Business Law Part 1 – Contract Formation
1 Overview
The primary concern of Business Law is to resolve conflicts regarding contracts, or exchange of promises. Naturally, the first question to ask is whether a contract has even been formed. If there were not contract formed, there is no dispute to resolve.
1.1 Requirements for Formation of Contract
In general, there are three commonsensical requirements for the formation of a contract:
- Identifiable agreement that is complete and certain (usually analysed through Offer and Acceptance)
- Consideration
- Intention to create legal relations
1.2 Related Issues
There are also related issues concerning the formation of contracts, namely:
- Promissory Estoppel
- Capacity
1.3 Exam Tips (SUPER IMPORTANT)
The Contract Law syllabus is full of cases and general rules. It is important to realise that the ultimate truth lies in the case facts, not previous court rulings.
Ratio decidendi means that the rationale / procedures outlined by previous court rulings are binding. When answering questions, quote the reasoning used by a higher court case instead of blindly citing the outcome. It is easy to make the mistake of trying too hard to draw analogy from a past ruling to a point where the whole argument simply makes no sense.
It is also usually help to understand that most test procedures outlined in Business Law are there to help you systematically analyse the objective intentions of the parties / reasonableness of an action / remoteness of an event etc. Understanding why a certain test is conducted is crucial towards making a strong argument.
2 Offer and Acceptance
The essence of the Offer and Acceptance analysis lies in the objective intentions of the parties (i.e. what can be reasonably inferred from the conduct and context as a whole).
2.1 Was there a valid offer?
Ultimate Question: is the party looking to receive a direct acceptance or simply trying to initiate a negotiation (i.e. objective intentions)?
2.1.1 Offer vs Invitation to Treat
Another way to phrase the ultimate question is differentiating between an offer and an invitation to treat.
Offer: “An offer, capable of being converted into an agreement by acceptance, must consist of a definite promise to be bound, provided that certain specified terms are accepted.” - Gay Choon Ing v Loh Sze Ti Terence Peter (2009)
Invitation to Treat: “An ‘invitation to treat' … is simply an attempt to initiate negotiations, to induce offers; hence, a response to an ‘invitation to treat’ can never result in a concluded contract.” - Gay Choon Ing v Loh Sze Ti Terence Peter (2009)
A few general rebut-table rules are listed below. The essence here is to answer the above question using the facts of the case.
2.1.2 Substance over Form
When differentiating between an offer and invitation to treat, we should consider the entire conduct and intentions of the parties instead of relying on pure wordings.
- Holding: Words like “we are instructed to offer purchase of stock”, “please send in your tenders” were not considered an offer.
2.1.3 Display of Goods
General Rule: Display of goods for sale is generally an invitation to treat.
- Context: Pharmacists was stationed at cash desk, not at the shelves where the drugs were sold.
- Holding: Customer make offer to buy when he presents the goods for payment. Seller may reject or accept the offer at the cash desk.
2.1.4 Advertisements
General Rule: Advertisements are generally interpreted as invitations to treat as people may want to negotiate further and stocks might be limited.
- Context: “Bramblefinch cocks and hens, 25s each” advertised in magazine.
- Holding: Advertisement is an invitation to treat because: people who read the advertisements may want to negotiate further - seller may have wanted to limit number of items to sell (or might not have enough stock unless they are manufacturer)
Exception: An advertisements is an offer if the advertiser shows an actual intention to be bound.
- Holding: The fact that Carbolic Smoke Ball deposited $1000 with the Alliance Bank shows sincerity and intention to make an unilateral offer.
2.1.5 Tenders
General Rule: A tender is invitation to treat. - Spencer v Harding (1870)
Exception: A tender if an offer if it is explicitly stated that the highest offer would be accepted.
- Context: Defendant invited two parties to submit tenders for some shares, stating that they would accept the highest offer.
- Holding: The tender constitutes an offer.
2.1.6 Auctions
General Rule: Section 57(2) Sale of Goods Act - Harris v Nickerson (1873), Warlow v Harrison (1859)
- Calls of bids - invitation to treat
- Bids made - offer
- Acceptance - when the hammer falls
2.1.7 Internet Transactions
General Rule: Internet advertisements are generally invitations to treat (offer made when submitting order, subsequently accepted by seller through e.g. receipts).
- “A proposal to conclude a contract made through one or more electronic communications which is not addressed to one or more specific parties, but is generally accessible to parties making use of information systems, including a proposal that makes use of interactive applications for the placement of orders through such information systems, is to be considered as an invitation to make offers, unless it clearly indicates the intention of the party making the proposal to be bound in case of acceptance.”
- Context: Laser printers were listed for sale on the defendant’s website but prices were incorrectly listed as $66 per laser printer instead of $3854 and plaintiffs ordered 1606 of these printers. Orders were processed by the defendant’s automated order system and confirmation emails with the subject “Successful Purchase Confirmation from HP Online” were automatically sent to the plaintiffs.
- Holding: Contract formed but vitiated on the basis of mistake.
2.2 Was the offer terminated (before acceptance)?
If we have established that there is a valid offer, we next have to consider whether the offer was terminated. There are four ways of terminating an offer:
- Revocation
- Rejection of Offer and Counteroffer
- Lapsing of Time
- Failure of Condition
Regarding the termination of the offer, the rules are generally clear and straightforward. The only debatable part is what is considered “reasonable” when it comes to the lapsing of time.
2.2.1 Revocation
General Rule: Revocation must be communicated to the offeree to be effective. - Byrne v Van Tienhoven (1880)
General Rule: Revocation can be communicated by someone other than the offeror. - Dickinson v Dodds (1876)
General Rule: Offer can be revoked at any time before acceptance, even if deadline for acceptance is not yet over. - Routledge v Grant (1828)
2.2.2 Rejection of Offer and Counteroffer
General Rule: Counteroffer rejects the original offer and stands as a new offer made to the original offeror. - Hyde v Wrench (1840)
General Rule: Simply asking for more information regarding the offer does not terminate the offer (no counteroffer made). - Stevenson, Jacques & Co v McLean (1880)
2.2.3 Lapsing of Time
General Rule: Clearly stated limit determined when the offer lapses (unless clear from conduct or other evidence that offer is still capable of acceptance). - Panwell Pte Ltd v Indian Bank (No. 2) (2002)
General Rule: An offer with no express provision limiting its duration terminates after lapse of a reasonable time.
- share prices are volatile and a 5-month period is considered unreasonable as a duration for the offer to remain open
2.2.4 Failure of Condition
General Rule: Both explicitly stated / implied conditions would suffice.
- purchaser viewed and offered to buy a functional car and car was then badly damaged. Offer no longer valid due to implied condition that car would remain in the same state in order for the offer to be valid
2.3 Was there a valid acceptance?
If there is a valid offer (which is not terminated), we next analyse whether the offer has been accepted.
2.3.1 What is an acceptance?
Acceptance: “An acceptance is a final and unqualified expression of assent to the terms
of an offer.” - Gay Choon Ing v Loh Sze Ti Terence Peter (2009)
2.3.2 How can one accept and offer?
General Rule: The offeror may specify the way to accept the contract.
- “Where … the offeror has prescribed a particular method of acceptance, but does not insist that only acceptance in that mode shall be binding, acceptance communicated to the offeror by any other mode which is just as good will conclude the contract”
- “This offer may only be accepted by registered mail sent to X address”
General Rule: Acceptance by conduct is allowed (e.g. an offer to buy goods was accepted by supplying the goods).
- railway company submitted to a merchant a draft agreement for coal supply. The agreement was returned with several amendments which the railway company did not expressly consent to. Company accepted deliveries of coals for next two years.
- agreement was found starting from the point when such deliveries began based on the amended agreeement
General Rule: Acceptance by silence is generally not permitted.
- uncle offered to buy nephew’s horse, letter of offer says if he hear not more about the nephew he shall consider the horse his. When nephew sold the farm, uncle said the horse belongs to him.
- Nephew intended his uncle to have the horse but he did not communicate such intention to his uncle or done anything to bind himself
Exception: Acceptance by silence is permitted if offeree explicitly said that if you don’t hear from me, take it as acceptance.
- “if you do not hear from me, take it there is an agreement between us”
2.3.3 Receipt Rule vs Postal Rule
The most common complication that arises when determining whether there is a valid acceptance concerns the form of communication and the delays (or accidents) that occur due to the chosen form of communication.
Receipt Rule: For instantaneous forms of communication, acceptance is effective when acceptance is received. - Brinkibon v Stahag (1983)
Postal Rule: For acceptance via post, acceptance is valid when letter is posted (if address etc. all correct), because of historical reasons. - Adams v Lindsell (1818)
Email Communications: No court ruling in Singapore so far.
- In favor of receipt rule
- received in relatively short time frame
- Electronic Transactions Act incline towards receipt rule
- English court ruling - David Baxter Edward Thomas v BPE Solicitors (2010)
- In favor of postal rule
- sender loses control over the route and delivery time of the message
3 Consideration
The next requirement for contract formation is consideration, which, in layman’s term, means an actual exchange of promises.
3.1 What is consideration?
Consideration
- “… the price for which the promise of the other is bought.” - Dunlop v Selfridge (1915)
- “A valuable consideration, in the sense of the law, may consist either in some right, interest , profit or benefit accruing tot he one party, or some forbearance detriment, loss or responsibility given, suffered or undertaken by the other.” - Currie v Misa (1875)
3.2 Requirements for Consideration
Consideration is usually very easy to identify and justify because of the “practical benefit” exception. However, the general rules and relevant cases are listed below:
3.2.1 Consideration must be requested by the promisor
- Context: wife sued ex-husband for breach of promise to pay her maintenance, saying she had upheld her promise not to apply for maintenance in court. Husband had not asked her to refrain from applying for maintenance in court
- Holding: wife’s promise was not good consideration
3.2.2 Consideration must move from the promisee
- Context: A and B entered into a contract where each undertook to pay money to C. b died and C tried to enforce the contract against B’s estate
- Holding: C did not give consideration, it was A who provide consideration
3.2.3 Consideration must be sufficient but need not be adequate
General Rule: General sufficiency (in the eye of the law).
- Context: Nestle offered: “all you have to do to get such new record is to send three wrappers from Netl’s 6d. milk chocolate bars, together with postal order for 1s. 6d.” Three wrappers were discarded by Nestle once received
- Holding: wrappers were part of the consideration
General Rule: Forbearance to sue is good consideration if X has reasonable grounds for his claim and honestly believes he has a fair chance of success and does not hide from Y anything that may affect the validity of the claim. - Callisher v Bischoffsheim (1870)
General Rule: Promise to perform an existing contractual duty to a third party is sufficient.
- Holding: Benefit to promisor is that he is given a personal right to enforce the promise.
General Rule: Promise to perform an existing legal duty is not good consideration. - Stilk v Myrick (1831)
Exception: Promise to perform an existing legal duty is good consideration if it goes beyond the existing duty.
- Holding: The police force providing extra police protection than normal is considered good consideration.
Exception: It is usually helpful to approach the issue of sufficiency in terms of “practical benefit”.
- Context: The Defendant sub-contracted carpentry work for 27 flats to the Plaintiff. The Plaintiff ran into financial difficulties partway through the project; one of the reasons was that the contract price was too low for him to operate satisfactorily. The Defendant was worried that the Plaintiff could not complete carpentry works in time. This would adversely affect the Defendant’s ability to complete the main contract on time. The Defendant thus agreed to pay Plaintiff an additional sum of money for each flat completed. The Plaintiff resumed work and completed 8 more flats, but did not receive the full additional sum for the 8 flats. The Plaintiff sued for the additional payment.
- Holding: The Defendant obtained a “practical benefit” (or avoided a disbenefit) which constitutes good consideration. Here, it was the avoidance of having to find another subcontractor and avoiding paying a penalty under the main contract.
- Context: 2 crewmen deserted a ship. The captain promised the remaining sailors extra money to stay on. The captain reneged on his bargain. The sailors sued for the extra money.
- Holding: There was no consideration because the sailors were under an existing legal obligation to sail the ship anyway; no fresh consideration was provided.
- Context: Son owed father money. Father waived the debt once the son promised he would stop complaining about the father’s will. The father died. The father’s estate sued the son on the debt.
- Holding: The son had no right to complain; by abstaining from complaining he was providing no real consideration.
3.2.4 Part payment of debt
General Rule: Part payment of debt is not good consideration for discharge of the full debt.
- Context: Ms Beer agreed to give Mr Foakes time to pay a debt of about £2000 and agreed to accept £500 as part satisfaction of the debt. In return, Ms Beer agreed not to sue him.
- Holding: •Ms Beer was still entitled to sue him for the balance. Part payment of a debt does not constitute good consideration.
Exception: A debtor going beyond his contractual obligations is good consideration for the creditor discharging the full amount of the debt for less. - Pinnel’s Case (1602)
3.2.5 Past Consideration
General Rule: Past consideration is not good consideration.
- Context: The Plaintiff bought a horse from the Defendant for £30. After the purchase, the Defendant gave the Plaintiff an oral warranty that the horse was sound and free from vice. It appeared that the horse was not. The Plaintiff sued on the breach of the oral warranty, arguing that the warranty was supported by consideration of the £30 paid.
- Holding: The consideration which supported the contract for the sale of the horse was insufficient to support the subsequent oral warranty. That consideration was past and executed.
Exception: A past act can be good consideration if 3 requirements are met. - RainforestTradingLtd and anothervStateBankof India Singapore (2012)
- The act was done at the promisor’s request
- The parties understood that the act was to be remunerated either by a payment or conferment of some other benefit
- The payment or conferment of some other benefit must have been legally enforceable had it been promised in advance
4 Intention to Create Legal Relations
Besides an identifiable agreement and consideration, parties must also demonstrate intentions to create legal relations in order to form a contract.
4.1 Domestic Agreements
General Rule: It is presumed that there is no intention to create legal relations (even if there is good consideration). - Balfour v Balfour (1919) for husband and wife, Jones v Padavatton (1969) for mother and daughter
Exception: Presumption can be rebutted based on facts of the case.
- Context: Husband went to live with another woman. Agreed to pay wife £40 a month out of which she must pay the outstanding mortgage payments on the house and on completion of all the payments, he would transfer to her sole ownership. Wife refused to leave car until he recorded the agreement in writing and they both signed it. After she completed all the payments, he refused to transfer their joint ownership to her solely.
- Holding: On the facts, the presumption (of there being no intention to create legal relations) was rebutted.
4.2 Commercial Agreements
4.2.1 General Case
General Rule: It is presumed that there is an intention to create legal relations.
- Context: The clause read: “This arrangement is not entered into, nor is this memorandum written as a formal and legal agreement, and shall not be subject to legal jurisdiction in the Law Courts … but is only a definite expression and record of the purpose and intention of the … parties concerned, to which they each honorably pledge themselves with the fullest confidence – that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation”.
- Holding: Based on the facts, the presumption (of there being an intention to create legal relations) was rebutted.
4.2.2 Pre-contractual Documents
Commercial parties typically draft and exchange preliminary documents during negotiations before the actual contract is concluded / signed. These include “letter intent”, “memorandum of understanding”, or even draft contracts labelled “subject to contract”.
General Rule: No intention to create legal relations if critical term not agreed upon.
- Context: Cleveland was building a project, and was negotiating with British Steel about supply of steel nodes for the project. The price and detailed drawings had already been agreed, and British had indicated their plans for production and delivery. Cleveland sent a letter of intent to British Steel: “We are pleased to inform you it is [our] intention to enter into a sub-contract with you, for the supply and delivery of [steel nodes] … We request that you proceed immediately with the works pending preparation and issuing to you of the official form of a sub-contract.”
- Context: British Steel commenced work; no formal contract arrived. Cleveland asked for steel nodes in a certain sequence, leading to a revised fee quote by British Steel, including the words “timing of delivery was yet to be agreed”. The revised price was agreed on, and the steel nodes were delivered, but not in accordance with Cleveland’s preferred timing. Cleveland refused to pay for the nodes, and British Steel sued.
- Holding: No contract had been formed. The letter had stated “proceed … pending preparation … of the sub-contract”. Ultimately, the matter in dispute was the timetable of delivery; starting and finishing work was not enough to create the contract.
General Rule: Key terms already agreed upon and market convention allows pre-contractual document to serve as binding contract.
- Context: The sellers of three ships had been negotiating with the brokers of an unnamed buyer. Key terms were agreed, and the sellers issued a memorandum of agreement containing the key terms, the purchase price, and that a 10% deposit would be payable on the purchaser signing the memorandum.
- Context: The buyer was later identified, and the sellers issued a new memorandum of agreement including the name of the purchaser. The purchaser’s broker replied stating that the purchaser was content and keen to proceed. Nothing further happened. No deposit was paid, nothing was signed. The sellers sued for the 10% deposit for breach of contract (the contract being the memorandum)
- Holding: The sellers were entitled to the 10% deposit. All the key terms of sale had been agreed before the memorandum of agreement was sent; the contract had already been formed (including a term on the 10% deposit) and was not contingent on the memorandum being signed. A crucial point was that the shipping market generally regarded an unsigned memorandum as sufficient to create a binding contract.
General Rule: Divisible contracts might be binding to some extent.
- Context: McAlpine was the main contractor on a project, and had been in discussions with Emcor Drake to act as sub-contractor. The parties had agreed on a total sub-contract price, but negotiations on the specific terms continued. No formal sub-contract was ever signed.
- Context: As works had to commence under project timelines, McAlpine issued Emcor Drake a letter of intent setting out a limited scope of sub-contract work for a maximum sum of £1,000,000. With that, Emcor Drake started sub-contract works whilst continuing to negotiate the sub-contract with McAlpine. As negotiations continued, McAlpine continued to issue Emcor Drake successive letters of intent. Each successive letter of intent varied the scope of sub-contract work and increased the maximum sum payable, which eventually reached £14,000,000, The parties eventually fell into dispute.
- Holding: No sub-contract had been concluded for the whole of the works. However, the successive letters of intent had contractual effect. McAlpine thus had to pay Emcor Drake for the work done up to a value of £14,000,000 (the maximum sum payable under the latest letter of intent).
- Holding: This decision followed a line of cases which concluded that, where in the midst of negotiations, one party instructs another to start work, the instruction amounts to a commitment on the part of the instructor to pay a reasonable sum if the work is properly done.
5 Promissory Estoppel
5.1 What is promissory estoppel?
Promissory estoppel renders a promise as binding even though the promisee did not provide consideration. It is applicable when there is a lack of consideration provided by the promisee.
5.2 Limitations to Promissory Estoppel
- Can only be used as a shield not a sword
- Suspensive and not extinctive
5.3 Requirements for Promissory Estoppel
- The promisor makes a clear and unequivocal promise to not enforce his contractual rights.
- The promisee has relied on the promise.
- It is inequitable for the promisor to go back on his promise.
5.3.1 Clear and Unequivocal Promise
General Rule: A clear and unequivocal promise implied by words or conduct.
- Context: The landlord gave his tenant 6 months to repair the premises. In the middle of this 6-month period, the parties commenced negotiations for the sale of the lease to the landlord. The tenant indicated that he would not carry out repairs whilst they were negotiating. The landlord raised the issue of disrepair of the premises as a reason for lowering the price of the lease. Negotiations broke down, and the landlord sued the tenant for not repairing the premises.
- Holding: It could be inferred from the landlord’s conduct that the notice period would not run while the negotiations continued and would only continue to run after the negotiations ended.
5.3.2 Reliance
General Rule: The other person must be led “to alter his position”, having “acted on the belief induced by the other party”. - WJ Alan & Co Ltd v El Nasr Export and Import Co (1972)
General Rule: Recent cases suggest a need for detrimental reliance.
- SGHC Holding: detriment in either the “narrow” or “broad” conception of the term suffices.
- Narrow: detriment that has already been incurred in reliance of the promise.
- Broad: detriment that would only occur if the promisor were to go back on his or her promise.
- SGCA Holding: “where the promisor has obtained an advantage from a promise to the promisee, he should not be allowed to resile from his promise on the basis of promissory estoppel”.
5.3.3 Inequitable to Go Back on the Promise
General Rule: Dishonest behavior by the promisor makes it more inequitable, converse is also true.
- Context: •The Defendant owed the Plaintiff £482. The Defendant then offered the Plaintiff £300 to settle the account fully, or £0. The Plaintiff was nearing insolvency and thus accepted the payment. The Plaintiff then sought to recover the balance of £182.
- Holding: It was not inequitable for the Plaintiff to go back on their promise as the Defendant had taken advantage of their weak position in procuring the agreement.
General Rule: Can be explained using detrimental reliance.
6 Capacity
6.1 What is incapacity
In capacity does not affect contract formation.
Legal Impact of Incapacity
- The contract is not enforceable against the person who lacks capacity (eg, the person cannot be sued).
- The contract is still binding on and enforceable against the counterparty who doesn’t lack capacity.
6.2 Invidiaul (Minors)
6.2.1 Who is considered a minor?
- Anyone below the age of majority in the jurisdiction (in Singapore, usually 21, sometimes 18 related to most contracts)
- General rules is that contracts are not enforceable against a party who has not reached the relevant age of majority
6.2.2 Exceptions
- Binding contracts
- Beneficial contracts for necessaries (show 1 - the goods and services in questions are, at law, necessaries, 2- the minors has, in fact, actual need of the goods and services), e.g. beneficial contracts of employment, apprenticeship education etc.
- Contracts providing loans to minors for the purchaser of necessaries is unenforceable against the minor
- Voidable contracts
- Enforceable against a minor unless minor avoids or repudiates
- e.g. contracts to least or purchase land, contracts to subscribe for or purchase shares in a company, partnership agreements, marriage settlements
- Ratified contracts
- Binding if minor ratifies the contract upon reaching the relevant age of majority
- Minors' Contract Act
- Order a minor to restore any property / goods acquired by the minor from the counterparty if it is just and equitable to do so
6.3 Individual (Mental Capacity)
6.3.1 Requirements
- Mental incapacity must prevent the person from understanding the general nature and effect of the transaction he is entering into
- The counterparty must have or should have known about the incapacity at the time of contracting
- Examples: mental retardation or intoxication
- Note: Person may ratify the contract after he is cured / sober => then it becomes binding on him
6.4 Companies
- As separate legal entities, companies have capacity to enter into contracts just as human beings do.
- “Ultra vires” / objects clause in its Constitution
- If a company enters into a contract that is apparently beyond the scope of these “objects”, a shareholder or debenture holder of the company may apply to the court to set aside this ultra vires contract (only if just and equitable)
- Pre-incorporation contracts
- Contracts entered into before the company is even incorporated can be binding if ratified post-incorporation
- If not ratified, binding on the person who purportedly acted on behalf of the company before incorporation unless there is express agreement otherwise