What are Contracts?
Contracts are agreements between two or more parties that give rights to correlative rights and obligations enforceable by law. Tracing back to Singapore’s colonial history, it is no surprise that its contract law is based on English common law. While Malaysia and Brunei moved to codify their laws on contract following their independence from England, Singapore’s Parliament made no such action. The laws on contract consequently remain governed by judge-made rules or case law, although some have been amended by statutes that are largely English as well, evident from that 13 commercial statutes originating from English common law that were incorporated as part of the law in Singapore through the Application of English Law Act.
What are the Requisites for a Valid Contract?
Contracts must have the following elements to be legally enforceable:
- Meeting of the minds manifested through an offer and acceptance
- Payment of consideration
- Intent to enter into legal relations
- Capacity to contract for all parties
Meeting of the Minds
The first element must be broken down into two concepts: offer and acceptance. For an offer to exist, three requirements must be satisfied. The offer must:
- Contain the terms of exchange;
- Indicate the offeror or offering party’s willingness to be bound by the terms of the contract; and
- Confer on the offeree or accepting party the power to compel the offeror to perform the obligations under the contract upon the acceptance of the said offer.
Meanwhile, an acceptance is an unequivocal agreement to the terms of the offer which must be conveyed to the offeror before it can take effect. It does not require a certain form and can generally be written or verbal. Silence may not be considered as acceptance except in certain cases such as when it was expressly stipulated in the contract that silence amounts to acceptance.
Consideration supports the offer, which must have value and is expected to be delivered in exchange for the product or service promised by the offeror. It may consist of a benefit on the part of the offeror or a detriment on the part of the offeree. Notably, consideration does not need to be sufficient and is not legally required to be commensurate to the value of the offer.
Contracts that are not supported by consideration can still be binding under the doctrine of promissory estoppel. This applies to instances where one party makes a promise that he or she will not enforce his rights under the contract if it would result in inequity. A party may seek to enforce an offer or a promise even if the same is not supported by the compliance of the other party’s fulfillment of their obligation if there is:
- Clear and unequivocal promise
- Reliance on the said promise by the promisee or the party that accepted and is now seeking to enforce the offer
- Inequity, which usually refers to a detriment suffered by the promisee and other factors
The effect of promissory estoppel is likened to a “shield” rather than a new cause of action on its own. This means that the aggrieved party can use the doctrine of estoppel as a defense against the offending party’s action to enforce his rights under the contract.
Intent to Enter into Legal Relations
The will of the parties is central to the third requirement, and it must be evident that the parties intend to create legal relations. The determination of the parties’ intention is based on the facts relevant to each unique case.
Generally, commercial arrangements enjoy a presumption that parties intended to be legally bound. This presumption can be trumped with an express declaration that the parties intended the contrary, which can be shown in a memorandum of understanding, a letter of intent, or an honor clause, among others.
Meanwhile, there is an opposite presumption in cases of domestic or social arrangements and courts will generally presume that the parties did not intend to create legal relations unless the contrary is proven.
Capacity to Contract for All Parties
For a contract to be valid, parties must have the competence or capacity to contract. A contract may not be enforced if it was made with a party who is a minor, person of unsound mind, or an inebriated individual except in specific circumstances, e.g. when a minor is given “necessaries”, said minor must pay for the same under the Section 3(2) of the Sale of Goods Act.
On the other hand, contracts with companies are always enforceable, as they are considered “persons” capable of entering into contracts under the law. Even contracts made before the incorporation of a company may be ratified and adopted.
Under the law, parties must freely give their consent to the contract for the same to become binding. If there was coercion to induce another party to agree to the contract through the employment of duress, undue influence, or unconscionable conduct, the contract may be voidable. In these instances where there was vice in the consent of the aggrieved party through the offending party’s improper conduct or “unconscionable bargains” where they exploit a party’s weakness, the innocent party may elect to rescind the contract.
Rescission will release the parties from their obligations under the contract and restore them to the state they were in before the contract was constituted. However, the right to rescind may not be exercised if:
- The innocent party affirms the contract.
- Innocent third parties have gained vested rights under the contract.
- It is impossible for the parties to be restored to their original state prior to the contract.
- An excessive amount of time has lapsed since the parties entered into the contract unless there was fraud.
How Can Parties Be Discharged from a Contract?
Contracts end in ways, and not always through the fulfillment of their obligations under the contract as we have briefly discussed earlier. Parties may be discharged from the contract in various ways, namely:
- Discharge by performance
- Non-performance or defective performance
- Discharge by agreement
- Discharge by frustration
Discharge by Performance
Parties are released from their contractual relations when they have performed all their obligations in the manner stipulated under the contract. Ideally, the performance must be precisely as agreed, but trivial or unsubstantial defects in performance may be overlooked and deemed as “de minimis” which does not affect a party’s fulfillment. In the event that full performance can only be made with the other party’s cooperation, the mere tender of performance followed by the other party’s refusal to accept is generally considered as full performance resulting in the discharge of the contract.
Non-Performance or Defective Performance
If a contractual obligation was not performed or performed but in a defective manner that is non-trivial, the law provides remedies depending on the nature of the breach. We discuss this extensively in our article on contractual breach, which you may access here.
Discharge by Agreement
There are lawful excuses that can justify the non-performance or defective performance of an obligation, and the first type is discharge by agreement. Parties are just as free to release each other from the contract as they are to enter into the same contract at the onset. They may negotiate through an existing clause in the contract that specifies conditions for the termination of the contract, or by simply entering into a second contract, which is a contract of release. Even if the obligations have not been performed, Singapore law acknowledges the intent of parties to mutually release each other in the absence of any other formality, subject to a caveat: if one party has already complied and the other has not, the party who has already acquired benefit under the contract must still compensate the complying party prior to the discharge.
It may also be the case that the performance of the obligation is contingent upon the happening of a certain event that did not occur. In contrast, the parties may agree on the non-performance of the obligations on the ground of force majeure which they have incorporated in their contract. While there is no legislation on force majeure in Singapore, parties are allowed to stipulate force majeure clauses and list down circumstances beyond the parties’ control that would have the effect of discharging them from the obligations but not consider them in breach.
Discharge by Frustration
Finally, if the nature of non-performance is due to events that could not have been reasonably foreseen, the parties may be discharged by frustration. The Frustrated Contracts Act governs these instances and prescribes rules on reimbursements for preparations and partial work completed. The court may assess whether one party is entitled to further compensation if there were non-monetary benefits gained by the other party before the occurrence of the frustrating event, and compel the latter to pay the former accordingly.
Contract Creation and Obligations Monitoring are Made Easy with Lexagle
Contracts can be overwhelming, but cease to be so when you know exactly what they are, how they create legal obligations and when these contracts end.
A contract is valid and enforceable when there is a meeting of the minds through the acceptance of an offer, payment of consideration, mutual intent to enter into legal relations, capacity to contract for parties involved and consent.
Parties are released from the contract when it ends, which can occur if the obligations have been performed; if the obligations were not performed or performed in a manner contrary to the stipulations under the contract; if the parties agree to discharge themselves from the contract; or if the parties are discharged due to the frustration of the contract.
Our team at Lexagle rigorously studied the intricacies of contracts to build a template repository and clause library and make contract creation as quick as a few clicks. You can even save your own templates for specific contracts so you never have to manually edit the same contract again. Best of all, our technology natively tracks keywords, identifies all outstanding obligations or renewals, and notifies stakeholders before they are due, which can significantly improve processes and prevent contractual breaches.