SINGAPOREAN UPDATE – Court Held That Terminology “Subject to contract” Indicated Intent Not to Be Bound Until a Formal Agreement Was Negotiated and Executed
- Offer and acceptance letters’ inclusion of phrase “subject to contract” was , in the context of the factual matrix, found to make clear the intent of the parties that they were not to be contractually bound until a formal agreement was negotiated and executed.
- While the Court in this case found that no contract had arisen, it is important to note that the phrase “subject to contract” is not a magic formula; merely including it on a document does not automatically preclude a binding contract from arising. Ultimately, a Singapore court will look at all the facts of the case and the presence of the phrase is only one factor, albeit an important one, that a court will take into account.
In Norwest Holdings Pte Ltd (in liquidation) v Newport Mining Ltd  SGCA 42 (Singapore, Court of Appeal, 23 August 2011)), the liquidator of the plaintiff company, Norwest Holdings Pte Ltd, sought to sell the entire share capital of its wholly-owned subsidiary, Norwest Chemicals Pte Ltd (“Norwest Chemicals“).
Norwest Chemicals was the holding company of Sichuan Mianzhu Norwest Phosphate Chemical Company Limited (“Norwest Sichuan“). Norwest Sichuan’s assets were:
- the mining rights to two phosphate rock mines (“Mines“) for a period up to 2015; and
- production facilities for the production of sodium and potassium phosphate and phosphoric acid (“Facilities“).
The defendant, Newport Mining Ltd, was interested in purchasing the shares. On 2 May 2008, it submitted a Firm Letter of Offer for S$10 million. This was followed by a second Firm Letter of Offer for S$10.25 million on 9 May 2008.
On 12 May 2008, an earthquake struck the region where the Mines and Facilities were located and they suffered extensive damage. Two hours after the earthquake, the liquidator accepted the offer. The letter accepting the offer also stated that a formal sale and purchase agreement was to be negotiated and executed between the plaintiff and the defendant. It was not disputed on the facts that at the time of acceptance, the liquidator had not yet found out about the earthquake.
The plaintiff claimed that a binding sale and purchase contract for the sale of the Norwest Chemical shares had arisen. The defendant claimed that there was no binding contract. It was argued that the offers and acceptance were clearly made “subject to contract”, and accordingly, as no contract had been entered into, none had arisen. Alternatively, it argued that the offer had been made and accepted on the premise that the Mines and Facilities were sold in substantially the condition that they had been in when the offer was made, and that the damage to the same therefore vitiated the contract.
The High Court had found in favour of the defendant. On appeal, the Court of Appeal also found in the defendant’s favour.
The Court of Appeal held that the inclusion of the stock phrase “subject to contract” was not conclusive of the intention of the parties. Instead, it held that the better view was that the question whether there is a binding contract between the parties should be determined by considering all the circumstances. These would include what was communicated between the parties by words or conduct.
The Court noted that the key documents exchanged between the parties (i.e., the Information Memorandum, the letters of offer, and the letter of acceptance) had all referred to any agreement being “subject to contract”. This made clear the intent that parties were not to be contractually bound until a formal agreement was negotiated and executed. In addition, there had been no subsequent conduct that indicated that parties had changed this position:
- While the plaintiff pointed to the defendant finalising funding for the purchase, the Court noted the finalisation of the funding had not been communicated to the plaintiff.
- The plaintiff also noted that the defendant, a listed company, had announced the purchase and declared a trading halt in trading in its shares. The Court, however, held that this was not indicative of an intent to proceed with the purchase as this announcement had also been accompanied by a subsequent statement as to the earthquake and the need for time to ascertain the extent of the damage.
- Finally, the plaintiff noted that the defendant had, upon the liquidator’s request, topped up the purchase deposit despite knowing by then about the earthquake. The Court noted that this payment had only been made to preserve the defendant’s position while the extent of damage to the Mines and Facilities was investigated.
The Court accordingly held that, for all these reasons, the plain meaning of the “subject to contract” provisions in the Information Memorandum, the First Firm Letter of Offer, the Second Firm Letter of Offer, and the Acceptance Letter should be applied in this case. In the circumstances, therefore, the Court held that there was no binding contract entered into between the parties.
While the Court in this case found that no contract had arisen, it is important to note that the phrase “subject to contract” is not a magic formula; merely including it on a document does not automatically preclude a binding contract from arising. Ultimately, a Singapore court will look at all the facts of the case and the presence of the phrase is only one factor, albeit an important one, that a court will take into account.