19 July, 2018
A cautionary tale on why one should always take time to read and understand one's contract – even if it is only ten lines long!
Introduction
In the recent case of Broadley Construction Pte Ltd v Alacran Design Pte Ltd [2018] SGCA 25, the Singapore Court of Appeal cautioned that parties are expected to read and understand their contracts before they enter into them, especially if they are entered into with counterparties of equal bargaining power. A party that has not done so should not expect to escape the consequences of its contracts simply by relying on the doctrines of mistake and/or misrepresentation.
Facts
Broadley Construction Pte Ltd ("Broadley") was a sub-contractor for Singbuild Pte Ltd ("Singbuild") in a project relating to the construction of a residential development. In order to fulfil its obligations to Singbuild, Broadley entered into a contract with Alacran Design Pte Ltd ("Alacran") for the supply of construction equipment. In 2015, Broadley began to default on payments to Alacran (the "Outstanding Sum") because Singbuild itself defaulted on payments owed to Broadley.
In order to reach an arrangement in relation to the Outstanding Sum, representatives of Broadley and Alacran met on two occasions with the main factual dispute arising from the second meeting (the "Second Meeting"). It transpired that Broadley would not be able to fulfil its payment obligations to Alacran so long as Broadley itself did not receive payment from Singbuild. During the Second Meeting, Broadley proposed that it could authorise Singbuild to pay the Outstanding Sum directly to Alacran and an equivalent amount would be deducted from the debt owed by Singbuild to Broadley. Alacran agreed to this proposal but stated that Broadley would remain liable for any amounts unpaid by Singbuild to Alacran ("Alacran's Statement").
Nothing was said or done in response to Alacran's Statement by Broadley's representative at the Second Meeting.
Two days after the Second Meeting, Broadley prepared and circulated a one-page letter containing only three clauses spread over ten lines (the "Undertaking") to both Singbuild and Alacran. Contrary to Alacran's Statement, the Undertaking included an indemnity clause which absolved Broadley of all liability in the event that Singbuild defaulted in payment of the Outstanding Sum to Alacran (the "Indemnity Clause"). All three parties met at another meeting where Broadley and Singbuild signed the Undertaking before Alacran's representative took the Undertaking back to his office to sign it.
Singbuild later defaulted on its payment obligations under the Undertaking and Alacran consequently sued Broadley for the Outstanding Sum. While Broadley relied on the Indemnity Clause in its defence, Alacran argued, amongst other things, that the Undertaking was vitiated on the grounds there was fraudulent misrepresentation on Broadley's part when its representative remained silent to Alacran's Statement and/or that there was a unilateral mistake to the terms of the Undertaking on Alacran's part. While the High Court held that the Undertaking was vitiated on the grounds of both fraudulent misrepresentation and unilateral mistake, the Court of Appeal overturned the High Court's decision.
Does Silence Mean Consent?
The Court of Appeal reiterated the trite legal principle that great caution must be exercised before any legal significance is ascribed to a party's silence as silence lacks the definitive quality of an active statement.
In ruling that there was no fraudulent misrepresentation on Broadley's part, the Court of Appeal held that Broadley's representative's silence was not even a representation for two reasons. First, the parties were negotiating from opposing positions with opposing interests and it was clearly in Broadley's interest that it be absolved from all liability. Accordingly, Broadley's silence could not be objectively seen as amounting to unequivocal assent to Alacran's Statement. Second, and more importantly, both parties understood, at the time Alacran's Statement was made, that a written agreement would govern their respective legal positions.
As Alacran's Statement (and the responding silence from Broadley) was made before the signing of the Undertaking and before it was even drafted by Broadley, Broadley's disagreement to Alacran's Statement was manifestly apparent.
The Court of Appeal then opined that even if Broadley had made a representation, it did not have the effect of inducing Alacran to enter into the Undertaking. Both parties knew and acted on the basis that the Undertaking would govern their respective legal positions. As the express terms of the Undertaking (i.e., the Indemnity Clause) clearly contradicted the effect of Alacran's Statement that Broadley would remain liable for the Outstanding Sum, Broadley's silence could not be said to have induced Alacran to enter into the Undertaking. The Court of Appeal repeated the trite contract law principle that a person is bound by the terms of the contract he signs notwithstanding that he may be unaware of its precise legal effect. The Court of Appeal opined that it was therefore incumbent on Alacran's representative to read and understand the Undertaking before entering into it. If Alacran's representative chose to sign the Undertaking because he had assumed that it reflected what was discussed at the Second Meeting and did not avail himself of the opportunity to seek further clarification, the consequences must fall on Alacran alone.
Was There Unilateral Mistake?
The Court of Appeal further rejected Alacran's argument of unilateral mistake. There was nothing on the evidence to suggest that Broadley had actual knowledge of Alacran's mistake. The terms of the Undertaking were brief and simple. Alacran's representative had ample time to review the Undertaking after it was drafted, and he had in fact attended a meeting with Broadley and Singbuild where any queries could have been clarified. It was thus entirely reasonable for Broadley to assume that Alacran had read, and was agreeable to, all the terms contained in the Undertaking.
The Court of Appeal then opined that there was no unilateral mistake in equity either as there was no evidence of wilful blindness or constructive knowledge on Broadley's part that Alacran was labouring under a mistake when it entered into the Undertaking.
Conclusion
This case serves as a cautionary tale that a person is generally bound by the precise terms of the contract he or she signs whether or not he or she has read it or understood its purport. If a person does not understand the effect of a contract, he or she is expected to decline to sign the contract and seek clarification as to its legal effect.
For further information, please contact:
Jonathan Choo, Partner, ATMD Bird & Bird
jonathan.choo@twobirds.com
