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    04:51 PM Yip Man (Assistant Professor, Singapore Management University)

    Trusts in Commerce: Guy Neale v Nine Squares Pty Ltd [2014] SGCA 64

        

    In Guy Neale v Nine Squares Pty Ltd [2014] SGCA 64, the Court of Appeal considered the operation of the express trust in the commercial context and the principles relating to the award of an institutional constructive trust for breach of fiduciary duty.  The decision is interesting not only for the exposition of legal principles, but also because it relates to the posh restaurant-bar, “Ku De Ta”, located at Marina Bay Sands. 

    The dispute centred on whether Nine Squares Pty Ltd (“Nine Squares”), the registered proprietor of two Singapore trade marks bearing the “Ku De Ta” name, held the marks on trust for the partnership that owns the famous restaurant, bar and club, Ku De Ta in Bali (the “Ku De Ta Bali”)  

    Facts and Issues  

    The claim was brought by the founding partners of the partnership against Nine Squares, except for Chondros, a founding partner who gave evidence for Nine Squares in the proceedings.  Chondros was also the manager of Ku De Ta Bali as well as the founder and one of the two directors of Nine Squares.  The other director of Nine Squares was Ellaway. In running the daily operations of Ku De Ta Bali, Chondros enlisted the help of Nine Squares, which the other founding partners did not object to.  

    From 2002 onwards, various “Ku De Ta” trade marks were registered in different jurisdictions, including two Singapore trade marks registered in 2004 and 2009 respectively.  The marks which were registered from 2004 onwards were in the name of Nine Squares, and the Australian trade mark registered in 2002 was also later assigned to Nine Squares.  

    But it was only in mid-2007 that the rest of the founding partners came to know of steps being undertaken to register the “Ku De Ta” marks overseas.   As soon as this came to light, the founding partners held a meeting, which Chondros did not attend.  They then sent an email to all founding partners making clear that the use of the “Ku De Ta” name would require approval by all partners and all subsequent agreement must be governed by a licence agreement that would provide, inter alia, on what royalties would be payable to Ku De Ta Bali.  

    In 2009, the relations between Chondros and Ellaway deteriorated owing to Chondros’ suspicion that Ellaway was diverting money from Ku De Ta Bali by altering or forging suppliers’ invoices.  Chondros then informed Ellaway via email that he should not enter into any agreements or incur expenses without Chondros’ express written consent.  Chondros’ email notwithstanding, Ellaway caused Nine Squares to license to a party named Au the use of the 2004 Singapore trade mark within Singapore without Chondros’ knowledge (the “Licence Agreement”).  The use of the 2004 Singapore trade mark was later assigned to KDTSG, the current operator of the restaurant named “Ku De Ta” in Singapore and located in Marina Bay Sands (“Ku De Ta Singapore”).  Ku De Ta Singapore commenced operation in September 2010.  This spawned two actions commenced by the partnership, one against KDTSG and another one against Nine Squares, which this appeal was concerned with.  In the proceedings against Nine Squares, the partnership sought:

    1. a decalaration that the Singapore trade marks were held by Nine Squares on trust for the partnership and should be transferred to the partnership;
    2. alternatively, the registration of the Singapore trade marks should be invalidated; and
    3. further, an account of profits against Nine Squares from the use/and or the licensing of the use of the Singapore trade marks. 

    At trial ([2013] SGHC 249), Prakash J held that Nine Squares did not hold the marks on trust for the partnership, and further that there was no basis to invalidate the Singapore trade marks. 

    The Court of Appeal’s Decision 

    The partnership appealed on the following issues:

    1. Whether Nine Squares held the Singapore trade marks on an express trust for the partnership;
    2. Alternatively, whether Nine Squares held the Singapore trade marks on an institutional constructive trust for the partnership; and 
    3. If neither an express trust nor a constructive trust was found, whether the registration of the Singapore trade marks should be invalidated pursuant to s 23 of the Trade Marks Act (Cap 332, Rev Ed 2005).

    Disagreeing with the High Court’s ruling, the Court of Appeal was satisfied on the evidence that Nine Squares held the Singapore trade marks on an express trust for the partnership.  A declaration to this effect was thus granted, and the Court also ordered for the marks to be transferred to the partnership. The Court further ordered Nine Square to account to the partnership profits made from the exploitation of the Singapore trade marks.  Although the resolution of the express trust issue was sufficient to dispose of the dispute, the Court went on to address, in obiter, the alternative claim based on an institutional constructive trust, clarifying to some extent, the principles in relation to the award of an institutional constructive trust in cases of breach of fiduciary duty.  In light of the Court’s findings in respect of issues (a) and (b), issue (c) did not arise. 

    The commentary below focuses on the trust issues.

    Express Trust 

    The present case concerned a dispute of beneficial ownership where the plaintiff had neither legal ownership nor a written agreement to support their claim.  Notably, a trust argument in the commercial context generally faces the issue of tension between certainty (notably, by way of contract) and equitability.  For this reason, although the explicit use of the word “trust” is not conclusive, the courts do not readily infer an intention to create a trust, one of the three certainties required for the substantive validity of an express trust (see [50]-[63]), in the absence of explicit provision (see Hinckley Singapore Trading Pte Ltd v Sogo Department Stores (S) Pte Ltd [2001] 4 SLR 154).  The Court clarified in Guy Neale that the pertinent question to be asked in commercial cases is “whether it was possible and appropriate to infer an intention to create a trust by looking at evidence not only of the alleged settlor’s words and conduct, but also of the surrounding circumstances and the interpretation of any agreements that might have been entered into” ([58]). 

    In the present dispute, the “Heads of Agreement” entered into between the founding partners in 2000 and its updated version in 2009 defined the business ran by the partnership to refer to “the restaurant business named ‘Ku De Ta’ to be carried out in Bali, Indonesia”. The Court undertook a careful examination of all surrounding circumstances, according primacy to the evidence of the events from mid-2007 onwards, that is, when the other founding partners came to know of the overseas registration of the trade marks.  

    Other than the unequivocal position taken by the other founding members from mid-2007 onwards, another piece of evidence that was in favour of the finding of an express trust was Chondros’ testimony in an earlier set of proceedings before the Australian courts.  The Australian proceedings involved KDTSG and Au suing Nine Squares in relation to, amongst other matters, the validity of the Licence Agreement.  Both Chondros (giving evidence for Nine Squares) and Nine Squares took the position that the 2004 Singapore trade mark was held on trust for the partnership.   In Guy Neale, the Court was not satisfied that Chondros had properly explained the contrary position that he was now taking before the Singapore court ([115]).  Although the Australian proceedings only concerned the 2004 Singapore trade mark, the Court saw no reason not to apply the same analysis to the 2009 Singapore trade mark [(116)].  

    The Court’s decision is undoubtedly correct. Their analysis demonstrates the paramountcy of evidence in establishing an express trust in the commercial context.  That being the case, Guy Neale does not stand for the proposition that an express trust will be readily found even in commercial cases; after all, the facts of the dispute were rather exceptional.  Commercial parties’ interests are best protected by well drafted agreements. 

    Institutional constructive trust for breach of fiduciary duty 

    On the issue of constructive trust, the Court stressed that “[t]he liability of the constructive trustee is predicated on his knowing of some factor that affects his conscience” ([125]).  Indeed, this hallmark feature of the constructive trust distinguishes a constructive trust from an express trust, as the latter is concerned with the intention to create a trust.  For this reason, the constructive trust was claimed on the basis of Chondros’ wrongdoing.  Nevertheless, a further classification exercise remains: the Court has yet to undertake the difficult task of delineating the boundaries of an institutional constructive and a remedial constructive trust.  To recall, in the seminal decision of Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] 3 SLR 801, the Court of Appeal, in obiter, said that a remedial constructive trust does not automatically arise in response to unjust enrichment alone; there must be an additional element of fault to justify its imposition.  Accordingly, that the conscience of the holder of property is affected is not the distinguishing feature between the two types of constructive trusts. 

    Related to this issue is the Court of Appeal’s endorsement of the UK Supreme Court’s decision in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 ([127]-[130]).  Before the Supreme Court’s judgment, the English jurisprudence on whether a constructive trust is available for a fiduciary’s breach of duty in receiving bribes and secret commissions was in a state of flux (see, for example, Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453).   In FHR, it is now resolved that a constructive trust is indeed available, and previous contrary authorities such as Tyrrell v Bank of London (1862) 10 26 and Lister & Co v Stubbs (1890) 45 Ch D 1 were overruled.  That the Singapore Court of Appeal was in agreement with the English approach is unsurprising.  We do have the authority of Thahir Kartika Ratna v PT Pertambangan Minyak dan Gas Bumi Negara (Pertamina) [1994] 3 SLR(R) 312, and Singapore has always favoured strong deterrence against breach of fiduciary duty (see, for example, Ng Eng Ghee v Mamata Kapildev Dave [2009] 3 SLR(R) 109 at [142]-[145]).  Nevertheless, one further issue deserves attention: whether the constructive trust ought to be an institutional constructive trust or a remedial constructive trust?  The UK Supreme Court in FHR remains unwilling to recognise a remedial constructive trust, and this question is thus irrelevant to the English jurisprudence.  However, in Australia, where a remedial constructive trust is also recognised, the Full Federal Court of Australia has dealt with the same issue by way of a remedial constructive trust (see Grimaldi v Chameleon Mining (No 2) (2012) 200 FCR 296).  This question harks back at the proper doctrinal divide between the two types of constructive trusts under Singapore law. 

    The plaintiffs’ two bases for claiming a constructive trust were that Chondros had usurped a corporate opportunity that rightfully belonged to the partnership and secondly, that the goodwill of the “Ku De Ta” name which belonged to the partnership had been misappropriated by Nine Squares in registering the Singapore trade marks without the partnership’s permission.   Owing to the lower court’s finding that there was no goodwill in the “Ku De Ta” name in Singapore in the relevant classes at the respective times of registration, the Court did not consider it necessary to comment further on this second claim.  As such, we will focus only on the claim based on usurpation of corporate opportunity.  

    On usurpation of corporate opportunity, Court explained that the applicable legal test is “whether…the alleged usurper, had taken a corporate opportunity which there was a ‘real and substantial possibility’ of the Partnership pursuing, having regard to its existing business activities and its stated aspirations” ([133]).  The Court adopted a holistic approach of considering more broadly whether the partnership as a whole would have entered into a licence agreement for the use of the “Ku De Ta” mark in Singapore in 2009 when the discussions that led to the signing of the Licence Agreement commenced.  

    The Court answered the question in the affirmative, having regard to three main factors.  First, after the other founding partners came to know of the registration of the “Ku De Ta” marks overseas, they had explicitly indicated their interest in the licencing of the use of the “Ku De Ta” name and the receipt of royalties in mid-2007 via an email which was received by Chondros ([140]).  It was not necessary that they had in mind a specific country to pursue this plan, but it was clear that any partner who wished to exploit the name would require approval from all the other founding partners.  Second, based on the evidence, Chondros and Ellaway had a real interest in setting up a “Ku De Ta” business operation in Singapore ([141]).  Finally, even Chondros who held the strongest objection to the Licence Agreement had affirmed it after the Australian proceedings were settled.  It could thus be inferred that had the other founding partners been told of the opportunity to enter into a licence agreement for the use of the “Ku De Ta” name, they would have agreed to do so ([142]). The Court concluded by saying that if Chondros had registered the Singapore trade marks in Nine Squares’ name so as to use them for his own interests, then he would have been in breach of fiduciary duty by usurping, through Nine Squares, a corporate opportunity that properly belonged to the partnership ([143]).  

    This claim warrants a few comments.  First, the Court of Appeal seemingly treated the usurpation of corporate opportunity as a separate doctrine, as opposed to being part of the no-conflicts rule and no-profit rule.  In the English case of Bhullar v Bhullar [2003] BCC 711, Jonathan Parker LJ, with whom Schiefmann and Brooke LJJ concurred, analysed the issue of usurpation of corporate opportunity as a matter of the application of the no-conflicts rule.  Moreover, Parker LJ, in affirming the lower court’s award of proprietary relief, did not see the inquiry as being concerned with the beneficial ownership of the corporate opportunity.  After all, it seems difficult to treat opportunities as a species of property, which is in itself an unstable concept.  As such, one should not readily interpret the Court of Appeal’s phrasing of “properly belonged” as referring to ownership, as opposed to a sufficient connection to the partnership’s business. Finally, the application of the “real and substantial possibility” test by the Court of Appeal to the facts of the case indicates that the narrow “maturing business” test does not apply in Singapore, as was also the holding in Bhullar v Bhullar.   This is indeed sensible and a very welcomed clarification.  

    * This blog entry may be cited as Yip Man, "Trusts in Commerce: Guy Neale v Nine Squares Pty Ltd [2014] SGCA 64", Singapore Law Blog (22 January 2015) (http://www.singaporelawblog.sg/blog/article/79)

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

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