Contract drafted without legal advice was unenforceable “piece of legal nonsense”

We enter into contracts, many of them in fact, every single day. At its heart, a contract is a series of legally enforceable promises and obligations between the parties to that agreement. It can be as simple as a sale and purchase of a pen from a stationery shop, or as complex as a long term sourcing contract for the provision of global IT services to an MNC. The length of a written contract will often reflect the complexity and importance of that particular contract.

What happens when contracts are badly drafted, for example, with key terms and conditions missing? Sometimes, the law does step in to assist the parties. One such example is the Sale of Goods Act (Cap. 393) which applies to any contract for the sale of goods in Singapore. In most instances, the failure to set out the purchase price of the goods would be fatal to an agreement between the parties. However, section 8 of the Sale of Goods Act provides that the Singapore courts are entitled to look to the course of dealings between parties or failing which, the buyer must pay a reasonable price for the goods.

However, the recent Singapore Court of Teo Chong Nghee Patrick and others v Han Cheng Fong and another appeal, [2014] SGCA 29, provides an important warning to commercial parties that the courts may not strain themselves to rescue parties from their bad drafting. This post focuses solely on the issue of the legal effect of the “agreement” in question and does not deal with the company law issues involving legitimate expectations and breaches of fiduciary duties etc. Although this particular case did not involve arbitration, the lessons to be learnt from the case apply equally to common law governed commercial contract that fall for determination in arbitration.

Background

The parties were joint venture partners to a project in China. As the relationship between the two factions broke down, the Respondent, Dr Han Cheng Fong (“Dr Han”), was removed from his position in the joint venture company along with one of his “key lieutenant[s]”, a Ms Liew Sok Kuan (“Christine”) (see paragraph [1] and [4]).

The Singapore High Court below had held that the Respondent was wrongfully dismissed and was entitled to damages for losses to be assessed. The High Court’s decision was predicated on a document signed on 1 March 2010 between the parties (the “Document”). The High Court found that the Document “constitute[d] a binding shareholders’ agreement that granted [the Respondent] an enforceable right to his positions in the joint venture company” (see paragraph [2]; see Han Cheng Fong v Teo Chong Nghee Patrick and others [2013] SGHC 51).

The appellants were described as “the losing faction” and comprised Teo Chong Nghee Patrick (“Patrick”), Lim Shih Hsi (“Richard”) and Michael Heng Swee Hai (“Michael”). Richard and Michael were founder directors of Cleantech Partners Pte Ltd (“CTP”), while Cleantech Partners Hangzhou Pte Ltd (“CTP-HZ”) was the parties’ joint-venture vehicle in respect of the Hangzhou project.

The other faction comprised of the Respondent, Christine and “Low Soo Chee (“Robin”), also a founder-director of CTP but who had chosen to throw in his lot with Dr Han” (see paragraph [4]).

The Document

The Document that was the subject of the Singapore courts’ scrutiny is worth setting out in full:

[On CTP’s header]

Resolved and confirmed the following number of ordinary shareholders, no. of ordinary shares to be issued to each shareholder and the appointment of [Dr Han] and [Christine] as Company Directors, [Dr Han] as Deputy Chairman of CTP, CleanTech Ventures Asia Pte Ltd as Manager, is hereby accepted with effect from 1st March 2010.

Name

Designation

Ordinary Shareholding

[Patrick]

Chairman

2 shares

[Dr Han]

Deputy Chairman

2 shares

[Richard]

Managing Director

2 shares

[Robin]

Director

2 shares

[Michael]

Director

2 shares

[Christine]

Director

2 shares

CleanTech Ventures Asia Pte Ltd

Manager

4 shares

Total

16 shares

 # The directors will review the value of [CTP’s] equity interest in Hangzhou-Singapore Eco-Park (HSEP) pursuant to the conclusion of all completion documents and independent valuation of the development site in HSEP to determine a more realistic share value of [CTP’s] shares.

The Board of Directors also resolved that the following companies will be set up by [CTP]:

1. [CTP-HZ] as 100% subsidiary company of CTP and will be the Special Purpose Vehicle (SPV) for rolling out the Hangzhou Singapore Eco-Park Development Project in Hangzhou:

1.1 CTP-HZ Board of Directors will consist of all the six Directors of CTP and [Dr Han] as Chairman and [Christine] as CEO;

1.2 CTP-HZ Board of Directors has decided that the net income split between CTP-HZ and CTP will be 67% / 33% respectively.

1.3 It was also decided that of the remaining 67% held by CTP-HZ, 33% of the 67% is to be distributed to the CTP-HZ Board of Directors. The remaining 67% (ie 67% of 67%) is to be distributed to CTP-HZ Management headed by [Dr Han] and [Christine]. The distribution of the profit to the Management of CTP-HZ shall be decided by [Dr Han] at his sole discretion.

1.4 CTP-HZ will in due course enter into joint venture agreement to set up Hangzhou Singapore Eco-Park Investment & Development Co Ltd (HSEPID) in Hangzhou with the local partner [Vanwarm] where [Dr Han] will be appointed as Chairman and [Christine] will be appointed as CEO / GM respectively on the Board of Directors.

2. CTP Technology Pte Ltd (CTPT) as 100% subsidiary company of CTP and will function as the clean technology aggregator and integrator of CTP to deploy cleantech in the HSEP Development Project in Hangzhou and other potential projects in China and in the region;

2.1 CTPT Board of Directors will consist of [Robin], [Patrick], [Dr Han], [Richard] and [Michael] and [Robin] as Chairman & CEO; CTPT Board of Directors has decided that the net income split between CTPT and CTP will be 67% / 33%.

3. CTP will participate 25% equity stake in CTV Asset Management Pte Ltd (CTVAM), the Management Company of Shelterwood Eco-Venture Fund and Shelterwood Venture Accelerator Fund. CTVAM will be chaired by [Patrick] and its Board of Directors structure will be finalized when CTVAM is set up.

4. Any change to the above Resolutions shall require unanimous decision of the Board of Directors of CTP.

Decision of the Singapore Court of Appeal

The Appellants argued that the Document was not a binding shareholders’ agreement “because it was not sufficiently certain, was expressed to be a shareholders’ resolution, and in any event had been disregarded by the respondents” (see paragraph [17]).

The High Court had held that the Document was “in effect a shareholders’ agreement that gave Dr Han the right not to be removed from his posts in CTP-HZ without a unanimous vote of the persons listed in the document”. The reasons were as follows (see paragraph [22]):

“(a) The 1 March document had been prepared following a request made by Christine for a shareholders’ agreement governing the relationship between the parties;

(b) It was labelled a directors’ resolution rather than a shareholders’ agreement but this was not determinative of the matter;

(c) Clause 4 of the 1 March document provided for unanimous approval of any amendment but this contradicted the Articles of Association of CTP which had provided for board decisions to be taken by way of a majority vote;

(d) It was also signed by three persons, namely Dr Han, Christine and a company, who were not then directors of CTP;

(e) The appellants’ contention that vital terms such as governing law and jurisdiction clauses were missing so that the agreement was too uncertain was incorrect because such terms were not necessary in shareholders’ agreements.”

The Singapore Court of Appeal disagreed with the High Court. It held that the Document “was, objectively construed and notwithstanding the intentions of the parties, a piece of legal nonsense devoid of any binding effect” (emphasis added; see paragraph [23]).

One of the key aspects of the Singapore Court of Appeal’s finding was that the Document had been prepared by the parties without the benefit of legal advice. The lack of legal advice was fatal.

…The lack of legal input was apparent: in our view whatever the subjective intention of the parties to regulate their relationships on some kind of legal footing, the substance of what they might have had in mind never crystallised into the proper form. Construing the 1 March document objectively, we were therefore none the wiser as to what the agreement, if any, between the parties was” (see paragraph [25]).

The Singapore Court of Appeal considered and held that the Document was beset with legal problems, which militated against a finding that it was a shareholders’ agreement.

First, to create coherency in the Document would require the Court of Appeal to “to undertake substantial surgery on the document in order to make it work as an agreement” (see paragraph [26]).

Second, it was unclear from the Document what the rights and obligations of the shareholders as between themselves were (see paragraph [27]). The Court of Appeal reasoned as follows,

“…while there were positions ascribed to individuals, did this create any obligation on them to remain in those positions, and to carry out any specific duties in those capacities? These things were left completely unspecified; in any event, Dr Han himself did not take up the posts of director or deputy chairman of CTP. [There was also] the issue of distribution of CTP-HZ’s income or profits. Clauses 1.3 and 1.4 of the 1 March document stipulated for such income to be distributed in a specified way; but there was nothing said about the means by which CTP-HZ would be funded or how the costs of meeting disbursements would be apportioned; and this was important because profits are calculated by way of taking costs off from revenue.”

Third, certain provisions of the Document were never complied with. In this case, certain companies expressed to be set up according to a particular structure were never performed (see paragraph [28]).

Finally, the Court of Appeal held that the manner in which parties had conducted themselves, in particular, the Respondent and Christine, was inconsistent with a belief that the Document was in fact a binding shareholders’ agreement (see paragraph [30] to [33]).

Saving the Document through Implied Terms?

The Respondent had sought to meet the Court of Appeal’s concerns by suggesting a “number of solutions”. However, the fatal flaw to these solutions was that they “required the implication of a very great number of terms so as to be able to construct a workable shareholders’ agreement and we were of the view that this was a step too far” (see paragraph [29]).

The Court of Appeal was unwilling to strain itself to salvage the Document through the implication of various terms. The court held that it was not necessary to imply such terms just so as to “create a workable agreement out of the [Document]” (see paragraph [29]).

The Court of Appeal cited its own decision in Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal [2013] 4 SLR 193, in which the court had held (at [100]) that “the threshold for implying a term is necessarily a high one. The law remains that a term will only be implied if it is necessary” (see paragraph [29]).

Conclusions and Takeaways

If the legal relationship and obligations between parties are sufficiently commercially important and complex, parties should, as a matter of prudence, engage the assistance of lawyers to draft the agreements that govern them. At the very least, this should help ensure that any agreement drafted is valid, binding and enforceable between the parties. It also obviates the legal uncertainty of having to submit the agreement to the courts or arbitral tribunal to decide if the agreement has any legal effect at all.

 

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, China, Singapore and tagged , , , . Bookmark the permalink.

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