Contract & Arbitration Law Developments In 2012

Transcription

1 Contract & Arbitration Law Developments In 2012 Introduction 2012 saw a number of developments in the areas of contract and arbitration law. Over the course of the year, we have kept you informed with Client Updates featuring significant cases. We now set out a summary of the highlights of these cases in A) Formation of Contract We begin this retrospective of contract law developments in 2012 in the same way that all contracts begin at the stage of formation. Whether or not a contract has come into existence may seem to be a very basic question, but there are a number of factors which complicate the issue. Here, we look at a couple of cases which demonstrated the operation of such factors. (i) OCBC Capital Investment Asia Ltd v Wong Hua Choon [2012] SGCA 54 In the course of negotiations, parties may come to an oral agreement, which may or may not envisage the execution of subsequent documentation. In OCBC Capital Investment Asia Ltd v Wong Hua Choon, the Singapore Court of Appeal had to consider whether such an oral agreement is binding on the parties, and the circumstances under which the requirement for subsequent documentation in relation to the oral agreement renders such agreement subject to contract. The case involved an oral agreement between the Appellant and Respondent which required the parties to execute a supplemental agreement to effect necessary changes. However, the Respondent later refused to sign the documentation, claiming that he was not legally obliged to as the agreement was subject to contact. The Court held that a binding oral agreement had in fact been reached. On an assessment of the documentary evidence and witness testimonies, it was found that the parties did intend to be immediately bound, and did not intend to defer legal relations until formal execution of a written contract. In its decision, the Court of Appeal provided valuable guidance as to when a binding oral agreement is reached between the parties. Whether or not a binding contract has been 1 Rajah & Tann LLP

2 reached depends on the true intention of the parties, as indicated by the objective evidence of the case. If an agreement has been entered into, parties cannot avoid being bound by its terms merely by slapping a label of subject to contract on the oral agreement, or by requiring the execution of subsequent documentation. (ii) Barbudev v Eurocom Cable Management Bulgaria EOOD and others [2012] 2 All ER (Comm) 963 A contract cannot be made without an intention to create a legally binding arrangement. However, this does not in itself guarantee a legally enforceable contract. This was demonstrated in the English Court of Appeal case of Barbudev v Eurocom Cable Management Bulgaria EOOD and others. The case involved a side letter which the Appellant sought to rely on as a legally enforceable contract. The side letter stated that the Appellant would be offered the opportunity to invest in the Respondent on terms to be set out in an investment and shareholder's agreement. However, this agreement never came to fruition. The Court of Appeal held that the parties had intended to create legal relations in the side letter, in that they intended to enter into an agreement regarding the potential sale of shares to the Appellant. This was because the letter was drafted by lawyers, its language suggested the establishment of legal relations, and there were confidentiality provisions which were intended to be binding, whatever the status of other parts of the letter. However, the Court held that this was insufficient to ensure a binding agreement to sell the shares in the Respondent company to the Appellant, and on an examination of the legal relations which were actually created, the Court found that the side letter was no more than an "agreement to agree", in that the Appellant would be offered the opportunity to invest in the Respondent, and not the right to invest. The language was not that of a binding commitment to actually sell the shares to the Appellant, and the terms of the investment were still to be negotiated. B) Contractual Terms A contract is defined by its terms, and much effort goes into the drafting of provisions that will accurately give effect to the commercial intentions of the parties. However, even with common contractual clauses, there is sometimes uncertainty over the exact effect of the words used. We look at some examples arising from decisions in the last year. (i) Orchard Capital v Ravindra Kumar [2012] 2 SLR 519 The Singapore Court of Appeal case of Orchard Capital v Ravindra Kumar dealt with the interpretation of jurisdiction agreements, and the distinction between exclusive and nonexclusive jurisdiction agreements. 2 Rajah & Tann LLP

3 The Defendant in this case sought to stay proceedings against him in Singapore, relying on a jurisdiction agreement which stated that the parties submit to the non-exclusive jurisdiction of the courts of Hong Kong SAR. The Court held that this was a nonexclusive jurisdiction agreement, and on the facts, the Defendant had not demonstrated that Hong Kong was a more appropriate forum. This judgment highlights the fact that the manner in which jurisdiction agreements are phrased makes a lot of difference. Here, the Court focused on the promises made under the jurisdiction agreement and the obligations the parties wished to impose on each other. It did not take the non-exclusive label attached to the jurisdiction agreement as conclusive evidence of the nature of the agreement. Although the Court eventually did find the jurisdiction agreement to be non-exclusive, it did so on the basis of the substance of the parties intention. Parties may thus expect that it is the content of the promise made rather than the label attached to the jurisdiction agreement that will ultimately influence the Court. A carefully crafted jurisdiction agreement should dictate the countries where parties to a contract can or cannot bring their contractual disputes, without ambiguity. This is particularly important in today s context where business transcends borders. (ii) Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 While guarantees and performance bonds are closely related branches grown from the same legal root, they are in fact very different instruments. In fact, serious practical consequences may result from a drafter s failure to clearly establish whether a provision is a guarantee or a performance bond. In the English case of Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA, the Court had to consider an instrument which was described as a guarantee, but contained features of a performance bond as well in the wording of its provisions. The High Court determined that the instrument was a guarantee. However, the decision was overturned in the Court of Appeal. The Court of Appeal applied the test that an instrument will be presumed to be a performance bond if it: (i) (ii) (iii) relates to an underlying transaction between the parties in different jurisdictions; is issued by a bank; contains an undertaking to pay on demand ; and 3 Rajah & Tann LLP

4 (iv) does not contain clauses excluding or limiting the defences available to a guarantor. The Court of Appeal found that the High Court had not given sufficient regard to this presumption, and thus concluded that the document was instead a performance bond. Performance bonds provide for a far more immediate security for the discharge of obligations, not to mention immediate payment of such security, which is often essential, particularly in the construction and ship building industries. It is thus important to draft performance bonds clearly, and not to rely too heavily on the label of guarantee or performance bond. (iii) Sharma v Simposh Ltd [2012] 2 All ER (Comm) 288 A recent decision of the English Court of Appeal has turned the spotlight on the issue of recoverability of payments stipulated to be non-refundable when a contract turns out to be void. The same principles may apply to situations where payments are made in anticipation of contracts which fail to materialise. The Defendant in this case orally agreed to refrain from offering the sale of a certain property to anyone but the Plaintiff in exchange for a non-refundable payment. The oral agreement was found to be void, and the Plaintiff sought to recover the money paid. The Court of Appeal held that the deposit was not recoverable. Even though the contract was void, the Plaintiff had intended for property in the money to pass to the Defendant. The Plaintiff could have recovered the money in restitution, but had failed to establish a restitutionary claim. Further, the Court commented that it is possible as a matter of law to stipulate the nonrefundability of a deposit, and that such stipulation need not be in a binding contractual provision, but could arise by the common intention of the parties. While it is unclear if the Singapore Courts will adopt the same stand, the English Court of Appeal s obiter comments support the argument that an agreement as to the non-refundability of payments may have the legal effect of preventing a restitutionary claim even if such agreement is not contractually binding. (iv) HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd [2012] 4 SLR 738 Friendly negotiation clauses requiring parties to in good faith endeavour to agree have become relatively common. However, in light of the potentially adversarial positions and differing interests of parties in a negotiation, can such clauses be valid? This was the question the Singapore Court of Appeal sought to answer in HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd. 4 Rajah & Tann LLP

5 The case involved a rent review mechanism in a lease agreement, which included a provision requiring the parties to endeavour to come to an agreement in good faith. However, the landlord accused the tenant of breaching its good faith obligations, and subsequently sought a declaration that the rent review mechanism had been rendered inoperable. The Court rejected the tenant s submission that friendly negotiation clauses are inherently invalid. It held that such clauses are in the public interest, and are in fact a common practice for Asian businesses. However, the Court then found that, while the tenant had breached its good faith obligations, the breach had been remedied, and the rent review mechanism remained workable. Good faith negotiation clauses are an interesting addition to the process of contractual negotiations. While parties are often expected to come to the negotiating table with a view towards a fair and common agreement, such provisions go further by imposing a contractual obligation to observe standards of fair dealing in negotiations. These obligations, as highlighted by the Court, seem particularly to be grounded in the Asian cultural context. C) Restraint Of Trade Restrictive covenants are commonly used in contracts of employment to prevent former employees from taking advantage of resources or goodwill obtained during their employment for their own or a competitor s benefit. However, these clauses are notoriously difficult to enforce, as Courts are likely to find them void for being in restraint of trade unless they can be shown to be just wide enough to reasonably protect the employer s legitimate interests. Restrictive covenants in employment contracts have featured prominently in recent jurisprudence. (i) Smile Inc Dental Surgeons Ptd Ltd v Lui Andrew Stewart [2012] 4 SLR 308 Smile Inc Dental Surgeons Ptd Ltd v Lui Andrew Stewart was one of two Singapore Court of Appeal decisions on restrictive covenants in The provision here was a more conventional one, restricting the employee dental surgeon from soliciting the employer s patients and from practicing within a 3 km distance from a number of the employer s clinics. The Court of Appeal held that the restrictive covenants were an unreasonable restraint of trade. They were not reasonable as they did not provide for any fixed duration of operation, rendering them void and unenforceable. It was also unreasonable to restrain the employee from practicing within a radius of clinics which he had never practiced at. This decision also discussed the duty of good faith and fidelity which is an implied duty owed by an employee to his employer. Here, the employee had begun setting up his own 5 Rajah & Tann LLP

6 dental clinic near the employer s clinic even while he was still working for the employer. The Court held that this was not a breach of his duty of good faith and fidelity as the acts fell within the limits of preparatory activity. The duty of good faith and fidelity generally applies during the course of employment, while restrictive covenants generally govern post-employment conduct. However, they may overlap where the restrictive covenant also expressly refers to the employee s conduct during his employment. The Court highlighted that where there is such overlap, the scope of the express restrictive covenant supersedes the implied duty of good faith and fidelity. Drafters should thus ensure that restrictive covenants do not end up narrowing the scope of the duty of good faith and fidelity owed to the employer. (ii) Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2012] 4 SLR 371 The second Singapore Court of Appeal case on restrictive covenants, Mano Vikrant Singh v Cargill TSF Asia Pte Ltd, concerned an uncommon form of post-termination restraint. The dispute arose from an employer s terms and conditions for deferred bonus payments, which stated that a part of the bonus amount earned by the employee would be paid in stages. Further, the deferred bonus was only payable so long as the employee did not join a competitor for two years post employment. The Court of Appeal held that the deferred bonus scheme constituted an indirect restraint on trade. The deferred bonus payments were vested, due and payable to the employee as at the termination of his employment. This meant that any conditions attached to the payment of the vested amounts, where such conditions prohibited the employee from joining a competitor, were another form of a restraint on trade. The Court further held that the restraint on trade was not reasonable and thus would not be upheld. This was because the restraint had no geographical limit, and prohibited employment in activities beyond the scope of the employer s business. The starting point thus appears to be that incentive awards which vest prior to termination of employment but are subject to forfeiture or claw-back may constitute restraints of trade. Employers may therefore wish to consider structuring their financial incentive schemes so that employees are not made to forfeit awards which are vested in them if they leave their employment and join a competitor. Instead, employers should look to structure such schemes in a manner which mitigates against the risk that their terms could be found to be in restraint of trade. (iii) Birdanco Nominees Pty Ltd v Liam Paul Money [2012] VSCA 64 The Australian Court of Appeal case of Birdanco Nominees Pty Ltd v Liam Paul Money bears some similarity to the Singapore case of Mano Vikrant Singh v Cargill TSF Asia Pte Ltd covered above. The restraint clause in question prohibited the employee from providing 6 Rajah & Tann LLP

7 accounting services to the employer accounting firm s clients for a period of three years after termination of his employment. Upon breach, the employee was liable to pay 75% of the particular client s fees received by the employer in the preceding year. The Australian Court of Appeal held that the clause in question amounted to a restraint of trade. However, the restraint was found to be valid in this case. Here, the employer was found to have a legitimate interest in protecting the goodwill developed with its clients as a result of its employees performing accounting services. Further, the scope of restraint was reasonable in terms of time and demographic, and the 75% liquidated damages was a reasonable pre-estimate of the monetary loss associated with losing any particular client. (iv) CEF Holdings Ltd v City Electrical Factors Ltd [2012] EWHC 1524 (QB) The English High Court case of CEF Holdings Ltd v City Electrical Factors Ltd dealt with restrictive covenants in a different context, as it concerned the poaching of employees. Here, a large number of employees from the Plaintiff company had allegedly been enticed to leave their employment and join a rival business. The restrictive covenants in question prohibited the employees from working in competition with the Plaintiff during the six month period after their employment, from soliciting the Plaintiff s employees during the same period, as well as from soliciting the Plaintiff s customers. The Court recognised that an employer may be entitled to protect the stability of its workforce by imposing a covenant precluding the solicitation of employees. It was acknowledged that employees working in teams might obtain special knowledge of or influence over their team-mates. Replacing large parts of entire teams might be difficult for the employer, and it may try to protect itself against such an attempt at solicitation. However, the restrictive covenants were found to be unreasonable, as they did not limit the pool of employees protected from solicitation to those in the relevant employee s team, or with whom they had direct contact, and thus could not be enforced. D) Termination As our review of significant decisions in 2012 on contractual principles commenced with the topic of formation of contracts, so we conclude our review with the topic of termination. 7 Rajah & Tann LLP

8 (i) Isabella Shipowner SA v Shagang Shipping Co Ltd ( The Aquafaith ) [2012] 2 All ER (Comm) 461 It is a basic principle that, when faced with the repudiation of a contract, the innocent party can choose to accept the repudiation and sue for damages, or reject the repudiation and insist on the continued performance of the contract. However, the innocent party s right to reject repudiation is not absolute, and is subject to whether it has a legitimate interest in continuing the contract. In the English decision of The Aquafaith, the High Court examined the existing authorities and considered the situations in which an innocent party may be prevented from insisting on its right to affirm a contract. The case involved a time charter which the charterer sought to repudiate. An arbitrator had found that the innocent party was not entitled to reject the charterer s repudiation as it had no legitimate interest in continuing the contract. The Court held that the arbitrator had failed to consider the proper test of whether the ship owner had a legitimate interest, and that the ship owners were in fact entitled to refuse the repudiation. It confirmed that a lack of legitimate interest will only be found in a handful of extraordinary cases, where damages would be an adequate remedy, and keeping the contract alive would be wholly unreasonable, extremely unreasonable or perverse. While the rule regarding legitimate interest in rejecting repudiation as applied in The Aquafaith remains to be followed and applied in any reported decision of the Singapore Courts, it still constitutes persuasive authority in Singapore that in the absence of a highly persuasive factual matrix, it is unlikely that the Courts will limit an innocent party s right of repudiation as a result of the other party s breach of contract. E) Arbitration Arbitration is increasingly becoming a choice alternative to litigation, and as it continues to progress, arbitration law takes on a greater importance. The year 2012 saw a number of significant decisions relating to arbitration law, both in Singapore and in England. (i) L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2012] SGCA 57 Singapore s growing position as a regional arbitration hub means that greater attention is being paid to how arbitrations are conducted under our local institutions. The Singapore Court s position in this regard has been quite consistent: it will not interfere with arbitral proceedings unless it is absolutely necessary, either to aid in enforcement or to correct clear procedural or legal errors. In this sense, the Court plays a supporting role and function in Singapore s arbitral system, rather than a controlling or supervisory function. 8 Rajah & Tann LLP

9 This was demonstrated in the Court of Appeal case of L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd. Following arbitral proceedings between the Plaintiff and Defendant, the Arbitrator issued an Additional Award without giving the Plaintiff an opportunity to reply or make submissions on the issue. This Additional Award was then set aside in the High Court. Both parties appealed to the Court of Appeal. While the Defendant argued that the Additional Award should not have been set aside, the Plaintiff submitted that the Additional Award should have been declared a nullity instead. Both appeals were rejected. The Court held that the Arbitration Act already provided the setting aside of the award as a remedy for situations where the arbitral procedure was not in accordance with the agreement of the parties, and that it thus had no residual or supervisory power to declare the award a nullity. It further held that the award had been made in breach of natural justice, and the resulting prejudice to the Plaintiff warranted its setting aside. The holding that the Court does not maintain any supervisory or concurrent jurisdiction over arbitral proceedings beyond what is specified in legislation further demonstrates the Court s stand on non-intervention. This can also be seen from the high threshold to be met before the Court will intervene to set aside an award based on breaches of natural justice. (ii) PT Pukuafa Indah and others v Newmont Indonesia and another [2012] SGHC 187 The Singapore Court s policy of arbitral independence also came to light in the case of PT Pukuafa Indah and others v Newmont Indonesia and another, where the High Court considered the Singapore judicial approach towards interlocutory orders in arbitral proceedings. In this case, the Plaintiffs applied to set aside an interim order from an arbitral tribunal restraining the Plaintiffs from court proceedings in the Indonesian courts. However, the Singapore High Court rejected the application. It held that, while the court has jurisdiction to set aside arbitral awards, it does not have the jurisdiction to set aside interlocutory orders. Parliament has chosen an approach of minimal curial intervention towards interlocutory orders to balance fairness and efficiency. The Court does not have the jurisdiction to consider an application to set aside an interlocutory order, but the Singapore system lends the coercive powers of the court by enforcing such orders. This represents the balance struck between judicial intervention and arbitral independence. While procedural issues such as interlocutory orders fall within the ambit of the arbitral tribunal, the Court is to assist in the enforcement or overseeing of proceedings in certain situations. 9 Rajah & Tann LLP

10 (iii) Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 An arbitration agreement is a unique clause in a contract because it exists separately from the contract in which it is found. Therefore, it may be governed by a different law than the substantive contract. While this may at first sight appear to be a somewhat academic issue, the distinction may have practical consequences. In the English case of Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA, the proper law of the arbitration clause was potentially determinative of whether arbitration could be invoked at all. The case involved a contract which specified the law of Brazil as the choice of governing law of that contract, and was also closely connected with Brazil in terms of parties and subject matter. However, the English High Court found that the proper law of the arbitration agreement within the contract was English law. This was based on the choice of London as the seat of arbitration, as well as the fact that Brazilian law could possibly render the arbitration agreement enforceable only upon further consent of the parties, which could not be their intention. Parties do not often specify the proper law of an arbitration clause, assuming that it is identical to the governing law of the substantive contract. However, this is not always the case, and contracting parties should be aware of the factors which may lead to a divergence of governing law within a contract. Contract drafters should also take note of the potential implications of different governing laws for the substantive agreement and the arbitration agreement, such as in the present case, where Brazilian law would have imposed limitations on the ability of a party to unilaterally invoke the arbitration agreement. 10 Rajah & Tann LLP

11 Contacts Ng Kim Beng Partner D (65) F (65) kim.beng.ng@rajahtann.com Mohammed Reza Partner D (65) F (65) mohammed.reza@rajahtann.com Danny Ong Partner D (65) F (65) danny.ong@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam and Thailand, as well as associate and affiliate offices in Malaysia, Indonesia, Cambodia and the Middle East. Our Asian network also includes regional desks focused on Japan, South Asia and Myanmar. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 11 Rajah & Tann LLP