Contract Law

Citation(2008) 9 SAL Ann Rev 212
Date01 December 2008
Published date01 December 2008
Formation of contract
Offer and acceptance

10.1 It is trite law that a contract may be concluded by conduct, and in such cases the precise point at which consensus ad idem occurs is essentially a question of fact. In Singh Chiranjeev v Joseph Mathew[2008] SGHC 222, the High Court held that an owner of a condominium unit was bound by his consent to an option agreement once he had accepted the deposit of the option moneys into his bank account. Not being made ‘subject to contract’, it was irrelevant that the option agreement had not been signed at that point.

10.2 In contrast, an attempt to infer a contract from the parties” conduct failed in Sitt Tatt Bhd v Goh Tai Hock[2008] SGHC 220. Here, the plaintiff alleged that the defendant, the sole director and shareholder of Prime International Consultants Pty Ltd (‘Prime’), had by his conduct contracted with the plaintiff to procure Prime to fulfil its various undertakings to the plaintiff. In substance, the plaintiff argued that such inference was justified because Prime, being an artificial entity, would not be in the position to discharge any of its responsibilities except through the defendant, its alter ego. As such, the defendant must be taken have accepted personal responsibility for Prime”s obligations. Judith Prakash J had no difficulty in dismissing these arguments. On the evidence adduced, it was clear that the plaintiff was at all material times aware that it was dealing with the defendant as the representative of Prime. The recognition that the defendant was factually responsible for Prime”s discharge of its contractual obligations could not lead to the implication of a direct contract between the plaintiff and the defendant. If the plaintiff”s arguments were right, it would ‘have the potential to impose liability by way of a collateral contract between the directors

who control any company and third parties who contract with the company’ (at [29]), which was plainly unacceptable.

10.3 In Econ Piling Pte Ltd v NCC International AB[2008] SGHC 26, the High Court was asked to determine if two partners had, over a period of protracted negotiations, entered into a binding agreement to dissolve the partnership. Chan Seng Onn J emphasised that the issue was to be determined by an objective assessment of the parties” conduct in the course of the negotiations as well as the surrounding circumstances. Where the evidence demonstrated that the parties had reached agreement on the material terms of dissolution, the parties were bound even if one partner subsequently refused or neglected to execute the deed of dissolution setting out the terms of the agreement. In such circumstances, the failure to execute the deed was only an incompleteness in form but not substance.

Consideration

10.4 Various aspects of formation issues arose in relation to compromises in Gay Choon Ing v Loh Sze Tie Terrence Peter[2009] SGCA 3. In this case, the appellant claimed the beneficial ownership of 1.55 million ordinary shares (‘the GLS shares’) in the capital of a company known as Gay Lip Seng & Sons (Pte) Ltd (‘GLS’) and various remedies in consequence of the respondent”s alleged breach of trusts.

10.5 The parties had been close friends for over 30 years. The respondent, Loh, was the managing director and shareholder of a company known as ASP Co Ltd (‘ASP’) operating in Nairobi, Kenya. The appellant, Gay, joined ASP as its general manager in 1981 and had continued in its employment until 2004. In 1994, Gay subscribed for the GLS shares using funds provided by Loh. A trust deed was subsequently executed, under which Gay undertook to hold the GLS shares on trust for Loh.

10.6 At the trial, Loh claimed that he had extended the subscription moneys to the appellant as an investment in GLS, and was therefore the beneficial owner of the GLS shares. Gay, however, argued that the moneys were a loan from Loh and the trust was created as security for the loan. As a subsidiary defence, Gay also contended that Loh”s rights in relation to the GLS shares had in fact been extinguished under a compromise agreement constituted by two documents, viz, a ‘points of agreement’ dated 27 October 2004 (‘POA’) under which Loh agreed to sell his entire stake in GLS to Gay for a sum of $1.5m; and a letter of waiver signed on the same day by Gay and Loh (in his capacity as managing director of ASP), pursuant to which Gay agreed to forego any claim for severance pay as against ASP.

10.7 Before the High Court (see Loh Sze Ti Peter v Gay Choon Ing[2008] SGHC 31), both parties accepted that the proper construction of the trust deed was central to the resolution of the dispute. Looked at in its entirety, Justice Belinda Ang concluded that the trust deed created an express trust in favour of Loh, who was therefore the beneficial owner of the GLS shares. Significantly, Ang J also rejected Gay”s ‘subsidiary’ argument that the POA and waiver letter resulted in a binding compromise on three grounds.

10.8 First, no compromise had arisen because the POA and waiver letter were two independent transactions binding different parties. While the POA dealt with the rights and liabilities of Loh and Gay, the waiver letter was concerned with Gay”s claims against ASP. Even though Loh was a signatory to the waiver letter, he did so in his capacity as managing director of ASP and there was no evidence to suggest that Loh was the alter ego of ASP. Second, even if it was accepted that the parties had entered into a compromise, the POA was, nevertheless, tainted by the breach of the fair-dealing rule and hence liable to be rescinded. Finally, Gay”s own assertions for severance pay after the execution of the POA and the waver letter amounted to clear evidence of there being no concluded compromise.

10.9 In the Court of Appeal, however, the analysis of the issues took a decided turn. For the appeal court, the crux of the issue laid in the legal effects of the POA and the waiver letter rather than the legal status of the trust deed. Contrary to the findings in the court below, the Court of Appeal found that a valid compromise agreement had arisen by virtue of the contemporaneous execution of the POA and the waiver document. Taken together, the two documents had the effect of releasing Gay from all his obligations under the trust deed, while Loh was released from any obligation relating to the payment of severance fees to Gay. In effect, the settlement put an end to both parties” claims, and Loh”s interests in the GLS shares, which had been lawfully sold to Gay under the terms of the POA, had to fail.

10.10 Delivering the judgment of the court, Justice of Appeal Andrew Phang took the opportunity to clarify the law on compromises and settlements. Compromises, the learned judge observed (Gay Choon Ing v Loh Sze Tie Terrence Peter[2009] SGCA 3 at [45]), are predicated on there being a pre-existing dispute. Once it is clear that the parties are negotiating to settle a dispute, the question whether a binding compromise arises will be determined by applying the general principles of contract law. These would, of course, include the usual principles relating to offer, acceptance, consideration and intention to create legal relations.

10.11 In the High Court, one of the reasons cited for invalidating the compromise agreement was that the POA and the waiver letter bound different parties. In particular, whilst Loh relinquished his rights under the trust deed, he appeared to have derived no direct benefit in Gay”s promise to forego his claims for severance pay against ASP. However, the Court of Appeal did not regard this as an insuperable difficulty.

10.12 As Andrew Phang JA explained (Gay Choon Ing v Loh Sze Tie Terrence Peter[2009] SGCA 3 at [78]—[79]), the more critical issues raised by these facts were whether the parties intended to create a binding compromise, and whether there was adequate consideration to support their respective promises. Both questions were answered in the affirmative. In particular, the court was satisfied that Gay had given adequate consideration for Loh”s promises under the POA because Gay”s promise to waive his claims against ASP was given at the request of Loh. Loh”s request crucially demonstrated that the POA and the waiver were part and parcel of one compromise rather than two unrelated transactions.

10.13 Although Andrew Phang JA emphasised (Gay Choon Ing v Loh Sze Tie Terrence Peter[2009] SGCA 3 at [81]) that consideration could take the form of either detriment to the promisor or benefit for the promise, the signing of the waiver letter fulfilled both conditions. Loh clearly had a personal interest in ensuring that Gay gave up his claims against ASP and to that extent, Gay”s promise conferred a benefit on Loh inasmuch as it was a detriment to Gay. Thus viewed through the lens of contract law, the parties” conduct amounted to a settlement which, having been fully executed, had the effect of extinguishing their prior claims and liabilities. (For another case decided on similar grounds, see Tsu Soo Sin v Ng Yee Hoon[2008] SGHC 30, where an attempt to invalidate an agreement on the ground of lack of consideration failed because the plaintiff”s promise was in fact given in exchange for the other parties” promises to confer benefits on third parties.)

10.14 Apart from analysing the specific facts and issues arising in Gay Choon Ing v Loh Sze Tie Terrence Peter[2009] SGCA 3, Andrew Phang JA also commented broadly on the conceptual and doctrinal difficulties surrounding the contractual formation rules. One such comment related to Lord Denning”s suggestion (in Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd[1979] 1 WLR 401) to substitute the rigid adherence to offer and acceptance rules with a more fluid approach that focuses on the finding of agreement on material points.

10.15 Whilst acknowledging that the traditional application of formation rules do, on occasion, result in...

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