ACTAtek, Inc. v Tembusu Growth Fund Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ,Tay Yong Kwang JA,Steven Chong J
• Judgment Date: 17 August 2016
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 191 of 2014
• Date: 17 August 2016

ACTAtek, Inc and another

and

Tembusu Growth Fund Ltd

[2016] SGCA 50

Sundaresh Menon CJ, Tay Yong Kwang JA and Steven Chong J

Civil Appeal No 191 of 2014

Court of Appeal

Contract — Breach — Respondent wrongfully calling event of default — Whether wrongful calling of event of default amounts to breach

Contract — Contractual terms — Implied terms — Appellants making statements on way loan proceeds would be utilised — Whether term should be implied restricting use of proceeds

Tort — Misrepresentation — Fraud and deceit — Appellants making statements on way loan proceeds would be utilised — Whether statements untrue or failing to reflect true intent of appellants

Facts

Civil Appeal No 191 of 2014 arose out of two convertible loan agreements (‘CLAs’) which had been entered into between the first appellant (‘the first Appellant’) and the respondent (‘the Respondent’). The first of these was in 2007 (‘the 2007 CLA’) while the second was in 2012 (‘the 2012 CLA’). The first Appellant was a company incorporated in the Cayman Islands which provided identification management solutions whereas the Respondent was a venture capital fund incorporated in Singapore which invested in medium-sized start-up companies with growth potential. Under the terms of the CLAs, the Respondent was to lend certain amounts of money to the first Appellant which were then to be repaid by the issuance of shares in the first Appellant upon its intended listing on the New Zealand (‘NZ’) stock exchange. However, the envisaged plan did not come to fruition. In May 2012, the Respondent declared an event of default under the 2012 CLA in that the first Appellant had misapplied the loan proceeds, on the basis of which the Respondent also contended that a cross default under the 2007 CLA had been triggered. As part of its claim, the Respondent also argued that the second appellant, who was the chief executive officer of the first Appellant, had deceived it into entering into the 2012 CLA. The Appellants, for their part, contended that there had been no misapplication of the loan proceeds under the 2012 CLA; and therefore that the Respondent had improperly declared an event of default under the 2012 CLA and, consequently, that no cross-default under the 2007 CLA had been triggered. The Appellants also brought a counterclaim for damages suffered by reason of the fact that the Respondent's act of wrongly declaring the event of default had resulted in the first Appellant's planned listing on the NZ stock exchange being aborted.

At the trial below, the High Court judge (‘the Judge’) found in favour of the Respondent and held that there was an implied term that the first Appellant would utilise the 2012 CLA loan proceeds only in accordance with four specified categories (‘the Four Categories’). The Judge supported this finding on the basis that there were two statements made by the Appellants to the Respondent on 3 October 2011 and 14 December 2011 (‘the First Statement’ and ‘the Second Statement’ respectively) which indicated that the loan proceeds would only be used for the Four Categories. The Judge also held that the Appellants were liable in the tort of deceit as he found that the Appellants did not have the genuine intention, at the time the Statements were made, to limit the use of the loan proceeds to the Four Categories. Consequently, as the Judge found that the Respondent was entitled to declare an event of default under the 2007 and 2012 CLAs, he dismissed the Respondent's counterclaim.

It was on the above basis that the Respondent brought the appeal against the Judge's decision with respect to both the main claim and the counterclaim.

Held, allowing the appeal:

(1) An actionable misrepresentation rested upon a statement of past or present fact. An assertion as to the existence of a particular intention or state of mind would amount to a statement of fact. It followed that a misstatement of the existence of such a state of mind or intention would amount to a misrepresentation of fact: at [48].

(2) With respect to the First Statement, this could not amount to a representation of fact as to the Appellants' intention in relation to the use of proceeds under the 2012 CLA. This was because the First Statement was made at a time when negotiations for the 2012 CLA had not yet even commenced: at [49].

(3) As for the Second Statement, it was neither untrue nor failed to reflect the true intent of the Appellants at the time it was made. In a tort of deceit claim, the subjective belief of the representor was crucial: at [59].

(4) The Respondent was not entitled to pursue the argument that there had been an express term in the 2012 CLA restricting the use of proceeds as it was effectively seeking to reverse the Judge's decision on this issue and should have filed a cross-appeal if it wished to do so: at [73]

(5) Not all gaps in a contract are ‘true’ gaps in the sense that they can be remedied by the implication of a term. It was only where the parties did not contemplate the issue at all, and so left a gap, that it would be appropriate for the court to even consider implying a term into the parties' contract. In order to answer the question whether the parties had contemplated the particular issue or had left a gap because they missed the point altogether, the court had to first consider what the alleged gap was. In the present case, the gap could be characterised as the absence of an express restriction on the use of proceeds. The restrictions on the use of proceeds had indeed been in the parties' contemplation, although the evidence showed that there was no common understanding or agreement as to the ambit of this restriction. This was precisely the sort of situation where it would be inappropriate for the court to complete the task which the parties had commenced but could not conclude: at [86] and [88].

(6) With respect to the business efficacy test, the test was not one of absolute necessity. Rather, a term would be implied if without the term, the contract would lack commercial or practical coherence. The correct question to be asked was whether the contract or agreement would lack commercial or practical coherence if a term was not implied and not whether a particular express term in the contract would be accorded greater commercial sense with the implication of the term. On the facts, there was simply no reason to think that the 2012 CLA would lose commercial or practical coherence if a restriction on the use of proceeds were not included: at [91], [93] and [94].

(7) Unlike the House of Lord's decision in Concord Trust v The Law Debenture Trust CorporationWLR[2005] 1 WLR 1591 (‘Concord Trust’) and the English Court of Appeal's decision in Jafari-Fini v Skillglass LtdUNK[2007] EWCA Civ 261 (‘Jafari-Fini’), the lender's (ie, the Respondent's) obligation under the 2012 CLA did not cease with its disbursements of the loan proceeds. Pursuant to cl 5.1 of 2012 CLA, the Respondent was still under the express continuing obligation to convert the loan into equity upon the successful IPO. In this regard, the 2012 CLA was an executory contract and differed from Concord Trust and Jafari-Fini in which, by the time the event of default was purportedly declared, the contracts had already been wholly executed on the part of the lenders. A key premise undergirding the decisions in Concord Trust and Jafari-FiniENR was that there was no element of non-performance or future non-performance of the contracts when the event of default was wrongfully declared and in that sense, it could not be said that the lender was repudiating the contract simply because there was no obligation under the contract to be repudiated. On the facts, since the wrongful declaration of the event of default was accompanied by the Respondent's manifestation of its refusal to comply with cl 5.1 of the 2012 CLA, this sufficed to constitute an anticipatory breach of the 2012 CLA: at [107] and [110].

[Observation: In both Concord Trust and Jafari-Fini, the courts proceeded on the basis that it was not a breach for a lender to accelerate the repayment of a loan contrary to the agreed terms for repayment or to assert an event of default without basis. In the present case, it was not necessary for the court to reach a conclusion on this because it was possible to distinguish the present case from both those cases. The court therefore left open for decision on another occasion whether such conduct if wrongly done would amount to a breach of the implicit obligation to act in accordance with explicit obligations that had been undertaken in the contract: at [112].]

Case(s) referred to

Chiam Heng Hsien v Chiam Heng Chow [2015] 4 SLR 180 (refd)

Concord Trust v The Law Debenture Trust Corp plcWLR [2005] 1 WLR 1591 (distd)

Edgington v FitzmauriceELR (1885) 29 Ch D 459 (refd)

Hewlett-Packard Singapore (Sales) Pte Ltd v Chin Shu Hwa Corinna [2016] 2 SLR 1083 (refd)

Lim Eng Hock Peter v Lin Jian Wei [2010] 4 SLR 331 (refd)

Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) LtdELR [2016] AC 742; [2015] 3 WLR 1843 (refd)

Mohammad Jafari-Fini v Skillglass LtdUNK [2007] EWCA Civ 261 (distd)

Panatron Pte Ltd v Lee Cheow Lee [2001] 2 SLR(R) 435; [2001] 3 SLR 405 (refd)

Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193 (refd)

Sheng Siong Supermarket Pte Ltd v Carilla Pte Ltd [2011] 4 SLR 1094 (refd)

Tan Chin Seng v Raffles Town Club Pte Ltd [2003] 3 SLR(R) 307; [2003] 3 SLR 307 (refd)

Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] 3 SLR 801 (refd)

Xia Zhengyan v Geng Changqing [2015] 3 SLR 732 (refd)

Legislation referred to

Rules of Court (Cap 322, R 5, 2014 Rev Ed) O 59 r 9A(5) (consd)

S Magintharan, Liew Boon KweeandVineetha G (Essex LLC)for the appellants;

Daniel Chia Hsuing Wen, Chua Hun Yuan, Kenneth, Stephany Aw Shu HuiandKer Yanguang (MorganLewis Stamford LLC)...