Case Note

• Published date: 01 December 2012
• Date: 01 December 2012
• Author: GOH Yihan LLB (Hons) (National University of Singapore), LLM (Harvard); Advocate and Solicitor (Singapore); Assistant Professor, Faculty of Law, National University of Singapore. YIP Man LLB (Hons) (National University of Singapore), BCL (Oxford); Advocate and Solicitor (Singapore); Assistant Professor, School of Law, Singapore Management University.
• Citation: (2012) 24 SAcLJ 553

PAST CONSIDERATION OR UNCONNECTED CONSIDERATION?

Rainforest Trading Ltd v State Bank of India Singapore

[2012] 2 SLR 713

It is trite law that a valid and enforceable contract must be supported by consideration. The recent Court of Appeal case of Rainforest Trading Ltd v State Bank of India Singapore[2012] 2 SLR 713 is a further addition to the local jurisprudence on consideration, specifically the issue of past consideration. This note considers the specific issue of past consideration and argues that its label should be discarded in favour of a more realistic one that correctly emphasises its underlying concerns.

I. Introduction

1 A valid and enforceable contract must be supported by consideration, defined as either a benefit conferred by the promisee on the promisor in return for the promisor's promise, or a detriment incurred by the promisee in return for the promisor's promise.1 The recent Court of Appeal decision of Rainforest Trading Ltd v State Bank of India Singapore2 (“Rainforest Trading”) affords us an opportunity to consider the subsidiary rule that past consideration is not good consideration (“the past consideration rule”).

2 This note suggests that the nomenclature of the past consideration rule, premised as it is on the chronological order in which consideration is provided, may be misleading and should be discarded. Even though the supposed exception in Pao On v Lau Yiu Long3 (“Pao On”) preserves the emphasis on the chronological order by carving out an emphasis on the promisor's request, the fact remains that the courts are often more than willing to find such “request”, such that the exception, if indeed it is one, has become the norm. The proper emphasis is really whether the consideration was connected to the promise sought to be enforced. The chronological order in which consideration was given is an indication of such connection but that is neither determinative nor the primary concern. This note then briefly discusses various categories in which the past consideration rule may apply and how a test based on connection will produce a clearer analysis.

II. Facts and decision in Rainforest Trading

3 The facts of Rainforest Trading4 concerned commonplace commercial arrangements. With the intent of investing in the second appellant, Teledata Information Limited (“Teledata”) entered into a share subscription agreement with the second appellant and its majority shareholder, Mr Goel. Pursuant to this agreement, a company (the first appellant) was incorporated in the British Virgin Islands in order for Mr Goel to transfer his majority shareholding in the second appellant to the first appellant in return for a certain shareholding in the latter. Teledata would then invest in and extend loans to the first appellant, which would in turn use such moneys to extend loans to the second appellant. The result was for Teledata to eventually hold 51% of the shares in the first appellant.

4 Subsequently, Teledata nominated its subsidiary, Baytech Inc (“Baytech”), to subscribe to shares in the first appellant. To fund the subscription, Baytech entered into a facility agreement with the respondent bank on 22 February 2007. Crucially, the first appellant “pledged” 10,200,000 shares in the second appellant (representing 51% of its share capital) as security to the respondent. On 23 February 2007, Baytech fully drew down on the facility. The first appellant then delivered share certificates representing the pledged shares and a signed bank share transfer form to the respondent on 5 April 2007. On the same day, the second appellant informed the respondent in writing that it had noted the respondent's interest in the Register of Members.

Finally, on 10 December 2007, the first appellant and Baytech each registered a charge over the pledged shares in favour of the respondent.

5 As it turned out, Baytech failed to repay moneys due to the respondent on 29 February 2009. After the declaration of an event of default by the respondent, the respondent sought to enforce its security over the pledged shares. The High Court ruled that it could.5 The court held that an equitable mortgage carrying an implied power of sale was created over the pledged shares in favour of the respondent. This was done through the deposit of the share certificates and the signed blank share transfer form with the respondent. Since an event of default had occurred, the respondent could therefore exercise its power of sale.

6 On appeal to the Court of Appeal, the appellants argued, inter alia, that the equitable mortgage over the pledged shares was invalid because the consideration furnished by the respondent, namely the entrance into the facility agreement or the subsequent disbursement of funds was past consideration. It was argued that consideration was past because both said events took place before the creation of the equitable mortgage on 5April 2007. Further, the exception against past consideration in Pao On6 did not apply because the first appellant, who granted the equitable mortgage, did not request the respondent to enter into the facility agreement in the first place. Also, the first appellant was never involved in any discussions regarding the loan facility and had no dealings with the respondent before 5 April 2007. There was thus no understanding between the parties that the respondent would be granted the equitable mortgage when the facility agreement was entered into and when the funds were fully disbursed.

7 The Court of Appeal rejected this argument on two bases. It first held that there was a “fundamental – and fatal – flaw”7 with this argument because it was inconsistent for the appellants to argue that the equitable mortgage granted over the pledged shares was unenforceable due to past consideration, while simultaneously arguing that the first appellant had no contact with the respondent. In the court's view, any argument on past consideration is necessarily premised on a separate agreement that would otherwise have been a valid contract between, inter alia, the first appellant and the respondent, thus falsifying the former's claim of no prior dealings.

8 Second, and more substantively, the Court of Appeal held that the exception in Pao On8 clearly applied: the court was prepared to find,

in the context of the commercial dealings between the parties, that there was a request by the appellants that the respondent enter into the facility agreement with Baytech and that this would be compensated for by the grant of an equitable mortgage over the pledged shares. The court found evidentiary support for its analysis in the appellants' letters to the respondent on 5 April 2007. Those letters showed that the appellants knew that the share certificates were deposited in accordance with the facility agreement.

III. Re-examining the past consideration rule

A. Past consideration in Rainforest Trading

9 The past consideration rule was clearly the focus of Rainforest Trading.9 Apart from being determinative of one aspect of the parties' appeal, the court also explained that the past consideration rule is a “firmly established part of both the English and Singapore law of contract”.10 Where it operates, the rule has the effect of preventing an otherwise valid contract from being formed.11 However, as the court noted,12 the potential harshness of the rule is mitigated by an apparent “exception” that has its genesis in the old English case of Lampleigh v Braithwait13 and stated in its modern form in Pao On. According to Lord Scarman in Pao On, three cumulative elements must be satisfied before the “exception” against the past consideration rule can operate where an act is done before the giving of the promise sought to be enforced:15

(a) the act must have been done at the promisor's request;

(b) the parties must have understood that the act was to be remunerated; and

(c) such remuneration must have been legally enforceable if it had been promised in advance.

The court, with respect, correctly pointed out that this is not a true exception inasmuch as it operates outside of the past consideration rule.16

10 The court in Rainforest Trading17 also pointed out that “while the doctrine of past consideration remains part of our law, it would generally be difficult for a party to successfully argue that a perfectly sensible and legitimate commercial transaction is unenforceable simply because the consideration provided for the promise was past”.18 The court seemed to justify this by reference to the modern approach in contract law that requires “very little” to find the existence of consideration. It also pointed out that a strictly chronological approach in determining whether consideration is past or not is “deeply unrealistic and unnecessarily restrictive” and it undermines the freedom of contracting parties and the sanctity of commercial transactions.19 These are, once again, very sensible views well supported by authority.20

B. Past consideration or unconnected consideration?

11 The court's analysis in Rainforest Trading21 follows the traditional analysis in resolving such questions: the chronological order in which the consideration is given relative to the promise sought to be enforced is first examined and a determination is made whether the consideration was factually past. If factually past, the subsequent question is whether the consideration was nonetheless given at the request of the promisor and if so, the “exception” in Pao On22 applies. This traditional analysis seemingly attributes too great an importance to the chronology of events,23 an approach that is perhaps inherently mandated by the label “past consideration”. However, factual past consideration is not equivalent to legal past consideration; it is the latter which renders the promise unenforceable. Factual past consideration is merely an indication of the possibility of such an outcome.

12 However, legal past consideration...