JTJB Legal Update 2017

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JTJB LUPDATE JULY

Silence is golden. Or is it? The consequences of silence in pre-contractual negotiations

What happens in the situation when a written agreement does not reflect what was orally agreed in a prior meeting between the parties? The Singapore High Court recently considered this question in the decision of Alacran Design Pte Ltd v Broadley Construction [2017] SGHC 162.

The Defendant, Broadley Construction Pte Ltd (“Broadley”) was engaged in a construction project and owed a sum of money to the Plaintiff Alacran Design (“Alacran”) for equipment which Alacran supplied. Broadley was unable to repay Alacran until it obtained payment from another contractor (“Singbuild”), who was the main contractor in the construction project. Alacran and Broadley held various meetings culminating in one where Broadley proposed that an undertaking be issued to authorise Singbuild to pay Alacran directly. Alacran agreed but responded that it would still hold Broadley liable should Singbuild default on the payment. Broadley remained silent once confronted with this statement, which Alacran contended that to be an agreement.

Broadley proceeded to draft the undertaking to include a clause absolving them of liability in the event Singbuild defaulted. Notwithstanding the inclusion of the said clause, Alacran signed the undertaking. Singbuild subsequently failed to pay Alacran and Alacran commenced proceedings against Broadley.

(i) Holding

The Court held that this was a case of Broadley making a fraudulent misrepresentation. The Court affirmed the holding in Hong Leong Singapore Finance Ltd v UOB Bank and held that silence maintained in circumstances where the party in question ought to have spoken could constitute misrepresentation. In this case, Broadley was obliged to inform Alacran of its position when confronted with Alacran’s query on the release of Broadley’s liability.

Apart from misrepresentation, the Court found that this was also a case of Alacran making a unilateral mistake in signing the undertaking. Such mistake was sufficiently important or fundamental, to the extent that had Alacran been aware of the clause, it would not have executed the undertaking. Furthermore, Broadley had knowledge of this mistake as they understood Alacran’s position to be contrary to what they had drafted.

(ii) Learning points
This case highlights the importance of pre-contractual negotiations between parties; representations made whether orally or otherwise during such negotiations can potentially impact on the parties’ liability under the contract. Parties purporting to draft letters of undertaking should therefore be wary of the wording of the clauses or provisions.

To avoid falling victim to such practices in future, it is vital to ensure that what is reflected in the written agreement is similar to what had been already agreed upon. In this case, Alacran was fortunate that the Court ruled in its favour given that it went on to sign the undertaking. Being vigilant and reviewing documents with due diligence would go a long way in preventing such cases from entering the realms of litigation, as terms inconsistent with previous oral agreements can be easily spotted and dealt with. This would avoid both the costs and possible frustration of an extended recovery process.

weijie Contributed by:
Zhang Weijie
Associate

zhangweijie@jtjb.com

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