Ng Boon Ching v Claas Medical Centre Pte Ltd

• Jurisdiction: Singapore
• Judgment Date: 02 March 2009
• Date: 02 March 2009
• Docket Number: Suit No 745 of 2007
• Court: High Court (Singapore)

Ng Boon Ching

Plaintiff

and

Claas Medical Centre Pte Ltd

Defendant

[2009] SGHC 54

Belinda Ang Saw Ean J

Suit No 745 of 2007

High Court

Contract–Illegality and public policy–Restraint of trade–Agreement containing restrictive covenants–Determination of reasonability of restraint by court–Considerations of protection of goodwill sold through sale of business–Whether there was prima facie breach of non-competition clause–Whether legitimate proprietary interest existing–Whether restrictive covenants reasonable in interests of parties and in interests of public–Contract–Privity of contract–Contracts (Right of Third Parties) Act (Cap 53B, 2002 Rev Ed)–Defendant not party to November Agreement–Whether defendant could rely on s 2 Contracts (Rights of Third Parties) Act–Contract–Restraint of trade–Severance–Whether severance of unenforceable portion possible–Whether severance altered meaning of restrictive covenant

The plaintiff ran a clinic practising aesthetic medicine at Chinatown Point (“Dr B C Ng Laser Surgery”) in 1993. In 1996, he set up AHA Centre, a distributorship business of aesthetic laser and intense pulsed light machines and skin care products. Six doctors decided to acquire Dr B C Ng Laser Surgery and AHA Centre. Pursuant to this, the plaintiff incorporated BCNG Holdings Pte Ltd (“BCNG Holdings”) and entered into a Shareholders Agreement with the six doctors on 6 April 2005 (“April Agreement”). Under the terms of the April Agreement, Claas was given an option of two years to purchase the plaintiff's remaining 40% shareholding in BCNG Holdings at an agreed sale price of $1.28m. In the event Claas did not exercise the option, the plaintiff could purchase the defendant's 60% shareholding in BCNG Holdings at an agreed price of $700,000. Once all the shares in BCNG Holdings were held by one shareholder, the other shareholders would cease to be bound by the restraint of trade provision under cl 12.1 (i) of the April Agreement. The plaintiff began to train the other shareholders in aesthetic medicine and surgical procedures. The option to acquire the plaintiff's remaining 40% shareholding in BCNG Holdings was exercised in November 2005. As they were short of funds, the plaintiff agreed to arrange for a loan of $1.28m from UOB. The plaintiff and the six doctors entered into another Shareholders Agreement dated 15 November 2005 (“November Agreement”). Unlike the April Agreement, Claas was not a party to the November Agreement. This November Agreement included a restraint of trade provision (“Clause 11”) which provided that the seven signatories were precluded for a period of three years, following the date when any one shareholder ceased to hold shares in Claas from, inter alia, competing with Claas; soliciting or dealing with its customers or, soliciting or enticing its employees. In default, the offending party had to pay liquidated damages to Claas. Dr Ng promised to pay $1m as liquidated damages while the other signatories to the November Agreement agreed to pay $700,000. From 2005, Claas took over the running of the Chinatown Point clinic. A Supplemental Shareholders Agreement was entered into between the seven original shareholders of Claas and Dr Joseph Soh (“Dr Soh”), who acquired some shares in Claas and agreed to be bound by the terms and conditions of the November Agreement. The plaintiff's shareholding in Claas increased to 23% and the six doctors together with Dr Soh held 77% of the paid up capital of Claas. The plaintiff later resigned as a director of Claas and BCNG Holdings.

In this action, the plaintiff sued the defendant (“Claas”) for the total sum of $236,500 being the balance of outstanding loans owed by Claas. The claim was admitted by Claas who sought to set-off the debt against its counterclaim of $1m for breach of Clause 11 after the plaintiff set up his own general and aesthetic medical practice Dr B C Ng Aesthetics at Goldhill Plaza.

Held, allowing the claim but dismissing the counterclaim:

(1) Given that the defendant was not a party to the November Agreement, the first issue was whether Claas could sue to enforce the non-competition provision by relying on s 2 (1) (a) and 2 (b) of the Contracts (Rights of Third Parties) Act (Cap 53B, 2002 Rev Ed) (“the Act”). First, s 2 (1) (a) of the Act was inapplicable as the November Agreement did not expressly provide that Claas could enforce the terms of Clause 11 (a) and Clause 11 (c) against the plaintiff. Second, for s 2 (1) (b) of the Act to apply, the third party had to be expressly identified in the contract by name, as a member of a class or answering a particular description but need not be in existence at the point the contract is entered into. Clause 11 referred to Claas as the “Company” and payment of liquidated damages under Clause 11 (b) and Clause 11 (c) left no doubt as to whom the payment was to be made and the quantum of the payment. Clause 11 (c) therefore purported to confer a payment benefit on Claas: at [23] to [30].

(2) The defendant had no locus standi to sue the plaintiff under the November Agreement. Section 2 (2) of the Act required that parties intended third party enforcement on a proper construction of the contract. However, the presence of inconsistent terms in the November Agreement was sufficient to rebut the presumption of intention. The terms of the November Agreement were therefore for the protection of the plaintiff and the other shareholders in their capacity as individual shareholders, and not for Claas as a corporate entity. The restrictive covenants applied only to shareholders who were parties to the November Agreement or those who agreed to be bound by the provision when they bought shares. A right in contract to claim liquidated damages under Clause 11 (b) and Clause 11 (c) for breach of Clause 11 (a) could only be relied upon by the shareholders against another if all were bound by the November Agreement. The majority shareholder of Claas, Unimedic Pte Ltd, had not justified (and there was no evidence of this) how it was entitled to the benefit of the restrictive covenants through an action brought by Claas: at [31] to [37] and [38] to [41].

(3) The second issue was whether the plaintiff had been discharged or released from the obligations under Clause 11 by virtue of cll 12.1 (i), 12.1 (iv) and 12.2 (ii). First, cl 12.2 (ii) only applied if one of the five events in cl 12.1 occur. Second, cl 12.1 (iv) was inapplicable as the identity of the acquiring company was not named by the plaintiff and the plaintiff had not established that all the shareholders of Claas had become the shareholders of the acquiring company. Third, cl 12.1 (i) did not apply as the shares were not held by only one shareholder: at [44] to [48].

(4) The covenants entered into by the plaintiff in the November Agreement were supported by consideration. The plaintiff received a total of $3.2m for the shares in BCNG Holdings which he sold to Claas and the draft annexed to the April Agreement contained the restrictive covenant. However, the restrictive covenant would only be enforceable if (a) there was an interest meriting protection; (b) the restraint was reasonable; and (c) it was not contrary to the public interest. The court would enforce a restrictive covenant in the sale of a business if it went no further than was reasonably necessary to protect the legitimate proprietary interest in the goodwill: at [50] to [54].

(5) The onus of showing that the restrictive covenant was against the public interest lay with the party avoiding enforcement. A non-competition clause in the context of a sale of business could not be said to be contrary to public interest. The restrictive covenants were taken for the protection of the goodwill of the business sold through the medium of a share sale. Both the April and November Agreements were inter-connected in that the latter was a condition of the sale of the plaintiff's shares in BCNG Holdings: at [55] to [64].

(6) The onus of showing the reasonableness of the restrictive covenant between the parties was on the defendant. The court would examine the goodwill of the business to decide if a restraint was reasonable and whether it was more than adequate for the protection of the legitimate interests of the parties to the November Agreement. The reasonableness of any contractual restraint of trade had to be judged in light of the facts and circumstances as they were at the time the contract was entered into although the parties' reasonable expectations were to be taken into account. Protectable goodwill referred to that which attached to the business which the plaintiff as vendor had sold: at [65] to [68].

(7) Clause 11 was drafted in very wide terms and prohibited the parties from being engaged and/or interested in any trade and/or business carried on in Singapore that was similar to the “Business” of the Company and/or the practice of “Aesthetic Medicine” in Singapore. Clause 11 covered any and every type of practice of aesthetic medicine and as such, was wider than reasonably necessary to protect the goodwill sold by the plaintiff: at [65] to [73].

(8) Given that the plaintiff had a loyal following of patients wherever he was located, a restraint covering the whole of Singapore was necessary. The sale of the business included the plaintiff's patient lists. Patients of a practice were one of the elements of the goodwill of the practice. On the other hand, the restriction of three years was unreasonably long. The ambit of Clause 11 was therefore unnecessarily wide and vitiated by unreasonableness. Furthermore, one might take into account the provisions of Clause 11 (c) in considering the enforceability of Clause 11 (a). Clause 11 (c) was a penalty clause and it provided an additional reason for holding Clause 11 (a) to be an unreasonable restraint of trade: at [74] to [76] and [83].

(9) A threefold test had to be applied in considering if severance of the...