Commercial Law Homework
qychang
CL_StudyGuidev2.0-1.pdf
Study Guide
HIGHER EDUCATION HIGHER EDUCATION
ACADEMY INSTITUTE
Diploma Programme
Commercial Law v2.0
Copyright © 2021 Kaplan Singapore. All rights reserved. i
COMMERCIAL LAW
KHE-LCD-SGD-00341
ii
Kaplan Desired Graduate Attributes
Through the reading of this module, Kaplan Singapore intends to:
• Instill in students the value of lifelong and self- directed learning by stimulating intellectual curiosity, creative and critical thinking and an awareness of cultural diversity;
• Assist students in developing professional attributes, ethical values, social skills and strategies that will nurture success in both their professional and personal lives;
• Foster integrity, commitment, responsibility and a sense of service to the community;
• Prepare students to meet the ever-changing needs of their communities both now and in the future; and
• Promote innovative and effective teaching.
Culminating from these institutional values and educational goals, Kaplan Singapore’s Desired Graduate Attributes are:
Inquiry and criticality: Graduates will be able to critically collect, evaluate and apply information and data in order to make decisions in a wide variety of professional situations. This attribute is demonstrated when students:
• Undertake, evaluate and apply appropriate research, theories, concepts and tools to investigate problems and find solutions;
• Exercise critical thinking and independent judgement to assess situations and determine solutions; and
• Have an informed respect for the principles, methods, values and boundaries of their profession and the capacity to question these.
Ethicality and discernment: Graduates will be able to assess situations and respond in an ethically, socially and professionally responsible manner. This attributed is demonstrated when students:
• Act responsibly, ethically and with integrity in their profession;
• Hold personal values and beliefs and participate in the broad discussion of these values and beliefs while respecting the views of others;
• Understand the broad local and global economic, political, social and environmental systems and their impact as appropriate to their discipline and profession; and
• Acknowledge personal responsibility for their own judgments and behaviour
Ability to communicate well: Graduates will recognise the importance and value of communication in the learning and professional environment. This attributed is demonstrated when students:
• Create and present knowledge, arguments and ideas confidently and effectively using a variety of methods and technologies;
• Recognise the wide range of possible audiences for information and respond with communication strategies appropriate to those audiences; and
• Work collaboratively with people from diverse backgrounds and be aware of the different roles of team members and to function within that team.
Independent and reflective practitioner • Graduates will be able to work independently and
be self-directed learners with the capacity and motivation for continued professional learning and development; and
• They will be able to critically reflect on their own practice and evaluate and understand current capacity and further development needs
Embedded within the desired graduate attributes are the following skills: • Conduct research. • Analyse, organise and present data and
information. • Think and read critically. • Make an oral presentation. • Intellectual curiosity and awareness of culture and
diversity. • Develop professional ethos and practice that will
foster success in career and life. • Meet the ever changing needs of communities
now and in the future.
COMMERCIAL LAW
KHE-LCD-SGD-00341
iii
Table of Contents
ii iii iv
v vii viii
1
13
23
33
40
46
60
75
88
Kaplan Desired Graduate Attributes Table of Contents About this module Instructions to Students Scheme of Work Assessment Matters
Topic 1 Introduction to Law
Topic 2 The Law of Contract: Offer & Acceptance
Topic 3 The Law of Contract: Consideration & Intention to Create Legal Relations
Topic 4 Terms of a Contract
Topic 5 Exemption Clauses
Topic 6 Factors Vitiating a Contract
Topic 7 Discharge of Contract & Remedies for Breach of Contract
Topic 8 The Law of Tort
Topic 9 Sale of Goods
Topic 10 Business Organisations 101
COMMERCIAL LAW
KHE-LCD-SGD-00341
iv
About this module
Commercial law is the body of law that governs the broad areas of business, consumer transactions, and commerce. The application of commercial law has developed a specific set of laws that apply to commercial activities, pursuits, and transactions. All businesses use commercial law to create wealth, and to identify and mitigate risks.
Included in the discussions are the Law of Torts, essential in understanding non-contractual obligations of individuals and organisations; the Sales of Goods transactions, an important facet in mercantile transactions; and Business Organisations, the legal entities that exist to facilitate business.
This broad study in commercial law will equip the student with a comprehensive understanding of the laws, i.e. rights and obligations, central to consumer and business transactions, so vital to the success of any thriving economy.
Module Learning Outcomes
Upon successful completion of this module, the student should be able to:
• Describe the sources of law.
• Explain the elements necessary to create a legally-binding contract.
• Evaluate the importance of terms of a contract.
• Navigate through the factors that could render a contract void or voidable.
• Distinguish between a breach of contract and frustration of contract.
• Appreciate the various remedies available in a breach of contract.
• Demonstrate an understanding of tort law and its effects on business.
• Address the legalities involved in sale of goods transactions.
• Understand and compare the various business entities in Singapore.
COMMERCIAL LAW
KHE-LCD-SGD-00341
v
Activity Sheets
It is imperative that you sincerely attempt all the activities in class and document your responses faithfully. These activity sheets are specially designed to scaffold your learning; working through the tasks is an integral part of developing the desired skills.
Also, by making your thinking visible through the activity sheets, it is then possible for your lecturer to provide you with growth producing feedback so that you may improve your performance or have your doubts clarified.
Instructions to Students
How to use this study guide
This study guide consists of written notes that form the main treatise of the subject matter of this module. You are strongly advised to study these notes carefully and thoroughly, as well as, examine the sources that have been cited.
Written quiz and examination will not test beyond the scope of the contents found in the study guide. However, in order to fully address the assessment requirements of the assignment, you will need to research beyond the confines of the study guide. Nevertheless, the materials herein are still a sound basis from which to build the assignment.
Further supporting materials
The study guide is supplemented by the following:
• Reproduced PowerPoint slides used by the lecturers
• Activity sheets
PowerPoint Slides
The PowerPoint slides are meant for the lecturers to signpost the flow of the lesson and for you to have a visual focus when in class. Outside of class, they can also serve to help you recall the activities that took place during the respective lessons so that you might be reminded of key learning points.
However, the PowerPoint slides must NOT replace the need for you to read the written notes in the study guide. The slides alone are INSUFFICIENT for you to gain the necessary understanding of the subject matter. As such, they will NOT prepare you adequately for the various summative assessment components.
COMMERCIAL LAW
KHE-LCD-SGD-00341
vi
Overview of Learning Resources
Recommended Reading:
Other Suggested Reading:
Other Sources: See Proquest and Newslink databases linked to your Elearn LMS homepage. The National Library Board on North Bridge Road (databases are for Singaporean/PR only).
COMMERCIAL LAW
KHE-LCD-SGD-00341
vii
Scheme of Work
SESSION TOPICS
FT PT 1 1 Topic 01 Introduction to Law
2 Topic 02 The Law of Contract: Offer & Acceptance
3 2 Topic 03 The Law of Contract: Consideration & Intention to Create Legal Relations
4 Topic 04 Terms of a Contract
5 3 Topic 05 Exemption Clauses
6 Recap of Topics 1-5 Discussion of Assignment Brief
7 4 Topic 06 Factors Vitiating a Contract (part 1)
8 Topic 06 Factors Vitiating a Contract (part 2)
9 5 Topic 07 Discharge of Contract & Remedies for Breach of Contract (part 1)
10 Topic 07 Discharge of Contract & Remedies for Breach of Contract (part 2)
11 6 Topic 08 The Law of Tort (part 1)
12 Topic 08 The Law of Tort (part 2)
13 7 Topic 09 Sale of Goods
14 Topic 10 Business Organisations
Recap of Topics 6-10
COMMERCIAL LAW
KHE-LCD-SGD-00341
viii
Assessment Matters
Assessment Overview
Assessment 1: Continuous Assessment (Quiz) Weighting: 20% Date: To be confirmed Duration: 10 minutes per quiz Test Format: 5 MCQs per topic
Assessment 2: Examination Weighting: 80% Duration: 2 hours Date: To be confirmed Format: 2 Case Studies
4 Short Answer Questions
Important Policies
Penalties for Plagiarism
Plagiarism in any form is not tolerated by Kaplan Singapore. That said, direct quotations and general similarities of common terms and language mean the E-Learn LMS will often pick up every small similarity so the likelihood of a Turnitin Similarity report recording a result of 0% is unrealistic. After all, no technology is perfect and there is the need for some direct quotation (provided you reference using APA guidelines, of course) and to use commonly accepted terms and language.
TOP TIP: The surest way to succeed is to ensure all work is correctly referenced. Keep a copy of the Kaplan Singapore Academic Works and APA Guide handy when you are typing your assignments and use it to guide you as to correct referencing, citation and other aspects of academic writing.
COMMERCIAL LAW
KHE-LCD-SGD-00341
ix
Penalties for late submissions
Kaplan Singapore prepares students for the realities of the workforce and further education by requiring students to meet deadlines and submit all work on time. As such, students are required to seek approval and penalties will be imposed on late assignment submissions in accordance with the table below and cited in the Programme Handbook:
No of days late Penalty 1 – 5 days 10% deduction per day from the
marks attained by students. After 5 days Assignments that are submitted
more than 5 days after the due date will not be accepted and it will be deemed as “No Submis- sion”. Student will be required to re-module.
Assignments and Kaplan Learning Management System
Kaplan Singapore School of Diploma Studies requires you to submit Assignments through the Learning Management System (E- Learn LMS). When submitted, your assignment is checked for plagiarism by software called Turnitin linked to the E-Learn LMS. The software is intended to provide one more tool to improve the quality of academic writing and as such will be compulsory for use. It is important to note that this is merely one of many tools available to you and that final decisions about the quality of your work rest with your lecturer.
Assigment Submission: How to Use E-Learn LMS for Assignment Submission
1. You will be enrolled by the School of Diploma Studies Programme Management into the E-Learn LMS system only after your fee payment is confirmed.
2. You will be sent your USER NAME and PASSWORD via email.
3. Reset your password as prompted. 4. Enter the site at the following address:
https://elearn-diploma.kaplan.com.sg 5. To submit assignment please refer to the
LMS Manual
Please refer to your Student Handbook for more details on Penalties for Plagiarism, Misconduct, Examinations Rules and Regulations. Should you have any queries, please contact [email protected]
COMMERCIAL LAW
KHE-LCD-SGD-00341
x
Topic 1 Introduction to Computers
Topic 2 Cache Memory
Topic 3 Internal Memory
Topic 4 External Memory
Topic 5 Number Systems
Topic 6 Matrices
Topic 7 Introduction to Problem Solving
Topic 8 MATLAB Environment
Topic 9 MATLAB Functions
Topic 10 Control Structures
Topic 11 Control Structures
Topic 12 Plotting
Topic 13 g
This page intentionally left blank
COMMERCIAL LAW
KHE-LCD-SGD-00341
Study Guide
Topic 1 – Introduction To Law
What is Law?
Law is a system of rules, usually enforced through a set of institutions. Law regulates the
behaviour of individuals, and well as offers rules and regulations that govern all organisations.
It shapes politics, economics and society in numerous ways, and serves as the foremost social
mediator in the relationships between all parties in a country. (The word “parties” is generally
a term used in law to describe either a person or an organisation. Therefore, it is not
uncommon to hear of term “parties to a contract” or “parties in a dispute”.)
It is therefore no surprise to anyone that law governs a wide variety of social activities. For
example, contract law regulates all commercial transactions such as buying a bus ticket or a
meal to entering in an employment contract or cell phone contract. All these are legally-binding
contracts. Another example would be property law, which defines rights and obligations
related to the transfer and title of real estate between parties. There is also tort law, which
protects the rights of parties even in the absence of any contract, and which allows a claim for
compensation should a party’s rights be violated by another.
Laws are grouped into “public law” and “private law”. Public law governs the relationship
between individuals and the state. Falling into this category are constitutional law,
administrative law and criminal law. Private law governs the relationships between individuals,
such as the law of contracts and the law of tort.
Commercial law (also known as business law) is the body of law which governs businesses
and commercial transactions. It is often considered to be a branch of civil law and deals both
with issues of private law and public law.
What do we need law?
Laws are very important for human beings to live a dignified and secured lifestyle. Laws
generally provide us a sense of security. A society lives in comfort knowing that there are
laws to keep them safe, that their rights are protected, as well as ensure that legally-binding
contracts are observed by all parties.
Laws also serve as deterrence for those who would commit crimes. For example, murderers,
thieves, and others with no moral code to live by must be deterred from harming others. If
we did not have laws, chaos would prevail.
COMMERCIAL LAW
KHE-LCD-SGD-00341 1
The rule of law
The Rule of Law, in its most basic form, is the principle that no one is above the law. Most
legal systems are based on this principle. It provides that governments and individuals can
only act in accordance with publicly-known laws. These laws must be adopted and enforced
in a manner that is consistent with established conventions, traditions and procedures.
It has been said that the Rule of Law cannot exist without a transparent legal system; the
main components being a clear set of laws that are freely and easily accessible to all, strong
enforcement structures, and an independent judiciary to protect citizens against the arbitrary
use of power by the state, individuals or any other organisation.
Categories of law
Law can be divided into civil law and criminal law.
• Civil law
Civil Law deals with legal relationship between private individuals (commercial or
personal injury disputes, for example). Typically, one-person (the plaintiff) will claim
that the other person’s (the defendant) actions caused him/her harm, and file a civil
suit against that person seeking compensation (i.e. damages) for that harm caused.
• Criminal law
Criminal Law is designed to prevent citizens from deliberately harming each other and
involves actions that have been declared illegal by the state (murder, theft, assault,
etc.). In a criminal case, the State (represented by the Public Prosecutor) brings a
defendant (who is accused of having committed an offence) to trial, and a guilty verdict
usually results in imprisonment, a fine, or both.
Sources of Law Before engaging in the discussion on the sources of laws in Singapore, we need to briefly
examine Singapore’s history.
Modern Singapore was founded by Sir Stamford Raffles in 1819. It immediately served as a
trading post of the British Empire. In 1867, the colonies in Southeast Asia were reorganised
and Singapore came under the direct control of Britain as part of the Straits Settlements.
During World War II, the country was occupied by Japan, but returned to British control as a
separate crown colony following Japan’s defeat and surrender in 1945. Self-governance was
obtained in 1959 and in 1963, Singapore became part of the new federation of Malaysia, which
included Malaya, North Borneo and Sarawak. Singapore was expelled from the federation two
years later (due to ideological differences) and became an independent country.
COMMERCIAL LAW
KHE-LCD-SGD-00341 2
As a former British colony, the legal system in Singapore is based on the English common
law. There are (generally) four sources of law in Singapore: the constitution, legislation,
subsidiary legislation and legal decisions made by judges.
• The Constitution
The Constitution enshrines the fundamental rights of the individual. It also comprises
the fundamental principles and basic framework for the three organs of state – the
Executive (which consists of the President, Prime Minister and other ministers
responsible for government affairs and accountable to the Parliament), the Legislature
(which consists of the President and Parliament with its legislative authority
responsible for enacting legislation) and the Judiciary (the various courts of law which
operate independent of the Executive and Legislature).
• Legislation
Legislation or statutory laws are written laws enacted by the Singapore Parliament or
other bodies that had power to pass such laws in the past in Singapore. These are
called statutes.
o Statutes
A statute is a formal written enactment of a country’s parliament. Typically, statutes
command or prohibit something, or declare policy.
A statute of the Singapore Parliament begins its life as a Bill. In order for a Bill to
become law, it must go through three readings and it must be passed by a majority
of votes in Parliament. Even after the Third Reading, a Bill does not become law
until it goes the Presidential Council of Minority Rights to ensure that does not
discriminate against any racial or religious minority. The President must also
assent to the Bill and it must be published in the Gazette.
Some examples of Acts are the Sale of Goods Act (Cap 393, 1999 Rev Ed), the
Companies Act (Cap 50, 2006 Rev Ed), and more recently, the Covid-19
(Temporary Measures) Act 2020.
• Subsidiary Legislation
Subsidiary legislation or delegated legislation refers to written law made by ministers,
government agencies or statutory boards under the authority of a statute (often called
its “Parent Act”) or other lawful authority, and not directly by Parliament.
Delegated legislation frees up members of parliament to deal with broad issues of
policy, leaving it to the experts to fill in the gaps. There are various review and scrutiny
committees attached to parliament to examine delegated legislation to make sure that
it doesn’t go beyond the authority given under the enabling legislation.
COMMERCIAL LAW
KHE-LCD-SGD-00341 3
Some examples of subsidiary legislation are Environmental Public Health (Public
Cleansing) Regulations made under the Environmental Public Health Act (Cap. 95,
2002 Rev. Ed.) and Rapid Transit Systems Regulations (Cap. 263A, 1997 Rev. Ed.).
• Judge-made Law (Common Law)
More traditionally called “common law”, judge-made law refers to court judgments
which are considered a source of law. Such a court judgement is called a “judicial
precedent”. Judicial precedents derive their force from the doctrine of stare decisis,
also known as the doctrine of binding precedent. According to this doctrine, the
decisions of higher courts are (generally) binding on lower courts and courts at the
same level when cases come before these courts with similar facts. Thus, judgments
of the Court of Appeal are binding on the High Court, and judgments of both of these
superior courts are binding on State Courts.
According to the doctrine of stare decisis, only the ratio decidendi (that is, the legal
principle that determines the outcome) of a case is binding. Other principles expressed
during proceedings in court, such as the obiter dicta (a judge's expression of opinion
uttered in court or in a written judgement, but not essential to the decision) are not
binding.
For example, in Pharmaceutical Society of Great Britain v Boots Cash Chemicals
(1952), where a pharmacy - whose medicines were displayed on shelves - was
accused of offering to sell medicines without a prescription. The court held that goods
placed on shop shelves constituted an invitation to treat, not an offer. An invitation to
treat is where a shop (business) invites customers to make an offer to buy, which may
be accepted or rejected by the shop. Therefore, no offence was committed by the
pharmacy.
This decision, the judicial precedent, was followed in the case of Fisher v Bell (1961)
where the court held that a display of an offensive weapon (flick knife) did not
constitute an offer for sale but was merely an invitation to treat.
Statutory Interpretation
Statutory Interpretation is the process by which judges are called to interpret the Acts of
Parliament (statutes). When interpreting a statute, the judges seek to determine the intention
of parliament, or the reason for parliament passing the law. Sometimes the words of a statute
have a plain and straightforward meaning, which allows for the statute to be interpreted easily.
But in most cases, however, there is some ambiguity; i.e. the statute can be interpreted in
more than one way, or the statute is vague and unclear. Under such a circumstance, the judge
will have to decide on the meaning of the statute or the intention of parliament, and this is
done by applying the facts of relevant cases to the relevant statute. An example of where the
language was unclear can be seen in the case of Twining v Myers (1982), where the court
has to decide whether roller skates amounted to a “vehicle” within the meaning of the relevant
statute.
COMMERCIAL LAW
KHE-LCD-SGD-00341 4
So, the problems with interpreting statues is that judges have to decide what parliament meant
by a particular piece of legislation, and they do this by generally applying certain rules or
canons. These canons are not hard and fast rules but a mixture of common-sense
presumptions about the law, as well as legal techniques in giving full effect to the words under
consideration. The four general approaches are:
1) The Literal Rule
This approach assumes that the intention of Parliament can be found in the statute itself
in that the words are read in their plain and ordinary meaning. However, when there is
ambiguity, adoption of this rule may lead to absurd results, i.e. the sale and/or purchase
of drugs are illegal in Singapore (absurdity; prescription drugs are not illegal). Thus, only
where the words clearly unambiguously state the intention of Parliament can the Literal
Rule be used.
2) The Golden Rule
The general principal underlying the Golden Rule is that a statute must be construed to
avoid manifest absurdity or contradiction with itself. See the case below.
In re Sigsworth (1935)
The Golden Rule was applied to prevent a murderer from inheriting an estate on the intestacy
of his victim although he was (as her son) her only heir (Literal Rule here clearly could not be
applied).
3) The Mischief Rule (also known as the Purposive Approach)
Known sometimes as the Rule in Heydon’s Case (1584), the Mischief Rule considers the
state of the law before the enactment (statute) in question and the “mischief” (or defect)
which Parliament intended to cure with the enactment or amendment. See the case below.
In Gardiner v Sevenoaks (1950)
The purpose of the Act was to provide for the safe storage of inflammable material wherever
it might be stored on “premises”. Notice was served on the Plaintiff who stored such material
in a cave to comply with safety rules. The Plaintiff argued that “premises” did not include a
cave. The court, in applying the Mischief Rule held that “premises” included the cave,
considering the intention of the Act (enactment).
The canons are not used exclusively. No judge will adopt one particular approach. Depending
on the facts of the case before him and the words with which he has to interpret, the judge
may adopt on or a combination of the three canons.
COMMERCIAL LAW
KHE-LCD-SGD-00341 5
The canons include the following rules (or maxims of interpretation) which assist the courts in
determining the meaning of particular words. These are:
The Ejusdem Generic Rule: Where specific words are followed by general words, it will be
presumed that the general words cover only the same kinds of things specifically mentioned.
For example, “traffic signs and other devices” were held in Evans v Cross (1938) to mean all
signals, warning sign posts, direction posts and not the white line on the road since all the
specific devices referred to were more in the nature of signs seen at eye level or higher.
The Noscitur a Sociis rule: Doubtful words are interpreted by looking at the other words which
they are associated with. For example: “public places” will take on a different meaning when
read with “parks and recreational spaces” than “government buildings.
The Expressio unius est exclusion alterius rule: An express mention of one thing impliedly
excludes anything else. So, a statutory rule on domestic animals would exclude wild animals
and other sea wild life.
The Court System in Singapore
The Chief Justice, who is appointed by the President, is the head of the Judiciary.
The Judiciary is made up of the Supreme Court and the State Courts.
The Supreme Court hears both civil and criminal matters and is separated into the Court of
Appeal and the High Court.
The State Courts consist of District Courts and the Magistrates' Courts.
A Senior District Judge overlooks the State Courts.
The Supreme Court
▪ The Court of Appeal
As its name suggests, the Court of Appeal hears appeals from the decisions of the High
Court in both civil and criminal matters. It is the Chief Justice and Judges of Appeal who
sit in the Court of Appeal. The Court of Appeal is usually made up of three judges (the
Chief Justice and two Judges of Appeal). However, on certain occasions there may be
less than or more than three judges.
COMMERCIAL LAW
KHE-LCD-SGD-00341 6
▪ The High Court
It is the Chief Justice and Judges of the High Court (which can in certain instances
include a Judge of Appeal or subject matter experts to provide assistance in certain
cases) who comprise the High Court. Normally all proceedings are heard before a
single judge.
The High Court hears both criminal and civil cases, as well as appeals from the
decisions of District Courts and Magistrates' Courts. In addition, it hears proceedings
concerning admiralty matters, company winding-up, bankruptcy and applications for the
admission of advocates and solicitors.
The High Court has general supervisory and revisionary jurisdiction over all State
Courts in any civil or criminal matter. In general, the High Court deals with matters
where the value of the subject matter of the claim exceeds $250,000. It has jurisdiction
to try all offences committed in Singapore and in certain cases, try offences committed
outside Singapore as well. The High Court tries criminal cases whose punishment
involves the death penalty or more than 10 years of imprisonment.
The Singapore International Commercial Court (SICC) is a division of the High
Court designed to deal with transnational commercial disputes. Established on 5
January 2015, this court has the jurisdiction to hear and try an action if:
o the claim in the action is of an international and commercial nature;
o the parties to the action have submitted to the SICC’s jurisdiction under a
written jurisdiction agreement; and
o the parties to the action do not seek any relief in the form of, or connected with,
a prerogative order (including a mandatory order, a prohibiting order, a
quashing order or an order for review of detention).
The SICC may also hear cases which are transferred from the High Court.
The State Courts
Originally called the Subordinate Courts, they were renamed “State Courts” on 7 March 2014. The State Courts comprise the District and Magistrate Courts — both of which oversee civil
and criminal matters that do not fall under the jurisdiction of the Supreme Court. Over 90% of
all judicial cases in Singapore are heard in the State Courts.
District judges and magistrates are appointed by the President of the Republic of Singapore
upon the recommendation of the Chief Justice.
Appeals against decisions in the State Courts are made to the Supreme Court.
COMMERCIAL LAW
KHE-LCD-SGD-00341 7
• District Court
Civil cases involving claims of between $60,000 and $250,000, or up to $500,000 for
road traffic accident claims or claims for personal injuries arising out of industrial
accidents. For criminal matters, the District Court hear cases where the maximum
imprisonment term does not exceed 10 years, or which are punishable with a fine only.
• Magistrates Courts
Civil cases involving claims not exceeding $60,000 are dealt with by the Magistrates
Court. For criminal matters, Magistrates’ Courts hear cases where the maximum
imprisonment term does not exceed 5 years, or which are punishable with a fine only.
• Specialised Courts
Apart from the District and Magistrate Courts, the State Court system has the following
specialised courts:
o Coroner’s Court: This court holds inquiries to ascertain the cause of a
person’s death and determines if anyone is criminally responsible where the
death results from unnatural causes.
o Community Court: This court deal with cases such as offenders with mental
disabilities, animal abusers, and cases that affect race relations.
o Family Justice Courts: These courts, which comprise the Family Division of
the High Court, the Family Courts and the Youth Courts, deal with matters such
as divorce, family violence, adoption and guardianship cases, youth cases and
probate matters.
o Syariah Court: This court administers and resolves marriage and divorce
disputes between parties who have married under the provisions of Muslim
Law.
o Community Justice and Tribunals System: This venue generally hears
matters on employment claims and issues, community disputes, harassment
cases, and small claims.
o Community Disputes Resolution Tribunal: This tribunal hears cases
involving disputes between neighbours.
o Small Claims Tribunal: This tribunal deals with resolution of small claims
between consumers and suppliers, contracts arising from the sale of goods or
provision of services, and lease of residential premises not exceeding 2 years.
o Copyright Tribunal: This tribunal deals with disputes between copyright
owners and the users of that copyrighted material.
COMMERCIAL LAW
KHE-LCD-SGD-00341 8
o The Employment Claims Tribunal: This tribunal provides employees and
employers with a speedy and low-cost forum to resolve their salary-related
disputes and wrongful dismissal disputes.
o Traffic Court: As its name suggests, this court hears matters on traffic offences
and related offences.
Methods for Resolving Business Disputes Going to Court can be an expensive as well as time-consuming process, depending on the
parties’ course of action. We now examine the alternative methods to going to court to resolve
disputes.
The State Courts Centre for Dispute Resolution (SCCDR) was established in March 2015.
This centre employs a judge-led Court Dispute Resolution (CDR) process to ensure that cases
in the State Courts are managed effectively. It also conducts mediation, neutral evaluation,
conciliation and arbitration to facilitate the resolution of civil matters without the need for a
trial. These methods are also less costly methods of resolving disputes. These methods,
however, do not apply to criminal cases.
• Mediation is a structured, interactive process where an impartial third-party will assist
disputing parties in resolving conflict through the use of specialized communication
and negotiation techniques. All participants in mediation are encouraged to actively
participate in the process. Mediation is a “party-centred” process in that it is focused
primarily upon the needs, rights, and interests of the parties.
• Neutral Evaluation is conducted by an unbiased third party, such as a former judge
or senior counsel, known as an “evaluator” who will review the case and provide an
early assessment of the merits of the case. The parties, with their respective lawyers,
will present their case and the key evidence to this evaluator, who will then provide his
best estimate of the parties' likelihood of success at trial.
• Conciliation is a court dispute resolution process for parties in a case to resolve their
dispute without going for a trial in Court. It allows each party to seek guidance from the
Judge during the conciliation session to come up with an optimal settlement for all
parties.
• Arbitration is a process where parties agree to resolve the dispute by bringing the
matter before a neutral third party, i.e. an arbitrator, for decision. During an arbitration
hearing, both parties, with their respective lawyers, will present their case to the
arbitrator, who, after hearing all the parties, will come to a decision. This decision by
the arbitrator is legally binding even if one or both of the parties does not agree with it.
COMMERCIAL LAW
KHE-LCD-SGD-00341 9
Enforcement of Court Judgments and Orders in Singapore
After winning a lawsuit in one of the courts mentioned above, the party who wins the case is
known as the “judgment creditor”, and the party who loses is called the “judgement debtor”.
The judgment creditor must enforce his court judgment or order in order to obtain the relief
he/she is seeking against the judgment debtor. By not taking action to conduct enforcement,
the court judgment or order will not take effect.
The following are some of the different types of enforcement options available to a judgment
creditor:
• Small Claims Tribunals (SCT) – Order of Tribunal
An order of tribunal obtained from the SCT ordering money payments to be made by
the respondent (or judgment debtor) will generally be coupled with a deadline for
payment. If the respondent does not pay, the judgment creditor will have to take up
separate enforcement proceedings against the judgment debtor.
• Writ of Seizure and Sale
A writ of seizure and sale authorises the bailiff to seize and sell movable property
belonging to the judgment debtor to pay the judgment creditor.
• Writ of Delivery
A writ of delivery is a court order requiring the judgment debtor to deliver movable
property to the judgment creditor to satisfy the judgement debt.
• Garnishee Proceedings
Where a third-party owes money to the judgment debtor (such as an employer), a
garnishee proceeding can be taken out so that the garnishee must pay the money to
the judgment creditor instead of the judgment debtor.
• Committal Order
Where the judgment debtor fails to obey a court order, the judgment creditor can apply
to court to have the judgment debtor sanctioned with fine or imprisonment.
• Bankruptcy and Winding Up Applications
Where the judgment debtor cannot pay the debts owed, the judgment creditor can
apply for bankruptcy or winding up proceedings against the debtor depending on
whether the debtor is an individual or a company.
COMMERCIAL LAW
KHE-LCD-SGD-00341 10
General information on Court Procedures - The person making the claim is the Plaintiff. - The person being served or against whom the claim is made is the Defendant. - Depending on the nature and amount of the claim a suit is filed in the appropriate Court. - If the Defendant wishes to settle the claim and not dispute it, he can contact the Plaintiff or the Plaintiff's lawyer for an out-of-court settlement. If not, the Court will set a date to hear both sides and evaluate all evidence and proof. - There can still be an out-of-court settlement at this point. - Once a ruling is made, it is enforceable. - If the parties refuse to comply, the Court can issue a writ of seizure and sale. This allows the claiming party to seize the assets and sell them to recover his compensation. - The Court's judgment can be contested by making an appeal to the High Court.
COMMERCIAL LAW
KHE-LCD-SGD-00341 11
Class Activity Get into small groups and discuss the following:
1) Discuss the possibility that rights of Singapore citizens, as enshrined in the Constitution
of Singapore can be curtailed or removed.
2) Would you agree that litigation is still the best method of resolving business disputes
in Singapore?
3) Suggest reasons for Specialised Courts.
COMMERCIAL LAW
KHE-LCD-SGD-00341 12
Topic 2 – The Law Of Contract: Offer & Acceptance
Introduction
A contract is a legally binding agreement between two or more persons. For example, if you
buy a meal, purchase any goods, buy a house, engage a builder to carry out work on your
house, borrow money, order goods or machinery from a manufacturer, or sign up for a
telephone plan, these are all types of contracts.
The law of contracts is vital to the law which affects consumers. It is a complex area and is
governed both by the general law – that is, laws which have evolved from decisions made
over the years by judges, and laws introduced by the courts and parliament.
Who can make a contract?
Generally, a person is able to make a contract when they reach 18 years of age. However,
there are some circumstances when a person who is younger than 18 will be bound by a
contract into which he or she has entered.
A person who is mentally ill or intellectually disabled at the time may not be bound by a contract
entered into.
What makes a contract?
A contract involves certain basic elements:
• Offer – a willingness by one party to enter into a legal relationship with another party,
• Acceptance (of that offer) – the party to whom the offer is addressed accepts that
offer,
• Consideration – an exchange between the parties of some benefit or something of
value; for example, a party pays a sum of money for goods supplied by another party,
the exchange would be that one party receives the goods while the other receives the
money, and
• An intention to enter into legal relations – that is, the parties intended to enter into
a legally binding agreement (although this is often not specifically stated, it is usually
implied).
All four elements must exist for there to be a legally-binding contract.
Who decides the terms of a contract?
Generally, the terms of a contract are for the parties to decide. However, the law may “imply”
terms into the contract. An example of an implied term is that food sold by a hawker is fit for
human consumption.
COMMERCIAL LAW
KHE-LCD-SGD-00341 13
Does a contract have to be in writing?
Generally, contracts do not have to be in writing. A contract can be made in writing (as is usual
in commercial transactions) or it can be verbal (such as ordering food from at a hawker centre).
Are you bound by a clause you did not read?
If you sign a written contract, then generally you are bound by all of its terms even if you did
not read or understand them.
There are various types of contracts which you may come across in everyday life which do
not require your signature, for example, a car park ticket or a dry-cleaning docket which has
clauses printed on the back. Generally, the rule is that you are bound by the clauses if you
have read them or if you knew they were there but did not bother to read them, or if the other
person took reasonable steps to draw them to your attention.
It is important that you read all the terms of a contract before you enter into it, and you should
not sign any document until you are fully aware of what its terms and conditions are and what
they mean.
What happens if the terms of a contract are broken?
Once you make a contract you will be committing a breach of contract if you do not comply
fully with the terms, or if you change your mind and decide not to perform your side of the
contract. If a party breaches a contract, the following remedies are available:
• Damages – monetary compensation payable by the party who broke the contract to
the other party who suffers the breach of contract,
• Specific performance – a court order demanding that the party keeps to the contract,
• Injunction – a court order preventing a party from breaking the contract.
The Offer In Preston Corporation Sdn Bhd v Edward Leong (1982), an offer was defined as:
“An offer is an intimation of willingness by an offeror to enter into a legally binding
contract. Its terms either expressly or impliedly must indicate that it is to be binding on
the offeror as soon as it has been accepted by the offeree.”
The party making the offer is the offeror, and the party receiving the offer is the offeree.
An offer must be a definite promise to be bound by specific terms, and ascertainable.
An offer cannot be vague. In Gunthing v Lynn (1831), the offeror offered to buy a horse “if
it was lucky”. The court held that such as offer was too vague.
When an offer is made to a party (the offeree) and no one else, only that party can accept the
offer.
COMMERCIAL LAW
KHE-LCD-SGD-00341 14
Offers may also be made to the world at large or to a certain group of persons. For example,
if an advertisement is placed in the newspapers offering a reward for the finding and returning
of a lost dog, this is said to amount to an offer made to the world at large. It can be accepted,
and the reward claimed by the person who finds this lost dog. This principle was established
in:
Carlill v Carbolic Smoke Ball Co (1893).
FACTS: Mrs Carlill saw a newspaper ad stating that the manufacturers of a smoke ball
would pay £100 to anybody who bought the smoke ball, used it correctly and still got
the flu. Mrs Carlill bought a smoke ball, used it correctly and still got the flu. Mrs Carlill
wanted to claim the £100, but the company refused to pay claiming the advertisement
was not an offer.
HELD: The court held the wording of the advertisement did amount to an offer, and
that by buying and using the smoke ball, Mrs Carlill had accepted that offer. The
company was made to pay the reward to Mrs Carlill.
Offers must be distinguished from the following:
1) An Invitation to Treat. An offer must be distinguished from an invitation to treat (i.e.
an invitation to make an offer). An invitation to treat is not an offer which is capable of
being turned into a contract by acceptance. An invitation to treat is a mere invitation by
one party to another to make an offer.
Some examples of invitation to treat
• Placing goods in a shop window
• Goods displayed in a catalogue.
• Goods displayed on shelves.
In these situations, it is the customer who must make the offer to buy. The following
cases illustrate the point that an advertisement is not considered an offer.
Pharmaceutical Society of Great Britain v Boots Cash Chemicals (1952)
FACTS: When Boots became a self-service pharmacy, problems arose because of
the need for certain drugs to be sold under a pharmacists’ supervision. If customers
were serving themselves, the question that arose was whether the sale of goods was
unsupervised. The court had to decide at what stage the contract was formed.
HELD: The court held that goods placed on shop shelves constituted an invitation to
treat. The customer was offering to buy the medicine at the checkout at which point
the assistant would accept or reject the customers offer. In this case, there was always
a pharmacist at the checkout, and thereby the pharmacy was not selling medicines
and drugs without a pharmacists’ supervision.
COMMERCIAL LAW
KHE-LCD-SGD-00341 15
Similarly, the display of goods with a price tag on the shop window is only an invitation
to treat, or an invitation to make an offer. It is not an offer. In the case of Fisher v Bell
(1961) it was held that a display of an offensive weapon (flick knife) for sale did not
constitute an offer for sale but was merely an invitation to treat.
2) Declaration of Intention. In Harris v Nickerson (1873) it was established that an
advertisement that goods will be put up for auction does not constitute an offer to any
person that the goods will actually be put up, and that the advertiser is, therefore, free
to withdraw the goods from the auction at any time prior to the auction. The court held
that a declaration of intention does not create a binding contract with those who acted
upon it.
So the use of the word ‘offer’ is not conclusive. For example, a prospectus offering to
sell cars or shares in a company is merely an invitation to treat. This would be the
same for auctions (in which the auctioneer is making an invitation to treat, and the
bidder making the offer), as well as tenders (in which companies invite tenders for a
project – the tender is the offer).
3) Provision of Information. In some cases, a communication may not be an offer but
a mere response to a request for information. This principle was established in the
case of Harvey v Facey (1893).
FACTS: Facey (D) was in negotiations with the Mayor and Council of Kingston
regarding the sale of his store. Harvey (P) sent Facey a telegram stating: “Will you sell
us Bumper Hall Pen? Telegraph lowest cash price-answer paid.” On the same day,
Facey sent Harvey a reply by telegram stating: “Lowest price for Bumper Hall Pen
£900.” Harvey sent Facey another telegram agreeing to purchase the property at the
asking price. D refused to sell, and P sued for specific performance and an injunction
to prevent Kingston from taking the property.
HELD: A mere statement of the minimum selling price is an invitation to treat and not
an offer to sell.
Termination of an Offer
An offer may be accepted as long as it is still being made.
The general principle is that an offer cannot be terminated once it has been accepted.
The offer may be terminated in the following manners:
• Lapse of time: An offer may state a specific time for acceptance. Example: “Offer valid
for one month only” and “Offer expires 31 December 2020.” If there is no specific time
mentioned, the law will presume an offer to have lapsed after a reasonable time.
COMMERCIAL LAW
KHE-LCD-SGD-00341 16
In Ramsgate Victoria Hotel v Montefiore (1866), the defendant applied for hotel
shares, but the acceptance came only after 5 months. By then the defendant had
already lost interest in the shares. Taken to court by the sellers in question, the court
held that 5 months was not a reasonable time, and therefore the defendant’s offer had
lapsed.
• Counteroffer: Where an offeree makes an alternative offer to the offer made to him,
this amounts to a counter-offer which effectively destroys the original offer. When this
happens, it is now the offeree who is making the offer. (In a sense, counteroffer could
be taken as bargaining, and in most cases, for a lower price.)
In Hyde v Wrench (1840), where in response to an offer to sell a farm at a certain
price, the plaintiff made an offer to buy at a lower price. This offer was refused and
subsequently, the plaintiffs sought to accept the initial offer. The seller refused and the
matter was brought to court. The court held that the seller was not bound to sell the
farm to the plaintiff as the plaintiff’s counteroffer destroyed the seller’s original offer to
sell the farm.
• Death of Offeror: An offer terminates upon the death of the offeror if the offeree has
notice of the offeror’s death. If the offeree has no notice of the offeror’s death, then
whether or not the offer can be accepted would likely depend on the nature of the offer.
If the offer was for a personal service, then the offer “dies” with the offeror; if the offer
related to something tangible, then it is likely that the offer could still be capable of
acceptance.
• Revocation of the Offer by Offeror: An offer may be revoked by the offeror at any
time before acceptance.
In Routledge v Grant (1828) there was an offer made to buy the house, giving the
offeree 6 weeks to accept. However, the offeror withdrew his offer before the 6 weeks.
The court held that the offeror had a right to do so, declaring that an offer was revocable
at any time before acceptance.
However, for revocation to be effective, the following requirements must be met:
o Revocation must be communicated
In Byrne v Van Tienhoven (1880), the defendants made an offer to the plaintiffs
by post. Following this on the 8th of October, they posted a letter revoking the offer.
This letter reached the plaintiffs on the 20th of October. Meanwhile, the plaintiffs
accepted the defendants’ offer on the 11th of October in ignorance of the
revocation.
The court held that revocation was effective only on the 20th of October and, since
by then the plaintiffs had accepted the defendants’ offer, there was a binding
contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 17
o Notice of revocation need not come from the offeror himself
In Dickinson v Dodds (1876), the defendant gave the plaintiff an offer to sell his
house and the offer was to be left open until 9 am on Friday, the 12th of June. On
Thursday, the defendant sold the house to someone else and another person
informed the plaintiff of this sale. Despite this, the plaintiff tried to hand over a
formal letter of acceptance before 9 am on the 12th of June.
The court held that since the plaintiff knew that the defendant had sold the property
to someone else, the offer was withdrawn and could not be accepted.
The Acceptance An agreement comes into existence when the offer is accepted. However, the acceptance
must be made while the offer is still in force, i.e. before it has lapsed, been revoked or
rejected. And this acceptance must be communicated.
Once acceptance is complete, the offer cannot be revoked; to do so would constitute a breach
of contract.
Principles of Acceptance
• An acceptance of an offer may be express (orally or in writing), or implied by
conduct.
• Acceptance must be positive and not passive. The party accepting the contract must
actively accept an offer. He cannot be deemed to have accepted the offer by his doing
nothing.
In Felthouse v Bindley (1862), the plaintiff offered to buy his nephew’s horse and
stated, “If I hear no more about him, I consider the horse mine” at a certain price. The
nephew made no reply, and the horse was sold to someone else. The plaintiff sued.
The court held the offeror cannot impose silence on the offeree and so there was no
contract. If the rule were otherwise, that could lead to abuse. For instance, a business
could send goods to a person’s home and state in an accompanying document that if
it did not hear from that person in by a specific time, it would take it that the person has
accepted the goods. This is, of course, unacceptable. Therefore, silence can never
be taken to be acceptance.
• Acceptance must be unqualified. An introduction of new terms to the offer amounts
to a counteroffer and consequently a revocation of the original offer.
COMMERCIAL LAW
KHE-LCD-SGD-00341 18
In Neale v Merrett (1930), A offered land to B for $280 cash. B paid $80 and offered
to pay the remaining $200 in $50 instalments. When the matter was brought before
the court, the court held that there was no acceptance. The normal terms are that the
entire price is payable as a single sum. Unilaterally deciding to pay by instalments
amounts to a variation of the terms of the original offer, and therefore a
revocation of the offer.
• Acceptance must be communicated. The general rule is that acceptance must
actually be received by the offeror. Generally, to avoid complications, offerors specify
the mode of communications of acceptance required. For example, he may specify
that “written acceptance must be received at his office by 3pm and no later”. This
means that the acceptance must be made in writing, and it must physically reach the
offeror’s office by 3pm; any other form of acceptance or delay would render the
acceptance invalid.
If the acceptance us to be in writing, it must be received by the offeror; if it is to be
orally, it must be heard by the offeror: Entores Ltd v Miles Far East Corp. (1955).
If the offer specifies a method of acceptance (such as by WhatsApp or email),
acceptance must be by that method specified by the offeror. The failure to keep to the
specified method of acceptance would result in no acceptance being offered: Yates
Building Co. Ltd v R.J. Pulleyn & Sons (York) Ltd (1975)
Exceptions to Communication of Acceptance
There are three situations in which acceptance need not be communicated to or
received by the offeror:
o Waiver of Communication
(As seen above) in Carlill v Carbolic Smokeball, the offer was made to the
world at large. Here, communication of acceptance was dispensed with. So
long as someone bought the smokeball, used it according to the directions, he
is deemed to have accepted the offer.
COMMERCIAL LAW
KHE-LCD-SGD-00341 19
o Silence
This can only apply where parties have agreed that the offeree’s silence is to
be construed as his acceptance. For this to be effective, both parties must
agree to it. For example, if both parties agree that the offeree will have a
positive obligation to communicate only if he wishes to reject the offer, then
silence would amount to acceptance: Southern Ocean Shipbuilding v
Deutsche Bank AG (1993). Contrast this with Felthouse v Bindley
(discussed earlier). If the offeror, without the consent of the offeree, imposes a
condition that the offeree’s silence would be taken as acceptance, then, such
a condition would not be enforceable.
o The Postal Rule
The Postal Rule (also known as the “mailbox rule” or “deposited acceptance
rule”) provides that the contract is formed when a properly prepaid and properly
addressed letter of acceptance is posted: Adams v Lindsell (1818).
However, care must be taken when applying The Postal Rule. It should be
applied only in circumstances where it is clear that the parties agreed that the
acceptance be sent by post.
In Quenerduaine v Cole (1893) it was held that an offer made by telegram
gives rise to the presumption that a speedy reply is expected, so posting in
such a situation does not attract the application of The Postal Rule.
Electronic Communications of Acceptance
Here we consider acceptance by e-mails or online acceptances. In relation to e-mails or online
acceptances, the question is whether the general rule should apply (i.e. that acceptance must
be received) or the postal rule (i.e. once notification of acceptance is properly posted) should
apply, assuming such issues have not been addressed in the contract. The matter is yet to be
authoritatively settled, and there are arguments going both ways.
In the event that it is held that acceptance is effective upon receipt, the question might also
arise as to what is meant by receipt. In this regard, reference must be made to the Electronic
Transactions Act (Cap 88, 2011 Rev Ed). Under section 13 of the said Act, if the message
is sent to an electronic address that was designated by the addressee, receipt occurs when
the message is capable of being retrieved by that addressee; and where message is sent to
a non-designated electronic address, receipt occurs when the message becomes capable of
being retrieved by the addressee and that addressee becomes aware that the message has
been sent to that address.
COMMERCIAL LAW
KHE-LCD-SGD-00341 20
Subject to Contract
It is possible for an agreement to be made “subject to contract”. This phrase simply means
that the offeree is agreeable to the terms of the offer but proposes that the parties negotiate a
formal contract on the basis of the offer.
In Yap Eng Thong v Faber Union (1973), the court found the agreement to sell a house
“subject to contract” was not binding.
And in Chillingworth v Esche (1924), C and D signed an agreement for the purchase of a
house by D “subject to a proper contract” to be prepared by C’s solicitors. A contract was
prepared by C’s solicitors and approved by D’s solicitors, but D refused to sign it. The court
held that there was no contract as the agreement was conditional.
Making negotiations “subject to contract” is a very useful tool to ensure that everyone is only
bound to the contract when they sign the contract and not before.
COMMERCIAL LAW
KHE-LCD-SGD-00341 21
Class Activity Get into small groups and discuss the following:
1) Would you suggest that taxis and buses plying the roads are making an offer, or are
potential commuters making the offer to board these public transport vehicles?
2) Why would you suggest that silence cannot be acceptance?
3) When Horace lost his dog, which wandered off in the neighbourhood, he placed an
advertisement in the newspapers suggesting that if anyone who found his dog and
returned it to him, he would receive a reward of $500. Does this amount to an offer?
How can it be accepted?
COMMERCIAL LAW
KHE-LCD-SGD-00341 22
Topic 3 – The Law of Contract: Consideration & Intention to Create Legal Relations
Introduction
Having understood what constitutes a valid offer, how it is made and how it can be accepted;
the student must now grasp the other two components necessary to form a legally binding
contract – consideration and the intention to create legal relations.
Consideration
Consideration is the third necessary ingredient to form a legally binding agreement – i.e. a
contract.
Consideration is essential for all contracts (except for those under seal, such as a deed;
these are still binding notwithstanding the absence of consideration). Consideration can be
viewed as the exchange between the parties to a contract. For example, if A agrees to sell
his book to B for $50, then consideration for selling that book is $50; so A gets the $50 and B
gets the book (the exchange). In another example, in an employer-employee relationship, the
consideration between these parties is that the employer gets work done by the employee,
and the employee gets a wage (i.e. a salary consideration) in exchange.
In Currie v Misa (1875) consideration was defined as:
“……some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other”.
Further, in Chappell v Nestle (1960), the court held that “a contracting party can stipulate
what consideration he chooses……….”
Types of consideration:
• Executed consideration
An executed consideration is an act done by one party in exchange for a promise
made or an act done by the other. When the act constituting the consideration is
completely performed, the consideration is said to be executed.
For example, where A offers a reward of $500 to anyone who finds and returns his lost
cell phone, his promise becomes binding the moment B performs the act; i.e. finding
and returning the lost cell phone.
It should be noted that in the above example, A is not bound to pay anything to anyone
until that thing he requests is done.
COMMERCIAL LAW
KHE-LCD-SGD-00341 23
• Executory consideration
An executory consideration is a promise made by one party in exchange for a promise
made or an act done by the other. Where the consideration is a promise to be
performed in the future, it is executory. A promise is an executory consideration
that something will be done in the future.
An example of this would be where a customer orders goods which a shopkeeper
undertakes to obtain from the manufacturer. The shopkeeper promises to supply the
goods, and the customer promises to accept and pay for them. Neither has done
anything but each has given a promise.
• Past consideration
Past consideration refers to an act performed prior to, and to that extent
independent of, the promises being exchanged. In other words, the action that was
performed was not done in contemplation of, or in response to, a promise given.
Consequently, the general rule is that past consideration is not valid consideration.
The case of Roscorla v Thomas (1842) illustrates this point. At T’s request, R bought
T’s horse for $30. After the sale, T promised R that the horse was “sound and free of
vice”. The horse proved to be vicious. The court held that the defendant’s (T) promise
was made after the transaction had already been concluded and was therefore past
consideration.
Rules of Consideration:
1) Consideration must move from the promise.
(The promisor is the one making the promise; the promisee is the one receiving the
promise.)
The person to whom the promise is made must furnish the consideration. It must
always be remembered that a contract is a bargain. If a person gives no consideration
for a promise, he cannot sue on that promise whether or not he is the person to whom
the promise is made. The case below illustrates this point:
Tweedle v Atkinson (1861)
FACTS: A young couple married, and their fathers subsequently entered into a
contract which provided that each father was to pay a specified sum to the young
husband, Tweedle, and that he would be entitled to sue for the money. The fathers
later died. Tweedle, under the terms of the agreement made between the fathers, sued
the executors for one of the fathers for the money due to him.
COMMERCIAL LAW
KHE-LCD-SGD-00341 24
HELD: The court held that Tweedle could not enforce the contract between the two
fathers because a) he was not a party to the contract, and b) no consideration moved
from him.
The rule that consideration must move from the promisee is often associated with the
rule of Privity of Contract. This rule states that unless a person is actually a party to
the contract, he cannot sue.
In Beswick v Beswick (1967), P, a coal merchant, entered into a written agreement
with his nephew, J. Under the terms of the agreement, which was a contract of sale of
P’s business to J, it provided that upon the death of P, J should pay P’s widow an
annuity of $5 per week. P died and J refused to pay her. The widow brought legal
proceedings against the nephew. The court held that she could not enforce the
obligation of J to pay her the annuity because she was not a partly to the contract made
between her husband and his nephew.
New approach to the dilemma in Beswick’s case
This position just described in Beswick and Beswick has changed with the enactment
of the Contracts (Rights of Third Parties) Act 2001. Simply put, the Act allows a third
party (who is not a part of the contract) to enforce the contract if that third party is
named or is reasonably identifiable in that contract.
So, taking the situation in Beswick v Beswick, whereby the only reason why Mr
Beswick and his nephew contracted was for the benefit of Mrs Beswick. Under this
Act, and if the case was before the courts today, Mrs Beswick would be able to enforce
the performance of the contract in her own right. Therefore, the Act realises the
intentions of the parties.
This new approach has been welcomed by many as a relief from the strictness of the
doctrine of privity.
2) Consideration must be sufficient, but it need not be adequate
Consideration is sufficient if it is something that is of economic value such as
money or some other item with a monetary value. So, for example, a promise made
gratuitously, or one made on account of love and affection or out of a moral obligation
is not enforceable as it was given without sufficient consideration.
However, whilst the law requires sufficient consideration, it does not require the
consideration to be adequate. In other words, the law does not require that the
consideration given for a promise measures up, economically or financially, to the
promise given. So, if A offers to sell B a $100 book for $2, the consideration is valid.
The case of Chappell v Nestle (1959) illustrates the point that consideration is
sufficient if it has some value, although it may be nominal.
COMMERCIAL LAW
KHE-LCD-SGD-00341 25
There are at least two reasons why the law does not require consideration to be
adequate. The first is that the law would not interfere with the bargain made by the
parties. The fact that one party pays too little or too much in exchange for a promise
is, generally, not a matter of concern to the court. The second is that it is undesirable
for the court to be drawn into such an inquiry as it would mean that the court would
have to develop a system of price control for a whole range of transactions. This is
neither practical nor consistent with its main objective of administering the law.
3) Consideration must be legal
A criminal act is not consideration.
4) Consideration must be certain
Consideration cannot be vague. It must amount to something that is capable of
expression in economic terms.
In White v Bluett (1853), Bluett, when sued by his father’s executors for an outstanding
debt to his father, claimed that his father had promised to discharge him from it in return
for him stopping complaining about property distribution. The Court held that the
cessation of complaints was of no economic value; thus, Bluett’s father had received
no real consideration for the promise, and Bluett was still liable for the outstanding
debt.
5) Other issues with consideration
a. Performance of Existing Duty to Promisor
There may be insufficient consideration where the promisee is under an
existing duty to the promisor to perform an act which is to be the purported
consideration.
The case of Stilk v Myrick (1809) illustrates this point. Stilk was a seaman on
a ship sailing from London to the Baltic. During the voyage, two seamen
deserted the ship. The captain promised the crew that wages of the deserting
sailors would be divided among them if they worked to bring the ship home.
Stilk sought to claim the extra wages. The court held that there was no
consideration for the captain’s promise because the remaining crew did what
they were contractually required. Desertion of a few sailors was considered
within the usual emergencies of such a voyage.
Contrast this case with Hartley v Ponsonby (1857). In this case a number of
sailors had deserted that the ship became unseaworthy, and Hartley was
required to do much more than he was originally contracted to do. The court
found there was sufficient consideration here.
COMMERCIAL LAW
KHE-LCD-SGD-00341 26
In 1991 the rule in Stilk v Myrick was qualified in its application. The court held
in Williams v Roffey Bros and Nicholls (1991) that “…in certain
circumstances, discharging an existing duty owed to the promisor may, in
certain circumstances, constitute good consideration for a fresh promise”.
Below are the facts of the case.
Williams v Roffey Bros and Nicholls (1991)
FACTS: The Roffey Brothers entered into a contract to refurbish a block of flats
for a fixed price of £20,000. They sub-contracted carpentry work to Williams. It
became apparent that Williams was threatened by financial difficulties and
would not be able to complete his work on time. This would have breached a
term in the main contract, incurring a penalty. Roffey Brothers offered to pay
Williams an additional £575 for each flat completed. Williams continued to work
on this basis, but soon it became apparent that Roffey Brothers were not going
to pay the additional money. He ceased work and sued Roffey Brothers for the
extra money, for the eight flats he had completed after the promise of additional
payment. The defendants argued that there was no fresh consideration given
for their oral promise.
HELD: The Court of Appeal held that Roffey Brothers must pay Williams the
extra money because the defendants obtained “practical benefits” from
Williams’ work – this benefit was that they would not be liable under the main
contract for late completion.
b. Performance of Existing Public Duty
There would be no consideration if the person performs the duty he is
supposed to; e.g. as a policeman or other public servant, or as one who is
summoned to give evidence in the interest of justice: Collins v Godefroy
(1831).
However, while there is no consideration if one performs an existing obligation,
should an extra service be rendered, there is consideration.
In Glasbrook Brothers v Glanmoran City Council (1925), there was an
industrial dispute in which the mine owners agreed to pay for special police
guard. Later they refused to pay, arguing that the policemen were under a
public duty to protect property and lives. The court held that the police did do
extra work over and above what they were supposed to by providing that extra
protection; this was consideration for extra pay.
COMMERCIAL LAW
KHE-LCD-SGD-00341 27
c. Payment of a Lesser Sum
Part payment of a debt is no consideration for discharge of the whole
debt. For example, if a sum of money is owed by A to B, A must pay the full
sum. If A wishes to pay a lesser sum, he must offer further consideration. This
is sometimes known as the Rule in Pinnel’s Case, which was subsequently
confirmed by the House of Lords in Foakes v Beer (1884). In 2001, the rule
was endorsed in Singapore by the District Court in the case of Euro-Asia
Realty v Mayfair Investment.
However, there are some exceptions to the Rule in Pinnel’s Case:
o Payment of a smaller sum before the due day at the creditor’s request is
valid consideration;
o Payment of a smaller sum, at a different place at the creditor’s request is
valid consideration; and
o Payment of a smaller sum accompanied, at the creditor’s request, by
delivery of a chattel (a product) is valid. (Note: part payment by cheque,
where full payment was due by another means, is not consideration [D &
C Builders Ltd v Rees]).
Promissory Estoppel
An agreement without consideration intended to create legal relations, which to the knowledge
of the promisor has been acted upon by the promisee, although it cannot be enforced, is
binding on the promisor so that he will not be allowed to act inconsistently with it. In other
words, a party is stopped from going back on his/her promise when he/she knows that that
promise has been acted upon by the other party. This is the equitable principle of promissory
estoppel.
The principle was used in Central London Property Trust v High Trees (1947):
FACTS: In 1939, Y let out a block of flats to X for $2500 per annum. During World War
Two (1939 to 1945), it became difficult to let the flats out and Y agreed in writing to reduce
rent by half, i.e. $1250, per annum. The reduced rent was paid from 1940 to 1945. After
1945 the flats were fully rented out and Y demanded full $2500 for all future rentals and
also sought to recover the difference between the amount paid and the actual contractual
figure during 1940 to 1945.
HELD: The court held that Y was entitled to the future but not to past rent. He was
estopped from going back on his promise. Where one party to a contract waives his legal
right, another party, relying and acting on the waiver, acts to his detriment, the party
waiving his right is estopped from denying he has waived his rights.
It should however be noted that the equitable principle of promissory estoppel applies only to
promises made voluntarily and to existing rights.
COMMERCIAL LAW
KHE-LCD-SGD-00341 28
Shield not a sword
Another point to note is that promissory estoppel can only be used “as a shield and not a
sword”. This means that it can only be used as a defence against a claim made by a plaintiff.
Promissory estoppel cannot be used to commence a suit.
The case of Combe v Combe (1951) establishes this point:
FACTS: After obtaining a divorce, a husband promised his wife $100 per year as an
allowance. Relying on this promise, the wife chose not to obtain a formal court order for
maintenance. The husband failed to pay, and the wife sued on the basis of the promise.
HELD: The Court of Appeal rejected the wife’s claim on the principle that promissory
estoppel can only be “used as a shield and not as a sword”.
Intention to Create Legal Relations
This is the final element necessary for there to be a valid contract. If the intention is absent,
then the promise may not create any binding obligation at all.
In determining whether the promisor has the intention to create legal relations, the law applies
an objective test: Whether a reasonable person viewing all the circumstances of the case
would consider that the promisor intended his promise to have legal consequences.
Further, the party who asserts that the agreement was made without any intention to create
legal relations must prove that this; he who asserts must prove.
Situations in which the intention to create legal relations fall into two categories: Domestic
Agreements and Commercial Agreements.
Domestic Agreements
Agreements of purely domestic (family) or social nature are generally not intended to create
legal relations, and therefore not binding in law. Such agreements are intended to rely on
bonds of mutual trust and affection. Many kinds of domestic and social agreements are
unenforceable on the basis of public policy, for instance between children and parents.
Balfour v Balfour (1919)
FACTS: This case involved a husband and wife. The husband was due to return to
Ceylon where he had employment, but the wife, on medical advice was to remain in
England. The husband promised to pay the wife £30 per month until she was able to
join him in Ceylon. Later the parties separated and were divorced. The wife brought
this action for the money her husband had promised to pay to her but had failed to do
so.
COMMERCIAL LAW
KHE-LCD-SGD-00341 29
HELD: The parties did not intend the promise to be legally enforceable; the claim by
the wife failed.
In De Cruz Andrea Heidi v Guangzhou Yuzhitang Health Products Co Ltd (2003), the
plaintiff consumed some Slim 10 pills and suffered liver damage. She brought an action
against various parties including the defendant. She had asked the defendant to buy the pills
for her as a favour, and the question arose whether there was a contract between the
defendant and the plaintiff, in particular whether there was an intention to create legal
relations.
The court held that as the defendant was just doing her a favour, coupled with the fact that
both the plaintiff and defendant were very close friends, there was no intention to create legal
relations.
However, even if the parties are in a domestic or social relationship and do intend that their
agreement to have legal consequences, an enforceable contract is concluded:
Merrit v Merrit (1970)
FACTS: A husband and wife separated. They then met to make arrangements for the
future. After this the husband agreed to pay £40 per month maintenance, out of which
the wife would pay the mortgage. When the mortgage was paid off it was agreed he
would transfer the house from joint names to the wife's name. He wrote this down and
signed the paper, but later refused to transfer the house.
HELD: When the agreement was made, the husband and wife were no longer living
together; therefore, they must have intended the agreement to be binding, as they
would base their future actions on it. This intention was evidenced by the writing and
therefore the husband had to transfer the house to the wife.
Commercial Agreements
In commercial agreements there is a general presumption that the parties do intend to make
their agreement a legally enforceable contract. This presumption flows partly from the desire
of the law to give efficacy to agreements made in a commercial context.
In Foo Jong Long Dennis v Ang Yee Lim Lawrence and anor (2016), the court concluded
that since the parties were dealing in a commercial capacity, a presumption arose that the
parties intended to create legal relations. This presumption was not rebutted as the contract
stated that the parties “agreed” to perform the contract, and even set out their liabilities to each
other in the event of a breach of contract.
In some situations, however, the parties may agree that their agreement, although couched in
legal terms, shall not be binding in law but shall be binding “in honour” only. Such agreements
are generally not enforceable and are also called “honour clauses”.
COMMERCIAL LAW
KHE-LCD-SGD-00341 30
Rose and Frank v J R Crompton and Brothers Ltd (1925)
FACTS: Rose and Frank Co. was the sole U.S. distributor of J.R. Crompton's carbon
paper products. In 1913, the parties signed a new document which included this
clause: “This arrangement is not entered into, nor is this memorandum written, as a
formal or legal agreement and shall not be subject to legal jurisdiction in the law courts
..., but it is only a definite expression and record of the purpose and intention of the
three parties concerned to which they each honourably pledge themselves with the
fullest confidence, based upon past business with each other, that it will be carried
through by each of the three parties with mutual loyalty and friendly co-operation.”
The relationship between the two parties broke down as J.R. Crompton refused to
supply some of the orders of the plaintiff. Rose and Frank Co. sued on enforcement of
the agreement.
HELD: The agreement was not legally binding because the clause clearly and
expressly stated their intention that it would not give rise to legal relations.
In other situations, a company could assume a “moral” but not legal obligation to help another;
an agreement of this type will be deemed to have no contractual effect. Called Letters of
Comfort, these are letters written by one party unusually intended to vouch for the financial
soundness of another related party who wishes to enter into a contract with a third party.
Kleinwort Benson v Malaysia Mining Corp (1989)
FACTS: The plaintiff bank agreed with the defendants to lend money to a subsidiary
of the defendants. As part of the arrangement, the defendants gave the plaintiffs a
letter of comfort which stated that it was the company's policy to ensure that the
business of its subsidiary is at all times in a position to meet its liabilities. The subsidiary
went into liquidation and the plaintiffs claimed payment from the defendants.
HELD: The letters of comfort were statements of the company's present policy, and
not contractual promises as to future conduct. They were not intended to create legal
relations and gave rise to no more than a moral responsibility on the part of the
defendants to meet the subsidiary's debt.
COMMERCIAL LAW
KHE-LCD-SGD-00341 31
Class Activity Get into small groups and discuss the following:
1) What do you understand when it is said that “whilst the law requires sufficient
consideration, it does not require the consideration to be adequate”?
2) Would you presume an intention to create legal relations exists between friends who
become partners in a business?
3) Would a marriage amount to a legally-binding contract?
COMMERCIAL LAW
KHE-LCD-SGD-00341 32
Topic 4 – Terms Of A Contract
Introduction
Having studied the four essential components of a valid contract, students will now examine
both the express terms and implied terms of a contract, i.e. the heart of the contract. But before
engaging in the discussion on terms, it is important to note that terms should be distinguished
from advertising puffs, which have no legal effect.
Express Terms
Generally, every transaction one makes is a contract: whether it is to buy property, an
employment contract, a contact for the sale of goods, etc. The express undertakings and
promises contained in any contract are known as the terms of the contract. Parties are free
to negotiate and agree with just about any term they wish and have it as part of the contract,
as long as the terms negotiated are not against public policy or contravene any statute.
The heart of any contract is its terms. Terms are the promises and undertakings given by
each party to the other. Failure to keep to the terms generally constitutes a breach of
contract. The party suffering the breach would generally be entitled to sue for damages.
Terms of the contract must be distinguished from representations or pre-contractual
negotiations, which are made before the contract is entered into and are generally not intended
to form an integral part of it. Two cases demonstrate this application:
In Routledge v McKay (1954), (a case involving the sale of a motorcycle) R entered
into negotiations with M to purchase M’s motorcycle. M told R that the model was a
1942 model; it eventually turned out to be a 1930 model motorcycle.
The issue was whether there was a contract to purchase a 1942 model or a 1930
model; or whether the age of the motorcycle was irrelevant. The written contract
between R and M for the sale of the bike was made without reference to its age.
The court held that the statement about the date was a pre-contractual representation,
and the plaintiff could not sue for damages for breach of contract. It was also said in
this case that the fact that a verbal statement is not subsequently included in a written
contract, will suggest that it is not to be treated as a part of the contract.
In Bannerman v White (1861), the plaintiff was a buyer of hops and asked the seller
whether sulphur had been used in their cultivation. He added that if sulphur had been
used, he would not even bother to ask the price. The seller duly assured the plaintiff
that sulphur had not been used. It later transpired that sulphur had been used, and the
plaintiff brought an action for breach of contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 33
The court held that the assurance given by the seller was a condition of the contract
because without that assurance, the plaintiff would not have entered into a contract
with the seller.
In situations where the maker of the statement has greater knowledge concerning the
statement as compared to the other party, it is more likely that the statement is a term. The
rationale behind this is that the other party to whom the statement is made will be dependent
upon the maker of the statement for its accuracy. Two cases illustrate this point:
In Oscar Chess Ltd v Williams (1957), W sold his Morris car to the plaintiff, O, a
motor car dealer. He told the plaintiff that the car was a 1948 model on the basis that
the registration book showed that it was first registered in 1948. In fact, unknown to
both of them, the registration book had been tampered with and the car was actually a
1938 model. When it was discovered that the car was a 1938 model, O sued for breach
of contract.
The court held that W’s statement was not a term of the contract because, as a private
individual, W was not in a position to guarantee the accuracy of the year of registration.
In Dick Bentley Productions v Harold Smith (Motors) Ltd (1965), the defendant
motor car dealer told the plaintiff that a Bentley he was to buy had done 20,000 miles,
when in fact it had done 100,000 miles. After the plaintiff bought the car, he discovered
the true mileage and sued for breach of contract.
The court held that there was a breach of contract in this case because the defendant’s
statement, given that he was a car dealer, was a term of the contract.
[Note: In Oscar Chess v Williams, the seller, an individual, honestly believed his
statement and had no way of knowing otherwise. In the Dick Bentley case, the seller,
a motor car dealer, was in a better position to know the true facts regarding the
Bentley.]
The Parol Evidence Rule
This rule states that once an agreement has been reduced in writing, generally, evidence
cannot be introduced to contradict, vary, add to, or in any way modify the written agreement.
The reason for this is because, if it were otherwise, it would defeat the purpose of a written
contract because parties of that contract would be adding and subtracting at will.
In Hawrish v Bank of Montreal (1969), where oral terms of an agreement could not be
reconciled with the written terms of that agreement, the court held that oral evidence could not
be admitted to vary or contradict the express terms of the contract.
Similarly, in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design &
Construction Pte Ltd (2008), the court held that extrinsic evidence was not admissible to add
to, vary, or contradict the terms of an agreement.
COMMERCIAL LAW
KHE-LCD-SGD-00341 34
An exception to the Parol Evidence Rule is where one party misrepresents the terms in a
written contract to the other party; under this circumstance, oral evidence of what that party
said may be admitted
In Exklusiv Auto Services Pte Ltd v Chan Yong Chua Eric (1996), a customer placed an
order to buy a new car and signed an agreement. The sales representative told the customer
that if he cancelled the order, he would only lose his deposit. However, the written agreement
stated otherwise. The customer then cancelled the order, and the customer contended that all
he would be liable for was the deposit. As a result of the misrepresentation, the court upheld
his argument, allowing the oral statement made by the sales representative to override the
express term in the contract.
While the terms discussed thus far are express terms, it is important to note that terms can
also be implied.
Implied Terms
An implied term is a term which has not been expressly agreed by the parties but is
nevertheless implied into the contract. Such terms are generally implied (understood to exist)
in order to make a contract workable. For example, when ordering a plate of chicken rice,
one just places the order for what he/she wants (express term). One does not have to tell the
seller to ensure that the food is not contaminated (implied term). Or say an employment
contract; there would be terms on the duties, benefits, entitlements, etc. listed in the terms
(express), but there would not be a term that allows that employee to use the washroom
(implied).
Implied terms can be implied into a contract by a custom, by a court, or by a statute.
• Terms implied by custom
These are unwritten terms that are long standing, well-established and particular
to a trade or industry. A bank dishonouring a cheque that is more than six months old
is a prime example.
• Terms implied by the courts
The court sometimes implies a term into a contract to ensure business efficacy; the
court will supply a term which it considers as having been intended by the parties. The
court will presume the intention of the parties using what’s termed as the “officious
bystander test”. This test is simply where an officious bystander, who had observed
the negotiation and/or concluding of the contract, had intervened to remind the parties
that in formulating their contract they failed to mention a particular point to which the
parties would have replied, “of course...we did not trouble to say that; it is too clear.”
COMMERCIAL LAW
KHE-LCD-SGD-00341 35
The Moorcock (1889)
FACTS: Owners of a wharf agreed that ship should be moored alongside to unload
cargo. Both wharfingers and ship owners knew that at low tide the ship would ground
on the mud at the bottom. At ebb tide the ship rested on a ridge concealed beneath
the mud and suffered damage.
HELD: It was an implied term, though not expressed, that the ground alongside the
wharf was safe at low tide since both parties knew that the ship must rest on it.
• Terms implied by statute
Terms can also be implied by statute such as the Sale of Goods Act, which seek to
protect the interests of buyers of goods. Terms implied by statue have the force of law,
and it is irrelevant that the parties are unaware of the statute.
For example, one of the key provisions in the Sale of Goods Act 1979 is section 12,
which states that the person selling the goods has the legal right to sell them.
Condition and Warranty
Having examined express and implied terms of the contract, we now address how the terms
can be classified as either a condition or a warranty. This distinction is important because
the legal consequences for breaching a condition and breaching a warranty are different.
A breach of condition gives the injured party the option to affirm the contract or discharge the
contract. In either case he may also sue for damages.
A breach of warranty does not give the injured party the right to discharge the contract. The
contract remains in force and the injured party can only sue for damages.
• Condition
A condition is a vital term of a contract which goes to the root of the contract.
If a condition is breached, it entitles the injured party to rescind the contract and claim
damages for non-performance.
In Wallis v Pratt (1910), a condition was defined as “an obligation which goes so
directly to the substance of the contract, or, in other words, is so essential to its very
nature, that its non-performance may fairly be considered by the other party as a
substantial failure to perform the contract.”
COMMERCIAL LAW
KHE-LCD-SGD-00341 36
• Warranty
A warranty is not a vital term in a contract, but one which is merely subsidiary, a breach
of which gives no right to rescind the contract but only an action for damages for the
loss which the injured party has suffered as the result of the breach. Failure to perform
it does not go to the substance of the contract.
However, whether a term is a condition, or a warranty depends on its importance in a given
situation. The two cases illustrate how similar fact situations can give rise to different
interpretations on the nature of the terms of a contract.
In Poussard v Spiers (1876), the plaintiff (P) agreed to sing in an opera throughout a series
of performances but failed to appear on the Opening Night and next few days due to illness.
The producers engaged a substitute for the whole run and when P recovered, the producers
refused her services to sing for the remaining performances. It was held by the court that
failure to sing on the Opening Night was a breach of condition which entitled producers to treat
contract as being discharged.
Compare this case with Bettini v Gye (1876). In this case the plaintiff agreed to sing for the
defendant, who was the director of Italian Opera in England, during certain dates and was to
arrive in London 6 days before the commencement of the engagement for rehearsals.
However, he arrived only 2 days before commencement, and the defendant refused to be
bound by the contract. In this case, the court held that the stipulation to arrive 6 days earlier
was not a condition, and that rehearsal clause was only subsidiary to main purpose of the
contract; the contract could not be rescinded but producer could claim damages if he could
prove loss.
The distinction between conditions and warranties are important because of their
consequences, and/or severity of damages.
Innominate Terms
Innominate terms (or intermediate terms) combine the nature of a condition and warranty in
so far as in some events of breach of such undertaking may even entitle the innocent party to
rescind the contract, and in other events the breach entitles him only to claim damages but
does not entitle him to rescind the contract:
In Hong Kong Fir Shipping Co v Kawasaki Kaisen Kaisha (1962), Kawasaki chartered a
ship to the plaintiffs. It was a term in the contract that the ship was “in every way fitted for
ordinary cargo service”. Unfortunately, the crew was insufficient in number and incompetent,
and so this term was breached. The question was whether the breach entitled the plaintiff to
terminate the charter.
COMMERCIAL LAW
KHE-LCD-SGD-00341 37
The court held that the term in question would cover both trivial matters such as a missing
nail, and serious matters such as the whole ship being unseaworthy. Thus, it could not be
classified as a condition or warranty (such a term was subsequently coined as an “innominate”
term). The court further held that the plaintiff could, nonetheless, terminate the contract if the
consequences of the breach were such that they substantially deprived the innocent party
of the whole benefit of the contract. On the facts, as the consequences of the breach were
not that serious, the plaintiffs could not terminate the charter. They could only claim damages.
Therefore, unlike a breach of condition, breach of an innominate term does not automatically
entitle the injured party to discharge the contract. If the breach and its consequences are not
serious, the breach of an innominate term will be treated like a breach of warranty. If the
breach and its consequences are serious, the breach of an innominate term will be treated
like a breach of condition.
COMMERCIAL LAW
KHE-LCD-SGD-00341 38
Class Activity Get into small groups and discuss the following:
1) Explain the difference between express terms and implied terms. Give examples.
2) With regards to implied terms, would you consider them necessary in contracts?
3) When Alfred ordered laksa from a stall at a food court, he was given a bowl with yellow
noodles and laksa gravy. Using your understanding of conditions and warranties,
would Alfred be able to reject the laksa?
COMMERCIAL LAW
KHE-LCD-SGD-00341 39
Topic 5 – Exemption Clauses
Introduction
In relation to breach of contract, contracts often contain clauses that try to exclude or limit
liability in the event of a breach of contract, i.e. such clauses are, in effect, intended to be used
as a defence for breach of contract.
However, parties are free to include exemption clauses into their contracts as long as the
clauses are not against public policy or are prohibited by law (common law and statutes). For
example: a term exempting a party from liability in the event of his committing fraud against
the other party to the contract is void because it infringes public policy.
Exemption clauses will be examined here under statute and common law.
Exemption Clauses under Statute
The Unfair Contract Terms Act (UCTA) is a statute designed to protect consumers who may
be prejudiced by the weaker bargaining positions they occupy in most consumer transactions.
Main Provisions of the UCTA 1977
• The prohibitions and restrictions which the Act provides for apply only to business
liability (liability arising in the course of business (s 1 (3)).
• Any contract term excluding or restricting liability for death or personal injury
resulting from negligence is void (s 2 (1)).
• In the case of other kinds of loss or damage, contract terms aimed at excluding or
restricting liability are void unless they satisfy the “requirement of reasonableness”
(s 2 (2))
• Section 3 provides that where one party deals as a consumer or on the other’s written
standard terms (i.e. standard term contracts are contracts which cannot be
negotiated), liability for breach of contract cannot be excluded or restricted unless the
terms satisfy the requirement of reasonableness.
The Requirement of Reasonableness
Guidelines for the application of the requirement of reasonableness are provided in Schedule
2 of the UCTA 1977 Act. The Guidelines state that the following factors shall be taken into
consideration:
a) The bargaining strength of the parties: If the bargaining strength of the parties are
equal, it is likely that the exclusion clause will be reasonable as between the parties;
COMMERCIAL LAW
KHE-LCD-SGD-00341 40
b) Whether the customer received any inducement to agree to the exclusion clause, or
had an opportunity of entering into a similar contract with other persons without having
to agree to a similar clause;
c) Whether the customer knew, or ought reasonably to have known, of the clause;
d) Where the clause excludes or restricts a liability if some condition is not complied with,
whether it was reasonable at the time of the contract to expect that compliance with
that condition would be practicable;
e) Insurance of the goods in question: If the party relying on the exclusion clause
needs to take out insurance to cover liability, that clause could be unreasonable.
The following two cases with similar facts illustrate the operation of the UCTA. The first case,
Green v Cade (1978) was decided before the UCTA came into effect, whereas George
Mitchell v Finney Lock Seeds (1983) was decided after the UCTA became law.
Green v Cade (1978)
FACTS: A contract on standard written terms provided for the sale of seed potatoes
by potato merchants to farmers. There were 2 main disclaimer clauses which:
a) Excluded liability if the buyers did not give notice of defect within 3 days of
delivery and
b) Restricted the sellers’ liability for any consequential loss, limiting that liability to
amount of contract price.
The potatoes were planted and proved to be infected with virus. The farmers sued for
damages.
HELD: That the 1st clause was not reasonable but 2nd clause, which had been in use
for many years with the approval of the negotiating bodies representing potato
merchants and farmers was reasonable.
George Mitchell v Finney Lock Seeds (1983)
FACTS: A group of farmers ordered 30 lbs of cabbage seed from the sellers and
seeds arrived with invoices, which included a clause excluding all liability for any loss
or damage and limiting seller’s liability to an obligation to replace the seed or repay the
price. The price of the cabbage seeds was £192. The seeds were planted and proved
to be wrong type of cabbage, which was unfit for human consumption. The farmers
incurred a loss of £92,000, which farmers claimed from the sellers. The sellers relied
on the exclusion clause.
HELD: The court held in this case that the exemption clause in the contract was
unreasonable pursuant to s 6(3) UCTA because, among other things, the buyer could
not discover the breach until the plants grew; whereas the seller was at all times in a
position where it should have known whether the wrong seed was supplied.
COMMERCIAL LAW
KHE-LCD-SGD-00341 41
The courts have held that “…..whether a particular exemption clause is reasonable or not
depends on the facts of a particular case”: Kenwell & Co Pte Ltd v Southern Cross
Shipbuilding Co Pte Ltd (1999). Furthermore, in Press Automation Technology Ltd v
Trans-Link Exhibition Forwarding Pte Ltd (2002), the court held that “…even if a party
knowingly enters a contract with a restrictive condition, he will still be able to seek the
protection of UCTA”.
The Unfair Contract Terms Act does not apply to all contracts. For instance, pursuant to the
First Schedule to the Unfair Contract Terms Act, sections 2 and 3 (discussed above) do not
apply to certain contracts such as:
• contracts of insurance,
• contracts relating to the creation or transfer on interest in land,
• contracts relating to the creation or transfer of right or interest in patents, trademarks,
copyrights, registered designs or other intellectual property, and
• contracts relating to creation or transfer of securities.
Exemption Clauses under the Common Law
A clause is of no effect unless it is incorporated as a term in the contract. It must be
incorporated when the contract is made. Any attempt to incorporate it after the contract is
made will be unsuccessful. Consider the following cases.
1) An exemption clause cannot be introduced after the contract has been accepted
except by mutual agreement.
In Olley v Marlborough Court (1949), a husband and wife checked into a hotel room
that was paid for in advance. When the wife went into her room, she saw a notice on
the wall stating that the hotel disclaimed liability for loss of valuables unless they were
handed to the management for safe keeping. The wife locked room and gave key to
counter. A thief got the key and stole her furs. The hotel denied responsibility, citing
the notice in the room.
When the matter was pursued in court, the court held the defendants were liable. The
contract was concluded at the reception desk, and no additional term could be included
unilaterally. Therefore, the terms of the notice in the bedroom were not part of the
contract.
Exception: An exception to this rule is past dealings: Where the parties have had
consistent dealings with each other in the past and when the documents used contain
similar clauses. If the parties have had a history of previous dealings, then the person
to be bound by the exemption clause may be sufficiently aware of it (as a proposed
condition) at the time of making the latest contract. However, it is necessary to show
that he actually knew of the condition. It is not sufficient that he might have become
aware of it. The following case illustrates this point:
COMMERCIAL LAW
KHE-LCD-SGD-00341 42
Spurling v Bradshaw (1956)
FACTS: The defendant delivered eight barrels of orange juice to the plaintiffs who
were warehousemen. A few days later the defendant received a document from the
plaintiff which acknowledged receipt of the barrels. It also contained a clause
exempting the plaintiffs from liability for loss or damage “occasioned by the negligence,
wrongful act or default” caused by themselves, their employees or agents. When the
defendant collected the barrels, some were empty, and some contained dirty water.
He refused to pay the storage charges and was sued by the plaintiffs.
HELD: The court stated that although the defendants did not receive the document
containing the exclusion clause until after the conclusion of the contract, the clause
had been incorporated into the contract as a result of a regular course of dealings
between the parties over the years. The defendant had received similar documents on
previous occasions, and he was now bound by the terms contained in them.
Further, in Thornton v Shoe Lane Parking Ltd (1971), the plaintiff drove into an
automatic car park whereupon, after slotting money into the machine, a ticket was
issued to him by the machine.
The court held that the acceptance had taken place when the customer put the money
into the slot machine. The contract was formed at that point. Since the ticket
(containing terms) was introduced subsequent to that, the terms on the ticket were not
binding on the plaintiff.
2) An attempt to introduce an exemption clause in a receipt given after the
conclusion of the contract would not make it a term of the contract and
consequently not binding on the person receives it.
In the case of Chapelton v Barry UDC (1940), there was a pile of deck chairs and
notice stating: “Hire of chairs 3d per session of 3 hours.” The plaintiff took 2 chairs,
paid for them and received a receipt, which he put in his pocket. One of the chairs
collapsed and he was injured. The defendants relied on the notice on the back of the
receipt disclaiming liability for injury.
When the matter came before the court, the court held that the notice advertising chairs
for hire gave no warning of limiting conditions, and it was not reasonable to
communicate them on a receipt. The disclaimer of liability was, therefore, not binding.
COMMERCIAL LAW
KHE-LCD-SGD-00341 43
3) If a person signs a document, he is bound by the terms even if he does not read
them.
In L’Estrange v Graucob (1934), A sold to B, a shopkeeper, a slot machine under
conditions which excluded B’s normal rights under the Sale of Goods Act 1893
(warranty). B signed the document without reading it. The machine did not work, and
B refused to pay for it.
The court held that the conditions were binding on B since she signed them. It was not
material that A had given her no information of their terms nor called her attention to
them.
4) A person is not bound by an exemption clause if the other party has made a
misrepresentation of its terms.
In Curtis v Chemical Cleaning Co (1951), the plaintiff took her wedding dress to be
cleaned and was asked to sign a receipt in which the defendants disclaimed
responsibility for damage “howsoever arising”. The plaintiff made enquiries about the
effect of the disclaimer clause before signing and was told that the defendants would
not accept liability for damage to sequins or beads. The dress was returned badly
stained, and the defendants sought to rely on the clause.
The court held that the defendants could not rely on the clause since the assistant had
misrepresented the nature of the clause to the Plaintiff who thought that the exemption
only covered here sequins and beads.
5) Similarly, if at the time of the contract, a person gives an oral promise which
cannot be reconciled with a term in the printed contract, the oral promise takes
priority over the printed clause.
In Mendelssohn v Normand (1970) M left his car in N’s garage. Contrary to the rules
of the garage, the car attendant who took the car over told M that he must not lock the
car. M informed the attendant that there was valuable property in the car, and the
attendant promised to lock the car after he had had moved it. By the terms of the ticket
which the attendant gave M, N excluded responsibility for the loss of the contents of
the car. A suitcase containing valuables were stolen from the car.
The court held that N was liable; the oral promise made by the attendant took priority
over the printed exclusion clause and therefore could not be relied upon.
COMMERCIAL LAW
KHE-LCD-SGD-00341 44
Class Activity Get into small groups and discuss the following:
1) When Rose went to Thailand for a holiday, she stayed at the Pied Piper Hotel. At the
reception desk, there was a sign, clearly visible to all guests, that “the hotel would not
be responsible for valuables not handed over to the reception for safekeeping. Rose
checked in to the hotel, and the next day, while she was out sight-seeing, a thief broke
into her room and stole her valuable.
Can Rose hold the hotel liable for her losses?
2) Consider the effect of the following exemption clause found at the payment counter of
a shop selling laptops: “Notice of any defect of laptops purchased must be given within
two days’ of purchase before any refund or exchange can be made”.
3) Discuss the implications (as well as validity) of the sign “no refunds or exchanges” in
a shop.
COMMERCIAL LAW
KHE-LCD-SGD-00341 45
Topic 6 – Factors Vitiating A Contract
Introduction
So far we have dealt with how a contract is formed, as well as the nature of its terms. We now
look at factors which can render a contract void, voidable or simply unenforceable. The
following vitiating factors will be examined:
• Incapacity
• Illegality
• Public Policy
• Misrepresentation
In Incapacity
Incapacity refers to the lack of capacity to enter into a legally binding contract. These can
come in the form of minority, intoxication or mental illness. So should a party with any of
the said incapacities enter into a contract, that contract can be set aside, unless that contract
was for necessaries that such parties would need.
Minority
Minors are individuals who have not reached the age of majority. Under section 35 of the Civil
Law Act, the age of majority is 18 years old. Persons below the age of 18 are considered
minors, and generally, minors cannot enter into legally binding contracts.
The law protects minors from entering into a legally binding contract because they may not
fully appreciate the consequences of their actions.
There are three classes of contracts by minors: Valid Contracts, Voidable Contracts, and
Ratifiable Contracts.
• Valid Contracts
Valid contracts bind both the minor and the other party and therefore fully enforceable:
o a minor is bound for necessary goods and services, and
o a minor is bound by contracts of employment.
o Necessary goods and services
These are restricted to things that are required to maintain bare existence – such
as food and clothing – and includes articles which are reasonably necessary to the
minor having regard to his situation in life.
• Duress
• Undue influence
• Mistake
• Unconscionability
COMMERCIAL LAW
KHE-LCD-SGD-00341 46
In Nash v Inman (1908), a tailor sued a minor to whom he had supplied clothes,
including 11 fancy waistcoats. It was decided that, as the minor was an
undergraduate at Cambridge University at the time, the clothes were suitable
according to the minor’s station in life. However, the court held that this was not a
necessity as he already had an ample supply of clothes.
Minors are only under a legal obligation to pay for things necessary for their
maintenance, although even then they will only be required to pay a reasonable
price for any necessaries.
However, it does not mean that a minor can get away with enjoying goods and
services that are not necessaries without paying for them. Under the Minor
Contracts Act (Cap 389, 1994 Rev Ed) the court may, in its discretion, require the
defendant who is not liable on a contract on the basis of minority to “transfer any
property acquired under the contract or any property representing it, if it is just and
equitable to do so”.
If the property cannot be returned, e.g. the minor has consumed the goods, “…it is
contrary to natural justice that he should recover the money which he has paid”:
Valentini v Canali (1889).
Contracts for the minor’s benefit will be binding on him. These can take the form of
education or apprenticeship, or anything that will enable him to earn a living:
Roberts v Gray (1913) and Chaplin v Leslie Ferwin Publishers Ltd (1966).
o Contracts of employment
Beneficial contracts of employment are enforceable because they enable the minor
to earn a living: Francesco v Barnum (1800).
• Voidable Contracts
The second class of a minor’s contract is voidable contract. This contract is valid and
binding on the other party, but a minor is entitled to repudiate the contract anytime during
his infancy, or within a reasonable period after he attains majority, without any liability on
his part. Examples of these contracts are leases, partnerships, and holding shares in a
company: Davies v Benyon-Harris (1931).
• Ratifiable Contracts
The third class of minor’s contact is ratifiable contract. Such a contract would not be valid
or enforceable against the minor unless he ratifies it after he attains majority. The contract
is nevertheless binding on the other party.
COMMERCIAL LAW
KHE-LCD-SGD-00341 47
Intoxication and Mental Illness
In the same way that the law seeks to protect minors from being bound by contracts which
may not benefit them, the law also protects mentally unsound and intoxicated persons. A
contract with such a person may be unenforceable against that person if it can be shown that,
at the time the contract was made:
a) he was incapable of understanding the nature of the contract; and
b) the other party knew or ought to have known of his incapacity.
As with minors, mentally disordered persons and intoxicated persons are liable for
necessaries supplied to them and are also bound to pay a reasonable price for them.
Illegality
The validity of a contract can be affected if it contravenes any statue or common law, and
thus would not be enforceable.
Some examples of contracts deemed to be illegal under statute:
a) Under section 14 of the Moneylenders Act, loans granted by unlicensed money lenders
are not enforceable.
b) Under section 5 of the Civil Law Act, contracts of gaming and wagering between
individuals are not enforceable. For example, if John bets $100 that soccer Team A
will win the match on Saturday, and Tom bets $100 that the other playing team, Team
B, will win the match, either party who wins the bet will not be able to enforce the
contract on the other.
Such contracts are unenforceable
Some examples of contracts deemed to be illegal under the common law:
a) Contracts to commit crime, tort or fraud:
In Ting Siew May v Boon Lay Choo (2014), where the buyer got the seller to backdate
the option to purchase a property in order to circumvent rules which restricted the
amount of bank loan the buyer could apply for, the court held that the contract was
illegal and hence the buyer could not enforce the contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 48
b) Contracts that are sexually immoral:
In Pearce v Brooks (1866), the plaintiffs let out on hire a coach to a prostitute knowing
that it would be used by her to ply her trade. When the coach was returned in a
damaged state, the plaintiffs tried to sue the prostitute. The court held that the plaintiffs
could not as the contract was illegal in that it promoted sexual immorality.
c) Contracts prejudicial to the administration of justice: such as a contract to give false
evidence to the police or court, and
d) Contracts to corrupt public life: such as bribery given to a public official to promote
some interest for the bribe-giver.
Public Policy
Public policy can be generally defined as a system of laws, regulatory measures, courses of
action, and funding priorities concerning a given topic promulgated by a governmental entity
or its representatives.
For example, clauses in contracts which are restraint of trade since are considered to be
contrary to public policy. Any restriction on a person’s freedom to carry on a trade, business
or profession in whatever way a person chooses is considered a restraint of trade and is void
unless it can be justified.
Sometimes called a “non-compete clause”, the use of such clauses is premised on the
possibility that upon their termination or resignation, an employee might begin working for a
competitor or starting a business and gain competitive advantage by abusing confidential
information about their former employer’s operations or trade secrets, or sensitive information
such as customer/client lists, business practices, upcoming products, and marketing plans.
Conversely, a business might abuse a non-compete covenant to prevent an employee from
working elsewhere at all. Courts have held that, as a matter of public policy, an individual
cannot be barred from carrying on his/her profession that he/she has been trained for except
to the extent that is necessary to protect the employer.
The common law uses three considerations to determine whether or not such clauses are
void:
1) The person imposing that restriction must have a legitimate interest to protect, i.e. trade
secrets;
2) The restraint must be reasonable between the parties as a protection of that interest;
and
3) The restraint is reasonable using the objective test.
COMMERCIAL LAW
KHE-LCD-SGD-00341 49
Misrepresentation
Misrepresentation means a false statement of fact made by one party to another party
before the conclusion of the contract and has the effect of inducing that party into the
contract. For example, under certain circumstances, false statements or promises made by
a seller of goods regarding the quality or nature of the product that the seller has may
constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission
and sometimes damages depending on the type of misrepresentation.
• False Statement of Fact
The representation must be one of fact. Mere puffing or commendatory statements by
traders as to their wares, or statements of opinion are not representations of fact. A
statement of intention is also not a representation of fact, but if can be proved that at
the time of making that statement that no such intention was held, there can be an
action for misrepresentation:
In Edgington v Fitzmaurice (1885), a company issued a prospectus stating that
money raised would be used to improve buildings and extend the business. In fact, the
real intention was to pay off debts. The court held that there was misrepresentation
because the stated intention was not actually held.
• Induces the Party into a Contract
The representation must be made with the intention that it should be acted upon by
the person to whom it is addressed.
In Edgington v Fitzmaurice, the plaintiff was induced to enter into a loan agreement
with the company on the basis that the company was to use the money for expansion
when in reality, the money was used to pay off debts. The court held that the company
had misrepresented the plaintiff.
But if the party to whom the statement was made does not rely on the false
representation, there would be no inducement: Smith v Chadwick (1884).
Further, even if the party misled had the means, of which he did not avail himself, of
discovering the falseness of the representation, he is still entitled to rely on the
representation made to him: Redgrave v Hurd (1881).
COMMERCIAL LAW
KHE-LCD-SGD-00341 50
Silence as Misrepresentation
The general rule is that silence itself does not constitute a misrepresentation except in several
situations:
a) If what is stated becomes a half-truth by what is left unsaid. For example, where a seller
of land told a purchaser that the land was fully let but did not say that the tenants had been
given notice to quit, the unsaid facts turned the stated facts into half-truths and constituted
a misrepresentation:
In Dimmock v Hallett (1866), the vendor of a land, in order to make the purchase sound
like a good investment stated that the land was tenanted. However, he did not disclose
that the tenant had given notice to quit. In the circumstances, since what he stated was
only half the truth, he was obliged to reveal the rest and since he did not, he was held
liable for the misrepresentation.
b) Where a change of circumstances renders a previously truthful statement misleading:
In With v O’Flanagan (1936), the defendant, a doctor, said truthfully in January 1934 that
his medical practice had a business of £2000 pa. However, in from May of that year,
business went down to only £5 a week because the defendant had become ill. The contract
was signed with the plaintiff to buy the medical practice, but the defendant did not disclose
the change in circumstances.
The court held that where a statement is rendered false by a change in circumstances,
there is a duty to disclose the change. A failure to do so will result in an action for
misrepresentation.
c) Where there is a special relationship between contracting parties:
o Fiduciary Relationships
A fiduciary relationship is one of trust and confidence; it involves one party acting for
the benefit of another. For this reason, when entering into a contract, it is important for
a fiduciary to disclose all facts which could be considered material even if not expressly
asked about.
In Lowther v Lord Lowther (1806), the plaintiff handed over a picture to an agent for
sale. The agent knew of the pictures true worth yet bought it for a considerably lower
price. The plaintiff subsequently discovered the pictures true worth and sued to rescind
the contract.
The court held that the defendant was in a fiduciary relationship with the plaintiff and
accordingly assumed an obligation to disclose all material facts. Accordingly, the
contract could be rescinded.
COMMERCIAL LAW
KHE-LCD-SGD-00341 51
o Contracts Uberrimae Fidei
A contract of uberrimae fidei is a contract of “utmost good faith”. Similarly, to fiduciary
relationships, the parties are required to make known all material facts influencing the
contract. Contracts uberrimae fidei usually arise when one party has knowledge which
the other does not have access to. Contracts which are commonly considered to be of
such a nature include contracts of insurance and family agreements.
When applying for insurance, for example, the party must disclose all material facts so
that the insurer can properly assess the risk involved with the offering of insurance.
Since the insurer cannot have access to all information relating to the insured and their
situation, which could affect the risks involved, it is necessary for this disclosure so that
both parties are entering into the contract on equal grounds.
Types of Misrepresentation
• Fraudulent Misrepresentation – arises when the false statement is made by the
representor knowing that it is false: Derry v Peek (1889).
• Negligent Misrepresentation – arises when the false statement is made by the
representor without due care: Howard Marine & Dredging Co Ltd v Ogden & Sons
(Excavations) Ltd (1978).
• Innocent Misrepresentation – arises where the representor made the false statement
without fraud or fault, i.e. he made the false statement believing and having reasonable
grounds to believe its truth: Redgrave v Hurd.
Remedies for Misrepresentation
The usual remedies for misrepresentation are either damages and/or recession, depending of
the facts of each case.
Duress
In order for there to be a valid contract the parties must act freely. If one of the parties is
forced to make the contract by violence or the threat of violence, that is duress, and renders
the contract voidable.
It should be pointed out that in the cases of a threat of violence being directed on the party
being forced to enter into the contract, the mere threat is sufficient for the successful plea of
duress. The actual threat need not be carried out.
COMMERCIAL LAW
KHE-LCD-SGD-00341 52
Further, the person making the threat must be in a position to actually carry out that threat.
So, if, for example, a wheelchair-bound individual threatens to harm to an able-bodied person
if this person refuses to enter into a contract with him, the plea of duress to vitiate that contract
is not likely to sustain.
In Barton v Armstrong (1976), A threatened to kill B if B did not enter a contract which was
wholly unfavourable to B. The court held that B could set aside the contract. This case
establishes conditions for a successful plea of duress to a person:
1) There must be a threat; and
2) That threat must be in relation to that of actual physical violence to life, limb or liberty
of the plaintiff or members of his family.
In some situations, a court may also be willing to find duress where the threat is made in
respect of a person’s assets (goods). This kind of commercial pressure is called economic
duress.
In Atlas Express v Kafco (1989), the court held that the plaintiff’s claim for a minimum fee for
transporting the defendant’s basket-ware to Woolworths store chain was not enforceable. This
was because the defendant’s agreement to the minimum fee was a new term negotiated after
the original contract and was obtained only because the defendant was, by the time question,
in the difficult position of not being able to find an alternative carrier and was fearful of
breaching their supply contract with Woolworths.
If duress is established, the innocent party could rescind the contract.
Undue Influence
This is another situation in which the contract entered into may not necessarily be through
one’s own free will. An equitable doctrine, undue influence is the unconscientious use of
one’s own power or authority over another to obtain a benefit or achieve a purpose by
exerting improper pressure.
A good illustration of this doctrine is found in the case of Inche Noriah v Shaik Allie bin Omar
(1929). Here the plaintiff was an old and illiterate woman who was living alone and dependant
on her nephew, the defendant. The defendant managed to get her to sign over her properties
to him. Realising her mistake, she sought to have the contract set aside. The court held that
there was indeed undue influence and set the contract aside.
Compare this case with Susilawati v American Express Bank Ltd (2008). In this case a
woman had given a guarantee to a bank for her son-in-law’s debts. When the son-in-law could
not pay the debts, the bank sought recovery from her. She pleaded undue influence of her
son-in-law. The court held that she was the main decision-maker in financial matters, and that
there was no undue influence. She was held liable for the debts of her son-in-law to the bank.
COMMERCIAL LAW
KHE-LCD-SGD-00341 53
In another example: Malayan Banking Berhad v Hwang Rose (1997), the Court of Appeal
held that each father-son relationship must be examined to see whether a presumption of
undue influence would arise. In that case, the father was an experienced businessman who
knew the nature and legal consequences of a guarantee and there could be no presumption
of undue influence.
Generally, commercial institutions such as banks, insurance companies, etc. should be alert
when dealing with parties whose relationship with each other are of a non-commercial nature,
e.g. husband and wife, father and son, mother and mother-in-law, etc.
There are two types of undue influence:
• Presumed undue influence (such presumption to be rebutted by the party
complained of having exercised undue influence), and
• Actual undue influence
• Presumed Undue Influence
Under this heading there are two subgroups:
o First subgroup
In the first subgroup, the relationship falls in a class of relationships that as of
law will raise a presumption of undue influence. Such classes include:
o Parent/child: Wright v Vanderplank (1855)
o Guardian/ward
o Priest/member of parish: Roche v Sherrington (1982)
o Solicitor/client: Wright v Carter (1903)
o Doctor/patient: Mitchell v Homfray (1881)
In such cases, the onus of proof lies on the party benefiting from the contract
to prove there was no undue influence when the contract was made.
o Second subgroup
The second subgroup covers relationships that do not fall into the first
subgroup, but on the facts of case, there was an antecedent relationship
between the parties that led to undue influence. The test is one of whether there
was a relationship of such trust and confidence that it should give rise to such
a presumption:
COMMERCIAL LAW
KHE-LCD-SGD-00341 54
Lloyds Bank v Bundy [1975]
FACTS: Bundy owned a house, which was the extent of his estate. His son
operated a business that did not do very well, and the son asked his father to
give him collateral for taking out loans from Lloyds Bank. The father signed the
original collateral for a smaller amount of money after considering it overnight
and talking to his lawyer. Later on, the son needed more collateral, and the only
way that Bundy could provide it was by using the house as collateral. When the
lawyers from the bank came over with his son, they explained that this was the
only thing that he could do to help his son, and Bundy signed the document.
Five months later the bank foreclosed on the son’s assets, and as he was
bankrupt, they sought to seize the house. Bundy refused to leave the house,
and the bank commenced legal action to have him evicted.
HELD: There was a relationship of trust and confidence between the father and
the bank manager giving rise to a presumption of undue influence. The charge
over the house and guarantee the farther signed were therefore set aside.
• Actual Undue Influence
An innocent party may also seek to have a contract set aside for actual undue influence,
where there is no presumption of undue influence, but there is evidence that the power
was unbalanced at the time of the signing of the contract.
Contracts can be set aside based on the ground of undue influence in which one party had
induced the other to enter into the transaction by actual pressure which equity regard as
improper, but which does not amount to duress at common law because no element of
violence to the person was involved. In this situation, it must be affirmatively proved that
one party in fact exerted undue influence over the other and that the transaction resulted
from that influence.
For example, a promise to pay money can be set aside if obtained by a threat to prosecute
the promisor or his close relative or his spouse for a criminal offence.
Undue influence can be exercised without making illegitimate threats or indeed any threats
at all. The party who claims relief on the ground of actual undue influence must show that
such influence existed and had been exercised, and that the transaction resulted from that
influence.
To establish actual undue influence, the person who raises the complaint must establish
the following:
a) that the other party had the capacity to influence the complainant;
b) the influence was exercised;
c) its exercise was undue; and
d) its exercise brought about the transaction.
COMMERCIAL LAW
KHE-LCD-SGD-00341 55
These principles were affirmed in the Singapore High Court in Tan Teck Khong &
Another v Tan Pian Meng (2002).
Mistake
The next vitiating factor to consider is mistake.
In law very few mistakes which can vitiate a contract. The High Court in Singapore, in the case
of Adani Wilmar Ltd v Cooperative Centrale Raiffeisen-Boerenleenbank BA (2002), held
that, “Contracts are robust creatures; they do not fall to just any mistake. Only mistakes which
lie at the root of the contract would have any effect.”
At common law, mistake vitiates a contract such that it becomes void ab intitio (from the
beginning) meaning that no party under the contract can claim any rights or be under any
obligation once the contract is avoided. Mistake has been generally classified under four types:
• Common mistake
• Mutual mistake
• Unilateral mistake
• Non est factum (it is not my deed)
• Common Mistake
Common mistake occurs when both parties to the contract make the same
fundamental mistake of fact. For example, the parties may have entered into a
contract relating to a cargo of fruit, but unknown to both parties, that cargo of fruit had
already perished: Couturier v Hastie (1852).
• Mutual Mistake
This occurs when parties misunderstand each other and are at cross purposes, i.e.
both parties are not aware of each other’s mistake. For example, A offers to sell B
three-bedroom apartment and B accepts what he thinks is A’s offer to sell a four-
bedroom apartment.
• Unilateral Mistake
This occurs when only one party is mistaken. The other party knows or ought to have
known the first party’s mistake. Using the example of the apartment above, if A is aware
of B’s mistake as to the kind of flat A is selling, then it is a unilateral mistake.
COMMERCIAL LAW
KHE-LCD-SGD-00341 56
In Chwee Kin Keong v Digilandmall.com Pte Ltd (2005), an IT company mistakenly
advertised its $3800++ printers for sale on its website for $66. Another IT company
saw this advertisement and ordered several. The first IT company argued the mistake
and could not sell the said printers for $66. The second IT company sued. The matter
before the court was whether the first IT company was bound to sell its $3800++
printers to the second IT company for $66. The court held that the second company,
being in the same profession must have known that there was a mistake in the
advertisement and refused the second IT company to take advantage of the mistake.
• Non est factum
The English language translation to this is that “it is not my deed”. This arises when a
person signs a document that is fundamentally different in character from that
which he contemplated or wanted to sign. This plea is available in 2 circumstances:
1) When the person who signs is blind and illiterate; or
2) When the person is induced to sign the document through fraud.
The party pleading this defence must also establish that:
o the document is fundamentally different in substance from what the signer believes
to be; and
o the mistake must be made without carelessness on the part of the party who signs.
Saunders v Anglia Building Society (1971)
FACTS: Mrs Gallie made a will leaving her house to her nephew, Parkin. Parkin has a
friend, Lee, who was in debt. Through a series of circumstances, Lee tricked Mrs.
Gallie into signing a document that Lee told her was a gift deed to her nephew, Parkin.
She could not read the document because she had broken her glasses. She signed it
nonetheless. What she did not realise until later was that the document she signed
was a deed (transfer of the house) to Lee. Lee mortgaged the house to the Anglia
Building Society. He defaulted and the Society sought possession of the house. Mrs.
Gallie argued that the document she signed was void under the doctrine of non est
factum.
HELD: Mrs Gallie knew that she was transferring her house; and her act of signing the
document during a temporary inability to read amounted to carelessness. The claim to
repudiate the transfer failed. Mrs Gallie could not plea non est factum.
Unconscionability
Unconscionability (also known as unconscientious dealings) is a term used in contract law to
describe a defence against the enforcement of a contract based on the presence of terms
unfair to one party. Typically, such a contract is held to be unenforceable because to enforce
the contract would be unfair to the party seeking to escape the contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 57
A court will consider evidence that one party to the contract took advantage of its superior
bargaining power, or his position of authority, to insert provisions that make the agreement
overwhelmingly favour the interests of that party. Usually, for a court to find a contract
unconscionable the party claiming unconscionability will have to prove that he/she was in a
weaker bargaining position, and that there was no choice but to enter into that contract given
the superior nature of the other party.
Upon finding unconscionability a court has a great deal of flexibility on how it remedies the
situation. It may refuse to enforce the contract, i.e. set the contract aside, refuse to enforce
the offending clause, or take other measures it deems necessary to have a fair outcome.
Damages are usually not awarded.
The doctrine is designed to prevent to protect individuals from victimization and abuse.
COMMERCIAL LAW
KHE-LCD-SGD-00341 58
Class Activity Get into small groups and discuss the following:
1) Discuss if you think that the laws governing incapacity would apply to online contracts.
2) Sixty-seven-year-old retiree, Bernard Chen, had at twenty-something-year-old
mistress who was a foreigner. One day, Bernard and the mistress went to the bank,
and while there, Bernard instructed the bank to transfer all his money in his account to
the young lady’s account overseas. The mistress soon went back to her country and
has remained uncontactable.
Bernard’s wife has found about the transfer. Using your understanding of vitiating
factors, explain if the transaction could be set aside by the wife.
3) Examine the difference between undue influence and duress.
COMMERCIAL LAW
KHE-LCD-SGD-00341 59
Topic 7 – Discharge Of Contract & Remedies For Breach Of Contract
Discharge Of Contract
Introduction
A contract comes to an end when both parties are discharged from all their obligations under
the contract. There are four ways in which a contract may be discharged:
• Performance
• Agreement
• Breach
• Frustration
A contract can be breached if the (implied and/or express) terms are broken. Should this occur,
the following remedies would be available to the injured party: damages, and/or the court
orders of specific performance and injunction.
Performance
For a contract to be discharged through performance, there has to be precise performance.
The parties must have performed what they agreed to under the contract, and performance
must be strictly in accordance with the terms of the contract to be a discharge.
A partial performance will not normally suffice, nor does incorrect performance.
In Re Moore & Co Ltd and Landauer Co Ltd (1921), there was a contract for the supply of
canned fruit from Australia. The supplier agreed to pack the fruit in cases of 30 cans each.
When the cases were delivered, it was found that they contained 24 cans instead of the agreed
30 cans. The buyers rejected the shipment.
The court held that the buyers could reject the goods since they were not of contract
description, and that the contract had not been discharged by performance, i.e. there was no
performance.
Fundamentals of Performance:
1) Time for Performance
If one party fails to perform the contract at an agreed time, he may perform it later so long as
prompt performance does not constitute one of the essential conditions of the contract. The
effect will be that the contract will continue in force.
COMMERCIAL LAW
KHE-LCD-SGD-00341 60
If time is of the essence, i.e. an important aspect of the contract, and this is made known to
the other party, prompt delivery becomes a condition. If this aspect of time is breached, the
injured party may refuse the late performance and treat the contract as being discharged by
breach.
If time is not of the essence, then the injured party must accept late performance and claim
damages.
In Charles Rickards v Oppenheim (1950), a contract was made to produce a Rolls-Royce
chassis within 7 months. When this period expired without delivery, the purchaser agreed to
wait for another 3 months. At the end of that period, it was still not ready. The purchaser then
served a notice requiring completion within 4 weeks failing which he would cancel the order.
When there was still no delivery of the engine, he cancelled order. Yet the builders tendered
delivery 3 months after that cancellation, which was promptly rejected by the purchaser.
When the matter was brought to court, the court held that although purchaser had first waived
his rights, he could, by serving reasonable notice to complete the contract, make time of the
essence and treat the contract as discharged if there was no performance within the stipulated
period of the notice.
2) Payment
Payment of the amount due under a contract is a discharge. Payment of a smaller amount
is not a discharge, unless it is made at an earlier date or in a different manner from that
prescribed by the contract (for example, at the debtor’s premises instead of the creditor’s.)
Here, the issue of consideration arises. (Students should refer to that chapter.)
3) Complete Performance
Generally, the contract price is not payable till there is complete performance. At
common law, there is no right to demand proportionate payment for partially completed work.
In Cutter v Powell (1795), D employed P as second mate of ship sailing from Jamaica to
Liverpool at a wage for the complete voyage of 30 guineas. P died at sea after completing
three quarters of the journey. The court held that he was entitled to nothing unless he
completed the entire journey.
There are, however, exceptions to this rule of complete performance:
• Divisible Contracts. Some contracts may be divisible into stages. Such contracts will
see the party being paid at the various stages of completion of that part of the contract.
An example of this would be renovations contract, where a deposit is initially paid (say
5 percent), to be followed by something like 75 percent of the renovation cost when
the work is underway, with the remaining 20 percent to be paid at the end of the
renovations.
COMMERCIAL LAW
KHE-LCD-SGD-00341 61
• Complete Performance Prevented. Where, under the terms of a contract, one person
performs services for another, and the other breaks or repudiates the contract, the
person who has performed the services may usually, instead of claiming damages,
sue upon a quantum meruit to recover the amount earned by his labours. (Simply
explained: quantum meruit is simply the amount earned or to be paid up to the point
when the contract was ended.)
In Planche v Colburn (1831), the plaintiff agreed, for $100, to write a book for the
defendants, who were publishers. When he had written part of the book the defendants
abandoned the project and repudiated the contract. The court held that the plaintiff
could recover $50, upon a quantum meruit.
• Partial Performance Accepted. The other party may accept partial performance, in
which case he is entitled to be paid for the part performance, again in quantum meruit.
However, this acceptance of partial performance must be genuine acceptance.
In Sumpter v Hedges (1898), Sumpter was engaged by Hedges to construct a
structure on Hedges’s land. Sumpter failed to complete the job, so Hedges had to
complete the rest of the job. Sumpter sued for the value of work done. The court held
that he need not be paid, as Hedges had no choice but to accept the partially
completed structure. Hedges could not reasonably be expected to knock it down or
leave it standing on his land in its partially completed state.
• Doctrine of Substantial Performance. This doctrine may be applied especially in the
case of building contracts. Basically, its effect is that if the major part of the contract
has been fulfilled, the party who performed it may claim for performance of what has
been completed.
In the case of Hoenig v, Isaacs, D employed P to decorate his flat for £750, to be paid
as the work progressed. D paid an initial £400 when the work commenced. When it
was completed, D objected to quality of work and refused to pay the balance. The cost
of putting right incomplete or defective work was assessed at the trial at £56. The court
held that D must pay the balance less £56.
Agreement
Another way in which a contract can be brought to an end is through an agreement. The
discharge may be effected by a term within the existing agreement, or by a subsequent
agreement.
• Existing agreement – A contract may include a term that it would be discharges upon
the occurrence of a stipulated event or the expiration of a certain period. For example,
the notice period to terminate a fixed-term employment contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 62
• Subsequent agreement – A contract may also be discharged by the parties entering
into a fresh agreement seeking to end the earlier contract. Where both parties agree
to cancel a contract (rescind the contract) before it has been completely performed on
both sides, the agreement to cancel is itself a new contract, which calls for all the
four elements of a contract to exist in this new agreement.
• Accord and Satisfaction – Where one party purchases his release with fresh valuable
consideration provided to the other party, the understanding to do so it the accord, and
consideration provided is the satisfaction.
• Waiver – A party to the contract may also, without the request of the other party, allow
the other party not to perform an existing obligation under the contract without any
consideration. The courts have upheld such waivers on the basis of estoppel. (Refer
to the Doctrine of Promissory Estoppel, discussed earlier in the Guide.)
Breach of Contract
A breach of contract is a failure, without legal excuse, to perform any promise (term) that forms
all or part of the contract. Such a breach can happen in both written and oral contracts. The
parties involved in a breach of contract may resolve the issue among themselves, or in a court
of law.
There are different types of contract breaches, including a minor or material breach and an
actual or anticipatory breach.
• Minor breach: A breach is minor if, even though the breaching party failed to perform
some aspect of the contract, the other party still receives the item or service specified
in the contract.
For example, in a contract for the sale and delivery of goods on a specific date, but no
mention is made that time is of the essence, any reasonable delay would be
considered a minor breach. In such an instance, the other party is still required to
perform his obligations under the contract but may recover damages resulting from
this minor breach.
• Material breach: A breach is material if, as a result of the breaching party’s failure to
perform some aspect of the contract, the other party receives something substantially
different from what the contract specified.
For example, if the contract specifies the sale of boxes of canned fruit to be 30 cans
per box, but what is delivered are boxes with 24 cans per box. In such an instance, the
other party is no longer required to perform his obligations under the contract and has
the immediate right to all remedies for breach of the entire contract, i.e. damages.
COMMERCIAL LAW
KHE-LCD-SGD-00341 63
• Actual Breach: An actual breach occurs when one person refuses to fulfil his/her
side of the contract on the due date or refuses to perform some fundamental term of
the contract.
Here, there are many examples, such a breach of contracts for the sale and purchase
of goods, failure to keep to terms of, say, employment contracts, rental agreements,
etc.
It is also a case of actual breach of contract if a party to a contract by his own act
disables himself from performing the contract, the other party can treat the contract as
discharged.
In Synge v Synge (1894), a man agreed before marriage to settle a house on his wife
after marriage. He subsequently conveyed the house to a third party. The court held
that his wife could bring an action against him for breach of contract.
• Anticipatory Breach: A party may break a condition of a contract by declaring in
advance that he will not perform it when the time for performance arrives, or by some
action which makes future performance impossible. This is actionable immediately.
In Hochster v De La Tour (1853), D engaged P as courier to accompany him on
European tour starting on 1 June. On 11 May, D wrote to P saying that he no longer
required his services. On 22 May, P sued, but D claimed that there was no actionable
breach till 1 June. The court held that P was entitled to sue as soon as the anticipatory
breach occurred on 11 May.
The innocent party may treat this action as anticipatory breach and consider the
contract as being discharged forthwith, or he may allow the contract to continue until
there is an actual breach. In the latter case, the guilty party may decide to perform the
contract should he later decide to carry out performance.
Remedies for Breach of Contract
When there has been a breach of contract, and assuming the injured party’s (the one who
suffers the breach) has not waived his/her rights, remedies would be damages, orders for
specific performance and/or injunction.
Damages
Damages is monetary compensation to the party who suffers as the result of a breach of
contract. It should be noted that damages are not meant as a form of punishment. The
injured party to a breach of contract will not be able to profit in any way from the breach of
contract. The purpose of damages is simply to put the injured party in a position he/she would
have been had the breach of contract not occur.
COMMERCIAL LAW
KHE-LCD-SGD-00341 64
For example: if a lecturer in a private academic institution breaches his/her contract to lecture
for a whole module, resulting in that institution having to pay more to secure another lecturer
almost immediately to avoid any disruption in lessons, that institution can only claim that
amount it has paid to the new lecturer, plus costs. Costs are usually lawyers’ fees in pursuing
the breach of contract before the courts.
Two types damages will be examined here: unliquidated damages and liquidated
damages.
• Unliquidated Damages: This is damages that will be ascertained by the court, who
will be guided on principles and facts of the case before it. The main purpose of
unliquidated damages is to restore the party who as suffered the loss to the same
position as if the contract had been performed properly: Robinson v Harman (1948).
There are four aspects of this principle to consider:
1) Causation
2) Remoteness
3) Mitigation
4) Assessment
1) Causation
For damages to succeed, the loss must have been caused by the breach of
contract.
In the example given above, it was the lecturer’s breach that caused the private
academic institution to pay out more to a substitute lecturer to avoid any disruption of
classes. This amount, together with lawyer’s fees in pursuing the matter in court, is
what would likely be awarded by the court against the lecturer who breached the
contract.
2) Remoteness
The defendant will only be held liable (in damages) for the plaintiff’s losses if they are
generally foreseeable or if the plaintiff tells the defendant about any special
circumstances in advance.
Hadley v. Baxendale (1854)
FACTS: A mill belonging to X had a broken shaft, and X delivered the shaft to Y, a
carrier, to take to a manufacturer to copy it and make a new one. Y delayed delivery
of the shaft beyond a reasonable time, as a result of which the mill was idle for a long
period than would have been necessary. X did not make known to Y that delay
would result in a loss of profits.
COMMERCIAL LAW
KHE-LCD-SGD-00341 65
HELD: The court held that Y was not liable for the loss of profits during the period of
delay; this was because the only relevant information given by Hadley to Baxendale
was that the article to be carried was a broken shaft of a mill and the plaintiff were
millers of the mill. It was not disclosed that that was the only shaft and therefore it
should be returned as quickly as possible.
The rule in Hadley v Baxendale has two limbs to it.
a) The defendant must compensate the plaintiff for those ordinary losses which
were reasonably foreseeable, at the time of entering the contract, as a
serious possibility as arising from the breach.
b) In addition, the defendant may have to compensate the plaintiff for
extraordinary losses which arose from the breach, so long as those
extraordinary losses were brought to the attention of the defendant at the
time of formation of contract.
These two aspects of the rule in Hadley v Baxendale are neatly illustrated by the facts of Victoria Laundry v Newman Industries (1949). In this case he defendant was some 20 weeks late in delivering a boiler to the laundry. As a result of this, the laundry lost profit from its ordinary day-to-day business (approximately £16 per week) but, in addition, it lost the opportunity of taking advantage of some particularly lucrative government contracts (approximately £262 per week). The court held that the defendant must be expected to contemplate the former loss, but the defendant was not made aware at the time of formation of the contract about the particularly lucrative contracts and so was not liable for those extraordinary losses. [In other words, expected loss can be claimed; unexpected losses cannot be claimed]
3) Mitigation
Mitigation simply means that a party cannot recover loss which he could have avoided;
he must take all reasonable steps to minimize his/her losses. What amounts to
“reasonable steps” depends on the circumstances of the case.
In Holcim (Singapore Pte Ltd v Kwan Yong Construction Pte Ltd (2009) the
defendant could not supply concrete to the plaintiff because of a sudden ban on supply
by Indonesia. The court held that the defendant could have got alternative sand
supplies from elsewhere (in this case, government stockpiles) but failed to do so; the
defendant did not mitigate his losses and therefore could not claim those losses.
4) Assessment
Damages awarded to an injured party can be classified under two headings: damages
for loss of profit (or loss of bargain) and damages for wasted expenditure.
Loss of profit is sometimes called expectation loss, because this loss is the
amount which the injured party would have expected to gain had the contract been
properly performed.
COMMERCIAL LAW
KHE-LCD-SGD-00341 66
Wasted expenditure is sometimes referred to as reliance loss, because this loss
represents the expenses incurred by the injured party who, relying upon the contract,
prepares to perform his obligations incurring expenses which are rendered wasted
because of the breach.
Anglia Television Ltd v Reed (1970)
FACTS: Anglia (P) made preparations to produce a play for television. Anglia
contracted with Robert Reed (D) to star in the production. Reed agreed to come to
England and be available from September 9-October 11, 1968, to rehearse and act in
the film in exchange for 1,050 pounds, a living expense of 100 pounds per week, and
first class air fare between England and the United States. After significant expenses
had been incurred, D repudiated the contract. P sued D and sought wasted
expenditure but not lost profits.
HELD: The court held that P was entitled to recover damages of £2,700 representing
its wasted expenditure.
Some other points on unliquidated damages
o Difficulty in Assessment: The fact that damages are difficult to assess should
not prevent that injured party from obtaining them. Difficulties in assessing
damages often arise in cases where the loss is to some degree speculative in
nature. In such a situation, the court may take into account the probabilities
involved and award damages accordingly: Chaplin v Hicks (1911).
o Non-pecuniary losses: Damages could be claimed where the plaintiff suffers
substantial physical inconvenience as the result of the breach of contract:
Bailey v Bullock (1950); as well as where a contract, whose very aim is to
provide enjoyment and security is breached, giving rise to disappointment and
distress: Jarvis v Swan Tours Ltd (1973).
There have also been an award of damages for mental anguish and distress:
Baltic Shipping Co. v Dillon (The Mikhail Lermontov) (1993)
FACTS: Dillon was a passenger on a cruise ship that sank near New Zealand.
Dillon sued Baltic Shipping Co, claiming damages for distress and disappointment.
HELD: The High Court found that Dillon was entitled to damages for the
disappointment and distress she had suffered. The court recognised that it is
usually the aim of such travel contracts to provide pleasure and relaxation. Baltic
Shipping had failed in this regard and the loss suffered by Dillon was directly linked
to this breach of contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 67
• Liquidated damages: Also referred to as ascertained damages, are damages
whose amount the parties designate during the formation of a contract for the injured
party to collect as compensation upon a specific breach (e.g. late performance).
Generally, the courts will enforce a liquidated damages clause as long as it is a pre-
estimate of loss. Such a clause will not be enforced if it amounts to a penalty
clause; a clause designed to cause fear to the other party.
Whether a liquidated damages clause is a genuine pre-estimate of loss, or a penalty
is largely a matter of construction. The case of Dunlop Pneumatic Tyres Co Ltd v
New Garage & Motor Co Ltd (1915) offers the following guidelines:
a) It will be held to be a penalty if the sum stipulated is extravagant and
unconscionable in amount in comparison with the greatest loss that could
conceivably be proved to have followed from the breach.
b) Whether a single sum is payable regardless of the extent of the breach.
c) The description of the clause as a “penalty” or “liquidated damages clause”
is relevant but not conclusive.
Once the court determines that the clause is a genuine pre-estimate, only what is
stated in the clause can be recovered: Cellulose Acetate Silk Co Ltd v Widnes
Foundry Ltd (1993).
In Harris Hakim v Allgreen Properties Ltd (2001), it was held that where the
liquidated damages clause is prescribed by statute, the injured party can only claim
the amount stipulated in the clause; he is not allowed to claim damages at common
law nor to recover more than what he is entitled to under the clause.
If the liquidated damages clause is construed as a penalty and the amount stipulated
is higher than the actual loss suffered, the injured party could obtain damages for the
actual loss suffered. However, if the liquidated damages are construed as a penalty
but the amount is in fact less that the actual loss suffered, then the injured party has a
choice. He can sue on the clause and recover no more than the amount stipulated, or
he may sue for breach of contract, generally avoiding the clause and therefore seek to
recover damages in full.
Specific Performance (a court order)
There are situations where a party who suffers a breach of contract may not want damages.
Specific performance means that the court will exercise its discretion and insist that the
parties carry out their obligations under the terms of the contract; in other words, to keep
to the terms of the contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 68
Specific Performance is a court order that is usually granted in extreme circumstances where
other remedies fail. For example, if A has spent all his life searching for an ideal house, which
he finally found when B offered his house for sale. If B backs out of the agreement, A will not
be satisfied with damages because it is the house that he wants. In this case, A will apply to
the court for an order specific performance requiring B to sell the house to A.
While specific performance can be in the form of any type of forced action, it is usually used
to complete a previously established transaction, thus being the most effective remedy in
protecting the expectation interest of the innocent party to a contract.
Orders of specific performance are granted only when damages are not an adequate
remedy, and in some specific cases such as land sale. Such orders are discretionary, as with
all equitable remedies, so the availability of this remedy will depend on whether it is
appropriate in the circumstances of the case.
The key principles which will guide the court in deciding whether to exercise its discretion are:
1) Where damages would be an adequate remedy: Lee Chee Wei v Tan Hor Peow
Victor (2007)
2) Where such an order would require the court to supervise the obligations on a
continuous basis, e.g. a contract for the construction of a building;
3) Where one of the parties is a minor, and
4) Contracts for personal service.
Orders for specific performance are relatively rare compared to orders for damages.
In Tay Ah Poon & Another v. Chionh Hai Guan & Another (1997) the Court of Appeal in
Singapore held that the presence of a liquidated damages clause in a contract for the sale of
a flat does not preclude an order for specific performance.
Injunction (also a court order)
An injunction is a court order restraining a person from doing some act. For example, in an
agreement between two parties, A (the buyer, and B, the seller), over the purchase of a house
by A from B. If B, in an attempt to thwart the sale of the house to A (for whatever reason), then
attempts to transfer the house to a third party, A could apply for an injunction to prevent this.
In Lumley v Wagner, W agreed to sing at L’s theatre and nowhere else. A short while after
the contract was made, W wanted to sing for Z. The court held that W could be restrained by
injunction from singing for Z.
If the party that fails to adhere to the injunction, he/she will face civil or criminal penalties, and
may have to pay damages or accept sanctions for failing to follow the court's order. In some
cases, breaches of injunctions are considered serious criminal offences that merit arrest and
possible prison sentences.
COMMERCIAL LAW
KHE-LCD-SGD-00341 69
An injunction will be granted where damages would not be an adequate remedy.
• The Mareva Injunction
This is an injunction ordering a person not to remove specified assets or goods
from the court’s jurisdiction. The purpose of this injunction is to prevent the
defendant from nullifying the effect of a judgment which the plaintiff is likely to obtain
against him. More often than not, such injunctions are used in divorce proceedings
where one party (usually the husband) is attempting to transfer his assets to someone
else in an effort to put it beyond the reach of the court (or his divorcing wife, for that
matter). Here, the wife will apply for an injunction to prevent this, so that the matrimonial
assets can be distributed by the court accordingly.
The Mareva Injunction is a temporary measure (granted only while a case in
pending in court).
It will be granted only if (1) the plaintiff is likely to recover judgment; and (2) there is
reason to believe that the defendant has assets in the jurisdiction to meet the judgment
but may take steps to remove them and make sure they are no longer available.
The plaintiff must specify which assets he wishes to “freeze”.
Limitations of Actions Limitation of actions is defined as the period of time in which a person has to file with the clerk of the court or appropriate agency what he believes is a valid lawsuit or claim. The period varies greatly depending on what type of case is involved. Section 6 of the Limitation Act in Singapore provides that for actions founded on contract, the limitation period is 6 years. Time begins to run from the date the cause of action accrued. For example, in a breach of contract situation, this would mean the date of the breach. After that, the action is said to be time-barred and cannot be pursued. However, with regards to fraud on the part of the defendant or mistake, the period does not begin to run until the plaintiff discovers the fraud or mistake or could, with reasonable diligence, have discovered it.
Frustration of Contract
Frustration refers to the situation where an unexpected event occurs, for which neither party
is responsible, with the result that the very basis of the contract is destroyed, i.e. the common
object of the contract can no longer be achieved.
For a successful pleading of frustration, the following three requirements must be satisfied:
1) The event occurs which was outside the contemplation of the parties, see Jackson v
Union Marine Insurance (1874) below. [was not foreseeable]
COMMERCIAL LAW
KHE-LCD-SGD-00341 70
2) The contract, if performed, would be a different contract from that entered into (e.g.
where the contract is entered into for a particular purpose and that purpose is no longer
attainable): Krell v Henry (1903) below, and
3) The event is one for which neither party is responsible for; see Maritime National Fish
v Ocean Trawlers (1935) below. [was not a self-induced frustration]
Generally, such impossibility arises in one of the following circumstances:
• Destruction of a Subject Matter. In Taylor v Caldwell (1863), a hall was let for a
series of contracts on certain dates. However, the hall was destroyed by fire and the
organiser sued the owner of the hall. The court held that destruction of subject-matter
of the contract (i.e. the hall) rendered the contract impossible to perform and therefore
discharged the contract.
• Personal Incapacity (only in cases of personal service). In Condor v Barron
Knights (1966), P was to perform as drummer every night of the week, but he fell ill.
His doctor recommended that his performances be restricted to 4 nights a week. The
court held that the contract of personal service was based on assumption that
employee's health allowed him to perform his duties. If that was not so, the contract,
was discharged for frustration.
• Government Intervention or illegality. In Singapore Woodcraft Manufacturing v
Mok Ah Sai (1979), P entered into an agreement with D to display their wares on a
commission basis for 10 years. In consideration, P paid D $1,000 a month. However,
in 1975, D's property was acquired by the Singapore government. The court held that
the contract was discharged by frustration.
With regards to monies paid as a deposit in pursuance of a contract for the sale of land
or other property, these are recoverable. In Lim Kim Som v Sherriffa Taibah bte
Abdul Rahman (1994), P entered into an agreement to purchase a piece of property
which was subsequently acquired by the Singapore government under the Land
Acquisition Act. The Court of Appeal held that the frustration could apply to
transactions involving land and that compulsory acquisition had effectively frustrated
the agreement. Since a deposit had been paid, section 2(2) of the Frustrated
Contracts Act applied, and the deposit was recoverable.
• Non-occurrence of an Event if that Event is the Sole Purpose of the Contract. In
Krell v Henry (1903), a room overlooking the route of coronation procession of King
Edward VII was let for the day. However, the coronation was postponed as a result of
the King's illness. The court held that since the event did not take place, and the event
was the sole purpose of the contract of room rental, the contract was discharged by
frustration.
COMMERCIAL LAW
KHE-LCD-SGD-00341 71
• Interruption Which Prevents Performance of the Contract in the Form intended
by the Parties. In Jackson v Union Marine Insurance (1874), there was a contract
for the charter of a ship to proceed immediately to load cargo for San Francisco.
However, the ship ran aground and could not be re-floated for over 1 month.
Thereafter, it needed to be repaired. It was held by the court that the interruption put
an end to the contract in a commercial sense since it was no longer possible to perform
contract intended by the parties. It was thus discharged by frustration.
Contrast the abovementioned case with Tsakiroglou & Co Lt v Noblee and Thorl
GmbH (1962) in which there was a contract for the sale of groundnut to be shipped to
Hamburg. The parties envisaged shipping through the Suez Canal, but the canal was
closed after the contract was concluded. The court held that the contract was not
frustrated as the ship could go round via the Cape of Good Hope (there being no
implied term that carriage was to be via Suez), an alternative route. The greater cost
of the freight was not so great as to render this a fundamentally different adventure.
A contract is not discharged in the following situations:
a) If alternative mode of performance is still possible.
b) If performance becomes suddenly more expensive: Tsakiroglou v Noblee (above).
c) If one party has self- induced frustration. In Maritime National Fish v Ocean Trawlers
(1935) it was held that if either party contributes to the occurrence of the event, they
cannot claim that it amounts to a frustrating event.
Force Majeure Clause
The Force Majeure clause in a contract excuses a party from not performing its
contractual obligations due to unforeseen events beyond its control. These events
include natural disasters such as floods, earthquakes, and other “acts of God”, as well as
uncontrollable events such as war and terrorist attacks.
Force Majeure clauses are meant to excuse a party provided the failure to perform could not
be avoided by the exercise of due diligence and care. However, it does not cover failures
resulting from a party's financial condition or negligence.
The intention of the Force Majeure clause is to excuse liability of a party because of
uncontrollable outside events. For example, you signed a purchase agreement for a house,
and before you gained ownership of it, the house burned down due to a fire caused by
lightning. Neither the buyer nor the seller would be held liable under the terms of the contract;
the seller for not providing the property as stipulated in the contract, and the buyer for not
paying the balance of the purchase price.
COMMERCIAL LAW
KHE-LCD-SGD-00341 72
The Frustrated Contracts Act (cap 115). In many cases, the rights and liabilities of the
parties are regulated by the Frustrated Contracts Act. The main provisions may be summed
up as follows:
1) Any moneys paid under a frustrated contract are recoverable. And any moneys
payable at the time of frustration ceases to be payable: s 2(2) FCA.
2) Expenses incurred by a party in connection with the contract are recoverable from the
other party: s 2(2) FCA.
3) Benefits conferred (other than money) prior to the time of discharge can be
compensated with an amount the court considers just: s 2(3) FCA.
COMMERCIAL LAW
KHE-LCD-SGD-00341 73
Class Activity Get into small groups and discuss the following:
1) Explain what you understand by discharge of contract through performance. How does
frustration of contract affect performance?
2) Harold Teo entered into a contract for the sale of his flat in Bishan to Rob Peters.
Before going through with the sale, Harold’s wife said that she didn’t want to leave the
neighbourhood and asked Harold to “cancel the sale”. When Harold told Rob about
this, Rob insisted they had an agreement, and demanded Harold to keep to this
agreement or “face legal action”. To prevent Rob from getting the flat, Harold intends
to transfer ownership of the flat to his brother, Luke.
Using the laws you have studies, explain how Rob to force Harold to keep to the
contract.
3) Examine several situations in which you believe a contract could be frustrated.
COMMERCIAL LAW
KHE-LCD-SGD-00341 74
Topic 8 – The Law of Tort
Introduction Tort law is a body of rights, obligations, and remedies that is applied by courts in civil proceedings to provide relief for persons who have suffered harm from the wrongful acts of others. The person who sustains injury or suffers pecuniary damage as the result of tortious conduct is known as the plaintiff, and the person who is responsible for inflicting the injury or damage is known as the defendant or tortfeasor. Examples of torts are nuisance, assault, battery, false imprisonment, trespass to the person, trespass to land, and negligence. The Tort of Negligence Negligence as a tort covers both acts and omissions, i.e. a person could be negligent at law for doing something he should not have done, as well as for not doing something he should have. The essentials that must be proved to succeed in an action for negligence are:
a) a duty of care; b) breach of that duty; and c) damage (or loss) resulting from that breach.
a) Duty of Care In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The principle underlying the concept of duty of care concept is the “neighbour principle”, which was declared in the landmark case of Donoghue v. Stevenson (1932) by Lord Atkin. Donoghue v. Stevenson (1932) FACTS: A friend of the plaintiff (Donoghue) bought a bottle of ginger beer for her. After consuming the contents, the plaintiff found the remains of a partially decomposed snail at the bottom of the ginger beer. This, she claimed, made her ill. She could not sue in contract because she did not buy the ginger beer. She sued in tort. HELD: The House of Lords held that the manufacturer of the ginger beer was liable in negligence. Said Lord Atkin:
COMMERCIAL LAW
KHE-LCD-SGD-00341 75
“The rule that you are to love your neighbour becomes in law you must not injure your neighbour; and the lawyer's question: ‘who is my neighbour?’ receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be — persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as long as so affected when I am directing my mind to the acts or omissions that are called in question.” To establish a duty of care, the courts in Singapore have declared that it must first be reasonably foreseeable that the defendant’s action or omission would cause damage to the plaintiff. Once this is established, a two-stage test will be used: Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency (2007):
1) Was there a close and proximate relationship between the parties? and if so, 2) Whether there are policy considerations which negate the finding of a duty of care.
• Foreseeability
For a duty of care to exist, it must be shown that it was foreseeable that the action of the defendant could have caused harm to the plaintiff. The test is an objective one: would a reasonable foresee that damage may result from the defendant’s action. Wyong Shire Council v Shirt (1980) FACTS: The plaintiff council had dredged a channel in the south lake of Tuggerah Lake. The lake was normally shallow. The council erected signs that stated, “deep water”. An inexperienced water-skier, believing the entire lake to be of deep water, suffered serious injury when he entered the shallow area of the lake while water-skiing. HELD: The sign was ambiguous, and a reasonable person might conclude that the area beyond the sign was also deep water. It was therefore reasonably foreseeable that damage of injury may occur. The plaintiff’s claim was successful. It is not necessary to foresee the actual damage that will occur. It is enough if it can be shown that some type of damage could arise as a result of the defendant’s conduct.
• Proximity Proximity is seen as a sense of closeness between the person who owes the duty of care and the person to whom the duty of care is owed. For example, a motorist owes a duty of care to other road users to drive and maintain control of his vehicle while driving on the road. However, this proximity extends to, for example, a mechanic; the mechanic owes a duty of care to repair a car such that it does not breakdown or cause an accident 40 miles away. If it does, the mechanic would have breached his duty of care by failing to ensure that this does not happen.
COMMERCIAL LAW
KHE-LCD-SGD-00341 76
• Public policy considerations The case of Hill v Chief Constable of West Yorkshire (1989) illustrates this point. In this case the father of a woman murdered by Peter Sutcliffe attempted to sue Yorkshire police. The family claimed the police missed numerous opportunities to catch the perpetrator of these crimes. The UK courts decided that the police did not owe a duty of care to any individual member of the public. The case was decided on so-called public policy grounds, meaning that even if the police were at any point negligent in the way in which investigations or protection was provided, public policy would prevent any such case coming to court. This decision was confirmed in Osman v. UK (1998).
In an action on negligence, the plaintiff must prove that the defendant owes him a duty of care. b) Breach of that Duty
Once it is established that the defendant owed a duty to the plaintiff, the matter of whether or not that duty was breached must be settled. The test is both subjective and objective. The defendant who knowingly (subjective) exposes the plaintiff to a substantial risk of loss, breaches that duty. The defendant who fails to realise the substantial risk of loss to the plaintiff, which any reasonable person in the same situation would clearly have realised, also breaches that duty (objective).
The test to determine whether a duty of care has been breached has been stated in Blyth v Birmingham Waterworks (1856) as “….the omission to do something which a reasonable man….would do; or doing something which a prudent and reasonable man would not do”.
Breach of duty is not restricted to professionals or persons under written or oral contract; all members of society have a duty to exercise reasonable care toward others and their property. A person who engages in activities that pose an unreasonable risk toward others and their property that actually results in harm, breaches their duty of reasonable care.
An example is shown in the facts of Bolton v Stone (1951). In this case the House of Lords, which established that a defendant is not negligent if the damage to the plaintiff was not a reasonably foreseeable consequence of his conduct. In this case, Stone was struck on the head by a cricket ball while standing outside her house. Cricket balls were not normally hit a far enough distance to pose a danger to people standing as far away as was Stone. Although she was injured, the court held that she did not have a legitimate claim because the danger was not sufficiently foreseeable.
Furthermore, whether or not a duty of care has been breach would depend on the facts of the case. One factor that would be taken into account would be the defendant’s level of skill. In evaluating the facts, the court will consider the “standard of care” expected from the person who owes the duty. For example, if the defendant is a doctor, then the standard of care expected is that which a reasonably competent doctor will exercise. This is illustrated in the case of: Wells v Cooper (1958) FACTS: The defendant, an amateur carpenter, fitted a new door handle onto the door of a house. The plaintiff suffered injury when he pulled the door handle because the door handle came off resulting in the plaintiff falling down some stairs. The plaintiff brought action against the defendant for negligence.
COMMERCIAL LAW
KHE-LCD-SGD-00341 77
HELD: The defendant was not liable to the plaintiff because the defendant had not breached his duty of care. The defendant had met the standard of care of a reasonably competent amateur carpenter. It should also be added that the more serious the injury, the higher the standard of care required of the defendant. Therefore, not only the likelihood of injury is taken into account, but also the type of injury which is likely to be suffered by the plaintiff. Paris v. Stepney Borough Council (1951) FACTS: S employed P as a garage mechanic. P had lost the sight of one eye during World War II. In order to loosen a stiff bolt, he struck it with a hammer; a piece of metal flew off and (because he was not wearing goggles) struck him in his good eye, causing him to become totally blind. After the accident, P claimed damages for his injury. HELD: The probability of such an event was very small, but its consequences were very serious. His employers, knowing of his disability, should have taken extra care to provide goggles for him. The more serious the possible damage, the greater the precautions that should be taken. S owed a special duty of care to P and had been negligent in failing to supply him with goggles. The effort required to remove the risk of injury Another factor relevant to determining whether the standard of care has been met is the amount of effort that would be required to eliminate that risk. If it is relatively easy to remove the risk and would cause little expense and inconvenience, then this may be required. A failure to do so may result in a breach of a duty of care. Latimer v AEC (1953)
FACTS: The plaintiff was employed by the defendant. On the afternoon of the day of the accident, an exceptionally heavy rainstorm had flooded the whole of the defendant’s premises. Oil, which normally ran in covered channels in the floor of the building, rose to the surface and when the water drained away, left an oily film on the floor. The defendants took measures to clean away the oil, using all the sawdust available to them. The plaintiff came on duty with the night shift, unaware of the condition of the floor. While endeavouring to place a heavy barrel on a trolley, his foot slipped on the still oily surface, he fell on his back, and the barrel crushed his left ankle. When the matter was brought before the court, the trial judge found a breach of common law duty of care. The Court of Appeal reversed this decision.
HELD: The appellate court held that, in this case, a reasonable employer had to make a decision whether or not to shut the factory down to totally eliminate the risk, which was quite unnecessary. The employer took every step that reasonably could have been taken in the circumstances and in so doing had negated any possible allegation of negligence. [In other words, the defendant does not have to totally eliminate the risk but must do as much as the reasonable person would do in the circumstances.]
COMMERCIAL LAW
KHE-LCD-SGD-00341 78
Res ipsa loquitur A Latin term meaning “the thing speaks for itself”. Res ipsa loquitur is a legal doctrine or rule of evidence that creates a presumption that a defendant acted negligently simply because a harmful accident occurred. The presumption arises only if:
1) the thing that caused the accident was under the defendant’s control, 2) the accident could happen only as a result of a careless act, and, 3) the plaintiff's behaviour did not contribute to the accident.
This is alternative way in which a defendant can be shown to have breached his duty of care to the plaintiff. This is usually referred to in the “scalpel left behind” example of obvious negligence in the case of a physician, in which a person goes to a doctor with abdominal pains after having his appendix removed. X-rays show the patient has a metal object the size and shape of a scalpel in his abdomen. It requires no further explanation to show the surgeon who removed the appendix was negligent, as there is no legitimate reason for a doctor to leave a scalpel in a body at the end of an appendectomy. In Scott v London and St Katherine Docks Co (1865), the plaintiff was entering the doorway of the defendant’s warehouse when six sacks of sugar fell from a crane on him. The plaintiff brought an action for negligence. The court held that negligence was established without having to prove that the defendant breached his duty of care to the plaintiff. Here, res ipsa was established because the sacks of sugar were under the control of the defendant and the accident could not, in the ordinary course of things, have occurred without the negligence of the defendant. c) Damage This is the third and final requirement to prove the tort of negligence. The plaintiff must show that he suffered damage as the result of the defendant’s breach. Two aspects must be considered: causation and remoteness.
• Causation
A common test used to determine causation is the “but-for” test. According to this test, the plaintiff would have not suffered damage “but-for” a certain event that caused the damage.
Barnett v Chelsea & Kensington Hospital (1969)
FACTS: At a hospital casualty department, provided and run by the defendants, three night-watchmen presented themselves, complaining to a nurse on duty that they had been vomiting for three hours after drinking tea. The men were told to go home and visit their own doctors the next day. The men then left, and, about five hours later, one of the men died from poisoning by arsenic, which had been introduced into the tea. The wife commenced action against the hospital for negligence resulting in the death of her husband.
COMMERCIAL LAW
KHE-LCD-SGD-00341 79
HELD: While the court did find that there was a duty of care owed to the night- watchmen, and this duty was breached by not attending to them when they showed up at the hospital, it was discovered that this breach did not cause that man’s death. Given that he was poisoned by arsenic, the experts pointed out that even if the correct medical treatment had been given to the man, the death would have occurred anyway. o Novus actus interveniens
It should, however, be noted that even if the “but-for” test is satisfied, there would not be any liability on the part of the defendant if there is a new intervening act (novus actus interveniens). In Mckew v Holland and Hannens and Cubitts (1969), the plaintiff had suffered injuries in the course of his employment, which meant his left leg could give way underneath him. A few days after the incident and while in his recovery, he tried to come down a set of steep steps, which did not have a handrail. His injured leg gave way beneath him, and he attempted to jump the remaining 10 steps. However, he fell down the stairs and severely fractured his ankle and was left with a disability. While the defendant accepted liability for the leg injury resulting from the accident at work, the issue in this case concerned the ankle fracture sustained in the second incident. The defendant disputed liability for the act by the complainant. The court held that the act of jumping down the stairs was a new action by the plaintiff, i.e. it was a novus actus interveniens that broke the chain of causation. The defend has held not liable for the second injury.
• Remoteness
In negligence, the test of causation not only requires that the defendant was the cause in fact, but also requires that the loss or damage sustained by the claimant was not too remote. As with the policy issues in establishing that there was a duty of care and that that duty was breached, remoteness is designed as a further limit on a cause of action to ensure that the liability to pay damages is fairly placed on the defendant. Here the courts use what’s known as the “reasonable foreseeability” test.
In the Wagon Mound (No 2) (1967), a large quantity of oil was spilt into Sydney Harbour from the Wagon Mound (a ship) and it drifted under the wharf where the claimants were doing oxyacetylene welding. The resulting fire caused extensive damage to the wharf and to vessels moored nearby. HELD: The evidence shows that the discharge of so much oil on to the water must have taken a considerable time, and a vigilant ship’s engineer would have noticed the discharge at an early stage. The findings show that he ought to have known that it is possible to ignite this kind of oil on water, and that the ship’s engineer probably ought to have known that this had in fact happened before. The most that can be said to justify inaction is that he would have known that this could only happen in very exceptional circumstances. But that does not mean that a reasonable man would dismiss such a risk from his mind and do nothing when it was so easy to prevent it. If it is clear that the reasonable man would have realised or foreseen and prevented the risk then it must follow that the appellants are liable in damages.
COMMERCIAL LAW
KHE-LCD-SGD-00341 80
It has further been held in Bradford v Robinson Rentals Ltd (1967) that what has to be reasonably foreseeable is the kind of harm (damage), not the extent of the harm. The defendant would still be liable notwithstanding that he did not know the extent of harm, as long as he foresaw some type of harm resulting from his action or inaction.
Thin Skull Rule Furthermore, in relation to damage, the rule is that the defendant takes his plaintiff as he finds him. Known as the “thin skull” rule, this means to say that if X, in breach of his duty, knocks down C who dies as a result because he has a weak heart or an unusual condition (say, thin skull), X would be liable for the death even if a normal person would not have died. In Smith v Leech Brain & Co (1962), Smith's husband worked in a factory owned by Leech Brain galvanizing steel. He had previously worked in the gas industry, making him prone to cancer. One day at work he came out from behind his protective shield when working and was struck in the lip by molten metal. The burn was treated, but he eventually developed cancer and died three years later. The protection provided to employees during their work was very shoddy. In finding the defendant liable for Smith’s death, the court stated: “If a man is negligently run over... it is no answer to the sufferer’s claim for damages that he would have suffered less injury... if he had not had an unusually thin skull or an unusually weak heart”. The ratio decidendi is that a tortfeasor is liable for negligent damage, even when the claimant had a predisposition that made that damage more severe than it otherwise would have been. Defences to an Action for Negligence A defendant taken to court for negligence can raise the following defences:
• Contributory Negligence – This defence can only be raised in situations where the plaintiff’s injury was partly contributed by the plaintiff’s own fault. In Sayers v Harlow UDC (1958), having paid to use a public toilet, a 36-year-old woman found herself trapped inside a cubicle which had no door handle. She attempted to climb out by stepping first on to the toilet and then on to the toilet-roll holder, which gave way. The court held that the injuries she suffered were a natural and probable consequence of the defendant’s negligence, but that the damages would be reduced by 25% since the claimant had been careless in depending for support on the toilet-roll holder.
• Voluntary Assumption of Risk (volenti non fit injuria) – This defence is used when the plaintiff willingly accepts the risk of being injured by the foreseeable behaviour of the defendant. In Morris v Murray (1990), the plaintiff helped an obviously drunken pilot (the defendant) get into a small aeroplane which crashed as it attempted to take off. This was a classic case for volenti to apply. The court held that the plaintiff must have known the condition of the defendant and voluntarily took the risk of negligence by agreeing to be a passenger.
COMMERCIAL LAW
KHE-LCD-SGD-00341 81
Other Torts Absorbed by Negligence
1) Occupier's liability 2) Defective products 3) Defective structures 4) Negligent misstatements 5) Vicarious liability 6) Passing Off 7) Conspiracy 8) Confidence
1) Occupier’s Liability An occupier is any person who has occupation or control, whether it is partial or whole, of land or a structure standing on the land: AC Billings & Sons Ltd v. Rodem (1958). They owe a common law duty of care to ensure that anyone who comes on to those premises is not injured: Hackshaw v. Shaw (1984). Premises include a wide range of fixed and movable structures. Occupiers owe a duty of care to entrants of their premises to ensure that they are not dangerous. Two questions need to be considered:
1) Would a reasonable person in the defendant's position have foreseen that the conduct involved a real risk of injury to the plaintiff? If the risk is real, and it doesn’t matter whether it is remote or unlikely to happen; then 2) What would a reasonable person do in response to the risk? This requires consideration of factors such as:
a) the magnitude of the risk; b) its degree of probability; c) whether it is obvious: Phillips v. Daly (1989); and d) whether a person coming on to the occupier’s premises is acting reasonably.
In the case of those people who establish entry by contractual right, a higher standard of care is required. At common law, the duty owed will turn on whether there are express or implied terms of entry in the contract. An occupier can be held liable even for the actions of third parties as it is a non-delegable duty. For example, where an owner of a premises engages contractors to work on renovations of that premises, that owner will be liable to a third party who is injured as the result of those renovations. This is fully addressed in Property Law and Conveyance. 2) Defective products In the case of manufacturers, the same duty is owed in respect of all products, even though the defect is hidden and unknown to the consumer. In Grant v. Australian Knitting Mills (1936), the plaintiff, who bought undergarments and proceeded to use them, contracted severe dermatitis due to a chemical residue on the garments. He succeeded in an action against the manufacturers under the law of tort.
COMMERCIAL LAW
KHE-LCD-SGD-00341 82
3) Defective structures Where the premises suffer a defect, and it could be reasonably foreseen that a person could suffer injury as a result, the builder, owner or occupier may be liable to a purchaser where they know about such defects. 4) Negligent misstatements If one party gives advice, information or an opinion to another party in circumstances where the other person reasonably relies upon the advice, information or opinion, the first person may be liable for any loss or damage caused if the advice, information or opinion was given negligently. Common cases include advice given by professionals, such as solicitors or accountants. Basic elements in negligent misstatements:
1) the defendant had, or claimed to have some special skill or knowledge; 2) the plaintiff relied on that skill or knowledge; 3) the claim is in relation to a serious matter; and 4) the plaintiff suffered loss or damage.
The remedy is usually damages. To succeed in such an action, however, the plaintiff must show a “special relationship” with the defendant such that they have placed trust and reliance in the defendant’s statement, and the defendant knew that the statement would be relied upon. In Hedley Byrne & Co. Ltd v. Heller & Partners Ltd (1964), Hedley Byrne (HB) were a firm of advertising agents. A customer, Easipower Ltd, placed a large order. Before proceeding, HB wanted to check their financial position and creditworthiness, and so asked their bank to get a report from Easipower’s bank, Heller & Partners Ltd (H&P), who replied in a letter that Easipower is “considered good for its ordinary business engagements”, but added a clause in its reply to HB that this information was given “without responsibility on the part of this bank” Easipower soon went into liquidation, and HB lost £17,000 (equivalent to £400,000 in 2019) on contracts. HB sued H&P for negligence, claiming that the information was given negligently and was misleading. The court found that H&P’s disclaimer was sufficient to protect them from liability and Hedley Byrne’s claim failed. The court also ruled that damage for pure economic loss could arise in situations where the following four conditions were met:
1) a fiduciary relationship of trust & confidence arises/exists between the parties; 2) the party preparing the advice/information has voluntarily assumed the risk; 3) there has been reliance on the advice/info by the other party, and 4) such reliance was reasonable in the circumstances.
This came to be known as the “Hedley Byrne test” In Caparo Industries plc v Dickman(1990) the court refined the Hedley Byrne test with regards to third parties relying on misstatements. In this case, an auditor (Dickman) negligently approved an overstated account of a company’s profitability. A takeover bidder (Caparo) relied on these statements and pursued its takeover on the basis that the company’s finances were sound. Once it had spent its money acquiring the company’s shares, and company control, it found that the finances were in poorer shape than it had been led to believe. Caparo sued the auditor for negligence.
COMMERCIAL LAW
KHE-LCD-SGD-00341 83
The court held that there was no duty of care between an auditor and a third party pursuing a takeover bid. The auditor had done the audit for the company, not the bidder. The bidder could have paid for and done its own audit. Thus, there was neither a relationship of “proximity” nor was it “fair, just and reasonable” to make the auditor liable for the lost sums of money that the takeover incurred. 5) Vicarious liability When one person is liable for the negligent actions of another person, even though the first person was not directly responsible for the injury. For instance, a parent sometimes can be vicariously liable for the harmful acts of a child, and an employer sometimes can be vicariously liable for the acts of a worker. This is a form of strict liability and arises principally in the case of an employer-employee relationship. It has the effect of making the employer an insurer of the employee: Lister v. Romford Ice and Cold Storage Co. Ltd [1957]. The employee must be acting in the course of their employment when they injure another person to make their employer personally liable. In Cassidy v. The Minister (1951), the plaintiff was a patient at a hospital run by the defendant who required routine treatment to set the bones in his wrist. Due to negligence on the part of one of the doctors, the operation caused his fingers to become stiff. The claimant sued the defendant in the tort of negligence on the basis of vicarious liability. The defendant argued that the doctor responsible for the negligence was not one of their servants, as they had no control over how he performed his job. The Court of Appeal held that the defendant was vicariously liable. The fact that the worker engages in specialised and technical work for which he is specially qualified does not mean that he is necessarily not a servant. The Court held that a person is a servant of the defendant if he was chosen for the job by the defendant and is fully integrated into the defendant’s organisation. In this case, the doctors were appointed to the hospital by the defendant and not chosen by the patient and were fully integrated into the hospital. They were therefore the defendant’s servants. 6) Tort of Passing Off Passing off is a common law tort which can be used to enforce unregistered trademark rights. The tort of passing off protects the goodwill of a trader from a misrepresentation that causes damage to goodwill. Goodwill is the reputation the firm enjoys. The tort of passing off prevents one person from misrepresenting his or her goods or services as being the goods and services of the claimant, and also prevents one person from holding out his or her goods or services as having some association or connection with the plaintiff when this is not true.
COMMERCIAL LAW
KHE-LCD-SGD-00341 84
• Passing off and trademark law
A cause of action (or claim) for passing off is a form of intellectual property enforcement against the unauthorised use of a mark which is considered to be similar to another party's registered or unregistered trademarks. Passing off is a form of common law, whereas statutory law such as the Trade Marks Act provides for enforcement of registered trademarks through infringement proceedings. The law of passing off is designed to prevent misrepresentation in the course of trade to the public, for example, that there is some sort of association between the business of defendant and that of the claimant. Another example of passing off is where the defendant does something so that the public is misled into thinking the activity is associated with the claimant, and as a result the claimant suffers some damage, under the law of passing off it may be possible for the claimant to initiate action against the defendant.
In Reckitt & Coleman Products v Borden Inc (1990), it was held by the court that to establish the tort of passing off, three conditions must be satisfied:
1) There is goodwill (reputation) owned by a trader; 2) There is misrepresentation by the defendant that the goods (or services) offered by him are the same as those of the plaintiff; and 3) The plaintiff has suffered loss or is likely to suffer loss.
Plaintiffs have the burden of proving goodwill in its goods/services, get-up of goods, brand, mark and/or itself per se. The plaintiff also has the burden of proof to show false representation (intentional or otherwise) to the public to have them believe that goods/services of defendant are that of the plaintiff; thus, there must be some connection between plaintiff’s and defendant’s goods/services/trade. 7) Tort of Conspiracy Two or more persons commit the tort of conspiracy if they agree on a course of conduct to harm another. A conspiracy to commit an illegal act may also amount to a criminal offence. In the civil sphere, there are two types of conspiracy: conspiracy by unlawful means and conspiracy by lawful means. The elements necessary to establish conspiracy are:
a) There must be a combination of two or more persons, and an agreement between them to carry out certain acts; b) If the conspiracy involves lawful acts, then the main purpose of the conspirators must be to cause damage or injury to the plaintiff; if the conspiracy involves unlawful means, then such a main purpose is not needed; c) The acts must be performed in furtherance of the agreement; and d) The plaintiff must have suffered damage.
For example, employees who conspire to resign from their jobs at once and together thereby, depending on the situation, negatively affecting the employer’s business and this employer suffers business losses as a result; the tort of conspiracy may have been committed.
COMMERCIAL LAW
KHE-LCD-SGD-00341 85
8) Tort of Confidence
The common law tort of breach of confidence deals with unauthorised use or disclosure of certain types of confidential information and may protect such information on the basis of actual or deemed agreement to keep such information secret.
If an employee comes into confidential or exclusive information during his course of employment, and this employee resigns and uses the information to his advantage, the employer may have a cause of action for breach of confidence. The leading case to establish a breach of confidence is Coco v A N Clark (Engineering) Ltd (1969). In this case Coco was developing a motor-assisted cycle or moped. He entered into negotiations with AN Clark to develop the moped and provided information to Clark about his moped. Negotiations fell through and soon after, Clark began to develop its own moped. Coco discovered this and applied for an injunction to stop Clark from making or selling any moped using his confidential information. The issues before the court was
1) if Coco established a strong prima facie case that the information was confidential or that there had been a breach of confidence, and 2) if an injunction be awarded to prevent the making and selling of the moped?
The court held that Coco had failed to establish that the similarities between the two mopeds were achieved by the use of information provided by him to Clark; and further, an injunction was not appropriate as the evidence for the case had not been properly tested and Coco had not developed his own moped and therefore it did not need protection from the sale of the rival moped. The court laid out three elements to be established if a case of breach of confidence is to succeed. The three elements are:-
1) The information must be generally of a confidential nature, 2) The information must have been communicated in circumstances importing an obligation of confidence (on the part of the defendant), and
3) There must be unauthorised use or disclosure of the information by the defendant, i.e. use by the defendant of the plaintiff’s information without his consent.
COMMERCIAL LAW
KHE-LCD-SGD-00341 86
Class Activity Get into small groups and discuss the following:
1) In Singapore, weddings often see what’s locally termed as “gate crashing”. This is when friends of the bride and/or groom arrive at a very early hour in the morning at the bride’s or groom’s house to enjoy a noisy gathering. Their arrival in several cars is usually announced by car horns blaring throughout the neighbourhood. Using your understanding of tort law, is this permissible? 2) The tort of negligence requires three elements to be proved, i.e. duty of care, breach of the duty of care, and damage resulting from the breach of that duty of care. Explain this with reference to driving a car and walking a huge pet dog through the neighbourhood.
Explain professional negligence.
COMMERCIAL LAW
KHE-LCD-SGD-00341 87
Topic 9 – The Sale of Goods
Introduction Generally speaking, the sale of goods transactions is governed by the Sale of Goods Act (Cap 393, 1999 Rev Ed), hereinafter referred to as “SGA”. The lays down compulsory rules regarding the sale of goods and defines the meaning of “goods”. The Act also consists of an array of presumptions and implied terms, which aim to reflect the commercial expectations in the most commonly agreed sales contracts.
The Sale of Goods Act The law relating to the domestic sale of goods in Singapore is governed by the SGA. This Act applies to all contracts for the sale of goods: s 1(1). It does not apply to contracts such as hire- purchase, leasing or barter. The SGA applies to any contract for the sale of goods i.e. a contract in which the seller transfers or agrees to transfer property in goods to the buyer for a money consideration called the price: s 2(1). Goods are defined in section 61(1) to include all personal chattels apart from things in action (such as shares) and money. The SGA does not apply to the provision of services. If some consideration other than money is supplied, for example where goods are exchanged for other goods, the SGA does not apply. Contract for the Sale of Goods
• Formalities - Contract of sale of goods may be made in writing, orally, partly in writing and partly orally, or it may be implied from the conduct of the parties.
• Capacity - Capacity to enter into sale contracts is determined according to the general law relating to capacity to contract, but the SGA specifically provides that where necessaries are sold and delivered to a minor or to a person who is incompetent to contract because of mental capacity or drunkenness, he must pay a reasonable price for the goods.
• The Price - The price of goods can be fixed by the contract, decided according to a course of dealing between the parties, or decided in the way agreed under the contract. Where the price cannot be decided by any of these methods, the buyer must pay a reasonable price.
COMMERCIAL LAW
KHE-LCD-SGD-00341 88
• Types of Goods - “Goods” are referred to in SGA as:
o “existing goods” – goods in existence and which are possessed by the seller at the time the contract is made: s 5(1); o “future goods” – goods to be manufactured or acquired by the seller after the contract is made: s 61(1); o “specific goods” – goods identified and agreed upon by the seller and buyers at the time the contract is made; and o “unascertained goods” – goods which at the time of the making of the contract of sale, have not yet been identified and agreed upon by the parties.
Terms of the Contract for the Sale of Goods Two types of contractual terms are specifically mentioned in the SGA, conditions and warranties. Breach of a condition will give the innocent party the right to terminate the contract, whereas breach of a warranty gives rise to a right to claim damages but not to end the contract. Under the general law of contract, there is a third type of term, namely, the innominate or intermediate term, a breach of which will entitle the innocent party to end the contract only if such breach deprives him of substantially the whole benefit of the contract. The classification of a term is usually a matter of construction of the contract, but it can sometimes be provided for by statute. Implied Terms Sections 12 to 15 of SGA contain terms that are implied in a contract for the sale of goods. Some are implied conditions, others implied warranties.
• Seller’s Right to Sell the Goods
Under section 12(1), there is an implied condition in a contract of sale that the seller has the right to sell the goods. This condition would be breached where, for example, the seller does not have title to the goods and is unable to pass a good title to the buyer. In Rowland v Divall (1923), the plaintiff bought a motor car from the defendant and used it for several months. It then appeared that the defendant had had no title to it, and the plaintiff was compelled to surrender the car to the true owner. The plaintiff sued the defendant to recover the purchase money that he had paid, on the basis of a total failure of consideration. The court held that, notwithstanding that the plaintiff had had the use of the car, there was a total failure of consideration, and he was entitled to recover his purchase price.
Sections 12(2) (a) and 12(2) (b) provide for implied warranties that the goods sold are free from any encumbrances unknown to the buyer, and that the buyer will enjoy quiet possession of the goods.
COMMERCIAL LAW
KHE-LCD-SGD-00341 89
• Correspondence with Description
Section 13 provides that where there is a sale of goods by description, there is an implied condition that the goods correspond with the description. Even where the goods are advertised for sale in a catalogue and are selected by the buyer, this implied condition applies. The case of Beale v Taylor (1967), for example, involved a car that turned out to be a collection of soldered together vehicles, not what the buyer intended to purchase.
For s 13 to be successfully invoked, the buyer must have relied on the description: Harlingdon & Leinster Enterprises Ltd v Christopher Fine Art Ltd (1991). The implied condition must generally be complied with strictly. Refer to Re Moore & Co Ltd and Landauer Co Ltd (1921) in Topic 7, under discharge of contract by Performance.
• Satisfactory Quality
Where a seller sells goods in the course of a business, section 14(2) provides that is an implied condition that the goods are of satisfactory quality. However, this condition does not apply to any defect which is specifically drawn to the buyer’s attention before the contract is made, nor if the buyer examines the goods before the contract, to any defect which that examination ought to have revealed.
Section 14(2B) lists a number of aspects of quality which are to be taken into account such as:
a) the fitness for purpose for which the goods in question are bought for; b) their appearance and finish; c) freedom from minor defects; d) safety; and e) durability.
Second-hand goods will attract a lower standard of satisfactory quality.
• Fitness for Purpose
Where the seller sells goods in the course of a business and the buyer makes known expressly or by implication to the seller any particular purpose for which the goods are being bought, section 14(3) provides that there is an implied condition that the goods supplied are reasonably fit for that purpose. This is regardless of whether that is a purpose for which such goods are commonly supplied. The implied condition does not apply where the circumstances show that the buyer does not rely on the skill and judgment of the seller or that it would be unreasonable for him to do so.
COMMERCIAL LAW
KHE-LCD-SGD-00341 90
Frost v. Aylsbury Dairy Co Ltd (1905) FACTS: The plaintiff bought milk from the defendant for family consumption. The milk was contaminated with typhoid germs. The plaintiff’s wife died after drinking the contaminated milk. HELD: The Court of Appeal held that the purpose for which the milk was bought was clearly for human consumption. Clearly unfit for human consumption in this case, there was a breach of the implied condition of fitness for purpose. Further, section 14(3) would not apply if special conditions/situations relating to that which is purchased is not made known to the other contracting party. In Griffiths v Peter Conway Ltd (1939), a lady visited a shop and asked for a tweed jacket. She was recommended a Harris Tweed jacket, which was made from rough tweed. She bought the jacket and contracted dermatitis after wearing it. However, there was nothing wrong with the jacket; it was the customer’s skin that was delicate. But this was not made known to the seller at the time of the contract of sale. The rough material on her skin gave her dermatitis. The seller’s defence was that if she had told the seller, she had delicate skin, they would not have recommended that particular tweed. The court held that the seller was not liable.
• Sale by Sample
Section 15 provides that where goods are sold by sample, there is an implied condition that the bulk will correspond with the sample in quality, and that the goods will be free from any defect making their quality unsatisfactory, that would not have been apparent on a reasonable examination of the sample. If the sale is by sample as well as by description, the goods must correspond with both the sample as well as the description.
Exclusion of Implied Terms The ability of a seller to exclude or restrict any liability that might otherwise arise under the implied terms in sections 12 to 15 of the SGA is controlled by section 6 of the Unfair Contract Terms Act (Cap 396, 1994 Rev Ed). The terms implied by section 12 (the right to sell, freedom from encumbrance and quiet enjoyment) cannot be excluded at all, whilst the conditions implied under sections 13, 14 and 15 (correspondence with description, satisfactory quality, fitness for purpose and sale by sample) cannot be excluded or restricted as against a person dealing as a consumer. In the case of a buyer who is not dealing as a consumer, the operation of sections 13 to 15 may be excluded or restricted by a contract term only if it satisfies the requirement of reasonableness.
COMMERCIAL LAW
KHE-LCD-SGD-00341 91
Passing of Property It is important to firstly distinguish between ownership, possession and title and possession. Possession only refers to physical possession, but not ownership, i.e. borrowing a friend’s car for the evening means the person who borrows that car for the evening has possession of the car for that evening, ownership (property or title) is still retained by the lender. Determining when ownership, property or title in goods passes from the seller to the buyer is important for three reasons:
1) If property has passed, the goods would belong to the buyer, and so the unpaid seller would be able to sue the buyer for the price of the goods: (s 49). 2) Generally, risk passes with ownership (s20), so the owner of the property must bear the loss should something happen to the goods. 3) If either the seller or buyer becomes insolvent, it is important to determine who has property of the goods. If property has passed to the buyer who becomes the subject of bankruptcy proceedings, it will be difficult to make a claim against the buyer; if property has not passed to such a buyer, then the seller will be able to retrieve the goods.
Intention of the Parties The general rule under section 17 is that property in specific or ascertained goods passes according to the intention of the parties, having regard to the terms of the contract, the conduct of the parties and all the circumstances of the case. Under section 16, property in unascertained goods cannot pass until they are ascertained, regardless of the intention of the parties. In the absence of any indication as when property will pass, Section 18 provides five default rules to determine when property in goods passes. These rules are divided according to the type of goods and the sale contract concerned.
• Section 18, Rule 1
This rule provides that in an unconditional contract for the sale of specific goods in a deliverable state (i.e. such a state that the buyer would be bound under the contract to take delivery of them), property in the goods passes when the contract is made, even if payment or delivery, or both, might be postponed. This rule might apply, for instance, when a customer selects an item in a shop.
What is considered to be in a “deliverable state” was seen in Philip Head & Sons Ltd v Showfronts Ltd (1970) where it was held that delivered carpets that were stolen before they could be laid on the buyers premises were not considered “deliverable state”; as such property and risk remained with the seller.
• Section 18, Rule 2
Rule 2 governs the sale of specific goods where the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, and it provides that property passes when the thing is done, and the buyer has notice that it has been done. For example, if some of the furniture purchased is yet to be assembled, then property does not pass to the buyer until the furniture has been fully assembled and the shop notifies the buyer that this has been done.
COMMERCIAL LAW
KHE-LCD-SGD-00341 92
• Section 18, Rule 3
Under rule 3, where there is a sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test, or do some other act to the goods for the purpose of determining their price, property passes under this rule when the thing is done, and the buyer has notice that it has been done.
• Section 18, Rule 4
Rule 4 applies where goods are delivered on sale or return, or on approval or other similar terms. Here, property in the goods will pass to the buyer when the buyer signifies his approval to the seller or does any other act adopting the transaction; or he retains the goods beyond a certain time without giving notice of rejection. In Elphick v Barnes (1880) a horse was passed on approval for 8 days but died after 3. The buyer had possession but no liability to pay.
• Section 18, Rule 5
Rule 5 applies to the sale of unascertained goods or future goods by description. Property will pass when goods of that description and in a deliverable state are unconditionally appropriated to the contract. In order for unconditional appropriation to take place, case law requires that the contract goods must be identified, separated from other goods where applicable, and irrevocably attached to the contract.
In Aldridge v Johnson (1857), the buyer agreed to buy 100 quarters of barley out of 200 quarters which he had inspected and sent some sacks to contain the goods. The court decided that property passed as soon as the seller filled the sacks, even before the goods left the seller’s possession.
In Carlos Federspiel & Co SA v Charles Twigg & Co Ltd (1957) property in bicycles manufactured to the buyer’s order by the seller was held not to have passed even after the bicycles were made and packed into containers with the buyer’s name and address because the seller did not ship them as he was supposed to do under the contract.
Reservation of Title Clause Where there is a contract for the sale of specific goods, or where goods are subsequently appropriated to a contract, section 19 allows the seller to reserve the right of disposal to the goods until certain conditions are fulfilled. Under such a situation, property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled, notwithstanding delivery of the goods to the buyer or to a carrier for transmission to him. This is also known as a Romalpa clause, whereby a seller retains title to the goods sold until these have been paid for by the buyer: Armour v. Thyssen Edelstahlwerke (1991). Risk
• Passing of Risk
Where goods are at the risk of one party, he has to bear the loss if the goods are damaged, lost or destroyed. Section 20(1) provides that the goods remain at the seller’s risk until the property in them is transferred to the buyer, and that risk passes to the buyer once property passes regardless of whether the goods have been delivered.
COMMERCIAL LAW
KHE-LCD-SGD-00341 93
In Tarling v Baxter (1827), a haystack was sold to a buyer but burned down before the buyer could take possession. The court held that property had passed to the buyer and consequently, he bore the risk.
Section 20(1) is subject to a contrary agreement between the parties, and in such cases property and risk may be separated.
Section 20(2) provides an exception to s 20(1) in that where delivery is delayed through the fault of either the buyer or the seller, the goods are at the risk of the party at fault “as regards any loss which might not have occurred but for such fault”. Demby, Hamilton & Co v Barden (1949) illustrates this point. In this case, goods purchased had perished due to the buyer failing to take delivery; the court held that the buyer was at fault for delaying to take the goods.
• Specific Provisions where Goods have Perished
Where, in a contract for sale of specific goods, the goods, without the knowledge of the seller, have perished at the time of the contract, section 6 provides that the contract is void.
Section 7 provides that where in an agreement for the sale of goods, the goods perish without fault of the buyer or the seller after agreement to sell but before risk passes to buyer, the agreement is frustrated.
Delivery Delivery is the voluntary transfer of possession from one person to another. Delivery may be actual or constructive. Delivery is constructive when the goods themselves are not delivered, but the means to obtaining possession of the goods is delivered; for example, by delivering the key to the garage where the car sold is kept. Whether the seller has to send the goods to the buyer, or the buyer has to take them from the seller, depends on the terms of the contract: section 29(1). In the absence of any such terms, the rules of delivery apply:
1) The place of delivery is the seller’s place of business, or his residence if he has no place of business. If the contact if for sale of specific goods which, to the knowledge of both parties, are in some other place, then that place is the place of delivery: section 29(2). 2) Where the seller is bound to send goods to the buyer, but no time for sending them is fixed, the seller must send the goods to the buyer within a reasonable time: section 29(3). 3) If the seller agrees to deliver goods to the buyer at a place other than where they are sold, the buyer must, in the absence of such an agreement to the contrary, take the risk of deterioration necessarily incident to the course of transit: section 33. 4) The expenses for putting the goods in a deliverable state must be borne by the seller: section 29(6).
COMMERCIAL LAW
KHE-LCD-SGD-00341 94
Transfer of Title by Non-Owner The general rule under section 21 is that where a person who is not the owner sells goods, the buyer acquires no better title to the goods than the seller had. This rule is often expressed in Latin as nemo dat quod non habet (no one can give what he has not got). According to this rule, a thief cannot pass good title to stolen goods, and the original owner of the goods does not lose his title to them. There are, however, exceptions to the Nemo Dat Principle. It does not apply where:
a) a non-owner sells goods under the authority or with the consent of the owner (an agency situation); b) the owner of the goods is, by his conduct, precluded from denying the seller’s authority to sell (an estoppel situation) [section 21(1) SGA]; c) a mercantile agent sells goods in certain circumstances under section 2 of the Factors Act [section 21(1)(a)]; d) there is a contract of sale under any special common law or statutory power of sale, or under a court order [section 21(2)(b)]; e) where a person with a voidable title sells goods - before the contract is avoided - to a buyer who buys in good faith and without notice of the seller’s defect in title (section 23);
Duties of the Seller and Buyer
• Payment and Delivery
Under section 27, the seller has a general duty to deliver goods according to the terms of the contract. Delivery here does not mean the physical despatch of goods; it means the voluntary transfer of possession of goods from one person to another. Therefore, the seller must have the goods in a readily available state for the buyer to take possession of them. Likewise, it is the duty of the buyer to accept and pay for them in accordance with the terms of the contract. Section 28 provides that delivery of the goods and payment of the price are concurrent conditions. Neither party can claim that the other is in breach if he himself is not ready and willing to perform his obligations.
• Good Title
A seller has the duty to pass a good title. In selling the goods, there is an implied condition that the seller has the right to sell the goods or, in the case of an agreement to sell, he will have that right to sell when property is to pass: section 12(1).
There is also an implied warranty, unless previously disclosed to the buyer, the goods are free from encumbrances and that the buyer will enjoy quiet possession: section 12(2).
• Buyer’s Right to Reject the Goods
The buyer has the duty to accept goods only in accordance with the terms of the contract. If there is a breach of condition, or if the breach of an innominate term is sufficiently serious, the buyer may be entitled to reject the goods and terminate the contract under the general law.
COMMERCIAL LAW
KHE-LCD-SGD-00341 95
• Delivery of Wrong Quantity
Under section 30, the buyer can choose to reject the goods if the seller delivers the wrong quantity. However, if the excess or shortfall in quantity is so slight, it would be unreasonable for the buyer to reject the goods (section 30(2A)).
• Instalments
The buyer is not bound to accept delivery by instalments unless this is agreed between the parties (section 31).
• Loss of Right to Reject the Goods
A buyer will lose his right to reject the goods and terminate the contract for breach of condition once he has accepted the goods. Section 35 sets out the situations where a buyer is deemed to have accepted goods. These are
a) where the buyer intimates to the seller that he has accepted the goods; b) where the buyer does an act inconsistent with the ownership of the seller; and c) where the buyer retains the goods beyond a reasonable time without intimating to the seller that he has rejected them.
Unpaid Seller’s Remedies against the Goods Sections 38 to 48 provide an unpaid seller with real rights against the goods themselves. The requirement before any of these rights are available is that the seller has to be an unpaid seller. Section 38(1) stipulates that a seller is unpaid when the whole of the price has not been paid or tendered, and this could be the case even if partial payment has been made, or the seller has sold on credit. Where property has passed to the buyer, an unpaid seller might in certain circumstances have a right of lien over the goods, a right to stop the goods in transit, or a right to resell the goods (section 39(1)). A right of lien is a right of an unpaid seller who is in possession of the goods to retain them until payment or tender of the price. This right is available provided that the goods are sold without any stipulation as to credit, or the credit has expired, or the buyer has become insolvent. Even where the seller has lost possession of the goods, he would have a right of stoppage in transit if the buyer becomes insolvent, and this entitles him to resume possession of the goods as long as they are in the course of transit and to retain them until payment or tender of the price. An unpaid seller who has exercised his right of lien or stoppage in transit may pass a good title to his buyer if he resells the goods (section 48(2)). Where property has not passed to the buyer, the seller has the right to withhold delivery (section 39(2)). The seller also has power under the general law to pass good title to the next buyer upon resale, as property in the goods remains with him in this case.
COMMERCIAL LAW
KHE-LCD-SGD-00341 96
It should be noted that an unpaid seller will have the right to resell the goods in the following circumstances:
• where he has expressly reserved the right to resell the goods in case the buyer should make a default (section 48(4)),
• where the goods are of a perishable nature, and
• where he has given notice to the buyer of his intention to sell, and the buyer does not pay or tender the price within a reasonable time: section 48(3).
Unpaid Seller’s Action for Breach of Contract
• Action for the Price
Where property in goods has passed to the buyer and he wrongfully neglects or refuses to pay for them according to the terms of the contract, the seller may sue the buyer for the price of the goods (section 49(1)). This action might be available even for goods that have not yet been delivered, as long as property has passed.
When the property in the goods has not passed, the remedy available to the seller is to bring an action for breach of contract.
• Damages for Non-acceptance
If a buyer has refused to accept and pay for the goods, section 50 allows the seller to sue for damages for non-acceptance. This is commonly used in situations where property has not passed to the buyer. If property has passed to the buyer, the seller may bring an action for the price of the goods (as described earlier).
The measure of damages for non-acceptance is the loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract (section 50(2)). Where there is an available market for the type of goods in question, the measure of damages is prima facie based on the difference between the contract price and the market or current price of the goods at the time when they ought to have been accepted, or if no time was fixed for acceptance, at the time of refusal to accept (section 51(3)).
Thompson Ltd v Robinson (Gunmakers) Ltd (1955)
FACTS: R contracted to buy a Vanguard motor car from T, who were car dealers. R refused to accept delivery. There was no shortage of Vanguards. HELD: T were entitled to damages for the loss of their bargain, i.e. the profit they would have made, as they has sold one car less than they otherwise would have sold. Note: If the demand of cars exceeds the supply and the car dealer can sell all the cars he can get, he has suffered no loss of profit and the damages are nominal only: Charter v Sullivan (1957).
COMMERCIAL LAW
KHE-LCD-SGD-00341 97
• Special Damages and other Rights
Where the seller suffers losses as a result of the buyer’s refusal to take delivery of the goods within a reasonable time of a request by the seller, the seller can sue for any loss caused by the buyer’s refusal to take delivery, as well as a reasonable charge for the care and custody of the goods (section 37(1)).
Buyer’s Actions for Breach of Contract
• Damages for Non-delivery
Where the seller wrongfully neglects or refuses to deliver the goods, the buyer may sue the seller for non-delivery (section 51(1)). The provisions for damages for non- delivery are based on the same principles as those for damages for non-acceptance.
Section 51(2) expresses the measure of damages to be the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract. Where there is an available market, section 51(3) provides that the measure of damages is prima facie the difference between the contract price and market or current price of the goods at the time they ought to have been delivered, or if no time was fixed, at the time of refusal to deliver.
If the buyer purchased the goods for resale and the seller knew of this, the measure of damages will be the difference between the contract price and the resale price, if the goods cannot be obtained from the market. If they can be obtained from the market, the buyer ought to obtain them there and so fulfil his contract of resale, with the result that the damages will be the difference between the market price and the contract price.
• Specific Performance
Where the contract is one for the delivery of specific or ascertained goods, the court has the discretion under section 52 to direct that the seller must perform the contract specifically. Whether specific performance will actually be awarded in such contracts will depend on the general principles under which the remedy is available at common law.
• Damages for Breach of Warranty
Under section 53, where the seller has breached a warranty of the sale contract, or where the buyer elects or is compelled to treat a breach of condition as a breach of warranty, the buyer can bring an action against the seller for damages for breach of warranty.
Consumer Protection The Competition and Consumer Commission of Singapore (CCCS) administers the Consumer Protection (Fair Trading) Act (Cap. 52A) or CPFTA, which seeks to protect consumers against unfair trading practices by suppliers in Singapore and provides additional rights to consumers in respect of goods that do not conform to contract.
COMMERCIAL LAW
KHE-LCD-SGD-00341 98
Under the CPFTA, a consumer who has entered into a consumer transaction involving an unfair practice may bring an action against the supplier. A sale of goods transaction falls within the ambit of this statute, and a consumer who buys goods may therefore rely on the statute for protection. Generally, it would constitute unfair practice for a supplier, in relation to a consumer transaction
1) to do or say anything if as a result a consumer might reasonably be deceived or misled; 2) to make a false claim; or 3) to take advantage of a consumer if the supplier knows or ought reasonably to know that the consumer is not in a position to protect his own interests, or is not reasonably able to understand the character, nature, language or effect of the transaction.
The CPFTA also sets out a list of specific unfair practices (schedule 2). These include representing that goods have performance characteristics, qualities or benefits that they do not have; representing that goods are of a particular standard, origin or method of manufacture if they are not; or representing that goods have a particular history when the supplier knows that this is not the case. Section 5(3) provides that in determining whether a supplier has engaged in any unfair practice, the reasonableness of his actions in the circumstances should be considered. Section 6(1) offers remedies to a consumer who has entered into a consumer transaction involving unfair practice. Such a consumer may commence an action against the supplier, and should a court actually find that the supplier did indeed engage in unfair practice, the court may:
1) order restitution of any money or property or other consideration, 2) award damages, 3) make an order for specific performance, 4) direct the supplier to repair goods or provide parts for the goods, or 5) vary the contract between the consumer and the supplier.
Lemon Law Lemon Law is a law that protects consumers against defective goods that fail to conform to contract or are of unsatisfactory quality or performance standards at the time of delivery. Under the CPFTA, suppliers have to repair, place, reduce the price or provide a refund for a defective good within six months from the date the good was delivered to the consumer. The Consumers Association of Singapore The Consumers Association of Singapore (CASE) is a non-profit, non-governmental organisation that seeks to protect consumers interest against ethical trade practices.
COMMERCIAL LAW
KHE-LCD-SGD-00341 99
Class Activity Get into small groups and discuss the following:
1) Mrs Goh went to the we market to buy fish, intending to cook a fish dinner for her family. At the market stall selling fish, she asked the price of the mackerel and was told the price. Finding the price agreeable, she ordered five pieces of the fish, which the seller sliced and bagged it. At that point in time, Mrs Goh said she changed her mind about the mackerel and wanted some prawns instead. Using you understanding of the concept of “property” in goods, and at which point in time it passes from buyer to seller, would Mrs Goh be able to change her mind at this point in time? 2) Consider the concept of “no refunds” in consumer transactions in Singapore.
Explain the role of the Consumers Association of Singapore.
COMMERCIAL LAW
KHE-LCD-SGD-00341 100
Topic 10 – Business Organisations
Introduction This last chapter focuses the types of business organisations in Singapore; how they are formed, and the advantages and disadvantages of each type of business. All businesses in Singapore must be registered with The Accounting and Corporate Regulatory Authority (ACRA).
Sole Proprietorship A sole proprietorship is a type of business that is exclusively owned, managed and controlled by a single person with all authority, responsibility and risks involved in running that business. It is the easiest form of business to set up and operate. Characteristics of a Sole Proprietorship
a) Single Ownership: The sole proprietorship form of business organisation has a single owner who himself/herself starts the business by bringing together all the resources.
b) No Separation of Ownership and Management: The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organisation. c) Fewer Legal Formalities: The formation and operation of a sole proprietorship form of business organisation involves limited legal formalities. Thus, its formation is quite easy and simple.
d) No Separate Entity: The business unit does not have an entity separate from the owner. The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit.
e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the entire loss is also borne by him. No other person is there to share the profits and losses of the business. He alone bears the risks and reaps the profits.
f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to pay the business liabilities, his personal property can also be utilised to pay off the liabilities of the business.
g) Control: The controlling power of the sole proprietorship business always remains with the owner. He/she runs the business as per his/her own will.
COMMERCIAL LAW
KHE-LCD-SGD-00341 101
Merits of a Sole Proprietorship
a) Easy to Form and Wind-Up: It is very easy and simple to form a sole proprietorship form of business organisation. Minimal legal formalities are required to be observed. Similarly, the business can be wind up any time if the proprietor so decides.
b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the sole proprietary organisation. So, he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.
c) Direct Motivation: With this type of business organisation, the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently, and as profitably as possible.
d) Flexibility in Operation: It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organisations.
e) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.
f) Personal Touch: Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with the customers and employees. By knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious relationship with them, and run the business smoothly.
Limitations of a Sole Proprietorship
a) Limited Resources: The resources of a sole proprietor are always limited. Being the single owner, it is not always possible to arrange sufficient funds from his own. So, the proprietor has a limited capacity to raise funds for his business.
b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.
c) Unlimited Liability: In the eyes of law the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts.
d) Not Suitable for Large Scale Operations: Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large-scale business.
e) Limited Managerial Expertise: A sole proprietorship from of business organisation always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc. Again, because of limited financial resources, and the size of the business it is also not possible to engage the professional managers in sole proprietorship form of business organisations.
COMMERCIAL LAW
KHE-LCD-SGD-00341 102
Partnership A partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business and share its profit. The persons who form a partnership are individually known as partners and collectively a firm or partnership. The statute governing partnerships is the Partnership Act (1994 Cap. 391 Rev. Ed.) Characteristics of a Partnership
a) Number of Partners: To form a partnership firm at least two persons are required, with a maximum limit 20 partners.
b) Contractual Relationship: A partnership is created by an agreement among the persons who have agreed to join hands. Such persons must be competent to contract. Thus, minors, persons with mental disabilities and bankrupts are not eligible to become the partners.
c) Sharing Profits and Business: There must be an agreement among the partners to share the profits and losses of the business of the partnership firm.
d) Lawful Business: The business of which the persons have agreed to engage in as a partnership must be lawful.
e) Principal-Agent Relationship: There must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts as an agent of other partners, and at the same time the other partners become the principal.
f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well as individually liable for the debts and obligations of the partnership. If the assets of the firm are insufficient to meet the partnership’s liabilities, the personal properties of the partners can also be utilised for this purpose.
Merits of a Partnership
a) Easy to Form: A partnership can be formed easily without many legal formalities. A simple registration with ACRA is all that is required.
b) Availability of Larger Resources: Since two or more partners are needed to start a partnership, there will be a wider pool of resources as compared to sole proprietorship.
c) Better Decisions: In partnership, each partner has a right to take part in the management of the business. All major decisions are taken in consultation with all partners.
d) Flexibility: The partnership firm is a flexible organisation. At any time, the partners can decide to change the size or nature of business or area of its operation after securing the necessary consent of all the partners.
e) Sharing of Risks: The losses of the firm are shared by all the partners equally or as they have agreed.
COMMERCIAL LAW
KHE-LCD-SGD-00341 103
f) Benefits of Specialisation: All partners actively participate in the business as per their specialisation and knowledge. For example, a partnership that is a law firm could address many areas of law where each partner specialises in a particular field of law. Therefore, such a partnership could deal with criminal and civil matters.
g) Secrecy: Business secrets of the firm are only known to the partners. It is not required to disclose any information to the outsiders. It is also not mandatory to publish the annual accounts of the firm.
Limitations of a Partnership
a) Unlimited Liability: The most important drawback of partnership firm is that the liability of the partners are unlimited, i.e., the partners are personally liable for the debt and obligations of the partnership. In other words, their personal property can also be utilised for payment of partnership’s liabilities.
b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the retirement of any partner brings the firm to an end.
c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity to raise funds remains limited as compared to a company where there is no limit on the number of shareholders.
d) Non-transferability of Partnership: The share of interest of any partner cannot be transferred to other partners or to the outsiders.
e) Possibility of Conflict: In a partnership, there sometimes can be friction among partners. Differences of opinion may give rise to difficulties, which could lead to dissolution of the partnership.
Company The relevant statute with regards to companies is Companies Act (Cap 50, 2006 Rev Ed), hereinafter CA.
Once a company is set up (registered with ACRA) it becomes a “legal person” in the eyes of the law, separate and distinct from the persons who set up the company. It is said to be a separate legal entity (SLE); it has its own independent existence and has all the powers of an individual. It can own property, enter into contracts, hire persons, etc., all in its own right.
The principle of separate legal entity was established in Salomon v Salomon (1897), in which a prosperous boot and shoemaker, Mr Salomon, who ran a business as a sole proprietorship, later formed a company with other members of his family and sold his business to the company. He held 20,001 of the 20,007 shares and gave one each to his wife and 5 children which were issued by the company, and $10,000 of debentures. About 2 years after its formation the company was wound up. The assets at that time were worth about $6,000. The persons claiming these assets were: a) creditors to the value of $7,000; and b) S, as holder of $10,000 debentures. The creditors claimed priority because S and the company were one and the same person. The court held that S and the company were separate legal entities and since debenture holders generally have priority over creditors, S was entitled to $6,000 assets.
COMMERCIAL LAW
KHE-LCD-SGD-00341 104
Veil of Incorporation This recognition that a company is an SLE is often referred to as the veil of incorporation. This veil of incorporation is a protective veil that shields members from personal liabilities of the company. Where a company is set up for illicit purposes by members, or where a company is set up to avoid legal obligations, the veil will be lifted or pierced by the courts. Here are some examples where the court lifted the veil:
• Re Darby (1911): the veil was lifted where it was found that the company was created and used as a vehicle for fraud.
• Gilford Motor Co Ltd v Horne (1933): the veil lifted when it was found that the company was created to avoid legal obligations of the member.
• Green v Bestobell Industries Pty Ltd (1982): the veil was lifted when it was found that the company knowingly participated in a director’s breach of fiduciary duties.
Shareholders Persons who “own” the company or who have provided finance for the setting up of a company are known as shareholders or members. Such shares are generally transferrable, i.e. can be sold to other parties. Should the company go into liquidation, the shareholders liabilities are limited to the amount of shares that they own. In other words, their personal property cannot be seized to settle any outstanding debts the company owes at the time of liquidation. Further, a company could issue new shares should it require further capital for investment and expansions. However, the company has to comply with the rules and regulations of the Singapore Stock Exchange before being allowed to do so. Characteristics of a company
a) Separate legal entity: Once a company is formed, it exists as a separate legal entity, distinct and separate from the persons who formed (registered) the company.
b) Able to sue and be sued: A company may sue or be sued in its own name. Thus, if a company enters into a contract which is breached by the other party, it is the company who has the right to sue, not the members. c) Perpetual Succession: A company will exist until such a time it is liquidated or wound up. Even if the directors and/or shareholders change over time, the company will continue its existence.
d) Able to Own and Sell Property: Because a company is a separate legal entity, it can, like any other legal person. own and dispose of property. e) Able to Hire or Terminate Employees: A company is able to hire and terminate employees. It is important to note that when a person is employed to work for the company, the employment contract is between that person and the company.
COMMERCIAL LAW
KHE-LCD-SGD-00341 105
f) Directors: At what is known as an Annual General Meeting (AGM), which takes place every year of the company’s existence, the shareholders will elect a Board of Directors (BoD) who will manage the company. From this BoD, the directors will elect, from amongst themselves a Managing Director (or Executive Director) to manage the company on a daily basis.
Merits of a Company
a) Larger Scale of Business Operation: More often than not, companies are usually larger than sole proprietorships or partnerships. This is largely due to the effect that they can issue shares to secure more funding.
b) Able to Secure Loans and to Attract Investment: Unlike sole proprietorships and partnerships, it may be easier for companies to secure loans from banks, as well as attract investors. Depending on the size of the company, such lending is usually based on the collateral that the company is able to offer. The better the collateral, the greater the loan or investment the company is able to secure. c) Shareholders’ Liability Limited: As mentioned above, the shareholders’ liabilities are limited to the amount of shares they have purchased.
Limitations of a Company
a) Complexities: There are generally more rules and regulations involved in setting up, maintaining and dissolving a company. Regulatory measures need to be complied with, and more often than not, a web of outstanding debts need to be addressed before the company is finally liquidated. b) Stricter Rules: As mentioned, the CA is the main governing statute for companies, and this statute offers rules and regulations governing companies in Singapore. These must be complied with, failing which, penalties will be imposed on the company and/or its officers depending on the breach or non-compliance of any regulation. c) Control: Control of the company vests with the directors who are appointed by the shareholders at the AGM (as mentioned above). Directors have full control of the company and, notwithstanding that they are voted in by the shareholders, the shareholders cannot interfere with business decisions of directors. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunningham (1906). This is so because, more often than not, shareholders are ordinary individuals who have no business experience of running a company. However, the abovementioned does not mean that the shareholders have no control over the directors. If shareholders are unhappy with the directors, they can remove and replace the directors at the next AGM (by voting him out). The other possibility available to the shareholders is that they are able to change the constitution, limiting the powers of the directors. (Shareholders have the power to change or amend the company’s constitution by passing a special resolution: s26 CA.)
COMMERCIAL LAW
KHE-LCD-SGD-00341 106
Types of Companies There are a few types of companies (17(2) CA).
• Company Limited by Shares: The liability of the members (shareholders) are only up to the amount of shares they have (purchased or invested); the members are not personally liable for the debts of the company in the event the company goes into liquidation.
Types of Shares
Two types of shares need to be considered here: fully-paid up and partially-paid up shares. A fully-paid up share is a share that has been fully paid; a partially-paid up share is a share in which full payment for that share has not been made. Usually, when shares are offered by companies, purchasers need only to make a partial payment of the share (the percentage usually decided by the company). The remaining amount remains subject to being “called” at some later date. When the company makes such a call, the shareholder must pay the outstanding amount on each share. A shareholder is contractually bound to make payment upon call; this is the case even if the company is going into liquidation and the call is made by the liquidator (section 250(1) CA).
• Company Limited by Guarantee: In such companies, the guarantee (of the company’s debts) is usually made by the members; for companies limited by guarantee (s250(1) CA), there are no shareholders in such cases. The liability of the members is on the guarantee that they made. Such companies are usually charities or non-profit organisations, as opposed to profit-driven companies.
• Unlimited: The liability of the members in such companies is unlimited and could possibly extend to their personal property (s250(2) CA). Given its nature, such companies are rare.
Public and Private Companies Companies can also be classified into public or private companies. Simply put, the main difference is that a public company is able to issue shares to be public when it needs to raise capital for further expansion (or financing), whereas a private company cannot raise funds by issuing shares to the public. Public companies are traded on the stock exchange; private companies’ shares cannot do so. The name of a public company is abbreviated as “Ltd” (limited), where are a private company is abbreviated as “Pte Ltd” (private limited).
COMMERCIAL LAW
KHE-LCD-SGD-00341 107
Other Forms of Business Entities As of 2005, other types of business entities have come into existence to facilitate and promote the setting up of businesses in Singapore.
• Limited Liability Partnership (LLP): Has the similarities of a partnership and company in that it is a SLE, meaning that the partners exist separately from this partnership and therefore are not personally responsible for the debts of this partnership, and each partner is responsible for acts of other partners (vicarious liability).
• Limited Partnership (LP): Has all the similarities of a partnership, but the only main difference is that there must be one or more limited partners (partners with limited liability), while the others are general partners (personally liable for the debts of the partnership in the event the partnership is liquidated, i.e. unlimited liability). The LP has no separate legal entity; some partners remain personally liable for the debts of the company (general partners).
• Joint Venture: This business relationship is unlike the sole-proprietor, partnership or company. This is a one-time business undertaking in which the parties come together, pursue or carry out a one-time business opportunity, and when completed, the parties go their separate ways.
COMMERCIAL LAW
KHE-LCD-SGD-00341 108
Class Activity Get into small groups and discuss the following:
1) Edmund Poh Tian Hock plans to start a business. He wants to be shielded from any debts his business might incur, yet he wants be in control of the business. He also plans to offer shares when he needs more capital to fund his business expansion plans.
Explain to Edmund the best business entity that may suit his needs.
2) Discuss the protective nature of Separate Legal Entity. Would you suggest it offers protection only to shareholders? 3) Examine the various business entities and suggest which is the best option for a person going into business to sell cars.
- END OF STUDY GUIDE -
COMMERCIAL LAW
KHE-LCD-SGD-00341 109
- Pages from Study Guide_Dip Commerce_Accounting for Managers-2
- Pages from Study Guide_Dip Commerce_Accounting for Managers-3
- copyright page.pdf
- CMCA_INDD
- IDC Study Guide Cover.pdf
- PHTM_Section B_Study Guide_complete 1
- PHTM_Section B_Study Guide_complete 2
- Section B
- Topic 01-Computer Architecture_edited
- Topic 02-Memory Hierarchy_edited
- Topic 03-Base Conversions I_edited
- Topic 04-Base Conversions II_edited
- Topic 05-Matrix Algebra_edited
- Topic 06-Boolean Algebra_edited
- Topic 07-Boolean Algebra_II_edited
- Topic 08-MATLAB Intro_edited
- Topic 09-MATLAB Plotting_edited
- Topic 10-MATLAB Programming_edited
