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    06:25 PM Leong Hoi Seng Victor (Justices’ Law Clerk, Supreme Court, Singapore) & Zhuang Changzhong (Practice Trainee, Harry Elias Partnership LLP)

    Yap Son On v Ding Pei Zhen clarified Contractual Interpretation but left questions about Extrinsic Evidence and the Starting Points for Interpretation

        

    Introduction

    In Yap Son On v Ding Pei Zhen [2016] SGCA 68 (“Yap Son On”), the Court of Appeal found that ‘19%’ of a certain number of shares could not be reinterpreted as an absolute amount of 5.5m shares. This note briefly explores the Court’s approach in coming to that conclusion. While Yap Son On successfully consolidated the approaches to contractual interpretation, it left behind the problems of how this interacts with extrinsic evidence, and how contractual interpretation differs for non-native speakers without legal advice.

    What did Yap Son On hold?

    The most significant feature in Yap Son On was the balance between “conceptual clarity, evidentiary discipline, and procedural rigour” in contractual interpretation (at [3]). This balancing approach was previously developed in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich Insurance”) as supplemented by Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193 (“Sembcorp Marine”). The Court of Appeal reaffirmed the two-step approach in Zurich Insurance, namely, that the Court first considers whether extrinsic evidence is to be admitted as a matter of evidence, and then interprets the contract as a matter of substantive law (at [28]).

    On the first step, the Court reaffirmed the starting point that when the parties intended the document to represent the complete agreement between them, then section 94 of the Evidence Act (Cap 97, 1997 Rev Ed) (“EA”) operates to bar extrinsic evidence from being used to contradict, vary, add to, or subtract from that contract (at [36]). To determine whether this is the case, however, extrinsic evidence may be used. But even if this restriction applies, section 94(f) of the EA allows extrinsic evidence to interpret the terms – even if there is no ambiguity (at [41]). Interpretation involves choosing a meaning from a range of possible meanings borne out by the text (at [40], [62]); and cannot be used as a pretext to contradict its terms.

     

    This use of extrinsic evidence to interpret (and not contradict) the contract is subject to four safeguards: the pleading requirements in Sembcorp Marine, the exclusionary rules in the EA itself, the rules on evidence showing the drafters’ subjective intentions, and the three requirements in Zurich Insurance – of relevance, reasonable availability, and pointing to a clear and obvious context (at [42]). Collectively, these safeguards balance conceptual clarity against evidential discipline; they prevent the Court from being flooded with evidence and at the same time give notice to the adversary (at [49]).

    On the second step, the Court upheld its previous, latest decision in Y.E.S. F&B Group Pte Ltd v Soup Restaurant Singapore Pte Ltd [2015] 5 SLR 1187 (“Soup Restaurant”) for the following principles: while both the text and context must be considered, because the objective of the exercise is to find the parties’ intentions as objectively ascertained, the text assumes first importance (Yap Son On at [30], [38]). The Court rejected the interpretation adopted by the High Court because it was not even within the range of permissible textual meanings to begin with (at [31]): the High Court found that ‘19%’ of a certain amount of shares was to be interpreted as an absolute amount of 5.5m shares; but these two events were meant to be mutually exclusive events looking at the parties’ financial prospectus (at [34]). Accordingly, even the text itself could not sustain the meaning chosen by the High Court.

    The Court sought to clarify its previous decision in Xia Zhengyan v Geng Changqing [2015] 3 SLR 732 (“Xia Zhengyan”). It noted that Xia Zhengyan did not change the law; it merely proceeded from a different starting point – that the contract was not drafted in English or with the benefit of legal advice. Seen in this light, the parties’ intentions as objectively ascertained would be different, as reasonable persons would not ascribe the same meaning to a contract drafted in Chinese by lay persons (at [74]).

    Most of these requirements are settled law by now. Two points in Yap Son On stand out for evaluation: first, whether the approach adopted “signal[s] a retreat to literalism” (at [37]). And second, whether the Court’s attempted reconciliation of Xia Zhengyan (at [71]-[75]) was successful in integrating Xia Zhengyan within the auspices of Zurich Insurance, Sembcorp Marine, and Soup Restaurant.

    The Court should have recognized that extrinsic evidence invariably influences the substantive task of interpretation

    In finding that the matter could be resolved by reference only to the text and without considering the extrinsic evidence, the Court was cognizant that Yap Son On may be interpreted as “signal[ing] a retreat to literalism” (at [37]). The Court sought to assuage this concern by noting that courts can (and do) depart from the plain meaning of words. What they cannot do is to ascribe a meaning to the words that they are incapable of bearing (at [37], [40]). The Court also subsequently considered the extrinsic evidence for completeness (at [41]).

     

    But like Oedipus, the Court arguably contributed to literalism in its very attempt to avoid it. As described above, the Court disposed of the appeal in ratio by relying on the text alone. It expressly stated that there was “no basis” to go outside the terms of the contract and to consider extrinsic evidence (at [29]), even though it later considered the evidence in dicta.

    Such an approach may ignore the reality that the substantive task of interpretation and the admissibility of extrinsic evidence are not neatly severable. It is true that the plain meaning of the text can be dispositive where it is exceptionally clear. It is also true that in cases where the parties had intended for the contractual document to encompass the parties’ entire agreement, extrinsic evidence cannot be used to vary the contract (per section 94 of the EA). But in order to determine whether the plain meaning is exceptionally clear, the court must look at the context to begin with. Indeed, the court in Soup Restaurant remarked that the text, while apparently plain and clear on its face, may be revealed to be absurd when looked at in its context (Soup Restaurant at [31]). Similarly, in order to determine whether the parties intended for the contractual document to be conclusive, and whether parties were ‘varying’ or ‘interpreting’ the contract, extrinsic evidence could be used (Zurich Insurance at [112]).

    One way of understanding the Court’s approach in Yap Son On is that the Court found the contract so patently clear that the proposed alternative reading is untenable – even in light of compelling extrinsic evidence. In that case, the proposed alternative reading, that ‘19%’ of a certain number of shares meant an absolute number of 5.5m shares, directly contradicted the text. Hence, there was no need to look at extrinsic evidence where the proposed reading cannot be borne by the words at all.

    This is not necessarily true. In Soup Restaurant, the court found that it should not depart from the plain meaning in order to avoid an absurd result if it could be shown that parties intended this absurd result (Soup Restaurant at [32]). In other words, extrinsic evidence was still relevant to confirm that the parties could have intended an absurd result. What we have here is the opposite situation, where one party is trying to give the words an interpretation that is not absurd in its result, but is ‘absurd’ in the sense that it appears to contradict the text. A natural corollary of Soup Restaurant would be that extrinsic evidence is still relevant in confirming whether the parties intended the result, despite the ‘absurd’ wording. This is especially so where non-native speakers are concerned – as was the case in Yap Son On – since it may be unfair for such speakers to be held strictly to what the text says.

    This reading of Soup Restaurant is consonant with sections 96-99 of the EA. These sections also deal with the situation where the wording appears plain on its face. Section 96 provides that where the language is plain and where it “applies accurately to existing facts”, no further evidence may be given to show that it was not meant to apply to such facts. But in order to determine whether it “applies accurately to existing facts” to begin with, extrinsic evidence may be necessary. Similarly, sections 97-99 envisage situations where the original language becomes “meaningless” or “partly correct and partly incorrect” when placed in reference to existing facts (Zurich Insurance at [78]-[79]). Extrinsic evidence may then be given to contradict the language. Again, in order to determine whether this is the case, those existing facts may be pleaded through extrinsic evidence.

    Finally, this is also consistent with the Court’s initial approach in Yap Son On: that the first step is admitting the evidence, and the second, subsequent step is the substantive task of interpretation (at [28]). Admitting the evidence first recognizes that extrinsic evidence invariably influences every step of the interpretative process.

    The Court was not entirely successful in clarifying Xia Zhengyan

    The Court in Yap Son On also attempted to clarify its previous comments in Xia Zhengyan, given that the lower court judge in Yap Son On had interpreted Xia Zhengyan to mean that an “investigation into the deeper background” was necessary even though the text was clear (at [73]). The Court of Appeal rejected this approach. It emphasized that Xia Zhengyan did not dilute the objective approach to contractual interpretation in favour of a subjective one (at [74]). Xia Zhengyan only stood for the proposition that an objective person would also consider whether the parties drafted the contract in English, and whether they did so with legal advice (at [74]).

    In Xia Zhengyan, the question before the Court was whether the transfer of a 50% share of the company (specifically including half of all the respondent’s shares in the company, franchisees and the sole proprietorship) meant:

    1. A transfer of only half of the company’s shares, and 50% of the beneficial interest of the franchises and sole proprietorship, or
    2. A transfer of half of the shares in the company, franchisees and the sole proprietorship.

    The Court in Xia Zhengyan preferred the second interpretation based on the factual background of the contract: the parties drafted the contract without legal advice and did so in Mandarin (Xia Zhengyan at [46]). This affected the interpretation of the contract, since lay persons were unlikely to know of the concept of beneficial interest (Xia Zhengyan at [48]). The Court in Yap Son On further clarified that this interpretation was permissible because it “fell comfortably within the ambit of the words used” (at [75]).

    But it is unclear how the ambit of the words used supported the interpretation reached by the Court in Xia Zhengyan. The Court’s interpretation essentially allows words within a parenthesis to expand the scope of the words preceding the parenthesis. But this is not the conclusion ordinarily reached from the plain meaning of words in brackets – they are usually seen as “non-essential insertions” (at [74]). The Court got around this problem by pitching the reasonable person’s expectations as expectations of a non-native speaker (at [74]). But it is also unclear how this standard of a non-native speaker interacts with the concept of a plain, textual interpretation, since one cannot arrive at a plain (or obvious) reading of text prepared in the English language if one does not adopt the ordinary meaning associated with words in the English language. The preferred approach would have been to recognize that the Court was departing from the plain meaning of the text, but to justify this (slight) departure using the standard of a non-native speaker.

    This concept of a different starting point is not foreign to the Court’s jurisprudence. In Zurich Insurance, the Court noted that even before the actual interpretative exercise takes place, the “first and foremost consideration” must be the “essence and attributes of the document being examined” (at [110]). The Court in Zurich Insurance was concerned with the distinction between standard form contracts and negotiated contracts, or contracts where parties do not have a comprehensive understanding of their background. But there is no reason why this approach cannot apply equally to the parties’ native language and the availability of legal advice.

    Interpreting Xia Zhengyan in light of Zurich Insurance, rather than in the way that the Court in Yap Son On chose to do, would also have reconciled it with Soup Restaurant. In Soup Restaurant, the question was whether the phrase ‘the Company’s lease’ in a sub-lease referred to a 2009 lease or a 2010 one. The Court of Appeal noted that although the relevant clause referred to ‘the Company’s lease’, the 2009 lease was defined instead as ‘the Agreement’ in another clause (Soup Restaurant at [61]). This should ordinarily have foreclosed ‘the Company’s lease’ as also referring to the 2009 lease as contracting parties are usually taken to mean different things if they use different words. But the Court only concluded that this made the clause ambiguous, and not that it foreclosed either interpretation (Soup Restaurant at [62]). Arguably, this was because it recognized that this particular canon of interpretation could not apply given that the contract was drafted “without any legal assistance” (Soup Restaurant at [63]) – a different starting point.

    Proceeding in this manner would avoid the new difficulty that Yap Son On created in attempting to clarify Xia Zhengyan: what does it mean to fall ‘comfortably’ within the ambit of the plain text? While the specific use of a percentage (19%) in Yap Son On could not be read as an integer, the problem may not be so simple in future cases. The problem would have been better tackled with a different starting point as in Zurich Insurance, which would allow the Court to depart more (or less) easily from the plain text (Zurich Insurance at [110]), rather than having to untie the Gordian knot of what is or is not within the ambit of the plain text to a non-native speaker.

    Finally, Yap Son On did not address a specific finding in Xia Zhengyan that the preferred interpretation could be sustained even though it was legally impossible. The legal impossibility was that sole proprietorships do not have shares that can be transferred. But the Court stated that “the mere fact that a supposed obligation to transfer a thing is legally impossible because of the nature of the thing itself does not mean that parties did not genuinely intend that there should be an obligation to transfer that very thing” (Xia Zhengyan at [56]). But much like parties cannot agree to transfer an item that does not exist, or cannot agree to transfer an item which did not belong to them, it is unclear why they can transfer a non-transferrable item.

    Summary

    While Yap Son On consolidated the cases from Zurich Insurance to Soup Restaurant, two problems still remain: extrinsic evidence is indivisible from the substantive task of interpretation, and many cases can be resolved by using a different starting point (per Zurich Insurance). Accordingly, the following (updated) framework may be useful in approaching the overall task of interpretation.

    [Image found in PDF version]

    * The opinions contained in this commentary reflect the authors’ own views and are not to be understood as reflecting the views of the authors’ employer.

    ** This blog entry may be cited as Leong Hoi Seng Victor and Zhuang Changzhong, “Yap Son On v Ding Pei Zhen clarified Contractual Interpretation but left questions about Extrinsic Evidence and the Starting Points for Interpretation” (20 February 2017) (http://www.singaporelawblog.sg/blog/article/178)

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

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