When both parties to a contract are incapacitated the contract is?

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In some circumstances, a contract can be nullified.

In general, for a contract to be considered legally binding, it should fulfil four key characteristics:

1. A clear agreement between all the relevant parties on what is offered, and a clear acceptance of the offer;
2. Consideration – i.e. something of value that is given in exchange for a promise;
3. An intention to create legal relations – i.e. both sides are willing to be legally bound together in an agreement;
4. All parties must have a capacity to enter into, and freely consent to the contract.

Sometimes however, an action, an unforeseen event, or the revelation of new information can dramatically affect the validity or enforceability of a contract – in which case, the contract can be rendered void, or is considered voidable – thereby releasing the parties from their obligations in the contract.

What’s the difference between a void contract, and a voidable contract?

Simply put, if a contract is rendered void, it would be considered as though a contract was invalid from the moment it was created, and since it is invalid, neither party can be bound by the terms of the agreement. Generally, a contract may be void if there is insufficient consideration provided between the parties, or if the fourth characteristic of a valid contract is unfulfilled – i.e. not all parties have the capacity to enter into the contract. Some examples include:

• Where one party is a minor (i.e. below the age of consent (18));
  • For instance, if a car salesman enters into a contract to sell a car to a teenager, but later finds out that the teenager is a minor, then the contract would be void since the other party was not of an age that could provide proper consent, and does not fulfil valid contract elements.
  • Note however, that there are some categories of contracts that are not void and may bind a minor in limited ways. These contracts include contracts for necessaries, such as for example training, education and certain voidable contracts that are enforceable against the minor unless he repudiates the contract before attaining the age of majority (21) or within a reasonable time thereafter. Some examples of voidable contracts include acquisition of interests in land or a subscription for shares (i.e. a minor will still have to pay rent under a lease or pay calls on shares owned by him during his infancy unless repudiated).
    
  • Additionally, pursuant to section 35(4) of the Civil law Act (Cap. 43), where a minor has reached the age of 18 but is still under the age of 21, he will still not have capacity to consent to (i) any contracts for the sale, purchase, mortgage, assignment or settlement of any land or a lease for more than 3 years; (ii) any contracts for the sale, pledge or transfer of such party’s beneficial interest under a trust; or (iii) any contracts for the settlement of any claim which any legal proceedings or actions may arise.
• Where the terms of the contract are unreasonable and unrealistically difficult to fulfil – whether the contract is void depends on whether such terms can be severed from the contract (i.e. if such terms form the whole or the main consideration of the contract, the contract is void from the outset);
• Where the terms of the contract are illegal/have been entered into for an unlawful purpose and/or against a country’s public policy; or
• Where there is a mutual mistake;
  
  • For instance, Jack enters into a contract with Mr. A on Carousell to buy an iPhone X, but Mr. A actually doesn’t really know the difference between the two phones, so Mr. A ends up selling an iPhone 8 to Jack. In this case, Jack can request for the contract to be voided since both sides had failed to reach a clear agreement on the subject matter of the contract.

On the other hand, a voidable contract is a valid contract (in that it fulfils the valid contract elements), and may be enforceable under certain conditions if both parties agree to continue with the contract. A voidable contract arises when one party rejects the contract for legal reasons, even though they had previously agreed to be bound by the terms of the contract. Some examples where a contract can be made voidable include situations where:

• There is a material breach of the terms of the contract;

• • A term of the contract can either be a condition or a warranty. The difference being that while a breach of a warranty would only entitle the non-defaulting party to a claim in damages, a breach of a condition would cause the contract to become voidable (i.e. the non-defaulting party may choose to affirm the breach and claim damages or terminate the contract).
  • Under Singapore law, where a contract does not clearly and unambiguously provide for the events pursuant to which a party was entitled to terminate a contract, the term is an innominate term and the Singapore court will ascertain the seriousness of the breach in question.
  • Note further that pursuant to section 6(1) of the Limitation Act (Cap. 163), no action may be brought for a breach of contract after 6 years have lapsed from the time when the contract was breached.

• A party was coerced or threatened into signing the agreement – e.g. the threat of physical harm to the individual, their goods, or economic interest;
• One party was under undue influence – i.e. where the first party is able to dominate/force the other party into unreasonable terms, purely out of a financially opportunistic desire to exploit the second party);
• One party is not of sound mind or mentally competent at the point of signing the contract;

• • Such contract is voidable only where it can be proven that the party of unsound mind or mental incompetence (i) did not at the material time understand what he was doing; and (ii) that this incapacity was known to the other party.

• The contract is frustrated – where the reason for the failure of performance of the contract lies in events beyond the control of the contracting parties and which neither party could have reasonably foreseen;
• The contract is fraudulent – where one party deliberately, or accidentally omits or falsifies facts or information; or has intended from the start not to carry out their contractual obligations); or
• Misrepresentation occurs, or the other party is induced to enter a contract due to a false statement of fact.

How is a ‘misrepresentation’ defined, and can I claim damages for it?

Generally, a ‘misrepresentation’ takes place when one party to a contract makes a materially false statement of fact (as related to a past or present fact) to the other party in order to influence the latter to agree to enter into a contract. However, an exaggeration or vague statement in the nature of a ‘puff’ is not considered a ‘misrepresentation’. For instance, telling a prospective homebuyer that the apartment is free of bed lice, when it is not, can be considered a misrepresentation.

While silence or non-disclosure of information is not necessarily considered a representation made by a party to a contract, if a party chooses to omit some information in order to distort the truth of the information that was disclosed, then such an action would be considered a misrepresentation. Failure to correct an earlier and continuing representation that may have been true earlier, but is now subsequently incorrect, can also be considered as a misrepresentation. For instance, telling a prospective homebuyer that the apartment has full utilities, even though the plumbing is extremely faulty is an example of distorting the truth of disclosed information. Similarly, if a homebuyer agrees to buy an apartment because you had earlier claimed that the apartment is already wired up for internet speeds of 1GB/sec, but you later find out that the apartment’s original owner had downgraded to dial-up internet speeds, yet you fail to tell the homebuyer subsequently, then you are liable for misrepresentation.

If it has been established that a contract was induced by a misrepresentation, the other party can choose to either consider the contract voidable, or affirm the contract. If the contract is considered voidable, then both parties are released from their contractual obligations, and both parties are restored to their original positions prior to signing the contract. Otherwise, if the contract is affirmed, then the contract will still remain valid.

In the event that you wish to claim damages for negligent misrepresentation, under Section 2 of the Misrepresentation Act, you only need to establish that you entered into a contract after relying on the other party’s misrepresentation – which will then place the burden of proof onto the other party to prove that he/she was not negligent since he/she had reasonable grounds for believing in the truth of the representation that they made, from the time the misrepresentation was made to the time the contract was entered into as a result of the misrepresentation.

The extent of damages that may be claimed under Singapore law will depend on whether or not the damages incurred by the innocent party are too remote in nature; losses that are too remote are not recoverable. The general rule is that for a particular loss to be recoverable, a reasonable man, taking into consideration the state of knowledge of the misrepresenting party at the relevant time, must be able to foresee that a breach must necessarily result in that loss. However, what about the scenario where a taxi driver takes on board a passenger, who states that he would lose a million dollars if he does not reach the destination in time? It is clear that it would not be fair for the taxi driver to be liable for a sum of one million dollars. In this regard, the Singapore court has adopted a nuanced approach in considering the way the knowledge was brought to the defendant and whether the circumstances of the case were reasonable.

Kennedy Chen

Kennedy is a lawyer who has sufficient experience to advise on all legal matters, and who seeks to add value to all who approach him. He understands that more than 70% of any business' or individual's legal requirements emanate from day-to-day legal commercial and regulatory compliance matters of a routine nature. Yet, it is the same routine matters that have to be urgently addressed in order for any business engine to remain relevant and competitive, and to surge towards creating and maximising value. https://www.linkedin.com/in/chenkjh/

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