Contract Law

• Citation: (2010) 11 SAL Ann Rev 239
• Published date: 01 December 2010
• Date: 01 December 2010

Formation of contract

Certainty and completeness

11.1 A number of formation issues were considered by the High Court in the interesting case of Norwest Holdings Pte Ltd v Newport Mining Ltd [2010] 3 SLR 956 (‘Norwest v Newport’). The suit arose out of an attempt by the plaintiff to sell the shares (‘the NC Shares’) it owned in a wholly-owned subsidiary in the course of its (ie, the plaintiff “s) liquidation. The subsidiary, in turn, owned a Chinaincorporated company licensed to mine, process and sell phosphorous in China (‘the Chinese Business’). On 9 May 2008, the defendant made an offer (‘9 May Offer’), in the form prescribed by the plaintiff, to purchase the NC Shares for $10.25m. On 12 May 2008, a massive earthquake measuring 7.9 on the Richter scale hit the province of Sichuan at 2.28pm Singapore time. About two hours later, the plaintiff e-mailed its acceptance of the 9 May Offer to the defendant. The plaintiff “s evidence, which was unchallenged, was that it was unaware of the Sichuan earthquake at that time. The defendant subsequently refused to complete the sale when it became apparent that the quake had severely affected the Chinese company“s mining and production facilities and the shares were eventually sold to the plaintiff “s parent company for $4.5m.

11.2 In response to the plaintiff“s suit for breach of contract, the defendant argued, inter alia, no legally binding contract existed between the parties. The court rejected this argument. In its view, the defendant“s argument comprised two related but distinct issues, namely, (a) whether substantial agreement was reached by the parties; and (b) whether the parties had the intention to create legal relations. On the first issue, the court affirmed the legal requirement for certainty and completeness but

cautioned (Norwest v Newport at [28]) that it is substantial, and not complete agreement, that has to be proved:

[It] should be emphasised that what is required is substantial or essential agreement and not complete agreement. A contract may be regarded as having been formed even though it has not been worked out in meticulous detail. Similarly if a contract calls for further agreement between the parties, the absence of further agreement between the parties will vitiate the contract only if it makes it unworkable or void for uncertainty.

Furthermore:

[The question whether] substantial or essential agreement has been reached is a question of fact to be decided with regard to all the circumstances of the parties“ dealings with each other, including in particular the nature of the transaction envisaged by the parties. It is worthwhile to bear in mind … that, in deciding whether a matter is essential, it is the intention of the parties, and not the opinion of the court, which is decisive.

11.3 On the facts, the court found that a substantial agreement had in fact been reached because they had agreed to the price, subject matter (the NC Shares) as well as the allocation of risk (the sale on an ‘as is, where is’ basis). Significantly, the court noted (Norwest v Newport at [30]) that because this was a sale effected by a liquidator, ‘[there] was ‘no place for the extensive representations, warranties and guarantees which might be found in normal sale and purchase agreements’. Since there was clear evidence that both offer and acceptance had been exchanged on the understanding the liquidator was not in a position to give any warranties, the agreement could not be impeached on the ground of uncertainty or incompleteness.

11.4 The second strand of the defendant“s argument was that no binding agreement had been formed because the defendant“s offer was made ‘subject to the terms and conditions in the Sale and Purchase Agreement to be negotiated’. In this connection, the court reiterated (Norwest v Newport at [34]) the primacy of the objective approach:

[In] finding an intention to enter into legal relations, and more generally, an intention to make or accept an offer, the law is predominantly concerned with the 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. The obvious rationale for the objective approach is to enable parties to deal in reliance on each others“ manifest intentions.

11.5 That being the case, the plaintiff “s board minutes and internal email correspondence, not having been made known to the defendant at the time of the contract, were irrelevant in determining the plaintiff “s objective intention.

11.6 Construing the offer document holistically, the court found that there was sufficient objective evidence of the defendant“s intention to be bound. These include the high degree of formality in the parties“ communication, the defendant“s references to its offer as a ‘firm offer’, as well as express recognition of its obligation to pay the balance of the purchase price less the deposit. Seen in this context, the ‘subject to’ phrase did not have the effect of rendering the parties“ agreement provisional. Rather, it should be understood to mean ‘the purchase would take place in accordance with the terms and conditions in the eventual Sale and Purchase Agreement …“to be negotiated“’ [emphasis in original]: Norwest v Newport at [37]. The net result was that the parties had entered into a binding agreement of sale, even if the precise mechanics of the transfer were still to be worked out.

Offer and acceptance

11.7 Another interesting issue that was considered in Norwest v Newport was whether an offer would lapse in the event of a fundamental change in circumstance by the operation of an implied term in the offer. Two decisions were cited in support of this proposition. Financings Ltd v Stimson [1962] 1 WLR 1184 (‘Stimson’) was concerned with the sale of a car under hire purchase. The purchaser“s offer to purchase was made on 16 March 1961, but only accepted by the finance company on 25 March 1961. However, the car was stolen and damaged on the night of 24 March 1961. The English Court of Appeal held that no binding agreement has been reached in such circumstance because the offer was conditional on the subject matter of the sale remaining substantially the same as it was when the offer was made.

11.8 In Roderick Nielsen v Dysart Timbers Ltd [2009] NZSC 43 (‘Dysart Timbers’), the Supreme Court of New Zealand was more explicit that there could be ‘implied’ a term into an offer that such offer would lapse in certain circumstance. However, the court was divided as to the precise mechanics by which such implication would arise. For the majority judges, the proper approach was to focus on the offer, a unilateral statement, and ask what the offeror meant to happen. This should be assessed objectively, taking into account the terms of the offer and all relevant circumstances. If, on this view, it were determined that the offer was made on a particular factual basis, and such factual basis were fundamental to the offer, then it may be possible to find that the offer would lapse if such basis ceased to apply. The requirement for a

‘fundamental’ change is critical, as Tipping and Wilson JJ explained (Dysart Timbers at [27]):

Recognising that a change in circumstances of this fundamental kind is necessary before an offer lapses will ensure that lapse on this basis will be a relatively rare occurrence. This is an appropriate way to reconcile the interests of the offerors and the offerees and to avoid the considerable uncertainty that would result from the test being at a lower level.

11.9 A slightly different approach was preferred by McGrath J (in the minority). His Honour regarded the issue to be one of normal contractual construction, ie, ‘whether, having regard to the terms of the offer, the change of circumstances, and the subsequent ‘acceptance’, viewed as a whole and objectively, there is a concluded agreement’: Dysart Timbers at [61]. That being the case, it follows that the test for deciding whether a term should be implied into an offer is the same as that for implying a term into a contract. In other words, the term implied must be necessary to make the contract workable and so obvious that it goes without saying.

11.10 In Norwest v Newport (above, para 11.1), Belinda Ang Saw Ean J distinguished both Stimson and Dysart Timbers on their facts. In Ang J“s view, the fact that the offeree (ie, the plaintiff) knew not of the change in circumstance at the time of acceptance was a critical point of distinction. Allowing the offer to lapse in such circumstance would be inconsistent with the objective approach to offer and acceptance, as it would ‘considerably undermine an offeree“s ability to rely on the objectively ascertained apparent intention of the offeror’: Norwest Holdings Pte Ltd v Newport Mining Ltd [2010] 3 SLR 956 at [63]. Furthermore, Ang J cited (Norwest v Newport at [66]) four reasons why the ‘implied term’ approach would not be a satisfactory means of resolving the issue at hand:

First, an implied term - and specifically an implied condition - is not something which the parties had in their actual contemplation … So in this regard an implied term is an artificial solution to unanticipated changes of circumstances, and, for the same reason, has fallen out of favour as the juristic basis for both common mistake and frustration.

Second, the implied term approach is necessarily focused on the offeror“s intention at the time of the offer, and on the parties“ intentions at the time of contract. Subsequent actions are only relevant to the extent that they reflect or evince the relevant original intention. Such an approach is appropriate in the case of a contract, where the parties“ obligations are fully formed at the time of the contract and cannot be unilaterally changed...