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    05:47 PM Darren Low (LL.B. (Lond), LL.M. (Cambridge)) and Daniel Boon (LL.B. (Durham), LL.M. (Cambridge))

    Pre-Contractual Payments and Liability in Unjust Enrichment: Benzline Auto Pte Ltd v Supercars Lorinser Pte Ltd [2018] SGCA 2

        

    Introduction

    The law of unjust enrichment is flourishing and has come a long way since Lord Goff’s seminal decision in Lipkin Gorman v Karpnale Ltd [1988] UKHL 12. The deluge of decisions from the highest echelons of the English and Singaporean Courts has yet to ebb. In the first month of 2018 alone, the legal community has had the benefit of two Singapore Court of Appeal (“CA”) decisions, Ochroid Trading Ltd and another v Chua Siok Lui and another [2018] SGCA 5 and Benzline Auto Pte Ltd v Supercars Lorinser Pte Ltd [2018] SGCA 2. This entry summarises and considers the implications of the latter.

    Facts

    Party A makes a payment to Party B in the course of pre-contractual negotiations. Their relationship breaks down, no contract was formed, and Party A sues to recover the payment. Will Party A succeed? In Benzline, Party A failed.

    Party A consisted of Supercars Singapore Pte Ltd and Supercars Lorinser Pte Ltd (Respondents in the appeal; collectively, “Supercars”), who were car retailers in Singapore. Party B, on the other hand, was Benzline Auto Pte Ltd (as Appellant in the appeal) (“Benzline”). Benzline was also in the car business, but was engaged in a number of other aspects of the business such as modification services, parallel importation and retail sale and wholesale of car parts and accessories.

    Looming in the background were two German entities, Daimler AG (“Daimler”) and Sportservice Lorinser Sportliche Autoausrustung GmbH (“Lorinser”). Daimler manufactures the Mercedes-Benz line of cars, which Lorinser buys to modify with its own parts. Lorinser then sells the modified cars under the Lorinser brand (“Lorinser cars”). Neither Daimler nor Lorinser were party to the Singaporean proceedings.

    Benzline and Lorinser have been business partners since 1993. In 2013, a business opportunity along the lines of importing Lorinser cars for sale in Singapore was made available to Benzline. Benzline, however, did not have any interest in seizing this opportunity. It therefore decided to extend such an opportunity to Supercars via an Exclusive Sub-Dealership Agreement. Under the agreement, Supercars, as the sub-dealer, would purchase and import the cars through Benzline and sell it themselves.In exchange for the opportunity, Benzline, as the middle-man, would receive a commission.

    The payment that was the subject of the dispute arose against this commercial background. In January 2014, negotiations between Benzline and Lorinser were still ongoing, and no purchase orders for any Lorinser cars were made by Supercars yet. This was a matter of some urgency as if no orders were placed soon, a lengthy delay in the eventual delivery of cars to Supercars might result, possibly affecting Supercars’ 2014 sales targets.

    Mr Chua, a director of both respondents, discussed the matter with Mr Yu, a shareholder of Supercars Singapore Pte Ltd. Mr Yu then paid to Mr Ng, Benzline’s managing director, S300,000 by way of personal cheque drawn in favour of Benzline. Benzline forwarded the S$300,000 to Lorinser, and the latter confirmed Supercars’ order of 100 cars.

    The relationship between Benzline and Supercars broke down thereafter, and Supercars did not take delivery of the cars that were eventually delivered to Benzline. Supercars then commenced proceedings to recover the payment.

    CA’s Decision

    The Court of Appeal disallowed restitution of the payment. The issue turned largely on one question: what was the payment for?

    The payment was neither a refundable deposit, nor was it a good faith payment that demonstrated the seriousness of Supercars’ interest in the deal (at [24] and [65]). Rather, the CA found that the payment was to enable Lorinser to pay a deposit to Daimler, thus setting in motion the car production process and avoiding what would otherwise have been an unacceptable delay in the eventual delivery of the Lorinser cars (at [24]). Furthermore, the payment was conditional upon Benzline offering Supercars the choice to enter into an Exclusive Sub-Dealership Agreement with it (in contrast to a condition that the parties would enter into such an agreement), the terms of which would be materially similar to the terms in the agreement between Benzline and Lorinser, which Supercars had reviewed by way of a circulated draft immediately prior to making the payment (at [24]).

    The CA found that Benzline was in fact prepared to move forward with the Exclusive Sub-Dealership Agreement, but Supercars was not. The option was given but refused (at [69]). Hence, the condition, and the basis for the payment, did not fail. The unjust enrichment claim was therefore denied.

    Observations and Commentary

    The CA’s holding, which was succinctly explained in two paragraphs ([23]–[24]), involved a straightforward application of the relevant unjust enrichment principles to the facts. That is not to say, however, that everything in the decision was trite – far from it. On a closer examination of the decision, we detail three interesting aspects that herald further development.

    Implied Basis: Fundamental or Otherwise Obvious or Reasonable?

    As the evidence did not yield an express basis for the payment, the CA had to decide if any basis could be implied. In this regard, the CA observed that “the basis to be implied must be fundamental to the transaction, or otherwise obvious to an objective observer.” (at [51] & [67]; citing Rowland v Divall [1923] KB 500 and Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68). This is a new development in the law of unjust enrichment in Singapore and, as far as the authors know, in general. Is the ‘fundamental or otherwise obvious’ requirement a test that needs to be passed in order for an implied basis to arise? If so, should we insist that this be a strict criterion to imply a basis, or should the requirement be seen in light of a criterion based on ‘reasonableness’?

    Before we explore the implications of this development, it is important to resolve any confusion as to what the development is. It is not, for instance, a concomitant requirement for implying a basis that there must have been a fundamental or obvious deficiency in the transfer. It is also not a requirement that the acts that constitute the failure of basis must also amount to a fundamental breach entitling the party to terminate any underlying contract. Rather, it is a general requirement that the implied basis be, in some sense, important to both parties. In this regard, we should distinguish the two senses in which the test itself pertains – fundamentality appears to refer to the quality of the basis, when it has been implied. Obviousness, by contrast, does not. Without more, it would appear that the test seems to be based on two different rationales, collapsed into a single formulation to be applied in the exercise of construing the parties’ intentions at the same time.

    This test, presumably, would apply across the landscape of dealings between parties, whether contractual or non-contractual, as it would make sense to have a unified requirement applicable in all cases. Nevertheless, Rowland & Roxborough were cases where restitution was awarded in a contractual context. This raises a question: should the same requirement be applied in a non-contractual or pre-contractual context? What are the reasons for having a requirement of fundamentality or obviousness?

    One such reason might be that it respects the parties’ allocation of risk. Where an unjust enrichment claim is made within a contractual context and a party elects to claim for restitution instead of claiming in damages for breach of contract, restitution would be denied if the award upsets the parties’ contractual allocation of risk (The Trident Beauty [1994] 1 WLR 161). In a contractual context, since the contract serves as the main evidential basis upon which the court analyses the parties’ risk allocation, it might therefore be said that requiring the basis to be fundamental or otherwise obvious minimises any attendant friction with the contract and/or its allocation of risk. This is because parties are unlikely, much less presumed, to allocate to themselves the risk of the other party’s non-compliance with the conditions that trigger the failure of the implied basis and this is all the more so where the basis is so important as to be fundamental or otherwise obvious. If this was the parties’ intention, then one would expect them to record this down in writing, as the parties did in The Trident Beauty.

    Such a reason would not be readily applicable in non-contractual or pre-contractual cases. The need to respect the “contract” and its allocation of risk therefore falls away. But this does not mean that the court would not respect any commercial allocation of risk – on the contrary, it would. Rightly so, we might add, as the general reluctance to impose pre-contractual liability on those that work (or confer benefits) under an assumption of risk remains (see Kit Barker, ‘Coping with Failure – Reappraising Pre-Contractual Remuneration’ (2003) 19 JCL 105).

    Indeed, the allocation of risk was crucial, if not decisive, in Benzline itself. In arriving at its decision, the CA emphasised the need to consider the commercial reality of the payment: Benzline was merely a “commission agent’”, while Supercars bore the “lion’s share of both risk and reward”; this can be seen from the fact that the parties intended for the Benzline–Lorinser Agreement to mirror the Benzline–Supercars Sub-Dealership Agreement (at [28]–[30]). On this basis, the CA found that Benzline would have wanted to shift the liability for the Lorinser cars to Supercars, leading to the conclusion that “[i]t was inherently unlikely that Benzline would be willing to place in Supercars’ hands the ability to claw back the Payment simply by refusing to sign the Exclusive Sub-Dealership Agreement later.” (at [67]).

    But the larger point here is that in such settings, non-contractual understandings govern, uninhibited by the parol evidence rule, the implied terms doctrine and entire agreement clauses. Hence, there is no limit (theoretically speaking) to the range of bases which may ground a transfer and, by the same token, no limit to the number of scenarios where a court ought to do corrective justice. It should be recognised, therefore, that the fundamentality/obviousness requirement sits in light of an overarching “reasonableness” criterion, i.e. what a reasonable person, in the parties’ position, would understand the basis of the transfer to be.

    The open question after Benzline is whether implication is permissible if the basis to be implied is neither fundamental nor otherwise obvious but is nevertheless what a reasonable person in the parties’ position would understand the basis to be. We pause to observe that if such bases are indeed prohibited from implication, then one must square the practical difficulties that might arise in the application of this requirement when juxtaposed with other exercises in the construction of bases. For instance, when apportioning contractual bases, some English courts have taken the view that they are not bound by what the parties expressly or impliedly agreed and this rather flexible approach has allowed them to apportion a basis whenever it should be done and can be done without difficulty (DO Ferguson v Sohl (1992) 62 BLR 95, 96; Giedo van der Garde BV v Force India Formula One Team [2010] EWHC 2373 at [323]) but at least one Singapore court has accepted that it will not divide or apportion the contract unless it is clear that the parties intended it to be so (Max Media FZ LLC v Nimbus Media Pte Ltd [2010] 2 SLR 677 at [24]). It appears therefore that when apportioning bases the courts could take a flexible approach but, when implying bases, the courts are necessarily constrained by what is fundamental or otherwise obvious. This state of affairs is admittedly unsatisfactory, given that the possibility of overlap for practical purposes can prove troublesome when a thin dividing line exists between apportioning an express basis as opposed to implying an apportioned basis (indeed, it is debatable which side of the line Roxborough falls). At the very least, the disparity between both legal tests is stark, especially when both exercises are supposedly concerned with common issues such as, first, the identification of the parties’ agreement and, second, actual contemplated performance. The interaction between both approaches is also testing, because any apportionment of an implied basis risks threatening the fundamentality or the obviousness of the basis itself.

    Ultimately, it should be borne in mind that construing implied bases in unjust enrichment serves an altogether different purpose from implying terms in contracts, and we add that both doctrines should not be so wide in scope as to be abused by desperate claimants to claw back benefits willingly conferred. The emphasis on the fundamentality and obviousness of a basis before it is to be implied goes some way to ensuring that this does not happen. Nevertheless, to account for those cases in which the court is still required to intervene to give effect to the parties’ intentions, adopting a “reasonableness” inquiry at the first stage would still be eminently helpful.  

    Partial Failure: CA Not Hostile To Partial Failure Arguments

    The second point is a point less developed, but potentially has larger implications – the CA has explicitly left the door open for the possibility that a partial failure of consideration may ground an unjust enrichment claim (at [53]–[54]).

    The CA did not pay this possibility mere lip service either. In applying the requirement of total failure to the case, they observed that had the second draft Benzline-Lorinser Agreement been offered on terms drastically different from the first circulated draft (see above), Supercars might have had a good argument that the introduction of the new terms meant that the basis had failed (at [69], emphasis added). This is an important observation because it is known that any consideration of “partial” failures necessarily involves questions of degree. For instance, one formulation of “partial” failure is that the failure needs to be “substantial” as opposed to “total” (Frederick Wilmot-Smith, ‘Reconsidering “Total” Failure’ (2013) 72 CLJ 414). Practitioners should therefore watch this space for further developments.

    Mistake: Possible Unjust Factor?

    Third, whilst restitutionary claims for pre-contractual payments are often grounded by failure of consideration/basis, the facts reveal that restitution might have been possible on an alternative basis: Mr Yu’s mistake in making the payment (see Singapore Swimming Club v Koh Sin Chong Freddie [2016] SGCA 28).

    The HC’s (at [63]) and CA’s observations (at [66]) on the evidence strongly indicate that, at the very least, Mr Yu tacitly assumed that the payment was refundable if the Benzline-Supercars contract was not signed. Assuming that this amounts to an operative mistake, this might ground an unjust enrichment claim had Mr Yu’s assumption (which was not true) caused him to make the payment (Singapore Swimming Club, at [94(c)]).

    Accepting this possibility, a number of subsidiary questions arise:

    1. Given the CA’s finding that the payment was made on a basis that had not failed, would this bar a successful mistake claim?
    2. Would Mr Yu be denied relief on the basis that he unreasonably ran the risk of error, in spite of the Chinese New Year urgency? After all, the request was made on a Friday and the payment was made the following Tuesday, 5 days later.
    3. Could Mr Yu’s mistaken belief be attributed to Supercars? Does it even need to be so attributable? (see BP Oil International Ltd v Target Shipping Ltd [2012] 2 Lloyd’s Rep 245)
    4. If so, could Mr Yu recover the payment in his personal capacity? It seems unlikely that Mr Yu would have taken it upon himself to pay the deposit if he acted solely in his capacity as a shareholder.

    Because the Plaintiff’s claim was not framed as a mistake claim, the answers to these important and unresolved questions would have to wait to be considered in subsequent cases.

    Conclusion

    The above are just some thoughts on the constantly evolving law of unjust enrichment. Ultimately, claims in unjust enrichment will often involve facts that cut across private law and lawyers should be alive to these possibilities whenever they are called upon to frame such claims.

    * This blog entry may be cited as Darren Low & Daniel Boon, “Pre-Contractual Payments and Liability in Unjust Enrichment” (4 April 2018) (http://www.singaporelawblog.sg/blog/article/208)

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

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