doctrine of total failure of consideration to a situation where
goods or services are supplied on a particular basis which has failed, is not
completely straightforward. Practically speaking, there may be difficulties with
returning goods, and services once rendered cannot be readily returned. So
very often, what we are thinking about when we consider the possibility of a
“refund” of goods or services is their money’s worth (often termed “quantum
valebant” in the case of goods and “quantum meruit” in the case of services),
and there are numerous cases based on a reasonable valuation of benefits
provided by a plaintiff. Although none expressly provides that they are
merely manifestations of the doctrine of total failure of consideration, now
extended to include non-monetary “refunds”, the reasoning seems obvious
enough.
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18.114
But can quantum meruit or valebant be successfully pleaded by a plaintiff
who has provided non-money benefits to the defendant, where the value
of such quantum meruit or valebant would exceed the contractually agreed
price, had such price been payable? There appears to be no local or English
case on this point as yet, but the case of Lodder v Slowey (1901), a decision
of the Privy Council on appeal from the New Zealand Court of Appeal,
suggests that it can.
18.115
In that case, Slowey was contracted to carry out certain construction works
by Lodder. In breach of the agreement, Lodder prevented Slowey from
completing his work. Without considering at all what Slowey could have
recovered from Lodder under the terms of the contract had he been allowed
to complete his work, Lord Davey, delivering the opinion of the Privy
Council, agreed with the decision of the New Zealand Court of Appeal and
allowed Slowey to recover on the basis of quantum meruit for the value of
the work he had completed up to the time when the contract was breached,
and therefore brought to an end by Lodder.
18.116
But is the contract price completely irrelevant? It should be noted that the
defendant in Lodder v Slowey (1901) benefited from the part-performance of
the plaintiff in that case. However, it should not be assumed that every case
of partial performance of an obligation amounts to a benefit to a defendant
since “benefit”, in this context, is determined subjectively. In other words,
the defendant is sometimes entitled to “subjectively devalue” the plaintiff ’s
partial performance by arguing that he does not subjectively find the partial
performance to be of any benefit at all.
18.117
Such an argument is extremely difficult where the benefit is incontrovertible,
as in the case where the benefit takes the form of money: receipt of a sum
of money is invariably valuable and beneficial, even if it is only a partial
payment. And in relation to benefits in kind, sometimes, the plaintiff may
be able to show that his partial provision of benefits in kind (ie, goods and
services) has relieved the defendant from expenses which he would inevitably
have had to incur. If so, the defendant’s benefit of having saved inevitable
and necessary expenses should be treated as an incontrovertible benefit and
cannot be subjectively devalued. In such cases of incontrovertible benefit, it
has been argued that the pro rata contract price should rightfully be ignored
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(see, eg, Professor Burrows’ analysis in the Law of Restitution (3rd ed, 2011)
at pp 349–350).
18.118
Secondly, as incontrovertibly beneficial partial performance is likely to be
the exception rather than the rule, most plaintiffs will have to demonstrate
benefit by other means. One possible alternative is the concept of a
“requested-for” benefit. Professor Burrows suggests that, “[a] request is the
most obvious way by which a person chooses to have a benefit conferred by
another. The request shows that the person making it desires and values the
objective benefit conferred. Even if the request is not explicit, encouraging
(ie, impliedly requesting) another to render a benefit also constitutes a choice
of that benefit and again is a sufficient indicator that the person desires
and values that benefit.” (Law of Restitution, 3rd ed (2011) at p 52). This,
Professor Burrows clarifies, reflects “…a general factual truth: in general —
but clearly not always — people regard themselves as benefitted by receiving
part of what they requested. …” (at p 53). In that work, Professor Burrows
also makes a further point — that in such cases, it could be that the question
as to whether the receipt of part of that which had been requested might
well be taken to be of “benefit” to the recipient if the recipient conducted
itself in such a way which would indicate that it desired or valued the
part performance, for example, by failing to return that part performance,
particularly in cases where return would have been a straightforward process
(at pp 53–54).
18.119
In contrast with the position in relation to recovery of advance payments
on unjust enrichment grounds (as to which, see discussion above, at paras
18.108–18.111), it appears that the success of a plaintiff ’s quantum meruit or
quantum valebant claims in unjust enrichment does depend on the plaintiff ’s
non-blameworthiness. Where the plaintiff is himself at fault for causing the
contract to come to an end, the Singapore Court of Appeal decision of Lee
Siong Kee v Beng Tiong Trading, Import and Export (1988) Pte Ltd (2000)
hints that quantum meruit is not available to a contract-breaker. Even so, this
problem was not specifically in issue before the court and the true position
has yet to be clearly and authoritatively formulated, given that it appears
to be inconsistent with the position which seems to have been adopted in
relation to claims based on total failure of consideration (see above at para
18.108). It is hoped that the courts may be able to clarify the position further
in an appropriate case.
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Restrictions on Recovery for Unjust Enrichment
18.120
Even in its present nascent form, the law of unjust enrichment recognises
that having established a cause of action, certain defences may nonetheless
apply to restrict recovery for unjust enrichment. However, apart from the
defence of “change of position” (which will be expanded upon in the next
few paragraphs), the extent to which a number of other “restitutionary”
defences that have been recognised in other Commonwealth jurisdictions
will be applied in the courts of Singapore is doubtful, following the decision
of the Singapore Court of Appeal in the case of Management Corporation
Strata Title No 473 v De Beers Jewellery Pte Ltd (2002) (“De Beers (2002)”)
(see [46]–[53] of the judgment). In particular, the Court of Appeal in
De Beers (2002) rejected the applicability of estoppel as a defence to a claim
under unjust enrichment, since the requirements for estoppel (discussed
in Chapter 8, para 8.45 onwards) overlap greatly with those for “change
of position” and yet would be overly broad, since it would prevent any
recovery at all, and not just that portion of the benefit which had been
dissipated by the defendant’s change of position. It did, however, suggest
in obiter dicta that a number of other defences were possible, for example,
a defence of “payment under a settled view of the law”. Since this chapter
is focused on remedies for breach of contract, it is probably inappropriate
to provide a detailed discussion of the various viewpoints and approaches.
Therefore, we will just provide a brief outline of the defence of “change of
position” which has clearly been approved and applied locally.
18.121
The defence of change of position was recognised in England by the
House of Lords in the case of Lipkin Gorman (a firm) v Karpnale Ltd
(1991). Locally, the Singapore Court of Appeal in Seagate Technology
Pte Ltd v Goh Han Kim (1995) has recognised that it is applicable in
Singapore and in the Singapore High Court case of Info-communications
Development Authority of Singapore v Singapore Telecommunications Ltd
(No 2) (2002), Lai Kew Chai J identified four constituent elements. A
defendant recipient of a benefit from the plaintiff will be able to resist or
minimise restitution if:
° the payee has changed his position;
° the change is bona fide;
° it would be inequitable to require him to make restitution or to make
restitution in full; and
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° there is a causal link between receipt of the benefit and the recipient’s
change of position.
18.122
An example as to the application of the defence might take the following
form. Following receipt of a benefit in money from the plaintiff, the defendant
spends the increase in his wealth on an expensive luxury holiday which he
would not have gone on if not for the benefit received. Since he would not
have decreased his overall wealth by expenditure on such a holiday but for
the benefit from the plaintiff, it would be inequitable now to require him to
disgorge that benefit.
18.123
The payee’s disenrichment would not be bona fide if he had acted
dishonestly or in bad faith. The disenrichment would also not be bona fide
if he had accepted the benefit knowing of facts which would entitle the
plaintiff to restitution. However, care must be taken not to assume that
every bona fide disenrichment would result in a change of position. As
observed by Lord Goff in Lipkin Gorman (a firm) v Karpnale Ltd (1991)
(at p 580):
[T]he mere fact that the defendant has spent the money, in whole or
in part, does not of itself render it inequitable that he should be called
upon to repay, because the expenditure might in any event have been
incurred by him in the ordinary course of things.
18.124
As for causality, “[i]t is clear that … the change of position must occur
after the receipt of the payment …” (per Lai Kew Chai J at [141] of
Info-communications Development Authority of Singapore v Singapore
Telecommunications Ltd (No 2) (2002)).
18.125
The requirement of inequity, however, awaits further elucidation in our
courts.
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Chapter 20
Agency
20.1–20.4
20.5–20.6
Introduction
True Agency Against Commercial Agency
20.7
20.8–20.9
20.10–20.11
20.12–20.14
20.15–20.17
20.18–20.19
20.20–20.23
20.24–20.28
How Agency Arises
By Agreement
(1) Express authority
(2) Implied authority
Without Agreement: Agency of Necessity
Ratification
(1) Requirements
(2) Effects
20.29
20.30–20.32
20.33–20.34
20.35–20.37
20.38–20.42
20.43
20.44–20.45
20.46
20.47
20.48–20.49
20.50–20.52
20.53–20.56
Effects of Agency
Principal–Third Party Relationship
(1) Disclosed agency
(2) Undisclosed agency
(3) Apparent authority
Principal–Agent Relationship
(1) Duties of an agent
(a) Duty to avoid a conflict of interests
(b) Duty not to make a secret profit
(c) Duty not to delegate
(2) Rights of an agent
Agent–Third Party Relationship
20.57–20.60
Termination of Agency
20.61–20.62
Conclusion
Principles of Singapore Business Law
INTRODUCTION
20.1
The law of agency is an important part of commercial law. This is because
agents are integral to the conduct of modern business. An agent, at the
most rudimentary level, is one who acts on someone else’s behalf and a
significant part of the law of agency deals with the ability of the agent to
affect the legal position of that someone else. It has often been observed that
commercial activity would be severely curtailed if all business transactions
had to be conducted personally. Indeed, personal attention to all aspects of a
business would not only be inconvenient but also impracticable where time,
knowledge or expertise is lacking, and certain business structures, like the
partnership and the company, would not be able to operate at all.
20.2
The term “agent” is bandied about very frequently in the marketplace,
especially when referring to middlemen, or persons who represent others.
Thus it is common to find persons described as employment agents, sales
agents, estate agents, insurance agents and sole agents. This led to Lord
Herschell’s observation in Kennedy v De Trafford (1897) (at p 188) that “[n]o
word is more commonly and constantly abused than the word ‘agent’”. It
needs to be pointed out however, that the law of agency may not necessarily
apply in all of these situations. Thus, in the words of Lord Herschell again,
“[a] person may be spoken of as an ‘agent’, and no doubt in the popular
sense of the word may properly be said to be an ‘agent’, although when it
is attempted to suggest that he is an ‘agent’ under such circumstances as
create the legal obligations attaching to agency that use of the word is only
misleading”.
20.3
What exactly then, is agency? In Thai Kenaf Co Ltd v Keck Seng (S) Pte
Ltd (1992) (at [49]), KS Rajah JC defined it as “the relationship that exists
between two persons when one, called the agent, is considered in law to
represent the other, called the principal, in such a way as to be able to affect
the principal’s legal position in respect of strangers to the relationship by
the making of contracts or the disposition of property”. In the same vein,
Gummow J, in the High Court of Australia, observed in Scott v Davis (2000)
(at p 1451) that:
[t]he term “agency” is best used … to connote an authority or capacity
in one person to create legal relations between a person occupying the
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position of principal and third parties … Usually the legal relations so
created will be contractual in nature … The resultant contract is formed
directly between the principal and the third party and there is no
contract between the agent and the third party which is attributed to
the principal.
20.4
The agency relationship is sometimes represented as being triangular as it
involves three parties: the agent, the principal on whose behalf the agent
acts, and the third party with whom the principal ultimately contracts. The
agency relationship may also be seen as comprising an internal aspect, which
is the relationship between the agent and his principal, and an external
aspect, which affects the legal position of the principal vis-à-vis the third
party. In any case, what is crucial in the relationship is the power of the
agent to alter his principal’s legal position, and the complementary liability
of the principal that comes with the altered position (see Dowrick, “The
Relationship of Principal and Agent” (1954) 17 Modern Law Review 24 at
p 36). Whilst the agent might be responsible for negotiating, concluding
and perhaps even executing (but in the name or on behalf of the principal)
the contract, he is himself typically not personally bound by the concluded
contract between his principal and the third party. It is therefore often
said that, provided he acts within his authority, the agent “drops out of
the picture” as soon as the contract is concluded. Any recourse that the
third party has under the contract will therefore be against the principal and
not the agent. For an overall picture of the relationship between the three
parties, see Figure 20.1.
Agent
Deals with
Authorises
Principal
Resulting
contract
Third party
Figure 20.1 The “triangular” agency relationship
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True Agency Against Commercial Agency
20.5
Many commonly called agents are really not, in the legal sense, genuine
agents because they are themselves in fact acting as principals. A
distributor of goods for the manufacturer, for example, may refer to itself
as the “sole agent” or “exclusive agent” for these goods. In legal reality,
the distributor probably buys the products, and then resells these to
consumers. The sale contracts with ultimate consumers are not made
by the distributor on behalf of the manufacturer; rather, any contract
of sale entered into by the distributor will be on its own behalf as
principal.
20.6
The distributor may undertake, under the contract of supply, to furnish
the necessary advertising and promotion, in return for exclusive distributorship rights. In such contracts, the manufacturer could be in breach of
contract if it sells the goods itself. Thus, in the case of WT Lamb & Sons
v Goring Brick Co (1932), a manufacturer of bricks and other building
materials, who appointed the plaintiffs as “sole selling agents of all
bricks and other materials manufactured at their works” for a certain
period was held to be in breach of contract when it decided to sell all
bricks manufactured by it without the intervention of an agent before
the expiration of this period. Clearly, if the relationship had been one of
agency, the manufacturer would (as principals) have been free to sell
as well. The Court of Appeal found, however, on a proper construction
of the agreement, that it was one of vendor and purchaser and not one
of agency, and the manufacturer was thus precluded contractually from
so selling.
HOW AGENCY ARISES
20.7
An agency relationship may arise as a result of an agreement between
the principal and agent, but may also arise in the absence of such an
agreement where the law imposes an agency of necessity. The significance
of establishing that there is an agency relationship is that it confers on
the agent the power to bind his principal, provided he has acted within
the authority conferred upon him, whether by agreement or by operation
of law.
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By Agreement
20.8
Typically, an agency relationship arises when there is an agreement between
the principal and the agent that the latter should act for the former. The
essence of such an agency is consent. It is, however, not necessary for the
agreement to amount to a contract. In Yasuda Fire and Marine Insurance
Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd (1995),
Colman J observed (at p 57) that:
Although in modern commercial transactions agencies are almost invariably founded upon a contract between principal and agent, there is no
necessity for such a contract to exist. It is sufficient if there is consent by
the principal to the exercise by the agent of authority and consent by the
agent to his exercising such authority on behalf of the principal.
This consent is objectively ascertained because whether an agency relationship
exists or not is a question of law. As Lord Pearson explained in Garnac
Grain Co Inc v HMF Faure & Fairclough Ltd (1968) (at p 1137), the principal
and the agent “will be held to have consented if they have agreed to what
amounts in law to such a relationship, even if they do not recognise it
themselves and even if they have professed to disclaim it … But the consent
must have been given by each of them, either expressly or by implication
from their words and conduct”. This test was applied by Judith Prakash J in
the Singapore decision of Win Line (UK) Ltd v Masterpart (Singapore) Pte
Ltd (2000).
20.9
In agencies that are premised on agreements, it is important to determine
the scope of the agent’s authority, because the principal is only bound by the
agent’s acts when the agent has acted within his authority. In such cases, the
agent is said to be conferred actual, or real, authority, which may be either
expressly or impliedly conferred.
(1) Express authority
20.10
Express authority is, as the description implies, conferred by express
appointment and the agent would be specifically told what he is authorised
to do. There is no formality required in the appointment of an agent and an
oral appointment is equally effective to confer express authority. The scope
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and extent of the agent’s authority will primarily be determined on a true
construction of the words of the appointment itself.
20.11
Where the appointment is contained in a written agreement, the extent of
the agent’s authority will depend generally on an examination of the agreement, applying the ordinary principles for the construction of contracts.
Where the agreement is oral, this will be a matter of evidence. In Ashford
Shire Council v Dependable Motors Pty Ltd (1961), Lord Reid observed
(at p 349) that “the extent of an agent’s authority, if in doubt, must be
determined by inference from the whole circumstances”.
(2) Implied authority
20.12
Authority may arise by implication or inference from the conduct or the
relationship of the parties. Sometimes, a person is made an agent by his
appointment to a particular post or designation. He would then have the
implied authority to do all those things that would normally be necessary
for the proper execution of his duties in that particular post or designation.
As Lord Denning MR explained in Hely-Hutchinson v Brayhead Ltd (1968)
(at p 583):
[Actual authority] is implied when it is inferred from the conduct of
the parties and the circumstances of the case, such as when the board
of directors appoint one of their number to be managing director. They
thereby impliedly authorise him to do all such things as fall within the
usual scope of that office.
20.13
Additionally, an agent, who is conferred express authority, will have the
implied authority to do all such things that are incidental to and necessary
for the execution of that express authority.
20.14
Finally, an agent appointed in a particular trade, business or profession, will
be impliedly authorised to do those things that are normally or ordinarily
done in that trade, business or profession.
Without Agreement: Agency of Necessity
20.15
An agency relationship may arise even without the parties’ agreement. In
certain limited circumstances, the law confers authority on a person to act for,
and bind, another because he is confronted with a situation that requires
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him to act expeditiously in order to protect the property or interests of
that other person. The origin of this doctrine lies in mercantile law,
particularly in shipping cases, where the shipmaster was given authority to
act as the ship owner’s agent in emergencies so as to preserve the ship and
its cargo.
20.16
The doctrine applies, in cases of pre-existing agencies, to confer on an
authorised agent a further or more extensive authority, and also to confer
authority by necessity on a person who was hitherto not in any agency
relationship with the principal. In both situations, there are policy concerns
with over-extending the applicability of the doctrine. In the first, the concern
is over-condoning, in the name of necessity, all that an agent does such that
the agent becomes in effect the principal. In the second, the law is disinclined
to confer authority on the “officious intermeddler” (see I Brown, “Authority
and Necessity in the Law of Agency” (1992) 55 Modern Law Review 414 at
p 418) so as to subject the principal to obligations without his consent. The
doctrine is therefore kept within narrow boundaries.
20.17
The doctrine of necessity has specific requirements. First, the agent must
have been unable to obtain, or it must have been practically impossible to
obtain, timely instructions from the principal. Second, the agent must have
acted, reasonably and in good faith, in the interests of the principal and,
third, there must have been a necessity or emergency that compelled the
agent to act as he did.
Ratification
20.18
As a general rule, if the agent has neither actual nor ostensible authority
(as to ostensible or apparent authority, see paras 20.38–20.42), the principal
is not bound by the agent’s acts. However, the principal may choose to
adopt, or ratify, the agent’s acts subsequently. When this occurs, the agent
is conferred with authority retrospectively and the principal thereby assumes
full contractual obligations and rights with respect to the agent’s earlier acts.
Lord Sterndale MR in Koenigsblatt v Sweet (1923) explained (at p 325) the
concept in the following terms:
[Ratification] is equivalent to an antecedent authority … and when there
has been ratification the act that is done is put in the same position as if
it had been antecedently authorised.
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20.19
Ratification may be express or implied from the principal’s conduct, although
in the latter case, the principal’s conduct must unequivocally indicate an
affirmation of the agent’s acts.
(1) Requirements
20.20
There are a number of requirements for ratification to be effective.
First, there can be ratification only by the person in whose name or
on whose behalf the act was purportedly done. Thus, if the agent had
professed to be acting on his own, and not on the principal’s behalf,
or who had intended to act on the principal’s behalf but failed to
disclose this fact to the third party, the principal cannot ratify. The facts
of Keighley, Maxsted & Co v Durant (1901) illustrate this point. An
agent was authorised to purchase, at a certain price, wheat on a joint
account for himself and the defendants. Acting in excess of authority,
he purchased wheat at a higher price from the plaintiffs but in his own
name and without disclosing that he was also buying on behalf of the
defendants. The defendants ratified the purchase the next day but failed
subsequently to take delivery of the wheat. The House of Lords held that
the action for breach of contract must fail. The purported ratification was
ineffective as the agent had contracted in his own name. The defendants
were therefore under no contractual obligation to the plaintiffs.
20.21
Secondly, the principal must have been in existence at the time the
transaction was completed and was legally competent to act then and at the
time of ratification. This particular requirement presented difficulties in the
context of pre-incorporation contracts entered into by the incorporators (or
promoters) of a company that is yet to be incorporated. At common law, a
company was not bound by contracts made prior to its incorporation and
it could not ratify the contract either. The position has been legislatively
changed by s 41 Companies Act (Cap 50, 2006 Rev Ed) which provides
as follows:
Any contract or other transaction purporting to be entered into by a
company prior to its formation or by any person on behalf of a company
prior to its formation may be ratified by the company after its formation
and thereupon the company shall become bound by and entitled to the
benefit thereof as if it had been in existence at the date of the contract
or other transaction and had been a party thereto.
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Where the company does not ratify, or where the company fails to get
incorporated, s 41(2) provides for the promoter, in the absence of any
express agreement otherwise, to be personally liable on the pre-incorporation
contract (reference may also be made to Chapter 9, para 9.49).
20.22
With regard to what transactions may be ratified, the general rule is that
anything that can be done through an agent, including even unlawful acts,
may be ratified by the person on whose behalf that act was done. However,
a transaction that is void at its inception cannot be ratified, neither can acts
that are prohibited by statute.
20.23
Finally, the ratification must be in time. If there is a time fixed for the
performance of the contract, ratification must clearly be within this particular
period of time. If there is no fixed time, then the ratification should occur
within a reasonable time of the principal acquiring knowledge of the
unauthorised transaction.
(2) Effects
20.24
Ratification has a retrospective effect, which means that the parties involved,
viz, the principal, the third party and the agent, will be placed in the position
they would respectively have been in if the agent’s acts had been authorised
all along. In Bolton Partners v Lambert (1889), Cotton LJ said (at p 306):
The rule as to ratification by a principal of acts done by an assumed
agent is that the ratification is thrown back to the date of the act done,
and that the agent is put in the same position as if he had the authority
to do the act at the time the act was done by him.
Thus, the principal acquires rights and obligations under the contract with
the third party, and the agent drops out of the picture.
20.25
This rule, known as the doctrine of relation-back, does at first glance appear
to favour the principal unfairly over the third party. Whilst the principal
may or may not decide to ratify, the third party does not have the same
choice.
20.26
Under the rules of offer and acceptance (see Chapter 7), we know that
an offer may be revoked any time prior to it being accepted. But in this
agency context, if the principal does later ratify, the effect of ratification is
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retrospective, and relates back to the time the agent purportedly contracted
on behalf of the principal. Thus, although the principal is not bound by the
contract until he ratifies, the third party would appear to be effectively bound
from the date of the contract. The facts of Bolton Partners v Lambert illustrate
the point. Scratchley, a director of the plaintiff company, was unauthorised to
bind the plaintiff but nevertheless accepted an offer made by the defendant.
Prior to the plaintiff ’s ratification, the defendant purported to withdraw his
offer. The plaintiff subsequently ratified. The court held that the defendant
was bound to the contract. In the words of Cotton LJ (at pp 307–308):
I think the proper view is that the acceptance by Scratchley did constitute
a contract, subject to its being shewn that Scratchley had authority to
bind the company. If that were not shewn there would be no contract
on the part of the company, but when and as soon as authority was
given to Scratchley to bind the company the authority was thrown back
to the time when the act was done by Scratchley, and prevented the
Defendant withdrawing his offer because it was then no longer an offer,
but a binding contract.
20.27
This perceived inequity of the doctrine of relation-back should not,
however, be over-stated. The real “hardship” or inconvenience suffered by
the third party is the uncertainty as to whether and when the principal will
ratify the transaction. In this regard, it has already been pointed out that
ratification must be effected within a reasonable time. As to what amounts
to a “reasonable time”, Bowen LJ said in Re Portuguese Consolidated Copper
Mines Limited (1890) (at p 35) that:
[T]here is no hard-and-fast line in any case: the measure of the
reasonableness of the time depends entirely upon the circumstances of
the case. You cannot take a hypothetical case and say that if this had
been an instance of an offer made and nothing done, with all the parties
silent and the silence continuing for two or three months, then the
[ratification] would have come too late … It must be a question of fact
in each case what the reasonable limit is. Mere time is nothing except
with reference to the circumstances.
On the facts of Re Portuguese Consolidated Copper Mines Limited, the English
Court of Appeal placed considerable emphasis on the fact that the third party
did not “repudiate” or intimate that he would like to withdraw the offer on
the ground of the agent’s lack of authority in concluding that a ratification
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that came after two to three months was effected within a reasonable time. It
would, therefore, be open to the third party to require the principal to ratify
quickly or not at all.
20.28
The doctrine of relation-back has no application when the agent contracts
subject to the principal’s approval or ratification and the third party may
therefore withdraw his offer anytime prior to ratification. As Maugham J
explained in Watson v Davies (1931) (at pp 468–469):
In a case where the agent for one party to a negotiation informs the
other party that he cannot enter into a contract binding his principal
except subject to his approval, there is in truth no contract or contractual
relation until the approval has been obtained. The agent has incurred no
responsibility … An acceptance by an agent subject in express terms to
ratification by his principal is legally a nullity until ratification, and is no
more binding on the other party than an unaccepted offer which can, of
course, be withdrawn before acceptance.
EFFECTS OF AGENCY
20.29
When an agency is created or imposed by law, a triangular relationship results
from the agency. The most important characteristic of agency is the agent’s
power to affect the legal position of the principal vis-à-vis third parties. As
such, we will begin this section with a consideration of this aspect, and
proceed thereafter to consider the effects of agency on the principal–agent
relationship and on the agent–third party relationship.
Principal–Third Party Relationship
20.30
Generally, a principal is entitled to the benefit of, and would be liable under,
a contract made by his agent on his behalf and which is within the scope of
the agent’s actual authority (see Figure 20.2). In the normal agency situation,
the third party when dealing with the agent would know that the agent is
in fact acting on behalf of someone else (the principal). The third party
therefore deals with the agent as an agent. The principal in these cases is
known as a disclosed principal. Where the third party is aware of the existence
of the principal, it does not appear relevant that the principal is unnamed.
An unnamed principal is still a disclosed principal.
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Express
Actual
Implied
Authority of
Agent
Incidental
Ratification
Usual
Inferred from
facts
Figure 20.2
The Agent’s actual authority
20.31
There are also situations in which the third party deals with the agent in the
latter’s capacity as principal, and who is therefore unaware of the existence
of the agent’s own principal, and that the agent was in fact acting on behalf
of his principal. In these situations, the principal is said to be undisclosed.
The undisclosed principal, notwithstanding the third party’s ignorance of his
existence, has a right to enforce the contract against the third party if the
agent has acted within his authority. The rules to determine the principal’s
rights against the third party depend partly on the distinction between
disclosed and undisclosed principals. As such, each category will be dealt
with separately in the ensuing paragraphs.
20.32
Finally, there are situations in which a principal is bound by a contract with
a third party made by another even though that person is not his agent at all
or is an agent who had exceeded his authority in the particular instance. The
liability of the principal in these cases arises by operation of the doctrine of
apparent authority.
(1) Disclosed agency
20.33
Generally, where an agent acts within the scope of his actual authority,
whether express or implied, a disclosed principal is bound by and becomes
liable for the acts of his agent. Direct contractual relations would therefore
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be established between the principal and the third party. The main
concern in such cases is to determine the scope of the agent’s authority. If
the agent’s acts fall within the scope of his authority, his principal is not
only imposed with obligations to the third party, but also acquires rights
against the third party. Even where the agent has acted outside the scope
of his authority, the disclosed principal may ratify the contract. When this
occurs, the principal may sue and be sued on the contract with the third
party. The agent drops out of the picture, and accordingly, neither the third
party nor the principal can, as a general rule, discharge their respective
liability to each other by settling with the agent. Thus, in Butwick v Grant
(1924), payment for goods by a third party purchaser to the agent of the
seller did not discharge the third party’s liability to the principal-seller. The
court held that authority to an agent to sell goods does not necessarily imply
authority to receive payment for the goods. In Irvine & Co v Watson & Sons
(1880), the principal’s payment to his own agent, of the purchase price for
the oil that the latter had contracted for on the principal’s behalf, did not
discharge his liability to the third party. Bramwell LJ said (at p 416):
I think it is impossible to say that it discharged them, unless they were
misled by some conduct of the plaintiffs into the belief that the broker
had already settled with the plaintiffs, and made such payment in
consequence of such belief.
20.34
The situation is slightly different when the agent acts without authority and
the principal does not ratify. If the agent had acted within an authority he
appeared to possess, that is, his apparent or ostensible authority, the principal
will undoubtedly be liable to the third party. However, it is unlikely that the
principal will be able to initiate an action against the third party on contracts
purportedly made by these “apparent agents”.
(2) Undisclosed agency
20.35
An undisclosed principal, as alluded to before, may be able to enforce a
contract entered into by his agent with a third party, and this is so even
though the third party was under the impression that he was dealing only
with the agent in the latter’s own capacity. As such, this rule is generally
thought of as anomalous because it goes against the fundamental principles
of privity of contract, which is logically only established between the third
party and the agent. The rule is, however, justified on grounds of commercial
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convenience (per Lord Lloyd in Siu Yin Kwan v Eastern Insurance Co Ltd
(1994) at p 207). Lord Lindley explained the justification in Keighley, Maxsted
& Co v Durant (1901) (at p 260) in the following manner:
As a contract is constituted by the concurrence of two or more persons
and by their agreement to the same terms, there is an anomaly in
holding one person bound to another of whom he did not, in fact,
intend to contract. But middlemen, through whom contracts are made,
are common and useful in business transactions, and in the great mass of
contracts it is a matter of indifference to either party whether there is an
undisclosed principal or not. If he exists it is, to say the least, extremely
convenient that he should be able to sue and be sued as a principal,
and he is only allowed to do so upon terms which exclude injustice.
20.36
The rules that apply to an undisclosed agency was summarised by Lord Lloyd
in Siu Yin Kwan v Eastern Insurance Co Ltd (1994) (at p 207) as follows:
(1) An undisclosed principal may sue and be sued on a contract made
by an agent on his behalf, acting within the scope of his actual authority.
(2) In entering into the contract, the agent must intend to act on the
principal’s behalf. (3) The agent of an undisclosed principal may also sue
and be sued on the contract. (4) Any defence which the third party may
have against the agent is available against his principal. (5) The terms
of the contract may, expressly or by implication, exclude the principal’s
right to sue, and his liability to be sued. The contract itself, or the
circumstances surrounding the contract, may show that the agent is the
true and only principal.
In order for the undisclosed principal to intervene in the contract made
by his agent, it is of great importance that the agent acted within his
actual authority, and that he intended to act on his principal’s behalf. The
undisclosed principal’s right of intervention is “subject to any defences or
equities which without notice may exist against the agent” (per Sir Montague
Smith in Browning v Provincial Insurance Co of Canada (1873) at p 272).
Thus, the third party may utilise any right of set-off against the agent which
may have accrued in his favour before he has notice of the principal’s
existence. In a similar manner, if the third party settles on the contract
with the agent prior to his discovery of the principal’s existence, this would
provide a complete defence to any action brought by the principal. The
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position here is clearly different from that of the disclosed principal (discussed
in para 20.33), because the undisclosed principal had allowed the agent to
act as though he (ie, the agent) is the principal. As long as the principal
remains undisclosed, the agent, who has contracted with the third party in
his own name, will be able to sue and be sued on the contract. However,
once the principal decides to intervene in the contract, the agent loses his
right to sue.
20.37
Once the third party becomes aware of the existence of the principal, the
law confers on the former the right to elect (or choose) whether to sue the
principal or the agent on the contract. In the words of Earl Cairns LC in
Kendall v Hamilton (1879) (at p 514):
[W]here an agent contracts in his own name for an undisclosed principal,
the person with whom he contracts may sue the agent, or he may sue
the principal, but if he sues the agent and recovers judgment, he cannot
afterwards sue the principal, even although the judgment does not result
in satisfaction of the debt.
Point (5) in the quotation by Lord Lloyd in para 20.36 is necessary in order
to prevent any injustice that the principal’s unqualified right to intervene
may cause to the third party because of the third party’s ignorance of the
principal’s existence. Thus, the undisclosed principal will not be permitted
to intervene if this would contradict the express or implied terms of the
contract.
(3) Apparent authority
20.38
Sometimes, a person, by his conduct or representation, creates an impression
that another, the “agent”, has the requisite authority to act on his behalf. If
the third party has relied on the impression so created and alters his legal
position, then the person creating that impression is not allowed to deny the
purported agent’s authority, and would therefore be bound by that agent’s
acts. Apparent, or ostensible, authority, therefore, is the authority which an
agent appears to have but in fact does not.
20.39
What are the essential elements of apparent authority? In Rama Corporation
v Proved Tin and General Investments Ltd (1952), Slade J said (at pp 149–
150):
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Ostensible or apparent authority … is merely a form of estoppel, indeed,
it has been termed agency by estoppel, and you cannot call in aid an
estoppel unless you have three ingredients: (i) a representation, (ii) a
reliance on the representation, and (iii) an alteration of your position
resulting from such reliance.
20.40
The basis of apparent authority is therefore the principal’s “holding out”, or
representation, to the third party that the “agent” is authorised to act as his
agent. This representation of authority is often implied from the conduct of
the principal in appointing the agent to a particular position, which might
usually carry with it the authority to conclude contracts of the type in question,
or from a previous course of dealings between the principal and the third
party. Thus, a representation of authority could be made when the supposed
principal allows the alleged agent, who has not in fact been properly appointed
as agent, to appear as if he is the principal’s agent. This occurred in Freeman &
Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) (see also Chapter 21,
para 21.41). The articles of association of the company authorised the board
of directors to appoint a managing director, but none was in fact appointed.
The board, however, allowed one director to act as managing director, and
he contracted with a third party to do some work for the company. The company claimed that it was not bound by the contract because the director had
no authority. It was held that although the director had no actual authority
to so contract, the company had, through its board of directors, created
an impression of authority by acquiescing in the director’s conduct. The
company was therefore bound by any act within the ambit of that apparent
authority. Diplock LJ explained (at p 503) the basis of apparent authority:
An “apparent” or “ostensible” authority … is a legal relationship between
the principal and the contractor (third party) created by a representation,
made by the principal to the contractor, intended to be and in fact acted
upon by the contractor, that the agent has authority to enter on behalf of
the principal into a contract of a kind within the scope of the “apparent”
authority, so as to render the principal liable to perform any obligations
imposed upon him by such a contract. To the relationship so created the
agent is a stranger. He need not be (although he generally is) aware of
the existence of the representation but he must not purport to make the
agreement as principal himself. The representation, when acted upon by
the contractor by entering into a contract with the agent, operates as an
estoppel, preventing the principal from asserting that he is not bound
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by the contract. It is irrelevant whether the agent had actual authority to
enter into the contract.
Perhaps more commonly, the impression of authority is generated when the
principal either revokes or limits the authority his agent actually possesses,
but fails to inform those third parties with whom the agent had dealings. In
this situation, the agent would appear to continue to possess authority, when
in fact his actual authority has either been revoked or curtailed. The previous
course of dealings therefore constitutes the principal’s representation. Lord
Denning gave an example of this in Hely-Hutchinson v Brayhead Ltd (1968)
(at p 583):
[W]hen the board appoint one of their number to be managing director,
they invest him not only with implied authority, but also with ostensible
authority to do all such things as fall within the usual scope of that
office. Other people who see him acting as managing director are entitled
to assume that he has the usual authority of a managing director. But
sometimes ostensible authority exceeds actual authority. For instance,
when the board appoint the managing director, they may expressly limit
his authority by saying he is not to order goods worth more than £500
without the sanction of the board. In that case his actual authority is
subject to the £500 limitation, but his ostensible authority includes all
the usual authority of a managing director. The company is bound by his
ostensible authority in his dealings with those who do not know of the
limitation. [emphasis in original]
It should be noted that the representation must come from the principal, or
someone actually authorised by the principal, in order for the estoppel to
arise against him. It is generally insufficient for the representation to have
come from the agent himself. In United Bank of Kuwait v Hammond (1988),
Lord Donaldson MR observed (at p 1066) that “it is trite law that an agent
cannot ordinarily confer ostensible authority on himself. He cannot pull
himself up by his own shoe laces”.
20.41
The second element that is necessary to establish the estoppel against the
principal is that the third party must have relied on the representation. There
can be no reliance if the third party did not deal with the “agent” as agent.
Equally, where the third party knows, ought to know or suspects that the
agent is in fact without authority, he will not then be allowed to rely on the
doctrine of apparent authority to bind the principal.
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Box 20.1
Reflecting
on the law
Apparent authority and representations
Whether an agent can create his own appearance of authority so as to bind the
principal is a difficult question. Whilst the orthodox position appears to be that an
agent without actual authority to act for the principal cannot make the representation
on the principal’s behalf, the reality is that in the corporate commercial world, the
creation of an impression of authority comes often as much from the agent’s actions,
as from the corporate principal’s appointment of the agent to a particular position.
After all, who would communicate with and have face-to-face dealings with third
parties other than the agent himself? In this regard, a careful consideration of the
facts of the case is of particular importance. A conclusion might be reached, as
was the case in First Energy (UK) Ltd v Hungarian International Bank Ltd (1993),
that although the agent may not have had actual authority vis-à-vis the contract
itself, he nevertheless had the authority to communicate the agreement to contract
on behalf of the principal. The ultimate result in such a case would be a binding
contract. It should be pointed out, however, that the Court of Appeal has
cautioned, in Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia
Pacific Breweries (Singapore) Pte Ltd (2011) that the case of First Energy (UK) Ltd
should be confined to its own unique facts.
20.42
Finally, there must be an alteration of the third party’s position as a result
of the reliance. The third party’s entering into the contract is sometimes
considered sufficient alteration (see, eg, Arctic Shipping Co Ltd v Mobilia AB,
The Tatra (1990) at p 59), although other cases appear to require that the
third party suffers a detriment (Norfolk County Council v Secretary of State
for the Environment (1973)).
Principal–Agent Relationship
20.43
The rights and duties of the principal and the agent derive from the terms of
the contract, if any, between the parties. Additionally, and independently of
contract, certain duties arise from the agency relationship itself.
(1) Duties of an agent
20.44
Where the agent is appointed under a contract, he is clearly bound to
perform in accordance with the terms of the contract and with the instructions stipulated therein. The obligation to perform with reasonable care
and diligence will, if not expressly stipulated, be an implied term of the
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contract (see Chapter 10). If he acts in a manner that is not authorised,
he will be in breach of the contract. Even an agent who is not appointed
pursuant to a contract is required to act with due care and skill, although it
is likely that a higher standard might be expected of a paid, as opposed to a
gratuitous, agent.
20.45
In addition, agents are fiduciaries. A fiduciary is a person who stands in a
position of trust and confidence vis-à-vis another, and is conferred discretion
to act for the benefit of that other (ie, the beneficiary). A fiduciary possesses
the mandate to exercise individual discretion, and is able (like the agent) to
affect the legal position of the beneficiary. However, the very power held by
the fiduciary that allows him to benefit the other, also allows him to “indulge
his own interest and to injure” that other (see D A DeMott, “Beyond
Metaphor: An Analysis of Fiduciary Obligation” (1988) Duke Law Journal
879 at p 914). Thus, as McCardie J explained in Armstrong v Jackson (1917)
(at p 826):
The position of principal and agent gives rise to particular and onerous
duties on the part of the agent, and the high standard of conduct required
from him springs from the fiduciary relationship between his employer
and himself. His position is confidential. It readily lends itself to abuse.
A strict and salutary rule is required to meet the special situation.
A number of fiduciary duties are therefore imposed on agents. A breach of
the agent’s fiduciary obligations will render the agent liable to surrender his
ill-gotten gains to his principal. The main fiduciary obligations are discussed
below.
(a) Duty to avoid a conflict of interests
20.46
An agent is under an obligation not to put himself in a position where his
duties as agent conflict with his personal interests unless the conflict has
been fully disclosed to the principal and the latter’s consent obtained. An
agent who gained a benefit in breach of this duty will have to surrender that
benefit to his principal. This rule is necessary because of the agent’s power
to affect his principal’s legal position. It has been said that “human infirmity”
(per Eldon LC in Ex Parte Bennett (1805) at p 897) renders it difficult to
resist the temptation to favour oneself over one’s principal. This temptation
is particularly acute if the agent, employed to buy, were allowed to purchase
his own goods on behalf of his principal or if the agent, employed to sell,
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were allowed to himself buy the principal’s property. The purpose of the noconflict rule is thus to remove that temptation.
(b) Duty not to make a secret profit
20.47
In a similar vein, the agent is not allowed to use his position (including
property or confidential information acquired in his position as agent),
without the knowledge and assent of the principal, to make personal profits
or for a personal advantage. Neither is he allowed to accept bribes or secret
commissions from the third parties with whom he is dealing on behalf of his
principal. Slade J defined, in Industries and General Mortgage Co Ltd v Lewis
(1949) (at p 575), a “bribe” as follows:
A bribe means a payment of a secret commission, which only means
(i) that the person making the payment makes it to the agent of the other
person with whom he is dealing; (ii) that he makes it to that person
knowing that that person is acting as the agent of the other person with
whom he is dealing; and (iii) that he fails to disclose to the other person
with whom he is dealing that he has made that payment to the person
whom he knows to be the other person’s agent.
Both the agent who receives the bribe and the third party who pays it may
be criminally liable under the Prevention of Corruption Act (Cap 241, 1993
Rev Ed). In addition, the bribe received by the agent may be confiscated or
forfeited under the Corruption, Drug Trafficking and Other Serious Crimes
(Confiscation of Benefits) Act (Cap 65A, 2000 Rev Ed).
(c) Duty not to delegate
20.48
The general rule is that an agent cannot appoint and delegate his authority
to a sub-agent except with the express or implied authority of the principal,
and where confidence in the person of the agent is the root of the agency
relationship, the authority to delegate cannot be implied as an ordinary
incident in the contract (per Thesiger LJ in De Bussche v Alt (1878) at p 310).
However, it is recognised that the exigencies of business do sometimes
require that a sub-agent be appointed. The authority to delegate may (in
such situations) be implied, as Thesiger LJ explained (at p 310):
[W]here, from the conduct of the parties to the original contract of
agency, the usage of trade, or the nature of the particular business which
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is the subject of the agency, it may reasonably be presumed that the
parties to the contract of agency originally intended that such authority
should exist, or where, in the course of the employment, unforeseen
emergencies arise which impose upon the agent the necessity of employing a substitute.
20.49
However, even where such authority to delegate exists, there appears to be
no general principle of law that privity of contract then arises as between the
principal and the sub-agent so that the sub-agent, and not the agent, becomes
directly responsible to the principal in connection with the performance of
the original mandate. Wright J stated, in Calico Printers’ Association Ltd v
Barclays Bank (1930) (at p 109) as follows:
English law … has in general applied the rule that even where the subagent is properly employed there is still no privity between him and the
principal. The latter is entitled to hold the agent liable for breach of the
mandate which he has accepted, and cannot in general claim against the
sub-agent for negligence or breach of duty. I know of no English case
in which a principal has recovered against a sub-agent for negligence.
The agent does not as a rule escape liability to the principal merely
because employment of the sub-agent is contemplated. To create privity
it must be established not only that the principal contemplated that a
sub-agent would perform part of the contract, but also that the principal
authorised the agent to create privity of contract between the principal
and the sub-agent, which is a very different matter requiring precise
proof. In general, where a principal employs an agent to carry out a
particular employment, the agent undertakes responsibility for the whole
transaction and is responsible for any negligence in carrying it out, even
if the negligence be that of the sub-agent properly or necessarily engaged
to perform some part, because there is no privity between the principal
and the sub-agent.
(2) Rights of an agent
20.50
The agent has a number of rights against his principal. Very importantly, the
agent has a right to be remunerated for carrying out his mandate, but this is
a right that depends on the agreement between the parties. Where the agent
is appointed pursuant to a contract, the terms of the contract will govern his
right to remuneration.
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20.51
The agent is also entitled to be reimbursed for expenses incurred and
indemnified by the principal against all liabilities which he has reasonably
incurred in the execution of his mandate. However, the agent is not entitled
to reimbursement or to an indemnity in respect of expenses incurred outside
of his authority unless the principal ratifies the agent’s acts. This rule applies
equally to expenses that result from illegal acts or from the agent’s own
breach of duty.
20.52
Finally, an agent is entitled to a lien over his principal’s property in
respect of all claims against the principal that arise out of the agency. A
lien is essentially a security interest that allows the agent to retain possession
of his principal’s property until the principal satisfies all of the agent’s
claims.
Agent–Third Party Relationship
20.53
The general rule is that the agent who contracts on behalf of his principal
owes no liability to, nor does he have any rights against, the third party.
20.54
There are, however, exceptions. An agent may have agreed or undertaken to
be personally liable. This is a matter of proper construction of the contract
concluded with the third party, it may be common practice in the particular
trade or business for the agent to be personally liable and entitled, or this
could be the usual course of business between the specific parties. The agent
may also be liable, as we saw above, where the principal is an undisclosed
principal.
20.55
Statute may also render an agent personally liable. Section 26 Bills of
Exchange Act (Cap 23, 2004 Rev Ed), for example, provides that “where a
person signs a bill as drawer, indorser, or acceptor, and adds words to his
signature, indicating that he signs for or on behalf of a principal, or in a
representative character, he is not personally liable thereon; but the mere
addition to his signature of words describing him as an agent, or as filling
a representative character, does not exempt him from personal liability”. In
a similar manner, s 41 Companies Act (see para 20.21) renders the agent
(ie, the promoter of the company) personally liable on pre-incorporation
contracts if these are not subsequently ratified by the company after it is
incorporated.
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20.56
An agent who contracted in excess of authority, and whose principal does
not adopt the agent’s acts through the process of ratification, may be liable
to the third party for breach of the agent’s implied warranty of authority. In
the words of Willes J in Collen v Wright (1857) (at p 657):
[A] person who induces another to contract with him as the agent of
a third party by an unqualified assertion of his being authorised to act
as such agent, is answerable to the person who so contracts for any
damages which he may sustain by reason of the assertion of authority
being untrue … The fact that the professed agent honestly thinks that
he has the authority affects the moral character of his act; but his moral
innocence, so far as the person whom he has induced to contract is
concerned, in no way aids such person or alleviates the inconvenience
and damage which he sustains.
It should be obvious that if the third party knows or must be taken to know
of the agent’s lack of authority, the agent cannot be made liable on this
ground. Also, where the principal ratifies the agent’s unauthorised acts, the
agent will also not be liable for a breach of warranty of authority.
TERMINATION OF AGENCY
20.57
Agency may be terminated by the acts of the parties themselves or by
operation of law. Certain classes of agency are, however, deemed by law to
be irrevocable.
20.58
Where the agency is created by an agreement that amounts to a contract,
it may, as a general rule, be determined in a similar manner as a contract.
Thus the contract of agency may be discharged by performance and breach
or frustration (see Chapters 16 and 17 respectively). As agency is mostly
a consensual relationship based on agreement between the parties, its
termination too may be effected by agreement. Either party may also give
notice of his intention to withdraw from the agency, subject to liability in
damages if the agency is derived from a contract. Whilst these acts terminate
the relationship of the principal and the agent, they do not necessarily
terminate the agent’s apparent or ostensible authority unless the third party
has notice of this. Vis-à-vis the third party, therefore, the principal may
remain liable for the acts of his former agent.
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20.59
Even where the parties do not themselves act to terminate the agency,
certain events do so by operation of law. Death of either party determines
the agency whether the surviving party has notice of the death or not.
But where it is the principal who has died, the agent may be liable to
the third party for breach of warranty of authority. In a similar manner,
the supervening insanity of either the principal or the agent determines
the agency. Whilst the bankruptcy of the principal (which amounts to
legal incapacity) will automatically terminate the agency relationship, the
bankruptcy of the agent will determine the relationship only if the agent
is thereby made unfit to perform his duties.
20.60
The authority of an agent may become irrevocable in certain situations.
Specifically, authority given to an agent by contract or deed for the purpose
of protecting a pre-existing interest of the agent, cannot be revoked by
the principal without the agent’s consent. In this sense, the authority is
irrevocable. The facts of Gaussen v Morton (1830) illustrate the operation of
this doctrine. A principal owed money to another, and therefore conferred
authority on the latter to sell certain property and to use the proceeds to
discharge the debt. The purpose of the creation of the agency was therefore
to secure a benefit to the agent (ie, the repayment of the debt). It was
therefore held that the agent’s authority could not be revoked without the
agent’s consent.
CONCLUSION
20.61
In this chapter, we considered the main principles of agency law. An agent is
a person who acts on behalf of another, known as his principal. As a general
rule, a transaction with a third party that is properly entered into by an
agent on his principal’s behalf binds the principal, and the agent is not liable
on the resulting contract. However, this is the case only if the agent acted
within the authority that was conferred on him either by his principal, or by
law. Where the agent has acted without authority, the agent may be liable,
not only to the principal if loss has been occasioned by the agent’s actions,
but also potentially to the third party for breach of his implied warranty of
authority. Whether or not liability on the agent is imposed depends on the
particular circumstances of the case.
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20.62
Although a principal is generally bound only by the acts of his authorised
agent acting within the scope of his authority, we saw that, in some
circumstances, a principal may be bound, notwithstanding the agent’s lack
of authority. It is also possible for a principal to adopt an unauthorised act
retrospectively. This process is known as “ratification”, and when it occurs,
will allow the principal to take the benefit, as well as the liability, of the
otherwise unauthorised transaction.
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Business Organisations
21.1–21.3
21.4–21.6
21.7–21.8
21.9–21.15
21.16–21.21
21.22–21.25
21.26–21.28
21.29–21.36
21.37
21.38–21.44
21.45–21.47
21.48–21.50
21.51–21.55
21.56
21.57–21.58
21.59–21.60
21.61–21.66
21.67
21.68–21.69
21.70
21.71
21.72
Introduction
Overview
Registering a Business
Companies
Overview
Categories and Classification
Company Formation
Persona Ficta
(1) Legal personality
(2) Looking behind the veil of incorporation
How Companies Operate
(1) Rules of attribution
(2) Division of powers
(3) Corporate contracting
Directors
(1) General
(2) Directors’ obligations and duties
(a) Equitable and fiduciary duties
(b) Duty of skill, care and diligence
(3) Enforcement of directors’ duties
Relationship between Shareholders
(1) Statutory contract
(2) Majority rule and protection of the minority
Non-corporate Business Organisations
Sole Proprietorships
Partnerships
(1) General partnership
(a) Dealings with third parties
(b) Unlimited personal liability of partners
(c) Dissolution
Principles of Singapore Business Law
21.73–21.74
21.75–21.77
(2) Limited partnership
(3) Limited liability partnership
21.78–21.79
Business Trusts
21.80
Conclusion
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INTRODUCTION
Overview
21.1
A person contemplating starting a business has a number of options
as to how to structure his business. The major basic structures are,
traditionally, the sole proprietorship, partnership and company, and these
will be considered in this chapter. Apart from these traditional forms,
legislation has introduced other hybrid forms with the intention of widening
the options available for businesses and investments in Singapore. One
of these newer structures is the limited liability partnership (“LLP”) (see
the Limited Liability Partnerships Act (Cap 163A, 2006 Rev Ed)), which
combines the favourable attributes of the ordinary partnership and the
company. A variant of the ordinary partnership is the limited partnership,
to which the general principles of partnership law apply, albeit subject
to a number of modifications imposed by the Limited Partnerships Act
(Cap 163B, 2010 Rev Ed). Then there is the business trust (see the Business
Trusts Act (Cap 31A, 2005 Rev Ed)) which is essentially an orthodox trust
constituted to manage an asset for the purposes of generating returns for
its investing unit holders. We will revisit these forms later in the chapter.
In addition, there are organisational structures such as societies, cooperative
societies and trusts. These are generally utilised for purposes other than
that of business and profit-making.
21.2
There are also methods of association that may be used for business purposes.
The joint venture is one such common example. Other examples include the
syndicate and the consortium. These are effectively facilitative arrangements
between two or more parties (who may themselves be individuals, partnerships or companies) who come together to cooperate commercially for a
particular purpose. The actual legal form through which these associations
pursue their shared undertaking is usually either the partnership or the
company.
21.3
The law does not, as a general rule, dictate the structure that a business
must adopt. However, if the proposed association is formed for the purposes
of gain and consists of more than 20 persons, then s 17(3) Companies Act
(Cap 50, 2006 Rev Ed) (“CA”) mandates that it be incorporated as a
company. Otherwise, the particular business form chosen is very much a
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private decision. The final decision as to the form to adopt will depend,
first of all, on whether the businessman does it alone or with others, and
secondly, on a careful evaluation and weighing of a number of factors
including the nature of the business contemplated, the potential for liability,
the management process and the present and future capital requirements of
the business and tax incentives.
Registering a Business
21.4
There is one other matter that needs to be at least briefly mentioned
before we look in more detail at the basic business forms, and this is the
requirement for the registration of businesses. The Business Registration
Act (Cap 32, 2004 Rev Ed) (“BRA”) makes it compulsory for every person
who intends to carry on a business in Singapore to make an application
to the Registrar of Businesses (who is an officer of the Accounting and
Corporate Regulatory Authority (“ACRA”)) in the prescribed manner for
the registration of the business. This application must be made before the
commencement of business (s 5 BRA). Section 4 exempts from registration
certain small businesses (as listed in the First Schedule including that
carried on by licensed hawkers, taxi drivers, trishaw riders and, subject to
certain conditions, craftsmen and farmers) and businesses that are carried
on by bodies already regulated under other laws (accountants and lawyers
fall within this exemption). Companies and limited liability partnerships,
which are regulated under the CA and the Limited Liability Partnerships
Act respectively, do not need to be registered under the BRA, unless the
company or the LLP carries on a business under a name that is not its
registered name (ss 4(2) and 4(3) BRA). The requirement for registration
serves to provide the public with a repository of information on persons
who do business in Singapore, and in so doing, protects the public against
being misled as to the real identity of such persons. To ensure that the
registered information is kept updated, the BRA imposes the further obligation to notify the Registrar of any changes to particulars already registered
(s 12 BRA).
21.5
There are both civil and criminal consequences for failing to register.
Section 21 provides that a person who defaults on the registration requirements in respect of a business (including the requirement to update registered
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particulars) shall not be able to enforce his rights under any contract which
relates to that particular business. This section does not prejudice the rights
of the other party to the affected contract; the intention is clearly to penalise
only the defaulting party. It should be obvious, however, that if the disability
was to be a strict and absolute one, this section might stand to be abused by
the other contracting party as a means to avoid his contractual obligations
and injustice would thereby be suffered by the defaulter. The disability
therefore is not absolute and the court is given “the widest possible powers
of granting relief to persons in default” (per Christopher Lau JC in Federal
Lands Commissioner v Benfort Enterprises & Anor (1998) at [13]) where it
is satisfied that the default was “accidental or due to inadvertence or some
other sufficient cause, or that on other grounds it is just and equitable to
grant relief ” (s 21(3) BRA). The justification for this is explained by Lush J
(with whom Christopher Lau JC expressly agreed) in Weller v Denton (1921)
as follows (at p 109):
The reason why this wide power of granting relief should be given to
the court can well be understood. Where the defendant has not been
misled, and knew the members of the firm or other persons with whom
he was dealing, it might be most unjust and inequitable to hold that the
plaintiff ’s action should not be maintained merely because he did not
know that he ought to have been registered under the Act.
Whilst this might give the impression that relief is readily granted on request
as long as the defaulter “did not know that he ought to have been registered”,
this is not the case. In Watson v Park Royal (Caterers) Ltd (1961), Edmund
Davies J made it clear that however broadly the English equivalent of s 21
is to be construed, it is still a requirement that the court be satisfied of the
matters set out therein as grounds for relief. In his Honour’s words, “to hold
that [relief] is automatically granted on request would simply be to put a
pencil through the provisions of an Act of Parliament which obviously had
security and stability in business dealings as its object” (at p 736).
21.6
Section 27 imposes criminal sanctions for non-compliance with the BRA.
This does not, however, render the contract entered into by a defaulter void
on the ground of illegality (Lim Feng Chieh (formerly trading as Intra-Smit
Agencies) v GS Auto Supply Pte Ltd (1993)) (on the BRA generally, see H M
Zafrullah, “The Law of Business Registration in Singapore” (1985) 2 Malayan
Law Journal ccxvii).
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COMPANIES
Overview
21.7
The word “company” is used in this chapter to denote a corporation that is
formed through the process of registration or incorporation laid down in
the CA. Indeed, this is the definition the CA ascribes to the word. The effect
of complying with the requirements of registration is to bring into being
“a body corporate by the name contained in the memorandum capable
forthwith of exercising all the functions of an incorporated company and of
suing and being sued and having perpetual succession and a common seal
with power to hold land” (s 19(5) CA). Companies are therefore really a
sub-category of associations known as “bodies corporate” or “corporations”,
all of which share in common the possession of corporate status. This means
that the law conceptualises the corporation as an entity possessing artificial
personality. The effect of this will be discussed in the ensuing paragraphs.
21.8
Corporations include those that are created directly by an Act of Parliament.
The Maritime and Port Authority of Singapore, for example, is a body
corporate created directly by the Maritime and Port Authority of Singapore
Act (Cap 170A, 1997 Rev Ed). These statutory corporations do not fall
within the definition of “corporations” that are subject to the provisions of
the CA (s 4 CA).
Categories and Classification
21.9
The CA classifies companies according to the method by which the liability
of the members to contribute to the assets of a company is determined. In an
unlimited company, there is no limit placed on the liability of its members
who may therefore be personally liable for the whole of the company’s
liabilities to its creditors. In a limited company, this liability is restricted to
an amount fixed by reference to the terms by which shares are held or by the
company’s constitutional documents.
21.10
The CA recognises two types of limited company: a company limited by
shares and a company limited by guarantee.
21.11
A company limited by shares has a share capital. Most of the companies
registered under the CA are companies limited by shares as this provides
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perhaps the most appropriate form for commercial purposes. A share
represents the holder’s financial undertaking in the company and provides
the basis on which he is conferred membership rights, such as the right to
vote and the entitlement to participate in the profits of the company, in the
form of dividends. The terms “shareholder” and “member” are generally used
interchangeably, although technically, a shareholder becomes a “member”
only when his name is entered into the company’s register of members
(s 19(6) CA).
21.12
The liability of a member or shareholder of a company limited by shares is
limited to the amount that remains unpaid on his shares. For example, if
a company allots to X a share at the price of $1, and X pays $0.50 to the
company on the issue of that share, X’s maximum potential liability to meet
the company’s debts is then limited to the outstanding balance of $0.50. The
company may require X to contribute the outstanding amount by making a
call on the unpaid balance even when the company is not being wound up.
An unpaid call amounts to a debt owing to the company.
21.13
In a company limited by guarantee, a member (note that there cannot be
“shareholders” in such companies as there is no share capital) is only liable
to contribute to the assets of the company in the event of its winding up, and
then only at the (usually nominal) amount fixed by the memorandum. Such
companies are used mainly for non-profit making purposes such as charities
or recreational clubs. The Singapore Management University, for example, is
a company limited by guarantee. This chapter deals only with the company
limited by shares.
21.14
The CA also classifies companies as private or public. Under the CA, only
companies having a share capital may be incorporated as private companies.
A private company must, in its memorandum or articles of association,
restrict the right to transfer its shares and limit the number of its members
to 50 (s 18(1) CA). Within this class of private companies, there is a further
division into companies that are conferred exempt status and those that are
not. An exempt private company is defined in the CA as “a private company
in the shares of which no beneficial interest is held directly or indirectly by
any corporation and which has not more than 20 members” or any private
company wholly held by the Government and which is declared, in the
national interest, as an exempt private company (s 4). These companies are
exempted from certain accounting requirements under the CA.
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21.15
A public company is any company that is not a private company (s 4 CA).
Public companies, because of their generally unrestricted ability to raise funds
from the public, are subject to a correspondingly higher degree of regulation
by the law. A public company may be listed or unlisted. Where the shares
of a public company are listed on a stock exchange, there is a ready market
for the company’s shares. The stock exchange will have its own listing and
ongoing requirements that will have to be complied with by listed companies.
Listed companies are regulated separately by the Securities and Futures Act
(Cap 289, 2006 Rev Ed). For a broad classification of incorporated entities
generally, see Figure 21.1.
Incorporated
entities
Registered under
Companies Act
Created by
specific statutes
Private
Unlimited
Limited by
shares
Limited by
guarantee
Public
Exempt
Listed
Non-exempt
Unlisted
Figure 21.1 Classification of incorporated entities
Company Formation
21.16
Any individual may incorporate a company. The CA requires a company to
have at least one member (s 20A), and the sole member may also be the
sole director of the company provided he is ordinarily resident in Singapore
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(s 145(1)). The CA prescribes the process of incorporation. It requires the
drawing up of the company’s constitution and the lodging of this with the
Registrar of Companies, together with certain prescribed forms and the
prescribed fee (s 19). If all is in order, the Registrar will issue a certificate
of incorporation whereupon “the subscribers to the memorandum together
with such other persons as may from time to time become members of
the company shall be a body corporate” (s 19(5)). The incorporation of
companies is now done electronically through BizFile, which is an electronic
filing system maintained by ACRA.
21.17
Currently, the company’s constitution comprises two documents: the memorandum of association and the articles of association. Section 22 CA prescribes
the minimum information that must be contained in the memorandum. It
was previously mandated that the memorandum should include the objects
of the company. This statement of the company’s objects formed the basis
for the development of the difficult “ultra vires” doctrine. The doctrine is a
rule of company law that is concerned with the capacity of the company. By
the doctrine, a company cannot do anything that is not within the scope of
its objects clause as it would be without the capacity to do so. In the eyes
of the law, an ultra vires transaction would be null and void, and would
not be capable of being authorised or ratified (retrospectively approved),
not even by a unanimous decision of the shareholders. Operating together
with the doctrine of constructive notice, which deems all who deal with the
company to have notice of the contents of the company’s constitution and
other lodged documents, the doctrine of ultra vires has been the cause of
significant injustice to outsiders who may have supplied goods or services to
the company for a purpose not contained in the memorandum.
21.18
Section 23(1) CA now provides that, unless otherwise provided, a company
has full capacity to undertake any business or do any act, with full attendant
rights, powers and privileges. Nevertheless, the company may include a
statement of its objects in its memorandum (s 23(1A)) and may, by a
provision in its memorandum or articles, restrict its capacity, rights, powers
or privileges (s 23(1B)). In this case, the doctrine of ultra vires, as modified
by s 25, remains relevant.
21.19
Section 25 CA reformed the doctrine of ultra vires. The section provides
that, with respect to outsiders, “no act or purported act of a company …
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shall be invalid by reason only of the fact that the company was without
capacity or power to do such act …”. However, as a matter of internal
administration, the fact of corporate incapacity may be relied upon by a
member who wants to restrain the company from doing an ultra vires act.
Unlike the position at common law, where the ultra vires transaction is
automatically void, restraint or the setting aside of the ultra vires transaction
under s 25(3) will only be ordered if the court considers that it would be
just and equitable to do so. The company’s lack of capacity may also be
relied upon in any action by the company or by any member against the
company’s officers for breach of duty.
21.20
The articles of association of the company regulate the internal administration
of the company. The Fourth Schedule of the CA contains Table A, a default
set of articles which may be adopted by companies who do not have articles
specially drafted for them.
21.21
It has been recommended that the requirement for separate memorandum
and articles of association be eliminated and replaced by a single model
constitution. Indeed, with the removal of the requirement to include objects
in the company’s memorandum, the significance of the memorandum has
been correspondingly reduced. There is therefore no real need for separate
constitutional documents, with different rules applicable to the valid
alteration of each. However, any merger of the documents is unlikely to have
any significant impact on the substantive law.
Persona Ficta
(1) Legal personality
21.22
According to Lord Hoffman in Meridian Global Funds Management Asia
Ltd v Securities Commission (1995) (at p 506), a company “exists because
there is a rule (usually in a statute) which says that a persona ficta shall
be deemed to exist and to have certain of the powers, rights and duties
of a natural person”. Legal personality is the capacity to enjoy legal rights
and to owe legal obligations. It is possessed, not only by “natural persons”,
ie, human beings, but also by “artificial persons” created by the law
through the process of incorporation. The company is one such artificial
person.
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21.23
A consequence of being a persona ficta is that the company is considered
separate and distinct from the humans who caused the company to be
incorporated. This means that the company may, on its own account,
hold property, make contracts and carry on business irrespective of its
current shareholders. The corollary to this is that, individually, the
shareholders do not own the company’s assets or property, and any rights
or obligations that arise out of the company’s contracts do not belong to the
shareholders.
21.24
The well-known case of Saloman v A Saloman & Co Ltd (1897) illustrates
the effect of this principle. Mr Saloman ran a successful boot and shoe
manufacturing business as a sole proprietor. He incorporated a limited
liability company to take over the business. He with his wife and five
grown-up children were the subscribers to the memorandum (ie, the initial
shareholders). His business was transferred to the company, which gave
Mr Saloman in consideration therefor, £1,000 in cash, £10,000 in debentures
(which represented the company’s indebtedness to Mr Saloman repayable
at a later time) and 20,000 shares of £1 each. The company unfortunately
fell on difficult times and had to be wound up. While the company’s assets
were sufficient to pay off the debentures, there was in that event nothing
left to pay the trade creditors. It was therefore alleged on behalf of the
trade creditors that the debentures were invalid as Mr Saloman and the
company were one and the same, and he therefore could not lend money
to himself. The House of Lords held that “the company is at law a different
person altogether from the subscribers to the memorandum; and though it
may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands receive the
profits, the company is not in law the agent of the subscribers or trustee for
them. Nor are the subscribers as members liable in any shape or form …”
(per Lord MacNaughten at p 51). The debentures were therefore valid and
Mr Saloman was entitled to repayment.
21.25
The other consequence of incorporation is that the company has perpetual
succession. This means that, once incorporated, the company continues to
exist notwithstanding changes in its shareholders until it is properly wound
up through the legal process of liquidation. This is one of the advantages
that the corporate form has over non-incorporated business forms like the
general (as opposed to the limited liability) partnership, which generally
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dissolves should there be a change in its constitution, whether through death,
discharge or bankruptcy.
(2) Looking behind the veil of incorporation
21.26
The conferment of a separate legal status on the company upon incorporation
is often likened to a “veil of incorporation” that descends to separate the
human incorporators from the company. Because this veil shields the
shareholders from being liable on the company’s debts, there is potential
for the corporate form to be abused by persons seeking to avoid their legal
obligations and liabilities. Where this is the case, the courts will “lift the veil”
and ignore the separate personality of the company, affixing liability on the
wrongdoing shareholders.
21.27
In Trade Facilities Pte Ltd v Public Prosecutor (1995), the company was
implicated in the sale of adulterated Hennessy XO in genuine Hennessy
XO bottles, and was later prosecuted for selling and importing goods to
which a trade mark had been falsely applied. Looi owned all but one share
in the company and was its sole directing mind and will. On the question
of whether Looi or the company did the prohibited act, the High Court of
Singapore held that as the evidence showed that the company was nothing
more than a vehicle that Looi employed as and when it suited him, it was
the alter ego of Looi. It would therefore be appropriate to lift the corporate
veil and impose liability on Looi. However, the fact that the corporate veil
had been lifted did not absolve the company of all liability. The court further
held that as the company had allowed itself to be used as a vehicle of Looi’s,
it was also liable.
21.28
The corporate veil, particularly that which exists between a parent company
and its subsidiaries within the same group, is, however, not to be cast aside
merely because it would appear just to do so. As the English Court of Appeal
explained in Adams v Cape Industries plc (1990) (at p 536):
[S]ave in cases which turn on the wording of particular statutes or
contracts, the court is not free to disregard the principle of Saloman v
A Saloman & Co Ltd merely because it considers that justice so requires.
Our law, for better or worse, recognises the creation of subsidiary
companies, which though in one sense the creatures of their parent
companies, will nevertheless under the general law fall to be treated
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as separate legal entities with all the rights and liabilities which would
normally attach to separate legal entities.
How Companies Operate
(1) Rules of attribution
21.29
Although a company has legal existence, its existence is really only a
legal fiction. In practical terms, it cannot operate except through human
individuals. It is therefore a necessary part of corporate personality that
there are “rules of attribution” to help us ascertain what acts should count
as acts of the company. This is necessary for deciding not only what rights
a company is entitled to, but also what liabilities it is subject to. There are
“primary” as well as “general” rules of attribution.
21.30
The primary rules of attribution, as Lord Hoffman explained in Meridian
Global Funds Management Asia Ltd v Securities Commission (1995),
attributes decisions taken by the company’s organs to the company. The
shareholders in general meeting and the board of directors are the two
organs of the company. With the exception of the single-member company
with only one director, decisions of each organ (known as resolutions)
are usually made at meetings. The meeting, and its collective nature, is
therefore the bedrock of corporate decision-making. Where the company
only has one member and/or one director, a signed record of the
resolution suffices to pass it (s 184G CA in the case of members’ resolutions,
and Fourth Schedule, Table A, Art 90A CA, in the case of directors’
resolutions).
21.31
The constitution of the company, typically the articles of association, lays
down the framework by which the company is run internally, including
details as to the proper conduct of shareholder as well as directors’
meetings. As long as the proper procedure for decision-making by these
organs is followed, the company’s organs are “identified” with the company.
Decisions made at a general meeting of the shareholders, or at a meeting of
the board of directors are then considered decisions of the company.
21.32
Decisions are taken by shareholders in general meeting through a process
of voting and by a majority of votes. In most cases, a simple majority (ie,
more than half of the shareholders present and voting) is sufficient to
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carry the decision, but a higher percentage of majority may be required for
certain decisions. A decision to wind up the company, for example,
requires a majority of at least 75 per cent. Resolutions that are carried by a
simple majority are known as ordinary resolutions, whilst resolutions requiring a minimum majority of 75 per cent are known as special resolutions
(s 184 CA). Decisions of the shareholders may also be made through written
means (ss 184A–184F CA). This involves circulating a document that
contains the text of the resolution to the shareholders who may then indicate
their agreement or disagreement to it on the document. This method of
procuring the shareholders’ agreement to a particular resolution dispenses
with the need for physical meetings.
21.33
The directors are appointed by the shareholders in general meeting, and
together they comprise the board. The board’s powers to act as the company
(except in the case of the company with only one director) is a collective
one, ie, through a board resolution. Individual directors therefore do not,
unless specifically authorised, have the power to bind the company. Directors
are generally left to regulate their meetings as they think fit (Table A,
Art 79 CA).
21.34
However, it should be obvious that a company does not act only through
board or shareholder resolutions which, because of the formal requirements
to hold valid meetings, can be significantly slower and more cumbersome
to obtain. It is therefore usual for the company to appoint agents to act
on its behalf. The general rules of attribution, which are the principles of
agency, attribute the acts of the agents to the company (see Chapter 20).
To recapitulate, an individual (the agent), who is actually or apparently
authorised to act on behalf of another (the principal), will be able to bind
that other if the agent had acted within this actual or apparent authority.
21.35
In a similar manner, the company will be bound by the acts of its agents
if these agents have been either actually or apparently authorised. However,
unlike the comparatively straightforward case of a human individual
appointing an agent, an additional question needs to be addressed in the
case of the company: whether the company has, by the rules of attribution,
taken the decision to appoint an agent. The answer is determined
both by the application of the primary rules of attribution and, somewhat
circuitously, the general rules of attribution. It is not unusual for the
articles of association to provide that the power to make commercial
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decisions is vested in the board and, further, for the board to have the
power to delegate its functions to one or more of its number. When the
power to delegate is exercised by the board, this would be a decision of the
company by the primary rule of attribution. The director to whom certain
functions of the board is delegated is then an authorised agent and when
he acts to appoint yet other agents, his act will bind the company by the
general rules of attribution.
21.36
The agency principles, when applied to companies, are additionally affected by
the operation of two other company law doctrines, the indoor management
rule and the rule of constructive notice. These concepts will be explained in
later paragraphs.
(2) Division of powers
21.37
How the company is managed generally depends on its constitution. It is
usual for the articles to provide that general managerial powers shall vest in
the board, and where this is the case, the courts have consistently maintained
that it is not open to the shareholders in general meeting to intervene in
or dictate the exercise of those powers. Thus, although the shareholders are
the owners of the company, they cannot countermand what their appointed
directors have done within the latter’s powers, even if they are unhappy with
the directors’ actions. In the oft-quoted words of Greer LJ in John Shaw &
Sons (Salford) Ltd v Shaw (1935), “if powers of management are vested in
the directors, they and they alone can exercise these powers. The only way
in which the general body of the shareholders can control the exercise of
powers vested by the articles in the directors is by altering their articles, or
if opportunity arises under the articles, by refusing to re-elect the directors
of whose actions they disapprove. They cannot themselves usurp the
powers which by the articles are vested in the directors any more than the
directors can usurp the powers vested by the articles in the general body of
shareholders …” (at p 134). This position is now enshrined statutorily in s
157A CA, which provides that the business of a company “shall be managed
by or under the direction of the directors”.
(3) Corporate contracting
21.38
Two issues inevitably arise when considering the enforceability of contracts
purportedly entered into by companies. The first relates to the capacity of
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the company, as determined by the doctrine of ultra vires. This doctrine, as
we saw earlier, is no longer as significant as it used to be. The second but
more relevant issue relates to the authority of the company’s agents to bind
the company.
21.39
As we saw in the preceding discourse, management of the company is
usually in the hands of the board of directors. The board may, and indeed
often will, in turn delegate certain decision-making powers to a particular
director. The constitution may also specify a particular office — the office
of the managing director for example — which is authorised to act for the
company, and any limitation that is placed on the scope of that officer’s
authority. A company’s agent may therefore be appointed through a board
resolution by which board functions are delegated to him, or by appointment
to a particular office. The actual authority of these agents will depend on
the relevant provisions of the constitution, as well as the terms of any
board resolution in relation to their appointment. In addition, these agents
may themselves appoint or employ yet other agents, and the scope of
authority of these agents will then depend on their respective contracts of
employment.
21.40
We saw in Chapter 20 that apparent or ostensible authority is the authority
that an agent appears to have. Certainly a managing director, by virtue of
his appointment to that position, may appear to have more authority than
he actually has. The doctrine of ostensible authority is premised on principles
of estoppel, that is, where there is a representation of authority by the
principal, which induced a person to alter his position (usually by contracting
with the principal through the agent), the principal is estopped from denying
that the agent had the requisite authority. It appears that only representations
that are made by agents who have actual (as opposed to apparent) authority
from the company will be capable of founding the estoppel against the
company.
21.41
In the corporate context, the representation by the company may be made
by either of the company’s organs or by an agent who has been authorised
to make representations on the company’s behalf. It should be noted that
the making of such a representation is itself an act of management of the
company’s business (per Diplock LJ in Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd (1964) (at p 505)). The representation may take
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the form of an appointment to a particular position within the company’s
hierarchy or the acceptance of or acquiescence to a particular factual state.
The facts of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
(1964) illustrate this. The company was a property development company
incorporated to buy and resell a large piece of land, the shares of which
were held equally by K and H. The board of directors comprised K and H
and a nominee of each. Although the company’s constitution provided for
the appointment of a managing director, none was appointed. H travelled
frequently and left the day-to-day management of the company to K.
K employed a firm of architects for the purposes of applying for planning
permission for the development of the land. When this fell through, the
company refused to pay the firm’s fees on the grounds that K did not
have the authority to appoint it. The court found that the board of directors
was aware throughout that K was effectively running the company’s
affairs on a day-to-day basis. As such, although K did not have the actual
authority to appoint the architect as he was never appointed to the office of
managing director, he nevertheless had the apparent authority to do so. As
Diplock LJ explained (at p 505):
The commonest form of representation by a principal creating an
“apparent” authority of an agent is by conduct, namely, by permitting the
agent to act in the management or conduct of the principal’s business.
Thus, if in the case of a company the board of directors who have “actual”
authority under the memorandum and articles of association to manage
the company’s business permit the agent to act in the management or
conduct of the company’s business, they thereby represent to all persons
dealing with such agent that he has authority to enter on behalf of the
corporation into contracts of a kind which an agent authorised to do
acts of the kind which he is in fact permitted to do usually enters into
in the ordinary course of such business.
21.42
We also saw in Chapter 20 that where the other contracting party is aware
of the agent’s lack of authority, he will not be able to raise the estoppel against
the principal. In the corporate context, the company’s constitution may
place limitations on the agent’s scope of authority. In the past, a contracting
party seeking to rely on the agent’s apparent authority to bind the company
would have been affected by the doctrine of constructive notice. By this
doctrine, third parties were deemed to know the contents of a company’s
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lodged documents, as lodgment with the regulatory authority permitted
discovery through searches, even if they had not read the documents. The
burden was placed firmly upon third parties to search the lodged documents.
The doctrine of constructive notice has now been abolished. Section 25A CA
provides that a person is not to be deemed to have notice of the contents
of any document relating to the company merely because the document is
lodged or available for inspection.
21.43
When the doctrine of constructive notice operated, the rule in Turquand’s
case, also known as the “indoor management rule”, was developed to
ameliorate the injustice that could be caused by the doctrine of constructive
notice. This rule, which has not been abolished, provides that third
parties, who deal with the company in good faith and with no notice of
any irregularity, are entitled to assume that matters relating to the internal
administration and regulation of the company have been duly complied
with. The facts of Turquand’s case (Royal British Bank v Turquand
(1856)) itself illustrate this rule. The company had given to the plaintiff
bank a bond for £2,000 under the seal of the company and signed by two
directors and the secretary. However, the company, by its constitution, could
issue bonds of only such sums as was authorised by the company in general
meeting, and it was alleged that no specific resolution had been passed.
The court held that a third party, like the plaintiff bank, on reading the
company’s constitution, “would find, not a prohibition from borrowing, but a
permission to do so on certain conditions. Finding that the authority might
be made complete by a resolution, he would have a right to infer the fact of
a resolution authorising that which on the face of the document appeared to
be legitimately done” (at p 332). Thus, as all that was required to authorise
the borrowing was an ordinary resolution, which unlike a special resolution
did not have to be lodged with the Registry, the doctrine of constructive
notice would not apply and the third party was entitled to assume that the
resolution had been properly obtained.
21.44
Now that the doctrine of constructive notice as applicable to a company’s
documents has been abolished, the scope for operation of the indoor
management rule would be reduced. Nevertheless, it would come to the
aid of a contracting party who is aware of the limits placed on a corporate
agent’s authority, whether in the company’s constitution or other docu-
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ments that are available for inspection. In such a case, the contracting party
should be entitled to assume that the relevant internal matters have been
complied with.
Directors
(1) General
21.45
Every company must have at least one director who is ordinarily resident
in Singapore (s 145 CA). Only natural persons of full age and capacity
may act as directors. Subsequent directors are usually elected by the
shareholders in a general meeting, which will also fix their remuneration
(Fourth Schedule, Table A, Arts 68 and 70 CA). The general meeting is
also conferred the power to remove any director by an ordinary resolution
(Table A, Art 69 CA).
21.46
We have already been introduced to the managing director, who is an
executive director. Executive directors are the working directors of the
company and they are frequently appointed pursuant to service contracts.
They are, in addition to holding the office of director, in effect employees of
the company. A removal of a director prior to the end of his contractual
term, even if done in accordance with the provisions of the constitution,
could amount to a breach of the service contract (Southern Foundries (1926)
Ltd v Shirlaw (1940)).
21.47
Non-executive (or outside) directors are directors who do not hold a
managing or executive position in the company. They are therefore not
involved in the day-to-day running of the company’s affairs. Non-executive
directors play an important role in corporate governance as independent
monitors of management decisions in public companies.
(2) Directors’ obligations and duties
21.48
Directors owe a number of duties to the company. These duties are found,
not only in the rules of common law and equity, but also in the terms of
any contract with the company and in the provisions of the CA. In addition,
the CA, as well as the regulations promulgated under it, contains many
requirements and rules with which the directors have to comply.
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21.49
The law does not draw any distinction between the executive and the
non-executive director for the purposes of imposing duties on them,
although the standard of skill, care and diligence expected of an executive
director is likely to be higher than that expected of a non-executive
director.
21.50
The area of directors’ duties is not an easy area of company law, not
least because of the overlapping common law, equitable and statutory
rules. In fact, there are many unresolved issues beyond the scope of this
chapter but which will become patent on reading the specialist texts
on company law. The ensuing paragraphs introduce the directors’ duties
in brief.
(a) Equitable and fiduciary duties
21.51
Directors have wide management powers conferred on them and, as
such, stand not only in a position of trust and responsibility vis-à-vis
the company, but also in a position of considerable power and control.
The law therefore obliges the directors, as a collegiate body, to exercise the
powers conferred on them in good faith and in the company’s interests.
In addition, the law treats the director as being in a fiduciary relationship
with the company. Being a fiduciary obliges the director, as an individual,
to always place the company’s interests ahead of his own. Section 157 CA,
which requires a director to act honestly at all times, has been interpreted
as encapsulating the general law of equitable and fiduciary duties (Lim Weng
Kee v PP (2002)).
21.52
The basic equitable duty owed by the directors is to act bona fide in what
they believe (and not what a court may consider) to be in the interests
of the company. But with whom should the “company” be identified for
the purposes of ascertaining its interests in this context? Other than most
obviously the shareholders, present and future, there are other stakeholders
in the company whose interests might be of relevance and should be considered. The claims of the company’s employees, for example, are recognised
legislatively (s 159 CA). A corresponding duty requires the directors
to exercise the powers conferred on them for proper and not collateral
purposes. A breach of the director’s equitable duties will entitle the company
to equitable compensation.
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Box 21.1
Reflecting
on the law
Duty to creditors?
In the Australian High Court decision of Walker v Wimborne (1976), Mason J opined
(at p 532) that “the directors of a company in discharging their duty to the
company must take account of the interests of its shareholders and creditors”. The
idea that directors owed any duty at all to the company’s creditors, whose interests
are often diametrically opposed to that of the company, is clearly at odds with
the trite principle that directors must exercise their powers for the benefit of the
company. It is now generally accepted that directors are only obliged to consider
the interests of creditors when the company is insolvent or near insolvency. This is
because the assets of an insolvent company no longer, in a practical sense, belong
to the shareholders. However, creditors do not acquire an independent right of
enforcement against errant directors. Instead, it is the liquidator of the company
who may bring an appropriate action against directors who have failed to give due
consideration to the interests of the creditors.
21.53
As a fiduciary, the director owes a strict duty of loyalty to the company.
There are two aspects to this duty. First, he must not allow his personal
interest to come into conflict with the company’s interest, and secondly, he
must not make a profit out of his position unless the informed consent of
the company has been obtained. A conflict of interests is present if, in any
transaction to which the company is party, the director has an interest adverse
to, or different from, that of the company. In the absence of disclosure, the
company may avoid the transaction. Thus, a director cannot, without full
disclosure, enter into a contract with the company or cause the company
to enter into a transaction if he has an interest in that contract. This rule
is supplemented statutorily by an obligation to disclose on pain of criminal
penalties (s 156 CA). The articles will usually also require the interested
director to abstain from voting on the transaction (Table A, Art 81 CA).
21.54
Interestingly, and somewhat inconsistently, directors are permitted, as a
general rule, to serve on the boards of more than one company simultaneously
and even to compete with the company on their own account (London &
Mashonaland Explorations Co Ltd v New Mashonaland Exploration Co Ltd
(1891)). Whilst this position was assumed correct by Lord Blanesburgh in
Bell v Lever Brothers, Ltd (1932) (at p 195), many company law commentators
(see, eg, P L Davies, Gower and Davies Principles of Modern Company Law
(8th ed, 2008) at 16.72) have expressed doubt over its correctness. In the
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UK Court of Appeal decision of Plus Group Ltd and others v Pyke (2002),
Sedley LJ opined (at [84]) that “if one bears in mind the high standard
of probity which equity demands of fiduciaries, and the reliance which
shareholders and creditors are entitled to place upon it, the Mashonaland
principle is a very limited one”. Clearly, there is nothing objectionable
about competing with the company (whether as a director on the board
of a competing company or on the director’s own account) if the director
concerned had disclosed and obtained the company’s consent (Kea Holdings
Pte Ltd v Gan Boon Hock (2000)). The question is whether consent is likely
to be given (for further reading on this topic, see M Christie, “The Director’s
Fiduciary Duty Not to Compete” (1992) 55 Modern Law Review 506).
21.55
The no-profit rule prohibits the director from making a secret profit out of
his office, and he cannot divert corporate contracts or business opportunities
meant for the company to himself. This rule is strictly applied, even if the
director had acted in good faith and for the benefit of the company because
“liability arises from the mere fact of a profit having, in the circumstances,
been made” (per Lord Russell in Regal (Hastings) Ltd v Gulliver (1942)
at p 386). The company is entitled to ask for an account of the profits made
by the director in breach of his fiduciary duties.
(b) Duty of skill, care and diligence
21.56
Directors are expected to exercise, when performing their functions as
directors, at least that level of skill, care and diligence that might reasonably
be expected of any director occupying a similar position. The standards
may be further elevated if the director in question possessed specific
qualifications or expertise. Section 157 CA reflects the general law obligation
by requiring the director to exercise reasonable diligence in performing the
duties of his office.
(3) Enforcement of directors’ duties
21.57
Directors owe their duties to the company and not to individual shareholders
(Percival v Wright (1902)). Breach of a common law or equitable duty owed to
the company is therefore a civil wrong against the company, and enforceable
only by the company. The power to commence and conduct litigation in
the name of the company is generally considered a management power and
therefore vested in the board of directors. However, where the board as a
whole has committed a wrong against the company, the power to call the
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directors to account must rightly revert to the company in general meeting,
where the decision rests with the majority.
21.58
There is an alternative procedure for the redress of a corporate wrong,
including a breach of directors’ duties, which may be commenced by an
individual shareholder. This is the statutory derivative action under s 216A
CA, which lays down a procedure by which a shareholder, or other “proper
person”, may apply to court for leave to commence an action in the name
of the company. To convince the court, the applicant bears the burden of
showing not only that he is acting in good faith, but also that it is prima facie
in the interests of the company that the action be brought. In recognition of
the fact that the course of action is a corporate one, the applicant must have
first given notice to the company’s board of directors of his intention to bring
the action. This gives the board, acting as the company, the opportunity to
take over the action itself.
Relationship between Shareholders
(1) Statutory contract
21.59
The relationship between the shareholders of a company is governed by the
constitution. Pursuant to s 39 CA, the constitution takes effect as a contract
which binds the company and the shareholders as if it had been “signed
and sealed by each member and contained covenants on the part of each
member to observe all the provisions of the constitution”.
21.60
This “contract” is, however, unlike the normal contract that is dealt with in the
other chapters of this book. First, it is alterable by special resolution, which
as we saw earlier, requires only a three-fourths majority, not unanimity, so
that the alteration takes effect even if there are members who do not agree.
Second, the cases have held that this statutory contract binds members qua
members only. What this means is that the “contract” can only be relied upon
to enforce what are properly members’ rights, and not other non-member or
outsider rights. In Beattie v E & F Beattie Ltd (1938), for example, a director
was sued for the return of certain sums that had allegedly been improperly
paid to him. As he was also a member of the company, he sought, relying
on a clause contained in the articles of association, to refer the dispute to
arbitration. The court, however, held that as the dispute had arisen in his
capacity as a director and not in his capacity as a member, he could not rely
on the “contract” comprised in the articles.
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(2) Majority rule and protection of the minority
21.61
We saw earlier that decisions are made for the company by either of its
two organs on the basis of the majority vote. Whilst the director’s vote is
controlled by strict fiduciary duties, there are no such constraints on the
shareholder’s vote. As Dixon J of the High Court of Australia explained,
“shareholders are not trustees for one another, and, unlike directors, they
occupy no fiduciary position and are under no fiduciary duties. They vote in
respect of their shares, which are property, and the right to vote is attached
to the share itself as an incident of property to be enjoyed and exercised
for the owner’s personal advantage” (see Peter’s American Delicacy Co Ltd v
Heath (1939) at p 504).
21.62
The shareholders who control the majority of the votes in a company
therefore wield substantial power in the company which is likely to be run
in accordance with their wishes. Indeed, this must naturally be so as the
majority’s control is a result of the correspondingly higher investment that it
has made in the company. The greater say therefore comes at a higher price.
The shareholders who fall in the minority must generally accept this as a fact
of commercial life.
21.63
Acknowledging this, however, does not mean that the minority has to
accept unfair or wrongful acts that result from abuses of the majority
power, opportunity for which clearly exists. Attempts have been made, both
legislatively and judicially, to achieve some balance between the opposing
interests of the majority and the minority. In this chapter, we consider in
brief the duty imposed on the majority in seeking to alter the company’s
constitution, to vote bona fide for the benefit of the company as a whole and
the oppression action under s 216 CA.
21.64
The relationship between the members and their rights inter se are usually
governed by the company’s constitution. But, as we saw earlier, it is possible for
the provisions of the constitution to be altered with a three-fourths majority.
The opportunity thus exists for such a majority to alter the constitution
to improve their position at the expense of the minority. The courts have
therefore laid down the rule that the power to alter the constitution must be
exercised bona fide for the benefit of the company as a whole (Allen v Gold
Reefs of West Africa Ltd (1900)). In this case, the company’s articles gave it a
lien (which is a security interest) for all debts and liabilities of any member
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“upon all shares (not being fully paid) held by such member”. Z owed the
company money and was the only holder of fully paid shares. An alteration
was made to the articles to give the company a lien over fully paid shares as
well. The court held that the alteration was valid. Although Z was at the time
of the alteration the only holder of paid-up shares, the alteration applied to
all holders of fully paid shares and did not distinguish amongst them. Since
the alteration would allow the company to recover moneys owing to it, it
was made bona fide for the benefit of the company.
21.65
There are, however, difficulties with the application of the test, and these
were pointed out by the Australian High Court in Peter’s American Delicacy
Co Ltd v Heath (1939). Dixon J explained (at p 512):
If the challenged alteration relates to an Article which does or may
affect an individual, as, for instance, a director appointed for life or a
shareholder whom it is desired to expropriate or to an Article affecting
the mutual rights and liabilities inter se of shareholders or different
classes or descriptions of shareholders, the very subject matter involves
a conflict of interests and advantages. To say that the shareholders
forming the majority must consider the advantage of the company
as a whole in relation to such a question seems inappropriate, if not
meaningless …
If the alteration to the company’s constitution results in unfairness to a
member, the member may consider applying under section 216 CA for relief.
We turn now to consider this section.
21.66
Legislatively, s 216 CA gives any member the right to petition to court if the
affairs of the company are being conducted in a manner that is oppressive or
in disregard of his interests, or some act of the company has been done or
is being threatened that unfairly discriminates against him, or is otherwise
prejudicial to him. In the Privy Council decision (on appeal from the Federal
Court of Malaysia) of Re Kong Thai Sawmill (Miri) Sdn Bhd (1978), Lord
Wilberforce made the following comments (at p 229):
[T]he mere fact that one or more of those managing the company possess
a majority of the voting power and, in reliance on that power, make policy
or executive decisions, with which the complainant does not agree, is not
enough. Those who take interests in companies limited by shares have
to accept majority rule. It is only when majority rule passes over into
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rule oppressive of the minority, or in disregard of their interests, that the
section can be invoked … [T]here must be a visible departure from the
standards of fair dealing and a violation of the conditions of fair play
which a shareholder is entitled to expect before a case of oppression can
be made … And similarly “disregard” involves something more than a
failure to take account of the minority’s interest: there must be awareness
of that interest and an evident decision to override it or brush it aside or
to set at naught the proper company procedure …
His Lordship’s comments have been adopted and followed locally. In
Low Peng Boon v Low Janie (1999), the Singapore Court of Appeal observed
that the court’s discretionary power to make an appropriate order is
unfettered and that each case has to be considered on its own merits.
NON-CORPORATE BUSINESS ORGANISATIONS
Sole Proprietorships
21.67
A sole proprietorship is essentially a business that is owned and managed by
one person, the proprietor. Apart from the requirement for the registration
of the business name under the BRA, there are no other formalities that
have to be complied with in the creation of a sole proprietorship. The debts
of the business are really the debts of the person, for which the sole
proprietor is personally liable, without limit. There is also no legal process
for the business to carry on following the sole proprietor’s incapacity or
death. The main advantage of the sole proprietorship as a form of business
structure is the flexibility that accompanies its operation. This results not
only from the relative lack of formal requirements, but also from the fact
that the sole proprietor is the only person in control of the business. The
necessary corollary t