Contract Law

Published date01 December 2011
AuthorTHAM Chee Ho LLB (Hons) (National University of Singapore), BCL (Oxford); Solicitor (England and Wales), Advocate and Solicitor (Singapore); Attorney and Counsellor-at-Law (New York State); Associate Professor, School of Law, Singapore Management University. LEE Pey Woan LLB (Hons) (London), BCL (Oxford); Barrister (Middle Temple), Advocate and Solicitor (Singapore); Associate Professor, School of Law, Singapore Management University. GOH Yihan LLB (Hons) (National University of Singapore), LLM (Harvard); Advocate and Solicitor (Singapore); Assistant Professor, Faculty of Law, National University of Singapore.
Date01 December 2011
Formation of contract

Certainty and completeness

11.1 The Court of Appeal decision of Norwest Holdings Pte Ltd v Newport Mining Ltd[2011] 4 SLR 617 (Norwest (CA)) (on appeal from [2010] 3 SLR 956 and discussed in (2010) 11 SAL Ann Rev 239 at paras 11.111.12) raised an important issue concerning the effect of a subject to contract clause. The case originated from the respondent's offer on 9 May 2008 to purchase the entire share capital of a whollyowned subsidiary of the appellant. This offer was in response to the information memorandum put up by the appellant's sole liquidator. Crucially, this offer was stated to be subject to the terms and conditions in the Sale and Purchase Agreement to be negotiated. Three days later, on 12 May 2008, a massive earthquake struck the region where the subsidiary's main assets were located. Just two hours after the earthquake, the appellant purported to accept the respondent's offer. The respondent transferred the balance of the required deposit to the appellant on 14 May 2008. By 3 June 2008, the respondent had not completed the purchase of the shares even though the completion date for doing so was 1 June 2008. The appellant then sued the respondent for breach of contract, whilst the respondent counterclaimed against the appellant for the return of the deposit paid.

11.2 The Court of Appeal held that the main issue was whether there was a binding contract between the parties. The respondent had argued that there was no concluded contract due to the subject to contractclause in its offer made on 9 May 2008. It was further argued that conditions precedent still needed to be negotiated between the parties and therefore the prima facie meaning of the subject to contract clause should prevail, with the result that there was no binding contract between the parties. In contrast, the appellant argued that the essential terms of the contract had been agreed between the parties and hence the subject to contract clause ought not to be given its prima facie meaning because the context showed that the parties intended to be bound by a contract following the acceptance of the offer made on 9 May 2008. Therefore, as is evident from these arguments, the case turned on the proper approach to be taken in relation to a subject to contract clause.

11.3 The Court of Appeal stated that the starting point in considering whether there is a binding contract between parties should be determined by a consideration of all the circumstances and not be decided solely on the basis of the inclusion of a subject to contract clause. The court therefore agreed with the decision of the Supreme Court of the UK in RTS Flexible Systems Ltd v Molkerei Alois Mller GmbH & Co KG (UK Production)WLR[2010] 1 WLR 753 (RTS Flexible Systems) to the effect that a subject to contract clause could be waived by the parties if the circumstances showed this to be the case: Norwest (CA) at [24].

11.4 The Court of Appeal further noted that, even if the essential terms of a contract had been agreed upon, parties entering into a contract containing a subject to contract clause may still be taken to intend that they not be contractually bound until a formal contract is subsequently executed. This would be the default position unless there is strong and exceptional evidence to the contrary: Norwest (CA) at [29]. In support of this approach, the court referred to the Malaysian case of Low Kar Yit v Mohamed Isa[1963] MLJ 165, in which Gill J said (at [173]), that the courts will tend to give effect to a subject to contract clause unless there is strong evidence to the contrary.

11.5 It appears, therefore, that the approach of the Court of Appeal in Norwest (CA) is to presume rebuttably that when parties use a subject to contract clause, they intend for its prima facie meaning to apply. This presumption can be rebutted, although it seems that this would be an exceptional case requiring strong and exceptional evidence, and the fact that parties had nothing left to negotiate does not necessarily rebut this presumption. This understanding of the court's holding is consistent with the court's earlier reference to the RTS Flexible Systems case: in deciding whether the presumption that the parties intended the prima facie meaning of a subject to contract clause to be rebutted, the court is to have regard to all the circumstances of the case. In other words, the inclusion of a subject to contract clause is not determinative. However, such an inclusion is not without significance, for it means a court's analysis commences on the footing that there is a rebuttable presumption to the effect already described above.

11.6 Applying this approach to the facts of Norwest (CA), the Court of Appeal found that the parties did not intend to be contractually bound until a formal sale and purchase agreement had been negotiated and executed. In particular, the court placed emphasis on the numerous references in the parties' correspondences to subject to contract clauses. In addition, the offer made on 9 May 2008 was itself stated to be subject to contract in more than one place. In fact, the appellant's own acceptance stated that a formal sale and purchase agreement was to be negotiated and executed between the parties. These facts led the court to conclude objectively that the parties had intended to further negotiate a sale and purchase agreement such that the subject to contract clause ought to be given its prima facie meaning.

11.7 Next, the Court of Appeal found that there was not a very strong and exceptional context which would override the prima facie meaning of the subject to contract clauses found in the parties' correspondence and, it may be added, principally in the respondent's offer on 9 May 2008: Norwest (CA) at [31]. On the contrary, the facts confirmed that the parties intended for the prima facie meaning of the subject to contract clause to apply. First, the respondent needed to obtain third-party funding to complete the purchase once the sale and purchase agreement had been negotiated and agreed upon. Second, the respondent's trading halt of its shares was not indicative of a concluded agreement with the appellant. Finally, the respondent's payment of the deposit was made pursuant to an express term of the information memorandum and on the understanding that it would be refunded if the sale and purchase agreement were not to materialise. As a result, the Court of Appeal found that there was no binding contract between the parties and ordered the appellant to return the paid deposit to the respondent.

11.8 Another decision of the Court of Appeal, Soon Kok Tiang v DBS Bank Ltd[2012] 1 SLR 397, discussed the issue of when a contract will be void for uncertainty. The case arose out of an action brought by the appellants, who were investors in a series of callable basket credit-linked notes known as DBS High Notes 5 (HN5), to recover their investment sums under the said notes. The HN5 had been terminated due to the global financial crisis of 2008. The respondent bank informed the appellants that no sum would be due or payable to them as a result of the financial crisis. This rendered the appellants' investments in the HN5 worthless. The appellants' legal strategy to recover their investment sums was to argue that the HN5 were void at the time of their issuance and that the principal sums they had paid ought therefore to be returned to them. The HN5 were said to be void because a material term of the contract underlying the HN5, which concerned the calculation of the sum payable in the event of early termination, was uncertain. It was uncertain because (it was argued) four possible (and contradictory) methods of calculation were included in various parts of a document known as the pricing statement. Furthermore, it was argued that two methods of calculation were not workable because there was uncertainty in the formulae for the calculation specified.

11.9 The Court of Appeal characterised the issue as a question of fact, rather than a question of law. After perusing the evidence, it found that the third method of calculation was the operative one and therefore the appellants' argument, which centred on uncertainty, failed. Further, it also found that the formulae for calculation were not uncertain and that, properly interpreted in the context, were entirely workable. The appellants therefore failed. In choosing to deal with the issue as a question of fact, the Court of Appeal provided a timely reminder that the question of whether a contract is void for uncertainty is a very factual one. However, that factual enquiry must have been guided by legal principles operating in the background, for it is otherwise impossible to know whether the threshold of uncertainty had been breached on the facts. In this regard, the Court of Appeal had referred to the legal arguments raised by both parties, though it did not indicate its express agreement with them. However, the principles appear clear. As argued by counsel, the starting point is that stated by the House of Lords in G Scammell and Nephew Limited v H C and J G OustonELR[1941] AC 251, to the effect that it is only where the words of the contract failed to evince any definite meaning on which the court could safely act, that the court could say the contract was void for uncertainty. This is to be a measure of last resort. On the facts, this high threshold was evidently not crossed, because the court found that, in any event, there was no uncertainty.

Offer and acceptance

11.10 It is trite law that there must be, inter alia, a coincidence of offer and acceptance in order for a contract to be formed. This proposition is easy to state, but more complicated in practice.

Acceptance of an offer to settle

11.11 The High Court decision of Robert Bosch GmbH v YSH Pte Ltd[2011] SGHC 148 (Robert Bosch GmbH) raised the issue of whether there was an acceptance of a compromise. In...

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