Contract Principles

Legal rules governing contracts are generally from

1. Common law (derived from case law, i.e. past judicial cases in Singapore and England); and

2. Written law i.e. statutes and subsidiary legislation.

These rules determine whether contracts are properly formed, valid and binding, whether contracts (or certain parts of the contract) may be defective, set aside and/or unenforceable, or whether the effect of certain parts of contracts may be altered from what is otherwise written in the contract.

Examples of written law which may apply to contracts are:

1. Unfair Contract Terms Act;

2. Contracts (Rights of Third Parties) Act;

3. Frustrated Contracts Act;

4. Misrepresentation Act;

5. Consumer Protection (Fair Trading) Act;

6. Electronic Transactions Act;

7. Sale of Goods Act;

8. Minors’ Contracts Act.

The fundamental requirements for a valid binding contract to form, are generally:

1. Offer of terms communicated;

2. Acceptance of terms communicated;

3. Consideration (value requested by the promisor and provided by the promisee);

4. Intention to create legal relations;

5. Certainty and completeness of terms.

These are regardless of medium, e.g. verbal, email, text messages, printed document, etc. The Electronic Transactions Act provides that contracts may form over electronic records, e.g. emails or text messages i.e. offer, acceptance, declaration of intent, etc, except in relation to (among other things) wills, negotiable instruments, indentures, declarations of trust or powers of attorney, contracts involving immovable property and documents of title.

The above requirements are deceptively simple but have given rise to complicated problems.

For example, on intention to create legal relations, billionaire businessman Oei Hong Leong fought a case all the way to the highest court in Singapore and lost on this point (Oei Hong Leong and another v Chew Hua Seng [2020] SGCA 78). He sought to argue that there had been a valid agreement formed between him and Chew Hua Seng, the founder Chairman and CEO of Raffles Education Corporation Ltd. The court disagreed.

The court's inquiry into whether parties intended to create legal relations in each case is an objective one. The subjective assertions of the parties are, in and of themselves, insufficient, although relevant testimony may be helpful in assisting the court in ascertaining whether the parties had (or had not) intended to enter into a legally binding contract. The law recognises two presumptions that might also assist the court in such an inquiry. In the context of social and domestic arrangements, there's a presumption that parties do not intend to create legal relations, whereas, in the context of business and commercial arrangements, there is a presumption that parties do intend to create legal relations.

It is also important to ensure that the correct persons (including natural persons and legal entities) are parties to the contract. If a wrong person is party to the contract, then the contract may be fundamentally defective. For example, if the person actually providing the benefit or value in the contract is a subsidiary and not the parent company, but the subsidiary is not party to the contract, then there may be a failure of consideration.

Further, if there was already an existing bargain or exchange of promise/value, then that same value cannot generally be used as consideration to support a new contract. Hence, there is a oft-cited principle: "past consideration is no consideration". Thus e.g. if party A agrees to renovate party B's flat for $1,000, but before completing the work, A tells B that A will not complete unless B pays $5,000 instead. If B agrees and A then completes the renovation work, there is no valid agreement for payment of $5,000. B only needs to pay A $1,000. This is because A was already contractually obligated to renovate the flat for $1,000. That same promise cannot be used to vary the contract into one, or make a new contract, for payment of $5,000. At this point, it should be noted that a variation of an existing binding contract requires all the fundamental elements of a valid contract to be fulfilled, i.e. including consideration.

However, there are exceptions. The classic case on an exception to this is Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989] EWCA Civ 5. The court there decided that in varying a contract, a promise to perform a pre-existing contractual obligation will constitute good consideration so long as a practical benefit is conferred on the promisor. In that case, the renovating contractor indicated his inability to complete the work on time. The employer promised to pay more. As the employed would obtain in practice a benefit, or obviate a disbenefit from giving the promise, and there was no economic duress or fraud, the variation was valid.

Also, an act done before the giving of a promise to make a payment or to confer some benefit may be consideration if certain conditions are satisfied (Pao On v Lau Yiu Long [1980] AC 614).

The issue of consideration can be circumvented by executing the contract as a deed. A deed has to be 'signed, sealed, delivered' (popularised by the Stevie Wonder song). Hence, certain important documents are usually executed as deeds, e.g. deed to assign or transfer intellectual property rights. For individual persons executing a deed, the person must affix a red seal next to her signature and deliver the deed to the other party. For corporate entities, the law in Singapore used to require a common seal but now has been changed. Companies and limited liability partnerships (LLPs) are no longer required to use the common seal in the execution of documents as a deed. Companies and LLPs can execute documents by having them signed by authorised persons. For companies, that would be a director and the secretary of a company; two directors of a company; or a director of a company in the presence of a witness who attests the signature. For LLPs, that would be two partners of an LLP; or a partner of an LLP in the presence of a witness who attests the signature.

Apart from the fundamental requirements above, there may also be issues of capacity of a party to enter into the contract. In relation to natural persons, issues include whether the party is a minor (in Singapore, below 18 years of age) or mentally unsound or drunk. In relation to corporate entities, apart from capacity issues, there may be authorisation issues. That is, whether the natural person purporting to enter into a contract on behalf of a company actually has the legal authority to do so. Otherwise, e.g. if any mere employee can enter contracts on behalf of companies, companies may get into serious problem if any mere low-level employee goes rogue and enters into huge debts.

A contract or deed may be executed in counterparts. This means that each party to the contract will sign a different but identical copy of the same contract. This is permissible whether or not a counterparts clause is included inside. It is interesting to note that the UK Supreme Court in RTS Flexible Systems v Müller [2010] UKSC 14 held on the facts that although the parties had included a counterparts clause which said that the contract would not be valid until counterparts are signed and exchanged, the parties had waived the requirement by conduct. Also, Explanation 1 in section 64 of the Evidence Act states: "Where a document is executed in several parts, each part is primary evidence of the document. Where a document is executed in counterpart, each counterpart being executed by one or some of the parties only, each counterpart is primary evidence as against the parties executing it." A typical counterparts clause would usually state: "This agreement may be executed in any number of counterparts, each of which when executed and delivered shall constitute a duplicate original, but all counterparts together shall constitute a single agreement."

1. Use simple language. Don’t need to have legalese or archaic language.

2. Be concise. Keep sentences short.

3. Make each clause deal with only one thing.

4. Be accurate and precise.

5. Consider if the wording gives room for ambiguity and address it.

6. Structure and organise the contract in a logical manner.

7. Ensure key terms or terms of art are properly defined. If a certain term is used more than once, define it.

8. Specify details: who, what, where, when, how. (Unless you want to be purposely vague.)

9. Avoid terms which require interpretation as far as possible unless it is intended to be left for application of law to facts.

10. Check for errors in clause references.

11. Use active not passive voice. Eg “Party A hereby assigns…”

12. Use the right verbs.

13. Shall = obligation. Shall not = prohibition.

14. May / is allowed to = discretion / permission.

15. Will = denotes something in the future.

16. Must = a requirement, but not an obligation from that clause.

17. Warrant / represent: a statement of fact that is material to the entering of the agreement. If not for this fact, parties would not have agreed to the deal. E.g. “Party A warrants that …”

18. Where there are terms that may include categories, define the terms specifically.

At Covenant Chambers LLC, we use Litera's products to help increase our accuracy and efficiency in drafting and reviewing contracts.

Wrong starting point

It is common for many of us nowadays to google a medical symptom and conduct a self-diagnosis. It is the same with legal and business matters, isn't it? Except that medical information websites will usually tell you horrifying worst-case scenarios that make you want to see a doctor. But with legal matters, we don't read such information to scare us to consult a lawyer.

Many clients come to me asking for a certain type of contract to be drafted. E.g. a partnership agreement. After asking further, it turns out that what they need is something else entirely! The danger of doing it yourself (DIY) is that if you got the wrong diagnosis in the first place, you'll be completely off even if you find the best templates!

Template contains comprehensive and customary terms?

Most freely available templates are lowest common denominators. They have terms that are probably universally applicable, but not specifically applicable to any given transaction. It is important therefore to use a template or precedent that is sufficiently comprehensive so that you can remove what you do not need. The problem is if you do not have certain terms in it, you will never know, because as tautological as it sounds, you don't know what you don't know! A template may also not contain customary terms in a given industry. Lawyers also use precedents to draft contracts. The difference is that lawyers generally have the experience to intuit that something is missing and have access to specialised resources. Even experienced lawyers give this same advice to other lawyers: pick the right precedent!

Template was never drafted with your interests in mind

Every template agreement you can find online was never drafted with your interests in mind, but someone else's. It may be that the template was drafted in a way that is unfavourable to you (or rather, the person in that contract who is in the your same position). Or even if the template is drafted in a way favourable to you, you can expect your own counterparty to amend the draft. You will then need to figure how to explain why your position or term should be accepted or not.

Template was drafted for some other jurisdiction (i.e. another state with a different applicable law)

It's easy for lawyers to know when someone had DIYed their own contract--the contract uses terms that are from another jurisdiction. Or the contract actually refers to the foreign law. The problem with this is that there may be terms which would make little sense in the Singapore context.

Other articles on this:

• Forbes: Three Things To Consider Before Using Online Legal Templates

• Don’t buy legal documents online without reading this story

1. Singapore Academy of Law webpage on Contract Law

2. My website (ronaldjjwong.com) setting out case updates and articles

3. FAQ on virtual signing or e-signing of contracts