Based on lectures and tutorials on Formation of Contract Parts

Anonymous
timer Asked: Dec 28th, 2017
account_balance_wallet $50

Question description

Based on lectures and tutorials on Formation of Contract Parts (I) and (II) and Terms & Exemption Clauses, you are required to use an example of a contract with a business organisation (e.g. a contract to purchase goods at a shop, a contract for a mobile account) which you have recently encountered in your daily life to write a Reflection Assignment. You are to a. select and explain the example of the contract with the business organisation; b. explain the applicable laws on formation of contract and how they apply to the contract you have described; c. identify and describe ONE term or exemption clause of the contract; d. explain the effect of the term or exemption clause on the contract; and e. express your views/opinions on the example and the law.


Please do it in Singapore Context, e.g. Business organisation in Singapore.

NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW (BM5742) LECTURE NOTES AY2017/2018 SEMESTER 2 (Year 2) CASE LIST SINGAPORE LEGAL SYSTEM - Carrefour Singapore Pte Ltd v Leong Wai Kay (2006) FORMATION OF CONTRACT (Part I and Part II) - Electronic Transactions Act Contracts (Rights of Third Parties) Act Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) Patridge v Crittenden (1968) Harvey v Facey (1893) Byrne v Van Tienhoven (1880) Hyde v Wrench (1840) Felthouse v Bindley (1862) The Brimnes (1975) Stone World Sdn Bhd v Engareh (s) Pte Ltd (2013) Grossner Jens v Raffles Holdings Ltd (2004) CONTRACTUAL TERMS AND EXEMPTION CLAUSES - Unfair Contract Terms Act L’estrange v F. Graucob Ltd (1934) Olley v. Marlborough Court Ltd (1949) Kendall v Lillico (1968) Chapelton v Barry Urban District Council (1940) Press Automation Technology Pte Ltd v Trans-Link Exhibition Forwarding Pte Ltd (2003) Curtis v. Chemical Cleaning & Dyeing Co (1951) DEFECTS IN CONTRACT (Part I) - Misrepresentation Act With v O’Flanagan (1936) Barton v Armstrong (1975) Atlas Express Ltd v. Kafco Ltd (1989) Royal Bank of Scotland Plc v Etridge (No.2) (2002) DEFECTS IN CONTRACT (Part II) - Civil Law Act Moneylenders Act 2008 Couturier v Hastie (1856) Sheikh Bros Ltd v Ochsner (1957) Raffles v. Wichelhaus (1864) Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 2 - Chwee Kin Keong v Digilandmall.com Pte Ltd (2005) Awang Bin Omar v. Omar Bin Ismail & another (1949) ANZ Holdings Pte Ltd v Bina Puri Holdings Bhd [2013] SGHC 97 Forster & Sons Ltd v. Suggett (1918) British Reinforced Concrete Engineering Co Ltd v Schelff (1921) Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd (2014) DISCHARGE OF CONTRACTS - Frustrated Contracts Act Cutter v. Powell (1795) Apportionment Act Hoenig v. Isaacs (1952) Hochster v De La Tour (1853) Avery v. Bowden (1855) Taylor v Caldwell (1863) Condor v Barron Knights Ltd (1966) Singapore Woodcraft Manufacturing Ltd v Mok Ah Sai (1979) Czarnikow Ltd v Rolimpex (1979) Davis Contractors v Fareham UDC (1956) The Super Servant Two (1990) RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd (2007) China Resources v Magenta Resources (1997) REMEDIES - Jarvis v Swans Tours (1973) Heron II (Koufos v C Czarnikow Ltd [1969] 1 AC 350 Victoria Laundry Ltd v Newman Industries Ltd (1949) Dunlop Pneumatic Tyre Co v New Garage (1915) Warner Brothers Pictures Inc v. Nelson (1937) SALE OF GOODS - Sale of Goods Act Unfair Contract Terms Act Rowland v Divall (1923) Beale v. Taylor (1967) Rogers v Parish (Scarborough) Ltd (1987) Rubin Computer Systems Ltd v United Paints Ltd (2000) Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1991) Sun Qi (formerly trading as Power King International) v Syscon Pte Ltd (2013) Eastern Distributors Ltd v Goldring (1957) Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 3 INTELLECTUAL PROPERTY - Copyright Act Patents Act Trade Marks Act Jumbo Seafood Pte Ltd v Hong Kong Jumbo Seafood Pte Ltd (1998) BUSINESS ORGANISATIONS - Business Names Registration Act Partnership Act Limited Liability Partnerships Act Companies Act AGENCY - United States Trading Company Pte Ltd v Philips Electronics Singapore Pte Ltd (2010) Freeman & Lockyer v Buckhurst Park Properties Ltd (1964) Keighley, Maxsted & Co v. Durant (1901) Richardson v Williamson (1871) Bertram Armstrong & Co. v Godfray (1830) Mahesan v Malaysia Government Officers’ Co-operative Housing Society Ltd (1979) Armstrong v Jackson (1917) LAW OF TORT - Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency (“DSTA”) (2007) Hill v Chief Constable of West Yorkshire (1989) Barnett v Chelsea & Kensington Hospital Management Committee (1969) McKew v Holland and Hannens and Cubitts (1969) Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 4 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW ________________________________________________________________________________ THE SINGAPORE LEGAL SYSTEM ________________________________________________________________________________ TOPICS - Law and Legal System - Law and Morality - Classification of law - Sources of Singapore law - The Singapore Court Structure Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 5 THE SINGAPORE LEGAL SYSTEM LAW 1) What is law? What role does law play in our lives? Law is viewed by people in many different ways. When asked that question, some think of the police, others think of rules that govern our daily behaviour. These answers are all partially correct. Simply put, law may be simply defined as a body of rules to be obeyed. While it is not possible for all of us to know each and every rule in force in Singapore, it is advisable for us to understand some of the general principles of law, how to avoid problems that are commonly encountered and when to seek professional legal help. 2) If Law is a system of rules then a legal system is made of rules as well as components that create and enforce those rules. In Singapore, the legal system consists of the different legal institutions (e.g. the law courts) and the laws themselves. The courts serve 2 important functions. First, they provide a system by which those who fail to obey the law are punished. Secondly, they provide a forum for individuals and businesses to resolve their disputes. For instance, a person suing another for not fulfilling his obligations in contract would go to court to have his rights enforced. In performing these functions the courts apply the relevant rules of law or in the absence of such rules, develop new legal principles to maintain order. Once a court makes a decision, it has the power, with the backing of the government, to ensure compliance. LAW AND MORALITY 3) Law should be distinguished from morality. Morality is based on generally accepted values that are used by society to distinguish between wrong and right. Unlike the law, moral values are not enforced by the government or by the courts. For example, there is no law in Singapore which forbids adultery or abortion even though many people may consider such acts to be morally wrong. The courts will only enforce a moral obligation if it is also a legal obligation. CLASSIFICATION OF LAW 4) The two most common types of law which you will come across are criminal law and civil law. 5) Civil law defines the rights and duties of individuals and businesses in their dealings with one another. Examples of civil law include the law of contract and the law of agency. When the civil law is violated, the injured party (known as the plaintiff) brings the dispute to court, seeking a remedy from the wrongdoer (known as the defendant). If the court finds that the defendant has broken the rules of civil law (for example, by breaching a contract), the court will hold the defendant liable and order him to compensate the plaintiff for the loss or injury that he has caused. 6) Criminal law consists of rules which regulate the behaviour of people. It is concerned with the punishment of criminals and seeks to deter people from committing crimes. The punishment imposed under criminal law may take the form of a fine, a prison term or caning. For very serious crimes such as drug trafficking, the offender may even be sentenced to death. 7) Unlike civil laws, criminal laws are enforced by legal proceedings brought by the government. In criminal cases, the government is usually represented by the public prosecutor who brings the alleged wrongdoer (known as the defendant or accused person) before a court for a determination of guilt or innocence. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 6 DIFFERENCES BETWEEN CRIMINAL LAW AND CIVIL LAW Criminal Law Purpose - Punishment Deterrence Civil Law - Examples - Defines rights and duties of individuals and businesses To provide a remedy for a private wrong Penal Code (murder, rape) Misuse of Drugs Act (drug trafficking) Prevention of Corruption Act (bribery) - Contract Law Agency Law Parties - Public Prosecutor Accused / Defendant - Plaintiff / Claimant Defendant Proof needed to succeed in a case - Beyond reasonable doubt - On a balance of probabilities What the court decides - Guilty Not guilty - Liable Not liable What the court orders - Fine Imprisonment Caning Death - Damages (monetary compensation) Specific performance Injunction - There may be instances where certain conduct may violate both the criminal law and the civil law. In such cases, the wrongdoer will be faced with 2 sets of legal consequences: he may pay a fine or be jailed under criminal law and may be made to pay compensation under civil law. Carrefour Singapore Pte Ltd v Leong Wai Kay [2006] Leong was employed by Carrefour Singapore as a facilities manager. During his employment, Leong received bribes of $292,800 from companies which provided services to Carrefour. The bribes were given in return for awarding contracts to these companies. Held:Leong’s conduct in receiving bribes had violated the criminal law. He was accordingly sentenced to 10 month’s imprisonment and ordered to pay a fine. Leong’s conduct in receiving bribes had also violated a civil law which states that an employee owes a duty to his employer not to receive bribes. For breaking this civil law, Leong had to pay his employer Carrefour $292,800, the value of the bribes received. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 7 WHERE DOES SINGAPORE LAW COME FROM? 8) The roots of our legal system may be traced back to 1826 when English Law was introduced to Singapore by the 2nd Charter of Justice. The laws currently in force in Singapore are derived from 4 sources:(a) (b) (c) (d) 9) The Constitution of Singapore; Legislation (statutes) enacted by Parliament; Subsidiary Legislation; and Common Law. The Constitution, statutes and subsidiary legislation are referred to as written law whereas the Common Law may be referred to as unwritten law or “Judge made law” as explained further in paragraph 16 below. For purposes of this module, “law” excludes religious law or customary practices. The Constitution of Singapore 10) The Constitution establishes certain basic principles relating to the structure of government, the law of the nation and the fundamental rights of individuals such as the right to personal liberty, equality before the law, freedom of religion and freedom of speech. 11) The Constitution is the supreme law of the land which means that any part of a law which does not agree with the Constitution has no legal effect 12) In Singapore, the system of government consists of the Executive, the Legislature and the Judiciary. The Executive is made up of the President, the Prime Minister and his Cabinet. The Legislature consists of Parliament and the President. The Judiciary consists of the judges of the Supreme Court and the State Courts. Legislation 13) These are written laws enacted by Parliament in the form of statutes (also sometimes referred to as “Acts”). Examples of statutes that are relevant to businesses include the Business Registration Act, the Companies Act and the Employment Act. An Act may be amended from time to time in order to keep pace with developments in technology and the business environment. In addition, existing statutes may be cancelled and new statutes passed by Parliament. Subsidiary Legislation 14) A statute may sometimes give power to a Minister or administrative body to make additional rules or regulations for specified purposes. These additional rules and regulations are known as subsidiary legislation. 15) The differences between Statutes (or Acts) and Subsidiary Legislation lies in the fact that acts are created with a broad purpose in mind with the subsidiary legislation being the detailed rules or the steps to make that broad purpose become a reality. For example the National Environment Agency Act (Cap 195) (“NEA Act”) states that one of the objectives of the National Environment Agency is “to identify and conduct investigations into and surveillance of infectious agents” Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 8 (section 11 of the NEA Act) and the subsidiary legislation or rules created under the NEA Act are to make that objective a reality. Common Law 16) The common law is judge-made law or case law. After a judge has finished hearing a dispute between two parties, he will prepare a written judgment. In his judgment, the judge may lay down certain legal rules or principles. These rules become part of the common law. 17) The Common Law is based on the Doctrine of Binding Judicial Precedent. It is best understood this way:(a) When a judge is deciding a case that has already been previously decided by a judge in another case and the facts are similar, the judge should follow that earlier decision so that his decision is consistent or in harmony with the earlier decision. (b) Where the earlier decision is made by a judge in a court that is superior to the judge deciding the current case, that judge has to follow the earlier decision. He has no choice in the matter, this is known as the Doctrine of Binding Judicial Precedent. The doctrine of judicial precedent is important as it helps to ensure consistency, fairness and predictability in the application of the law. EXAMPLE:The Civil Law Act requires leases of land to be in writing and signed by the party to be made liable. Otherwise, the lease is not legally enforceable. In 2010 Company A sues Company B in the High Court for compensation for breach of contract. Company A alleges that Company B had wrongfully backed out of a lease. There is no formal contract signed by the parties. However, the terms of the lease are clearly stated in the emails exchanged between the parties and the parties’ names are printed on the emails. The High Court rules that Company B is liable for breach of contract as the exchange of emails is good enough to meet the requirements of the law. In 2012 Company C sues Company D in the District Court for compensation for breach of contract. Company C alleges that Company D had wrongfully backed out of a lease. There was no formal contract signed by the parties. However, the terms of the lease are clearly stated in the emails exchanged between the parties and the parties’ names are printed on the emails. Following the doctrine of judicial precedent, the District Court must hold Company D liable for breach of contract since the facts of both cases are substantially similar and the High Court is superior to the District Court. THE SINGAPORE COURT STRUCTURE Court of First Instance vs Appellate Court 18) A court may be classified as a court of first instance or an appellate court. A court of first instance is the court where the parties’ dispute is first heard. If a party to the dispute is not satisfied with the decision of the court of first instance, he may appeal against the decision in an appellate court. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 9 Jurisdiction 19) Jurisdiction refers to the limit of a court’s power to deal with different types of cases. For example, in civil matters a Magistrates’ Court’s jurisdiction is limited to hearing claims of not more than $60,000. It does not have the jurisdiction to hear claims of more than $60,000. Courts 20) The Singapore court structure consists of 2 levels:(a) (b) The State Courts; The Supreme Court (which comprises of the High Court and the Court of Appeal). THE STATE COURTS 21) Please see the State Courts website at www.statecourts.gov.sg For a more detailed explanation of the different courts that collectively make up the State Courts. For the purpose of this Module, we will pay closer attention to the Small Claims Tribunal, the Magistrates Courts and the District Courts. Small Claims Tribunal 22) These courts have limited jurisdiction. The Small Claims Tribunal may only determine a dispute if (a) The dispute concerns:(i) A contract for the sale of goods; (ii) A contract for the provision of services; (iii) A contract for the lease of residential premises which does not exceed 2 years; OR (iv) A claim for damage caused to property (damage affecting motor-vehicles is excluded); (b) If the claim does not exceed $10,000. The claim can be further increased to $20,000, if both parties agree in writing that they would like the tribunal to determine the dispute; and (c) The claim is brought within one year from the date the plaintiff is entitled to claim. 23) Proceedings at the Small Claims Tribunal are conducted in an informal manner and lawyers are not allowed to represent the parties to the dispute. The parties conduct their own proceedings before a Referee who is legally trained. 24) A party who is not satisfied with the decision of the Small Claims Tribunal may appeal to the High Court on a question of law (i.e. where the Referee applies the law wrongly). 25) The advantage of using the tribunal is that it is cheap and disputes are resolved quickly and in an informal manner. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 10 Magistrates' Courts 26) These are courts of first instance with magistrates presiding over the dispute. The Magistrates’ Courts have power to hear both civil and criminal matters. 27) In civil matters, such as claims for breach of contract, a Magistrate Court's jurisdiction is limited to claims not exceeding $60,000. . 28) A party who is not satisfied with the decision of a Magistrates’ Court may appeal to the High Court where the amount of the claim is more than $50,000. Where the amount of the claim is less than $50,000, the dissatisfied party must first obtain the permission of the Magistrate’s court before he can appeal. District Courts 29) These are courts of first instance which hear both civil and criminal cases. In civil matters, a District Court's jurisdiction is limited to claims not exceeding $250,000. A party who is not satisfied with the decision of the District Court can appeal to the High Court where the amount of the claim is more than $50,000 (or with the permission of the District Court if less than that amount). 30) From 1 Dec 2016, the jurisdiction of the District Courts will rise from $250,000 to $500,000 for claims in road traffic accidents and injuries due to industrial accidents. THE SUPREME COURT 31) The Supreme Court consists of:(a) The High Court; and (b) The Court of Appeal. The High Court 32) The High Court has unlimited jurisdiction in all kinds of civil and criminal matters except those matters (such as marriage, divorce or distribution of property) relating to the Muslim community which are dealt with by the Syariah Court. 33) It is usually presided by a Supreme Court judge when the court is in session. 34) A party who is not satisfied with the decision of the High Court can appeal to the Court of Appeal if the claim exceeds $250,000. Where the claim is $250,000 or less, the party that wants to appeal to the Court of Appeal must first obtain permission to appeal from the High Court or the Court of Appeal. 35) The following types of cases can only be heard by the High Court:(a) Admiralty matters (b) Company Winding-Up Proceedings (c) Bankruptcy Proceedings 36) The High Court is also an appellate court and hears appeals from the Subordinate Courts in both civil and criminal matters. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 11 The Court of Appeal 37) The Court of Appeal is an appellate court. The Court of Appeal hears appeals against judgments of the High Court in civil and criminal matters whether the High Court is sitting as a court of first instance or an appellate court. The Court of Appeal is usually presided by 3 Supreme Court judges. 38) In criminal matters, both the defendant and the prosecutor can appeal. The defendant usually will appeal against his conviction for a crime and/or his sentence for the crime. The prosecutor may appeal if the defendant is acquitted of the crime or against the sentence if the prosecutor considers it too light. 39) The Court of Appeal is the highest court in Singapore. There is no further right of appeal from the Court of Appeal. E-learning 40) Go to https://www.youtube.com/watch?v=fAQQNlBr6GA and watch this video titled ‘Supreme Court Singapore (Corporate Video) 2015’ to get a better understanding of the legal system. 41) Go to https://www.statecourts.gov.sg and explore the website. What are the functions of the following:a) Court 25N/26N b) Centre for Dispute Resolution c) Community Justice Centre d) Bail Centre e) Employment Claims Tribunal f) Pro Bono Services Office g) Pre-Trial Conference (PTC) Centre 42) Go to https://www.youtube.com/watch?v=wZZUuF691-Q and take a virtual tour of a criminal court. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 12 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW FORMATION OF CONTRACT (Part I) & (Part II) Paul is a business man. His business requires him to purchase computer components from the seller. He needs to ensure that the seller delivers the products to him as contracted. How does Paul make a business contract? Must the contract be in writing? What must Paul do to make sure that the contract is legal and may be enforced against the seller if the seller fails to perform his obligations under the contract? Justin’s friends agree that they should make a trip to Hokkaido during the Term Break in April but at the last minute, all of them back out of the plan. Is this a contract that Justin may enforce or force his friends to carry out? S and B enter into a contract to benefit T. S breaches the contract. Can T sue S? Under a contract Han owes Jabba $10,000. Jabba agrees to accept $4,000 and to forget the balance. He promises not to claim the balance of $6,000. He breaks his promise and insists that Han pay him the balance. May Jabba claim the remaining $6,000.00 from Han? An understanding of the following lecture topics would help you to answer all the above questions and many more. 1. Agreement - Offer and Acceptance 2. Impact of the Electronic Transactions Act on Contract Law 3. Intention to Create Legal Relations 4. Consideration 5. Privity of Contract 6. Formalities Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 13 INTRODUCTION 1. We enter into contractual relationships in almost every area of our every day life. When you purchase food from the canteen, a movie ticket or sign up for a mobile phone account, you are in fact making contracts with others. 2. In a business context, when your business borrows money from a bank, leases (rents) office space, hires employees or takes out insurance on its property, the business is likewise making contracts with others. 3. It is therefore important for everyone to have a high level understanding of basic contract law and to be aware of the rights they are entitled to should someone not honour the contractual obligations owed to you or the consequences you may face should you not honour your contractual obligations owed to others. 4. Contract law is necessary because promises should be binding and there should be certainty in commercial transactions. Society will not be able to function if people and businesses could break their promises without any consequences at all. Would you be prepared to sign up for a tour package if the tour operator could at the last moment decide not to provide you with any lodging? 5. Contract law provides for certain consequences that will take place if a party fails to fulfill his promise. It allows for the innocent party to be compensated and put in the same position as if the promise had been carried out. DEFINITION OF CONTRACT 6. A contract is an agreement between 2 or more parties which is legally enforceable. Not every agreement is a contract. What makes a contract different from ordinary agreements is that when a contract is breached, the innocent party can sue in court for compensation and other legal remedies. 7. For an agreement to be legally enforceable, 3 important requirements must be met:(a) Offer and Acceptance – There must be an offer made by one party which is accepted by the other party; (b) Intention to Create Legal Relations - The parties must have intended the agreement to be legally binding - i.e. it is the intention of the parties that if one of them fails to carry out his promise under the agreement, he will be legally responsible for his failure to do so; and (c) Consideration - The agreement must be supported by consideration. This means that there must be an exchange of “something for something”. OFFER 8. An offer is a statement by one party of his willingness to enter into a contract on certain stated terms. An offer may be made orally, in writing or by conduct. The person making the offer is Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 14 called the offeror. The person to whom the offer is made is called the offeree. An offer can be made to a specific person, a group of persons or even to the world at large. 9. An offer must be communicated to the offeree. A person cannot be said to accept an offer without knowing about the offer. 10. Once the offeree accepts the offer, a binding contract is formed and the offeror can no longer back out of the agreement. If the offeror backs out, he will be in breach of contract. OFFER DISTINGUISHED FROM INVITATION TO TREAT 11. There are some situations that seem like offers but are not really offers. For example, goods may be displayed in a shop window with the words “Special Offer!”. Although the word “offer” is used, this is not an offer in the legal sense but an invitation to treat. 12. An invitation to treat is not an offer. An invitation to treat merely invites others to negotiate or make offers which then may or may not be accepted. An invitation to treat itself cannot be accepted so as to form a binding contract. The test of whether an “offer” is a true offer or merely an invitation to treat is whether it is intended that a binding contract should arise upon acceptance or whether the so-called “offeror” reserves the right not to contract. WHY IS THE DIFFERENCE IMPORTANT? 13. It is important to distinguish between an offer and an Invitation to Treat or between an offer and a request for information as only the acceptance of an offer leads to a legally binding agreement. 14. The following are examples of invitations to treat:a) Display of Goods in a Shop Window or a Store A shopkeeper who displays goods in his shop window or on shelves inside his store, with the price tag attached, is not making an offer. He is merely inviting potential customers to make an offer to him to buy the goods at the price stated. The offer in this case takes place when the customer selects the particular item and puts it in his shopping basket. The shopkeeper is free to accept or reject the offer at any time. Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) Boots ran a self-service store. Goods were displayed on the shelves with the prices marked on them. Customers selected the goods, put them into a basket supplied by the shop and took them to the cash counter where they paid the price. Held:The court held that the display of the goods was merely an invitation to treat. Offer was made when the gods were brought to the cashier, Contract The contract was made not when the customers put the goods in the basket but when the cashier accepted the offer to buy and received the price. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 15 b) Advertisements, Circulars and Catalogues The general rule is that an advertisement in a newspaper or magazine is an invitation to treat, not an offer. It cannot be accepted by a reader of the newspaper or magazine so as to form a legally binding contract. Patridge v Crittenden (1968) X took out an advertisement in a magazine offering wild birds for sale at a stated price. The court held that the advertisement was not an offer but merely an invitation to treat. Similarly, a seller who sends out a catalogue or a circular containing a list of his products and the prices is not making an offer. The reason for this rule is in part the practical consideration that since a seller does not have an unlimited supply of any item, the seller cannot possibly intend to make a contract with everyone who sees the catalogue or circular. c) Tenders Companies often invite interested parties to submit tenders for various projects. The call for the tender is normally an invitation to treat and not an offer. It is the party submitting the tender who makes the offer. A contract will only exist when the company calling for the tender has made a decision on which tender to accept and has communicated this to the party that submitted the successful tender bid. d) Supply of Information Very often during negotiations, one party may supply information such as information on the price of the product or product specifications at the request of the other party. The giving of such information is merely the supply of information and is not an offer. Harvey v Facey (1893) This case involved the sale of a piece of land known as B.H.P. Harvey sent a telegram to Facey: "Will you sell us B. H. P? Telegraph lowest cash price." Facey telegraphed back: "Lowest price for B. H. P. $900”. Harvey replied: "We agree to buy B. H. P. for $900 asked by you. Please send us your title-deeds.” Held:The court held that there was no contract. Facey's original reply was not an offer. It was merely supplying information about the lowest price at Harvey's request. Thus Harvey’s final reply was not an acceptance. WEBSITES 15. The Electronic Transactions Act (Cap 88, 2011 Rev Ed) (“ETA”) states that the default position with regard to internet websites that put up goods for sale is that they are to be regarded as invitations to treat. Internet websites should not be treated as binding offers, unless the website clearly indicates the intention of the web merchant to be bound in the case of an Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 16 acceptance. Hence, by placing an order online, it would appear that the customer is merely making an offer to buy the product and there is no contract until the web merchant communicates his acceptance. 16. Under the ETA, the time of sending out of an offer takes place when the electronic communication leaves the information system under the control of the maker of the offer. (section 13 of the ETA) TERMINATION OF THE OFFER 17. Once an offer is made, it remains open for acceptance until it is terminated or it lapses. An offer can be terminated by:a) Revocation by the Offeror An offeror may withdraw or revoke his offer at any time before the offeree's acceptance. Revocation of the offer is only effective when it is communicated to and received by the offeree. If an offeror revokes his offer by letter, the revocation is complete only when the letter is received by the offeree. Byrne v Van Tienhoven (1880) 1 OCT 8 OCT 11 OCT 15 OCT 20 OCT Oct. 1: Van Tienhoven (sellers) posted a letter in the U.K. offering to sell goods to Byrne (buyers) in the USA. Oct. 8: Van Tienhoven changed his mind and posted a letter revoking the offer. Oct.11: Byrne received the letter of offer and immediately telegraphed his acceptance on the same day. Oct. 20: Byrne received the letter of revocation. Byrne sued Van Tienhoven for compensation for not delivering the goods. Van Tienhoven argued that the offer was revoked by the letter posted on Oct. 8 and therefore there was no contract. Held:The court decided that Van Tienhoven’s letter revoking his offer was only effective when it was communicated to and received by the offeree Byrne on Oct 20. As Byrne had already accepted Van Tienhoven’s offer on 11 Oct., a valid contract had been already been formed, so Van Tienhoven could not revoke his offer on 20 Oct b) Rejection by Offeree A rejection by the offeree terminates the offer once it is received by the offeror. Since a rejection by the offeree terminates the offer, the offeree cannot later reconsider and accept the offer. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 17 c) Rejection by Counter-Offer A counter-offer is made when the offeree introduces new terms or changes the terms of the original offer. A counter-offer terminates the original offer. The party who made the original offer may accept the counter-offer and form a binding contract. However, the offeree who made the counter-offer cannot later change his mind and accept the original offer unless the offeror agrees. Hyde v Wrench (1840) Wrench offered to sell land for £ 1,000 to Hyde. Hyde wrote back offering £950, which was refused. Hyde later wrote back saying he accepted the original offer and was willing to pay £1,000. Held: The court held that there was no contract as Wrench’s original offer had been terminated by Hyde's counter-offer. d) Lapse of Offer An offer comes to an end and becomes invalid if:i) Before acceptance either the offeror or offeree dies; or ii) The offer has not been accepted within the stated time or within a reasonable time. What constitutes "reasonable time” depends on the nature of the subject matter and the circumstances of each case. Thus, an offer to sell perishable goods such as a harvest of watermelons would expire within a short time. ACCEPTANCE 18. Acceptance is when the offeree unconditionally agrees to the offer without changing the terms of the offer (see Stone World Sdn Bhd v Engareh (s) Pte Ltd [2013] SGHC 22). 19. An acceptance may be made in writing, orally or by conduct. 20. The law states that an acceptance must be communicated to the offeror i.e the offeree makes it known to the offeror that he has accepted the offer. If the offer itself expressly specifies how the acceptance is to be communicated, the offeree must use the specified mode or the acceptance would not be effective. If no specific mode of acceptance is stated, the offeree may accept using any mode of acceptance that is reasonable in the circumstances. 21. When may an acceptance be said to have been communicated to the offeror? The general rule is that an acceptance is effective when it is received by the offeror. Hence, if the parties are talking on the telephone, the words of acceptance must be heard by the offeror. In the case of a fax transmission, the fax must be received in the offeror’s fax machine. Based on existing case law, it would seem that if the fax is received in the offeror’s machine during office hours, but was not read by the offeror, the acceptance would still be treated as effective – see The Brimnes [1975]. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 18 22. In the case of email, the ETA suggests that where the offeror has designated an email address which the acceptance should be sent to, the acceptance would be effective when the email becomes capable of being retrieved by the offeror. Where a designated email address has not been specified, an email is said to be received when it the email is capable of being retrieved by the offeror and the offeror is aware that the email has been sent. Acceptance by Silence 23. In general, an offer cannot be accepted by silence. An offeree must actually do or say something to indicate his acceptance. Further, an offeror may not insert a condition in his offer that silence shall constitute acceptance unless the offeree agrees to it. Felthouse v Bindley (1862) F sent a telegram to his nephew which stated “I will buy your horse for £30 15s and if I hear no more I will consider it mine.” The nephew never replied and sold the horse to somebody else. The issue arose as to whether there was a binding contract between F and his nephew. Held:The court held that there was no contract between F and his nephew because F’s condition that silence amounted to acceptance was ineffective. Further, silence cannot amount to acceptance and any acceptance must be communicated to the offeror. Acceptance by Reason of Past Conduct 24. If there have been a series of transactions between the Offeror and Offeree in the past but in this particular current transaction, it is unclear whether the offeree has accepted the terms, the Court may look at the previous transactions to decide whether such acceptance has indeed taken place (see Grossner Jens v Raffles Holdings Ltd [2004] 1 SLR(R) 202). THE POSTAL ACCEPTANCE RULE 25. The general rule is that acceptance is effective only when it is received by the offeror. One exception to this rule is when the offeree accepts by post (i.e. by sending a letter). In such a case, the acceptance is complete and effective once the letter is validly posted, whether or not it ever reaches the offeror. This is known as the postal acceptance rule. This should not be confused with revocation of offers where the revocation is effective only when received and not when it is sent. 26. The Postal Acceptance Rule applies only where:(a) It is reasonable to use the post to communicate acceptance; and (b) The acceptance letter is properly addressed and stamped. INTENTION TO CREATE LEGAL RELATIONS 27. In addition to offer and acceptance, there must also be intention to create legal relations for an agreement to be legally binding. This means that the parties must intend for their agreement to have legal effect. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 19 Commercial Agreements 28. In commercial agreements (i.e. business transactions), the law believes that the parties intend to treat the agreement as legally binding. For example, if Company X enters into an agreement to supply raw materials to Company Y, the law take the view that if Company X fails to supply the raw materials, it will be legally liable to Company Y. 29. However, this may be shown to be false if the words used by the parties make it clear that there was no intention to create legal relations. Examples of this may include:• Agreements stated to be “subject to contract” – Sometimes the parties may have agreed on certain basic terms but do not intend for their agreement to be legally binding until a formal contract is drawn up and signed. In such cases, the document containing the agreed terms may be marked “subject to contract”. If a formal contract is not subsequently drawn up, the agreement would not be binding. • Memorandum of Understanding (“MOU”) - Sometimes, after initial discussions and before parties enter into detailed discussions on a contract, parties may sign a document known as a MOU. If the words used in the MOU make it clear that the parties do not intend to be legally bound, the MOU cannot be enforced. • Letters of comfort – Companies may sometimes issue “letters of comfort”. The words used in the letter of comfort may indicate that the parties do not intend to be legally bound. Social and Domestic Agreements 30. In cases of social arrangements between friends/colleagues and domestic agreements between family members, the law presumes that the parties do not intend to create legal relations. 31. Although the law presumes that social and domestic agreements are not intended to be legally enforceable, this presumption may be rebutted by showing that there is a business or commercial element to the agreement, even though it is made between family members or friends. CONSIDERATION 32. An agreement will not be legally enforceable unless it is supported by consideration. Consideration means that a person will not be required by the law to fulfill a promise he has made unless he has obtained (or has been promised) something in return. This requirement of giving “something for something” is called consideration. EXAMPLES:Justin, who is a mechanic, agrees to service Paul’s car if Paul, who is an air conditioner repairman, agrees to repair Justin’s air conditioner. Justin’s promise to service Paul’s car is the consideration for Paul’s promise to Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 20 repair Justin’s air conditioner and vice versa. If Paul fails to repair Justin’s air conditioner, Justin can sue Paul for breach of contract as he has provided consideration for Paul’s promise to repair his air conditioner. 33. Consideration may take the form of either a promise to do something or conduct. The promise or conduct must either give the promisor (person making the promise) a benefit or cause the promisee (person to whom the promise is made) to suffer a disadvantage. Common examples of consideration would include the payment of money (or a promise to pay money) and the performance of a service (or a promise to perform a service.). 34. The following are some of the rules regarding consideration:(a) Consideration must have some economic value Consideration must have some economic value, however small. Natural love and affection is not valuable consideration. EXAMPLE:Jenni promises Lawrence that she will love him and be devoted to him if he promises to buy her a diamond ring. Jenni has not provided any consideration for Lawrence’s promise to buy the diamond ring. (b) Consideration must be sufficient but need not be adequate So long as something of value is given in return for a promise, the courts do not ask whether the value of that “something” is equal to the promise. In general, the Courts will not ask whether the agreement is a bad bargain. EXAMPLE:Sally agrees to sell her car (worth $70,000) to Belle for only $1,000. Belle’s promise to pay $1,000 is sufficient since it is of some value. It is however not adequate since the car is actually worth much more. Even though Sally has made a bad bargain, the contract is valid. (c) Performance of an existing obligation cannot be consideration for a further promise If X is already obliged to do something for Y under an existing contract, the doing of that thing or a promise to do that thing cannot be consideration for a further promise by Y. EXAMPLE:Gemstone Movie Studio and movie star, Jen Kelly enter into a contract for Jen to star in a movie for $5m. At the last moment, Jen refuses to start filming but demands a further sum of $10m. Gemstone had no choice but to agree to the additional amount. However Gemstone is not required to pay the additional sum of $10m to Jen. This is because Jen has not provided any consideration in exchange for Gemsone’s further promise to pay her $10m. Jen is legally obliged to star in the movie for $5m as originally contracted. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 21 (d) Making part payment of a debt cannot be consideration for a promise to forego the balance At common law, a creditor’s (person to whom money is owed) promise to accept part payment of a debt and forego the balance is generally not binding as the debtor (person who owes money) has not provided any consideration for the promise. By making part payment, the debtor is simply performing his existing obligation to the creditor. EXAMPLE:Justin owes Paul $5,000. Paul agrees to accept payment of $3,000 and forego the balance $2,000. Payment of the $3,000 is part of Justin’s existing obligation and thus cannot be consideration for Paul’s promise to forego the balance $2,000. Paul’s promise is not binding. Paul can change his mind and sue Justin for the balance sum of $2,000. However, if the debtor does something that he was not previously required to do, he would have provided consideration for the creditor’s promise. For example, payment at an earlier date or in a different currency could amount to consideration for the creditor’s promise. EXAMPLE:Justin owes Paul $5,000. Paul agrees to accept payment of $4,000 and forego the balance $1,000 provided Justin pays him one week before the debt is due. By agreeing to pay $4,000 one week ahead of the due date for payment, Justin has provided consideration for Paul’s promise to forego the balance $1,000. Paul’s promise is binding. He cannot change his mind and sue Justin for the balance of $1,000. (e) Consideration must not be past Consideration is past when a party has performed an act before the other party makes the promise. Past consideration is not valid consideration. EXAMPLE:Lawrence gives Jenni a lift home in his car after work. On arrival, Jenni promises to pay Lawrence $50 the following day for giving her a ride. She later changes her mind. Lawrence cannot enforce Jenni’s promise to pay $50. Her promise is made after the act of driving her home is already performed. The consideration for Jenni’s promise is past. AGREEMENTS MADE BY WAY OF DEED 35. One of the exceptions to the rule that an agreement must be supported by consideration is where the agreement is contained in a deed. A deed is a formal legal document that is signed, sealed and delivered. If a promise is made by way of deed, it can be enforced even though there is no consideration. For example, a promise by X to make a gift to Y would be legally binding if it is contained in a deed even though Y may not have provided any consideration. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 22 PRIVITY OF CONTRACT 36. The people who make a contract and who provide the consideration are known as the parties to the contract. The general rule is that only the parties to a contract have rights and obligations under the contract. A person who is not a party to the contract cannot sue or be sued under the contract. This is known as the rule of privity of contract. EXAMPLE:A car dealer sells a car to Paul who immediately resells it to Justin. Should the car be defective, Justin would sue Paul for breach of contract, not the car dealer. The car dealer is not a party to the contract between Paul and Justin and hence does not have any rights or obligations under the contract. 37. There is now, however, an exception which allows a third party to sue under a contract. Under the Contracts (Rights of Third Parties) Act, a person who is not a party to the contract can sue under the contract provided he is named in the contract or the contract is clearly intended to benefit him. In this scenario, it is not necessary for consideration to have been provided by the third party. Example:Justin orders a table from The Furniture Shop. Justin informs the shop that the table is meant as a gift for his mother, Mabel, and instructs the shop to deliver the table to Mabel’s house. Mabel’s name is stated in the order form. If the shop fails to deliver the table, Mabel will be able to sue the shop even though she is not a party to the contract. Mabel is named in the contract or the contract is clearly intended to benefit her. 38. However, the parties to the contract may expressly state in the contract that the Contracts (Rights of Third Parties) Act shall not apply. In such a case, a third party would not be able to enforce the contract even if it is for his benefit. FORMALITIES 39. In general, there is no requirement that a contract must be in writing. A contract can be made orally or even by conduct. However, certain types of contracts such as contracts for the sale of land (which includes houses, buildings) and guarantees must be evidenced in writing. For such contracts, the agreement itself or some document which shows that the agreement exists must be in writing and signed. Otherwise, the contract cannot be enforced. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 23 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW _____________________________________________________________________ CONTRACTUAL TERMS AND EXEMPTION CLAUSES _____________________________________________________________________ 1. Terms of a contract 2. Representations vs Terms 3. Exemption Clauses Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 24 CONTRACTUAL TERMS AND EXEMPTION CLAUSES 1. A contract consists of a number of statements that set out the duties and rights / the rights and obligations of each party. These statements are known as the terms of the contract. For example, in a contract of sale of goods, one of the usual terms included is the seller's duty to deliver the goods on a stated date and the buyer's duty to pay the contract price. EXPRESS TERMS 2. The terms of a contract may be express or implied. 3. When the parties communicate the terms to one another, the terms are known as express terms. Express terms may be communicated orally, in writing or a combination of both. 4. In an oral contract, the terms are determined from the words spoken by the parties. 5. A written contract may be in the form of a single document signed by the parties or it may involve an exchange of letters, telegrams, telexes, e-mails or other written forms of communication. IMPLIED TERMS 6. An implied term is a term which the parties have not expressly communicated to one another but is nevertheless understood by the parties to be present in the contract. 7. Such unspoken or implied terms may be:a. Terms implied by the Courts b. Terms implied by Statute (written law) c. Terms implied by Custom or practices commonly followed in that particular trade or industry Terms Implied by the Courts 8. The courts may imply a term into a contract if it is so obvious that it goes without saying or if it is needed to give the contract business efficacy (i.e. to make the contract workable). Example:Jenni goes to the cinema to watch the movie “Argo”. When the movie is screened, there is no sound. The cinema is in breach of contract even though the requirement of sound was never mentioned when Jenni bought her ticket at the box office. The court will imply a term into the contract that the cinema is required to provide sound as this is something which is so obvious that it goes without saying. Terms Implied by Statute (Written Law) 9. Terms may also be implied by statute. For example, the Sale of Goods Act (Cap 393) says that in every contract for the sale of goods, there is an implied condition that the seller has the right to sell the goods – i.e. that he is the owner of the goods or is authorised to sell on behalf of the owner. If the seller does not own the goods, the buyer is entitled to reject the goods and obtain a refund even if this is not expressly stated in the contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 25 Terms Implied by Custom or Trade Usage 10. Terms may be implied by custom or trade usage if they are well known within a particular trade or industry. TERMS v REPRESENTATIONS 11. A contract is made up of a number of terms. A term must be distinguished from a mere representation. 12. A statement that encourages one to enter into a contract is a representation. It does not usually form a term of the contract. A term however is part of the contract as the parties have agreed to it. 13. It is important to distinguish between a term and a mere representation because if a party does not perform a term of the contract, the innocent party can bring a claim for breach of contract. However, in the case of a representation, if the representation is false, the innocent party’s claim will be for misrepresentation and not for breach of contract. For example:Justin is so eager to sell his house and in the course of negotiations he represents to Paul that the house is "termite free". In reliance on the statement Paul buys the house. If it turns out that the house is infested with termites, Justin has committed a misrepresentation which entitles Paul to remedies under the Misrepresentation Act. If both Justin and Paul have already agreed and have it stated in the contract that the house is termite free, then the statement is a term of the contract. If the house is indeed infested with termites, Paul is entitled to damages for breach of contract. 14. Whether a statement is a term of the contract or only a representation depends on the intention of the parties. In deciding what the intention of the parties was, the courts will look at the importance of the statement, whether the maker of the statement had special knowledge and whether the final written contract contains that statement. CONDITIONS AND WARRANTIES 15. A condition is a term intended by the parties to be very important and when one breaches a condition, the innocent party is entitled to terminate the contract. 16. A warranty is a less important term of the contract and a breach of a warranty only allows the innocent party to claim damages for the breach. He is not entitled to terminate the agreement. EXEMPTION CLAUSES 17. An exemption clause is a term in the contract that seeks to exclude or limit the liability of a party who is in breach of contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 26 EXAMPLES:“The Hotel cannot accept liability for any loss or damage to guests' property howsoever caused during their stay.” (Exclusion of Liability Clause) “The liability of Trac Consultant Pte Ltd (Consultant) to Client for work done pursuant to this Contract shall not exceed $60,000 or the amount of Consultant’s fee, whichever is greater..” (Limitation of Liability Clause) Exemption clauses are common in standard form contracts (i.e. where parties regularly enter into the same kind of transaction). However, it may be unfair if the clause is imposed by a party with stronger bargaining power on another with weaker bargaining power, particularly in the case of consumer contracts. An exemption clause may also be subject to abuse or may operate unfairly against the innocent party. 18. To prevent such abuse, the law states that in order for a person to rely on the exemption clause, it must be shown that:a. b. c. The exemption clause has been incorporated into the contract (i.e. made part of the contract); The exemption clause has not been made ineffective either by statute or at common law; AND The exemption clause is clear and unambiguous. INCORPORATION OF EXEMPTION CLAUSES 19. A party who has breached a contract and wants to rely on an exemption clause to escape from liability must prove that the exemption clause has been incorporated into the contract - i.e. that the exemption clause has become part of the contract. 20. There are 3 ways in which an exemption clause can become part of a contract:(a) Incorporation by signature (b) Incorporation by notice (c) Incorporation by previous course of dealing INCORPORATION BY SIGNATURE 21. Where a contract is in writing and is signed by the parties, the terms in the document, including any exemption clause, become part of the contract. A person who signs a document will be bound even if he has not read the document or does not understand the contents. L’estrange v F. Graucob Ltd [1934] 2 KB 394 The claimant signed a contract for the purchase of a machine. The contract which she signed contained several exemption clauses in small print that she failed to read. Held: The court held that the claimant was bound by the exemption clauses. It did not matter that the claimant had not read the exemption clauses. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 27 INCORPORATION BY NOTICE 22. Sometimes, the parties may not have signed any document. The exemption clause may be stated in an unsigned document such as a ticket or may be displayed in a notice at the premises. In such situations, the exemption clause can be incorporated into the contract by giving the other party advance notice that it is to be included in the contract. This is known as incorporation by notice. 23. The courts have set out a number of principles in relation to the incorporation of exemption clauses by notice:(A) The party who wants to rely on the exemption clause must take reasonable steps to bring the exemption clause to the notice of the other party before or at the time of the contract. For example, where the exemption clause is in a notice displayed at the premises, the notice must be displayed in a place where it can be seen before or at the time the contract is made. Olley v. Marlborough Court Ltd [1949] 2 KB 394 A husband and wife checked into a hotel. They went to their room and found a notice stating that "the proprietors shall not be responsible for articles lost or stolen....”. The wife left a number of fur coats in the room which were subsequently stolen. She sued the hotel. The hotel relied on the notice to exclude liability. Held:The court held that the hotel could not rely on the exemption clause and was therefore liable for the stolen fur coats. The contract with the hotel was made at the reception desk, before the husband and wife went to their room. However, notice of the exemption clause was given only after the contract was already made, when the couple arrived in their hotel room. (B) The document containing the exemption clause must be a document in which a reasonable person would expect to find terms and conditions. For example, if the document on which the exemption clause is printed is merely a receipt, it may be argued that such a document is merely an acknowledgment of payment and a reasonable person would not expect to find an exemption clause printed on it. Hence, the exemption clause would not be incorporated by notice (see Chapelton v Barry Urban District Council (1940 1 KB 532). INCORPORATION BY PREVIOUS COURSE OF DEALING 24. An exemption clause may be incorporated by a previous course of dealing between the parties. This occurs when there has been a consistent course of previous dealings between the two parties such that one party can be presumed to know the terms and conditions on which the other operates. Kendall v Lillico (1968) The parties involved had dealt with each other about 100 times in the past 3 years on similar terms. On each of the past occasions, there was an exemption clause stated in a note that accompanied the delivery of the goods ordered. The court stated that the exemption clause had been incorporated into the current contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 28 EXEMPTION CLAUSES MUST NOT BE MADE INEFFECTIVE 25. Even if an exemption clause is found to have been included into the contract, it may still be made ineffective by the law. An exemption clause may be made ineffective under the Unfair Contract Terms Act (UCTA) or at common law. EXEMPTION CLAUSES MADE INEFFECTIVE UNDER THE UNFAIR CONTRACT TERMS ACT 26. An exemption clause may be made ineffective under the Unfair Contract Terms Act (UCTA). The Act applies to liabilities that result in the course of a business and says that:(a) An exemption clause that excludes liability for negligence (careless conduct) resulting in death or personal injury is void – Unfair Contract Terms Act. EXAMPLE:The exemption clause states that: “The proprietor of the Hotel cannot accept liability for the death of or for any personal injury to guests howsoever caused during their stay”. If a guest trips over a badly maintained carpet, thus sustaining injuries, the Hotel cannot rely on the exemption clause to avoid liability because this is not allowed by the Unfair Contract Terms Act. (b) In the case of consumer contracts and standard form contracts, a party cannot exclude or limit liability for breach of contract unless the exemption clause is reasonable. – Unfair Contract Terms Act. Consumer contracts are contracts between a member of the public and a business (e.g. buying a book from a bookshop, watching a movie at the cinema). Standard form contracts are contracts that are not negotiated. In such contracts, a party can rely on an exemption clause to exclude liability for his breach of contract only if the exemption clause is reasonable. In general, whether an exemption clause would be reasonable would depend on various factors. These factors include the bargaining power of the parties, whether the customer had alternative means of meeting his requirements, whether the customer could have entered a similar contract with another party without having to agree to a similar exemption clause and whether the customer knew of the existence of the exemption clause. Press Automation Technology Pte Ltd v Trans-Link Exhibition Forwarding Pte Ltd [2003] 1 SLR 712 Trans-Link was a company that provided freight forwarding and transport services. Press Automation engaged Trans-Link to transport one of its machines to an exhibition in Bangkok. The machine was damaged while in Trans-Link’s possession and Press Automation claimed a sum of USD 178,091.75 which was the value of the machine. The contract was a standard form contract and contained an exemption clause which limited Trans-Link’s liability to the sum of $100,000. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 29 Held:Trans Link could rely on the exemption clause to limit its liability to $100,000. The exemption clause was reasonable as:1. This was not a case where the customer did not have any bargaining power. Press Automation could have engaged other transport companies some of whom appeared not to have any limitation clauses in their contracts. However, it chose to engage Trans-Link as it offered a cheaper package. 2. Limitation of liability clauses such as the one in Trans-Link’s contract were commonly found in the freight forwarding industry. The limit of $100,000 was at the higher end of the scale when compared to other similar limitation clauses. EXEMPTION CLAUSES MADE INEFFECTIVE AT COMMON LAW 27. An exemption clause may also be made ineffective under the common law. The clause will be held to be ineffective in giving protection to the contract breaker should that person or his agent, such as an employee, misrepresent the extent of the clause to the other party. Curtis v. Chemical Cleaning & Dyeing Co [1951] Ms Curtis brought a wedding dress for cleaning by the defendant cleaners. She signed a receipt containing an exemption clause after being told by the assistant that the exemption clause protected the cleaners only in the event of damage to beads and sequins. This was not accurate since the clause stated that the cleaners were not liable "for any damage howsoever arising". When the dress was returned it was badly stained and Ms Curtis brought a claim against the cleaners. Held: The court held that the cleaners could not rely on the exemption clause even though Ms Curtis had signed the receipt. By telling Ms Curtis that the exemption clause applied to only beads and sequins even though it covered all types of damage, the cleaners had misrepresented the extent of the exemption clause to Ms Curtis. INTERPRETATION OF EXEMPTION CLAUSES – EXEMPTION CLAUSE MUST BE CLEAR AND UNAMBIGUOUS 28. Even if the exemption clause has been incorporated and has not been made ineffective, the clause must still be clear and unambiguous. If the exemption clause is ambiguous and is capable of more than one interpretation, the courts will choose the interpretation which is least advantageous to the party trying to rely on the exemption clause for protection. This is known as the contra proferentem rule. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 30 Exemption Clauses – Suggested Analysis Is the EC part of the contract? Yes Incorporated by signature? No Yes Incorporated by notice? No Yes Incorporated by previous course of dealing? No EC not applicable/void. Contract breaker is liable. Has EC been made ineffective? Made ineffective by UCTA –EC dealing with death/PI? Contract breaker can rely on EC to escape liability. Yes No Made ineffective by UCTA – Unreasonable EC in consumer/standard form contracts? Yes No Yes Made ineffective at common law Misrepresentation- Curtis? Yes No EC is clear and unambiguous and covers situation at hand? Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic No Page 31 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW _____________________________________________________________ ______ DEFECTS IN THE CONTRACT (Part I) _________________________________________________________________________ DEFECTS IN THE CONTRACT: PART I 1. Misrepresentation 2. Contracts by minors 3. Contracts made under duress 4. Contracts made under undue influence Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 32 DEFECTS IN THE CONTRACT: PART I OVERVIEW 1. Sometimes, a party to a contract may find that he cannot sue on the contract even though all the essential elements of a contract (e.g. offer and acceptance, consideration, intention to create legal relations) are present. This is because there may be certain defects (faults) in the formation of the contract which results in the contract not being enforceable. 2. The presence of a defect usually makes a contract either void or voidable. 3. When a contract is void, the defect is so serious that the contract is treated as invalid from the very beginning and cannot be enforced. 4. When a contract is voidable, it means that the contract is treated as valid until such time when the innocent party chooses to rescind or set aside the contract. Summary of Defects Defect Effect on Contract Legal Position of Parties Misrepresentation Voidable Innocent party is entitled to rescind (cancel) the contract. Duress Voidable Innocent party is entitled to set aside the contract. Undue Influence Voidable Innocent party is entitled to set aside the contract. Mistake Void Neither party may enforce the agreement. Illegal Contracts Void Neither party may enforce the agreement. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 33 MISREPRESENTATION 5. A misrepresentation is a false statement of fact. It is a statement made by one party (representor) in the course of negotiations to the other (the representee) which induces the representee to enter into the contract. The statement of fact must be a material fact i.e. an important fact on which the representee relies upon when deciding to enter into the contract. Such statements do not usually form a term of the contract so in the event the statement is untrue, the party that was misled by that statement to enter into the contract may sue for Misrepresentation. 6. A contract that is made as a result of a misrepresentation is voidable. This means that the innocent party is entitled to rescind (cancel) the contract when he finds out the truth. The contract remains valid until the innocent party takes steps to cancel the contract. 7. The effect of rescission is that the parties would be put back into their original position, as though the contract had not been made. Any property that is sold is returned to the seller and the price that is paid is returned to the buyer. ELEMENTS OF MISREPRESENTATION 8. To bring an action for misrepresentation, the representee must show that:(a) The representor has made a false statement of fact When Sam represents that the floor area of his bungalow is 2,500 square metres, he is asserting the existence of a fact. A statement that a car has run 20,000 km is also a statement of fact. (b) The statement made must be material This means that the statement must be important enough that a reasonable person would consider the statement when he is deciding whether or not to enter into the contract or when he is deciding how much to pay under the contract. The floor area of a house is clearly an important consideration when one buys a house. (c) The representee must rely on the statement in deciding to enter into the contract There can be no misrepresentation if the representee does not rely on the false statement but instead appoints his own expert and relies on the report of his expert. Likewise, if the representee knows that the statement is false but proceeds with the contract anyway, he would not have the right to sue for misrepresentation. An example would be where a buyer of a house does not rely on the seller’s statement about its area, but instead appoints his own surveyor and relies purely on his own surveyor’s report. In such a case, the buyer will not be able to sue for misrepresentation if the seller’s statement turns out to be untrue. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 34 CAN SILENCE AMOUNT TO MISREPRESENTATION? 9. As a general rule, silence cannot amount to a misrepresentation. In other words, a person cannot be liable for misrepresentation for not telling the other person something. 10. There are exceptions to this general rule. The exceptions are:(a) Change in circumstances making an original statement untrue A representation may be true at the time when it is made. If there is later a change in circumstances which renders the statement no longer true, the representor must inform the other party about the change before making the contract. He cannot keep quiet about the change in circumstances. With v O’Flanagan [1936] Dr F wanted to sell his medical practice. During negotiations, he told an interested buyer that his practice was earning an income of approximately £2,000 per year. At the time Dr F made the statement, it was correct. Unfortunately, Dr F fell ill after that and his business deteriorated badly. By the time the buyer signed the contract, Dr F’s practice was hardly earning any income. The buyer argued that he was entitled to rescind the contract as there was a misrepresentation. Held:The court held that the buyer was entitled to rescind the contract and have his purchase money returned. Even though the statement that the business was earning £2,000 per year was true at the time it was made, the circumstances changed after that and Dr F should have informed the buyer about this before the contract was signed. (b) Half-Truths Another situation where silence can amount to misrepresentation is where the statement made is only half the truth - i.e. where the representor suppresses anything disadvantageous which is relevant. EXAMPLE:Paul while negotiating to sell his Volkswagon Mini to Justin tells Justin that the car was not involved in any accident while he (i.e. Paul) was the owner. Although there were no accidents while Paul was the owner, the car did in fact meet with an accident before Paul took over the car from its previous owner. Paul’s statement is only half-true and may amount to a misrepresentation. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 35 TYPES OF MISREPRESENTATION 11. There are 3 types of misrepresentation: innocent, negligent and fraudulent misrepresentation. (a) Innocent misrepresentation This is a statement made honestly with reasonable grounds for believing in its truth. The representor if sued has the burden of proving that he had reasonable grounds for believing that the statement is true. EXAMPLE:Paul engages surveyors to measure the floor area of his flat. He makes the statement to Justin based on the surveyor’s report (which subsequently turns out to be inaccurate). Paul’s misrepresentation is an innocent misrepresentation. The surveyor’s report would have given him reasonable grounds for believing in the truth of his statement. (b) Negligent Misrepresentation This is a statement made honestly but without reasonable grounds for believing in its truth. EXAMPLE:If Paul's statement to Justin is made without any surveyor’s report or without any other basis, then Paul would have no reasonable grounds for believing in its truth. Paul’s statement would be a negligent misrepresentation. (c) Fraudulent Misrepresentation This is when the representor makes a statement dishonestly, knowing it to be untrue or being reckless as to whether it was true or not. EXAMPLE:Assuming that Paul in our example, knows for a fact that the floor area of his flat is much lesser than 500 square metres but he deliberately misstates the floor area to fetch a higher price; Paul’s statement will amount to a fraudulent misrepresentation. It is made dishonestly knowing it to be untrue. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 36 REMEDIES FOR MISREPRESENTATION 12. It is important to know whether it is an innocent misrepresentation, fraudulent or negligent misrepresentation as the remedies available to the innocent party depend on what type of misrepresentation it is. Remedies for Misrepresentation Innocent Misrepresentation Negligent Misrepresentation Fraudulent Misrepresentation Generally, rescission only. However, Court may award damages instead of rescission where it would be fairer to do so (s2 Misrepresentation Act). Rescission and/or damages (compensation) under s2 Misrepresentation Act. Rescission and/or damages (compensation) for tort of deceit. Innocent Misrepresentation 13. In the case of innocent misrepresentation, the party misled generally has no right to damages. He can only apply to the court to rescind (cancel) the contract. 14. However, the court can award damages instead of rescission where it would be fairer to do so - s2 Misrepresentation Act. EXAMPLE:Paul sells Justin a painting. Paul innocently misrepresents to Justin that the painting is 27 by 40 inches when it is actually 26 by 40 inches. The fact that the painting is slightly smaller does not affect its value very much. In this case, it would be fairer for the court to order Paul to pay compensation to Justin rather than to order Paul to refund the full purchase price to Justin and have the contract cancelled. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 37 Negligent Misrepresentation 15. The party misled by the negligent misrepresentation can ask the court for rescission and/or damages as well - s2(1) Misrepresentation Act. Fraudulent Misrepresentation 16. Fraudulent misrepresentation is outside the ambit of the Misrepresentation Act. The deceived party can apply to the court for rescission and/or damages for the tort of deceit. Fraud in contract could also result in prosecution for the crime of cheating under the Penal Code (Cap 224) (a Singapore statute concerning crime and punishment). LIMITS TO THE RIGHT OF RESCISSION 17. As can be seen from the above, in all cases of misrepresentation the party misled may apply to the court for rescission of the contract. However, the innocent party’s right to rescind may be lost if:(a) There is a lapse of time In cases of innocent or negligent misrepresentation, the representee must take steps to rescind the contract within a reasonable time. If he fails to act within a reasonable time, he may lose his right to rescind the contract. EXAMPLE:Justin buys a painting from Peter after being told that it was painted by a famous painter. 5 years later Justin discovers that Peter had innocently misled him. Justin can no longer rescind the contract. (b) The party misled affirms the contract If the party misled, with full knowledge of the truth, chooses to affirm (i.e. support) and go on with the contract either by words or by conduct then he cannot later rescind the contract. EXAMPLE:Justin buys a painting from Paul after being told that it is painted by a famous painter. After discovering that the painting is not painted by the famous painter, Justin nevertheless proceeds to pay for the painting. Justin will be taken to have affirmed the contract and can no longer cancel the contract. (c) Restitution is impossible A party who wants to rescind the contract must return the goods to the representor before he can get his money back. He must make restitution i.e. he must restore the goods to the representor. If the goods have changed substantially (e.g. the goods are damaged) or if the goods have already been consumed by the buyer then restitution will be impossible. The misled party may have to be content with damages. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 38 (d) Rights of 3rd parties affected Where a third party has acquired rights over the item sold, rescission may not be available. EXAMPLE:A seller misrepresents the condition of goods to a buyer who then re-sells the goods to a third party, the buyer will no longer be able to rescind the contract and return the goods to the seller as the third party is now the owner of the goods. CONTRACTS MADE BY MINORS – UNENFORCEABLE CONTRACTS 18. People may enter into contracts once they reach 18 years of age. However, certain contracts such as contracts for the sale or purchase of land, the age of contractual capacity remains at 21 years of age. 19. People who are below 18 years of age at the time they enter into a contract (i.e. minors), the general rule at common law is that the contract cannot be enforced against the minor. The contract, however, can be enforced by the minor against the other party. The rationale behind the law is to protect minors from being taken advantage of by someone who is more experienced. 20. Although the general rule is that a contract made by a minor below 18 years of age is not enforceable against the minor, there are certain exceptions under the law:(a) Contracts for Necessaries A minor below 18 years of age is bound by a contract for necessaries. Necessaries may include (i) basic necessities such as food, medicine or clothes and (ii) articles necessary to the minor according to his position in life. For example, a diamond studded watch may be necessary to a millionaire's daughter although it is not necessary for someone who is not as well off. A minor is required to pay a reasonable sum for the necessaries supplied to him. (b) Educational and employment contracts for the minor's benefit Contracts for the minor's education and training are binding on the minor. Contracts of employment that are for the minor’s benefit are also binding on the minor. However, harsh and oppressive employment contracts are not binding on the minor. DURESS 21. When parties enter into a contract they give their free consent to be bound by the terms of the contract. A party enters into a contract under duress or under pressure when he is forced into the contract under a threat and does not give his free consent to the terms of the contract. 22. A contract which is entered into under duress is voidable. The party who is forced into the contract may choose to set aside the contract – i.e. consider himself no longer bound by the contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 39 23. There are 3 main types of duress at common law which would entitle the innocent party to set aside the contract:(a) Duress to the Person Duress to the person occurs when there are threats of physical violence to cause bodily injury or loss of life to the person or to an immediate member of his family. Barton v Armstrong (1975) Armstrong was the chairman of a company. Armstrong threatened to have Barton killed if Barton did not sign an agreement to buy Armstrong’s shares in the company. Held:The agreement between Armstrong and Barton was made under duress and Barton could set aside the contract. (b) Duress to Goods Duress to goods occurs when there are threats of damage to the innocent party’s goods rather than to his life. (c) Economic Duress The law now recognizes other forms of duress, apart from threats to a person’s life or to his goods. Economic duress takes place when one party uses illegitimate commercial pressure to get another party to agree to certain contractual terms. The party acting under economic duress may apply to court to set aside the contract if he can prove that:(a) (b) There is a threat to carry out a civil wrong, such as a breach of contract; and He had no practical alternative to compliance. Atlas Express Ltd v. Kafco Ltd (1989) Kafco, a small company dealing in basketware, had secured a large contract from Woolworths. Kafco entered into a contract with Atlas, a transport company, to distribute its goods to Woolworths' shops at an agreed price. Subsequently, Atlas informed Kafco that it would not carry out any deliveries unless Kafco agreed to pay an increased price. It was essential to Kafco's commercial survival that they should be able to meet the delivery dates. Also, as it was around Christmas time, it would have been very difficult to find another transport company to do the deliveries. Kafco accordingly agreed to pay the increased price but later refused to do so. Held:The court held that the pressure by Atlas to pay an increased price amounted to economic duress. The threat by Atlas to stop deliveries was a threat to commit a civil wrong. Kafco had no alternative but to comply with the threat because it was difficult to find another transport company to do the deliveries and Kafco could not risk being in breach of their contract with Woolworths. The agreement to pay the new price was thus not binding on Kafco. Further, Atlas did not furnish any consideration for the increased charges. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 40 UNDUE INFLUENCE 24. Undue influence occurs when one party has been affected by some improper conduct of the other party such as pressure, coercion or influence and as a result did not enter into the contract out of his own free will. 25. A contract formed as a result of undue influence is voidable at the option of the party under the influence - i.e. the party under influence can apply to court to set aside the contract. The claim to set aside the contract must be made within a reasonable time. Actual Undue Influence 26. There are two categories of undue influence – actual undue influence and presumed undue influence. In the case of actual undue influence, the party that wants to set aside the contract bears the responsibility of proving that he had acted under the influence of the other party and had entered into the contract without exercising his free will. Presumed Undue Influence 27. However, in some cases, the law assumes that there is undue influence and hence the innocent party who is trying to set aside the contract does not need to prove that he was influenced. Instead the responsibility lies on the wrongdoer to rebut the presumption of undue influence by showing that the innocent party had exercised his free will, for example, by showing that the innocent party had sought independent advice before entering the contract. Such cases involve what is known as presumed undue influence. 28. When will the law assume that a transaction was entered into under undue influence? The law will assume that there is undue influence where the parties are in a relationship of trust and confidence and the transaction is one that cannot be explained on the basis of the relationship alone. Examples of relationships which give rise to presumed undue influence include parent and child, lawyer and client, religious adviser and follower and as well as doctor and patient. Even if the case does not fall within the above categories of relationships, the innocent party may still rely on presumed undue influence by proving that he was in a relationship of trust and confidence with the wrongdoer. EXAMPLE:Jenni needs money to help her son in business. She decides to sell her flat. She goes to see Mr Wong, her lawyer. Mr Wong suggests to Jenni that she should accept his offer of $1m. Jenni accepts and the sale goes through. She does not seek the advice of another lawyer before agreeing. In fact the flat has a market value of $1.5 million. What can Jenni do? Here we have a lawyer and client relationship. The contract is highly disadvantageous to Jenni and cannot be explained simply on the basis of their relationship as lawyer and client. Hence the law presumes that Mr Wong must have exercised improper pressure or coercion over Jenni which prevented her from exercising her free will in agreeing to sell her flat. Mr Wong can rebut the presumption of undue influence if he can show that Jenni exercised her free independent will in making the contract, for example by showing that Jenni had sought competent and independent advice from another Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 41 lawyer. On the facts, it is not likely that Mr Wong can rebut the presumption. If that is the case, Jenni can apply to the court to have the contract set aside (rescinded) - i.e. she is able to get back her flat and Mr Wong his $1m Undue Influence and Third Parties 29. Undue influence may also affect the rights of third parties. For example, a husband may exercise undue influence over his wife and coerce her into mortgaging her property to a bank as security for a loan that is given to the husband. In such a scenario, although the bank itself did not exercise any undue influence over the wife, the bank may be put on inquiry – i.e. be required to take steps to ensure that the wife’s consent has been properly obtained. 30. When will a bank or financial institution be put on inquiry? The case of Royal Bank of Scotland Plc v Etridge (No.2) (2002) states that whenever the relationship between the parties is noncommercial, for example, a husband and his wife or a parent and his child, the bank would be put on inquiry. Once a bank is put on inquiry, it must take steps to ensure that the wife is advised by a lawyer on matters such as the nature of the transaction, the risks involved and the fact that she has a choice whether to proceed. If a bank is put on inquiry but fails to do the above, it may find itself unable to enforce the mortgage later on, as the wife may be able to set aside the mortgage on the grounds of her husband’s undue influence. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 42 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW __________________________________________________________________________ DEFECTS IN CONTRACT (Part II) __________________________________________________________________________ 1. Contracting under mistake 2. Illegal contracts 3. Contracts in restraint of trade Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 43 DEFECTS IN CONTRACT: PART II MISTAKE 1. As a general rule, when a party enters into a contract under a mistake, it does not make the contract void (i.e. of no legal effect). The reason for this is because contracts should, whenever possible, be upheld otherwise there would be commercial uncertainty. Thus, if a person buys a blue skirt for his girlfriend under the impression that his girlfriend likes the colour blue when she actually hates it, he cannot avoid the contract on the basis that he has made a mistake. 2. However, at common law, certain types of mistakes will result in the contract being void. At common law, a fundamental mistake (also known as an operative mistake) will make the contract void where it results in there being no real agreement between the parties. 3. At common law, there are 3 types of fundamental mistakes which may cause a contract to be void:(a) Common Mistake (b) Mutual Mistake (c) Unilateral Mistake COMMON MISTAKE 4. A common mistake occurs when both parties contract on the same mistaken assumption that a certain important or fundamental fact exists but it is subsequently discovered that such a fact does not exist. In such a case, the contract may be treated as being void for mistake. The parties would not have contracted in the first place had they known that such a fact did not exist. 5. For a common mistake to be sufficiently serious such that the contract is void, the mistaken fact must relate to either:(a) The Existence of the Subject Matter of the Contract The existence of the subject matter of the contract is fundamental. In a sale of goods contract, the subject matter of the contract is the goods. If by a common mistake and unknown to both parties at the time of the making of the contract, the subject matter did not exist, the contract is void. Couturier v Hastie (1856) A contract was made for the sale of a cargo of corn that was being shipped to England. Unknown to both parties, at the time of the contract, the cargo of corn had begun to rot and had already been sold off by the master of the ship. Held: The Court held that the contract related to a subject matter (i.e. the corn) which did not exist and was therefore void. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 44 (b) The Possibility of Performing the Contract A contract may be void for common mistake where both parties mistakenly believe that the contract is capable of being performed when this is in fact not the case. Sheikh Bros Ltd v Ochsner (1957) A contract was made whereby X agreed with Y that Y was to cut and process 50 tons of Sisal (a type of plant) per month for X. The Sisal was growing on land belonging to X. Unknown to both parties, the land was not capable of producing 50 tons of Sisal per month. Held:The contract was held to be void for common mistake as both parties were mistaken as to the possibility of performing the contract. MUTUAL MISTAKE 6. A mutual mistake occurs when one party intends to deal with one thing, and the other intends to deal with a different one. In such a scenario, the parties are at cross-purposes and there is no meeting of minds due to a misunderstanding. Such a mistake renders the contract void. Raffles v. Wichelhaus (1864) A contract was made for the sale of cotton. According to the contract, the cotton was to arrive by the ship "Peerless" from Bombay. By coincidence there happened to be 2 ships named "Peerless" sailing from Bombay – one sailing in October and the other sailing in December. The buyer was thinking of the one sailing in October while the seller was referring to the one sailing in December. Held:The court held that no contract had been created because the parties were at cross purposes. There was no meeting of minds. UNILATERAL MISTAKE 7. A unilateral mistake occurs when only one party makes a mistake and the other party is aware of the mistake. 8. Unilateral mistakes may fall under one of the following categories:(a) (b) (c) A mistake as to an important term of the contract such as the price A mistake as to the identity of the person contracted with A mistake as to signed document (a) UNILATERAL MISTAKE AS TO IMPORTANT TERM OF THE CONTRACT 9. Where one party is mistaken regarding an important term of the contract, such as the price, and the other party is aware of the mistake, the contract will be void for unilateral mistake. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 45 Chwee Kin Keong v Digilandmall.com Pte Ltd (2005) Digilandmall operated a website selling HP commercial laser printers. Due to a mistake, it posted the price of each printer as only $66 when the correct price should have been $3,854. The claimants ordered 1,606 printers from the website. Digilandmall pointed out the error and refused to deliver the printers. Held:The court held that the contracts were void and Digilandmall did not have to deliver the printers. The claimants knew of the mistake in pricing by Digilandmall. The claimants were technologically savvy and had conducted searches on the internet before placing their orders. They were aware that the printers were being sold at prices much higher than $66. (b) UNILATERAL MISTAKE AS TO THE IDENTITY OF THE OTHER PERSON 10. A party may sometimes make a mistake about the identity of the other party to the contract. For example, X may contract with Y when his true intention is to contract with Z and X thinks that Y is in fact Z. If this happens, the mistake would cause the contract to be void since the identity of the other contracting party is of fundamental importance. 11. However, the law makes a distinction between a situation where a person intended to contract with somebody else altogether (a mistake as to identity) and a mistake which merely concerns the other party’s attributes or characteristics such as his creditworthiness (his ability to pay) (a mistake as to attributes). A mistake as to identity would cause the contract to be void whereas a mistake as to attributes would not have such an effect. 12. Cases of mistake about the other contracting party can generally arise in 2 types of situations:(a) Where the contract is made face to face; (b) Where the contract is not made face to face but through other means such as letters or faxes. Where the parties contract face to face, the mistake will usually be treated as one relating to the attributes of the other party. Where the parties contract through other means, the mistake is more likely to be treated as one relating to identity. (c) MISTAKE AS TO SIGNED DOCUMENT 13. The general rule is that in the absence of fraud or misrepresentation a person signing a document is bound by its written terms. It is immaterial that he is illiterate or he did not read the document. 14. However, where a person signs a document under the mistaken belief that the document is something completely different from what it really is, the defence of non-est factum (latin for “this is not my deed”) may apply so that the contract is actually void. 15. To rely on the defence of non-est factum, the mistaken party must show that:a) He was induced to sign the contract by a trick or a fraud; b) He made a fundamental mistake regarding the nature of the document; and c) He was not careless in signing the document. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 46 Awang Bin Omar v. Omar Bin Ismail & another (1949) Omar, who did not know English, was induced by his brother to sign a document under the pretence that he was only witnessing his brother’s signature. In actual fact, the document signed by Omar was a guarantee in favour of the claimant. The claimant later sued Omar under the guarantee. Held:The court held that Omar was not liable as he could rely on the defence of non-est factum. Omar had been deceived and was induced to sign a document that was fundamentally different from the one he thought he was signing. Omar thought that he was only witnessing a person’s signature but he was actually signing a contract of guarantee. ILLEGAL CONTRACTS 16. The law would not allow the parties to enforce a contract that they have made (even if there is offer, acceptance, consideration and the intention to create legal relations) if the contract is illegal. A contract that is illegal has no legal effect and is unenforceable. A contract may be illegal at common law or illegal by statute. 17. What is an “Illegal contract”? The Singapore High Court in ANZ Holdings Pte Ltd v Bina Puri Holdings Bhd [2013] SGHC 97 commented that the origin of the concept of “illegality” in contract law was not restricted to an illegal act alone but may also include an “immoral” act. Therefore, the term should be understood broadly. CONTRACTS ILLEGAL AT COMMON LAW 18. Certain types of contracts are illegal at common law. Such contracts are either against public policy or involve the commission of an illegal act. Examples of contracts that are illegal at common law include:(a) Contracts where the objective is to commit a crime, a tort (civil wrong) or a fraud e.g. 2 bank robbers agree to rob a bank and split the ill-gotten gains 50-50. If one of the robbers fails to get paid his share, the court will not enforce the agreement as the objective of the agreement was to commit a crime – i.e. rob a bank. (b) Contracts to defraud the tax authorities If the intention of the parties to the contract is to defraud the tax authorities, the contract is illegal. e.g. A company agrees with its employee to conceal the employee’s actual pay from the tax authorities so that the employee will not have to pay so much income tax. The contract is illegal and the employee will not be able to sue for his actual pay. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 47 (c) Contracts that interfere with the administration of justice A contract that interferes with the administration of justice is illegal. For example, an agreement between A and B that A would not report to the police a murder or robbery committed by B if B pays him a sum of money is illegal. CONTRACTS ILLEGAL BY STATUTE 19. A contract may be illegal because it is prohibited by statute. 20. For example, section 5 of the Civil Law Act says that all gaming or wagering contracts shall be null and void. It also says that a party cannot sue to recover his winnings under a gaming or wagering contract. A gaming or wagering contract is essentially a gambling contract or a contract involving a bet over an uncertain event. EXAMPLE:Justin bets with Paul on the outcome of the English Premier League match between A.C. Milan and Real Madrid. If Justin wins and Paul refuses to pay, Justin cannot sue Paul as their agreement is a gaming and wagering contract. 21. In Singapore, authorized gambling activities such as Singapore Sweep, 4-D and Toto are legal under the law. 22. Section 14(2) of the Moneylenders Act 2008 states that a loan granted by an unlicensed moneylender is unenforceable. An unlicensed moneylender is a person who carries on the business of moneylending without a proper license. Thus, if a borrower fails to repay money borrowed from an unlicensed moneylender such as a loanshark, the moneylender will not be able to take legal action to recover the debt. THE EFFECTS OF ILLEGALITY 23. As a general rule, when a contract is illegal it is void and cannot be enforced. One party cannot sue the other for failing to perform an illegal contract. 24. Further, any money or property transferred under the illegal contract cannot be recovered. For example, if X pays Y $50,000 for Y to murder Z and Y fails to carry out the murder, X cannot recover the $50,000 from Y. The courts will not allow X to recover the money because to do so would amount to assisting a criminal act. CONTRACTS IN RESTRAINT OF TRADE 25. A contract in restraint of trade is an agreement in which a person restricts another from carrying on his trade, business or profession. A contract in restraint of trade is generally void and unenforceable as it is against public policy. 26. Contracts in restraint of trade are usually found in Employment Contracts. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 48 EMPLOYMENT CONTRACTS 27. An employee may agree in his contract of employment that after leaving the company, he will not set up a competing business or work for a competitor. He may also agree not to solicit the company’s existing employees and/or customers. Such agreements in restraint of trade are against public policy and void unless the employer can show that:(a) (b) He has some legitimate interest that needs protection. Such legitimate interests may include: Trade secrets or highly confidential information - This would include secret manufacturing processes and formula as well as other types of non-technical confidential information such as price lists and customer requirements that are not known to the public.  Customer Connection – The connection and goodwill that a company enjoys with its customers.  Maintaining a stable and trained workforce – A company may have invested substantial amounts of money to train its workers and is thus entitled to prevent its employees from being poached by its competitors. Or, the company may be operating in an industry where having a stable and trained pool of employees would enhance its value. The restraint of trade is reasonable. In general, the courts will consider the following factors in deciding whether or not the restraint is reasonable: The area of restraint – The area of restriction should not be too wide. For example, a restraint preventing the employee from competing worldwide is less likely to be reasonable compared to a restraint preventing the employee from competing only in Singapore.  The duration of restraint – The period of the restriction should not be too long. For example, a restraint preventing the employee from competing for 20 years is less likely to be reasonable than one preventing the employee from merely competing for 1 year after he leaves the company.  The position of the employee – The employee must have held a position where he knows of the company’s trade secrets or where he has had personal contact with customers or employees and is able to influence them. For example, a restraint on a clerk is unlikely to be reasonable since the clerk would not have dealt with customers while he was employed and will not be able to influence them. A clerk is also not likely to have detailed knowledge of trade secrets or confidential information.  The scope of the restraint – The restriction can only cover those activities which pose a threat to the ex-employer. For example, if the ex-employer manufactures only beer, it cannot restrict the employee from working for companies which manufacture soft drinks. In the case of clauses that prevent the solicitation of employees, the class Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 49 of employees covered should not be too wide – i.e. should cover only those employees that are important to the business. Forster & Sons Ltd v. Suggett (1918) The claimants were manufacturers of glass bottles. They trained their works manager in the use of secret manufacturing processes such as the correct mixture of air and gas to be applied in the furnaces. The manager’s contract stated that for 5 years after his employment ended, he would not be involved in the manufacture of glass bottles in the UK. Held:The restraint was valid and reasonable to protect the trade secrets of the claimants. Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd (2014) The Plaintiff a sales manager, resigned from her Employer to set up a similar business. Her Employer threatened to enforce the restrictive covenant in the Employment Contract against her as she was not supposed to engage in any competing business for a period of 2 years after she left her Employer. She applied for a decision from the Court on the enforceability of the clause. Held:The clause in question was both a non-competition obligation as well as a non-solicitation obligation which meant that she could not contact the customers of her Employer to persuade them to go over to her new employer. The Court decided that on the facts of this case, while there was indeed a legitimate interest to protect (in the form of trade connections), the restrictions in both the non-competition obligation and non-solicitation obligation were far too wide and therefore the clause was unenforceable. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 50 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW ____________________________________________________ _____________ DISCHARGE OF CONTRACT ________________________________________________________________________________ 1. Discharge of contract by agreement 2. Discharge of contract by performance 3. Discharge of contract by breach 4. Discharge of contract by frustration Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 51 DISCHARGE OF CONTRACTS 1. How does a contract come to an end? The most common way in which a contract comes to an end is by performance. For example, in a simple sale of goods contract, when the seller has received payment of the price and has delivered the goods to the buyer without any complaints from the buyer, the contract is discharged – i.e. it comes to an end and parties are discharged or released from the contract. Nothing more is required from each party as their respective obligations have been performed. 2. Contracts may be discharged in four ways:(a) Discharge by agreement (b) Discharge by performance (c) Discharge by breach (d) Discharge by frustration DISCHARGE OF CONTRACT BY AGREEMENT 3. A contract may be discharged by agreement between the parties. If neither party has performed his obligations, then both parties may mutually agree to excuse the other from performance. As with any agreement, each party must provide consideration to the other in order to be released from the contract. The consideration each provides to the other is the promise to excuse the other from performance. EXAMPLE:Sally contracts to sell her car to Belle; Sally agrees to transfer the ownership of the car to Belle on May 1 in exchange for the purchase price of $45,000 to be paid by Belle. Before May 1, she changes her mind and does not want to proceed with the sale. She informs Belle of her change in plan and Belle agrees to Sally not selling her the car as contracted. In this situation the contract is discharged by agreement. Belle has released Sally from her obligation to sell the car to her. DISCHARGE BY PERFORMANCE 4. A contract will come to an end when each party has done what they promised they would do. When this happens, the contract is said to be discharged by performance. The general rule is that a party’s performance must be precise and exact before the contract can be discharged. 5. Problems may arise when one party’s performance is incomplete. In some cases, when one party’s performance is incomplete, he may sometimes not be entitled to claim payment. Cutter v. Powell (1795) Cutter signed on as second mate on a ship sailing from Jamaica to Liverpool. The contract stated that Cutter would be paid 30 guineas (money) provided he completed the journey to Liverpool. Three-quarters of the way through the voyage, Cutter died. Cutter’s wife sued to recover a portion of his wages of 30 guineas. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 52 Held:The court held that Cutter’s widow was not entitled to any payment. Cutter had to complete the full voyage to Liverpool before he became entitled to any part of the 30 guineas. As he had not performed the whole voyage (i.e. his performance was not precise and exact), his widow was not entitled to any payment. 6. The above rule that performance must be precise and exact can lead to unjust results. For example in Cutter’s case, Cutter could not recover any wages at all even though he had worked for part of the journey. There are now a number of exceptions at common law and by statute:(a) Apportionment Act Under the Apportionment Act, certain periodical payments (i.e. payable at fixed intervals – monthly, weekly etc.) such as salary and rent are deemed to accrue from day to day. Hence, an employee whose salary is payable monthly but who works for only 15 days will still be entitled to be paid for his 15 days of work even though he has not completed the entire month. (b) Substantial Performance Under the principle of substantial performance, a party may be able to recover the contract price where he has done most or all of what he is required to do under the contract but there are some minor defects or omissions in what he has done. Where the principle of substantial performance applies, a party cannot claim the full contract price due to him as there will be a deduction for the cost of correcting the defects. Hoenig v Isaacs (1952) An interior decorator contracted to decorate and furnish his client’s flat for £750. On completion, the client paid only £400 as there were defects. A wardrobe door was faulty and a bookshelf was too short. The defects would cost the client £55 to rectify. Held:The court held that the contract had been substantially performed even though there were minor defects which would cost £55 to correct. The decorator was therefore entitled to recover the balance of £350 minus the sum of £55. (c) Acceptance of Partial Performance If one party has partially performed the contract and the other party accepts the part performance, then the party accepting the performance must pay a reasonable amount (on a quantum meruit basis) for the performance that has been accepted. Example:Justin orders 25 bottles of wine from Lawrence. Lawrence delivers only 20 bottles (partial performance). Justin may reject the 20 bottles. However, if Justin chooses to accept the 20 bottles, he must pay for the 20 bottles based on the contract rate. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 53 (d) Prevention of Performance If one party’s incomplete performance of the contract is caused by the other party who wrongfully prevented full performance, then the party who has partly performed is entitled to be paid for what he or she has done. The party who prevented full performance of the contract is in fact in breach of contract. The party who has partly performed may claim damages for breach of contract or claim on a quantum meruit basis – i.e. for a reasonable sum that his work deserved. Example:Justin owns a plot of land at Orchard Rd and engages Lawrence to build a house on the land at a price of $10m. Lawrence starts work on the construction but when he is about halfway through, Justin wrongfully refuses to allow Lawrence to come onto his land to finish the job. Lawrence can claim damages for breach of contract or a reasonable sum for the work carried out so far. (e) Severable or Divisible Contract A contract may be an entire contract or a divisible contract. If the contract is an entire contract, a party is not entitled to be paid unless he completes all that is required of him under the contract. An example of an entire contract would be the case of Cutter v Powell above. A divisible contract on the other hand is made up of separate, smaller transactions. In a divisible contract, a party is entitled to be paid so long as he finishes one part of the contract. EXAMPLE:A builder agrees to build a house for $1m. The contract provides for payment of $400,000 on completion of the foundations, payment of $300,000 upon erection of the main building structure and $300,000 on completion of the roofing. As this is a divisible contract, the builder is entitled to be paid $400,000 once he has finished laying the foundations even though he fails to complete the main structure and roofing. DISCHARGE OF CONTRACT BY BREACH 7. We have learnt that contracts consist of contractual terms and not every term is of equal importance. The more important terms are known as conditions and the less important terms are called warranties. We saw that a breach of a condition is a serious matter which entitles the injured party to treat the contract as discharged and sue for damages. In the case of a breach of a warranty, the injured party generally cannot treat the contract as discharged unless he has been deprived of substantially the whole benefit he was supposed to have obtained under the contract. He still has to carry out his obligations. His only remedy against the other party is to claim damages. 8. An anticipatory breach occurs when one party indicates to the other that he no longer wishes to perform the contract before the date for performance has arrived. In such a situation, the injured party may have the following options:(a) He may treat the contract as discharged and claim compensation at once. The party in breach cannot object on the basis that his performance is not due yet. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 54 Hochster v De La Tour (1853) D entered into a contract in April to employ Hochster in June as a courier. In May, D wrote to Hochster to inform Hochster that he no longer required his services. Hochster brought a claim in May before the date on which he was supposed to start work (i.e. June). D objected on the ground that Hochster could not sue until June. Held:The court held that although the date for Hochster to perform the contract (i.e. June) had not yet arrived, D had repudiated the contract and Hochster was entitled to claim damages at once. OR (b) The injured party can treat the contract as ongoing and insist on the performance of the contract on the due date. Here, since the injured party treats the contract as still ongoing, he must still perform his part of the contract. Furthermore, the injured party runs the risk of the contract being discharged in some other way such as through frustration and if this happens, he will no longer be able to bring any claim for compensation. Avery v Bowden (1855) Bowden chartered (rented) Avery’s ship and agreed to load the ship within 45 days. When Avery’s ship arrived at the port, Bowden told Avery to take the ship away as there was no cargo to load the ship with. Avery could have chosen to sue Bowden for breach of contract but did not. Instead, Avery chose to remain at the port, hoping that Bowden would change his mind before the end of the 45 days. War subsequently broke out and the contract was frustrated. Held:The court held that Bowden was not liable even though it had committed an anticipatory breach. By remaining at the port, Avery had chosen to treat the contract as ongoing. Subsequently, the breakout of the war had frustrated the contract. DISCHARGE OF CONTRACT BY FRUSTRATION 9. Frustration occurs when after a contract is made, an unforeseeable event that is beyond the control of the parties occurs and this event causes the contract to become impossible or illegal to perform, or causes performance of the contract to be radically different from what was originally envisaged. The effect of frustration is that the contract becomes discharged. 10. The following are examples of situations where contracts are frustrated at common law:(a) Destruction of the subject matter of the contract A contract is frustrated at common law if the subject matter of the contract is destroyed. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 55 Taylor v Caldwell (1863) In a contract for the hire of a music hall for conducting a series of concerts, the contract was frustrated when fire destroyed the hall before the first day of the concert. (b) Serious illness or incapacity of a party to a contract for the provision of personal services A contract for the provision of personal services is a contract where a person agrees to perform a particular task. If the person is unable to perform the task because of a serious illness or incapacity, the contract is frustrated. Condor v Barron Knights Ltd (1966) In a contract of employment of a drummer by a band to play 7 nights a week, the contract was frustrated when the drummer could only play for 4 nights a week because of his illness. (c) Governmental Acquisition If the government acquires the subject matter of the contract such that the contract can no longer be performed, the contract is frustrated. Singapore Woodcraft Manufacturing Ltd v Mok Ah Sai [1979] X agreed to let Y use certain premises in return for payment of $1,500 a month. The agreement was for 10 years. The agreement was held to be frustrated when the government took possession of the premises under the law. (d) A change in the law affecting the contract making the contract illegal Sometimes the contract is legal when it is made but due to a change in the law, it subsequently becomes illegal. In such a situation, the contract may be discharged by frustration. Czarnikow Ltd v Rolimpex [1979] Rolimpex, a Polish organization, contracted to sell Czarnikow Ltd beet sugar. Before delivery could be made, the Polish government banned all sugar exports. Czarnikow sued Rolimpex for breach of contract. Held:The court held that the change in the law had frustrated the contract. The change in the law was beyond Rolimpex’s control and it was therefore not liable. 11. In the following situations, contracts are not frustrated although there is a change in circumstances. The affected party must still carry out the contract and can be sued for breach if he does not perform. (a) If the contract subsequently becomes more difficult or expensive to perform Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 56 A contract is not frustrated just because it later becomes more difficult or expensive to perform. Davis Contractors v Fareham UDC (1956) The claimant agreed to build 78 houses in 8 months at a fixed price. Due to bad weather and labour shortages, the work took 22 months and cost $17,000 more than expected. The claimant argued that the bad weather and labour shortage, which were unforeseen, had frustrated the contract. Held:The court held that the fact that the unforeseen events made the contract more difficult or expensive to perform but did not amount to frustration. (b) Self-Induced Frustration If the frustrating event has been brought about because of the conduct of one of the parties, the frustration would be “self-induced”. Self-induced frustration will not discharge a contract. The Super Servant Two (1990) The defendants owned 2 ships – the Super Servant One and the Super Servant Two. The defendants were engaged to transport the plaintiffs’ drilling rig using either ship. Before the contract could be carried out, the Super Servant Two sank. The defendants were unable to use the Super Servant One to transport the plaintiffs’ rig as the Super Servant One was already assigned to other contracts. The defendants claimed that their contract with the plaintiffs was frustrated. Held:The contract was not made automatically impossible by the sinking of the Super Servant Two. Rather, it was the defendants’ decision not to use the Super Servant One that prevented the performance of the contract. Hence, the frustration was self-induced. EFFECTS OF FRUSTRATION AT COMMON LAW 12. The most important consequence of frustration is that it discharges the contract. The contract automatically comes to an end. 13. At common law, once a contract is frustrated, the parties under the contract are released from all future obligations. Any outstanding obligations at the time of frustration will no longer need to be performed. However, any obligation already due before the frustrating event takes place has to be performed. For example if X rents a music hall from Y over 4 days and the music hall is destroyed by a fire on the 2nd day, Y will still be liable for breach of contract if he fails to provide the music hall on the 1st day. 14. In Singapore, the Frustrated Contracts Act has changed the common law position where the payment of money is concerned. The Frustrated Contracts Act also states what happens if one party has incurred expenses or has received a benefit before the contract is frustrated. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 57 EFFECTS OF FRUSTRATION UNDER THE FRUSTRATED CONTRACTS ACT 15. Section 2 of the Frustrated Contracts Act says that when a contract is frustrated:(a) A party who has paid money before the contract is frustrated is generally allowed to recover the money that he has paid. EXAMPLE:Justin pays Lawrence a deposit of $500 under a contract to rent a shop house. Before the rental commences, the shop house is destroyed in a fire. Justin is entitled to recover his deposit of $500. (b) Any money payable under the contract at the time of frustration no longer has to be paid. EXAMPLE:A contract between Justin and Lawrence for the rental of a shop house provides for the payment of a $500 deposit by 10 April 2013. On 13 March 2013, the shop house is destroyed in a fire. If Justin has not paid the deposit yet, he is no longer required to do so. (c) If a party has incurred expenses in performing the contract before it was frustrated, the court may allow him to retain or recover his expenses. Where money has already been paid, the expenses may be retained from the money paid. Where money is payable but not yet paid, the court may order the other party to pay for the expenses. EXAMPLE:Justin engages Lawrence to build a house for $1m and pays a deposit of $50,000. Lawrence incurs expenses of $50,000 paying for bricks, cement and other construction materials and starts work. Halfway through, the structure is destroyed by fire. Lawrence can keep the deposit of $50,000 as he has incurred expenses to carry out the contract. (d) If a party has received a valuable benefit under the contract before frustration, the court may order him to pay the other party a reasonable sum for the benefit he has obtained. EXAMPLE:Justin rents a shop house from Lawrence for 10 days. After using the shop house for 3 days a fire destroys the shop house. Lawrence is entitled to claim a reasonable sum from Justin since Justin has obtained a valuable benefit (i.e. 3 days’ use of the shop house) before the fire. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 58 16. However, it is important to note that there are 3 categories of contracts to which the FRUSTRATED CONTRACTS ACT (“FCA”) does not apply. They are:(a) (b) (c) Voyage charterparties or contracts for the carriage of goods by sea; Insurance contracts; Contracts for the sale of specific goods where the goods have perished before the risk has passed to the buyer. FORCE MAJEURE CLAUSES 17. A force majeure clause is a term in the contract that states what is to happen to the contract should certain events occur (after contract formation) which affects either parties contractual obligations. Force majeure clauses typically deal with events that are not due to the fault of either party. (RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd (2007) ) Such events may include war, riots, natural disasters, labour and raw material shortages. Force majeure clauses are important as they allow a party to treat a contract as discharged in situations that may not otherwise amount to frustration under common law. Parties may also choose to provide for the contract to be suspended for a period of time before becoming discharged. Alternatively the force majeure clause may state that upon the occurrence of the unexpected event, the parties will get together and negotiate as to whether the contract is to continue in force or be terminated. 18. When negotiating a contract, parties should attempt to include a force majeure clause as the doctrine of frustration at common law is a narrow one. 19. The following are examples of a force majeure clause:‘Force Majeure: Neither party to this contract shall be liable for failing to perform the contract if their failure is a result of an event of force majeure, which is defined as labour disputes, raw material shortages and Acts of God. Should such an event occur, performance of the contract will be suspended for 14 days. If the event continues after 14 days, the contract shall be deemed to be discharged.’ “should the effect of the force majeure continue for more than 120 consecutive days, the buyer and the seller shall discuss through friendly negotiation …. Their obligation to continue to perform …..” China Resources v Magenta Resources (1997) Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 59 Effects of Frustration Obligations due after frustration = Performance no longer required. Contract discharged. Date CONTRACT FRUSTRATION Obligations due before frustration Payment of money  Ceases to be payable – [FCA]  If payment already made, money is recoverable. – [FCA] Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Other obligations not relating to payment of money = Must be performed. (Common Law) Page 60 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW _________________________________________________________________ REMEDIES ________________________________________________________________________________ 1. Common Law Remedies 2. Assessment Of Damages 3. Equitable Remedies Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 61 REMEDIES FOR BREACH OF CONTRACT 1. Where a party fails, without lawful excuse to perform his contractual obligations, he will be in breach of contract. The law offers the innocent party a range of remedies which he may claim. 2. Remedies can be divided into 2 main groups – common law remedies and equitable remedies. In the past, England had 2 sets of courts – the common law courts and the court of equity. Each court had its own set of remedies. Today, even though the courts are no longer divided in this way, it is still useful to group the remedies into common law and equitable remedies as the rules that apply to each group of remedies are different. 3. Common law remedies are awarded as of right. This means that so long as the claimant can show that there was a breach of contract, he is entitled to the remedy and the court does not have a choice but to award it. Equitable remedies, on the other hand, are not given as of right but are discretionary. Even if there is a breach of contract, the court can still choose whether to award the remedy, taking into account various factors such as the behaviour of the parties and any potential hardship that may be caused. COMMON LAW REMEDIES 4. There are 2 types of common law remedies:(a) Damages; and (b) Quantum Meruit. DAMAGES 5. Damages are monetary compensation awarded to the injured party against the defaulting party, when there is a breach of contract. An innocent party will be entitled to claim damages, regardless of whether the term broken is a warranty, condition or intermediate term. However, where the innocent party has actually suffered no loss, he will only be entitled to nominal damages (a small amount of money). The general principle is that damages is intended to put the innocent party, so far as money can do so, in the same position he would be in if the contract had been performed by the other party i.e. if the contract had not been breached. As an example if A engages B to carry out a project for a sum of money and B is wrongfully terminated, B should be compensated with the money he would have been paid if he had completed that project. 6. Damages may be divided into the following 3 categories:(a) Damages for pecuniary loss (loss involving money); (b) Damages for non-pecuniary loss (loss not involving money); and (c) Liquidated Damages - i.e. a sum agreed in advance by the parties to be payable if there is a breach of contract, such breach usually being a failure to comply with contractually agreed timelines. DAMAGES FOR PECUNIARY LOSS 7. A common example of a pecuniary loss would be a loss of profits. For instance, where there is a delay in the delivery of an item that is to be used to earn profits, the plaintiff may claim damages for his loss of profit (see the Victoria Laundry case below). A claim for pecuniary loss could also include a claim for wasted expenses or expenses incurred by an innocent party to deal with the consequences Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 62 of a breach of contract. For example, a buyer of a house could claim the cost of renting another apartment if there is a delay by the seller in transferring ownership. DAMAGES FOR NON-PECUNIARY LOSS 8. This type of loss is not a direct monetary loss. Examples of such losses include mental distress, disappointment, anxiety, annoyance or embarrassment. In general, contract law does not allow claims for such non-pecuniary losses. Thus, if you are wrongfully dismissed by your employer, you cannot claim damages for your hurt feelings or for any mental distress you may have suffered. 9. One of the exceptions to the general rule is where the main object of the contract is to provide enjoyment, comfort or sentimental benefits. For such contracts, non-pecuniary losses can be claimed. An example of a contract to provide enjoyment or comfort would be a contract to provide a holiday package. In awarding such a loss the court will come up with a monetary estimate for the mental distress or disappointment suffered by the plaintiff. Jarvis v Swans Tours (1973) Jarvis booked a winter sports holiday in Switzerland with Swans Tours. The tour brochure promised a party like atmosphere at the hotel, a bar that would be open several evenings a week and an English speaking host. The holiday was a terrible disappointment. The bar was only open once a week, Jarvis was the only guest at the hotel and nobody was able to speak English. Held:Jarvis was entitled to compensation for his distress and disappointment. The purpose of the contract was to provide enjoyment to Jarvis. LIMITATIONS ON THE AMOUNT OF DAMAGES A COURT CAN AWARD 10. The court will not order the contract breaker to compensate the plaintiff for every loss that is suffered. The law places some limitations on the amount of compensation that can be awarded. 2 important limitations which a court will consider are:(a) Remoteness of damage (b) Mitigation Remoteness of Damage 11. When the loss suffered is too remote, i.e. it is not connected closely enough with the breach of contract, the court will not order compensation for such a loss. The reason for this rule is that it would be unfair to make a contract breaker liable for all losses, regardless of how extreme or unforeseeable the loss was. 12. The rules relating to remoteness of damage states that a contract breaker will be liable for:(a) Any loss which arises naturally, i.e. according to the usual course of things, from the breach of contract. Such loses are known as natural and ordinary losses. They are loses that one would normally expect. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 63 Heron II (Koufos v C Czarnikow Ltd [1969] 1 AC 350 In a contract between P & D, P chartered a ship from D to transport sugar to Basrah where there was a sugar market. D was late in delivery and the price of sugar fell. This resulted in less profit for P. Held:D was ordered to pay P compensation. Prices in a commodity market fluctuates and D was presumed to know this. (b) 13. Any loss which did not arise naturally provided the contract breaker knew of the special circumstances that would give rise to the unusual or special loss and / or that it would have been obvious to a reasonable man in the defendant’s shoes that if he breached the contract there was a significant likelihood or serious possibility that such a breach would result in loss of the type which the plaintiff suffered. Such loses which do not arise naturally are known as unusual or special loses. The difference between natural/ordinary losses and unusual/special losses is illustrated in the following case:Victoria Laundry Ltd v Newman Industries Ltd (1949) The claimants operated a laundry and dyeing business. They wished to expand their business and ordered a boiler from Newman Industries. The boiler was delivered late. As a result, the claimants could not take on additional work. The claimants were also unable to secure an extremely valuable dyeing contract with the government. The claimants sued for the following losses:(a) (b) The loss of the normal profits that it would have earned from the ordinary sales that could have been taken on with the extra boiler. The loss of exceptional profits that it would have earned from the extremely valuable dyeing contracts that it could have obtained from the government. Held:Newman Industries had to pay for the loss of the normal profits. This was a natural and ordinary loss. Newman Industries, however, did not have to pay for the loss of the exceptional profits. At the time when the boiler was sold, Newman Industries did not know that the claimants were trying to secure valuable contracts with the government. This loss was a special loss and it was not within the reasonable contemplation of the parties at the time of the contract. It was therefore too remote. In the Victoria Laundry case, if the claimants had informed Newman Industries that they were trying to secure valuable contracts with the government and Newman Industries, it would have been liable for the exceptional profits. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 64 Mitigation 14. In assessing the damages to be paid to the plaintiff, the law requires that the plaintiff take all reasonable steps to mitigate his loss. This means that the plaintiff must take reasonable steps to try to minimise his loss. The plaintiff cannot claim for any loss that could have been avoided by his taking reasonable steps. For example, if a seller fails to deliver goods, the buyer must go into the market to try to obtain a substitute. If the buyer does not do so, he may not be able to recover any loss of profit that he suffers as a result of not being able to resell the goods. As another example, a supplier who has chartered (hired) a ship to deliver cargo to his customer should try to find a substitute vessel if the shipowner breaches the contract and fails to provide the ship as agreed. If he fails to do so, he may not be able to claim for losses incurred on his contract with his customer. LIQUIDATED DAMAGES 15. A liquidated damages clause is a term in the contract which fixes in advance a sum which will become payable in the event of a breach of contract by one party. A liquidated damages clause contains a genuine pre-estimate of loss. Where there is a liquidated damages clause, there is no need for the plaintiff to prove his actual loss. The Plaintiff will be entitled to claim the amount provided for in the liquidated damages clause. For example, a building contract may contain a liquidated damages clause which states that the builder shall pay $1,000 for each day of delay if the building is not completed on time. If the builder is late by 5 days, the owner may rely on the liquidated damages clause to claim the sum of $5,000 (5 x $1,000). He does not have to prove his actual loss. 16. A liquidated damages clause must be distinguished from a penalty clause. A penalty clause is a term in the contract which provides for the payment of a sum of money that is much greater than the genuine pre-estimate of loss. A penalty clause is meant to punish the defaulting party in the event of a breach and to pressurise him into carrying out his contractual obligations. If the clause is considered a penalty clause, the court will not allow the penalty to be recovered. The Plaintiff will have to prove his loss and the court will fix the amount of damages payable. 17. How does the court decide whether a clause is a liquidated damages clause or a penalty clause? In Dunlop Pneumatic Tyre Co v New Garage [1915], the court stated some guidelines:(a) Even if the parties have described the amount payable in the contract as a “penalty” or as “liquidated damages”, the court will look at the substance of the agreement to see if it is really a genuine attempt to estimate the loss in advance. (b) The amount payable will generally be considered a penalty if it is excessive and unreasonable when compared to the biggest loss that could possibly result. (c) If a single lump sum is payable regardless of how serious the breach is, the sum is likely to be a penalty. (d) If there was actually a genuine attempt to pre-estimate the loss, the amount payable will not be considered a penalty, even if it was difficult to calculate the loss exactly in advance. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 65 QUANTUM MERUIT 18. When a party claims on a quantum meruit basis, he is claiming a reasonable value for the work done - i.e. a sum that his work deserves. EXAMPLE:- 19. Justin agrees to write a book. When he has completed about half the work the publishers cancels the agreement. He is unable to completely perform what he has contracted to do. He can claim half of the contract sum if he is claiming on a quantum meruit basis. Claiming on a quantum meruit basis is an alternative remedy to a claim for damages. A party may ask for this remedy in the following situations:(a) A contract is performed but the price for the goods sold or the services provided is not specifically stated; (b) One party starts to perform the contract but is prevented from completing the performance as a result of the other party’s breach; (c) Where there is contract to provide necessaries to a minor, a minor is required to pay a reasonable sum for the necessaries; or (d) The claimant's partial performance of the contract has been willingly accepted by the other party. EQUITABLE REMEDIES – SPECIFIC PERFORMANCE 20. The equitable remedies which we will learn are specific performance, injunction and rescission. 21. Specific Performance is an order of court which requires the party in breach to do what he promised to do under the contract (e.g. to deliver an antique vase). It is appropriate if a party who has suffered a breach will not be adequately compensated by money and would prefer the other party to be compelled to carry out his contractual obligations. Generally, a court will order specific performance only when monetary damages are inadequate to compensate the plaintiff. 22. The courts have usually granted specific performance in relation to the following types of contracts:(a) Contracts for the sale of land or for the sale of a house - This is because the law regards monetary damages as inadequate compensation since each piece of land or each house is unique. (b) Contracts for the sale of items of unusual beauty or rarity or which are in limited supply – Examples of such contracts are contracts for the purchase of antiques or rare art pieces where monetary compensation will not be adequate to compensate the injured party. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 66 23. 24. The courts will not order specific performance in certain types of contracts:(a) Contracts for personal service – Examples of such contracts would be contracts of employment. The courts will usually not order an employee to work for his employer because it is not proper to make a person serve another against his will; and (b) Contracts requiring constant supervision by the court – Some contracts impose a continuing obligation on a party – e.g. a 30-year lease that requires a tenant to keep his store open during that period. In such contracts, the courts will usually not order specific performance as it would not be practical and would be a waste of resources for parties to keep going back to court to have the order of specific performance enforced. Once granted by the court, the decree of specific performance must be obeyed by the defendant. Failure to do so is a contempt of court for which the defendant could be imprisoned. EQUITABLE REMEDIES - INJUNCTIONS 25. If a party has promised to do something in his contract but breaks that promise, the court may order specific performance. However, if in the contract the party has promised NOT to do something, the appropriate remedy would be an injunction. Depending on whether the contract breaker has already done what he promised not to do, the court will order either a prohibitory injunction or a mandatory injunction. Prohibitory Injunction 26. A prohibitory injunction is a court order that orders a person not to do something. It is appropriate when the contract breaker intends to do something that he has promised not to do but has not actually done it yet. For example, a court order which requires an employee not to compete with his ex-employer would be a prohibitory injunction. Warner Brothers Pictures Inc v. Nelson [1937] A film actress by the name of Bette Davis agreed with Warner Brothers that she would NOT work as an actress for anyone else during the period of her contract. In breach of her agreement with Warner Brothers, she made a contract with a third party to act in films. Held:A prohibitory injunction would be granted to Warner Brothers to prevent Bette Davis from actually working for the third party as she had promised in her contract with Warner Brothers NOT to do so. Mandatory Injunction 27. A mandatory injunction is a court order that requires a party to do something to restore the situation to what it was before the breach – e.g. tear down a fence or demolish a building. It is appropriate when a party has promised in the contract NOT to do something but has already done what he is not supposed to do. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 67 EXAMPLE:Justin buys a piece of land from Lawrence. Under the contract, Justin promises not to build any fences on the land. If Justin proceeds to erect a fence, the court may grant Lawrence a mandatory injunction requiring Justin to tear down the fence. 28. Compared to a prohibitory injunction, this type of injunction is rarely granted as it is a highly drastic order. Also, the court will usually only grant such an injunction if the advantage gained from carrying out the order outweighs any inconvenience caused to the defendant. RESCISSION 29. Rescission takes place when a voidable contract is set aside for misrepresentation or undue influence. The parties are restored to their pre-contractual position as if the contract was never made in the first place. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 68 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW _____________________________________________________________________ SALE OF GOODS _____________________________________________________________________ 1. The features of a Sale of Goods Contract 2. Implied Terms in a Sale of Goods Contract a) b) c) d) e) Title Sale by Description Satisfactory Quality Fitness for Purpose Sale by Sample 3. Payment, Delivery and Acceptance 4. Seller’s Remedies 5. Buyer’s Remedies Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 69 LAWS APPLICABLE TO CONTRACTS OF SALE OF GOODS 1. In Singapore, the law in relation to contracts for the sale of goods comes mainly from:(a) (b) (c) The Sale of Goods Act (Cap 393) [“SGA”]; The Unfair Contract Terms Act (Cap 396) [“UCTA”]; and The English common law or case law. FEATURES OF A SALE OF GOODS CONTRACT 2. A contract for the sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called price - s2(1) SGA. 3. As can be seen from the above definition, there are 3 key elements peculiar to a sale of goods contract:(a) property; (b) goods; and (c) money consideration. 4. It is important to recognize the difference between a sale of goods contract and other types of contracts. This is because the Sale of Goods Act applies only to contracts for the sale of goods and not other types of contracts. PROPERTY 5. The essence of a contract for the sale of goods is the transfer of property (ownership) in the goods. A contract of services is simply one where one party uses his skill and labour to perform services for the other. Sometimes, it is difficult to decide whether a contract is to provide services or to sell goods because it may involve elements of both. In general, one looks at the main purpose of the contract to decide. If the main purpose of the contract is to obtain the skill and labour of the supplier, it is a contract for services. If the main purpose of the contract is to obtain ownership of goods and the skill and labour of the supplier is only subsidiary, it will be a contract of sale. 6. Property means ownership and not just possession. Thus, a contract to hire goods is not a sale of goods contract as it involves merely the transfer of possession and not of property. The hirer obtains the possession of the goods but the ownership of the goods does not pass to him. Examples of contracts to hire goods would be when you rent a DVD from a rental store such as Video EZY or where you rent a car from a car rental company such as Hertz or Avis. GOODS 7. Basically, goods would include all tangible (things that you can feel and touch) and moveable things such as cars, computers, television sets, raw materials, ships, planes, machinery and food. The meaning of goods as defined in s61 SGA also includes industrial growing crops and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Goods, however, do not include land or houses. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 70 PRICE - MONEY CONSIDERATION 8. The consideration for a contract of sale of goods must be money. A contract of barter where there is a straight exchange of goods lacks this monetary element and therefore is not a contract for the sale of goods. IMPLIED TERMS 9. In the earlier lectures, you would have learnt about terms which are implied by statutes. The Sale of Goods Act implies various terms into contracts for the sale of goods. Some of these implied terms are examined below:IMPLIED TERMS AS TO TITLE (a) Section 12(1) SGA : Implied condition that seller has the right to sell the goods s12(1) SGA says that there is an implied condition in sale of goods contracts that the seller has the right to sell the goods. In general, this means that the seller must own the goods. If the seller does not own the goods, he is in breach of this condition and the buyer is entitled to rescind the contract and obtain a refund of the purchase price. The buyer can get a refund even though he has had the benefit of using the goods for a period of time and even though the seller was unaware that he had no right to sell the goods. Rowland v Divall (1923) A buyer bought a car from the seller. The seller did not have legal ownership of the car as it had been stolen. Held:The buyer was entitled to obtain a refund of his purchase price even though he had used the car for several months and even though the seller did not know that the car was stolen. The object of the contract was to transfer legal ownership to the buyer and this could not be done. SALE OF GOODS BY A NON-OWNER What happens if a person who is not the owner of the goods sells the goods to a third party, T? Does the law treat T as the new owner of the goods or does the ownership remain with the original owner? Nemo Dat Rule The basic rule is that of nemo dat quod non habet, i.e. nobody can give that which he does not have. Thus, a person who is not the owner of the goods will not be able to transfer ownership of the goods to a third party. The law will treat the goods as belonging to the original owner. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 71 EXAMPLE:Justin steals Paul’s car and sells it to Lawrence. Justin is not the owner of the car and cannot pass ownership to Lawrence. The law will recognise Paul as the owner of the car. However, there are some exceptions to the nemo dat rule. In some situations, a non-owner may actually be able to transfer ownership to a third party. These exceptions are:a. b. c. d. e. f. Estoppel; Sale by mercantile agents; Sale by seller in possession; Sale by buyer in possession; Sale under voidable title; and Sale under a common law or statutory power or order of court. (b) Section 12(2)(a) SGA : Implied warranty that goods are free from charge or encumbrance Under s12(2)(a) SGA, there is an implied warranty that the goods are free from any charge or encumbrance not disclosed to the buyer before the contract is made. This means that if a 3rd party has an interest in the goods because the goods have been given as security to the 3rd party for a loan (e.g. there is a charge over the goods) and this is not disclosed to the buyer, the buyer can sue the seller for damages. (c) Section 12(2)(b) SGA: Implied warranty that the buyer will enjoy quiet possession of the goods s12(2)(b) SGA says that the buyer must be able to enjoy quiet possession of the goods. This means that the buyer must be able to do whatever he wants with the goods whenever he wants without any lawful interference from a third party or from the seller himself. For example, a buyer may contract to buy original Polo Ralph shirts but the seller delivers fake Polo Ralph shirts. In such a scenario, if the trademark owners later take legal action to seize the shirts, the seller will have to pay damages as the buyer is not able to enjoy quiet possession of his goods. For example, a seller of a computer system sold the buyer a system but fitted it with a time lock. This resulted in the buyer not being able to use the system. Rubin Computer Systems Ltd v United Paints Ltd (2000) IMPLIED TERMS AS TO QUALITY (d) Section 13 SGA : Implied condition that goods will correspond with description s13 SGA says that when there is a sale of goods by description, there is an implied condition that the goods correspond (match) with the description given. In general, if the goods do not correspond with their description, the buyer will be able to reject the Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 72 goods and obtain a refund of the purchase price. In addition, he can also sue for damages for any loss he has sustained. A sale by description takes place when a buyer purchases goods on the basis of a description of the goods given by the seller. The description could relate to matters such as the ingredients, age, quantity or specification of the goods. One example of a sale by description is when a buyer orders goods by merely looking at a catalogue, brochure or advertisement. Goods which are bought without being viewed by the buyer but where the buyer is relying on the description alone, is a sale by description. However, even if the buyer physically inspects the goods, there can still be a sale by description if the buyer has relied on some description given by the seller in making the contract. If a customer purchases an item from the supermarket based on description on the label or the packaging, it is likely to be a sale by description and the item must correspond with the description. Beale v. Taylor (1967) A car was described in an advertisement as a `Herald convertible, white, 1961'. The buyer inspected the car and bought it. The buyer later discovered that the car consisted of the rear half of a 1961 model which was welded to the front half of an earlier model. Held:The court held that the car did not correspond with its description and the buyer was entitled to damages. Although the buyer had inspected the car, he had relied on the description of the car in the advertisement. The buyer must have relied on the description when entering into the contract, and not relying on his own judgement. Non reliance on the description would indicate that description is not intended to be part of the contract and thus it is not a sale by description. Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1991) Seller sold a piece of art to buyer describing it as being painted by a German Expressionist artist; however the buyer did not rely on seller’s description but on his own judgement when purchasing the item. Held:The court held that the description is not intended to be part of the contract and thus not a sale by description. (e) Section 14(2) SGA - Implied Condition as to Satisfactory Quality Under s14(2) SGA, where the seller sells goods in the course of a business, there is an implied condition that the goods are of satisfactory quality. If the seller fails to supply goods of satisfactory quality, the buyer is entitled to reject the goods and obtain a refund. He may also sue for damages for any loss he has suffered. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 73 Goods can be said to be of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking into account the description, price and other relevant circumstances. The goods must be of satisfactory quality at the time of the sale. s14(2) SGA lists out some of the factors that can be considered in deciding whether the goods are of satisfactory quality:• Fitness for all common purposes – Goods which are unable to perform all the functions that they would normally be expected to perform would not be of satisfactory quality. A kettle which is unable to boil water, a refrigerator which is unable to keep food cold, a DVD player which is unable to play DVDs, would all be examples of goods which are not of satisfactory quality. • Appearance and finish – For example, if you buy a brand new iPod MP3 player but the player has numerous scratches on it, it might be considered of unsatisfactory quality. • Freedom from minor defects – Sometimes, the product might contain small or minor faults / defects. For example, a brand new car might have a problem with its locking mechanism or the car’s interior lighting may not be working. If the minor defects are such that they unreasonably affect the enjoyment and use of the car or may later cause serious harm, the buyer can return the car and obtain a refund even though strictly speaking, the car works – i.e. can still be driven around. • Safety – The goods should be safe for use. If the goods pose a danger for the user, they may not be of satisfactory quality. • Durability – The goods should remain in a good condition for a reasonable period of time. What is a reasonable period of time depends on the type of goods involved. For example, if the normal lifespan of fresh milk is 1 week, a seller would be liable if he sold milk which turned sour in only 2 days. Rogers v Parish (Scarborough) Ltd [1987] Rogers bought a new Range Rover motor vehicle from the Defendants. The engine misfired frequently and the gearbox was making a lot of noise. There were also defects in the bodywork of the vehicle. The Defendants argued that the vehicle was of satisfactory quality since it could be driven around safely. Held:The court held that just because the vehicle could be driven around safely did not mean that it was of satisfactory quality. The buyer of a new vehicle must be able to drive it around with an appropriate degree of comfort, ease of handling and pride in its appearance. The goods were therefore not of satisfactory quality and Rogers was entitled to reject the vehicle. Finally, it should be noted that there may be certain situations where although the goods may not be of satisfactory quality, the buyer cannot reject the goods:Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 74 (f) a. Where the defect is specifically drawn to the buyer’s attention before the contract is made. b. Where the buyer examines the goods before buying and the examination should have revealed the defect. A buyer is not required to examine the goods before he buys. However, if he does examine the goods, he cannot later reject the goods if he fails to notice a defect which a reasonable person would have noticed from the examination. Section 14(3) SGA - Implied condition as to fitness for purpose s14(3) SGA says that where a seller sells goods in the course of a business and he is informed by the buyer of the purpose for which the goods are required, there will be an implied condition that the goods are reasonably fit for that purpose. If the goods are not fit for their purpose, the buyer can reject the goods and obtain a refund. He may also claim damages from the seller. The buyer, however, cannot reject the goods if he did not rely on the seller’s skill or judgment in choosing the goods or where it would be unreasonable for him to rely on the seller’s skill or judgment. Example:Jenni wants to buy a Mother’s Day present for her mother. She goes to Cupide Department Store to purchase a blender for her mother. She informs Lawrence, the sales assistant there that she is looking to purchase a blender that is able to blend chillies as her mother often cooks curry. She further asks Lawrence if he is able to recommend such a blender. Lawrence assures Jenni that he has a good knowledge of blenders and he recommends the Idol Blender assuring Jenni that the blender is able to perform the function of blending chillies. Assured, Jenni purchases the Idol Blender; however when her mother uses the blender to blend chillies, the small chilli seeds cause the blender motor to short circuit and to stop functioning. It is not suitable for the function of blending chillies. As Jenni had relied on Lawrence’s skill and judgment when purchasing the blender, she can return the Idol Blender and obtain a refund. CONSUMER PROTECTION (FAIR TRADING) ACT: Lemon Law On 1st September 2012, changes to the Consumer Protection (Fair Trading) Act, more popularly known as the Lemon Law, came into force. It empowers consumers to demand for a remedy when goods are not of satisfactory quality; the changes make it compulsory for retailers to replace or repair a defective product. Under the changes, if repair or replacement takes too long and costs too much, the buyer would have the right to ask for a price reduction - or a refund. If the goods are found to be defective within 6 months of sale/delivery, customer has right to demand that seller repair or replace goods within a reasonable time and without causing significant inconvenience to consumer. Otherwise the consumer may decide to keep the product but obtain a discount or return product and demand a full refund. If retailer refuses and challenges the customer then the obligation is on the retailer to prove that the product is not defective. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 75 EXEMPTION CLAUSES We covered in the earlier lectures that an exemption clause is a term of the contract which seeks to exclude or limit the liability of the party in breach of contract. In contracts for the sale of goods, the law prevents a seller from using an exemption clause to exclude liability for certain matters. In the case of consumer sales, the Unfair Contract Terms Act says that a seller is not allowed to exclude his liability for providing goods that do not correspond with their description. The UCTA also says that for consumer sales, a seller is not allowed to exclude his liability for providing goods that are not of satisfactory quality or which are not fit for the purpose made known to the seller. For example, if you buy a digital camera from an electronics shop and it is stated in the receipt that “Goods Sold are Strictly Non-Returnable”, you will still have the right to return the goods and obtain a refund if they are not of satisfactory quality. PAYMENT, DELIVERY AND ACCEPTANCE Payment 10. Unless the contract states otherwise, payment and delivery are concurrent conditions. This means that the seller must be ready and willing to deliver the goods and the buyer must be ready and willing to pay the price. Delivery 11. Unless the contract states otherwise, the place of delivery is the seller’s place of business. Thus, if you order some furniture from a furniture shop, you will have to make arrangements to collect the furniture from the shop, unless you agree with the shop beforehand that they will arrange for the goods to be delivered to your home. Acceptance 12. Where the goods are not of satisfactory quality or are unfit for their purpose or do not correspond with their description, the buyer is entitled to reject the goods and obtain a refund. However, once a buyer accepts the goods, he can no longer reject them and can only claim for damages such as any repair costs that may have to be incurred. 13. The buyer is deemed to have accepted the goods and so loses the right to reject where (s35 SGA):(a) he expressly indicates to the seller that he has accepted them; (b) he does any act inconsistent with the seller's ownership of the goods (e.g. the buyer sub-sells the goods and delivers them to the sub-buyer); or (c) keeps the goods for more than a reasonable time, without informing the seller that he has rejected them. 14. What is “a reasonable time” in the context of 13(c ) above? This was considered by the Court in Sun Qi (formerly trading as Power King International) v Syscon Pte Ltd [2013] SGHC 38. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 76 In the case, the Defendant bought construction cranes from the Plaintiff who delivered them in Feb 2009. When the Defendant was sued for payment owed to the Plaintiff, it rejected the construction cranes on the basis that there was a breach of an implied term of quality. As the defendant had the cranes since 2009 and the case commenced some years later, could it be argued that they had not exercised their right to reject within a reasonable time? Held: - The Court decided that what constitutes “reasonable” will depend on the facts of each particular case. In this case it was reasonable because the defendant had made a series of “service requests” to the Plaintiff to have defects in the cranes rectified. It was clear from their conduct that they had not accepted the cranes and their right to reject was therefore preserved. 15. The buyer is not deemed to have accepted the goods until he has had a reasonable opportunity of examining them for the purpose of finding out whether they conform to the contract (s35(2) SGA). If for example, you order some goods which are delivered to you in a package by DHL or courier service, you will not be deemed to have accepted the goods just because you sign on the acknowledgement slip given to you by the courier company unless you have had the chance to open up the package to inspect the goods. SELLER’S REMEDIES 16. A number of remedies are available to a seller who has not been paid. These remedies fall under 2 main categories, remedies which can taken against the goods themselves and remedies that can be taken against the buyer. 17. The remedies which an unpaid seller has against the goods are:a) A right to withhold delivery b) A right of lien c) A right to stop the goods in transit d) A right to re-sell the goods 18. The remedies which an unpaid seller has against the buyer are:a) Action for the price of the goods b) Action for damages for non-acceptance Right to withhold delivery 19. If the goods have not been delivered to the buyer, and the seller has not been paid, then he has a right to withhold delivery of the goods. This remedy will not be available to the seller if the goods are already in the buyer’s possession or if ownership has already passed to the buyer. Right of lien 20. A lien is a right to retain possession of property pending payment of a liability. An unpaid seller has a lien over the goods until the price is paid. He may exercise his lien in the following situations:(a) The seller has sold the goods without agreeing to allow the buyer credit; (b) The seller has sold the goods on credit, but the term of credit has expired; (c) The buyer becomes insolvent (unable to pay its debts). Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 77 21. A seller cannot exercise his right of lien once he has parted possession with the goods. Right to stop goods in transit 22. If the seller has parted with possession of the goods and the goods are in transit (i.e. in the process of being delivered to the buyer), the seller may stop the goods in transit if the buyer becomes insolvent (unable to pay its debts). If the seller chooses to exercise this right, he may take back the goods from the carrier (i.e. the transport company). However, once the goods have been delivered to the buyer, the seller can no longer exercise this right to stop the goods. Right to re-sell the goods 23. A seller may withhold delivery, exercise his right of lien or stop the goods in transit. However, this does not entitle him to re-sell the goods. The seller may only re-sell the goods in the following situations:(a) (b) (c) Where the goods are of a perishable nature; Where the seller gives notice to the buyer of his intention to re-sell and the buyer does not pay within a reasonable time; OR Where the contract expressly allows the seller to re-sell the goods in such circumstances. Action for the price of the goods 24. The seller may sue the buyer for the price of the goods if ownership has passed to the buyer and the seller has not been paid. Damages for non-acceptance 25. If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue the buyer for damages for non-acceptance. The seller is normally expected to resell the goods if there is an available market for the goods. The amount of compensation will be the difference between the contract price and the market price at the date when the buyer should have accepted the goods. BUYER’S REMEDIES 26. If a seller is in breach of the contract of sale, the buyer has the following remedies available:a. Damages for non-delivery b. Specific performance c. Rejection of goods Damages for non-delivery 27. If the seller fails to deliver the goods, the buyer may sue for damages for non-delivery. The buyer is normally expected to go into the market to buy substitute goods if there is an available Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 78 market. The amount of damages will be the difference between the contract price and the market price for the goods at the time the goods should have been delivered. Specific performance 28. If the contract is for the sale of specific or ascertained goods, the court may order specific performance – i.e. order the seller to deliver the goods. However, as you will note from Lecture 8, specific performance is an equitable remedy and will be granted only if damages will not be sufficient compensation such as when the item sold is a rare piece of art or jewellery. Rejection of goods 29. Where there is a breach of a condition (e.g. as to satisfactory quality or fitness for purpose), so long as the buyer has not accepted the goods, he has the right to reject the goods and to refuse payment. If the buyer has already paid, he can recover the purchase price. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 79 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW Law of Intellectual Property 1. Trade marks 2. Patents 3. Copyright 4. The Tort of Passing Off Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 80 INTRODUCTION 1. The law of intellectual property seeks to protect creations of the human mind. It essentially protects such creations from piracy and unfair competition. Intellectual property represents a valuable source of income for businesses, estimated to be about SGD245 billion in 2012 according to a Straits Times Report dated 9 Apr 2014. Singapore’s IP laws saw many important amendments due to the signing of the United StatesSingapore Free Trade Agreement in 2003. Effective IP laws play an important role especially in the industries (inventions of new products and processes, research in medical and biotechnology and technology); arts and craft (paintings, music, films, written works); in business (confidential information and trade secrets). 2. In Singapore, the following types of intellectual property are protected under the law:(a) Trade marks (b) Patents (c) Copyright (d) Registered Designs (e) Plant Varieties (f) Layout Designs of Integrated Circuits TRADE MARKS 3. A trade mark is a sign used by a person in the course of trade to distinguish his goods and services from those of other traders. This sign can consist of any letter, word, name, device, shape or color. A trade mark is an item of property which can be sold (assigned) or rented to another party (licensed). In Singapore, the law on trademarks is set out in the Trade Marks Act. 4. The following are examples of trademarks:- 5. For a trade mark to be protected, it must be registered with the Trade Marks Registry at the Intellectual Property Office of Singapore (IPOS). Under trade mark law, goods and services are divided into different categories (e.g. clothing, footwear, alcoholic beverages etc.). To qualify for registration, the applicant must use or have a genuine intention of using the mark in the course of trade relating to the category of goods or services for which he is seeking registration. Example:Jenni has the intention to design and produce her own line of clothes for women. She may register her trade mark in the category of clothing. She may not register her mark for another category such as perfume unless she has a genuine intention of going into the perfume business as well. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 81 6. Once registered, the trade mark will be protected for 10 years from the date of application and thereafter may be renewed for further periods of 10 years. Protection of the trade mark is territorial in nature (i.e. if one registers the mark in Singapore, it is only protected in Singapore). To obtain protection outside Singapore, it is necessary to file applications in the countries concerned. 7. Even if the applicant intends to use his trade mark, he may not be able to register his trade mark in some circumstances. In general, the following types of trade marks cannot be registered:(a) Marks that do not have a distinctive character – A mark that is not able to distinguish the applicant’s goods or services from that of other traders cannot be registered. E.g. It may not be possible to register “Wong” without any extra features as Wong is a very common surname in Singapore. (b) Descriptive marks – Marks which merely indicate the quality, quantity or intended purpose of the goods or services cannot be registered. E.g. Registering the word “Super” or “Best” without any extra features. E.g. Registering the word “Cool” for linen. (c) Marks that are exactly the same as earlier marks – A trade mark cannot be registered if it is exactly the same as an earlier mark and the applicant is trying to register it for exactly the same category of goods or services. E.g. Registering “Levi’s” for jeans. (d) Marks that could cause confusion – Even if a mark is not exactly the same as an earlier trade mark or is being registered for goods or services that are not exactly the same, registration can still be refused if the public is likely to be confused. Whether the public is likely to be confused would depend on how similar the marks and categories of goods are. E.g. Registering “Levi’s” for swimwear. E.g. Registering “LEEVI’s” for jeans. (e) Deceptive marks – Marks that will deceive the public cannot be registered. E.g. Registering the trade mark “FROM LAND OF THE RISING SUN” in respect of goods made in India. (f) Marks which are against public policy or morality. E.g. Registering the trade mark “Gambling is Good!” Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 82 INFRINGEMENT OF TRADE MARKS 8. A person infringes the trade mark of another person if without the permission of the owner, he uses a similar or identical sign to trade in similar or identical goods or services and the public is likely to be confused. Using a sign would include actions such as applying the sign to goods or their packaging, selling goods or services under the sign, putting the sign on business documents such as catalogues or invoices and using the sign on advertisements. EXAMPLE:It would be trade mark infringement to set up a stall selling coffee and putting the Starbucks sign on the stall’s signboard, receipts and in advertisements. REMEDIES FOR TRADE MARK INFRINGEMENT 9. If a party wrongfully uses a trade mark without the permission of the registered owner, he may be sued for trade mark infringement. If the registered owner succeeds in proving to the court trade mark infringement, the court may award him the following remedies:(a) (b) (c) (d) (e) Injunction – A court order requiring the infringer to stop using the trade mark. Damages – Monetary compensation for any losses suffered by the owner of the trade mark. Account of Profits – The infringer must account and pay back any profits he earned from infringing the registered owner’s trade mark. Court Order to Remove Infringing Sign – Such an order would require the infringer to erase or remove the infringing sign from his goods or documents. Court Order for the Destruction of the Infringing Goods – If it is not practical to remove the infringing sign, the court may order the infringing goods to be destroyed. TORT OF PASSING-OFF 10. A party who has not registered his trade mark will not be able to sue for trade mark infringement. He may, however, bring a claim for passing-off. The tort of passing-off prevents a trader from misrepresenting his goods or services as that of another trader’s. It is in general more difficult to succeed in a claim for passing off (compared to trade mark infringement) as the plaintiff must show that there is goodwill or reputation attached to his business. 11. To bring a claim for passing off, the following 3 conditions must be satisfied:(a) There is goodwill or reputation attached to the plaintiff’s business; (b) There has been a misrepresentation by the defendant that his goods or services are the same as those of the plaintiff. This could occur if the defendant tries to use the plaintiff’s name, logo, trade mark or get up or something that is similar; AND (c) The plaintiff has suffered or is likely to suffer loss or damage. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 83 Jumbo Seafood Pte Ltd v Hong Kong Jumbo Seafood Pte Ltd [1998] The plaintiff had been operating a seafood restaurant under the name “Jumbo Seafood Pte Ltd” since 1987. The restaurant was located at the East Coast Park UDMC seafood centre. On 18 October 1996, the defendant started its seafood restaurant business under the name “Hong Kong Jumbo Seafood Restaurant”. The restaurant was located at the East Coast Recreation Centre, just a few kilometres away from the plaintiff’s restaurant. The plaintiff sued the defendant under the tort of passing off, claiming damages and an injunction for the defendant to stop using the name “Hong Kong Jumbo Seafood Restaurant”. Held:1. The Plaintiff had a turnover of over $40 million since it started business. It had spent a lot of money on advertising and had many favourable write ups in the media. Thus it was clear that the plaintiff enjoyed goodwill and reputation in the name “Jumbo” in relation to their seafood restaurant business in Singapore. 2. The Defendant’s use of “Jumbo” in the name of their seafood restaurant business had caused confusion. Their seafood restaurant was located along the same stretch of road at East Coast and members of the public had been misled into thinking that they were connected with the Plaintiff. The Plaintiff is therefore likely to suffer damage. 3. The court awarded damages against the Defendant and also an injunction for the Defendant to stop using the name “Hong Kong Jumbo Seafood Restaurant”. 12. If the plaintiff succeeds in proving passing-off, he is entitled to the following remedies:(a) Injunction (b) Damages (c) Account of profits PATENTS 13. A patent is the exclusive right to exploit an invention. It gives the owner of the patent a right to prevent others from exploiting his invention without his consent during the term of the patent. The invention may be a product or a process. The law on patents in Singapore is set out in the Patents Act. 14. To have a valid patent, the invention must be registered with IPOS. The right to apply for a patent lies with the inventor. However, if an invention is made during the course of employment, the right to apply for the patent lies with the employer and not the employee, unless the contract of employment states otherwise. 15. Once a patent is registered, it is valid for only 20 years. 16. Patent rights are territorial in nature (i.e. valid only in the country in which registration is applied for). To obtain protection outside Singapore, it is necessary to file applications in the countries concerned either individually or through the World Intellectual Property Office (WIPO). 17. To be registered as a patent, the invention must satisfy 3 criteria:(a) The invention must be new – i.e. it should not be known to the public anywhere in the world. If the invention has already been documented elsewhere previously (e.g. featured in a magazine article or advertised in the press), it cannot be patented. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 84 (b) The invention must involve an inventive step – i.e. it must be an improvement over an existing product or process which is already available. Further, the improvement must not be obvious to somebody who is skilled in the particular field or area. If the improvement is obvious to such a person, it cannot be patented. (c) The invention must be capable of industrial application - i.e. it must be capable of some physical or practical application. PATENT INFRINGEMENT 18. A patent is infringed if a person, without the permission of the owner of the patent, makes, disposes of, uses or imports the invention. The court will generally decide that a patent has been infringed if the defendant has taken the essential features of the P’s invention / process. 19. However, certain acts are not considered infringement:(a) (b) 20. Using the invention for private and non-commercial purposes Using the invention for experimental purposes If a patent is infringed, the owner of the patent may obtain the following remedies from the court:(a) (b) (c) (d) An injunction to stop further infringement Order for infringing products to be delivered up or destroyed Damages (Monetary Compensation) Account of Profits COPYRIGHT 21. Copyright protects works such as novels, computer programs, plays, sheet music and paintings. In general, the author of a copyright work has the exclusive right to reproduce, publish, perform and communicate his work. Copyright allows the owner to control the commercial exploitation of his work. 22. The law of copyright does not protect ideas, facts or information but rather the expressions of ideas. The expression of the idea must be in a tangible form such as a book, painting or film. For example, if Alan has an idea for a story and communicates his idea to Bob who then writes a book based on Alan’s idea, Bob is the person who would own the copyright, not Alan. Bob is the person who has expressed the idea into a tangible form. Copyright does not protect ideas but the expression of ideas. 23. In Singapore, copyright protection is automatic. There is no need to register in order to enjoy copyright protection. However, in order to enjoy copyright protection, the work must be original. To be original simply means that the work must not be copied from other material and must be a result of the author’s own skill, labour and judgment. The work, however, does not have to be the first of its kind. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 85 24. Copyright is an item of property. The person that owns the copyright can assign (sell) or license (rent) his copyright to others usually in return for payment of a fee known as a royalty. Licenses can be exclusive or non-exclusive. In the case of exclusive licenses, the copyright owner cannot grant similar rights to others whereas in the case of non-exclusive licenses, the copyright owner may grant similar rights to others. 25. In Singapore, the law on copyright is set out in the Copyright Act. WHAT TYPES OF WORKS ARE PROTECTED BY COPYRIGHT? 26. In Singapore, the following types of works enjoy copyright protection:Type of work Examples Literary Works - Books Newspaper or journal articles Poems Catalogues Brochures Song lyrics Web Pages Computer programs Dramatic Works - Scripts for plays and films Musical Works - Musical scores Music – i.e. melody and tunes Artistic Works - Paintings Drawings Photographs Sculptures Sound recordings - Music and other sounds recorded on tapes, CDs etc. Films - Films recorded on VCDs, DVDs etc. WHO OWNS THE COPYRIGHT? 27. In general, copyright is owned by the authors or makers of the work. Thus, the person who wrote the book or who wrote the song lyrics would own the copyright. However, if the work is created during the course of employment, copyright would belong to the employer unless otherwise stated in the contract of employment. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 86 28. In the case of sound recordings, the copyright will normally be owned by the recording company. In the case of films, the copyright will normally be owned by the producer or film production company. HOW LONG DOES COPYRIGHT PROTECTION LAST? 29. The duration of protection varies depending on the type of work involved. 30. Literary, dramatic, musical and artistic works (e.g. books, song lyrics, scripts) will be protected by copyright during the lifetime of the author and for 70 years after the author dies. 31. Sound recordings and films enjoy copyright for a period of 70 years from the year the sound recording or film was released. INFRINGEMENT OF COPYRIGHT 32. Copyright is the exclusive right to do certain acts. Copyright infringement occurs when a person, without the permission of the copyright owner, does something which only the copyright owner has the right to do. 33. For example, in the case of Literary, Dramatic and Musical Works (i.e. books, song lyrics and scripts), the authors have the exclusive right to reproduce the work, to perform the work in public and to communicate the work to the public. It would therefore be copyright infringement if one were to make a photocopy of substantial portions of a book without the author’s permission. It would also be infringement if one were to perform a play for the public without first obtaining the permission of the writer of the play. 34. As another example, the producer of a film has the exclusive right to make copies of a film and to screen it in public. Thus if you make unauthorized copies of a movie or screen it during a public event without prior permission, you would be infringing copyright. 35. For copyright infringement to take place, it is not necessary to have reproduced the entire work. The law deems that there is copyright infringement so long as a substantial amount has been copied. Whether the amount copied is substantial does not depend only on the quantity that has been copied but also the nature of what is copied. If the portion copied constitutes the primary part or essence of the work, that could still be copyright infringement. 36. For copyright infringement to take place, it is also not necessary for the person to know that he is infringing copyright. Even if he does not know that he is infringing copyright, there would still be infringement. REMEDIES FOR COPYRIGHT INFRINGEMENT 37. A copyright owner may seek the following remedies if his copyright has been infringed:(a) (b) (c) (d) Damages (monetary compensation) Account of profits Injunction Court order for infringing copies to be forfeited to the plaintiff or to be destroyed Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 87 DEFENCES TO COPYRIGHT INFRINGEMENT 38. Certain acts do not amount to copyright infringement:(a) Fair dealing for the purposes of research or private study If a person copies a reasonable portion of a work for research or private study, it would not be considered copyright infringement. The amount copied must not exceed one chapter or 10% of the total number of pages. Example:Justin photocopies 1 chapter of a business law textbook for his own study. Justin has not infringed copyright. (b) Fair dealing for criticism or review If a person reproduces a reasonable portion of copyrighted material for the purpose of criticism or review, it would not be considered copyright infringement. e.g. A person writing a book review in a newspaper takes portions of the book and includes it in his review. The writer of the review has not infringed copyright. (c) Fair dealing for the purposes of reporting current events If a person reproduces a reasonable portion of copyrighted material for the purpose of reporting current events, it would not be considered copyright infringement. e.g. A reporter writing a newspaper article on the Iraq war includes portions of an earlier newspaper article about the war. (d) Making a backup copy of a computer program A person does not infringe copyright by making a back-up copy of a computer program from an original that he owns for the purpose of using the backup copy in the even the original is lost or cannot be used. E-learning 39. Go to www.ipos.gov.sg and explore the website. 40. Answer the following questions: (a) What is a design? (b) How may a business go about protecting its design(s)? (c) What is a trade secret? (d) How may a business go about protecting a trade secret? Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 88 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW BUSINESS ORGANISATIONS (Part I) & (Part II) ___________________________________________________________________________ Jenni, Mandy & Belle have decided to open an ice cream & crepe café. Jenni has $50,000 in savings and will be investing $10,000 in the business and to save the balance for her son’s educational expenses. Mandy is a full time student and will not be involved in the running of the business; she however has a sum of cash and will be investing some of that money and to save the rest. Belle has no money to invest but she has experience in running an ice cream & crepe café having worked as a dessert chef for many years. Which form of business will be easiest for them to organise? Which will provide Jennie & Mandy the greatest protection for the money that they want to put aside and not invest into the business? Which form will be the best organisation for raising necessary operating capital if the money committed by Jenni & Mandy is insufficient? An understanding of the following lecture topics will help you to answer these questions and many more. 1. Which form of business organisation? 2. Sole proprietorship 3. Partnership 4. Limited Liability Partnership 5. Company Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 89 Business Organisations 1. The legal form of a business is very important to the successful operation of the business. A businessman owes it to himself to choose the form of business organisation that best suits his needs for a successful and profitable business venture. It is therefore important to be familiar with the various forms of business organisations and the legal requirements and formalities necessary to be complied with when doing business through these various forms. 2. Business organisations are distinguished by whether the business organisation is an incorporated or an unincorporated organisation. To decide which category to choose, the businessman should pose himself the question as to whether he wants to be separated from his business. The unincorporated business organisation does not have a separate identity but is merely an extension of the individual owner. The incorporated business organisation however has its own separate entity from the owner of the business with its own rights and obligations. 3. Sole proprietorship and partnerships are unincorporated business organisations; companies and limited liability partnerships are incorporated business organisations. SOLE PROPRIETORSHIP What it is 4. A sole proprietorship is a business owned by a single person. In order to carry on business as a sole proprietor, the business name must be registered with the Accounting and Corporate Regulatory Authority (ACRA) under the Business Names Registration Act (BNRA). Failure to register a business name may result in the business not being able to enforce its contracts – s31 BNRA. Registration 5. Under the Business Registration Act the sole proprietor must register his business by submitting an online application with the Accounting and Corporate Regulatory Authority (ACRA). Commencement – Easy and Convenient 6. A person wishing to commence business may do so under sole proprietorships as these are extremely easy to form – he just needs to register his business as stated above. Dissolution – Easy / Convenient 7. To dissolve a sole proprietorship, the sole proprietor need only send a notice of termination of notice to the ACRA within one month of cessation of business. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 90 Profits 8. All profits of the business belong to the sole proprietor. Management 9. The sole proprietor has full control and authority over the business and he will have less management conflict as he need not report to any other person. No Separate Entity 10. Sole proprietor owns the business and the liabilities of the business are his personal liabilities. Creditors may sue him personally for the debts of the business and his personal assets can be seized to satisfy any judgement debt. This means that if the business fails with debts the sole proprietor is liable to pay for all the debts and if he is unable to pay the debts he can be declared a bankrupt. No Continuity In Existence 11. If the sole proprietor dies the business dies with him. If the sole proprietor becomes mentally incapacitated or bankrupt the business will come to an end. Limited Capital 12. The sole proprietor may not be able to expand if he does not have enough funds and he may not be able to obtain large loans from the financial institutions. His ability to borrow will depend on his own personal assets to be used as security for loans. Limited Management Skill 13. The sole proprietor may not be able to expand his business as he may be limited by his management skills. PARTNERSHIP What It Is 14. A partnership is a business owned by more than one individual or company. Each partnership may have between 2 to 20 partners. Just like a sole proprietorship, the business name of the partnership must be registered under the BNRA. A partnership is usually created by a partnership agreement that may be oral or in writing. The partnership agreement will also set out the rights and obligations of each partner. The partners are collectively referred to as a firm and can be sued in the firm name. A partnership is an unincorporated business organisation and is not a separate legal entity from its partners. 15. Partnerships are governed by the Partnership Act (Ch 391). The Partnership Act section (1) defines partnership as “a relationship which subsists between persons carrying on a business in common with a view to profit”. “Persons” here also include companies; this means that two companies may form a partnership to carry on a business together. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 91 Registration 16. The partnership has to be registered with ACRA e.g. Lim Peng San & Co. Partners are collectively called a firm; the firm can now sue and be sued in its own name. Commencement 17. Commencement is easy and convenient. Dissolution 18. A firm may be dissolved in accordance with the provisions of the partnership agreement signed between the partners. In this regard the partnership should provide in the partnership agreement the ways in which a partnership is dissolved. 19. A partnership may be dissolved in the following ways: a) b) c) d) e) f) g) h) By one partner giving a notice to the other partners to dissolve the partnership; If the partnership is set up for a fixed term and upon expiry of the fixed term; If the partnership is set up for a specific project and upon termination of that specific project; If the partnership agreement states that dissolution will take place upon a certain event happening and that event has occurred; One of the partners becomes bankrupt; One of the partners dies; The partner’s share of the partnership property is charged for his own personal debts; If an event occurs that makes the partnership business unlawful. Profits 20. The profits of the partnership will be distributed in accordance with the partnership holdings of the partners in accordance with the partnership agreement. Management 21. All partners have full control over the running of the business. Partners, by agreement share responsibility for managing the business. Unless it is agreed upon a partners is not considered an employee and is not entitled to wages for the services he or she renders to the partnership. No Separate Entity 22. A partnership is an unincorporated entity; it has no separate legal entity of its own. Each partner is personally liable for all debts and legal obligations of the business. Even if the losses of the business are more than the individual partner’s share in the business, the partner is liable for the losses because each partner has unlimited liability. 23. Each partner is an agent for all other partners; when a partner acts with either actual or implied authority, all other partners become liable for his / her acts. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 92 24. Partners have joint and several liability, that means that a person who has a claim against the partnership can choose to sue either all of the partners together or any individual partner. No continuity in existence 25. Partnership ceases to exist upon the death or bankruptcy of the partners. Limited Liability Partnership What It Is 26. It is a partnership but is an incorporated entity registered with ACRA and governed by the Limited Liability Partnerships Act. There must be a minimum of 2 partners with no maximum limit on the number of partners. Registration 27. LLP has to be registered with ACRA and registration is quite simple. Commencement 28. Commencement is easy. Liability of Partners 29. The partners generally have limited liability for the debts of the business. Partners are only required to contribute to the extent of their investment in the business and are not liable for any debts that exceed their investment in the business, unlike an ordinary partnership. This is the most important difference between the two kinds of partnership. Partners generally cannot be sued individually; the LLP can sue and be sued in its own name. No joint and several liability of the partners. Property of an LLP belongs to the partnership; the property is not the personal property of individual partner. 30. Similar to an ordinary partnership a partnership agreement entered into between the partners govern the relationship amongst the partners; profits are distributed in accordance with the partnership agreement; the relationship between the partners will be in accordance with the provisions of the partnership agreement. 31. Dissolution of a LLP is similar to the dissolution of a company and will be discussed below. COMPANIES What It Is 32. A company is an incorporated business organisation. Upon incorporation a company becomes a separate legal entity having an existence of its own apart from its members. The company has its own rights and obligations. It can own assets in its own name and the assets do not belong to its Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 93 members. The members of the company are not liable for any losses of the company. Creditors cannot sue the members of the company. 33. The company will continue to exist on its own apart from its members and even if all its founding members have died or its members have changed, the company will continue to exist i.e. it has perpetual existence. It will only cease to exist when it is wound up either voluntarily by the members of the company or involuntarily by creditors – i.e. the company’s business is closed down, its assets sold off, the creditors paid and the balance assets distributed to the members. 34. The Companies Act governs companies. Any person 18 years old or above can set up a company. To incorporate a company, an application must be filed at ACRA. Incorporation is more complex than setting up a sole proprietorship or a partnership. 35. In the case of companies, there are also more legal formalities to comply with. For example, companies must have at least one director who is ordinarily resident in Singapore. In addition, a company secretary must be appointed within 6 months of incorporation and an auditor within 3 months of incorporation (with certain exceptions). Annual returns will have to be filed and annual general meetings conducted once every year. Types of Companies Company Limited by Shares Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 94 36. Company limited by shares is the most common type of company in Singapore. The members of the company hold shares in the company. The liability of members is limited to the amount unpaid on their shares. It can be either a private or public company. 37. The memorandum and articles of a private company limited by shares limit the number of members to not more than 50. They also restrict the right to transfer the company’s shares. 38. The name of the company will contain the words “Private Limited” e.g. “XYZ Pte Ltd”. Exempt Private Companies 39. Exempt Private Companies do not have more than 20 members and the shares cannot be owned by another company. 40. However, they are allowed to grant loans to their directors and director-related companies. Audit Exemption for Small Companies 41. A companies qualifies as a small company if: (a) (b) It is a private company throughout the financial year in question; and It meets at least 2 of 3 of the following criteria for immediate past two financial years: (i) Total annual revenue ≤ $10 million; (ii) Total assets ≤ $10 million; (iii) Number of employees ≤ 50 Public Companies 42. Public companies may be listed or unlisted. Listed companies are companies where their shares are quoted on a stock exchange. 43. If these public companies are limited by shares, their names will have the word “Limited” e.g. “XYZ Ltd”. Incorporation 44. All companies are required to lodge their memorandum and articles of association with ACRA as part of the incorporation process. 45. Companies can choose to design their own articles. If a company does not design its own articles, the articles found in the 4th Schedule of the Companies Act (Table A) will apply by default for companies limited by shares. 46. An incorporated company enjoys perpetual succession and the liability of a company’s members will be limited. It may have a common seal. 47. An incorporated company enjoys a separate legal personality. Therefore, it is able to:- Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 95 (a) (b) (c) Own land and property; Enter into contracts with its directors and members; and Sue and be sued in its own name. Piercing the Corporate Veil 48. However, the common law can choose to ignore the separate legal personality of the company if the company is set up for the purpose of avoiding an existing legal obligation or where the company is used to commit fraud. 49. The company and its shareholders or directors are treated as one and the director or shareholder can be made personally liable for the debts and obligations of the company. The company can be made liable for the personal obligations of its shareholders or directors. Directors 50. Business of a company is normally managed by the directors. The duration of the office depends on the Articles. 51. It is possible to have a director appointed for life in private companies. For public companies and subsidiaries of public companies, the director must vacate office once he reaches 70 years Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 96 of age. Members may re-appoint him as a director at the AGM. However, the appointment can only last until the subsequent AGM. 52. Other modes of vacating the office include resignation, retirement, removal from office, upon occurrence of certain events specified in the Articles and death. Duties of a Director Duty to avoid conflict of interest 53. Under the common law, any conflict of interest must be disclosed. This is a strict rule which requires disclosure even if company suffers no loss. A similar rule exists under section 156 of the Companies Act. 54. Under section 156 of the Companies Act, if a director has a material interest in a contract, he must declare his interest to the other directors before the contract is made. The director must also disclose any conflict of interest that arises as a result of him holding any office or owning any property. A failure to disclose is an offence under the Companies Act which will result in a fine or an imprisonment. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 97 Duty to act for Proper Purpose 55. Directors must exercise their powers for proper purposes. When a director is making a decision, he has to consider how the transaction benefits the company and whether he is putting any other person’s interest above that of the company’s. Remedies 56. The remedies include:(a) (b) (c) (d) Damages; Account of profits made by director or return of property obtained in breach of duty; Court may declare any act done or any resolution passed to be invalid; If the company enters into a contract with a third party, the contract may be set aside by the company, if the third party knows or ought to have known of the breach; and (e) Criminal liability e.g. fine / imprisonment under section 156 (Failure to disclose interest in transactions) and section 157 (breach of director’s duty) of the Companies Act 57. Section 157 of the Companies Act states that directors must at all times use reasonable diligence in the discharge of his duties. 58. At a minimum, directors are expected to:(a) (b) (c) (d) Acquire a basic understanding of the business of the company; Continually keep themselves informed about the activities of the company; Monitor the company’s business affairs and attend board meetings regularly; and Keep themselves familiar with the financial status of the company by regularly reviewing the company’s financial statements. Company Secretary 59. Every company must have at least 1 company secretary. The company secretary must be a natural person and must have his principal place of residence in Singapore. 60. Directors are responsible for appointing company secretary. They must ensure that the person appointed has the required knowledge and experience to carry out his functions. 61. It is possible for a director to also be the company secretary unless the company has only 1 director. The sole director cannot be both the director and the company secretary. 62. The company secretary of public companies must meet certain prescribed minimum qualifications:(a) (b) (c) (d) Held the office of company secretary for at least 3 out of the preceding 5 years; Qualified lawyer; Public accountant; or Member of the Institute of Chartered Secretaries and Administrators Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 98 63. The duties of a company secretary include:(a) (b) (c) (d) (e) (f) (g) Maintaining the registers of the company; Arranging for board and general meetings; Preparing minutes of meetings; Preparing and submitting annual returns; Filing documents and returns required by ACRA; Attending to the issue and transfer of shares; and Keeping the company seal and affixing it to legal documents. Financial Difficulties Liquidation 64. Liquidation (winding up) is process where a liquidator sells off the company’s assets and distributes the proceeds to the company’s creditors and members. At the end of a liquidation, the company is dissolved and it ceases to exist. 65. There are two types of winding up, voluntary and compulsory. 66. A voluntary winding up is commenced by the members of the company passing a special resolution for the company to be wound up. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 99 67. If the company is solvent, the winding up will proceed as a members’ voluntary winding up. If the company is insolvent, the winding up will proceed as a creditors’ voluntary winding up. 68. A company can be compulsorily wound up via an order of court when a person applies to the court to ask for the company to be wound up. A person who has a standing to make the application include:(a) The company itself; (b) A creditor of the company (contingent or prospective creditor); (c) A contributory (a person who is liable to contribute to the assets of the company in the event of a winding up e.g. a shareholder); (d) The liquidator; (e) The judicial manager of the company; (f) The Minister on certain grounds 69. The grounds for winding up a company include:(a) (b) (c) (d) (e) The company is unable to pay its debts; The court is of the opinion that it is just and equitable that the company be wound up; The company has passed a special resolution for it to be wound up by the court; The company does not commence business within 1 year from its incorporation; The period fixed for the duration of the company by the memorandum or articles expires; and (f) The company is being used for an unlawful purpose or against national security or interest. Receivership 70. Receivership is a process where the secured creditor(s) or the court appoints a receiver to collect the assets under the charge, sell the assets, pay the creditor(s) who appointed him and return any surplus to the company. 71. A secured creditor can appoint a receiver upon the occurrence of events specified in the loan document e.g. default in repayments by the company while the court will appoint a receiver if the security is in jeopardy. 72. The appointment of a receiver does not mean that the company will cease to exist. Once the process of receivership has been completed, the company can continue to trade. Judicial Management 73. Judicial management is a process used to rescue a financially troubled company from a premature liquidation. 74. There are 2 main requirements:(a) Company is or will be unable to pay its debts; AND (b) Placing the company in Judicial management is likely to achieve one or more of the following:i. The survival of the company as a going concern; Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 100 ii. The approval of a compromise or scheme of arrangement under Section 210 of the Companies Act; or iii. Judicial management will help ensure a more advantageous realisation of the company’s assets than if the company were wound up. Scheme of Arrangement 75. Scheme of Arrangement is a legally binding plan under which the creditors’ rights against the company are rearranged or extinguished. 76. The implementation of a scheme of arrangement does not end the company’s existence. E-learning 77. Go to www.acra.gov.sg and explore the website. 78. Answer the following questions:(a) Provide two examples of persons who are exempted from registering their business under the Business Registration Act. (b) John, a university student, operates a website selling comics for profit. Would John be required to register his business with ACRA? (c) Explain the main differences between a company and a partnership. (d) List some of the questions to consider when deciding upon which business structure to use. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 101 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW _________________________________________________________________________ LAW OF AGENCY ___________________________________________________________________________ 1. THE MEANING OF AGENCY 2. THE FEATURES OF AGENCY 3. CREATION OF AGENCY 4. EFFECTS OF AGENCY – RELATIONSHIP BETWEEN THE PARTIES 5. TERMINATION OF AGENCY Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 102 THE MEANING OF AGENCY IN LAW AND HOW IT IS CREATED 1. Agents play an important role in commercial and business transactions. Any person, whether it be an individual, a firm or a company can appoint an agent to act on his behalf in a particular matter. The role of agents in commerce and business is to negotiate and make contracts on behalf of someone else known as the principal. They play the role of a "middleman" because they possess special skill, expertise, or have special knowledge of a particular market. In a sophisticated economy, commercial and business transactions would be impossible if businessmen could not employ the services of travel agents, insurance brokers, forwarding agents, estate agents and the like and were expected to do everything themselves. DEFINITION OF AGENCY 2. An agent is a person who acts on behalf of another person known as the principal and is empowered to make legally binding contracts between his principal and third parties. An agent's power to bind his principal is referred to as the agent's authority. AGENCY IN LAW vs COMMERCIAL AGENCY 3. It is very common to find persons described as “sole agent” or “representative”. Sometimes, such a person, although described as an "agent" or "representative" is not really an agent in law at all e.g. a car dealer may be described as a “sole agent" or “authorised agent” for a particular car manufacturer. He is in fact, a reseller or a distributor of that product. The car dealer, is normally not the agent of the manufacturer in the strict legal sense as the buyer of the car has a contract with the dealer and not with the car's manufacturer. The dealer buys his cars from the manufacturer in order to resell them and is directly liable as a principal on his contract with the buyer of the car. THE CREATION OF AN AGENCY RELATIONSHIP 4. In general, an agent may have the authority to bind his principal in one of 3 ways:(a) (b) (c) Actual authority (express or implied) Apparent authority Agency created by ratification ACTUAL AUTHORITY 5. An agent has actual authority if his principal has given him the permission to carry out the act in question. Actual authority may be express or implied. Actual authority is express when the principal has given his authorization orally or in writing – for example, where the directors of a company pass a written resolution authorizing an employee to sign cheques on the company’s behalf, or where the seller of a house engages a property agent and instructs him to negotiate with potential buyers. 6. An agent’s actual authority need not always be express. Sometimes, it may be implied from the circumstances. For example, if a person is appointed to a particular position, he will be taken to have been given the authority to do things which are within the usual scope of his position or which is reasonably incidental to the discharge of his duties. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 103 United States Trading Company Pte Ltd v Philips Electronics Singapore Pte Ltd (2010) T was employed by the defendants as their purchasing manager. As purchasing manager, T was responsible for ordering aluminium on behalf of the defendants. T requested for a loan from the plaintiffs, one of the defendant’s suppliers. Unknown to the plaintiffs, T was perpetrating a fraud on them and the defendants never received the money advanced by the plaintiffs. The plaintiffs eventually sued the defendants for the money they had advanced. Held:T did not have any express actual authority to borrow money on the defendants’ behalf. Neither did T have any implied actual authority to borrow money. T was employed as a purchasing manager. It was not part of his usual function to borrow money on the defendant’s behalf. APPARENT AUTHORITY 7. In cases of actual authority (whether express or implied), the focus is on whether the principal has given the agent the authority to do the act in question. However, there may be circumstances where although an agent may not have been given the authority to do an act, he appears to third parties to have the necessary authority. Such an agent is said to have apparent authority. Agency by estoppel refers to a situation where a third party relies on an agent’s apparent authority to deal with the agent. 8. For agency by estoppel to arise, there must be:(a) A representation by the principal, either by words or by conduct, that the agent has the authority to act on its behalf. In other words, the principal must have done or said something that would create the impression that the agent was authorised to do the act in question. Such a representation may even be created by a principal failing to take action even though his agent is acting in a way that would suggest to others that he was authorized; AND (b) The third party must have relied on the representation in agreeing to deal with the agent – i.e. the third party made the contract under the impression that the agent was authorized. Once a third party relies on the words or actions of the principal and contracts with the agent, the principal cannot later say that the agent had no authority to enter into the contract. He will be bound by the contract. Freeman & Lockyer v Buckhurst Park Properties Ltd (1964) A company was set up by two persons, one of whom was an individual named Kapoor. Kapoor went about acting as if he were the managing director even though he was never appointed as one by the company. On behalf of the company, Kapoor engaged a firm of architects. The architects provided certain services but were not paid. When they sued the company, the company argued that Kapoor did not have the authority to engage the architects. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 104 Held:The company knew that Kapoor was acting as if he were the managing director but did not do anything about it. Therefore, by its conduct, the company had made a representation that Kapoor was authorised to act on its behalf. The architects had relied on the company’s representation and had agreed with Kapoor to perform the services for the company. The company therefore could not deny Kapoor’s authority and was liable for the architects’ fees. AGENCY BY RATIFICATION 9. An agent may attempt on behalf of a principal to do an act which is not authorised. Generally, in such a case, the principal for whom the agent claims to act has the choice of either rejecting the transaction or ratifying it. 10. Ratification takes place when the principal adopts, accepts or confirms (i.e. treat as authorised) a previously unauthorised contract made on his behalf. Once the agent’s unauthorised act is ratified by the principal, the law treats the act as though it had all along been authorised. Ordinarily, this means that the principal and the third party are bound by the contract made by the agent. Example:Paul instructs Arthur to buy goods on his behalf provided the goods do not cost more than $500. Arthur orders goods priced at $700 from Tim and informs Tim that he is placing the order on Paul’s behalf. Since Arthur is not authorised to buy goods for $700, Paul may choose to reject the contract. However, if Paul agrees to take the goods, he would have ratified the unauthorised contract made by Paul. Paul and Tim would be bound under the contract. 11. Ratification may be express or may be implied from the principal’s conduct. Implied ratification may arise when the principal does an act which shows that he intends to treat the contract as binding. For example, where an agent without authority orders goods and the principal later uses the goods, he will be taken to have impliedly ratified the contract. Conditions for Effective Ratification 12. In order for the principal’s ratification to be effective such that he and the third party are bound, the following conditions must be satisfied:(a) The agent must disclose the fact that he is acting on behalf of a principal If the third party is not aware of the existence of the principal, the principal cannot ratify the contract. Keighley, Maxsted & Co v Durant (1901) K authorised one Roberts to buy wheat on its behalf at a certain price. Roberts exceeded his authority and bought the wheat at a higher price from Durant. Roberts ordered the wheat in his own name without disclosing the fact that he was acting on behalf of K. K initially ratified the contract and agreed to take the wheat that Roberts had ordered. Later however, K failed to take delivery of the wheat. Durant sued K for breach of contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 105 Held:The court held that K’s ratification was not effective as Roberts had ordered the wheat in his own name without disclosing that he was acting on K’s behalf. K was therefore not liable to Durant under the contract. (b) The principal must be in existence at the time the agent made the unauthorised contract In general, a person cannot ratify a contract unless he existed at the time when the agent made the contract. This requirement is usually not a problem where the principal is a natural person. (c) Ratification must be done within a reasonable time or within the time fixed for performance Where the contract fixes a time for performance, the principal must ratify before that time. If no specific time is fixed, the principal must ratify within a reasonable time after he knows of the unauthorised transaction. EXAMPLE:Arthur, without authority, orders goods on Paul’s behalf from Tim. The goods are to be delivered by May with payment to be made on delivery. Paul cannot ratify in July as the time for performance has come and gone. EFFECTS OF AGENCY – RELATIONSHIP BETWEEN THE PARTIES Principal and third party 13. Where the agent is given the permission to act on his principal’s behalf (actual authority), or where a principal ratifies an unauthorised act, a contract will be created between the principal and the third party. The principal and the third party will be bound by the contract made by the agent. 14. Similarly, when a principal acts in such a way that he is estopped from denying his agent’s authority, a contract will be created between the principal and the third party. The principal and the third party will be bound by the contract made by the agent. Agent and third party 15. Most of the time, an agent will not be personally liable on the contract which he makes on his principal’s behalf. There may, however, be certain occasions where the agent is personally liable. This would depend on the manner in which the agent makes the contract:(a) Name of the principal is disclosed An agent who makes a contract with a third party and discloses the name of his principal will not be liable on the contract. The law treats the contract as one between the principal and the third party. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 106 Example:Paul authorizes Arthur to buy a car on his behalf. Arthur buys a car from Tim and informs Tim that he is buying on behalf of Peter. Arthur will not be liable on the contract. The law treats the contract as between Peter and Arthur. (b) The existence but not the name of the principal is disclosed An agent who makes a contract with a third party, disclosing the existence but not the name of the principal will likewise not be liable on the contract. The law treats the contract as between the principal and the third party. The agent needs only to make it clear that he is representing somebody else. Example:Paul authorizes Arthur to buy a car on his behalf. Arthur buys a car from Tim and informs Tim that he is buying on behalf of another person but does not mention Paul’s name. Arthur will not be liable on the contract. The law treats the contract as between Paul and Tim. (c) The doctrine of undisclosed principal If an agent is authorised to make a contract on his principal’s behalf, but proceeds to do so without telling the third party about the existence of his principal, he will be personally liable on the contract. The reason for this is that the agent has led the third party to believe that he is contracting personally and not on behalf of another person. Persons who are acting as agents should therefore be careful to state in their contracts that they are merely acting as agents. However, if the third party discovers the existence of the principal, he may choose to sue the principal instead of the agent. He must choose between the agent and the principal and cannot sue both. Example:Paul authorises Arthur to sell a painting on his behalf. Arthur sells the painting to Tim in his own name without informing Tim that he is acting on behalf of a principal. If Paul fails to deliver the painting, Arthur will be personally liable to Tim. From Tim’s point of view, he is buying the painting from Arthur and is dealing with Arthur only. If Tim discovers that Paul is the actual seller of the painting, he may choose to sue Paul instead of Arthur. What about the principal? Can he enforce the contract made by his agent if the agent does not disclose his existence? Under the doctrine of undisclosed principal, an undisclosed principal will be able to enforce the contract if the following conditions are satisfied:(a) (b) The agent has actually been authorised by the principal to make the contract. The terms of the contract do not create the impression that there can be no other party to the contract. For example, in a contract to sell goods, the agent must not be described as the “owner” of the goods. This would create the impression that there can be no other party to the contract. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 107 (c) The identity of the agent must not be crucial. If the third party would have dealt only with the agent, the undisclosed principal cannot enforce the contract. Example:Paul authorises Arthur to sell a painting on his behalf. Arthur sells the painting to Tim in his own name without informing Tim that he is acting on behalf of a principal. If Tim fails to pay for the painting, Paul will be able to enforce the contract and sue Tim provided Arthur did not describe himself as the “owner” of the painting and provided Arthur’s identity was not so important to Tim that he would not have bought the painting from anybody else. (d) Breach of warranty of authority An agent may be personally liable if he falsely claims that he has the authority to act when he does not. The third party can sue the agent for breach of warranty of authority. The agent will be personally liable for any loss which is suffered as a result of his lack of authority. The agent is liable as he has promised (warranted) that he has the authority to act and this promise has turned out to be false. Richardson v Williamson (1871) The directors of a building society borrowed money on its behalf from X. The directors represented to X that they were authorised to borrow money on behalf of the society. The directors were in fact not authorized. Held:The directors were liable for the amount of the loan. They had falsely promised that they were authorised to act on behalf of the society. This was a breach of warranty of authority. Principal and agent Duties of an agent 16. The law says that an agent owes various duties to his principal. Some of these duties include:(a) A duty to follow the instructions of the principal An agent is under a duty to act in accordance with the instructions of his principal. If he fails to follow his principal’s instructions, he may be liable for any losses that result. Bertram Armstrong & Co. v Godfray (1830) The agent was a stockbroker. His principal instructed him to sell certain stock when the market price reached a certain level. The agent did not follow the instructions and held on to the stock. When the market fell, the agent was forced to sell the stock at a loss. Held:The agent had failed to follow his principal’s instructions. He would be liable for his principal’s loss and would have to pay the difference between the price at which he was told to sell and the price at which the stock was eventually sold. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 108 (b) Duty to act with care and skill The law requires an agent to act with reasonable care and skill. In general, a higher standard of care is expected of persons who claim to have special knowledge or skill as compared with ordinary lay persons who do not. (c) Duty not to accept bribes An agent is under a duty not to accept any bribes in relation to his principal’s affairs unless his principal’s consent is first obtained. If the agent accepts a bribe, the principal can sue the agent to either recover the bribe or for any loss that results from the transaction (but not both). In Singapore, an agent that receives a bribe may also be charged under the criminal law and be sentenced to jail or a fine. Mahesan v Malaysia Government Officers’ Co-operative Housing Society Ltd (1979) Mahesan (agent) was a director and secretary of a society (principal). The society wanted to purchase land. In exchange for a bribe of $122,000 from one Manickam, Mahesan arranged for the society to buy the land from Manickam at a price of $944,000 even though the land could have been bought at a much lower price of $456,000. Held:The court held that the society was entitled to recover either the bribe of $122,000 or the loss that it suffered – i.e. $944,000 less $456,000 and related costs. (d) Duty to avoid a conflict of interest The relationship between a principal and an agent is a fiduciary one – i.e. it requires the parties to exercise their utmost good faith. An agent must not let his personal interests conflict with his duty to his principal. If he does so, the principal may sue the agent for any losses suffered. The principal may also claim any profit that the agent makes from the transaction Armstrong v Jackson [1917] 2 KB 822 An agent was appointed to buy some shares in a certain company for his principal. The agent owned some of these shares himself. Instead of buying the shares from the open market, the agent sold the principal the shares which he owned. Held:The court held that the agent had allowed his personal interests to conflict with the interests of his principal. Thus, he was liable to account to his principal for the profit he had made from selling his own shares. (e) Duty to account for money or goods received on behalf of the principal An agent that receives money or goods on behalf of his principal has a duty to account for the money or goods. He should maintain proper records and keep his principal’s money or goods separate from his own. For example, lawyers are required to maintain 2 Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 109 separate bank accounts – one for the lawyer’s own money and the other for the client’s money which the lawyer receives as an agent for his client. Rights of an agent 17. An agent also has various rights against his principal:(a) Right to remuneration / commission Whether an agent is entitled to any remuneration or commission depends on the terms of the agreement between the agent and his principal. The agreement may expressly provide for the payment of remuneration. It may also be possible to imply a right to claim remuneration. (b) Right to be reimbursed for expenses and liabilities In general, an agent is entitled to be reimbursed for all reasonable expenses or liabilities incurred in carrying out his principal’s instructions. (c) Right of lien A lien is the right to retain possession of another person’s property pending payment of a liability. If the agent has in his possession goods belonging to the principal, he has a right to hold on to the goods and not release them back to the principal until all his remuneration or claims in relation to the agency have been paid. TERMINATION OF AGENCY 18. An agency relationship may be terminated by:(a) By the agreement of both parties – The principal and agent may agree that the agency be terminated. (b) By revocation – The principal may revoke (withdraw) his agent’s authority thereby terminating the agency. If the principal revokes his agent’s authority, he should also give notice to third parties who have dealt with the agent before. (c) By the death, insanity or bankruptcy of the principal or agent. E-learning 19. Go to www.singaporelaw.sg and click on “Laws of Singapore” -> “Commercial Law” -> “Ch 15 Law of Agency” 20. Read the materials on the website and answer the following questions:‐ (a) Explain the concept of breach of warranty of authority; and (b) Explain the concept of undisclosed agency. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 110 NANYANG POLYTECHNIC SCHOOL OF BUSINESS MANAGEMENT BUSINESS LAW Law of Tort 1. Tort of Negligence 2. Duty of Care 3. Standard of Care 4. Causation 5. Remoteness 6. Vicarious Liability Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 111 INTRODUCTION 1. Tort Law is a wrongful act, not including a breach of contract or trust, that results in injury to another's person (negligence, assault & battery), property (trespass), reputation (defamation) and for which the injured party is entitled to compensation. 2. A person who commits a tort is called a tortfeasor. Tort of Negligence 3. One of the most common torts that a business or an individual may be sued by others due to their careless conduct (negligence). 4. There are 4 requirements that a Plaintiff has to fulfil in order to succeed in the claim of negligence against the defendant:(a) (b) (c) (d) The defendant must owe the plaintiff a duty of care; The defendant must have breached his duty of care to the plaintiff; The defendant’s breach of duty must have caused the plaintiff loss; and The plaintiff’s loss is not too remote. Duty of Care •Factual foreseeability •Reasonable foreseeability – would the defendant know that his actions Foreseeable? would cause harm to the Plaintiff? Proximate? Policy •Legal Proximity •Closeness of the relationship between the parties: physical closeness based on space and time, causal connection between the Df’s act and the Pf’s loss •Are there policy considerations to negate the establishment of a Duty of Care? 5. The test for duty of care was established in the Singapore case of Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency (“DSTA”) [2007]. 6. The first step is a preliminary inquiry – Was it factually foreseeable that the defendant’s actions/omissions would cause damage to the plaintiff? Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 112 7. This is followed by a 2-stage test:a) Was there a close and proximate relationship between the plaintiff and the defendant? b) Even if there is a close and proximate relationship, are there any policy considerations that should negate the duty of care? – e.g. see Hill v Chief Constable of West Yorkshire (1989) Standard of Care 8. Assuming that the Plaintiff is able to establish that the Defendant owed him a duty of care, he must then convince the court that the defendant had breached the standard of care. 9. The Defendant would have breached the standard of care if he had done something that a reasonable man would not have done or had omitted to do something that a reasonable man would have done. 10. If the defendant has a particular skill or knowledge (e.g. a doctor), he will be judged according to what another person with a similar level of skill or knowledge would have done (e.g. a doctor). 11. In deciding what a reasonable person would have done, court will balance the following factors:a) Likelihood of danger; b) Severity of danger if it results; and c) Cost of averting the danger Causation 12. The damage suffered by the Plaintiff must have been caused by the Defendant’s breach of duty. 13. The test for causation is the “but-for” test – i.e. would the plaintiff still have suffered harm if the defendant was not negligent? Barnett v Chelsea & Kensington Hospital Management Committee (1969) The patient was taken to the hospital for persistent vomitting. The doctor refused to see the patient and sent him away. The patient subsequently died. Evidence showed that patient had arsenic poisoning and had arrived at the hospital at a very late stage. Even if treatment was given, his likelihood of survival was very slim. Held: – Doctor’s negligence did not cause the plaintiff’s death. Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic Page 113 14. Sometimes the chain of causation may be broken by the plaintiff’s subsequent actions (referred to as “novus actus interveniens”). This usually involves actions that are unreasonable, deliberate or reckless. McKew v Holland and Hannens and Cubitts (1969) The Plaintiff injured his leg due to his employer’s negligence. Subsequently, Plaintiff tried go down a steep flight of steps without any aid and suffered further injury. Held: – Defendants not liable since it was the plaintiff’s subsequent unreasonable behaviour that caused the injury. Remoteness 15. Even if the defendant has breached his duty of care, he will not be liable for all losses that result. If a loss is too remote, the defendant will not be liable. The test for remoteness is whether the loss is reasonably foreseeable. Defences 16. Contributory Negligence – If the plaintiff himself was negligent and this contributed to the loss, the damages that he can claim will be reduced accordingly. 17. Voluntary Assumption of Risk – If the plaintiff by his actions voluntarily takes on the risk that he may be harmed by a tort, this can be used as a defence against liability. 18. Exclusion of Liability – Notices that attempt to exclude liability for death or personal injury caused by negligence are void under the Unfair Contract Terms Act. For notices that exclude liability for negligence resulting in other losses such as economic loss, the notice is valid if it is reasonable – Unfair Contract Terms Act. Vicarious Liability 19. An employer can be held to be legally liable for a tort committed by his employee. This is known as the employer’s vicarious liability. 20. In order to be vicariously liable, it was be shown that:(a) The employee has committed a tort; and (b) The tort was committed by the employee in the course of his employment - The Relevant test here is whether there is a close connection between the nature of the employment and the employee’s wrongdoing. ..... Business Law 2017/2018 Semester 2 Copyright © 2017 Nanyang Polytechnic THE END ..... Page 114

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Vndungu11
School: Purdue University

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Running Head: BUSINESS LAW

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Reflection Report: Business Law
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Institutional Affiliation

BUSINESS LAW

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Reflection Report: Business Law

The contract applied was purchasing goods at a shop in a mall that is registered and
containing the trading licenses. This contract was formed by the interaction between the shop
owner and the buyers in this case me. As the buyer, I bought a set of various good at the shop
and paid the amount required by the seller. According to the law in Singapore, the seller and the
buyer are bound by the contract which allows the seller to sell goods and services and on the
other hand, allows the buyer to purchase their choice of goods. Although the transaction went
smoothly, I was unaware of the rules regarding returning to good after purchasing.
Unfortunately, I needed to return some of the good bought as ...

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