Contract Law

• Date: 01 December 2016
• Author: GOH Yihan LLB (Hons) (National University of Singapore), LLM (Harvard); Advocate and Solicitor (Singapore); Associate Professor, Singapore Management University, School of Law. LEE Pey Woan LLB (Hons) (London), BCL (Oxon); Barrister (Middle Temple); Advocate and Solicitor (Singapore); Associate Professor, Singapore Management University, School of Law. THAM Chee Ho LLB (Hons) (National University of Singapore), BCL, DPhil (Oxon); Advocate and Solicitor (Singapore); Solicitor (England and Wales); Attorney and Counsellor-at-Law (New York State); Associate Professor, Singapore Management University, School of Law.
• Publication year: 2016
• Published date: 01 December 2016

Formation of a contract

General principles

12.1 The High Court decision of Independent State of Papua New Guinea v PNG Sustainable Development Program Ltd1 (“Independent State of Papua New Guinea”) provides valuable guidance on general aspects of contractual formation. In this case, BHP Billiton Limited's (“BHPB”) predecessor wished to close a mine in Papua New Guinea. BHPB's precedessor, as part of its exit plans, agreed to transfer its interest in the mining operations to PNG Sustainable Development Program Limited (“PNGSDP”), an independent third party, in exchange for certain concessions. Clause 9 and Art 52 of the Memorandum and Articles of Association (“M&A”) allegedly gave the State the right to inspect PNGSDP's accounts. The present case concerned the State's originating summons for an order that it be allowed to inspect and take copies of PNGSDP's accounts. In particular, the State argued that it had such a right not only by virtue of the M&A, but also a collateral contract comprising the terms of the M&A. This, therefore, raised issues concerning whether a collateral contract was concluded between the

State, BHPB, and PNGSDP, as well as whether that contract was supported by consideration.

12.2 Judith Prakash J (as her Honour then was) prefaced her consideration of whether there was a collateral contract by stating that “a collateral contract requires a promissory … statement, certainty of terms, separate consideration and intention to be legally bound.”2 These are not controversial requirements and have been accepted in several earlier decisions.3 However, as Prakash J also pointed out, the courts are sometimes reluctant to find a collateral contract if it will border on artificiality or results in commercial uncertainty. Thus, the finding of a collateral contract remains a finding of last resort and requires clear proof that the requirements of a binding contract have been met.

12.3 One of the arguments advanced by PNGSDP against a collateral contract is that the State could not identify a date on which it was entered into. In rejecting this argument, Prakash J held that the court's ultimate task is to uphold the reasonable expectations of honest men, following Tribune Investment Trust Inc v Soosan Trading Co Ltd4 (“Tribune Investment”). Interestingly, her Honour suggested that this may “involve eschewing the textbook approach to offer and acceptance and instead examining the documents as a whole to decide if parties agreed on all the material terms”.5 This is in line with the approach taken in the High Court decision of G-Fuel Pte Ltd v Gulf Petrochem Pte Ltd6 (“G-Fuel Pte Ltd”), which similarly endorsed Tribune Investment.7 All these seem to suggest that an overly technical approach should not be taken with regard to finding offer and acceptance. However, whether one should forsake the more technical approach and embrace a more flexible and holistic approach is perhaps best left to be resolved by the Court of Appeal at a later time.

12.4 G-Fuel Pte Ltd also raised the interesting issue of whether subsequent conduct can be used to infer the existence of a contract between parties. Tan Lee Meng SJ held that subsequent conduct can be used for such a purpose, distinguishing this from the use of such evidence for the interpretation of a contract, which he held cannot be done. Indeed, the learned judge pointed out that subsequent conduct

was considered by the High Court in Midlink Development Pte Ltd v The Stansfield Group Pte Ltd,8 where the court had to determine whether an oral lease agreement was concluded between the parties. Although the use of subsequent conduct to infer the existence of a contract seems reasonably well-established, it may be asked whether this is inconsistent with the preclusion of such evidence in the interpretation of contracts. This is a point that will be discussed below.

12.5 Beyond these cases, which dealt with the formation of a contract in commercial cases, the High Court case of Estate of Lee Rui Feng Dominique Sarron, deceased v Najib Hanuk bin Muhammad Jalal9 (“Lee Rui Feng”) concerned whether a contract could be concluded between a full-time national serviceman and the Singapore Armed Forces (“SAF”). The facts of the case were unfortunately tragic. Mr Lee, a full-time national serviceman, experienced breathing difficulties after the first defendant, who was the platoon commander of Mr Lee's platoon, discharged six smoke canisters during military training. Mr Lee, subsequently, lost consciousness and then died on the same day. The cause of death was ascertained to be acute allergic reaction due to the inhalation of zinc chloride fumes emitted from the smoke canisters. The first defendant was found to have breached training safety regulations, which specified that no more than two smoke canisters should have been used. Apart from suing the first defendant, Mr Lee's estate also sued the Attorney-General for breach of an alleged contract of service between Mr Lee and SAF. One issue, therefore, was whether such a contract existed between the parties.

12.6 Kannan Ramesh JC (as his Honour then was) held that there was no contract between Mr Lee and SAF. The learned judicial commissioner commenced his analysis by setting out the four elements for the formation of a valid contract, viz, offer, acceptance, consideration, and intention to create legal relations. His Honour said that there was no offer and acceptance because the statutory imposition of a duty to enlist meant that there was no freedom in the formation of the relationship which would be a necessary ingredient in the formation of a consensual relationship that was a contract. Indeed, even if the national serviceman enlisted voluntarily, that would not change the nature of how the relationship had come into being, that is, by legislative imposition. Accordingly, it would be artificial to speak of the parties entering into a contract that was underpinned by freedom of consent. Moreover, the learned judicial commissioner also held that there was no consideration because the full-time national serviceman was performing a duty that he was already under a statutory obligation to do so. There

was, furthermore, no intention to enter into any legal relationship between the parties since enlistment is an act done in discharge of a statutory duty. All in all, therefore, there was no contract between Mr Lee and SAF.

12.7 With respect, this must be the correct result. Although a contract can certainly come into being with it being in written form, it can only do so through the parties' intentions. Where one party is under a statutory obligation to perform a task, it will certainly be artificial to regard that party, as well as the counterparty, to concurrently intend to enter into a contractual relationship on top of that statutory obligation. The case of Lee Rui Feng is, therefore, a timely reminder that at the heart of contractual formation is the parties' requisite intention to enter into a contractual relationship, which is manifested through the basic elements of contractual formation.

Consideration

12.8 The doctrine of consideration, which is easily found in commercial cases, was also discussed in the High Court decision of Independent State of Papua New Guinea. More specifically, Prakash J considered whether there was good consideration for PNGSDP's alleged promise to allow the inspection of its accounts. The State argued that consideration was provided by the subsequent incorporation of PNGSDP. This argument faced two difficulties. First, it was odd to say that consideration given for a company's promise was the incorporation of that very company. Secondly, and following from that, it might be equally strange to say that, prior to its incorporation, a company had asked for its incorporation as consideration for a promise made by it. Prakash J rejected both difficulties. In so far as the first difficulty is concerned, her Honour held that the State was put to detriment as it had to incur costs in the incorporation of PNGSDP. Moreover, although the State had promoted PNGSDP, it had no legal duty to bring the company into existence, and the fact that it did constituted good consideration. As for the second difficulty, the learned judge held that consideration had been asked for by a party contracting on the (pre-incorporated) company's behalf qua promoter. The company could then ratify the contract upon incorporation. Accordingly, there was good consideration that moved from the State at the request of PNGSDP.

12.9 The High Court also had to decide whether there was good consideration in S Pacific Resources Ltd v Tomolugen Holdings Ltd.10 In this case, the parties entered into an agreement for the purchase of

certain shares by the plaintiff from the defendant for S$12.5m. As part of the agreement, the defendant granted the plaintiff a put option, which, if exercised, required the defendant to purchase those shares from the plaintiff at S$12.5m. The put option would expire if it was not exercised within the option period, defined to expire after 13 May 2013. However, the option period could be extended by mutual agreement between the parties. The parties, eventually, agreed to remove the expiry date by an amendment agreement dated 7 March 2013. When the plaintiff tried to exercise the put option in August 2014, the defendant failed to complete the purchase of the option shares. Judgment in default of appearance was entered against the defendant. The defendant succeeded in setting aside that judgment and, in the present case, sought to resist the plaintiff's appeal against the setting aside. The defendant argued that the amendment agreement was not supported by consideration.

12.10 Chua Lee Ming JC (as his Honour then was) disagreed and found that there was good consideration. The learned judicial commissioner agreed that variations to contracts need to be supported by good consideration...