Sun Electric Pte Ltd and another v Menrva Solutions Pte Ltd and another

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 03 December 2018
• Neutral Citation: [2018] SGHC 264
• Court: High Court (Singapore)
• Docket Number: Suit No 200 of 2016
• Published date: 01 October 2019
• Year: 2018
• Hearing Date: 26 June 2018,26 January 2018,30 January 2018,24 January 2018,31 January 2018,25 January 2018
• Plaintiff Counsel: Daniel Liu Zhaoxiang and Lim Yangyu (WongPartnership LLP)
• Defendant Counsel: Ng Lip Chih, Jennifer Sia Pei Ru and Rezvana Fairouse (NLC Law Asia LLC)
• Subject Matter: Contract,Breach,Contractual terms,Tort,Negligence,Duty of care,Breach of duty,Companies,Incorporation of companies,Lifting corporate veil
• Citation: [2018] SGHC 264

Vinodh Coomaraswamy J:

Sun Electric Power Pte Ltd (“SEP”) is a market-maker in Singapore’s electricity futures market.¹ SEP’s parent company, Sun Electric Pte Ltd (“SE”),² engaged Menrva Solutions Pte Ltd (“Menrva”) as a consultant to advise on SEP’s obligations as a market-maker. Under their consultancy agreement (“the Consultancy Agreement”), Menrva was obliged to provide the services of Menrva’s principal, Mr Bernard Chan (“Mr Chan”), to SE.³ To mitigate SEP’s risk as a market-maker, Mr Chan committed SEP to a series of hedges.⁴ These hedges turned out to be loss-making. Has Menrva breached the Consultancy Agreement? Did Menrva and Mr Chan owe the two Sun Electric companies a duty of care? Can Mr Chan be held personally liable for Menrva’s breaches of duty? These are the questions raised in this action.

The background The parties

SE is the first plaintiff in this action. It is in the business of operating solar electric power systems and trading energy.⁵ SEP is the second plaintiff in this action. It is a wholly-owned subsidiary of SE and is in the business of generating electricity. It holds a retail licence to sell electricity in Singapore.⁶ The director and chief executive officer of both plaintiffs is Dr Matthew Peloso (“Dr Peloso”).

Menrva is the first defendant in this litigation. It is in the business of trading commodities and providing business and management consultancy services.⁷ Mr Chan is the second defendant in this litigation. He is the sole director and sole shareholder of Menrva.⁸

The Scheme

In early 2015, the Energy Market Authority of Singapore (“EMA”) established the Enhanced Forward Sales Contract Scheme (“the Scheme”). The objective of the Scheme is to facilitate the participation of industry players in Singapore’s electricity futures market.⁹

Participants in the Scheme are market-makers in the electricity futures market. They therefore undertake an obligation to create liquidity in the market.¹⁰ The core obligation of a participant is either to buy or to sell a certain volume of electricity futures each trading day, depending on the prevailing price of the futures.¹¹

Like any futures, electricity futures fluctuate significantly in value from day to day and even minute to minute. The market-making obligations of a participant in the Scheme therefore entail a significant amount of risk. Under the Scheme, participants can mitigate this risk by entering into forward sale contracts (“FSCs”) with SP Services Limited (“SPS”).¹²

When an FSC between a Scheme participant and SPS is settled, the participant will either receive a payment from SPS or make a payment to SPS. The direction of the payment and the size of the payment on settlement depends on the difference between the wholesale electricity price (“WEP”) and the liquefied natural gas vesting price (“LVP”) at that time.¹³ If the WEP is higher than the LVP, a participant is obliged to pay SPS the difference between the WEP and the LVP. This is known as a negative FSC payment. If the WEP is lower than the LVP, SPS is obliged to pay the participant the difference between the WEP and the LVP. This is known as a positive FSC payment.

The EMA accepted SEP as a participant in the Scheme in March 2015.¹⁴ It was in the course of seeking the status of a participant in the Scheme that Dr Peloso and Mr Chan met for the first time.¹⁵ Mr Chan was introduced to Dr Peloso as an experienced power trader who could provide advisory, consultancy and risk management services to the plaintiffs in connection with SEP’s participation in the Scheme.¹⁶ On one occasion, Dr Peloso invited Mr Chan to a meeting with representatives of the EMA.¹⁷ After that, Dr Peloso sought advice from Mr Chan informally on the Scheme, such as whether it was a worthwhile venture and how SEP would carry out its market-making obligations should it become a participant.¹⁸

Dr Peloso and Mr Chan eventually sought to formalise their collaboration. They had several discussions about how they would do so. One suggestion which they discussed was a joint venture between Dr Peloso’s companies and Abundance Way Investments Ltd (“Abundance Way”). Abundance Way is Mr Chan’s wholly-owned corporate vehicle incorporated in the British Virgin Islands.¹⁹ An alternative suggestion was a consultancy agreement between Dr Peloso’s companies and Abundance Way. The parties eventually agreed to structure their collaboration as a consultancy agreement between SE and a corporate vehicle to be incorporated in Singapore by Mr Chan.²⁰

To this end, Mr Chan incorporated Menrva in April 2015.²¹

The Consultancy Agreement

Menrva and SE executed the Consultancy Agreement a few days after Menrva was incorporated.²² The parties agreed to backdate the agreement to 3 April 2015 – even though Menrva had not yet been incorporated on that date – to reflect the fact that Mr Chan had commenced providing consultancy services to SE from that date.²³

One of the key issues in this case arises from the fact that SEP was the participant in the Scheme, and therefore the target of Dr Peloso’s services, but was not a counterparty to the Consultancy Agreement.

Clause 1 of the Consultancy Agreement stipulated that Menrva was to perform its obligations to SE under the agreement by providing Mr Chan’s advisory services:²⁴ 1. Services a. [Menrva] shall provide the services of Bernard Chan (the “Advisor”) b. [Menrva] shall provide SE the service for setting up the … Market Making Obligations of the [Scheme]. Services include: i. Evaluation of partner(s) for fulfilling the … Market Making Obligations and its Risk Management (“MM Partner”) ii. Evaluation of proposals from MM Partner iii. Facilitation of negotiation with the MM Partner iv. Structuring of the Definitive Agreement between SE and the MM Partner v. [Menrva] will be appointed to the SE Advisory Committee throughout the term below, and provide the following services if the fees payment defined in Section 3 below from the preceding quarter exceeds SG$20,000 a) Daily indicative valuation of the FSC for risk monitoring b) Quarterly Outlook on the drivers affecting the value of the FSC c) Quarterly auditing of the financial settlement with the MM Partner and the [EMA] / [SPS] d) Consultation on risk management of the FSC e) Report of consolidated FSC income and costs for SE accountants.

In addition to these express terms, it is common ground that the Consultancy Agreement contains an implied term that Menrva would exercise reasonable care and skill in providing its services under the Consultancy Agreement.²⁵

One of the key steps which SE had to have in place before agreeing to be a participant in the Scheme was to identify and appoint what the Consultancy Agreement calls the MM Partner. The purpose of the MM Partner was to allow SEP to lay off some of the risk associated with being a participant. The corollary of that was that SEP would have to share with the MM Partner some of its reward for being a participant.

On 1 June 2015, with the assistance of Menrva, SEP secured Tong Teik Pte Ltd (“Tong Teik”) as its MM Partner.²⁶ Tong Teik’s obligations as the MM Partner were to perform SEP’s market-making obligations and to make all negative FSC payments due to SPS. In return, SEP agreed to pay Tong Teik 70% of the positive FSC payments which it received from SPS.

The Scheme and the amended Scheme

The Scheme was launched on 1 July 2015,²⁷ the beginning of the third quarter of 2015. In the week following its launch, there was significant volatility in the electricity futures market. As a result, the EMA suspended the Scheme on 11 July 2015 in order to undertake a review of it.²⁸

On 21 August 2015, as a result of the review, the EMA announced a suite of amendments to the Scheme.²⁹ It introduced a cap on positive FSC payments, a floor on negative FSC payments and a global revenue cap. The result of these amendments was to remove much of the risk associated with being a participant in the Scheme, while at the same time limiting a participant’s reward.

These amendments took effect from 1 October 2015, the beginning of the fourth quarter of 2015. That is when the Scheme was re-launched.

The CFDs

From the outset of the Scheme, there were concerns over volatility in the electricity market. These concerns were prompted largely by the possibility of electricity suppliers in Singapore deliberately restricting supply.³⁰ These electricity suppliers did not want the Scheme to proceed. As suppliers, they could disrupt the Scheme by reducing the supply of electricity in the market, thereby causing the WEP to increase. That, in turn, would cause participants in the Scheme to incur negative FSC payments.

One of the ways to hedge against volatility in the electricity futures market is by entering into contracts for differences on the WEP (“CFDs”). A CFD is a contract in which the seller of the CFD pays the buyer of the CFD the difference between the current value of an asset and the future value of the asset on a stipulated date.³¹ If the difference is negative, it is the buyer who pays the seller instead. The asset which forms the basis of the CFDs in this action is wholesale electricity. The value of these CFDs was dependent on the prevailing WEP.

In order to hedge against volatility in the electricity futures market,³² SEP entered into seven CFDs: A CFD on 29 June 2015 for the third quarter of 2015;³³ A CFD on 7 July 2015 for the fourth quarter of 2015;³⁴ A CFD on 3 August 2015 for the fourth quarter of 2015;³⁵ A CFD dated 31 August 2015 for the fourth quarter of 2015;³⁶ A CFD on 14 September 2015 for the fourth quarter of 2015;³⁷ A CFD on 15 September 2015 for the fourth quarter of 2015;³⁸ and A CFD on 17 December 2015 for the first quarter of 2016.³⁹ Of these seven CFDs, the last six were loss-making. SEP suffered a loss on these six CFDs totalling just under $1.46m.⁴⁰...