Introduction to Business Law


“The mere existence of the core elements of offer, acceptance and consideration will not guarantee a legally enforceable contract.” Discuss. A contract is a voluntary agreement between two or more parties that creates a legal relationship and it creates legally enforceable obligations upon the parties to a contract. Today, contracts govern the majority of our everyday dealings and have become a part of our daily life, regardless of whether it is intentional or unintentional. According to a quote in Pollock Principles of Contract (13th Edition) 1, a contract is "A promise or set of promises which the law will enforce". In the eyes of law, an agreement must satisfy certain requirements to be legally enforceable. There are situations where the parties have reached agreement however nullify consent due to vitiating factors. Vitiating factors leads to a contract to be legally unenforceable despite the present of three important elements: Offer, Acceptance and Consideration. To the contrary, an equitable remedy, the doctrine of promissory estoppel can enforce the promise although the essential elements of a contract are not present. The court could do this by imposing obligations on the parties through quasi contract. Essentially, it estops promisors from arguing that his or her promise should not be upheld as illustrated in Central London Property Trust v High Trees House Ltd (1947) Promissory estoppel cannot be used as a “sword” but as a defend, when the person trying to enforce the promise which he or she actually relied on the promise to his or her detriment to commence an action. The Objective Test is imposed by the court to meet the initial test of validity, assessing the intention of legal obligation. Hence, even though by satisfying the requirements of offer, acceptance and consideration, it may become invalid if there is any of vitiating factors discussed below: Domestic Agreement Social agreements between family and friends are different matters and not enforced as contract, it is harder to inflict legality unless there is a clear intention to create legal relations. Promises between husband and wife promising a one carat diamond ring to his wife that never ever happened. Under contract law, this is rebuttable and classified as

Introduction to Business Law


domestic agreement and there is no contract. This is as illustrated in Balfour v Balfour (1912). In modern days, this can be rebutted as promissory estoppels instead of contract law if the consequences of the promise proven to be serious. Counter Offer In the law of contracts, the mirror image rule states that an offer must be accepted exactly without modifications. A counter offer is taken to be a complete rejection of an original offer and a return offer with new terms. To make a contract legally enforceable, in addition to key element of offer, acceptance and consideration, there must be a meeting of the minds or mutual assent to the terms of the contract to constitute a valid contract. There is no contract until everyone explicitly agreed upon all terms of the contract. For instance, in Hyde v. Wrench (1840) the seller's original offer was cancelled by the buyer with a counter-offer hence the offer has become invalid, it can only be revived if the seller is willing to do so. Time Lapse Under the common law, a buyer reserves the right to withdraw his or her offer after the expiry of a reasonable timeframe. For example of an employment offer, rarely an agreement is open with infinity, there must be a time specified by the offeror, if the offer is accepted after time has lapsed as agreed or within a reasonable time. If there is a no time specific, it will be considered as void after a reasonable time depending on the types of goods, shorter timeframe for perishable goods. Ramsgate Victoria Hotel Co. Ltd v Montefiore (1866) shows that other factors that will lead to a contract being unenforceable despite having passed the objective test will be due to death by either parties or failure of condition. For example in personal services, the offer was for a famous designer to design a wedding gown for $10,000. Unfortunately, due to the death of the designer the contract is terminated because of the nature of the offer. Some offers were with certain condition acceptance like a clause or term in the agreement, this is also known as condition precedent. Another example, in service agreement, failure of condition could occur after the offer, a condition subsequent clause allows the contract to be terminate if both parties has stated happening of particular event give them the right

Introduction to Business Law


not to enforce the contract. In the case of employment contract, it is often subject to reference check, any unsatisfying conditions will results in termination. Statute of Frauds There has to be some writing in form of either a memorandum or note sufficient signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized. Certain contracts must be evidenced in writing, with reference to England’s Statute of Frauds, an Act passed in 1677. Statute of Frauds stipulates that a contract will not be enforced unless there is a written agreement that is signed by the persons bound by the contract’s terms or their authorized personnel. These could include any written notes or memorandums to a creditor of another to pay that individual’s debts when they are due, a marriage contract, a real estate contract, property transfer and a contract that cannot be performed within a year of its formation and has not been completely performed by any one side. In some jurisdictions, under the contracts of Sale, it is compulsory for contracts of guarantee to be witnessed by writing and/or in some cases, for example the contracts for sale of goods for $20 or more are being covered by this legislation. Statute of Frauds requirements are limitations on what sort of contracts are legally enforceable, the whole idea is to protect the public and reduce fraud caused by important contracts produced without paper trail. What counts as a written agreement has been stretched and argued upon in many instances. The general statute of frauds forbids a suit upon an agreement that is not to be performed within a year to be unenforceable unless it is in writing between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. This was affirmed in the case of Monetti, S.P.A. v. Anchor Hocking Corp. (1991) Incapacity Incapacity can be in the form of minority, intoxication or mental illness. In such a situation, enforcing the contract against the party suffering from incapacity may be filled with difficulties. The most significant category of persons is called “minors”. Under common law, a minor is a person below the age of 21 years old. In the UK, Family Law

Introduction to Business Law


Reform Act has lowered the age of majority to 18. With effect from 1 March 2009, statue in Singapore has been amended to lowering the minimum contractual capacity age from 21 to 18 years old to encourage entrepreneurship spirits. However, protection of the minor in namely in areas of the following contracts remained as 21 years old: For example in contracts for sale, purchase, mortgage of any land, contracts of settlement of legal proceedings, contract of sale, transfer or pledge of a minor’s beneficial interest under a trust or when trust is extinguished or the terms of trust are varied. Minors’ contracts are divided into three classes; valid contracts are fully enforceable and as it bind both minor and the other party, referring to the case of Valentini v Canali (1889). The contract is deemed valid as it benefits the minor as a whole and he has consumed or used what he paid for and it is a necessity. Contract law provides special protection to minors because of their immaturity to legal effects. They generally cannot be held liable for contracts that they enter into, unless the contract is for the “necessaries” The term “necessaries” usually include things such as food, shelter, education and extended to the provision of medical services, but can include a host of other things, depending on the circumstances and may be expanded to luxurious if it is appropriate because of their position or background. As illustrated in Peters v Fleming (1840). Voidable contracts that bind other party but minor include tenancy agreements, partnership agreements and agreements to purchase shares not fully paid up as illustrated in Davies v Benyon-Harris (1931). Lastly, ratifiable contracts that bind other party and bind minor only if minor ratifies, e.g. if a minor subscribes to a mobile phone service and does not pay for usage, the question could turn on whether the service is a necessity. People who are intoxicated, of an unsound mind or minors are said to be incapable or not within the capacity to enter into a contract. It is because it’s taken that they were incapable of understanding the contract when it was presented before them. Much in the same way as minors, the law also protects mentally unsound or intoxicated persons if it can shown that at the time of the contract was made that he was incapable of understanding the nature of contract and the other party knew or ought to have known of his incapacity, e.g. illustrated in Che Som bte Yip v Maha Pte Ltd (1989).

Introduction to Business Law Misrepresentation


Misrepresentation is a false or misleading statement made about a present or past agreement. In the case of a misrepresentation, the affected party may be able to cancel the contract. Representations are statements, verbal or writing made prior to a contract being formed. For the false statement to be misrepresented, the statement must induce the representee to enter into a contract and not a mere statement of some likely future events. As long as the statement is one of the inducing cause and not the sole inducement, it may also result in misrepresentation Panatron Pte Ltd v Lee Cheow Lee (2001). In the case of Tan Chin Seng & Others v Raffles Town Club Pte Ltd (2003), misrepresentation was not based on past or present facts but the statement of intention and did not hold upon that intention. The implied term became an important factor to vitiate the contract. There are three main categories of misrepresentations: Negligent, Fraudulent Innocent Misrepresentation. Negligent Misrepresentation arises when the false statement is made by representor without due care (Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd (1978) and Sodd Corp v N.tessis (1977). This type of misrepresentation is relatively new and was introduced to allow damages in situations where neither a collateral contract nor fraud is found. Fraudulent Misrepresentation Derry v Peek (1889) arises when one makes representation with intent to deceive and with the knowledge that a contract is false. An action for fraudulent misrepresentation allows for a remedy of damages. One can also sue for fraudulent misrepresentation in a tort law action. Innocent misrepresentation Redgrave v Hurd (1881) occurs when the representor had reasonable grounds for believing that his or her false statement was true. This type of representation primarily allows for a remedy of rescission, the purpose of which is to put the parties back into a position as if the contract had never taken place. Section 2(2) of the Misrepresentation Act 1967, however, allows for damages to be awarded in lieu of and

Introduction to Business Law


rescission if the court deems it equitable to do so. This is judged on both the nature of the innocent misrepresentation and the losses suffered by the claimant from it. Duress The law requires a contract to be entered by one’s own free mind, the fundamental rules of contract law. In the event that one of the parties is forced into entering a contract against their will by violence or the threat of violence, the contract will be unenforceable, that is known as duress. Barton v Armstrong (1976) another form of duress in commercial provision - economic duress, is where a party is forced by economic pressure to renegotiate the terms of the contract. B & S Contractors v Victor Green Publications (1984) and Lloyds Bank Ltd v Bundy (1974) Thus, the plaintiff who entered into a contract as a result of the duress may either confirm the contract or avoid the contract. With duress, it’s important to act swiftly, as the courts may doubt the authentically of a claim of duress made long after the danger has passed.

Mistake and Excuse Even the contract is valid in the eyes of law, mistake doctrine allows the contract to be void on the grounds of mistakes if there is any misinterpretation of an existing state of affairs. One claim to stop a contract arising from a mistake can only be done if the mistake relates to a fundamental fact, illustrated in Couturier v Hastie (1856) this is known as common mistake. Secondly, parties could void the contract only if it’s a mutual mistake and it materially affects the contracts. as illustrated in Raffles v Wichelhaus (1864) For a mistake to affect the validity of a contract it cannot be a misjudgment, such as buying a flat in Tiong Bahru area thinking it is worth $800,000 when in fact it is worth $500,000. In English common law, a mistake would have the effect of making the contract void ab initio, i.e if proven in the beginning, as explained in the case of McRae v Commonwealth Disposals Commission (1951) the contract never came into existence therefore no property will pass under it and no obligations can arise under it. And lastly an unilateral mistake where only one party is mistaken, e.g. illustrated in Smith v Hughes (1871); non est factum (it is not my deed) where a person signing a document of a

Introduction to Business Law


fundamentally different character that which he think, e.g. illustrated in Foster v. Mackinnon (1869) Undue influence In the context of a contract, undue influence is the use of one’s power or authority over another to obtain a benefit or achieve a purpose by exerting improper pressure. It usually involves someone who starts out at a disadvantage, perhaps due to illness, age, or emotional weakness. Undue influence prevents the person from exercising a free and independent judgment before entering into a contract as illustrated in Lim Geok Hian v Lim Guan Chin (1994) where a special relationship is presumed. The doctrine of undue influence guards against the victimisation of persons by those who exercise dominance or influence over them. When there are no special relationship, voidable contract is where there was an improper use of a position of influence or power to exercise influence, as illustrated in the case of recent Lehmans Brothers minibonds saga. Marketing materials did not explicitly explain the risks associated with minibonds and under undue influence to purchase the bonds. Illegality A contract may be avoided for illegality, both under the both and common law and statute, they are unenforceable or void as they are specifically prohibited due an immoral or illegal act. In Singapore, four common illegal contracts that are generally voided are Gaming and wagering, for example illegal gambling debt, contracts that are contrary to public policy, for example committing a bribe, crime, fraud or tort, contracts that are illegal in performance, for example payment for illegal drugs, prostitution and contracts in restraint of trade, for example trading of prohibited goods. Other contracts that are unenforceable on view of public policy are contracts in restraint of marriage, contracts in restraint of trade, etc. As seen, the effects of illegality are usually severe. Hence, a person who has been guilty of an illegal act will not, as a matter of public policy, be able to claim against the other party for breach of contract.

Introduction to Business Law


In conclusion, a contract possessing the core elements of offer, acceptance and consideration, is not enough to enforce a contract. To guarantee the legal enforcement of a contract, there has to be an intention to make the contract legally binding with the meeting of minds. That being satisfied, there has to be an absence of vitiating factors to make a contract legally recognized. Hence, a contract may not be guaranteed of its validity or legal enforceability even though if the agreement meets the initial test of validity by satisfying the above requirements of offer, acceptance and consideration, it may still be declared unenforceable if some other factors discussed above is present. In reality, there are many contracts tainted by many other vitiating factors that is well substantiate and considered invalid by the order of court. Word Count: 2,741

References: 1. Tabalujan, Benny and Du Toit-Low, Valerie. Singapore Business Law Four Edition. Singapore Business Law 2. [Accessed 06 February 2010] 3. yKey/GOVI-7NFEDR?OpenDocument [Accessed 13 February 2010] 4. [Accessed 06 February 2010] 5. [Accessed 20 February 2010] 6. [Accessed 21 February 2010] 7. Woon, W. 2000. Basic Business Law in Singapore Second Edition. Singapore: Prentice Hall. 8. Gibson, Andy and Fraser Douglas. 2007. Business Law Third Edition. Australia: Pearson Education.

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