PH Hydraulics & Engineering Pte Ltd v Airtrust (Hong Kong) Ltd and another appeal

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 11 April 2017
• Neutral Citation: [2017] SGCA 26
• Year: 2017
• Date: 11 April 2017
• Published date: 18 April 2017
• Hearing Date: 28 November 2016
• Subject Matter: Contract,Remedies,Punitive damages,Contractual terms,Damages,Exclusion clauses
• Plaintiff Counsel: Tan Chee Meng SC, Josephine Choo and Jeffrey Koh (WongPartnership LLP)
• Defendant Counsel: Assoc Prof Lee Pey Woan (School of Law, Singapore Management University) as amicus curiae.,Tan Chuan Thye SC, Avinash Pradhan, Daniel Gaw, Alyssa Leong and Arthi Anbalagan (Rajah & Tann Singapore LLP)
• Court: Court of Appeal (Singapore)
• Citation: [2017] SGCA 26
• Docket Number: Civil Appeals Nos 234 of 2015 and 96 of 2016

Andrew Phang Boon Leong JA (delivering the judgment of the court): Introduction

Is there any role for the concept of punishment in the common law of contract? Does the remedial response to a breach of contract lie only in compensation? Put simply, does the voluntary nature of an agreement in general and the recognition of the legitimate pursuit of self-interest in particular rule out − in the main, if not altogether − any possibility that egregious conduct by the party in breach might result in an award of punitive damages – that is, a monetary sanction in addition to the payment of compensation to the aggrieved party? To reiterate, is there any role for the concept of punishment in the common law of contract? And, if not, does contract law then necessarily take on a cloak of amorality? As we shall see, these deceptively simple questions belie deep (and oftimes complex) questions that bring us to the very heart of contract law.

Whether or not the law in Singapore should recognise the availability of punitive damages purely for breach of contract (that is to say, absent concurrent liability in tort) is the major issue in the present appeal (“Issue 2”); and to assist us in resolving it, we appointed Assoc Prof Lee Pey Woan (“Prof Lee”) as amicus curiae in this appeal. However, Issue 2 is sandwiched between two other issues. The first is whether the defendant below, and appellant in the first appeal, PH Hydraulics Pte Ltd (“PH”), had been reckless, dishonest and/or fraudulent in its design of a 300-ton Reel Drive Unit (“RDU”) for sale to the plaintiff below and the respondent on appeal, Airtrust (Hong Kong) Ltd (“Airtrust”) (“Issue 1”). In many ways, this particular issue is a threshold one, for if we answer it in the negative, then there would appear to be no legal basis to award punitive damages for breach of contract in the first place – although, for reasons we will come to, we do not think a negative finding on Issue 1 precludes us from expressing our views on Issue 2 (see below at [66]). The third issue (“Issue 3”) is whether a particular clause in the Sale and Purchase Agreement between the parties, Clause 25 (“Cl 25”), can be construed as limiting the extent of the damages payable by PH to Airtrust.

The High Court judge (“the Judge”) held, in Airtrust (Hong Kong) Ltd v PH Hydraulics & Engineering Pte Ltd [2015] SGHC 307 (reported in part in [2016] 1 SLR 1060) (“the Judgment”), in favour of Airtrust on Issue 1 and proceeded to find that PH’s conduct merited the award of punitive damages (thus also finding in favour of Airtrust with regard to Issue 2). Having found that PH had been fraudulent, he held that Cl 25 could not exclude such fraud. Issue 3 was not strictly speaking before the Judge but is an issue that has been raised on appeal. Issues 1 to 3 thus form the basis of PH’s appeal in Civil Appeal No 234 of 2015 (“CA 234”).

In a subsequent hearing, the Judge declined, in Airtrust (Hong Kong) Ltd v PH Hydraulics & Engineering Pte Ltd [2016] 5 SLR 103 (“the Costs Judgment”) to award Airtrust the costs of the action on an indemnity basis and ordered such costs to be awarded on the standard basis instead. Airtrust now appeals against this decision in Civil Appeal No 96 of 2016 (“CA 96”) and whether or not the Judge was right not to order indemnity costs is the final issue in the present appeals (“Issue 4”).

With this very brief overview, let us turn, first, to recount the facts as well as decision of the Judge in the court below.

Facts

PH is incorporated in Singapore. It designs, manufactures, and supplies heavy machinery for offshore use in the marine and gas industry. Airtrust is incorporated in the Special Administrative Region of the People’s Republic of China, Hong Kong.

In 2007, an Australian company, Trident Offshore Services (“Trident”), approached PH with the intention of purchasing a 300-ton RDU. The RDU was to be mounted on board a vessel for the laying of undersea umbilical cables in the Bass Straits of Australia. Airtrust then entered into talks with Trident, and it was decided that it would buy the RDU from PH which was then to be leased to Trident. It is not disputed that all negotiations for the purchase of the RDU were conducted between one of Trident’s associate companies, on Airtrust’s behalf, and PH.

Airtrust and PH entered into a Sale and Purchase Agreement (“SPA”) on 7 September 2007. Under the SPA, PH was to design and supply the RDU. The purchase price was $895,000. Included in the purchase price was American Bureau of Shipping (ABS) “Full Certification” at an itemised cost of $20,000. The purpose of the ABS certification was to ensure that an independent entity would review the design, survey the manufacturing processes and witness the testing of the RDU to ensure conformity with the requisite design, construction, and structural codes and standards. For present purposes, “full certification” refers to a review of the RDU’s structural design, mechanical design and electrical components.

It transpired that ABS was not able to provide certification for machines like the RDU. PH thus suggested to Trident, in an email on 12 October 2007, that ABSG Consulting, Inc (“ABSG”), a subsidiary of ABS, provide the certification instead. The email correspondence on this issue was forwarded to Airtrust, who agreed.

As part of the process for obtaining certification, PH prepared a confidential bundle of documents containing design drawings and calculations and submitted it to ABSG (“Confidential Bundle”). The bundle was prepared by one of PH’s assistant managers, Mr Steven Gan (“Mr Gan”). It was submitted in December 2007. Airtrust was at no time aware of what was in the Confidential Bundle – it was not disputed that PH was solely responsible for designing the RDU and that it kept the design of the RDU confidential.

PH engaged a freelance structural engineer, Dr Liu Li (“Dr Liu”), to analyse its structural design using STAAD.Pro, a computer programme by which structures are modelled so that they could be tested against different loadings, or load cases. In applying load cases to a model, the software also processes what is termed a “unity check”. To pass the unity check, a value of less than “1.0” is required.

In Dr Liu’s preliminary report sent to PH on 26 October 2007, the STAAD.Pro analysis showed that the unity checks were not met. PH then decided to strengthen the structure and indicated so in the AutoCAD drawing that Mr Lei Chengyi, PH’s design engineer at the material time, sent to Dr Liu on 29 October 2007. On 7 November 2007, Dr Liu sent Mr Lei a final report indicating that the structural design passed the unity check.

On 4 February 2008, Ms Renuka Devi (“Ms Devi”), the lead structural engineer from ABSG, asked Mr Gan for a number of documents, including the STAAD.Pro input file. Ms Devi asked for the STAAD.Pro file again the next day, 5 February 2008, but this time from Ms Tan Sin Liu (“Ms Tan”), PH’s mechanical engineer who was in charge of the design of the RDU. On 15 February 2008, Dr Liu emailed the STAAD.Pro file to Mr Lei, who forwarded it on 18 February 2008 to Ms Tan; she sent it to Ms Devi the same day.

On 18 February 2008, Ms Devi emailed PH (her email was specifically addressed to Ms Tan) with, among others, the following query: “No wind load has been considered – Please clarify”. Ms Tan forwarded the email to Dr Liu for his advice on Ms Devi’s query. Dr Liu replied on the same day, “As per the requirement by [PH], wind load was not considered in the report. [PH] suggested that spooler located in the cabine, hence there is no wind load applied.” PH then forwarded that email to ABSG.

On 19 February 2008, ABSG issued three certificates, two of which are relevant to the present appeals: (a) a Structural Design Review certificate, and (b) a Mechanical and Electrical Design Review certificate. Both certificates stated that the “300-ton Wire Spooler Tower” was considered satisfactory provided that the calculations and drawings were adhered to and the workmanship was to the satisfaction of an ABS consulting surveyor.

On 10 April 2008, Trident took delivery of the RDU on behalf of Airtrust. The RDU was then mounted on the vessel Maersk Responder which thereafter set sail for Australian waters. On 20 May 2009, the hydraulic drive motor and gear assembly on Tower A of the RDU broke loose from its mounting and fell down mid-way during the umbilical laying operation involving the second reel. This was a catastrophic failure. In the course of repairing the RDU, and based on further investigations, Airtrust discovered a number of problems with its design and manufacture. It commenced a suit against PH for breach of the SPA. Airtrust averred that the RDU was not of merchantable quality, was not fit for the purpose which it was intended to be used, was not free from defects in design, manufacture, or workmanship, and did not meet the relevant industry standards and certifications.

The decision in the court below

The trial before the Judge was bifurcated and dealt only with the issue of liability. The Judge found that PH had breached the SPA by not delivering an RDU that was of merchantable quality and fit for its purpose, and ordered damages to be assessed. There is no appeal against this finding.

Fraud

The Judge also considered whether PH had been “reckless, dishonest or fraudulent” in the manner it had secured the ABSG certification for the RDU.

In this regard, Airtrust had pleaded in its statement of claim that: PH did not obtain full and proper certification from ABSG because: In its document submission to ABSG, PH did not provide ABSG with any calculations with respect to wind loading. Specifically, PH’s representatives instructed ABSG not to take wind loads into account in considering the adequacy of the design of the structure. The Mechanical and Electrical Design Review was not complete as PH did not...