Practical Takeaways for Commodity Traders from the China Coal Decision by the Singaporean Court of Appeal

It is common for commodity traders to place orders over emails or telephone calls without executing formal contracts or, at the most, by executing skeletal contracts with boilerplate terms. Given the fast-paced nature of commodity trading, the above practice is considered business-efficient. Consequently, common law courts around the world have recognised such practices and have held that contracts can be entered into orally or over emails, of course, subject to the parties meeting the thresholds for contract formation under the applicable law.   

In this backdrop, it is interesting to note a recent decision of the Court of Appeal in Singapore—which overturned the High Court’s decision—to hold that the parties had failed to conclude a contract because the standard terms contract was not executed.

Background

China Coal Solutions Pte Ltd (‘China Coal’) and Avra Commodities Pte Ltd (‘Avra’) regularly conducted their business over email, including entering into contracts. On one occasion, they exchanged four emails to agree on the price and quantity of coal that was to be sold by Avra to China Coal. The fourth of these emails was from China Coal stating that it ‘confirm[ed] [Avra’s] good offer as below’. Thereafter, Avra sent a ‘draft’ contract containing the standard terms and conditions. The parties negotiated some of the terms of the draft contract through follow-up emails but did not revisit clause 26—the entire agreement clause (dealt with below). The draft contract was ultimately not executed. 

Subsequently, China Coal cancelled two of the three shipments that were despatched pursuant to the above exchange of correspondence, citing a slump in the price and demand of coal. Avra’s position was that signing the draft contract was a formality and that China Coal was bound by the contract exchanged over emails. Avra sued China Coal before the Singapore High Court with Avra prevailing. The Court of Appeal overturned the High Court’s decision.   

Decision of Court of Appeal

The Court of Appeal held on a review of the facts that the parties did not have any intention of creating a contract based on the four emails alone. Its decision turned on conditions precedent in clause 26, one of them being ‘This Agreement shall only come into force after being signed by both the Buyer and the Seller.’ In coming to its decision, the Court of Appeal laid emphasis on prior course of dealing amongst the parties, the peculiar terms of the draft contract being used for this particular transaction and the objective intention of the parties to enter into a contract. (Objective intention of the parties is usually construed by courts based upon correspondence and interactions in context, including the industry, the character of the documents containing the contract and the course of dealings between the parties).

Takeaways

1. Standardize the business practice: The most important take away is that prior course of dealings would ordinarily be respected by Singapore courts (or indeed most common law courts) when arriving at the finding of a binding contract. Therefore, it is essential that commercial parties establish a standard practice if entering into successive transactions with the same counter-party. In this context, it is also important to account for consistency of the content of negotiations in order to lead evidence of prior course of dealings. Suffice to say, it would be difficult to prove a binding contract if, on one occasion, the parties had insisted on exchange of signed copies whereas, on all other occasions, confirmation by email was sufficient to place the trade.
2. Establish unambiguous communication channels: One way of standardisation is by having a clear and single channel of communication when negotiating with a particular counter-party. For example, have the same set of persons communicate terms of agreement for every successive transaction, and preferably record all iterations or change of terms by emails only (instead of spreading the iterations over calls, text messages, emails and other modes of communication). This is also because it is often practically difficult to lead evidence regarding oral communication.
3. Record deviation from standard practice: When a party intends to deviate from the standard practice, it should ensure that such intended deviation is clearly recorded in writing. For instance, what came to the rescue for China Coal to deny conclusion of the contract was clause 26—that the agreement is only binding upon execution. Therefore, in this particular instance, signing of the contract was held to be not a formality but a condition precedent.
4. Know the standard terms: Conduct regular training and review sessions of the standard terms for teams that place trades to keep them updated about these terms. For example, create a flow chart of the ‘steps required to complete a trade’ to highlight the peculiar requirements of the standard contract for your company (such as whether standard terms must the signed before performance).    

Conclusion

It is comforting to note that common law courts are increasingly paying attention to industry standards and peculiarities. This is especially good news for commodity traders who grapple with fast moving transactions on a daily basis where trades are placed or executed even before formal signed contracts are entered into. 

Singapore courts, therefore, seem to be mindful of the needs of commercially sophisticated parties and the need of fast paced industries, provided the conditions to contract, as objectively intended by the parties, are met.

Subhajit Banerji is a disputes lawyer based in Singapore.  

Promit Chatterjee is a senior associate with the international arbitration practice at P&A Law Offices, Delhi.