Contract Law in Singapore
When starting a company, you enter into different types of contracts — office and equipment leases, shareholder agreements, agreements with new employees and contracts with customers. So when choosing where to start your company, you should consider whether that country’s laws will support your agreements and whether its legal system will fairly, quickly and cheaply adjudicate any disputes you have around them. Countries where contract law is byzantine and dispute resolution is drawn out are not business-friendly and therefore, not the right place for your company. The government of Singapore understands this and has taken steps to make Singapore one of the best places in the world to sign business contracts. In its annual Doing Business rankings, the World Bank consistently ranks Singapore first among 189 countries in enforcing contracts.
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This article provides a brief overview of contract law in Singapore and explain how its laws, in conjunction with its strong court and alternative dispute resolution system, make the island-state one of the best places to sign business agreements. Due to its colonial history, Singapore’s contract law is based on British common law and includes the concepts people typically associate with a contract, such as offer and acceptance, consideration, performance and breach. While independent from Britain for over fifty years, Singapore continues to follow British contract law, diverging in only small ways. Singapore’s alignment with the widely-understood and well-recognized common law tradition makes it easy for businesses to sign contracts in Singapore, even if they are with international partners.
Building upon its British common law foundation, Singapore resolves contract disputes in a rational, business-friendly way through a well-functioning court system, augmented by a very robust alternative dispute resolution system. The strong mediation and arbitration services available in Singapore are a key reason why contractual disputes here are resolved quickly and cheaply.
Governing Law and Venue
If you start a business in Singapore, you will want the law of Singapore to “govern” any contract you sign. That means that Singapore law will be used as the framework to decide any dispute you have about your contract. The governing law is used to determine whether the contract is valid and, if so, what rights each party has under the contract, what defense they have and what legal remedies are available to the wronged party. The laws of different jurisdictions can arrive at different answers on each of these issues with regard to the same contract.
Singapore allows the parties to choose what the governing law of their contract will be. It is possible, therefore, to agree that some foreign law will govern your agreement in Singapore, but that is not advisable. Singapore does not allow you to choose where you will litigate your contract dispute. A contract regulating a transaction in Singapore must be litigated in Singapore. Because the judges and mediators in Singapore know the law of their country the best, it makes sense to use Singapore as the choice of law for the contracts that are associated with your business activities in Singapore. In fact, given the advantages of Singapore’s contract laws, it may make sense for you to use Singapore as the governing law for your contracts outside Singapore too.
History of Contract Law in Singapore
For historical reasons, Singapore contract law is based on British common law. The strong relationship with British law dates back to 1819, when Sir Stamford Raffles established a port on the island that was to become Singapore to help British traders compete with Dutch ships in the Malay Archipelago. In 1824, the island became a formal British possession and, in 1926, along with Malacca and Penang on the Malay Peninsula, became the Straits Settlement under the control of British India. From this point until Singapore formally separated from England in 1959, the laws of Britain applied to Singapore (except for a short period when Japan controlled Singapore during World War II). Singapore had no independent laws. During this period, all contract disputes were settled through British common law on the relevant subject. After a short period of aligning with Malaysia, Singapore became an independent country in 1965. It adopted a Constitution, but, unlike its neighbour Malaysia, it did not codify its contract law into statutes. Singapore’s contract law remained the judge-made British rules used in Singapore courts for more than a century.
Since independence, Singapore has no longer been bound to follow British common law, as it was when it was a colony. Singapore contract law, however, continues to closely follow its earlier tradition i.e. that of Britain. Even today, if Singapore common law does not address an issue raised in a case, the courts will look to British law for guidance. Additionally, some of the statutes Singapore has passed to modify judge-made law are based on British statutes, such as the Contracts (Rights of Third Parties) Act. However, Singapore does not always follow England. For example, the Consumer Protection Act is based on statutes adopted in Canada.
Key features of Singapore’s Contract Law are highlighted here
Because of this long legal history with Britain, Singapore’s contract law follows that of common law countries, such as England and the United States. In these countries, a contract is an agreement created through an “offer” and an “acceptance” between two or more “competent” parties who exchange “consideration” to create a legal obligation between them. The Singapore Law Committee, a group formed and supported by the Singapore Academy of Law and Singapore’s Ministry of Law has outlined the basics of Singapore contract law. Its analysis is summarized below.
CAPACITY TO CONTRACT
A contract is only legal if the parties entering into it are “competent” or have the capacity to contract. In Singapore, a contract entered into with a minor, a person of unsound mind or an inebriated person may not be enforceable. Those individuals are deemed not to have the capacity to contract if they did not understand what they were agreeing to. To see under what circumstances a contract with a potentially incompetent individual is enforceable, see here.
OFFER, ACCEPTANCE AND CONSIDERATION
Under Singapore law, a contract is only formed if: 1) a party makes an “offer” of some good or service, 2) the other party or parties “accepts” that offer, and 3) some consideration passes between the parties. To satisfy the legal definition, the offer must express or imply a promise to be bound by the offer and not be simply a solicitation, also known as an invitation to treat. For example, displaying goods with prices is only an invitation to treat, not an “offer” in the legal sense. An offer can be withdrawn at any time before it is accepted. The acceptance must be unqualified and can be expressed through words or conduct. Silence is almost never sufficient to be considered an acceptance. The Electronic Transactions Act allows electronic offers and acceptances between parties to form contracts. Finally, to be considered a contract, the agreement must be supported by consideration, which means that the parties must give something of value to each other. Otherwise, the transaction is considered a gift. The value need not be equal between the parties; it can even be nominal on one side. The value can be something positive, such as payment, or something negative, such as refraining from building on a piece of land.
In commercial relationships, there is a legal presumption in Singapore that parties intend to be legally bound when they enter into agreements. Only a clear statement that the parties did not intend to be legally bound would overturn that presumption. The opposite is true with social relationships, where you would need a clear statement of the intent to be legally bound.
TERMS OF THE CONTRACT
The rights and obligations of the parties are delineated in the terms of the contract. Some of the essential terms of a contract are the length of the contract, the price being paid for a good or service, the description of the good or service being provided. For a contract to be valid, the essential terms must be specified.
When the contract has not been written down, the courts look at the parties’ statements and actions to determine if the parties intended to be legally bound by them. In making that determination, the courts look at when the representation was made, the importance the party attached to it and the sophistication of the party. When a contract has been written down, Singapore uses the parol evidence rule, which states that only the written contract can be used in determining the terms of the agreement, not prior negotiations or other oral or written evidence.
Sometimes, the court will imply a term if it is necessary to fulfill the intentions of the parties and does not contradict any express term in the contract. The court might also imply a term for public policy reasons or because it is mandated by statute, such as the Sale of Goods Act which requires sales contracts to have the implied term that the seller has the right to sell the goods.
Once the terms have been confirmed by the court, it now must interpret them. In doing so, it uses the “reasonable person” standard. How would a reasonable person understand the term, not how would the actual parties understand it. Singapore courts emphasize the factual framework in which the contract was made to determine how a reasonable person would understand that contract.
For example, contracting parties use exception clauses to limit or exclude liability under the contract. In Singapore, the Unfair Contract Terms Act (UCTA), which is based on a similar statute in England, places a reasonableness limit on such clauses. When deciding what is reasonable, the courts look to the relative bargaining positions of the parties and whether there was an inducement to agree to the clause. For example, a theme park in Singapore would not be allowed to use an exception clause to limit its liability for negligence that caused injury or death for a rider of a rollercoaster. Certain contracts, such as insurance contracts, are not covered by UCTA. These exceptions are outlined in the First Schedule.
PERFORMANCE AND BREACH
If both parties do everything required under the contract, the law says there has been performance. If one or both of the parties fails to perform, the law says there has been a breach of the contract. At that point, the aggrieved party can elect to end the contract and look to the legal system to hold the party who breached the contract liable for the consequences of the breach.
There need not have been an actual breach. If it is clear that one of the parties has no intention of following through with the contract, the other party can end the contract before performance is required through the legal doctrine of anticipatory repudiatory breach.
DEFENSES TO BREACH
A breach does not always lead to liability. The parties can be released from a contract through agreement, frustration, mistake, misrepresentation, duress, undue influence, unconscionability or illegality.
The parties can agree to release each other from the contract without any liability through:
- A termination clause in the original contract
- A newly negotiated agreement releasing each other from liability, called a novation
- A force majeure clause that states that, if a certain circumstance occurs, no party will be liable for breach
Another way the parties can be released from a contract without liability is the legal doctrine of frustration. Frustration releases the parties from liability if something that could not have been reasonably foreseen makes it impossible for one or more parties to perform.
Mistake voids a contract when one or both of the parties entered into the contract under a misapprehension about a critical term. For example, if a consignment store sells a coat to someone that (unbeknown to the store) had been destroyed or lost, that would be a mistake.
If it is a less critical term, the court will attempt to strike the proper balance between protecting the party under the misapprehension and satisfying the expectations of the other party about the contract.
However, not reading the contract you sign will not allow you to later claim mistake as the law expects that you have read it.
When one party induces another party to enter into a contract through misrepresentation, the contract is void. The misrepresentation can be express or implied. It can also be an omission. However, a vague or exaggerated sales promise, known as “puff,” is not a misrepresentation. A misrepresentation must be something material that a reasonable person would have relied upon when deciding to enter into the contract.
In addition to being able to void the contract, the aggrieved party may seek extra damages if the misrepresentation was fraudulent or negligent, as opposed to innocent.
Duress, Undue Influence and Unconscionability
A contract will be voided if one party is forced into the contract under duress where the other party threatens or harms the first party, his or her property or economic interests. Undue influence is a more subtle form of coercion, where one party dominates the other and undermines his or her independence. Certain relationships are presumed to exert undue influence, such as director-company, parent-child, doctor-patient and attorney-client. Finally, a contract can be voided if it is unconscionable, meaning grossly unfair due to the parties unequal bargaining power.
Illegality or Against Public Policy
A contract that is illegal or against public policy will be voided. Examples include contracts that:
- Deceive public officials
- Undermine justice
- Create a threat to public safety
- Commit a crime, fraud or a tort
- Promote sexual immorality
A contract that restricts trade will be voided as illegal unless it is reasonable. If the illegality only taints part of the contract, such as a term in an employment contract preventing employees from ever competing against the employer, that term, or part of it, will be severed from the rest of the contract and struck out, leaving the rest of the contract intact.
LEGAL REMEDIES FOR A BREACH
When a party breaches the contract, the court can order that party to “remedy” the breach through one or more of the following: contract damages, liquidated damages, specific performance and injunction. The aggrieved party should file its case as soon as possible. Certain remedies, such as specific performance and injunction, will only be granted if the request is made as soon as the party knows of the breach. For damages, the statute of limitations for a contract dispute in Singapore is six years.
The court can order the party who breached the contract to pay the aggrieved party for any financial loss he or she suffered as a result of the breach. Those are called contract damages. When calculating the contract damages, the court compensates the aggrieved party for the amount that he or she would have gotten had there been no breach. That can include the contract amount plus consequential damages for costs incurred as a result of the breach. Alternatively, the court can compensate for the amount the aggrieved party spent while relying on the contract. The court does not compensate for mental distress. And, the court will not compensate for issues arising from the aggrieved party’s failure to mitigate his or her damages.
If the parties included a term in the contract stating what the damages would be in case of a breach, those are called liquidated damages. The court will award those damages so long as they represent a genuine attempt at quantifying the loss a party would face and are not an attempt to punish the breaching party.
In the rare case when damages will not adequately compensate the aggrieved party, the court may award specific performance, which means that the party in breach will have to do what is required under the contract. For example, the court might order a party to deliver a painting or particular piece of land if that particular painting or land is the only one that will achieve the objective of the contract.
An injunction is the opposite of specific performance. With an injunction, the court prohibits a party from doing something. As with specific performance, this remedy is rarely granted.
SAMPLE CONTRACTS TERMS
To see some sample contracts used in Singapore, see here.
Quick and Efficient Dispute Resolution
The Singapore government is a strong proponent of alternative dispute resolution as a way of minimising the duration of lawsuits and their cost to business in the event that a contract is violated. It created the Primary Dispute Resolution Centre, the Singapore Mediation Centre, Singapore International Arbitration Centre, Singapore Chamber of Maritime Arbitration and the Consumers’ Association of Singapore, all of which provide mediation and arbitration services to potential litigants. Those organizations have been very successful. For example, as of July 2014, 73% of the disputes referred to the Singapore Mediation Centre were settled without the need for litigation. To further develop arbitration skills, Singapore National University set up the Singapore International Arbitration Academy in 2012.
Singapore’s advocacy of alternative dispute resolution along with its robust and efficient court system means that it takes on average of 150 days to enforce a contract in Singapore, compared to the worldwide average of 510. The cost of enforcement is only 25% of the claim. Those numbers make Singapore one of the best places in the world to enforce a contract.
If your disputes needs to be litigated in the courts, Singapore provides an efficient framework and infrastructure for doing so. Depending upon its value, a contract dispute can be heard in one of Singapore’s Small Claims Courts all the way to the Supreme Court.
- Small Claims Tribunal: disputes up to S$10,000
- Magistrates’ Courts: disputes up to S$60,000
- District Courts: disputes up to S$250,000
- Supreme Court: disputes over S$250,000
To learn more about Singapore’s legal system, see this article.
In 2000, Singapore revolutionized civil litigation by enabling court documents to be filed electronically, saving businesses time and money and enhancing their access to justice services. Litigants now can easily:
- Submit document filings
- Access any document filed in the case
- Schedule hearings and other court dates
The common law contract law Singapore inherited from its colonial past plus the common sense approach taken by its post-independence governments make Singapore an excellent location to enter into contracts. With its strong legal system, Singapore provides robust enforcement of contracts, at a speed and cost that other countries can’t match.