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    12:51 AM Janahan Thiru (Advocate and Solicitor, Supreme Court of Singapore)

    Case Comment on Xia Zhengyan v Geng Changqing [2015] SGCA 22

        

    Introduction

    Is the fact that a contract had been drafted by lay persons rather than lawyers or the fact that it had initially been drafted in a foreign language and not English relevant to the interpretation of its terms? Following the Court of Appeal’s (“CA”) decision in Xia Zhengyan v Geng Changqing [2015] SGCA 22 (Xia), the answer to this question appears to be a resounding yes. According to the CA, these factors could very well form part of the relevant context to which heed must be given when construing a contract. 

    Facts

    The dispute in Xia concerned the Appellant’s purchase of part of the Respondent’s interest in a chain of private children’s education centres operating under the “Apple Plus” name (the “Apple Plus Business”) by way of a share purchase agreement (the “Agreement”). 

    In time however, the parties’ relationship broke down due to disagreements over the management of the business, and the Appellant commenced an action in the High Court against the Respondent for (1) a breach of the Agreement and (2) fraudulent misrepresentation. The Respondent counterclaimed for the return of S$300,000 which had been automatically transferred from a joint timed deposit account, following its maturity, to the Appellant’s account. 

    At first instance, both of the Appellant’s claims were dismissed while the Respondent’s counterclaim was allowed. The Appellant accordingly appealed against the decision.

    The CA’s Decision

    The Contractual Claim

    The Appellant’s claim for breach of contract concerned the scope of the Respondent’s shares and interests in the Apple Plus Business that were to be transferred to the Appellant pursuant to the Agreement. Clause 1 of the Agreement provided:-

    Pursuant to the terms of this Agreement, [the Respondent] shall transfer the 50% share in Apple Plus School International Pte Ltd (specifically including 50% share in Apple Plus School International Pte Ltd, 50% share in Apple Plus School including trade mark and patent of Apple Plus School and Monkey Abacus, 12.5% share in Apple Plus School (Tampines) Pte Ltd, 13% share in Apple Plus School (Bukit Timah) Pte Ltd, 12.5% share in Apple Plus School (Serangoon) Pte Ltd, 12.5% share in Apple Plus School (Thompson) Pte Ltd and 25% share in Apple Plus School (Malaysia)) held by her to [the Appellant] in accordance with the provisions of the law.” (Emphasis added)

    It probably would be helpful at this juncture to explain the various interests and entities referred to in the above clause. The Apple Plus Business operates on a franchising model under which the master company, Apple Plus School International Pte Ltd (the “Company”), enters into franchise agreements with other companies (the “Franchisees”) granting them certain rights and logistical support in return for fees. The various entities referred to in Clause 1 with the exception of the Company and the Apple Plus School (which was a separate unincorporated entity of which the Respondent was the sole proprietor (the “Sole Proprietorship”)) are such Franchisees. The Sole Proprietorship is the registered proprietor of the “Apple Plus School” and “Monkey Abacus” trade marks in Malaysia while the Company was the registered proprietor of the same in Singapore. It is relevant to note that while the Respondent held shares in the Franchisees, the Company did not.

    At first instance, the trial judge, paying attention primarily to the actual language of Clause 1 and how the interpretation advocated by each party cohered with the other clauses in the Agreement, had accepted the Respondent’s position that Clause 1 only required her to transfer 50% of the shares in the Company. With respect to the other interests referred to in parentheses in Clause 1 (underlined above) (the “Disputed Interests”), the trial judge found that parties had only intended that the “benefit” of these interests be transferred but that any shares in these entities would continue to remain in the Respondent’s name. As the Respondent had transferred the shares in the Company as required, she had not breached the Agreement. 

    The CA however agreed with the Appellant and found that Clause 1 required the Respondent to not only transfer 50% of her shares in the Company, but where applicable, her shares in the various entities mentioned in parentheses in Clause 1. In arriving at its finding, the CA placed particular emphasis on:- (1) the fact that the Agreement was entered into in Chinese and (2) the fact that the Agreement was drafted by the parties themselves without legal advice. According to the CA, these facts formed part of the context of the contract and required one to “eschew a strict construction of the structure and language of Clause 1, and adopt instead a more common-sense approach that considers the reasonable and probable expectations that parties would have had”. In its view, the trial judge, by focusing on the factors which he had, had failed to do this. For instance, the CA considered that to find, as the trial judge did, that parties had contemplated a transfer of 50% of the Respondent’s beneficial interest in the Disputed Interests but not an actual transfer of the relevant shares, would require attributing to the parties knowledge of the law of equity which they were unlikely to have possessed. Another example is that while the trial judge had placed emphasis on the fact that Clause 4 (which provided a timeline for the transfer of shares) and Clause 6 (which warranted the Respondent’s full disposition rights for the shares) only referred to and covered the shares in the Company, which to him suggested that parties had only intended a transfer of the shares in the Company, the CA downplayed the weight of this factor by explaining that lay persons would not be aware that legal documents have to be interpreted in a holistic manner.

    Instead, the CA pointed to several other factors that in its view supported the Appellant’s interpretation. For instance, the fact that parties even mentioned the Disputed Interests in Clause 1 suggested to the CA that the obligation to transfer also applies to (or to use the wording of Clause 1, specifically includes) these interests. 

    Ultimately, the CA’s finding meant that the Respondent had failed to comply with her obligations and as such was required, pursuant to Clause 7.2, to return to the Appellant the purchase price of S$1.5 million. The Respondent however did not have to pay an additional S$100,000 as stipulated by Clause 7.2 as this obligation was held to be unenforceable on account of being a penalty.

    Before moving on, it is worth noting that while the CA initially appeared to rely on earlier drafts of the Agreement, these ultimately seem to have only played a subsidiary role in its decision, as it later in the judgement specifically stated that it was not considering the effect of prior negotiations and drafts of the Agreement as neither party had submitted on whether such evidence was admissible. Indeed, the CA took pains to highlight that the issue of whether and to what extent evidence of prior negotiations should be admissible under Singapore law, which it had left open in Sembcorp Marine Ltd v PPL Holdings Ltd and another and another appeal [2013] 4 SLR 193, continues to remain open. However, the CA did express some of its views on this issue. It noted that in most circumstances, there is a risk that draft agreements would be “construed out of context” as the court is left in the dark with regard to “the actual bargaining process undertaken by the contracting parties in the course of negotiations” which is “dynamic” and context-specific. At the same time however, the CA also acknowledged that there are circumstances, such as those in A & J Inglis v John Buttery & Co (1878) 3 App Cas 552, where reliance on draft agreements may be useful in resolving a contractual dispute. These statements seem to indicate an inclination towards a conservative approach to admitting evidence of prior negotiations though perhaps not a blanket exclusion of such evidence. The CA also appeared to allude to an approach based on the three requirements set out in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 (Zurich Insurance”) governing the admissibility of extrinsic evidence in general – namely that such evidence must be relevant, reasonably available to all parties, and must relate to a clear and obvious context. These requirements by themselves could perhaps provide a sufficient criteria to govern the admissibility of prior negotiations if a more precise definition is provided as to just how “clear” and “obvious” the relevant context has to be. As it stands, notwithstanding some guidance provided by cases such as Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart [2012] 4 SLR 308 (see [43] – [48]), this particular requirement remains somewhat nebulous (particularly given that it is intended to safeguard against excessive uncertainty) and at times one wonders whether the courts which have considered this requirement have all had similar conceptions of what it entails.

    The Misrepresentation Claim

    With respect to the Appellant’s claim for fraudulent misrepresentation, this was based on an alleged 22 misrepresentations, the broad effect of which was to allegedly exaggerate the success that the Apple Plus Business had enjoyed and its plans for expansion.

    The trial judge had dismissed this claim for a variety of reasons, including the fact that several of the statements had been made after the Agreement had been signed and that there was insufficient evidence to suggest that some of the statements were false. While the CA expressed certain doubts as to the soundness of the trial judge’s findings relating to two of the statements, it ultimately considered itself not to be in a position to interfere with these findings as they were essentially findings of fact and could not be found to be clearly wrong.

    The Respondent’s Counterclaim

    Finally, the CA’s finding that the Respondent was obliged to return the S$1.5 million purchase price to the Appellant pursuant to the Agreement also meant that the Respondent had no right to the S$300,000 that she sought to recover as this sum had been drawn from the purchase price. The CA accordingly reversed the trial judge’s decision in this respect and dismissed the Respondent’s counterclaim.

    Discussion

    The most striking aspect of the CA’s decision is the emphasis that it placed while interpreting the Agreement on the fact that it had been drafted by lay persons without legal advice. In general, this approach may be applauded for being a practical one that takes into account commercial realities by recognising that lay persons and lawyers possess differing levels of legal knowledge and acumen and may express themselves differently when drafting a contract. Indeed, while the weight the CA placed on this fact (i.e. that the Agreement was drafted by lay persons) is somewhat unusual, it is not unprecedented (see e.g. Schmidt v Wood, 2014 ABCA 80). It is also consistent with previous statements articulated by courts that the contextual approach would give heed to anything relevant which may affect the way in which the language of the document may be understood by the reasonable man (see e.g. Zurich Insurance  at [56] and [57] and BCCI v Ali [2002] 1 AC 251 at [39]; c.f. Master Marine AS v Labroy Offshore Ltd and others [2012] 3 SLR 125 at [34] – [42] where the CA took the view that at least with regard to certain types of commercial contracts, the court should be “restrained in its examination of the external context and extrinsic evidence” and should as far as possible “adhere to the plain meaning of the words”). 

    That said, the approach in Xia shares the typical shortcomings and potential pitfalls generally present in the contextual approach to interpretation. It has the tendency to make the interpretive exercise very fact-specific - placing particular focus on the drafter of the contract, his/her idiosyncrasies (in this case whether he/she was a lay person or a lawyer), and what he/she was intending to convey, and this in turn tends to result in greater uncertainty. In particular, the approach in Xia could possibly give rise to considerable difficulties in cases where a contract is partly drafted by lawyers and partly by lay persons or where it is drafted by lay people who possess specialised knowledge (e.g. accounting or tax professionals) or are experienced in negotiating contracts that may be drafted by lawyers. Indeed, it is conceivable that in future disputes, lay parties who are not legally advised may, in light of Xia, seek to adduce evidence showing that they possessed specific legal knowledge or understood a contract a certain way notwithstanding their background. The question of whether and to what extent this should be allowed, particularly where the evidence sought to be adduced may in effect be evidence of parties’ subjective understandings of the relevant contract, is another issue that may require further consideration.

    Conclusion

    Ultimately, Xia stands as a reminder of the potential breadth of considerations that may come into play when applying the contextual approach to interpretation and that the approach is still a relatively modern one that continues to require definition. On a more practical level, the case is also a reminder - given that it was pursued all the way to the CA - that carelessly drafted contracts are a fertile ground for heated and prolonged disputes and that parties should be wary of entering into agreements without the benefit of professional legal advice.

    * This blog entry may be cited as Janahan Thiru, "Case Comment on Xia Zhengyan v Geng Changqing [2015] SGCA 22", Singapore Law Blog (11 June 2015) (http://www.singaporelawblog.sg/blog/article/116)

    ** A PDF version of this entry may be downloaded here

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