PROVING CAUSATION IN A CLAIM FOR LOSS OF CHANCE IN CONTRACT

• Author: LEE Yeow Wee David LLB (Hons) (National University of Singapore); Assistant Registrar, Supreme Court of Singapore.
• Published date: 01 December 2005
• Date: 01 December 2005
• Citation: (2005) 17 SAcLJ 426

In 1995, the Court of Appeal dealt with the issue of loss of chance arising from a breach of contract in Straits Engineering Contracting Pte Ltd v Merteks Pte Ltd[1996] 1 SLR 227. Almost ten years on, the decision of the Court of Appeal in Asia Hotel Investments Ltd v Starwood Asia Pacific Management Pte Ltd[2005] 1 SLR 661 not only provided an opportunity for an update of the law in this area, but also presented a particular factual matrix upon which the court could provide valuable insight on how the thorny issue of causation in a claim for loss of a chance in contract is to be decided. Interestingly, the decision of the Court of Appeal was split, with the Chief Justice delivering a dissenting judgment. This article summarises the decision, analyses the differences of opinion in the Court of Appeal and surveys the decisions and authorities relied upon. There is also a brief discussion on how the views of the Court of Appeal differ with the law on loss of chance in the area of tort law. Finally, it aims to provide a framework for practitioners and courts in future cases involving a claim for loss of a chance in contract.

I. Introduction

1 The law on loss of chance has always been a thorny issue in both contract law and tort law.1 Since Chaplin v Hicks2 at the turn of the last

century, the Bench, the Bar and academia alike have found difficulty grasping the fundamental jurisprudential and theoretical basis for such a claim in contract in relation to other topics in contract law. This is not surprising because typically in a claim for loss of a chance, a defendant has breached a contract vis-à-vis the plaintiff, resulting in the plaintiff suffering the loss of a chance of a third party conferring a benefit on the plaintiff. Thus, the seeds of complexity are sown in the very factual scenario in which such a claim arises. Quite often, such a case involves a mix of events which actually happened between the immediate parties (ie, the plaintiff and the defendant), and postulations of whether a third party might have conferred a benefit on the plaintiff.

2 For example, in Chaplin v Hicks, there were two sets of events which had to be evaluated: first, whether the defendant-newspaper’s failure to inform the plaintiff about an audition in time resulted in her losing a reasonable opportunity to present herself for selection by a theatre manager, and second, what her chances of being selected by the theatre manager (the third party) were, if she had been duly informed. The former involved an evaluation of past facts which actually happened while the latter necessitated a certain degree of speculation as to what the third party might have done.

3 The English Court of Appeal in Chaplin v Hicks drew a distinction between the two, but not before rejecting arguments by counsel that the damages to be awarded would have been too remote.3 This is one illustration of how easy it is for a factual issue of causation to be camouflaged and passed off as another issue in contract law. Indeed,

the interaction of loss of chance as a concept with other areas of contract law has been the subject of literature both locally and overseas.4

4 Unlike the existing literature on this subject, this writer does not seek to be overly ambitious. The focus of this article will be on the interaction of causation and loss of chance in contract. In particular, it will discuss and analyse the standard of proof required of a plaintiff in proving loss of a chance where the issue of causation requires not just a determination of hypothetical actions by a third party, but also the hypothetical actions by the immediate parties, pursuant to the breach.

5 This was precisely the situation which arose in the recent decision of the Court of Appeal in Asia Hotel Investments Ltd v Starwood Asia Pacific Management Pte Ltd.5 In that case, the High Court found that the defendants had breached the contract between the plaintiff and the defendants, but awarded nominal damages of $10 because the trial judge found that the plaintiff could not prove that its claim for loss of a chance was caused by the defendants’ breach. The trial judge held that the plaintiff’s own inaction and incapability in complying with the requirements of the deal were what caused the loss of a chance.6 The appeal by the plaintiff was allowed by a majority of the Court of Appeal,7 with Chief Justice Yong Pung How delivering a dissenting judgment.8

6 This article seeks to analyse the difference in opinion and survey the authorities which had been relied on by the Court of Appeal. A brief comparison is then made with the approach adopted by the courts towards proving causation in tort law. Finally, and more importantly, this article aims to provide the lawyers and the courts with a framework to consider future cases involving the issue of causation in a claim for loss of chance in contract.

II. A summary of the facts in Asia Hotel leading up to the appeal

7 An analysis of the decisions emanating from the Court of Appeal requires an understanding and appreciation of the facts in Asia Hotel. The plaintiff (and appellant in the appeal), Asia Hotel, was a company whose director was one Mr Gary Murray. The plaintiff wanted to invest in a hotel in Bangkok. This hotel was formerly known as the Grand Pacific Hotel (“Grand Pacific”). At the material time, Grand Pacific was owned by a company known as PS Development Ltd (“PSD”). PSD had two shareholders. The majority shareholder was the Lai Sun group of companies (“Lai Sun”) and the minority shareholder was a Thai gentleman by the name of Mr Pongphan Samawakoop. The arrangement between Mr Pongphan and Lai Sun was such that if Lai Sun wanted to sell its shares in PSD, Mr Pongphan would have the first right of refusal. In short, this meant that Lai Sun would be able to sell its shares in PSD to others after Mr Pongphan declined to purchase those shares.

8 It was undisputed that Lai Sun was in some financial trouble and that it was keen to sell its shares in PSD. Mr Murray was an interested buyer. The plaintiff, through Murray, wanted to upgrade the Grand Pacific (a four-star establishment) to a five-star hotel. In order to achieve its goal, the plaintiff had to raise finances of around 1.3bn Thai baht (or US$31m) to purchase Lai Sun’s shares, restructure the debts of the Grand Pacific and renovate the hotel to a five-star status.

9 In November 2001, the plaintiff entered into a memorandum of understanding (“MOU”) with Lai Sun for the sale of the shares. Under this MOU, Asia Hotel had up to 14 December 2001 to complete its due diligence and enter into a sale and purchase agreement. It was also obliged, under the MOU, to provide a deposit of US$500,000. In turn, Lai Sun undertook not to negotiate with any other party up to the expiry of this MOU.

10 After this MOU, Asia Hotel had to get the finances in place and to engage an international hotel management company. It approached

Starwood Asia Pacific Management Pte Ltd (“Starwood”)9 and on 4 December 2001, it signed a non-circumvention agreement (“NCA”) with Starwood. Under this NCA, Asia Hotel and Starwood agreed not to enter into negotiations with any other party for the Grand Pacific deal for a period of one year.

11 Asia Hotel could not finish its tasks under the MOU by 14 December 2001. Instead, it asked for an extension of time from Lai Sun. Lai Sun turned down this request. In its letter to Asia Hotel,10 Lai Sun stated expressly that it did not wish to tie itself down to any one purchaser and that it would serve its interests best by opening up the offers to others.11

12 Thereafter, the Narulas came into the picture. The Narulas were the ones who eventually won the race to secure the Lai Sun shares for the Grand Pacific. It is interesting to note that it was Mr Pongphan who approached the Narulas for the deal. It is even more interesting to realise that Mr Pongphan spoke to the Narulas only after he (Mr Pongphan) had informed Mr Murray that he would have to look for alternative partners. It was Mr Murray who told Mr Pongphan to go ahead.12 Eventually, the Narulas entered into an MOU with Lai Sun on 5 February 2002 for the sale of the Lai Sun shares to the Narulas. Prior to that date, the Narulas also obtained Mr Pongphan’s irrevocable approval for Lai Sun to sell the shares to the Narulas on 18 January 2002. The MOU was eventually extended indefinitely on 19 February 2002 to allow the Narulas to obtain financing for the deal. A sale and purchase agreement was then signed between the Narulas and Lai Sun on 22 March 2002. Two months later,

the Narulas’ loan agreement with the bank was executed and on the same day, the sale and purchase of the shares to the Narulas was completed.

13 What complicated matters was the fact that the Narulas approached Starwood to manage the hotel. The evidence showed that on or about 15 February 2002, Starwood was approached by the Narulas’ agent to discuss the possibility of Starwood managing the Grand Pacific as a Westin.13 The basic terms of a management agreement was drawn up by the Narulas and Starwood on 28 February 2002 and a draft letter of intent sent from Starwood to the Narulas on 14 March 2002. In short, as the Narulas gathered pace in securing the deal with Lai Sun and with the financing arrangements, they negotiated with Starwood in haste. Finally, this led to a management agreement signed between Starwood’s nominee and the shareholders of PSD (namely, the Narulas14 and Pongphan) on 15 May 2002.

14 Apart from these facts upon which there is a similar emphasis in both the Chief Justice’s dissent and the majority judgment from Chao Hick Tin JA, there appears to be a difference in emphasis on some of the other facts. For example, the Chief Justice appeared to place much weight on Mr Murray’s “lacklustre negotiations” with the various parties offering a “stark contrast” from the conduct of the Narulas. Key amongst the facts...