Ethoz Capital Ltd v Im8ex Pte Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ,Tay Yong Kwang JCA,Steven Chong JCA
• Judgment Date: 20 January 2023
• Docket Number: Civil Appeal No 28 of 2022
• Court: Court of Appeal (Singapore)

Ethoz Capital Ltd

and

Im8ex Pte Ltd and others

[2023] SGCA 3

Sundaresh Menon CJ, Tay Yong Kwang JCA and Steven Chong JCA

Civil Appeal No 28 of 2022

Court of Appeal

Damages — Liquidated damages or penalty — Loan agreements providing for higher interest rate in event of default — Whether such provision was penalty

Damages — Liquidated damages or penalty — Loan agreements providing that total interest payable under loan was accelerated upon default — Whether clause created primary obligation or secondary obligation — Whether such provision was penalty

Held, dismissing the appeal in part:

(1) Misrepresentation was not argued by either party before the Judge. Thus, there was no factual basis for such a finding, especially given the fact-sensitive nature of an allegation of misrepresentation: at [26] to [30].

(2) There was a conceptual difference between paying Total Interest in instalments and paying it immediately in full. If Im8ex was to pay the Total Interest in full immediately upon default, Ethoz would have immediate use of the money while Im8ex would lose the corresponding benefit of paying in instalments over a period of time: at [46].

(3) In determining what was the primary obligation under a contract, a substance over form approach should be taken, and thus the whole contract should be analysed and not just the impugned clauses in isolation. Taking this approach, under the Facilities, Im8ex's primary obligation was the payment of Total Interest in instalments, while the full and immediate payment of Total Interest was a secondary obligation triggered upon breach: at [53] to [55] and [63].

(4) Generally, the party that asserted that a provision was a penalty bore the burden of showing this to be the case, but the evidential burden might shift to the other side if sufficient evidence had been adduced: at [69] and [75].

(5) In determining whether a provision was an unenforceable penalty, the material inquiry was whether it stipulated payment of money in terrorem of a defaulting party. On the face of the Facilities, the full and immediate payment of Total Interest was clearly a payment that operated in terrorem of Im8ex and forced compliance with its primary obligation under the Facilities: at [79].

(6) The payment of Default Interest was an unenforceable penalty because the increase between the regular interest rate and the Default Interest rate was “extravagant”, which Ethoz could not justify. It did not matter that the Default Interest rate was lower than the maximum interest rates set out in statutory provisions: at [97] and [99] to [102].

(7) The Judge erred in allowing Im8ex to make prepayment under cl 6(B) of the Facilities, because it did not give the stipulated three months' notice in the clause, and prepayment could not be made after an event of default: at [108] and [111].

(8) There was no need to invoke relief against forfeiture in a mortgagor-mortgagee situation because the mortgagee retained a beneficial interest in the property under the equity of redemption which entitled the mortgagor the right to obtain a retransfer of property upon full payment: at [119].

(9) Im8ex was allowed to exercise its equity of redemption and was granted a period of three months to redeem the Facilities by paying the Advance and loan interest as per the terms set out in Schedule 3 of the Facilities as this was Im8ex's primary obligation under the Facilities. It was thus ordered to repay $4,520,210.88: at [121], [122], [126], [129] and [130].

[Observation: Simply because a party bore the evidential burden to show that the clauses in question were penalties, it did not mean that it had to necessarily adduce evidence; if it was plain and obvious that there was already sufficient evidence, the party would not have to adduce more evidence: at [76].

The essence of a penalty was that it was a contractual stipulation that acted in terrorem over the offending party such that the threat of the penalty forced compliance with that party's primary obligation. Thus, if a clause provided for a secondary obligation that, in essence, stipulated the full performance of the primary obligation, this would indirectly force compliance with the primary obligation under a contract, thus undermining the purpose behind the penalty doctrine: at [86] and [87].]

Case(s) referred to

Alternative Advisors Investments Pte Ltd v Asidokona Mining Resources Pte Ltd [2022] SGHC 41 (refd)

Arcos Ltd v EA Ronaasen & Son [1933] AC 470 (refd)

Banner Investments Pte Ltd v Hoe Seng Metal Fabrication & Engineers (S) Pte Ltd [1996] 3 SLR(R) 244; [1997] 1 SLR 461 (refd)

Britestone Pte Ltd v Smith & Associates Far East, Ltd [2007] 4 SLR(R) 855; [2007] 4 SLR 855 (folld)

Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2021] 1 SLR 631 (folld)

Dunlop Pneumatic Tyre Co, Ltd v New Garage and Motor Co, Ltd [1915] AC 79 (folld)

Elders Forestry Ltd v Bosi Security Services Ltd [2010] SASC 223 (refd)

Ethoz Capital Ltd v T-Pacific Pte Ltd HC/RA 350/2019, HC/OS 938/2019 (1 April 2019) (refd)

Ethoz Capital Ltd v Thistle Energy Pte Ltd HC/RA 118/2021, HC/OS 1127/2020 (10 August 2021) (refd)

Financings Ltd v Baldock [1963] 2 QB 104 (refd)

Grains and Industrial Products Trading Pte Ltd v Bank of India [2016] 3 SLR 1308 (refd)

Hong Leong Finance Ltd v Tan Gin Huay [1999] 1 SLR(R) 755; [1999] 2 SLR 153 (folld)

iTronic Holdings Pte Ltd v Tan Swee Leon [2016] 3 SLR 663 (refd)

John Wallingford v The Directors of the Mutual Society (1880) 5 App Cas 685 (distd)

Leiman, Ricardo v Noble Resources Ltd [2020] 2 SLR 386 (folld)

Ng Hock Kon v Sembawang Capital Pte Ltd [2010] 1 SLR 307 (folld)

Pacific Rim Investments Pte Ltd v Lam Seng Tiong [1995] 2 SLR(R) 643; [1995] 3 SLR 1 (refd)

Phoenixfin Pte Ltd v Convexity Ltd [2022] 2 SLR 23 (distd)

SCT Technologies Pte Ltd v Western Copper Co Ltd [2016] 1 SLR 1471 (refd)

Sembawang Capital Pte Ltd v Ng Hock Kon [2009] 1 SLR(R) 833; [2009] 1 SLR 833 (refd)

State Bank of India Singapore v Rainforest Trading Ltd [2011] 4 SLR 699 (refd)

Facts

The appellant, Ethoz Capital Ltd (“Ethoz”), lent $6.3m to the first respondent, Im8ex Pte Ltd (“Im8ex”), under three loan facilities (“the Prior Facilities”) which were secured by mortgage over four different properties (“the Properties”) and were also guaranteed by the second (“2nd”) and third (“3rd”) respondents. They then began to discuss renewing the Prior Facilities and signed a new set of four loan facilities (“the Facilities”). The total amount advanced under the Facilities was also $6.3m (“the Advance”), and like the Prior Facilities, the Facilities were also secured by mortgage over the Properties and guaranteed by the 2nd and 3rd respondents.

Clauses 5(A) and 7(A) provided that the Facilities were extended at a flat interest rate of 3.75% per annum, with 180 equal monthly instalment payments to be made over 15 years. These payments, comprising of repayments of the Advance and interest payments, were set out in Schedule 3, which also defined the term “Total Interest” as being the aggregate of all 180 interest payments. Under cl 7(B), Total Interest was “deemed earned and accrued” upon drawdown of the Advance, and it was provided under cl 14(B)(2) that upon default, it would be “immediately due and payable”. Further, upon default, Im8ex would have to pay default interest (“Default Interest”) at a rate of 0.065% per day (“the Default Interest Rate”). Finally, Im8ex could prepay the Facilities under cl 6 by paying the Advance and “interest computed thereon in full” as per cl 6(B).

Im8ex defaulted on payment and Ethoz filed an originating summons seeking the delivery of vacant possession of the Properties, and the payment of the Advance, the Total Interest and Default Interest. This was granted by an assistant registrar at first instance and Im8ex filed an appeal which was heard by a judge of the General Division of the High Court (“the Judge”), arguing that the payment of Total Interest upon default and Default Interest were unenforceable penalties. The Judge allowed Im8ex's appeal, finding that the payment of Total Interest and Default Interest were unenforceable penalties. He also found that Ethoz had misrepresented to Im8ex that the terms of the Facilities were better than the terms of the Prior Facilities (“the Better Facilities Representation”) and this induced Im8ex into entering the Facilities. Finally, the Judge allowed Im8ex to make prepayment under cl 6(B) of the Facilities by paying only the Advance and loan interest, ordering that Im8ex pay the sum of $4,041,987.21.

Ethoz appealed against the entirety of the Judge's decision.

Legislation referred to

Conveyancing and Law of Property Act 1886 (2020 Rev Ed) s 22

Evidence Act 1893 (2020 Rev Ed) s 108

Land Titles Act 1993 (2020 Rev Ed) ss 76, 77(3)

Moneylenders Act (Cap 188, 2010 Rev Ed)

Moneylenders Rules 2009

Wong Soon Peng Adrian, Ang Leong HaoandBryce Yeo (Rajah & Tann Singapore LLP) for the appellant;

Ranvir Kumar Singh (UniLegal LLC) for the first and second respondents;

Third respondent absent and unrepresented.

20 January 2023

Judgment reserved.

Steven Chong JCA (delivering the judgment of the court):

Introduction

1 In our jurisprudence, the penalty doctrine makes a distinction between primary and secondary obligations, with only the latter attracting its application. In Leiman, Ricardo and another v Noble Resources Ltd and another[2020] 2 SLR 386 (“Leiman”), we referred to this as the “threshold issue” in the penalty doctrine (at [99]).

2 In attempts to get around this threshold, parties have resorted to what we have previously referred to as “clever drafting”: Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals[2021] 1 SLR 631 (“Denka”) at [95]. We should observe that “clever drafting” is a reference to a form...