RESOLVING AMBIGUITY THROUGH EXTRINSIC EVIDENCE

• Date: 01 December 2005
• Published date: 01 December 2005
• Author: CHAN Leng Sun LLB (Malaya), LLM (Cambridge); Advocate & Solicitor, Singapore; Advocate & Solicitor, Malaya; Solicitor, England & Wales.
• Citation: (2005) 17 SAcLJ 277

Flushed with optimism when a deal is struck, businessmen rarely welcome nit-picking. When goodwill is replaced by acrimony, the illusion of minds ad idem shatters. Even the most conscientiously drafted document can then attract debate. Matters extrinsic to the written document are often invoked in support of diametrically different interpretations. In this paper, we look at how the court treats such evidence.

1 The devil himself knows not the mind of man. The public at large, though, expects our judges to find the truth embedded in the protagonists’ minds. Since our judiciary relies on intellectual and not metaphysical powers, our system of extracting truth is built on what is discernible, ie words. Hence, while intention is the bedrock of contract law, the dictates of expedience embodied in the parol evidence rule1 turns this principle on its head:

The question … is, not what was the intention of the parties, but what is the meaning of the words they have used.2

Anyone with a dollar to spend should put his money, not where his mouth is, but where his pen poises.

2 Sometimes, parties intentionally leave things unsaid, hoping that good faith will prevail in resolving issues as they arise. But all too often, a dealmaker falls into a series of false assumptions. Firstly, he thinks that he has thought through every issue that can arise from the transaction.

Secondly, the dealmaker falsely believes that, by some remarkable telepathy, his counterpart is of the same mind on all unspoken issues. Thirdly, on issues discussed, he believes that his counterpart will honour the spoken word against all threats to life, and more importantly, career.

3 In Full Fledge Holdings Ltd v Wisanggeni Lauw, Kan Ting Chiu J observed that:3

This case would not be necessary if the parties had put their agreements into writing or engaged lawyers to do it for them.

An encouraging phrase for hardworking draftsmen, but maybe too kind on a lawyer’s power of elucidation. There are more things on heaven and earth than are thought of in the solicitor’s Forms and Precedents.

4 At worst, ambiguity can result in there being no agreement at all. At best, parties, their lawyers and the courts are left scrambling to make sense out of the document.

I. Where there is no binding contract

5 There are two competing considerations when the courts are faced with an ambiguous document. On the one hand, the court will strive to uphold an agreement, to give it legal effect. Tan Lee Meng J in Grossner Jens v Raffles Holdings Ltd elucidates:4

Depending on circumstances, negotiating parties may enter into a binding contract even though there are a few terms which have yet to be agreed upon. This was recently reiterated by the Court of Appeal in The Rainbow Spring [[2003] 3 SLR 362]. However, the position is very different where important terms have not been agreed upon for as Maugham LJ put it in Foley v Classique Coaches Ltd[1934] 2 KB 1 at 13, “unless all the material terms of the contract are agreed there is no binding obligation”. In the present case, the parties did not reach agreement on crucial terms such as the remuneration for JG …

6 A stipulated mechanism for determining essential terms that have not been agreed can save what would otherwise be an invalid contract. Thus, in Hillas and Co Limited v Arcos Limited,5 the House of Lords salvaged a contract to buy “100,000 Standards” by referring back to

the previous year’s contract which referred to “standards softwood goods of fair specifications”. By interpolating “fair specifications” into the current contract, the House of Lords found that there was an objective standard within the timber trade for assessing the kinds, qualities and sizes of the goods.

7 The common law approach is not that unusual. Article 2.1.14 of the UNIDROIT Principles of International Commercial Contracts 20046 provides that a contract can be valid even if parties intentionally leave a term open to be decided later, provided there is an alternative means of rendering the term definite.

8 In sale of goods contracts, s 8(2) Sale of Goods Act (Cap 393, 1999 Rev Ed) comes to the rescue by providing a “reasonable price” where the parties have not agreed on the price, nor fixed a manner for its determination or have a course of dealing in which the price can be determined.7

9 Similarly, Art 55 of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”),8 provides that where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered to have impliedly made reference to “the price generally charged” at the time of contract for such goods. This provision, though, is

a source of controversy in itself, as the price is one of the important factors for the formation of contract under Art 14.9

10 On the other hand, it is not the role of the court to write the contract for the parties. If crucial terms are not agreed and there is no means of determining such terms, there will be no binding contract.10 The concept of “reasonableness” is not a panacea for sloppiness. It is open to the court to interpret the lack of certainty as lack of contractual intention. In Baird Textiles Holdings Ltd v Marks & Spencer plc,11 Mance LJ reaffirmed the conditions for a contract’s existence: (a) an agreement on essentials with sufficient certainty to be enforceable; and (b) an intention to create legal relations. In that case, the lack of agreement on essentials indicated that neither party could objectively be taken to have intended to make any legally binding commitment. In Grossner Jens,12 the lack of agreement on the remuneration of the broker led the judge to find that there was no binding contract.

11 A particularly sensitive period lies between the initial understanding and the formalisation of the contract by a full written form. If the terms are agreed and the written document is just a formality, there is no problem finding that a contract exists. The question is whether the intended documentation is just a formality, or a condition for the existence of a contract.

12 In Tan Yeow Khoon v Tan Yeow Tat (No 1),13 MPH Rubin J found that all the essential terms had been settled and what remained to be finalised was the device or mechanism to set those terms in train. An agreement to execute a formal agreement did not prevent there being a valid and concluded agreement in the meantime. In The Rainbow Spring,14 the Court of Appeal held that a charterparty was established by telex exchanges, even though no formal charterparty was executed and minor terms had not yet been decided. In contrast, the Court of Appeal

in Compaq Computer Asia Pte Ltd v Computer Interface (S) Pte Ltd15 held that a letter awarding a tender contract “subject to final terms and conditions being agreed” showed that parties did not intend to have a binding contract at that stage. In Compaq Computer, the essential terms had also not been agreed yet.

13 What effect a phrase has depends on its context, but when parties say “subject to contract”, that has a more unsettling effect.

14 In Burby, Mark v Koo Khin Yong,16 a signed term sheet (investment agreement) was qualified “subject to contract”. Judith Prakash J considered the authorities, including the Court of Appeal decision in Compaq Computer and summarised the position thus:17

The conclusion to be drawn from the case law therefore, is that a document containing the clause “subject to contract” will, prima facie, not constitute a binding obligation unless there are exceptional circumstances that show that the prima facie implication must be displaced. The person who asserts that the prima facie implication is not applicable is the one who must prove it. In this case therefore, the onus of establishing the contractual status of the Term Sheet lies on the plaintiff.

15 On the facts, the learned judge held that the plaintiff had not proved the contractual status of the Term Sheet, even though it was signed. The judge found that:18

[I]t set out the overall scheme of the arrangement between the parties that would fall into place when the shareholders’ agreement and the subscription agreement were executed. It was intended as a guide for the detailed contents of these documents that would form the binding obligation between all parties concerned.

16 In the shipping context, English case law recognises that “sub details” or “subject to details” have a similar meaning to “subject to contract”, especially in the sale of ships as well as the fixing of charterparties. There is usually no binding contract until the details have been agreed.19 In Singapore, “subject to details” featured in

Pacific Orient Sea Transport Pte Ltd v The Owners of the ship or vessel “Ever Wealthy”.20 The parties had agreed by telex on a charter of the specific ship for a voyage of 80 days between a range of specified ports at a stated daily rate, subject to further agreement on three items, ie charterparty details, bunkers and board approval. On the facts, Judith Prakash J found that the board approval had been obtained and the details agreed subsequently. She further held that the fact that parties had not worked out the subject of bunkers in the charterparty did not prevent the existence of a binding charterparty contract.

17 It is clear that where the existence of a contract is in issue, extrinsic facts play a large part in providing the answer. In fact, in Mohamed Bassatne v Rifaat El Gohary,21 Lai Siu Chiu J looked to the subsequent conduct of the parties. In this case, however, she seems to have proceeded on an estoppel by convention, where parties cannot deny the truth of an assumption on which they have acted, if it would be unjust to allow them to go back on it.22 The question is, can subsequent conduct short of an estoppel assist the court in determining the existence, or...