Frothtea LLP v Takagi Ramen Pte Ltd

• Jurisdiction: Singapore
• Judge: Lewis Tan
• Judgment Date: 30 June 2023
• Neutral Citation: [2023] SGMC 48
• Court: Magistrates' Court (Singapore)
• Docket Number: Magistrate’s Court Originating Claim No 2197 of 2022
• Hearing Date: 16 June 2023,15 May 2023
• Citation: [2023] SGMC 48
• Year: 2023
• Plaintiff Counsel: Wong Soo Chih and Koh Rui Yan, Kimberly (SC Wong Law Chambers LLC)
• Defendant Counsel: Francis Chan Wei Wen and Alexius Chew Hui Jun (Titanium Law Chambers LLC)
• Subject Matter: Contract,Illegality and public policy,Restraint of trade,Damages,Liquidated damages or penalty
• Published date: 11 July 2023

Magistrate Lewis Tan: Introduction

Recognising the demand for bubble tea in Singapore, the parties entered into a mutually beneficial partnership whereby the claimant worked to introduce bubble tea items to be sold at the defendant’s chain of restaurants in exchange for royalty payments from the latter. After about two years, the partnership came to an end. Nonetheless, the defendant continued to sell bubble tea at its outlets without paying any royalty to the claimant. Seeking to put a stop to this, the claimant sought payment of $20,000 pursuant to a non-compete clause in the partnership agreement. The defendant resisted payment, arguing that the clause is unenforceable as a restraint of trade or penalty clause. The defendant also counterclaimed for $59,945.61 for alleged breaches of the partnership agreement.

Facts

The parties entered into a Partnership Agreement (“PA”) dated 10 June 2020. The agreement provided that the Claimant, Frothtea LLP, would be responsible for helping “introduce Bubble Tea to the permanent menu” of the Defendant’s chain of restaurants. The help that the Claimant was to provide was expressly defined in cl 6 of the PA, as follows (collectively, “the Claimant’s Duties”): Conduct monthly audit checks on the quality of the Bubble Tea products at all of the Defendant’s outlets. Conduct corrective training where audits reveal issues. Continue to research and develop (“R&D”) new flavours and propose at least one new menu item every month. Periodically source for and liaise with suppliers to find better quality or more affordable supply options. Keep abreast with market trends in Bubble Tea to stay competitive and attractive. Give suggestions on marketing pushes and campaigns where applicable.

In exchange, the Defendant, Takagi Ramen Pte Ltd, would “manage all necessary manpower and logistical needs for the ongoing operations of the bubble tea menu” and pay the Claimant “a fixed Royalty fee of 5% of Bubble Tea sales”.

The partnership carried on for almost two years, from June 2020 to March 2022.

According to the Defendant, the relationship between the parties deteriorated “due to the Claimant’s persistent failure, refusal and/or neglect” to carry out the Claimant’s Duties as set out in the PA. The Claimant failed to carry out monthly checks at all the Defendant’s outlets, and no corrective training was performed save for four months when conducted audits led to the discovery of issues. The Claimant also only proposed a few menu items, rather than monthly as per the PA. In total, the Claimant only proposed four new menu items during the entirety of the PA, and as such, the Defendant had to come up with its own creations, such as a coffee or wasabi flavour series. The Claimant also failed to keep abreast of market trends, or to periodically source for and liaise with suppliers for cheaper and more affordable supply options. Instead, the Claimant exclusively used “QQ Trading” and “Boba Planet” during the PA. No suggestions were provided for the Defendant’s bubble tea marketing pushes and campaigns even though the Claimant was the “subject matter expert on the bubble tea industry”. Despite the above breaches, the Defendant continued to pay “full royalties”.¹

The Claimant denies breaching any term of the PA. Audits were done on a monthly basis at each outlet, and the obligation to propose at least one new menu item every month was understood by the Claimant and the Defendant’s Co-Founder, Ms Ai Takagi (“Ms Amy”) the Claimant’s point of contact, as a “flexible arrangement”.² Any alleged breach of the PA has only been raised in retrospect, and the Defendant’s termination notice dated 22 February 2022 stated that the reason for termination was because parties were unable to come to an agreement for a new contract.³ Pursuant to that notice, the PA was terminated on 21 March 2022.

After termination, the Defendant (being the terminating party) was bound by clauses 9(c) and 9(d) of the PA, which operated for a period of one year after termination, ie, from 22 March 2022 to 21 March 2023 (hereinafter, the “Non-Compete Clause”): 9. Non Compete Clause

During the course of this partnership, the parties agree not to compete with each others’ businesses unless otherwise agreed so in writing by both parties. Competition is defined as follows:

… c) [The Defendant] agrees not to partner with any other Bubble Tea brand to offer bubble tea items on the menu. d) [The Defendant] agrees not to sell any bubble tea items in house without paying royalties as per this partnership.

In the case of termination of this agreement, the terminating party will continue to be bound by the relevant non-compete clause ([The Claimant] by terms (a) and (b) in this section; and [the Defendant] by terms (c) and (d) in this section) for a period of 1 year after the date of termination.

Breach of this non-competition clause by either party will attract a fixed penalty of $20,000 and entitle the non-breaching party to terminate the agreement immediately without notice. The breaching party will not have rights to any further actions against the non-breaching party for the early termination.

[emphasis in original]

Despite reminders, the Claimant avers that the Defendant continued to sell bubble tea items in their restaurants from 22 March 2022 (the first day of the Non-Compete Period) without paying the Claimant the 5% royalty fee stipulated in the Non-Compete Clause. Owing to this breach, the Claimant seeks $20,000, being liquidated damages, or the “fixed penalty”, payable for breaches of the Non-Compete Clause.

In response, the Defendant avers that the Non-Compete Clause, cl 9, is legally unsustainable as it imposes an unreasonable restriction on the operations of the Defendant which operates in a completely different space from the Claimant. Given the distinct nature of their businesses, the parties “cannot be considered competitors”. In any event, the termination arose from the Claimant’s repudiatory breach of the PA, and the termination notice was signed by the Claimant. The sum of $20,000 is also not a genuine reflection or pre-estimate of the parties’ losses, and the monthly royalties paid were far from that sum. It is accordingly a penalty clause that is unenforceable.⁴ As such, while the Defendant continues to sell bubble tea in their restaurants, the Claimant is not entitled to the $20,000.⁵

The Defendant further counterclaims for one months’ worth of royalties, which is estimated at $3,746.60, or alternatively, nominal damages, for various breaches of the PA, which they says the Claimant agreed and admitted to.⁶

Issues

The issues that arise for my consideration are as follows: First, whether the Non-Compete Clause, on which the Claimant’s claim for $20,000 is based, is enforceable in law. This raises sub-issues that pertain to whether the clause represents an unenforceable restraint of trade or is a penalty clause that does not represent a genuine pre-estimate of the likely loss. Secondly, whether the Claimant was in breach of their duties under the PA, and if so, the extent of damages that ought to be payable for such breach.

I consider the issues in turn.

Enforceability of the Non-Compete Clause

The Defendant seeks to avoid paying the $20,000 stipulated in the Non-Compete Clause by arguing that it is a restraint of trade or penalty clause that is unenforceable in law.

Restraint of trade

All covenants in restraint of trade are prima facie void and unenforceable. Such a clause will only be enforceable if it protects a legitimate proprietary interest, and if it is reasonable in the interests of both the parties and the public. Two factors almost invariably arise for consideration in this regard, being the factors of area and time. There is, however, no clear formula that would lead to a predictable result, and no one factor is decisive. The court has to examine all the circumstances as a whole and decide whether the restraint of trade clause is enforceable (Man Financial (S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2008] 1 SLR(R) 663 (“Man Financial”) at [70]–[73] and HT SRL v Wee Shuo Woon [2019] 5 SLR 245 at [71]).

However, not all covenants that restrict trade are in substance a restraint of trade clause that is prima facie void. In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2012] 1 SLR 311 (“Mano Vikrant”), the plaintiff was employed by the defendant as a senior trader. In addition to the employment agreement, the parties entered into a non-compete agreement which provided, among others, that the plaintiff was not to compete with the defendant for one year immediately following his termination with the defendant. In addition, the defendant had an individual incentive award plan which provided that 50% of an individual’s incentive would be paid out as a deferred incentive which could be forfeited in certain circumstances (“the Forfeiture Provision”). The plaintiff eventually resigned and set up a competing business, and the defendant accordingly claimed that he had breached the Forfeiture Provision and was thus not entitled to the balance of his deferred incentive payments. The plaintiff brought the action seeking a declaration that the Forfeiture Provision was void for being a restraint of trade. Finding that the Forfeiture Provision did not amount to a restraint of trade clause, Steven Chong J (as he then was) held at [60] that:

The Forfeiture Provision, in my view, merely contractually defines when the plaintiff loses his entitlement to the Deferred Incentive Payments. … [T]he plaintiff specifically agreed to abide by the terms of the Incentive Award Plan T&Cs. He had a choice not to accept the Incentive Award Plan T&Cs which is separate and distinct from the Employment Contract and had a further choice having agreed to the Incentive Award Plan T&Cs to compete with...