Metalform Asia Pte Ltd v Ser Kim Koi

• Jurisdiction: Singapore
• Judgment Date: 13 August 2008
• Date: 13 August 2008
• Docket Number: Suit No 496 of 2006 (Registrar's Appeal No 410 of 2007)
• Court: High Court (Singapore)

Metalform Asia Pte Ltd

Plaintiff

and

Ser Kim Koi and another (Holland Leedon Pte Ltd (in liquidation), third party)

Defendant

[2008] SGHC 131

Judith Prakash J

Suit No 496 of 2006 (Registrar's Appeal No 410 of 2007)

High Court

Civil Procedure–Pleadings–Striking out–Buyer claiming damages in statement of claim for breach of warranties with reference to multiplier which formed component of purchase price–Whether high threshold necessary to enable court to strike out portions of statement of claim on basis that it disclosed no reasonable cause of action was reached–Contract–Remedies–Damages–Buyer claiming damages for breach of warranties with reference to multiplier which formed component of purchase price–Whether damages for cost of cure could be claimed by applying multiplier used to derive the purchase price–Whether damages for loss of bargain could be claimed by applying multiplier used to derive purchase price

The plaintiff entered into a Sale and Purchase Agreement (“SPA”) to purchase the business of the third party. The defendants were directors and together the majority shareholders of the third party, and became directors of the plaintiff three days before the completion date of the SPA. Under the SPA, the third party gave the plaintiff several warranties as to the business and assets of the third party. The SPA also provided that the largest component of the purchase price was an item known as “EBITDA” (ie, earnings before interest, taxation, depreciation and amortisation) multiplied by seven.

The plaintiff subsequently alleged that the third party breached several warranties provided in the SPA. The plaintiff also alleged that the defendants breached their fiduciary duties owed to the plaintiff as they had a duty but failed to inform the plaintiff of the alleged breaches of warranties, as the plaintiff's directors. An arbitral tribunal determined that “Recurring Costs” (ie, costs allegedly incurred in the year after completion to rectify certain breaches of warranties and multiplied by seven) could be claimed from the third party as part of the claim for damages for breaches of warranties under the SPA. The present action was then commenced against the defendants. In the plaintiff's statement of claim, the plaintiff claimed damages for the alleged breach of fiduciary duties from the defendants, consisting of costs allegedly incurred in the year after completion to rectify the alleged warranties and Recurring Costs. The defendants applied to strike out the portions of the statement of claim relating entirely to the Recurring Costs claim. The assistant registrar, very substantially, granted the defendants' application and the plaintiff appealed against the assistant registrar's decision.

Held, dismissing the appeal:

(1) The basic rule for measuring damages in contract was that the claimant could claim either on the basis of loss of bargain or cost of cure, but not both. The applicable basis of the claimant's claim depended on the circumstances of each case: at [14].

(2) The plaintiff's claim for loss of bargain was not automatically equivalent to the cost of rectification multiplied by seven simply because the purchase price had been calculated on the basis of multiplying EBITDA by seven: at [21].

(3) The plaintiff's definitions of “one-off costs” and Recurring Costs in the statement of claim indicated that the plaintiff's pleaded case was for the cost of cure. Having claimed for the cost of cure, the plaintiff sought to multiply some of these costs by seven without pleading or proving that such costs had been or would have been incurred for seven years. There was also no legal basis for the plaintiff to use the multiplier to quantify its damages in relation to the cost of cure, since there was no contractual provision in the SPA providing for the reduction of the purchase price by reference to the costs to be incurred to remedy the alleged breaches of warranties multiplied by seven: at [24], [25] and [32].

(4) The plaintiffs were not entitled in law to adopt the “Purchase Price Formula” set out in the SPA to calculate the Recurring Costs. To be entitled to adopt the Purchase Price Formula to calculate Recurring Costs without proof of actual costs incurred for seven years, a contractual provision providing for the calculation of damages in this way, or providing for the abatement or adjustment of the purchase price using this formula, had to be identified and pleaded. Here, the SPA provided that the multiplier of seven was only relevant to the calculation of the purchase price and did not provide any other use for the multiplier. Thus, the EBITDA could not be changed or adjusted by any notional Recurring Costs which the plaintiff claimed the third party should have incurred: at [29] and [30].

(5) Further, the SPA provided that the “Purchase Consideration” as set out in the Completion Statement (which included the EBITDA as agreed by the parties) was to be final and binding on all parties in the absence of fraud or manifest error. The plaintiff did not assert that the Completion Statement was wrong as it was the result of fraud or manifest error in the statement of claim and thus did not challenge the actual EBITDA: at [31].

(6) The plaintiff also did not plead that there was a warranty of the value of the EBITDA or a warranty that the EBITDA in the Completion Statement was a figure which the plaintiff could rely on in calculating the purchase price. Thus, the multiplier of seven applied to the EBITDA to obtain the purchase price could not be used to calculate damages. If the proper measure of damages was the loss of bargain, the damages would be the difference between the price actually paid and the true value of the business at the time of the agreement, and such true value of the business would have to be pleaded and proved: at [38].

(7) The defendants were not estopped by the determination of the arbitral tribunal from questioning the way in which the damages claim here had been formulated. The decision of the arbitrator was not a final and conclusive judgment because it was a domestic arbitration and the third party had applied for leave to appeal against the decision on the basis that it was wrong in law. Further, the parties to the arbitration and the parties to the proceedings here were different as the defendants were not parties to the arbitration, and the decision made in the arbitration could not bind them: at [39].

Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 (distd)

Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's Rep 423 (distd)

Rules of Court (Cap 322, R5, 2004Rev Ed)O 18r 19

C R Rajah SC, Chew Kei-Jin and Lavinia Rajah (Tan Rajah & Cheah) for the plaintiff

Philip Jeyaretnam SC, Ajinderpal Singh, Kirindeep Singh and Koh Jiaying Hsien (Rodyk & Davidson LLP) for the defendants

Lee Eng Beng SC and Farrah Salam (Rajah & Tann) for the third party.

Judith Prakash J

Introduction

1 By Summons No 4377 of 2007, the defendants applied for certain parts of the plaintiff's statement of claim (Amendment No 2) (“the SOC”) to be struck out. This application was heard by the assistant registrar on 13 December 2007. She, very substantially, granted the defendants' application. The plaintiff appealed to the judge in chambers and I dismissed this appeal with costs on 31 March 2008. The plaintiff now seeks to appeal further to the Court of Appeal.

Background

2 Pursuant to a sale and purchase agreement dated 13 June 2004 (“SPA”), the plaintiff purchased the business and specified assets of the third party, Holland Leedon Pte Ltd (“HLPL”). The completion date for the acquisition under the SPA was 1 July 2004 (“the Completion Date”).

3 The defendants were the directors and together the majority shareholders of HLPL at all material times, including the period of time between 13 June 2004 and the Completion Date.

4 Pursuant to the SPA, HLPL furnished the plaintiff with several warranties pertaining to several aspects of the business and assets of HLPL. The plaintiff subsequently alleged that several of these warranties were breached by HLPL. The plaintiff also alleged that the defendants who became directors of the plaintiff as well, three days before the Completion Date, knew or ought to have known of HLPL's breach of the warranties under the SPA. By virtue of the fact that the defendants had become directors of the plaintiff prior to completion, the plaintiff contended that the defendants had a duty to inform the plaintiff of the alleged breaches but failed to do so. The present action was started by the plaintiff to claim damages from the defendants for their alleged breach of fiduciary duties to the plaintiff.

5 The purchase price paid by the plaintiff was around US$264m and was fixed as provided by cl 4.1 of the SPA. The purchase price comprised various components, the largest one of which was an item known as “EBITDA” multiplied by seven. The term EBITDA stands for “Earnings Before Interest, Tax, Depreciation and Amortisation” of HLPL for the financial year ending on 30 June 2004.

6 It is the plaintiff's case that if the warranties which HLPL has allegedly breached had in fact been true (ie, that HLPL had run its business in a way which complied with the warranties), HLPL would have had to incur much greater costs in the conduct of the business. Such costs would have been “Recurring Costs” in the operation of the business and would have reduced the amount of the EBITDA. The purchase price would accordingly also have been reduced by:

(The difference between the...