Soon Kok Tiang v DBS Bank Ltd

• Jurisdiction: Singapore
• Judgment Date: 02 November 2011
• Date: 02 November 2011
• Docket Number: Civil Appeal No 6 of 2011 and Summons No 2274 of 2011
• Court: Court of Appeal (Singapore)

Soon Kok Tiang and others

Plaintiff

and

DBS Bank Ltd and another matter

Defendant

[2011] SGCA 55

Chan Sek Keong CJ

,

Chao Hick Tin JA

and

VKRajah JA

Civil Appeal No 6 of 2011 and Summons No 2274 of 2011

Court of Appeal

Contract—Contractual terms—Contract containing four different descriptions of material term—Which description was operative description

Contract—Contractual terms—Formula in contract referring to percentage without specifying denominator for calculating percentage —Whether contract void for uncertainty

This appeal arose from a lawsuit by 21 investors (‘the Appellants’), representing 192 other plaintiffs (two of whom withdrew from the appeal before it was heard), for the refund of the entire capital sum (less the amount of interest received thereon) which they lost in investing in derivative credit-linked notes called ‘DBS High Notes 5’ (‘the HN5’) issued by DBS Bank Ltd (‘the Respondent’).

The HN5, which were linked to eight reference entities (‘the Reference Entities’), were structured such that the Respondent would use the funds raised from the issue of the HN5 to purchase two structured notes issued by its related entity, Constellation Investments Ltd. The performance of the HN5 was directly linked to (inter alia) these two structured notes (‘the Reference Notes’) and the Reference Entities. Pursuant to the Pricing Statement applicable to the HN5, HN5 holders would receive quarterly interest until the scheduled maturity date of the HN5 (‘the Maturity Date’) and, on the Maturity Date, 100% of the principal amount invested. However, if a ‘Credit Event’ (ie, an event of default in respect of any of the Reference Entities) occurred before the Maturity Date, the Reference Notes would terminate and would also cause the HN5 to terminate. HN5 holders would then receive an amount equivalent to what the Respondent would receive as the ‘Credit Event Redemption Amount’ (‘CERA’) under the Reference Notes.

On 15 September 2008, a Credit Event occurred upon the bankruptcy of Lehman Brothers Holdings Inc (‘Lehman’), one of the Reference Entities. The Respondent informed HN5 holders that the CERA under the Reference Notes was zero due to the substantial notional loss on the reference obligation associated with Lehman in the Pricing Statement and, thus, the CERA under the HN5 was likewise zero. The Appellants contended that the contract governing the HN5 (‘the HN5 contract’) was void for uncertainty as the Pricing Statement contained four different descriptions of the CERA (‘CERA Descriptions’), which they interpreted to be inconsistent and irreconcilable with one another. On this basis, the Appellants brought an action against the Respondent seeking, in the main, a declaration that the HN5 were void and a consequential order that the Respondent pay them (inter alia) the principal amount invested in the HN5.

The High Court judge (‘the Judge’) held that the first and second CERA Descriptions were merely general descriptions of the manner in which the CERA would be calculated, and that the operative CERA Description was the third CERA Description. As for the fourth CERA Description, which set out an inverse relationship between the CERA and the value of the reference obligation of the first of the Reference Entities to default (‘the Defaulted Reference Entity’), the Judge held that it contained an obvious clerical mistake as it would give rise to an absurdity. Applying the third CERA Description, the Judge held that the Appellants were entitled to only a zero payout.

Dissatisfied with the decision of the Judge, the Appellants appealed. They raised two issues on appeal, namely: (a)whether the Judge was right in ruling that the third CERA Description was the operative CERA Description; and (b)regardless of whether it was the third or the fourth CERA Description (these being the only two CERA Descriptions addressed on appeal) which was the operative CERA Description, whether the HN5 contract was void for uncertainty because both the third and the fourth CERA Descriptions were unworkable as they did not provide any agreed basis for calculating an element used in both descriptions, viz, the ‘Final Price’.

Held, dismissing the appeal:

(1) The first CERA Description was in substance the same as the third CERA Description in so far as both would give (for practical purposes) a zero payout, while the second CERA Description (if applied literally) would give the same payout as the fourth CERA Description in the circumstances of this case. The first and third CERA Descriptions were therefore inconsistent with the second and fourth CERA Descriptions: at [52].

(2) The Pricing Statement could only stipulate one operative CERA Description for the purposes of the HN5 contract. The question of which of the four (or two sets of) CERA Descriptions was the operative one was a question of fact which could be conclusively determined by examining the material facts: at [53].

(3) It was clear from a perusal of the Reference Notes and the relevant accompanying documents that the formula for calculating the CERA under the Reference Notes (and, thus, the formula for calculating the CERA under the HN5) was consistently stated to be the formula under the third CERA Description. In other words, the CERA Description for the Reference Notes was the same as the third CERA Description. The Judge was thus right in holding that the operative CERA Description for the purposes of the HN5 contract was the third CERA Description, and that the fourth CERA Description contained a clerical mistake: at [56].

(4) In both the third and fourth CERA Descriptions, ‘Final Price’ was defined as the price of the Defaulted Reference Entity's reference obligation ‘expressed as a percentage’. The words ‘expressed as a percentage’ meant expressed as a percentage of the aggregate principal amount of the Reference Notes, which the nominal value of the Defaulted Reference Entity's reference obligation was equated with. This interpretation was consistent with the structure of the HN5, whose terms provided that all the funds raised from the issue of the Reference Notes would be notionally allocated to the Defaulted Reference Entity: at [61].

(5) As there was no conceptual uncertainty in the definition of ‘Final Price’, the Judge rightly held that the HN5 contract was not void for uncertainty: at [61] and [62].

Brown v Gould [1972] Ch 53 (refd)

East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111 (refd)

Foley v Classique Coaches Ltd [1934] 2 KB 1 (refd)

G Scammell and Nephew Ltd v H C and J G Ouston [1941] AC 251 (refd)

Lloyd's Trust Instruments, Re (24 June 1970) (refd)

May and Butcher Ltd v R [1934] 2 KB 17 (refd)

Riddick v Thames Board Mills Ltd [1977] QB 881 (refd)

Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444 (refd)

Siraj Omar, Dipti Jauhar and Rachel Tan Swee Hua (Premier Law LLC) for the appellants

Davinder Singh SC and Una Khng (Drew & Napier LLC) for the respondent.

Judgment reserved.

Chan Sek Keong CJ

(delivering the judgment of the court):

Introduction

1 The appellants (‘the Appellants’) are a group of 21 investors in derivative credit-linked notes called ‘DBS High Notes 5’ (‘the HN5’) which were issued by the respondent, DBS Bank Ltd (‘the Respondent’). In Originating Summons No 774 of 2009 (‘the OS’), they brought proceedings against the Respondent, on behalf of themselves as well as 192 other plaintiffs listed in the Schedule to the OS (‘the 192 other plaintiffs’), for the refund of the entire capital sum which they and the 192 other plaintiffs had lost in investing in the HN5 (less the amount of interest received thereon) consequent upon the bankruptcy on 15 September 2008 of Lehman Brothers Holdings Inc (‘Lehman’), one of the reference entities to which the HN5 were linked. The High Court judge (‘the Judge’) dismissed the Appellants' action (see Soon Kok Tiang v DBS Bank Ltd [2011] 2 SLR 716 (‘the HC Judgment’)). The Appellants then brought the present appeal. We should mention, as a preliminary point, that prior to the hearing of this appeal, two of the 192 other plaintiffs withdrew from the appeal. The Appellants accordingly applied to this court (via Summons No 2274 of 2011) for leave to amend the OS by deleting the names of those two plaintiffs from the Schedule to the OS. We allowed the application (which the Respondent consented to) with costs to the Respondent fixed at $300.

Background

The launch of the HN5

2 The material facts as pleaded by the parties are not in dispute. The Respondent launched the sale of the HN5 on 30 March 2007 in two tranches, one in Singapore dollars (‘the SGD Tranche’) and one in US dollars (‘the USD Tranche’). The Respondent's offer of the HN5 was expressed to be made on the basis of the information contained in a 93-page pricing statement dated 29 March 2007 (‘the Pricing Statement’) and a 168-page base prospectus dated 22 December 2005 as amended by a supplementary base prospectus dated 5 April 2006 (collectively referred to hereafter as ‘the Base Prospectus’). These documents set out in great detail, inter alia: (a)the terms and conditions applicable to the HN5; (b)the manner in which the Respondent and its related entity, Constellation Investments Ltd (‘Constellation’), would use the funds of purchasers of the HN5 (‘HN5 holders’); and (c)the risks involved in investing in the HN5.

3 The sale of the HN5 was effected by the Respondent accepting applications made by prospective HN5 holders on prescribed application forms (‘Application Forms’). Each Application Form contained an acknowledgement by the prospective HN5 holder that he:

(a)‘agreed [to] the Terms and Conditions on the reverse of this form and the Terms and Conditions set out in ... [the] Pricing Statement’; and

(b)‘ha [d] assessed [the] suitability of the product against [his] risk attitude, financial means, and investment objectives’.

At the time the...