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    06:10 PM Nicholas Liu (JD (Summa cum laude), Singapore Management University); Lecturer of Law, Singapore Management University

    Town Councillors’ Fiduciary Duties and the Legal Risks of Discontinuing the Punggol East Lawsuit

        

    Introduction

    One curious implication of the Worker’s Party’s (“WP”) electoral success in the newly-formed Sengkang Group Representation Constituency (“GRC”) is that the WP will once again find itself in control of a lawsuit against its own party members (see Rei Kurohi, “Sengkang Town Council to take over Punggol East lawsuit: MND”, The Straits Times, 23 July 2020 (updated 24 July 2020)).

    Specifically, the newly-constituted Sengkang Town Council (“SKTC”) will soon take over conduct of the so-called Punggol East lawsuit from Pasir Ris–Punggol Town Council (“PRPTC”). PRPTC is a plaintiff, alongside Aljunied–Hougang Town Council (“AHTC”), in a lawsuit against the then-town councillors of AHTC, for breaches of fiduciary duties and other duties that allegedly caused loss to AHTC and to that part of PRPTC that was once the Punggol East Single Member Constituency (“SMC”).

    When it was Punggol East SMC, that area was managed as part of the Aljunied–Hougang–Punggol East Town Council (later reformed into AHTC), but it was subsequently absorbed into the Punggol East GRC and thus into PRPTC. That was why a Town Councils (Declaration of Towns) Order was made in 2015 giving PRPTC the right to sue in connection with matters concerning what used to be Punggol East SMC. (See the High Court’s decision in Aljunied-Hougang Town Council and another v Lim Swee Lian Sylvia and others and another suit [2019] SGHC 241 (“AHTC 2019”); a useful case summary is available here.)

    The reason for the transfer of conduct of the proceedings from PRPTC to SKTC now is that in the 2020 General Election, part of Pasir Ris–Punggol GRC was carved out to form Sengkang GRC. This included the part that once formed Punggol East SMC. SKTC is thus now in charge of the geographical area and residents of what was once Punggol East SMC, making it the appropriate entity to seek compensation for the alleged losses. Given that the WP has controlled AHTC since the 2015 General Election (although it entrusted the conduct of the litigation to an independent panel), this awkward situation of “ownself sue ownself” is a somewhat familiar one.

    PRPTC, like AHTC, partially succeeded in establishing the defendants’ liability before the High Court last year (as summarised in AHTC 2019 at [643]). Appeals against different aspects of the High Court’s decision, by the defendants and by AHTC and PRPTC, are pending before the Court of Appeal (“CA”). Additionally, because the suit had been bifurcated (i.e. split) into a liability phase and an assessment of damages phase, the amount payable to PRPTC/SKTC still remains to be determined.

    Against this backdrop, the media and public may now wonder what SKTC can do about the pending appeals and assessment of damages. This blog entry will address that question with a focus on the incoming Sengkang town councillors’ obligations under fiduciary law, which forms a part of private law (i.e. the law of an individual’s civil obligations and liabilities).

    For the avoidance of doubt, nothing in this blog entry is intended to imply that the Sengkang town councillors are considering breaching any fiduciary duties they may owe. To the contrary, WP MP-elect and incoming chair of SKTC, Ms He Ting Ru, has promised in a Facebook post dated 24 July 2020 that the incoming councillors will “ensure that all decisions taken in relation to the management of the ongoing lawsuit are fair, transparent and in accordance with the law” and that they “remain guided by [their] overriding duty to always act in the best interests of the residents of Sengkang GRC”.

    Discontinuing the suit: Theoretically possible, but is it legal?

    Assistant Professor Benjamin Ong notes, in comments quoted by The Straits Times (see the article linked in the first paragraph above), that SKTC could, in principle, apply to the court to discontinue the suit initiated by PRPTC. It would then be up to the court to decide whether to allow the discontinuance and, if so, on what conditions (for instance, who should pay the legal costs incurred in the proceedings, and whether PRPTC should be barred from bringing a similar suit in future). Ong further observes that if SKTC were to discontinue the suit, it might be possible, on one interpretation of the law, for the Minister of National Development to invoke s 43D of the Town Councils Act and order SKTC to apply to reinstate the suit. Other forms of pressure could also be applied.

    Without necessarily disagreeing with Ong’s summary, it is worth highlighting an important factor that has yet to be discussed: the fiduciary duties that councillors have been found to owe to their town council. As I will explain, if SKTC were to decide on its own to discontinue the suit, the Sengkang town councillors would run a serious risk of being in breach of their own fiduciary duties to SKTC, exposing themselves to potential proceedings in future. Consequently, discontinuing the suit is probably too legally risky to attempt, and the other scenario identified by Ong – appointing an independent panel to conduct the litigation – is the likelier outcome.

    Town councillors as fiduciaries

    In the High Court decision currently under appeal, Justice Kannan Ramesh held that town councillors owe fiduciary duties to the town council on which they serve (AHTC 2019 at [220] and [225]). In the terminology of fiduciary law, the councillors are “fiduciaries” and the town council is their “principal”.

    For present purposes, the key takeaway from Ramesh J’s comprehensive and carefully considered judgment is that by taking up their positions on the town council, councillors have necessarily “undertaken to act for or on behalf of another in a particular manner in circumstances which give rise to a relationship of trust and confidence”, the established test for whether a person has undertaken fiduciary duties (AHTC 2019 at [216]). As Ramesh J noted, a close analogy can be drawn to persons who undertake to act as officers of a company and who owe fiduciary duties to the company as a result.

    This holding was a first for Singapore law. Since the appeals from AHTC 2019 are pending, and the holding has not been considered or endorsed by the CA in any other decision, the CA may yet overturn the above position and find that councillors do not owe fiduciary duties to their town council.

    It would be unwise, however, to assume that the CA will overturn the holding in AHTC 2019, given that Ramesh J’s analysis was thorough and grounded in authority, whether one agrees with its conclusions or not. Until the CA provides clarity, councillors must, out of practicality, act on the assumption that they owe fiduciary duties to their town council. To do otherwise would be a dangerous gamble.

    The “no conflict” rule and its consequences for the Sengkang town councillors

    Fiduciary duties are based on the concept of loyalty and have a number of facets or sub-rules. The most relevant one, on the present facts, is known as the “no conflict” rule. This rule provides that a fiduciary “must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal” (Bristol and West Building Society v Mothew [1998] Ch 1 at 18A–C, endorsed by the CA in Tan Yok Koon v Tan Choo Suan and another and other appeals [2017] 1 SLR 654 (“Tan Yok Koon”) at [192] and cited in AHTC 2019 at [163]).

    It has been argued by legal scholars that the purpose of this rule, and of fiduciary law generally, is to guard the fiduciary’s conscience against temptation (see Irit Samet, “Guarding the Fiduciary’s Conscience—A Justification of a Stringent Profit-stripping Rule” (2008) 28(4) Oxford Journal of Legal Studies 763) and/or to prevent breaches of other duties that fiduciaries owe to their principals (see Matthew Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non Fiduciary Duties (Hart Publishing, 2010), cited by the CA in Tan Yok Koon at [192]). One can see how these concerns could be highly relevant in the context of members of a town council, who are supposed to selflessly serve the town council and ultimately the residents of the GRC.

    Whether an act constitutes a breach of fiduciary duty depends heavily on the specific facts. Nonetheless, in the present circumstances, it is obvious that a councillor/MP would at least seem to have a personal or partisan interest at stake in discontinuing a suit against other MPs of the same political party, and that discontinuance would benefit those other MPs.

    Faced with an apparent conflict of interest, a fiduciary would usually have the option of disclosing their conflict and seeking their principal’s informed consent to continue to act in the matter. In the company context, for example, a director can disclose their conflict to the board of directors and have the board vote on whether to consent, with the director concerned abstaining from the vote. Directors can also make disclosure to, and obtain the informed consent of, the shareholders of the company in general meeting (see Regal (Hastings), Ltd v Gulliver and others [1967] 2 AC 134 at 150A (per Lord Russell of Killowen)).

    Unfortunately for the councillors, this course of action does not appear feasible on the present facts. The potential conflict here arises from partisan interests that apply to all the incoming members of the town council, making consent from the SKTC itself meaningless. It would also be impractical, to say the least, to secure the functional equivalent of the consent of a company’s shareholders in general meeting (i.e. the consent of the majority of the constituents of Sengkang GRC), even assuming that would be legally effective.

    Legal and practical consequences of a (hypothetical) breach

    A breach of fiduciary duty would not invalidate or nullify a discontinuance, but would give SKTC the right to sue the town councillors for the breach, similarly to how the alleged breaches in the AHTC/PRPTC suits gave those town councils the right to sue the defendants. In that scenario, SKTC’s probable losses would include the sums that it could have recovered by persisting with the Punggol East suit until completion.

    For the immediate future, SKTC will be in the Sengkang town councillors’ control, so they could simply decide not to cause SKTC to sue them (a decision that could itself be a further breach of fiduciary duties). However, a suit could be launched later if Sengkang GRC were to fall into another party’s control in a subsequent election, or if the electoral boundaries were to be redrawn such that part of the geographical area previously served by SKTC fell within a constituency controlled by another party. There is also a conceivable argument that, consistently with the theory mentioned by Ong, the Minister for National Development could use powers under s 43D of the Town Councils Act to order the SKTC to commence the suit, even while under WP control.

    In short, it would be risky for the councillors to breach their potential fiduciary duties, even though the consequences of such a breach could be a while coming.

    What is the practical alternative?

    Given the above, it may seem that the SKTC should just continue the suit, but it is not that simple. If the Sengkang town councillors were to direct the proceedings themselves, they would still be acting under a conflict of interest. Any sub-optimal decisions by them could open them up to liability. Indeed, it is theoretically possible (though seemingly unlikely) that deciding not to discontinue the suit could incur liability if SKTC fares badly before the CA or recovers only a small amount in the subsequent assessment of damages. In that scenario, it could, ironically, be argued that the Sengkang town councillors had a personal or partisan interest in continuing the suit – namely, to avoid the public disapproval that discontinuance might attract.

    Needless to say, the incoming town councillors are hardly likely to decide to abdicate or refuse to take up their roles, although that would technically be an alternative solution to the conflict.

    Thus, the only legally safe and practical way forward appears to be for SKTC to appoint an independent panel to direct the litigation on its behalf, as was previously done by AHTC in consultation with the Housing Development Board. The independent panel would then be in a position to decide whether the suit should continue and, assuming it does, to steer the proceedings. Since the Sengkang town councillors would have no hand in these decisions, they would be safe from any potential claims against them for breach of fiduciary duties in that regard, assuming the appointment process itself was beyond reproach.

    Conclusion

    Because of the conflict between the Sengkang town councillors’ personal or partisan interests and the interests of SKTC, trying to discontinue the PRPTC suit would run a high risk of the councillors incurring liability for breach of fiduciary duties. It seems unlikely, therefore, that they would attempt to do so. Instead, the safe bet is that the SKTC will appoint an independent panel to conduct the remainder of the suit, consistently with the WP’s recent statement and the precedent they set in respect of AHTC.

    Regardless of whether the above prediction comes to pass, recent developments and, indeed, the underlying Punggol East dispute make one thing clear: private law can have a very real impact on the public sphere. Politicians, no less than commercial directors, would do well to pay heed to their private obligations if they wish to avoid public disaster.

    ** This blog entry may be cited as Nicholas Liu, “Town Councillors’ Fiduciary Duties and the Legal Risks of Discontinuing the Punggol East Lawsuit” (30 July 2020) (http://www.singaporelawblog.sg/blog/article/248)

    * A PDF version of this entry may be downloaded here

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