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    12:18 PM Goh Yihan (Associate Professor, Singapore Management University)

    Contract Law Update 2014

        

    With the end of 2014 almost upon us, it is apposite to take stock of the more important developments in Singapore contract law in the year. This entry examines four cases that straddle important developments across various fields in contract law, namely, formation, terms, breach and illegality. In each case, it can be seen that the Singapore courts are anxious to consolidate existing law, and to chart new courses where relevant and appropriate. 

    Formation

    The Court of Appeal decision of Woo Kah Wai v Chew Ai Hua Sandra [2014] 4 SLR 166 raised several issues of contractual formation. The case concerned the sale of an apartment unit. The purchaser had made a written offer dated 10 February 2010 to the vendors to purchase the property. This written offer was handed over to the vendors’ agent on 11 February 2010. Much of the appeal turned on the existence of this ‘pre-option’ contract, as well as the actual duration of the option period, which was stated in the written offer to be ‘three days’. 

    An option to purchase was prepared by the vendors’ agent and dated 11 February 2010. The exercise date stated in the option was on or before 4pm on 13 February 2010, which was three calendar days from 11 February 2010. The purchaser’s agent went to collect the option from the vendors’ agent on 12 February 2010. He complained that the option period was too short and left the option with the vendors’ agent. Eventually, the vendors refused to amend the option and the purchaser’s agent collected the option and finally passed it to the purchaser on 13 February 2010. However, by this time, the option had expired. The next three days were a Sunday and two public holidays. The purchaser tried to exercise the option on 17 February 2010, but the vendors on the reason that the option had already expired refused this. 

    The purchaser began proceedings against the vendors to specifically perform the sale of the apartment or for damages. The High Court found in favour of the purchaser, and the vendors appealed to the Court of Appeal. 

    The Court of Appeal dismissed the vendors’ appeal. It held that the elements of contractual formation were all present:

    • There was an offer to purchase the apartment since this was clearly stated in the purchaser’s written offer. Indeed, the written offer expressly provided that the vendors must ‘either accept or reject this offer’, which showed that the purchaser intended to be bound provided that his promise was accepted by the vendors.
    • There was an acceptance of the purchaser’s offer since the vendors had signed on an acknowledgement block indicating acceptance, and had left the rejection block blank. This signified the vendors’ final and unqualified expression of assent to the terms of an offer. 
    • There was consideration to support the pre-option contract since the purchaser had provided a cheque in exchange for the provision of an option to purchase. The court rejected the vendors’ argument that the cheque was for the option to purchase and not in support of the pre-option contract, ruling that this was far too technical a view of the entire transaction.
    • There was an intention to create legal relations since the vendors had sight of the written offer and acted in a way consistent with their acceptance of it. 
    • The pre-option contract was certain since the timeframe for performance was clearly spelt out.
    • Above all, a contract to grant an option to purchase, rather than an option to purchase itself, was enforceable as a matter of principle, so long as all the other requirements of contractual formation were satisfied.

    This demonstrates that the Singapore courts will not adopt an overly technical reading of the formation requirements and avoid the finding of a contract being validly formed. In particular, the courts will not easily find that consideration had not been made out on any facts, particularly if the transaction concerned commercial entities or exchanges. As has been said in many previous cases, the courts will look at the substantive content of a transaction in discerning consideration, and will not easily accept the breaking down of a transaction into artificially minor parts to avoid the finding of consideration. 

    Having found that the pre-option contract was validly formed, the Court of Appeal then had to consider if it had been breached. It interpreted the option period of ‘three days’ to mean three calendar days, but the period started only when the purchaser had actual possession of the option and was hence in a position to actually exercise it. Thus, by giving the purchaser only up to 13 February to exercise the option when the purchaser only got hold of it on that day, the vendors effectively only gave the purchaser one day to exercise the option. This was in breach of the three days stipulated in the pre-option contract. As a result, the court found for the purchaser and held that the proper measure of damages was the difference between the contract price and the market price, less the option money. 

    This demonstrates that the Singapore courts will adopt a commercially sensible interpretation of contracts and avoid an overly literal reading that might frustrate the objective intentions of commercial parties.

    Interestingly, the court also held that the formality requirements under s 6(d) of the Civil Law Act also applied to a pre-option contract, although such a contract did not represent the option to purchase itself. This reasoning seems to be premised on the ground that the formality requirements, which reinforce the strictness by which property transactions are viewed, should apply to constituent parts of such contracts, such as the provision of an option to purchase and now, it seems, even a contract to provide such an option to purchase. 

    Terms

    The Court of Appeal decision of KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] 2 SLR 905 raised some important points relating to non-absolute obligations clauses. In the case, BRE was awarded a charter for an oil rig to Petronas by 21 March 2006. It eventually approached KSE to supply the rig. KSE engaged a third party contract, Oderco, to build the rig. KSE also formed a joint venture company with BRE to charter the rig. The key provision in the joint venture agreement provided that KSE was to:

    ‘use all reasonable endeavours to procure the [oil rig] is constructed and ready for delivery in Abu Dhabi or other location specified by KSE within six months after the Charter Agreement is executed.’

    As it turned out, Oderco could not meet its deadline and the rig was not constructed in time. Petronas terminated its charter agreement with BRE. BRE then purported to terminate the joint venture agreement with KSE on the ground that KSE had failed to use all reasonable endeavours to procure the construction of the oil rig. The case therefore turned on the interpretation of the ‘all reasonable endeavours’ clause. In this regard, the Court of Appeal provided some valuable guidance on the interpretation of such clauses, as well as other non-absolute obligations clauses. 

    • First, an ‘all reasonable endeavours’ clause required the obligor to act as a prudent and determined person in the interest of the oblige and anxious to procure the contractual outcome within the stipulated timeframe. On the facts, KSE’s conduct satisfied this requirement since they were persistent in pushing for Oderco’s compliance, within reasonable boundaries. 
    • Second, there was a need to distinguish between an obligation to use all reasonable endeavours to procure a third party’s performance and an obligation to do the same oneself. The former required a lesser degree of reasonable endeavour as compared to the latter since the procurement of a third party’s performance might involve some uncertainty. Applied to the present case, KSE could not be expected to deploy permanent staff to supervise Oderco. Indeed, this would be an intrusive right in relation to a third party builder. 
    •  Third, there was little of no difference between the standard imposed by an ‘all reasonable endeavours’ clause and a ‘best endeavours’ clause. 
    •  Fourth, a simple ‘reasonable endeavours’ clause simply requires the obligor to act reasonably to procure the contractual outcome.

    This decision is sensible in avoiding the thin distinction that had hitherto existed in foreign cases concerning the distinction between an all reasonable and best endeavours clause. Perhaps the most practical lesson from the case is that parties should spell out completely the exact non-absolute obligations they require of the other party, failing which, they leave it to the courts to construe such clauses for them. This, being an objective exercise, may not meet the subjectively intended obligations held by parties at the time the non-absolute obligation was entered into.

    Breach

    The High Court decision of The ‘STX Mumbai’ [2014] SGHC 122 raised interesting issues relating to breach. In this case, the plaintiff claimed the price of bunkers it had supplied to the defendant’s vessel. The price was payable on 16 June 2013, but the plaintiff commenced proceedings on 14 June 2013 on the basis of anticipatory breach. The plaintiff alleged that the following circumstances warranted its action. First, the STX Group of companies, which the plaintiff claimed to include the defendant, became insolvent. Secondly, the plaintiff had demanded immediate payment from STX Corporation (which was not the defendant) on 13 June via email at 6.36pm, but since it received no payment, it was entitled to issue proceedings the next morning. 

    The first issue raised by the case was whether insolvency can be sufficient ground to trigger anticipatory breach. The court held that it could not. The mere fact of insolvency does not show that the party concerned did not intend to be bound by its obligations. 

    The second issue was whether the doctrine of anticipatory breach could apply to executed contracts, which are contracts in which the only obligation left was for the breaching party to make payment. It has been said that the doctrine of anticipatory breach does not apply to such contracts because the entire rationale of the doctrine is to enable the innocent party an immediate action to save himself from performing his outstanding obligations. Thus, so the argument goes, since the innocent party in an executed contract has no further obligations to perform, the rationale for anticipatory breach ceases to be relevant and hence the doctrine itself should not apply. The court in The ‘STX Mumbai’ said that there is a strong case for the exception to fully apply in the present case, but it is unclear if it is endorsing the application of the doctrine to executed contracts more generally.

    While the reasoning for the non-application of the doctrine of anticipatory breach to executed contracts is to some extent attractive, it ignores another line of cases which regard the rationale for anticipatory breach as not being narrowly confined to allowing the innocent party to escape future obligations. These cases instead hold that anticipatory breach confer a right on the innocent party to terminate the contract, without regard to whether that results in the innocent party escaping future obligations at the same time. There is a certain attraction with this latter line of cases, for they recognise that the application of anticipatory breach is a result of a party’s breach, rather than the consequences of the application of the doctrine.

    Illegality

    Finally, the Court of Appeal decision of Ting Siew May v Boon Lay Choo [2014] SGCA 28 raised important points relating to the doctrine of illegality. The court held that the common law illegality category of entering into contracts with the object of committing an illegal act is unenforceable, but that the application of this category is to be assessed with reference to the principle of proportionality. The general approach is for the courts to examine the relevant policy considerations underlying the illegality principle so as to produce a proportionate response to the illegality in each case. The relevant factors for assessing proportionality include (a) whether allowing the claim would undermine the purpose of the prohibiting rule; (b) the nature and gravity of the illegality; (c) the remoteness or centrality of the illegality to the contract; (d) the object, intent, and conduct of the parties; and (e) the consequences of denying the claim. However, this is not an exhaustive list of factors. 

    The court’s expansive reading of the common law illegality category of entering into contracts with the object of committing an illegal act meant that courts should be reluctant to over-read statutes as rendering contracts illegal. 

    With this case, it is likely that the broad common law illegality category of entering into contracts with the object of committing an illegal act will supercede the other grounds to set aside a contract for illegality. Indeed, the principle of proportionality gives the courts great latitude to decide if a contract should be unenforceable for such reason. This, as the Court of Appeal says, is likely to result in a restrictive approach by which courts take on statutory illegality. Yet, this need not necessarily be so, since the application of statutory illegality is, in principle, a matter of statutory interpretation premised on discerning the parliamentary intent. It is not, in that sense, affected by the broadness (or narrowness) of the other common law illegality categories. 

    * This blog entry may be cited as Goh Yihan, "Contract Law Update 2014", Singapore Law Blog (4 December 2014) (http://www.singaporelawblog.sg/blog/article/60)

    ** A PDF version of this entry may be downloaded here

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