Tan Hock Keng v L and M Group Investments Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 12 April 2002
• Neutral Citation: [2002] SGCA 22
• Docket Number: Civil Appeal No 600120 of
• Date: 12 April 2002
• Year: 2002
• Published date: 19 September 2003
• Plaintiff Counsel: Davinder Singh SC, Ajay Advani and Chan Wei Meng (Drew & Napier)
• Citation: [2002] SGCA 22
• Defendant Counsel: Chia Chor Leong (Chia Chor Leong & Co)
• Court: Court of Appeal (Singapore)
• Subject Matter: Evidence,Failure of company to repay,Whether clause imposes obligation of guarantee,Whether essential for word 'guarantee' to be in clause before guarantee obligation can arise,Words and Phrases,Agreements for sale and purchase of shares,Context of clause and entire document,Limitation of liability clause,'Procure',Admissibility of evidence,s 94 proviso (f) Evidence Act (Cap 97, 1997 Ed),Contractual terms,Whether breach of obligation,Whether extrinsic evidence admissible to aid construction,Whether clause clear and unambiguous,Contract,Contractual obligation to procure that company repays loans,Rules of construction

and gave judgment for Tan in the amount of $285,000.

In the same action, L&M made a counterclaim against Tan. This claim arose from a prior L&M loan of some $5.5 million to KWF. Following default, L&M counterclaimed against Tan in respect of two instalments of the loan totalling $440,000. L&M argued that Tan had in clause 15.1 agreed to "procure that (KWF) repays the inter-company loans" and this meant that he had "guaranteed" the repayment of the $440,000. At trial, the judge found that under clause 15.1, Tan had assumed an obligation which in effect guaranteed that KWF would repay the inter-company loans. Tan was therefore liable to L&M for the same amount.

In the current proceedings, Tan appealed against the judge’s construction of clause 16.1. On the counterclaim, Tan argues that just because he had agreed to procure that KWF pay the instalments on the loans, this did not mean that he assumed personal liability for its failure to meet its payment obligations. At best, it was only an obligation on him to use his best endeavours to persuade or induce KWF to repay the loans. In any case, even if he was in breach, there was no evidence that his breach had caused L&M’s loss.

Held

, allowing the appeal in part

(1) Interpreted as a whole, clause 16.1 is obscure and ambiguous. Unlike other clauses in the contract where the draftsman had deemed it fit to refer to clause 16.1, clause 14 did not make express reference to it. While clause 16.1 effectively restricted the rights of Tan, L&M was not subjected to the same restrictions. This was inconsistent with a sale based on NTA. The aim of clause 14 is to ensure that no party should obtain a windfall and clause 16.1 is probably intended to apply only to those provisions in the S&P agreement where only L&M had assumed obligations to Tan (see 18-22).

(2) Generally, extrinsic evidence is inadmissible to construe a document unless the facts fall within any of the exceptions specified in s 94 of the Evidence Act (see 10-11). In view of the unclear nature of the scope and the precise restrictions contained in clause 16.1, the proviso in s 94(f) of the Evidence Act applies and extrinsic evidence is therefore admissible. Tan’s claim in the action is to be remitted for continued hearing before the judge (see 23 and 35).

(3) The correct meaning of the word "procure" as it is used in clause 15.1 depends not only on its context but also on the context of the entire document. It is a canon of construction that the same word used in a document should be given the same meaning throughout it; Re Birks [1900] 1 Ch 417 (folld). Judging from the manner in which it is used in other clauses in the contract, "procure" cannot simply mean "to endeavour" or to "persuade or take steps". It is a definite obligation on the party for which the clause is directed (see 28-29).

(4) In clause 15.1, Tan undertook to ensure that KWF will repay the inter-company loans. When KWF defaulted, Tan breached his obligation of "ensuring" or "seeing to it" that KWF repays the loan. As such, it was unnecessary to determine if this was an guarantee obligation of the second category mentioned by Lord Reid in Moschi v Lep Air Services Ltd & Ors [1973] AC 331 or is only something akin to it. The fact that clause 15.1 had also contemplated that a guarantee be given by THK did not detract from the obligation of Tan and in the context, they are complementary. For Tan’s breach, L&M is entitled to damages (see 30-32).

(5) If Tan had discharged his obligation of ensuring repayment of the loans, there would have been no loss and no claim by L&M. Because he has breached his obligation, the loss ensued. This, in turn, gave rise to a claim in damages quantified by the amount that KWF failed to repay (see 34).

Legislation referred to

Evidence Act (Cap 97) s 94

Case(s) referred to

Moschi v Lep Air Services Ltd & Ors [1973] AC 331 (folld)
Re Birks [1900] 1 Ch 417 (folld)

Judgment

GROUNDS OF DECISION

1. This is an appeal which concerns the construction of certain clauses in two Sale and Purchase (S&P) Agreements of shares in a company named Khai Wah-Ferco Pte Ltd ("KWF"), where the appellant, Tan Hock Keng (‘Tan’) was the buyer and L&M Group Investments Ltd (‘L&M’) the seller

The background

2. KWF was wholly owned by L&M. On 3 October 1997, Tan entered into a S&P Agreement to purchase from L&M 28,350 ordinary shares of KWF. By this purchase, Tan would become 81% owner of KWF. Some two months later, on 2 December 1997, a second S&P Agreement was entered into between them whereby Tan agreed to purchase the remaining shares (6,650) which L&M retained in KWF. The second S&P Agreement essentially incorporated the main terms in the first S&P Agreement. The completion date for both Agreements was 2 December 1997. The effect of the two Agreements was that Tan would become the sole owner of KWF.

3. The purchase price paid by Tan for the shares in KWF was based on net tangible assets (NTA), which was determined to be S$285,900. This valuation was in turn founded on KWF’s unaudited accounts ended 30 September 1997. In part because the valuation was based on unaudited accounts, the first S&P Agreement in clause 14 provided that if a debt should, within a period of 12 months after it becomes due, be considered to be irrecoverable, or if credit notes were given by KWF after 30 September 1997 for work done prior to that date, the vendor (L&M) would pay the equivalent amounts to the buyer (Tan). We should add that there were corresponding provisions in clause 14 favouring L&M for similar events in the reverse situation. The problem that has arisen concerns the question whether clause 16.1, which is a limitation provision, applied to the amount or amounts which Tan is entitled to be paid under clause 14.

4. As the issue is one of construction, it is necessary that we should, at this juncture, set out the relevant provisions of clauses 14 and 16.1:-

Clause 14

(1) In the event that after Balance Sheet Date the Group Company recovers any debt that has been written off from the Accounts of the Group Company, the Purchaser shall within 14 days from the date of the Company’s receipt of the debt pay an amount equivalent to 81% of the recovered debt to the Vendor.

(2) In the event that after Balance Sheet Date any debt of the Group Company as stated in the Accounts have not been recovered within the 12 months from the due date of the debt and in the unanimous opinion of the parties is irrecoverable (such decision being made in good faith), the Vendor shall within 14 days from the date of the unanimous decision of the parties pay an amount equivalent to 81% of the irrecoverable debt to the Purchaser. Notwithstanding the foregoing, the Purchaser shall, prior to the payment of the irrecoverable debt and at the election of the Vendor, procure the appointment of the Vendor as agent of the Group Company for the recovery of the debt on the Group Company’s behalf.

(3) In the event that after Balance Sheet Date the Group Company issues a credit note to its customer or supplier for work done prior to Balance Sheet Date the Vendor shall within 14 days from the date of issuance of the credit note pay an amount equivalent to 81% of the amount stated on the credit note to the Purchaser.

(4) In the event that after Balance Sheet Date the Group Company receives a credit note from its customer or supplier for work done prior to Balance Sheet Date the Purchaser shall within 14 days from the date of issuance of the credit note pay an amount equivalent to 81% of the amount stated in the credit note to the Vendor.

(Note: (i) it would be appreciated that the amount payable to the other party under these provisions were specified to be 81% because that was the percentage of the shares involved under the first S&P Agreement. The second S&P Agreement related to the remaining 19% of the shares. Therefore, under both Agreements, the amount payable to the other party under these sub-clauses would be 100%.)

(ii) "Balance Sheet Date" is 30 September 1997.

(iii) Sub-clauses (1) and (4) are in favour of the vendor L&M).

Clause 16.1

The parties hereby agree that the total liability of the Vendor for all claims of any kind whether in contract, warranty, indemnity, tort, strict liability or otherwise arising out of the performance or breach of the Agreement or any of the terms herein shall not exceed the Consideration Sum as determined in accordance with Clause 4.1, or shall not terminate prior to the expiry of three (3) years from Completion Date, whichever occurs first.

5. Tan’s claim in the action is for the sums of S$109,737.55 and US$770,540.75, being the amounts due from L&M to him under clause 14 on account of trade debts which had become irrecoverable within 12 months of their due dates and credit notes issued after 30 September 1997 by KWF for work done prior to 30 September 1997, less various sums owing by Tan to L&M. In the course of the trial (during the cross-examination of Tan’s second witness) counsel for L&M, Mr Chia Chor Leong, at the invitation of the court, indicated that in order to save time and if the court were to rule that clause 16.1 had the effect of limiting L&M’s liability under clause 14 to only the "consideration sum" specified in clause 16.1, which is S$285,000, then L&M would be prepared to accept liability up to that sum. With this approach, there would be no necessity to go into a tedious examination of the various items of claim which made up the two sums claimed by Tan.

6. The trial judge ruled that, on a proper construction of clauses 14 and 16.1, the limit of $285,000 prescribed in clause 16.1 applied to the claim of Tan under clause 14. Following from that, the judge gave judgment to Tan for only the amount of $285,000.

Counterclaim

7. In the action, there was a counterclaim which L&M had made against Tan, totalling $751,504.13. Included in this amount claimed was a sum of $440,000, being two...