Although I have the same name as someone in the case below, I am not the person in the case.
In short:
Please open your pair of eyes big big and please do not assume and please do not jump into conclusions. Thank You!
Here is the case below:
Tan Wee Fong and Others v Denieru Tatsu F&B Holdings (S) Pte Ltd
[2009] SGHC 290
| Suit 461/2008 |
|
| 31 Dec 2009 |
|
| High Court |
|
| Belinda Ang Saw Ean J |
|
| N
Sreenivasan and Heng Wangxing (Straits Law Practice LLC) for the
plaintiffs, Kelvin Tan (Instructed, Counsel), Lawrence Lim (Mathew
Chiong Partnership) for the defendant |
| Contract
Damages Equity |
Judgment
31 December 2009
|
Belinda Ang Saw Ean J:
Introduction
1 This case involved two
agreements that gave effect to the plaintiffs’ purchase from the
defendant of the right to operate a country master franchise, namely,
the Country Master Partner Agreement dated 1 May 2008 (“CMPA”), and the
Confidentiality and Non-Competition Agreement also dated 1 May 2008
(“CNCA”). Shortly after the conclusion of the two agreements, on 29 May
2008, the defendant gave written notice of immediate termination of the
CMPA on the basis of the plaintiffs’ breach of a non-solicitation
provision in the CNCA. The plaintiffs responded by suing the defendant
on 4 July 2008 for wrongful termination of the CMPA. The plaintiffs
denied that they were in breach of the CNCA, or that the defendant was
entitled to terminate the CMPA.
2 In this action, the
plaintiffs sought (i) damages amounting to $321,120.15 for wrongful
termination of the CMPA; (ii) loss of profits amounting to some $5m;
(iii) a refund of the partnership and outlet fees amounting to
US$205,000 paid to the defendant; and (iv) a refund of $77,541.60 paid
to the defendant on 26 May 2008 for food products and packaging
material that were never delivered. In response, the defendant
contended that it was entitled to terminate the CMPA and filed a
counterclaim against the plaintiffs for liquidated damages in the sum
of US$1.025m. The defendant also maintained that it was entitled under
the terms of the CMPA to retain the partnership and outlet fees. As for
the $77,541.60, the defendant argued that it was entitled to retain the
money to set off in part the liquidated damages that was due to the
defendant.
Undisputed background facts
3 The defendant is the owner
and franchisor of the Shihlin Taiwan Street Snacks and its Quick
Service System (“the franchise”). The defendant has two franchise
models outside Singapore – a single unit franchise and a country master
franchise. A single unit franchise allows the franchisee to operate one
franchise outlet. A country master franchise allows the franchisee to
operate multiple franchises and to sub-franchise a single unit
franchise to a third party. The plaintiffs are Malaysian citizens with
business interests in Malaysia. The first plaintiff, Tan Wee Fong
(“Tan”), and the third plaintiff, Heng Boon Thai (“Heng”), already
operate a single unit franchise in Johor Bahru. The second plaintiff,
Ng Seng Guan, was brought in by Tan and Heng to jointly purchase a
country master franchise for Malaysia.
4 The negotiations to purchase
the country master franchise commenced in late December 2007 or early
January 2008 between Tan and Wong Chee Tat, who was known to the
plaintiffs as “Melvyn”. Melvyn is a 50% shareholder and director of the
defendant. The other 50% shareholder and director of the defendant is
Daniel Tay Kok Siong (“Daniel”). Eventually, the parties agreed that
the plaintiffs would purchase from the defendant the right to operate
the country master franchise in Malaysia for a period of eight years
from 1 May 2008. The CMPA and CNCA were signed on 20 April 2008 but
were dated 1 May 2008.
5 There were several matters
in relation to the CMPA that were indisputable. First, the terms of the
CMPA were openly negotiated. Tan was sent a copy of the CMPA for the
plaintiffs’ consideration. In an email dated 31 March 2008 to the
defendant’s employee, Mike Tan Boon How (“Mike”), and copied to Heng,
Tan, who signed off his email as “Wee Fong & Partners” raised with
Mike for discussion several clauses in the CMPA. One of them was cl 9.4
(see [10]
below). In that email, Tan requested that the benefit of the provision
conferring the right to terminate the CMPA be given to both the
plaintiffs and the defendant. He wrote:[note: 1]
Please add “vice versa” at the back of all the
sentence (sic) “owner reserves the right to terminate this agreement
immediately and without compensation for any sort should there be any
breach of this agreement by the master partner or vice versa”.
Tan sought a revised version of the CMPA in the event
that his proposal was accepted. His proposal was, however, rejected.
The reason for the refusal was that the amendment requested was not
necessary as advised by the defendant’s lawyers. The other query raised
by Tan in his email related to the royalty payable to the defendant
under cl 7.2. Tan’s proposal for waiver of the partnership royalty in
cl 7.2 for the first year was accepted by the defendant.
6 Second, the partnership and
outlet fees amounting to US$205,000 were expressly stated to be
non-refundable and payable upfront (see cll 7.1 and 9.4 of CMPA quoted
below in [10]).
As borne out by Tan’s conduct, the plaintiffs appeared to be
comfortable with the non-refundable provisions. For instance, the
plaintiffs through Tan queried the defendant on cl 7.2 but not cl 7.1.
Similarly, the plaintiffs queried one part of cl 9.4 but not the other
part of the clause relating to the non-refundable fees. Quite clearly,
the plaintiffs before they signed the CMPA were aware (and it was not
their case that they did not know) that the sum of US$205,000 was
non-refundable; and above all, they did not object to the provisions
that gave the defendant a right to retain fees paid prior to
termination of the CMPA.
7 Third, the breach concerned
a restrictive covenant relating to a franchise agreement. In such a
case, the court normally makes a distinction in its approach between
restrictive covenants as they appear in franchise agreements, in
contrast to those in employer-employee contracts. As far as franchise
arrangements are concerned, the covenants are to be approached on the
basis that they are, in essence, somewhat closer to the
vendor-purchaser type of case in contrast to that of employer and
employee (see Dyno-rod Plc v Reeve [1999] FSR 148
at 153). No such concern as outlined existed in the present case. The
plaintiffs did not object to the validity of the non-solicitation
clause. It was not the plaintiffs’ case that the clause did not pass
legal muster based on the applicable principles relating to restrictive
covenants of this nature. There was no plea that the non-solicitation
clause was unenforceable for being too wide or otherwise unreasonable.
Furthermore, the plaintiffs must be treated as being aware of the
restrictive covenants in the CNCA because each page of the CNCA was
initialled by them. Although the CNCA was handed to the plaintiffs
after the CMPA was signed, Tan who testified on behalf of himself and
the other plaintiffs acknowledged in the witness box that he was
probably “careless” in not reading through the CNCA before signing it.[note: 2]
It was thus not surprising that the plea that onerous provisions were
not brought to the notice of the plaintiffs was not pursued in the
plaintiffs’ closing submissions, and as such the plea was treated as
abandoned. The sole debate was on the true construction of cl 4 of the
CNCA. I will deal with the construction point below (at [12]).
8 Finally, the full sum of US$205,000 was paid before
1 May 2008. This sum of US$205,000 (described in cl 7.1 of the CMPA as
“the initial upfront fee”) was made up of a one-time partnership fee of
US$100,000 (“the partnership fee”) and a further payment of US$105,000
(“the outlet fee”) being 60% of a individual outlet fee of US$7,000 for
each of the 25 outlets the plaintiffs would have to set up in Malaysia
over a period of eight years. On 29 May 2008, the defendant’s
solicitors wrote to the plaintiffs stating that the defendant was
terminating the CMPA because the plaintiffs had breached cl 4 of the
CNCA by “solicit[ing] the employment and/or attempting to employ one of
[the defendant’s] employees”.[note: 3]
In the same letter, the defendant also demanded payment of US$1.025m as
liquidated damages and legal costs of $1,000. After receipt of the
notice of termination, Tan tried to contact the defendant to talk about
the termination. He was informed in an email dated 30 May 2008 that the
defendant’s management would only speak with him about the mode of
payment of the liquidated damages and nothing else.[note: 4] Eventually, the plaintiffs commenced this action on 4 July 2008 for wrongful termination of the CMPA.
The issues
9 The principal issues were as
follows. The first question was whether the plaintiffs were in breach
of cl 4 of the CNCA on which the defendant had relied upon for the
immediate termination of the CMPA, and if so, whether the breach
entitled the defendant to terminate the CMPA. If the defendant was
entitled to terminate the CMPA, the plaintiffs’ action for wrongful
termination must fail, and the claim for damages would be dismissed. As
for the defendant, the consequential question following an affirmative
ruling in its favour on the first question was whether the defendant
would be entitled to (a) claim the sum of $1.025m as liquidated
damages, or alternatively general damages; (b) retain the sum of
$77,541.60; and (c) retain the partnership and outlet fees of
US$205,000 (ie, the initial upfront fee).
Discussions and conclusions on liability
The relevant clauses of the CMPA and CNCA
10 I now go straight to the CMPA itself. The particular clauses with which I was concerned were the following clauses:
[Clause 2.1 of the CMPA]
The use of the Shihlin Taiwan Street Snacks ®
Quick Service System and the Proprietary Marks must cease immediately
upon termination or expiry of the [CMPA]. In the event of failure to
comply or any violation of the Confidentiality and Non-Competition
Agreement, the Owner reserves the right to seek liquidated damages from
the Master Partner, jointly and severally, for an amount equivalent to
5 times the initial upfront fee payable, as well as for all legal costs.
[Clause 7.1 of the CMPA]
The Owner charges a one-time partnership fee of
US$100,000.00 and an outlet fee of US$7,000.00 per outlet opened. A
non-refundable initial upfront fee of US$205,000 (inclusive of 60% of
the outlet fee for a base of 25 outlets over 8 years- see Appendix II)
is payable in full upon signing the [CMPA]. The remaining 40% of the
outlet fee for the base is payable prior to the opening of each outlet
or in accordance with the Development Schedule (see Appendix III),
whichever is earlier. These fees are for the use of the Shihlin Taiwan
Street Snacks ® Quick Service System and the Proprietary Marks for a
period of 8 years. This is not to be confused with any other chargeable
services rendered to the Master Partner.
[Clause 9.4 of the CMPA]
Should the Master Partner [the plaintiffs] be
found in default of this Agreement, the Country Operations Manual or
any policies, procedures, standards and specifications set by the
Owner, in part or in whole, the Owner reserves the right to terminate
this Agreement immediately, without compensation of any sort and to
seek liquidated damages from the Master Partner, jointly and severally,
for an amount equivalent to 2 times the initial upfront fee payable, as
well as for all legal costs. However, the Master Partner may
alternatively, at the Owner’s sole discretion, be granted the option to
compensate the Owner and/or be given up to 5 working days to rectify
the problem, failing which the Owner will immediately terminate this
Agreement for the general well-being of other partners. Generally, in
the case of non-curable defaults, namely the conviction of crime,
fraud, misinformation, repeated defaults, abandonment, misuse of the
Proprietary Marks or a breach of the Confidentiality and
Non-Competition Agreement [the CNCA], the Owner will immediately
terminate this Agreement [the CMPA] without prior notice. For all
termination cases, there will not be a refund of any fees already paid
to the Owner.
11 As for the CNCA, the relevant clauses were as follows:
[Clause 4 of the CNCA]
The Master Partner [the plaintiffs] will not,
during the course of this relationship [the relationship between the
parties as franchisor and franchisee] and for one year thereafter,
directly or indirectly, employ or attempt to employ or solicit for any
employment any of the Owner’s employees [i.e. the defendant’s
employees].
[Clause 7 of the CNCA]
The Master Partner hereby acknowledges and
agrees that any breach of Clauses 1 through 6 above, inclusive, will
cause damage to the Owner and the Shihlin Taiwan Street Snacks Quick
Service System in an amount difficult to ascertain. Accordingly, in
addition to any temporary, preliminary, and/or permanent injunctive
relief to which Owner may be entitled to, the Owner will also be
entitled to seek liquidated damages from the Master Partner, jointly
and severally, for an amount equivalent to 5 times the initial upfront
fee payable, as well as for all legal costs, for any breach or
threatened breach by the Master Partner of any of the terms of Clauses
1 through 6 above, inclusive.
Interpretation of clause 9.4 of the CMPA
12 Clause 9.4 of the CMPA (at [10]
above) was central to the defendant’s case. It provided for termination
of the CMPA in the situations specified. The general structure of
cl 9.4 suggests a “graded” system of termination. First, the defendant
may terminate and claim liquidated damages for breach of the CMPA, the
operations manual, policies and standards set up by the defendant. In
short, the first system provides for termination only if the defendant
wished it to terminate. Second, the defendant may terminate following a
demand for performance within a time limit of five days in certain
specified cases. Third, on breach of particular provisions and upon
certain events, the owner will be entitled to terminate without prior
notice. That said of the graded system, it must be remembered that the
interpretation of the termination clause (cl 9.4) is, above all, a
matter of construction. Simply put, all that the defendant needed in
order to prove that it had lawfully terminated pursuant to cl 9.4 was
to establish that the circumstances specified in the clause had
occurred.
13 It was not disputed that the
notice of termination would take effect immediately. The disagreement,
however, was mainly on the events giving rise to a right to immediate
termination and that discourse concerned the true construction of cl
9.4. Counsel for the plaintiffs, Mr N Sreenivasan, contended that
cl 9.4 was concerned with material breaches. Mr Sreenivasan argued that
the distinction was between a breach that was capable of remedy within
a period of five working days and a breach that was said to be
“non-curable”. Mr Sreenivasan said that the word “non-curable” in cl
9.4 meant that the defendant would be entitled to terminate the CMPA
only if the default was not curable.
14 I agreed with counsel for
the defendant, Mr Kelvin Tan, that the plaintiffs had misconstrued the
meaning of “non-curable” breach in cl 9.4. The word “namely” inserted
after the words “generally, in the case of non-curable defaults” was
glossed over by the plaintiffs so much so that its usage and meaning
was not given effect. The usage of the word “namely” in the context of
the sentence was to identify and create a list of defaults considered
by the parties to be non-curable. A breach of the CNCA was regarded by
the parties as one type or a specified instance of a non-curable
default which entitled the defendant to terminate without notice.
Was there a breach of the non-solicitation provision in cl 4 of the CNCA
15 I now turn to the
“non-curable” breach in question: the alleged breach by the plaintiffs
of the CNCA; in particular cl 4 of the CNCA (see [11]
above). It was not disputed that apart from the two directors, Melvyn
and Daniel, the defendant had a small staff of four or five persons.
The defendant led evidence that, during the prohibited period, Tan had
solicited the employment of two of the defendant’s employees, Mike and
Elaine Yow Yih Tyng (“Elaine”), on 6 May 2008. Further, on 9 May 2008,
Tan again attempted to solicit the employment of Elaine in an exchange
of emails. Mike and Elaine testified at the trial in support of the
defendant’s assertion of the plaintiffs’ breach of cl 4 of CNCA. Both
Elaine and Mike were trained and experienced personnel in the
defendant’s franchising business. Mike was the defendant’s
administrative executive. At the material time, his responsibilities
included business development, negotiating with parties interested in
entering into a single unit franchise or country master franchise with
the defendant and dealing with single unit franchisees and country
master franchisees on general operation issues. Elaine was the
administrative and accounts executive of the defendant. At the material
time, she was the defendant’s accounts personnel in charge of the
accounts of the defendant.
16 The plaintiffs denied that
they had breached cl 4 of the CNCA. The most significant and compelling
evidence against the plaintiffs was the tape recorded conversations
between Tan and Elaine, and between Tan and Mike. As both employees
were experienced in the franchise business, Tan’s obvious interest in
them was borne out from the substance what passed between Tan and
Elaine and recorded on tape on 6 May 2008 at a meeting that was held on
6 May 2008 to discuss the implementation of the franchise arrangement.
Unknown to Tan and the defendant’s staff, that meeting was secretly
recorded by Daniel. The tape recording was transcribed by Chin-Puar Yow
Hoy (“Ms Chin”), a certified interpreter, who testified at the trial.
The other witness was the defendant’s expert witness, C Girishanker.
His testimony confirmed the technical integrity of the tape recording.
Material parts of the conversation between Tan and Elaine on 6 May 2008
as shown in the transcripts are set out below (words in italics were
spoken in Mandarin and transcribed into English)[note: 5]:
ELAINE:
|
Hey.
|
[Tan]:
|
Who are you?
|
ELAINE:
|
Huh?
|
[Tan]:
|
Huh?
|
ELAINE:
|
Elaine lah!
|
[Tan]:
|
Orh, so it’s you.
|
ELAINE:
|
(inaudible) lah.
|
[Elaine and Tan discuss accounting procedures]
|
|
ELAINE:
|
This I do not know, but so far I help you to prepare your admin paperwork those things, so this one I also have to check---
|
[Tan]:
|
[First Statement] Or you transfer over directly, it’s easier.
|
ELAINE:
|
When you see him [Melvyn], you tell him.
|
[Tan]:
|
[Second Statement] Okay, never mind, you tender resignation to him will do already mah.
|
ELAINE:
|
(Laughter) Cannot, then he says that (when) we resign, I cannot work for related business.
|
[Tan]:
|
Is that so? Cannot be lah.
|
ELAINE:
|
Shhh…
|
[Tan]:
|
Hey it’s true, are you interested?
|
ELAINE:
|
What?
|
[Tan]:
|
[Third Statement] Come up to KL and work for me lor. KL.
|
ELAINE:
|
You are based in KL now?
|
[Tan]:
|
I am in KL, I am in KL
|
ELAINE:
|
You see, he is poaching.
|
[Tan]:
|
I feel that it’s easy. I feel that in this way it’s easy, I don’t want inconvenience because you know how to do accounts, right?
|
ELAINE:
|
I am doing accounts ah.
|
[Tan]:
|
Okay, good.
|
ELAINE:
|
You see that we know how to do accounts, right?
|
[Tan]:
|
Correct, correct. So, so---
|
ELAINE:
|
So you want to offer me?
|
[Tan]:
|
[Fourth Statement] Okay, you think---you consider about it lor. I want to employ you.
|
ELAINE:
|
[Fifth Statement] Cannot speak so loudly.
|
[Tan]:
|
[Sixth Statement] Close [the door] a bit tightly, he doesn’t hear anything.
|
ELAINE:
|
He is inside, can easily hear (us). He (inaudible) he (inaudible).
|
[Tan]:
|
Can or not? Do you want or not?
|
ELAINE:
|
What? In KL? How come you are based in KL huh?
|
…
|
|
[Elaine and Tan continue discussions on the franchise arrangement]
|
|
[Tan]:
|
Don’t talk about these. Can? You want?
|
ELAINE:
|
What?
|
[Tan]:
|
[Seventh Statement] You give me a price then let me decide.
|
ELAINE:
|
Huh? How would I know how much is the market rate?
|
[Tan]:
|
What do you think (inaudible)---
|
ELAINE:
|
Hey, don’t want, can you let me think over first.
|
[Tan]:
|
You think about it, KL, after all KL you have friends there, last time your school was in KL.
|
…
|
|
[Elaine and Tan continue discussions on accounting procedures]
|
|
[Tan]:
|
You think you want?
|
ELAINE:
|
(inaudible)---huh?
|
[Tan]:
|
You want?
|
ELAINE:
|
I don’t know (laughs), KL leh! I don’t know!
|
[Tan]:
|
KL (inaudible)
|
ELAINE:
|
(inaudible) because I don’t intend to stay here [in Singapore] for long.
|
[Ng]:
|
Just nice lor.
|
ELAINE:
|
Shhh…quiet.
|
[Tan]:
|
You tell me then I can---then I can---
|
ELAINE:
|
Why? You couldn’t employ people is it? (inaudible)
|
[Tan]:
|
No. I want to hire a---no, I want to hire. No, I don’t want inconvenience now, I don’t want to recruit those (inaudible), I don’t want---don’t want---
|
…
|
|
[emphasis in bold]
17 Mr Sreenivasan took issue
with the accuracy of the transcripts relating to parts of the
conversation that were in Mandarin in his cross-examination of Ms Chin.
In my view, Mr Sreenivasan’s cross-examination did not dent Ms Chin’s
credibility. The plaintiffs’ main point of contention was the
difference in a particular phrase in the earlier transcripts prepared
by Ms Chin and a later set of transcripts. The phrase, “I don’t want
inconvenience” (“the disputed phrase”), in bold in the quote above, was
translated as “I pay double” in the earlier transcripts. I accepted
Ms Chin’s explanation that she had made a transcribing error. On the
first occasion, she was not provided with the complete recording and
that made transcribing more challenging. On the second occasion she had
the benefit of the recording of the entire conversation and her earlier
error was then picked up. In any case, the phrase “I don’t want
inconvenience” would not diminish the weight of the incriminating
evidence against the plaintiffs. In fact, in my view, the phrase “I
don’t want inconvenience” was inherently damaging for it was plainly
indicative of the reason for Tan’s interest in Elaine. With a person of
Elaine’s experience in the plaintiffs’ team, they would not have to be
put through the inconvenience of training someone new.
18 Even if we were to ignore
both the disputed phrase and the phrase “I want to pay double”, the
plaintiffs would still have difficulties overcoming the other
incriminating evidence in the transcripts. The substance of what passed
between Tan and Elaine was evidence of a clear breach of cl 4 of the
CNCA. By the First Statement, Tan suggested that Elaine be
“transfer[red]” to his company. That was not an innocent suggestion for
Elaine to be seconded to work for him. Tan’s Second Statement advising
Elaine to resign made his intention clear. Not only did Elaine laugh
off what he said, her reply that she would not be allowed to work “for
[a] related business” was material. Even at that point, it could not be
said that Tan’s statements were, as he wanted the court to believe,
nothing more than a casual conversation between two Malaysians from the
same town. Furthermore, Tan persisted in asking Elaine to leave the
defendant’s employ to work for him. In his Third Statement, Tan tried
to persuade Elaine to work for him by highlighting that she would be
able to return to Malaysia. Tan even went on to say to Elaine outright
in the Fourth Statement: “I want to employ you.” By the Seventh
Statement, Tan was asking Elaine to state her “price” for his
consideration. At that point, Elaine asked for time to “think over” his
proposal. The statements were variations of the same theme, namely that
Elaine should leave the defendant’s employ to work for him. I rejected
Mr Sreenivasan’s submissions that Tan’s statements were only made in
jest. Elaine’s responses were telling. She was conscious that she could
not openly discuss the matter with Tan. For instance, in the Fifth
Statement, Elaine had told Tan not to speak too loudly and in reply,
Tan in the Sixth Statement asked her to close the door, ostensibly to
prevent other people from overhearing the conversation (at the time,
Mike had earlier stepped out of the meeting). It was evident that Tan
was serious about hiring Elaine and that both of them knew that it was
improper.
19 Tan again raised with Elaine
the prospect of employment in an email exchange between Tan and Elaine
on 9 May 2008. Tan sent Elaine an email on 9 May 2008 at 1113 hours
stating:
“[W]e are hiring an admin and account, once I got the personnel I will forward to you, or are you?”
[Elaine replied at 1158 hours:]
Thanks, Wee Fong. I feel is better for you to
find a new staff based in KL Lah. =) But if you have any questions
about admin/account, feel free to contact me.
[Tan replied at 1409 hours:]
Thanks for your prompt reply too … anyway, just
consider it, by anyway i will find somebody first, if you are
interested sometime later, feel free to give me a call.
20 Mr Sreenivasan maintained
that Tan’s first email of 1113 hours to Elaine was vague and made no
mention of any intention on Tan’s part to employ Elaine. That may be so
but Elaine fully understood Tan’s cryptic message. Elaine had
background and contextual knowledge; she understood Tan’s message and
was able to unequivocally reply. She read the email as a further
attempt by Tan to persuade her to work for him. In her email reply,
Elaine told Tan that it would be better for him to hire someone else.
Tan’s response, encouraging Elaine to call him if she was interested in
the future to work for him, was further confirmation of Tan’s attempt
to employ or solicit for the employment of Elaine.
21 As for Tan’s conversation
with Mike on 6 May 2008, the material parts of the transcript of the
6 May 2008 meeting are as follows (words in italics were spoken in
Mandarin and transcribed into English):[note: 6]
MIKE:
|
Correct, and moreover would be er, there are other
location which---that I mentioned like Sungei Wang all these thing,
right, even er, beside Low Yat which is Bukit Bintang Plaza, we are also in touch lah, with the landlord, but they are still looking at our---
|
[Tan]:
|
But you will give me all these, this (inaudible)?
|
MIKE:
|
This one not a problem. This one not a issue.
|
[Tan]:
|
Okay, like this will do.
|
MIKE:
|
This one we actually give you the contact list all these thing is not a issue lah. Then typically what we follow-up will be let you follow-up, this is what it means lor.
|
[Tan]:
|
[Eight Statement] Then you are a Malaysian also, right?
|
MIKE:
|
Right.
|
[Tan]:
|
Where huh?
|
MIKE:
|
Ipoh.
|
[Tan]:
|
[Ninth Statement] Ever thought of going back? Huh?
|
MIKE:
|
No, for the time being still no. I have already been here for 6 years already.
|
[Tan]:
|
6 years already hor.
|
MIKE:
|
Because---because all along I have been in F&B, so, I am quite---
|
[Tan]:
|
Before that, where were you working?
|
MIKE:
|
In er, western food. Some sort of like western food, it’s also management’s (work) lor.
|
[Tan]:
|
So not going back already?
|
MIKE:
|
[Tenth Statement] Why? You are hiring people huh? (Laughter)
|
[Tan]:
|
[Eleventh Statement] I want to hire people. I want to hire those that are already…..
|
MIKE:
|
[Twelfth Statement] Basically, er, I understand also lah. But, this one should be---because I, to be frank with you, I will still be in Singapore for the time being because I have already obtained the PR [permanent residency] here.
|
[Tan]:
|
PR?
|
MIKE:
|
[Thirteenth Statement] Right. That’s a point, right? Actually if I am not a PR, I may consider. But if it is Malaysia, a lot of considerations as well lah.
|
22 Arguably, Tan’s statements
to Mike in conversation were less direct than his statements to Elaine
in terms of evincing an intention on the part of Tan to hire the
respective parties. In isolation, Tan’s Eight Statement could be viewed
as casual small talk; an innocent query on Mike’s nationality to make
conversation. However, Tan’s Ninth Statement went a step further beyond
mere chit-chat as it introduced the idea of Mike leaving the
defendant’s employ to return to Malaysia to work. It must be remembered
that Tan had recently purchased the country master franchise and would
be setting up his operations in Kuala Lumpur. It seemed to me that
Tan’s query was not as innocuous as the plaintiffs had wanted the court
to believe. More importantly, Mike understood Tan’s intention. Evidence
of that understanding was borne out by Mike’s rhetorical response:
“Why? You are hiring people huh? (Laughs)”. Mike certainly caught the
drift of Tan’s approach and the latter’s interest in hiring Mike which
Mike confirmed, in cross-examination, was his impression of the
conversation at the time.[note: 7]
Tan’s immediate answer was to confirm that he was hiring. Mike
testified that in rejecting Tan’s approach, he had informed Tan that,
having obtained permanent residency in Singapore, he would not be
returning to Malaysia so soon. Considered in totality, the substance of
what passed between the two of them as seen from the transcripts
(quoted in [21] above) confirmed that Tan had attempted to employ or had solicited for the employment of Mike as well.
23 I now turn to
Mr Sreenivasan’s reasons for refuting the breach of cl 4 of the CNCA.
First, the conversations did not amount to solicitation because neither
Mike nor Elaine had reported Tan to their superiors. Second, in
interpreting cl 4 of the CNCA, the word “attempt” in the phrase
“attempt to employ” bore the same meaning as an “attempt” in criminal
jurisprudence and Tan’s actions had fallen short of the criminal
standard required of an attempt. There was little merit in either
argument. Evidentially, nothing significant turned on Elaine or Mike
not reporting the incident to the defendant. It was Tan’s conduct and
his statements that must be examined to determine if he and the other
two plaintiffs had contravened cl 4 of the CNCA. The incriminating
evidence resided in the tape-recording which had been transcribed and
the email thread of 9 May 2008.
24 The second argument was
equally untenable. It was completely wrong and utterly inappropriate to
refer to criminal jurisprudence to interpret the word “attempt” in cl 4
of the CNCA. Clause 4 of the CNCA referred not only to an “attempt to
employ” but also “solicit[ing] for any employment.” As for the plain
and ordinary meaning of the word “solicit,” counsel for the defendant,
Mr Tan, referred the court to Black’s Law Dictionary (St Paul. Minn: West Group, 7th
ed., 1999) which defined “solicitation” (at p 1398) as “the act or an
instance of requesting or seeking to obtain something; a request or
petition.” Mr Tan also referred the court to Hellmann Insurance Brokers v Peterson
[2003] NSWSC 242. In that case, Campbell J in considering the meaning
of “solicitation” in the context of a clause prohibiting the
solicitation of clients relied on the meaning of “solicitation” as
elucidated in some Australian and New Zealand authorities:
11 The meaning of “solicitation” is
elucidated by a decision of Wood CJ at CL in R v Laws [2000] NSWSC 880
(2000) 50 NSWLR 96, at 98. His Honour, at [8] recorded the remarks of
Spigelman CJ and Hidden J in R v Azzopardi, 1 October 1998, unreported,
which in turn approved remarks of Stout CJ in Sweeney v Astle [1923] NZLR 1198 at 1202 which I quote:
“The word ‘solicit’ is a common English word
and it means in a simplied form, ‘to ask’. In various English
dictionaries this simple meaning is given, but other simple words are
also used to explain other meanings it possesses, such as ‘to call
for’, ‘to make a request’, ‘to petition’, ‘to entreat’, ‘to persuade’,
‘to prefer a request’.”
12 Whether an employee is soliciting a
former client is not something which depends upon whether it is the
employee who telephones or arranges to meet the former client, or the
other way around. Rather, whether solicitation occurs depends upon the
substance of what passes between them once they are in contact with
each other. There is solicitation of a client by a former employee if
the former employee in substance conveys the message that the former
employee is willing to deal with the client and, by whatever means,
encourages the client to do so.
25 In the premises, contrary to
Mr Sreenivasan’s assertion, there need not be a discussion of the terms
of employment for a person to be said to have attempted to employ or to
have solicited for the employment of another. In the present case,
there was evidence of solicitation, which I accepted, and I found that
the plaintiffs had breached cl 4 of the CNCA.
Whether a breach of cl 4 of the CNCA entitled the defendant to terminate the CMPA
26 I have earlier set out the text of cl 9.4 of the CMPA and cl 4 of CNCA (see [10]-[11]
above). Clause 9.4 was a clear example of an express termination clause
which fell under “Situation 1” as outlined by the Court of Appeal in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR 413 (“RDC Concrete”) at [91] and reaffirmed in the recent decisions of the Court of Appeal in Sports Connection Pte Ltd v Deuter Sports Gmbh [2009] 3 SLR 883 (“Sports Connection”) at [51]-[56]; Fu Yuan Foodstuff Manufacturer Pte Ltd v Methodist Welfare Services [2009] 3 SLR 925 at [27]-[36] and Chua Chian Ya v Music & Movements (S) Pte Ltd [2009] SGCA 54
at [35]. What it means is that the defendant’s entitlement to
termination by reason of an express provision of the contract upon the
occurrence of a specified event, may be exercised without the need to
determine the severity of the breach, or whether that breach would
deprive the defendant (as the innocent party) of the substantial
benefit of the contract (see also Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR 663 (“Man Financial”) at [154]).
27 Having held the plaintiffs
in breach of cl 4 of the CNCA, I went on to hold that as the breach
fell within cl 9.4 of the CMPA, the defendant was entitled to terminate
the CMPA by virtue of cl 9.4. I also held that the CMPA was terminated
on 29 May 2009, the date on which the defendant’s solicitors had
informed the plaintiffs of the defendant’s decision to terminate (see [8] above).
The defendant’s counterclaim
28 This part of the judgment
considers the defendant’s claim for liquidated damages for breach of
contract. A relevant consideration would be the effect of termination
under an express contractual provision on the wrongdoer’s secondary
obligation to pay the full measure of damages which is distinct from an
innocent party’s general entitlement to nominal damages for breach of
contract. The answer to the question – was the defendant entitled to
recover damages for the loss of the benefit of the plaintiffs’ future
performance under the contract (“loss of bargain damages”) having
terminated the CMPA pursuant to an express contractual provision -
depended on whether the defendant had a concurrent right to terminate
for breach under general law. In that regard, it was necessary to
examine whether cl 4 of the CNCA was a condition of the contract. If cl
4 was a condition, the defendant could both terminate the contract and
recover loss of bargain damages which would be the sum of US$1.025m if
the liquidated damages clause was a genuine pre-estimate of the
defendant’s full loss, or alternatively damages to be assessed if the
liquidated damages clause was unenforceable as a penalty clause.
Express termination and damages for loss of bargain
(1) The applicable principles
29 The Court of Appeal in Man Financial (at [154]-[158]) helpfully summarised the four situations identified in RDC Concrete as entitling an innocent party to terminate a contract. The four situations are:
154 The first (“Situation 1”) is
where the contractual term in question clearly and unambiguously states
that, should an event or certain events occur, the innocent party would
be entitled to terminate the contract (see RDC Concrete at [91]).
155 The second (“Situation 2”) is where the party in breach of contract (“the guilty party”), by its words or conduct, simply renounces
the contract inasmuch as it clearly conveys to the innocent party that
it will not perform its contractual obligations at all (see RDC Concrete at [93]).
156 The third (“Situation 3(a)”) is where the term breached ... is a condition
of the contract. Under what has been termed the “condition-warranty
approach”, the innocent party is entitled to terminate the contract if
the term which is breached is a condition (as opposed to a warranty):
see RDC Concrete at [97]. The focus here, unlike that in the
next situation discussed below, is not so much on the (actual)
consequences of the breach, but, rather, on the nature of the term breached.
157 The fourth (“Situation 3(b)”)
is where the breach of a term deprives the innocent party of
substantially the whole benefit which it was intended to obtain from
the contract (see RDC Concrete at [99]). (This approach is also commonly termed the “Hongkong Fir approach” after the leading English Court of Appeal decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; see especially id at 70.) The focus here, unlike that in Situation 3(a), is not so much on the nature of the term breached, but, rather, on the nature and consequences of the breach.
158 Because of the different perspectives
adopted in Situation 3(a) and Situation 3(b), respectively (as briefly
noted above), which differences might, depending on the precise factual
matrix, yield different results when applied to the fact situation,
this court in RDC Concrete concluded that, as between both the aforementioned situations, the approach in Situation 3(a) should be applied first, as follows (id at [112]):
If the term is a condition, then the innocent party would be entitled to terminate the contract. However, if the term is a warranty (instead of a condition), then the court should nevertheless proceed to apply the approach in Situation 3(b) (viz, the Hongkong Fir approach).
[emphasis in original]
30 The difference in the remedial consequences of cases falling only
within Situation 1, on the one hand, and cases falling within
Situations 2, 3(a) and (b), on the other, was reaffirmed by the Court
of Appeal in Sports Connection where Andrew Phang JA (delivering the judgment of the court) at [55] observed as follows:
It should, however, be noted, at this juncture,
that whilst Situation 1 entails (in substance) the same legal effect as
a condition (pursuant to the condition-warranty approach), this is only
with regard to the termination of the contract. However, this does not
necessarily mean that, from a remedial perspective, the innocent party
is also entitled to the full measure of damages if there has, in fact,
been no breach which would have entitled it to terminate the contract
at common law (see the English Court of Appeal decision of Financings
Ltd v Baldock [1963] 2 QB 104 (“Financings”) as well as the High Court
of Australia decision of Shevill v The Builders Licensing Board (1982)
149 CLR 620; but cf Afovos Shipping and (more importantly) the English
Court of Appeal decision of Lombard North Central Plc v Butterworth
[1987] QB 527 (“Lombard”) (which demonstrates that the effect of
Financings could be avoided by appropriate drafting and which is noted
in G H Treitel, “Damages on Rescission for Breach of Contract” [1987] LMCLQ 143
as well Hugh Beale, “Penalties in Termination Provisions” (1988)
104 LQR 355); reference may also be made to Stocznia Gdynia SA as well
as Carter on Termination Clauses ([53]
supra) and Brian R Opeskin, “Damages for Breach of Contract Terminated
Under Express Terms (1990) 106 LQR 293); indeed, even if the contract
itself stipulates the damages recoverable, the term concerned might
still be unenforceable as constituting a penalty clause (see, for
example, Financings and Lombard).
31 At this juncture it is
useful as a reminder to view the difference in remedial consequences
under two scenarios. The first scenario is where a party terminates
pursuant to express contractual provisions but has no concurrent right
to terminate at the common law, and the only remedy available to the
innocent party is the recovery of damages for unperformed accrued
obligations up to the date of termination. In other words, the innocent
party is not entitled to claim loss of bargain damages having
terminated pursuant solely to an express contractual provision to do so. Authority for this legal proposition may be traced to the decision in Financings Ltd v Baldock [1963] 2QB 104 (“Financings”).
In that case, the English Court of Appeal held that a clause for
payment by the hirer of two-thirds of the total hiring costs in the
event of the termination of the agreement by the owner for non-payment
of rent was void as a penalty clause. In those circumstances, the owner
having elected to terminate the hiring for non-payment of two
instalments of hire cannot claim damages for any loss after the date of
termination. The defendant hirer paid the initial £100 but made no
further payments. When the instalments were two months in arrears the
plaintiff owner terminated the contract under an express contractual
provision which entitled it to terminate if the hirer failed to pay any
instalment within 10 days of the due date, repossessed the truck and
eventually sold it for £140. Lord Denning MR succinctly stated the
position thus (at 114):
Suffice it to say that in this case there was
no repudiation [under common law], but only non-payment, for which the
plaintiffs themselves, under an express stipulation in that behalf,
terminated the agreement. In that situation they can only recover the
unpaid instalments with interest.
32 In Financings, the
hirer had at the date on which the owners exercised their option to
terminate the contract said nothing to indicate his unwillingness or
his inability to pay either these or any future instalments. In the
absence of any express contractual provision to the contrary, the
non-payment of the two instalments would not of themselves go to the
root of the contract or evince an intention on the part of the hirer no
longer to be bound by the contract (ie, the facts do not fall within Situations 2 or 3(b) identified in RDC Concrete).
Thus, the owners only had a right to terminate under express
contractual provisions; no right to terminate had arisen under the
common law. In the result, the owners were only entitled to recover
damages for unperformed obligations which had accrued at the date of
the termination.
33 The second scenario is where the party who had terminated pursuant to express contractual provisions had a concurrent right
to do so under the common law, and as such, he would be entitled, in
principle, to recover loss of bargain damages. As Lombard North Central
Plc v Butterworth [1987] QB 527 (“Lombard”) illustrates, the
non-payment there breached a condition of prompt payment. The defendant
leased equipment from the plaintiff under an agreement that provided
for the payment of rentals at quarterly intervals on a specified day.
Clause 2(a) of the contract stipulated that punctuality in making
payments “is of the essence”. Clause 5(a) additionally provided for a
right to terminate in the event of default in punctual payment by the
lessee. The court found that because of cl 5(a), the lessee’s delay in
making payment was a repudiatory breach. As a result, the owner’s right
to terminate had arisen under both express contractual provisions and
the common law. The court thus allowed the claimant to recover loss of
bargain damages. In Lombard, the inclusion of cl 5(a) had led
to the conclusion that cl 2(a) was a condition, and because a condition
had been breached, the innocent party was entitled to terminate under
the common law, and thus could recover loss of bargain damages. As
noted (at [32] above), there was no repudiatory breach in Financings
to give rise to a right to terminate under the common law which would
have allowed the court to reach the same conclusion as that in Lombard.
34 Chitty on Contract at para 22-049 helpfully summarised the legal position as follows:
Thus, where a contracting party terminates
further performance of the contract pursuant to a term of the contract,
and the breach which has caused it to exercise that power is not a
repudiatory breach, the party exercising the right to terminate may
only be entitled to recover damages in respect of the loss which it has
suffered at the date of termination and not for loss of bargain
damages. Where, however, the breach is also repudiatory and that
repudiatory breach has been accepted, loss of bargain damages can be
recovered by accepting the contractual right to do so or by accepting
the other party’s repudiation of the contract.
35 Hence, whether the defendant
could recover loss of bargain damages depended on the existence of a
concurrent right to terminate under the common law.
(2) The nature of cl 4 of the CNCA
36 I now turn to consider the
nature of cl 4 of the CNCA. The clause in question was not expressly
designated as a condition. Even if it was, it must be remembered that
the designation of a term as a condition or the use of words to similar
effect would not invariably (although it would usually) lead to the
conclusion that the term was a condition (see Man Financial
at [165]-[166]). In determining whether or not a particular term was a
condition, the court would ascertain the objective intention of the
parties themselves by construing the actual contract in the light of
the surrounding circumstances as a whole (see Sports Connection
at [67]-[69]). If the circumstances in which the contract was concluded
suggested that a term was not truly a condition although so designated,
the court would not allow recovery of loss of bargain damages for a
minor breach of the term since the right to terminate would not have
arisen under the common law.
37 On a related point, a term
is not automatically classified as a condition simply because the
contracting parties have agreed to a right to terminate upon breach of
a particular term; something more is required for the court to reach
this conclusion (as illustrated by the difference in the results of Financings and Lombard).
It bears repeating that the court will have to construe the term in
context in order to determine whether it is a condition or a warranty.
38 The Court of Appeal in Man Financial
(at [162]-[173]) identified some factors that may assist the court in
determining whether or not a contractual term is a condition. The four
factors are classification by statute, express classification by the
parties, availability of a prior precedent, or use of the term in
mercantile transactions. On the evidence before the court, none of the
four factors mentioned here were applicable. In such a situation, the
court had to ascertain the objective intention of the contracting
parties themselves by construing the actual contract itself (including
the contractual term concerned) in the light of the surrounding
circumstances as a whole (see Man Financial at [161] and [174]).
39 Turning to the background
circumstances leading to the conclusion of the CNCA to ascertain the
parties’ objective intention, the key focus here (as was in Man Financial
at [187]) was on whether or not the contracting parties intended cl 4
of the CNCA to be a condition. The plaintiffs did not share the same
intention to treat cl 4 as an important term. The CNCA itself was
hardly the focus of the parties’ negotiations and played a relatively
incidental role when compared to the time and effort spent on the terms
of the CMPA. The correspondence between the parties from November 2007
to April 2008 showed that negotiations revolved solely around the terms
of the CMPA and that modifications were made to the CMPA as late as
3 April 2008.[note: 8]
Significantly, the defendant only extended a copy of the CNCA to the
plaintiffs at the tail-end of the negotiations on 26 March 2008[note: 9]
which was then signed soon after on 20 April 2008 (on the same day as
the CMPA) without amendment. In those limited circumstances, it did not
seem to me that it was the objective intention of both
contracting parties to treat cl 4 of the CNCA as a sufficiently
important term to be classified as a condition. Accordingly, I
concluded that cl 4 was not a condition.
40 Before moving on to the next
issue, I wish to comment on the defendant’s contention that by
describing the CNCA as a non-curable default the parties had agreed
that such a breach would go to the root of the contract between the
parties and that observance of the terms of the CNCA was a condition of
the CMPA. Whilst the CMPA and CNCA provided for the consequences of the
various events with which the parties were concerned, the defendant’s
argument must be examined with cl 7 of the CNCA and/or cl 2.1 of the
CMPA in mind. It must be remembered that cl 2.1 of the CMPA as a matter
of construction applies to post termination breach and not the present
situation. Clause 2.1 of the CMPA as a matter of construction applies
to the continued use of the franchise and the proprietary marks after
termination. The consequences of a breach of the non-solicitation
clause are dealt with under cl 7 of the CNCA, and not the CMPA.
Therefore, the allegation that observance of the CNCA was a condition
of the CMPA by virtue of cl 2.1 of the CMPA was obviously untenable.
There is one other comment and it relates to the defendant’s argument
that cl 4 of the CNCA was important because of the defendant’s reliance
on the collective effort of its small number of staff members with
their respective specific and complementary role in the defendant’s
business. In my view, the argument was untenable as it was based on ex
post facto reasoning and not on any of the facts in evidence.
41 I now come to the next
issue. A finding that cl 4 was not a condition of the contract would
not automatically result in the classification of the term as a
warranty (see Man Financial at [177]). The court would have to apply the Hong Kong Fir approach embodied in Situation 3(b) (see RDC Concrete
[99]) to consider whether there was a serious breach of the term. In
the present case, while the plaintiff had breached cl 4 of the CNCA,
the breach was not serious as it did not deprive the defendant of the
overall benefit which it was intended to obtain under the CNCA and the
CMPA. Neither Elaine nor Mike took up the plaintiffs’ offer of
employment. Both Elaine and Mike did not resign and were, at least up
to the trial, still in the defendant’s employ. Moreover, the plaintiffs
could have proceeded with the country master franchise if the contract
was not terminated. Therefore, while the defendant was entitled to
terminate pursuant to express contractual provisions (cl 9.4 of the
CMPA), no concurrent right to terminate had arisen under the common
law. Consequently, the defendant was not entitled to recover loss of
bargain damages. Notably, there were also no unperformed obligations
that had accrued as at the date of termination. The CMPA and the CNCA
were terminated on 29 May 2008, only a month or so after the contracts
had been concluded on 20 April 2008. At the time of the termination,
the parties were still in the early stages of implementing the
franchise arrangement. There were thus no unperformed obligations which
had accrued on 29 May 2008. In the circumstances, for the breach of cl
4 of the CNCA, the defendant was only entitled to nominal damages, and
I awarded the defendant $10 as nominal damages.
The liquidated damages claim of US$1.025m
42 Having concluded in the
preceding paragraph that the defendant had no right to claim loss of
bargain damages, the defendant’s claim for liquidated damages must
fail. There was no justification for payment of liquidated damages
based on a genuine pre-estimate of the loss of bargain by reason of the
breach. Consequently, the enforceability of the liquidated damages
clauses relied on by the defendant, which was for the purposes of
estimating loss of bargain, did not arise for determination. Be that as
it may, having heard the arguments on both sides, I was persuaded that
the liquidated damages clauses were, in any event, unenforceable as
penalties.
43 The defendant’s claim for
liquidated damages was made under cl 2.1 of the CMPA and cl 7 of the
CNCA (“the disputed clauses”). I again set out the clauses for
convenience and they read as follows:
[Clause 2.1 of the CMPA]
The use of the Shihlin Taiwan Street Snacks ®
Quick Service System and the Proprietary Marks must cease immediately
upon termination or expiry of the [CMPA]. In the event of failure to
comply or any violation of the Confidentiality and Non-Competition
Agreement, the Owner reserves the right to seek liquidated damages from
the Master Partner, jointly and severally, for an amount equivalent to
5 times the initial upfront fee payable, as well as for all legal costs.
[Clause 7 of the CNCA]
The Master Partner hereby acknowledges and
agrees that any breach of Clauses 1 through 6 above, inclusive, will
cause damage to the Owner and the Shihlin Taiwan Street Snacks Quick
Service System in an amount difficult to ascertain. Accordingly, in
addition to any temporary, preliminary, and/or permanent injunctive
relief to which Owner may be entitled to, the Owner will also be
entitled to seek liquidated damages from the Master Partner, jointly
and severally, for an amount equivalent to 5 times the initial upfront
fee payable, as well as for all legal costs, for any breach or
threatened breach by the Master Partner of any of the terms of Clauses
1 through 6 above, inclusive.
44 Mr Sreenivasan argued that
cl 2.1 of the CMPA and cl 7 of the CNCA were unenforceable as
penalties. I noted earlier that the plaintiffs did not object to the
relevance of cl 2.1 of the CMPA. Contextually, cl 2.1 of the CMPA as
explained in [40]
was irrelevant as it was inapplicable to a breach that occurred prior
to termination. That said there was still cl 7 of the CNCA to contend
with. For purposes of the discussion below, the relevance of cl 2.1 of
the CMPA was assumed.
45 In determining whether the
disputed clauses constitute unenforceable penalties, the following
principles stated by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Ltd [1915] AC 79 at 87-88 (“Dunlop”) and affirmed by the Court of Appeal in Hong Leong Finance Ltd v Tan Gin Huay [1999] 2 SLR 153 are apposite:
[1] It will be held to be a penalty if the sum
stipulated for is extravagant and unconscionable in amount in
comparison with the greatest loss that could conceivably be proved to
have followed from the breach.
[2] It will be held to be a penalty if the
breach consists only in not paying a sum of money, and the sum
stipulated is a sum greater than the sum which ought to have been paid.
[3] There is a presumption (but no more) that
it is a penalty when a single lump sum is made payable by way of
compensation, on the occurrence of one or more or all of several
events, some of which may occasion serious and others but trivial
damages.
[4] It is no obstacle to the sum stipulated
being a genuine pre-estimate of damage that the consequences of the
breach are such as to make precise pre-estimation almost an
impossibility. On the contrary, that is just the situation when it is
probable that the pre-estimated damage was the true bargain between the
parties.
46 Applying the first and third principles stated in Dunlop,
the disputed clauses were as Mr Sreenivasan rightly submitted
unenforceable penalties. With regard to the first principle, the
defendant contended that the US$1.025m was a genuine pre-estimate of
its losses. In support, it relied on calculations from figures in its
sales receipts and Monthly Sub-Partner Reports provided by its
single-unit franchisees for sales made by them in the months prior to
the conclusion of the CMPA to demonstrate that its greatest total loss
would be US$1,200,317.90 had the contract been performed. As such, the
US$1.025m was a genuine pre-estimate of the defendant’s loss of the
benefit of the plaintiffs’ performance of the contract. However, the
defendant was, as I found, not entitled to claim loss of bargain damages having terminated pursuant solely
to an express contractual provision. Hence, the disputed clauses could
not be said to be a genuine pre-estimate of the defendant’s losses
which were losses suffered for unperformed accrued obligations (see
also Financings where the court also regarded a clause (clause 11) which would have effectively allowed the innocent party to recover loss of bargain damages although not so entitled as a penalty).
47 Further, the disputed clauses could also be regarded as penalties under the third principle stated in Dunlop.
Mr Sreenivasan rightly pointed out that the US$1.025m was a single
fixed sum payable regardless of whether the breach was serious or
trifling; whether the breach took place at the earlier part of the
parties’ relationship or towards the end of the eight year period and
whether it caused actual loss or not. In short, the disputed clauses
were so broad as to require the payment of a single fixed sum
regardless of the nature of the breach of cll 1 to 6 of the CNCA when
such breaches could vary drastically in their effects.
48 For the reasons stated, I
concluded that cl 7 of the CNCA in so far as it required the plaintiffs
to pay the defendant five times the initial upfront fee of US$205,000
was a penalty clause and was thus unenforceable. Even if for the sake
of argument cl 2.1 of the CMPA was applicable, it would also for the
same reasons be unenforceable as a penalty clause.
The plaintiffs’ various claims for return of moneys paid prior to breach
Return of the $77,541.60
49 The plaintiffs had
previously paid S$77,541.60 to the defendant for an order placed with
STSS Integrated Pte Ltd (“STSS”), a food and packaging products
supplying arm of the defendant, for the purchase of packaging products
and food stuff for the franchise. When the plaintiffs requested that
the money mistakenly paid to the defendant be transferred to STSS, they
were told that the money could only be transferred upon the approval of
the defendant’s management. On the facts, the supplies ordered were
never delivered to the plaintiffs. The plaintiffs thus rightly claimed
$77,541.60 from the defendant on the ground of total failure of
consideration. The defendant did not contest primary liability but
instead claimed a right to set-off the plaintiffs’ claim against the
defendant’s counterclaim for liquidated damages or in the alternative
general damages after assessment. Having failed in its counterclaim,
the defendant must repay the plaintiff the sum of $77,541.60.
Refund of the partnership and outlet fees
50 The defendant claimed that it was entitled to retain the initial upfront fee of US$205,000 (see [10]
above). The plaintiffs’ argued that the clauses entitling the
defendants to retain the sum of US$205,000 were unenforceable as
penalties.
51 Normally a characterisation
of the nature of the payment is necessary in order to determine if the
money paid is legally retainable. The position on deposits and advance
payments is well-summarised in Lee Chee Wei v Tan Hor Peow Victor [2007] 3 SLR 537 at [84] (“Lee Chee Wei”) as follows:
The invariable judicial approach to forfeitable
deposits at common law is that the deposit will be forfeited to the
payee upon the discharge of the contract on the default of the payer,
irrespective of whether it would have been deemed part-payment had the
contract been completed. The payer cannot insist on abandoning the
contract and yet expect to recover the deposit as this would enable him
to take advantage of his own wrong (Howe v Smith (1884) 27 Ch
D 89 at 98). An advance payment, on the other hand, does not fall
within the category of forfeitable deposits and is neither designed nor
intended to secure performance (Lim Lay Bee v Allgreen Properties Ltd [1999] 1 SLR 471 (“Lim Lay Bee”)). This is underscored by the premise that the vendor is already amply protected by the recovery of damages he has sustained (Dies v British and International Mining and Finance Corporation Limited [1939] 1 KB 724).
52 On this point,
Mr Sreenivasan argued that on a proper construction of the CMPA, the
partnership and outlet fees were not forfeitable deposits. In support,
reference was made to Appendix II of the CMPA which sets out the
calculation of the partnership and outlet fees as follows: [note: 10]
Calculation of Initial Upfront Fee Payable
|
|
Partnership Fee (for 8 years wef 25 March 08):
|
US$100,000
|
Initial Upfront Fee Payable (based on US$4,200 x 25 outlets**]:
|
US$205,000
|
less deposit:
|
US$ 10,000
|
--------------
|
|
Remaining Initial Upfront Fee Payable:
|
US$195,000
|
** The remaining 40% of the outlet fee will be
payable prior to the opening of each outlet or in accordance with the
Development Schedule (see Appendix III), whichever is earlier. From the
26th outlet onwards, the full outlet fee of US$7,000 will be payable prior to the opening of each outlet.
|
|
[emphasis in bold and italics]
53 Mr Sreenivasan thus argued
that only the US$10,000 referred to as a deposit in the calculation
quoted above (in bold and italics) was a deposit. It must be remembered
that the plaintiffs were to pay 60% of US$7,000 for each outlet upfront
and to pay the remaining 40% prior to the opening of each outlet. In
the present case, the distinction between deposits and advances was
inconsequential because the initial upfront fee of US$205,000 was
agreed to be non-refundable. Clause 7.1 expressly stated that the
“initial upfront fee of US$205,000” was non-refundable and that it was
payable in full upon signing of the CMPA. Edwin Peel, Trietel: The Law of Contract (Sweet & Maxwell, 12th Ed, 2007) at para 20-136 noted:
A contract may provide that one party shall
make an advance payment but fail to specify what is to happen to the
payment if the contract is not performed. …A deposit is a sum of money
paid as “guarantee that the contract shall be performed”. At common
law, it is generally irrevocable unless the contract otherwise provide.
A part-payment is simply a payment of part of the contract price: it is
generally recoverable unless the contract validly provides the contrary.
54 Clause 9.4 of the CMPA
expressly provided that “For all termination cases, there will not be a
refund of any fees already paid to the Owner.” The court must give
effect to the parties’ intention as objectively ascertained from the
contractual terms. Above all, the sanctity of the contract must be
observed unless the provision, for example, is unenforceable as a
penalty. In Ng Gian Hon v Westcomb Securities Pte Ltd and others [2009] 3 SLR 518 at [81], the Court of Appeal observed that the courts would ordinarily refrain from rewriting contracts.
55 Mr Sreenivasan sought to get
round the express contractual provision on three grounds: (a) total
failure of consideration; (b) the clause was unenforceable as a
penalty; and (c) the court has the discretion to grant an equitable
relief against forfeiture. I will deal with each ground in turn.
(a) Total failure of consideration
56 The doctrine of total
failure of consideration would not assist the plaintiff as the
consideration for securing the country master franchise was the payment
of the partnership fee of US$100,000 and outlet fee of US$105,000 upon
the signing of the CMPA. The CMPA was signed by both parties and a
legally valid and binding CMPA was concluded on or by 1 May 2008. In
exchange for the US$205,000 as required by the defendant the plaintiffs
obtained the country master franchise in Malaysia for eight years, and
this right was granted by the duly executed CMPA. As Mr Tan rightly
submitted, the initial upfront fee of US$205,000 was earned as soon as
the parties entered into the CMPA. The plaintiffs did not dispute the
fact that the defendant had handed operational manuals and other
material including confidential information such as contacts for
material and food supplies, and organised and held briefings and
meetings in order to prepare the plaintiffs for the master franchise.
In my view, there was no total failure of consideration. The fact that
subsequent events resulted in the termination of the CMPA and
discharged the parties from their future performance was a matter that
was conceptually different from a total or partial failure of
consideration.
(b) Penalty
57 In response to
Mr Sreenivasan’s second and third reasons, Mr Tan submitted that the
non-refundable clause was agreed to by the parties, and that at any
rate, the court would not have jurisdiction to grant relief from
forfeiture in this case. Mr Tan also argued that even if the court had
jurisdiction, it should as a matter of discretion refuse to grant
relief. I propose to first deal with the question of whether the
non-refundable provision was in effect a penalty clause and then the
jurisdiction point. I shall deal with the question of discretion to
grant relief separately.
58 I should mention that the
jurisdiction to strike down penalties and the jurisdiction to relieve
against forfeiture are distinct though related (see Jobson v Johnson
[1989] 1 WLR 1026). It is settled law that a provision is penal when a
sum is payable upon breach. This distinction is explained in Halsbury’s Laws of Singapore, 2005 Reissue, Vol 7 thus (at [80.573]):
The inquiry whether a provision is penal is
only relevant when it is a sum payable upon breach. Where the
stipulated sum is payable upon other events (eg exercise of a right to
terminate), it is not susceptible to invalidation on the ground that it
is a penalty clause.
59 Further, the rule on penalty
clauses is inapplicable to clauses which are not concerned with
specifying the consequences of the breach but with defining the
parties’ rights and obligations (see Lancore Services Ltd v Barclays Bank plc [2008] EWHC 1264 at [94]-[101]).
60 In the present case, the non-refundable provisions related to the initial upfront fee already paid before
the breach. Clause 7.1 stipulated that the upfront fee of US$205,000
was payable upon entry into the CMPA and that fee was non-refundable.
Neither cl 7.1 of the CNCA nor cl 9.4 of the CMPA in so far as they
provided for retention of the fees were penalty clauses for they were not concerned with payment of a sum upon
a breach. Clause 7.1 of the CNCA simply defined the defendant’s right
to retain the initial upfront fee and cl 9.4 affirmed the
non-refundable nature of the initial upfront fee by providing that the
defendant was not required to refund fees paid even if the contract was
terminated.
61 Consequently and applying Lancore Services Ltd v Barclays Bank plc,
cl 7.1 of the CNCA and cl 9.4 of the CMPA in so far as they provided
for the defendant’s right to retain the fees were not penalty clauses.
(3) The relief from forfeiture
62 The plaintiffs’ pleaded case in para 16A of the Statement of Claim as amended read as follows:
Further or in the alternative, it will be
unconscionable for the [defendant] to forfeit or otherwise retain the
said total fee of US$205,000 (S$276,759). Such forfeiture or retention
will also amount to an enforcement of a penalty. In the premises, the
[defendant] should be ordered to return the said sum of US$205,000
(S$276,759) in full.
63 There are a number of
established areas in law where equitable relief is available against
harsh or unconscionable bargains, such as in the law relating to
penalties, forfeiture and relief against unconscionable bargains. On
the general plea of unconscionability, the observations of
Browne-Wilkinson J (as he then was) in Multiservice Ltd v Marden [1979] Ch 84 at 110 are apposite. The passage reads:
... a bargain cannot be unfair and
unconscionable unless one of the parties to it has imposed the
objectionable terms in a morally reprehensible manner, that is to say
in a way which affects his conscience.
64 In submitting that the
non-refundable clauses were potentially in the nature of forfeiture
and/or penalty clauses, Mr Sreenivasan did not distinguish the two
concepts on the facts. The parties agreed that the plaintiffs would pay
the partnership fee and the outlet fees (60% of the fee of US$7,000 per
outlet) as an upfront payment on the signing of the CMPA. Notably,
payment was independent of any breach. In other words, the money was
not something that was payable or would be forfeited following
termination of the contract. To repeat, US$205,000 was payable on the
signing of the CMPA and stated to be a non-refundable payment under cl
7.1. As the contract provided, the non-refundable initial upfront fee
of US$205,000 was for the right to operate the franchise in Malaysia
and for the right to use the proprietary marks for a period of eight
years. That was the bargain struck. A bad bargain does not in itself
suggest unconscionable conduct.
65 There was no suggestion by
the plaintiffs that the defendant had acted in a morally reprehensible
manner at the time of the contract. There was no plea in the statement
of claim that the defendant had acted in bad faith or in an underhanded
manner. The evidence I heard did not suggest that this might have been
the case. The contractual arrangement was freely entered into between
the parties (see also [5] and [39] above).
66 Finally, I noted that
traditionally, the court’s equitable jurisdiction to grant relief from
forfeiture was against the forfeiture of property and the transfer or
creation of proprietary or possessory interests as opposed to mere
contractual rights (see Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 69; Sport International Bussum BV v Inter-Footwear Ltd
[1984] 1 WLR 776). Equity also intervened in cases involving
proprietary rights in chattels or their proceeds of sale under a court
order (see On Demand Information plc v Michael Gerson (Finance) plc [2003] 1 AC 368).
67 It is still an open question
in Singapore whether relief from forfeiture might be granted in
contracts unconnected with any interest in land. In Pacific Rim Investments Pte Ltd v Lam Seng Tiong [1995] 3 SLR 1
at [42], the Court of Appeal inclined towards the position that the
power to grant relief from forfeiture was confined to contracts
connected with interests in land. In Triangle Auto Pte Ltd v Zheng ZI Construction Pte Ltd [2001] 1 SLR 370 , GP Selvam J took the view that the power extended to cases involving sale of goods. More recently, in Metro Alliance Holdings & Equities Corp v West LB AG [2008] 1 SLR 193
at [20]-[22], Lee Seiu Kin J considered but left open the question of
whether relief from forfeiture might be granted in contracts
unconnected with any interests in land. Some caution is understandable
given the uncertainty in the scope of equity’s power to grant relief
and the need to observe contractual sanctity and certainty in business.
Lord Hoffmann delivering the judgment of the Privy Council in United Eagle Ltd v Golden Achievement Ltd
[1997] AC 514 rejected the notion that the court’s jurisdiction to
grant relief against contractual penalties and forfeitures was
“unlimited and unfettered”. His lordship explained (at 519):
The principle that equity will restrain the
enforcement of legal rights when it would be unconscionable to insist
upon them has an attractive breadth. But the reasons why the courts
have rejected such generalisations are founded not merely upon
authority (see per Lord Radcliffe in Campbell Discount Co Ltd v Bridge
[1962] AC 600 at 626) but also upon practical considerations of
business. These are, in summary, that in many forms of transaction it
is of great importance that if something happens for which the contract
has made express provision, the parties should know with certainty that
the terms of the contract will be enforced. The existence of an
undefined discretion to refuse to enforce a contract on the ground that
thus would be unconscionable” is sufficient to create uncertainty. Even
if it is most unlikely that a discretion to grant relief will be
exercised, its mere existence enables litigation to be employed as a
negotiating tactic. The realities of commercial life are that this may
cause injustice which cannot be fully compensated by the ultimate
decision in the case.
68 The opposite view as canvassed by the editors of Goff & Jones, The Law of Restitution (7th Ed, Sweet & Maxwell, 2007) (“Goff & Jones”)
at 545, [20-046]) is that the court ought to have the power to grant
relief against forfeiture in cases which may not concern proprietary
and possessory interests but that the power should be exercised only in
exceptional circumstances:
The cases suggest that the courts may relieve
against the forfeiture of proprietary or possessory interests if the
forfeiture can be characterised as unconscionable. It is doubtful
whether the certainty of commercial transactions would be endangered
if, following Lord Denning in Stockloser v Johnson, the courts were to
accept a jurisdiction to relieve against the consequence of forfeiture
of instalment payments, even if there was no forfeiture of a
proprietary or possessory right, if the forfeiture would be penal and
out of proportion to the loss suffered. Equity already relieves against
the payment of penalties, and may raise an estoppel against person if
it would be unconscionable for him to assert his legal rights, It would
be regrettable, therefore, to conclude that the courts never have
jurisdiction to relieve against the forfeiture of such payments, made
in the course of the performance of commercial contracts, although it
is proper to affirm that relief should be granted only in exceptional
circumstances and that the burden should be on the party in breach to
demonstrate that the retention of any payment was unconscionable.
69 The commentary in Goff & Jones
suggests (at [20-041]) that a deposit may be recoverable in equity by
the party in breach if the forfeiture clause is penal so that it would
be unconscionable for the recipient to retain the money. In Stockloser v Johnson
[1954] 1 QB 476, the English Court of Appeal held that it had the
equitable jurisdiction to order relief against forfeiture of
instalments already paid should it prove oppressive and unconscionable
for the seller to keep the instalments. Denning LJ in Stockloser v Johnson helpfully provided guidance on when relief against forfeiture should be granted (at 490-492):
Two things are necessary [to give rise to the
relief in equity]: first, the forfeiture clause must be of a penal
nature, in this sense, that the sum forfeited must be out of all
proportion to the damage, and, secondly, it must be unconscionable for
the seller to retain the money.
…
The equity operates, not because of the
plaintiff’s default, but because it is in the particular case
unconscionable for [the other party] to retain the money. In short, he
ought not unjustly enrich himself at the plaintiff’s expense. This
equity of restitution is to be tested, I think, not at the time of the
contract, but by the conditions existing when it is invoked.
70 Romer LJ dissented. In Romer LJ’s view, there is “nothing inequitable per se
in a vendor, whose conduct is not open to criticism in other respects,
insisting upon his contractual right to retain instalments of purchase
money already paid.” For completeness, I should mention the contrasting
case cited to me, namely, Workers Trust Bank Ltd v Dojap Ltd
[1993] AC 573 which is on the recovery of a deposit at common law and
is not helpful to the discussion on the court’s equitable jurisdiction
to grant relief against forfeiture.
71 Having concluded (in [65]
above) that there was no evidence of unconscionability in this case, I
found it unnecessary to decide whether to adopt the liberal views of
the majority on equitable relief against forfeiture in Stockloser v Johnson.
Even if the approach in that case was adopted and followed, there would
have been no basis to grant equitable relief against forfeiture in the
present case since there was no evidence of unconscionability on the
part of the defendant.
Conclusion
72 In conclusion, for the
reasons stated, (i) the termination of the CMPA was not unlawful; (ii)
the defendant was awarded the sum of $10 as nominal damages for breach
of cl 4 of the CNCA; (iii) the defendant had rightly retained the
initial upfront fee of US$205,000 which represented the partnership fee
of US$100,000 and outlet fee of US$105,000; (iv) the defendant was
ordered to repay the plaintiffs the sum of $77,541.60 being money paid
for food supplies and packaging material which were never delivered.
Accordingly, judgment was entered for the plaintiffs in the sum of
$77,541.60 with interest thereon at the rate of 5.33% from the date of
the writ to judgment.
73 I directed that the issue of costs be heard at a later date.
_________________
[note: 1]1AB 119
[note: 2]Transcripts of Evidence, 20 April 2009 pp28-29
[note: 3]1AB 191-192.
[note: 4]1AB 198.
[note: 5]3AB 49-70
[note: 6]3AB 88-90.
[note: 7]Transcripts of Evidence 23 April 2009, p 31
[note: 8]Tan Wee Fong’s AEIC, Exhibit TWF-31.
[note: 9]Transcripts of Evidence, 23 April 2009 p 26.
[note: 10]See 1AB 162.
- wong chee tat :)
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