07:36 AM Devathas Satianathan (Justices' Law Clerk, Supreme Court of Singapore)

    Illegality in Contract: Poh Cheng Chew v K P Koh & Partners Pte Ltd [2014] 2 SLR 573


    Facts and Decision

    The plaintiff, Mr Poh Cheng Chew, owned a property at Sentosa Cove ("the Property”). The first defendant, K P Koh & Partners Pte Ltd, was an architecture and engineering firm. The second defendant, Tradesmen Pte Ltd, was a building contractor. Mr Koh Kok Peng ("Koh”) was a professional engineer and principal partner in the first defendant; Koh also ran the second defendant.

    Poh Cheng Chew centred on a settlement agreement entered into between parties on 12 March 2012. In April 2010, the plaintiff engaged the defendants to carry out additions and alterations ("the Works”) to the Property. Subsequently, a dispute arose between parties regarding the Works. On 8 February 2012, the plaintiff claimed $111,330 from the defendants as compensation for defective works. 

    Parties proceeded to mediation, and reached a settlement agreement on 12 March 2012. Pursuant to the settlement agreement, a professional engineer was to be appointed to identify the rectification works that needed to be done and select a party to conduct the necessary works. Also, clause 12 of the settlement agreement provided that the plaintiff "shall not file any complaints with the [PEB]…” ("the Relevant Portion”).

    Mr Chan Yaw Fai ("Chan”) was appointed as the professional engineer, pursuant to the settlement agreement. Chan identified the rectification works and awarded the contract to Crystallite Construction & Engineering Pte Ltd ("Crystallite”). However, the defendants were unhappy with Chan’s decision and refused to pay. After unsuccessful further mediation, the plaintiff sued the defendants and filed a complaint to the PEB against Koh by way of a statutory declaration on 16 August 2012.

    Before the High Court, the plaintiff sought damages as a result of the defendants’ alleged breach of the settlement agreement. The defendants denied that the plaintiff was entitled to any payment, and prayed for, inter alia: (a) Chan’s appointment as professional engineer under the settlement agreement to be set aside, as he was not independent and was acting under the influence of the plaintiff; and (b) a declaration that the settlement agreement had been repudiated or terminated as the plaintiff had breached the fundamental term in the Relevant Portion of clause 12, namely, that he refrain from filing a complaint to the PEB.

    The court found that Chan could not be regarded as independent, having been employed by the plaintiff. Nevertheless, the crux was whether he had acted impartially. The court held he had, but short of setting aside his appointment, it set aside the award of the contract to Crystallite. As the award of the contract was set aside, the court dismissed the plaintiff’s claim and ordered that the parties appoint a replacement professional engineer to conduct another tender exercise. Responding to the defendants’ second prayer, the court found that the Relevant Portion of clause 12 was illegal, and hence unenforceable, as it allowed "a professional engineer to effectively contract out of regulatory oversight of his professional conduct by the PEB” (at [92]). However, as the court determined that the Relevant Portion was severable from the rest of the settlement agreement, it held that only the Relevant Portion should be struck out, while the rest of the settlement agreement remained valid.

    The plaintiff filed a notice of appeal on 28 February 2014, contesting certain findings of the trial judge, including his finding that Chan’s award to Crystallite must be set aside. The appeal is due to be heard in the week commencing 18 August 2014. The plaintiff did not seek to disturb the clause 12 finding.

    Illegality and Public Policy

    The defendants raised five arguments in an attempt to convince the court that clause 12 should have been upheld. All five were rejected. 

    First, the defendants argued that the plaintiffs had not pleaded that clause 12 was against public policy. The judge replied that public policy and illegality are factors that the court has to take into account regardless of the pleadings of parties. 

    Second, the defendants argued that the PEA did not compel persons to file complaints to the PEB. The defendants distinguished the filing of complaints to the PEB from s 424 of the Criminal Procedure Code (Cap 68, 2012 Rev Ed), which imposes a duty on individuals "aware of the commission of, or the intention of any other person to commit, any arrestable offence punishable under certain provisions of the Penal Code” to give information on certain matters. The judge disagreed with this dichotomy. While he agreed that the PEA does not literally impose a duty on persons to make complaints, he preferred a purposive approach. The judge found that the purpose of the PEA was to "make an engineer accountable for his professional conduct not only to his client but also to a statutory body whose functions include the maintenance of standards of professional conduct and ethics of the engineering profession”. Clause 12 hence derogated from this purpose. 

    Third, the defendants argued that clause 12 was akin to a compromise by a party not to report certain criminal offences, such as criminal breach of trust ("CBT”), punishable under s 406 of the Penal Code (Cap 224, 2008 Rev Ed) ("Penal Code”). The judge rejected this analogy, noting that while the Penal Code draws a distinction between compoundable and non-compoundable offences, the PEA does not. Nor does the PEA allow professional engineers to release or exempt themselves from disciplinary proceedings by paying compensation. As such, while contractual attempts to stifle the prosecution of compoundable offences (such as CBT) may not be against public policy, attempts to stifle the prosecution of non-compoundable offences (such as violations of the PEA) are illegal and against public policy (at [97]). The rationale for this distinction is that conduct which tends to undermine the wider public interest should be left to the administration of the law, and not private individuals. Further, the judge noted that the allegations of misconduct against Koh were rather serious, as they pointed to a conflict of interest on the part of Koh in the discharge of his duties as a professional engineer. A fortiori, such misconduct should not be excluded from oversight. 

    In a hypothetical situation where Koh had committed minor breaches, one may question if this same reasoning would hold. Based on the judge’s reasoning, it would seem so. The operative offense was relinquishing oversight from the rightful arbiters (PEB). That in itself is illegal.

    Fourth, the defendants attempted to liken clause 12 to an agreement not to volunteer to give evidence, the latter of which was considered valid in the English case of Barrett v Universal-Island Records Ltd & Ors [2006] EWHC 1009 (Ch). The key portions of the settlement agreement in Barrett were paragraphs 4 and 7 (replicated in Barrett at [138]). Paragraph 4 read, "[i]t is agreed and acknowledged that the aforesaid sums are not paid pursuant to any liability on the part of [Party B]. [Party A] acknowledge and agree that they do not have now and have never had any claim against [Party B]…” Paragraph 7 read, "[Party A] further agree that in the event that any claim in relation to the assets is made… they will, if called upon… testify as to the matters set out in paragraph 4 hereof.” The English High Court found (at [170]) that while there was no public policy that prevented a person from promising not to volunteer to give evidence, it was contrary to public policy for a person to give evidence to a certain effect, because that might interfere with the administration of justice. The court held that paragraph 7, read with paragraph 4, did in fact impose a duty to give evidence to a certain effect, and was hence void (at [173]). The court in Poh Cheng Chew seemed adapted the dichotomy drawn in Barrett. The judge distinguished between the situation where a contracting party undertakes not to file a complaint in the future (akin to giving evidence to a certain effect) and a complainant withdrawing his complaint from a disciplinary tribunal already seised of jurisdiction (akin to promising not to volunteer evidence). The former was against public policy; the latter was not. In this case, the judge found that clause 4 resembled more of the former.

    The general notion of interference with administration of justice rings true in both hypotheticals, as the illegal option in both cases (giving evidence to a certain effect and promising not to file complaint) would impede the administration of justice, whereas the valid option (agreement not to volunteer evidence and undertaking to withdraw complaint) would not. A crucial premise in this analysis is that the disciplinary tribunal’s jurisdiction is not prejudiced by the subsequent withdrawal of a complaint (such as in disciplinary proceedings against solicitors. See Manjit Singh s/o Kirpal Singh and another v Attorney-General [2013] 4 SLR 483 at [5]). As long as this premise stays true, the distinction drawn by the judge is cognisant with the overarching philosophy of upholding the administration of justice. 

    Fifth, the defendants argued that even if clause 12 raised a public policy consideration, it would be negated by the countervailing consideration that contracts freely entered into should be upheld. While the judge agreed in principle that public policy did entail a balancing exercise between competing considerations, he disagreed on the calibration of the balance, holding that in this case, the need to uphold professional accountability outweighed all else.

    While Poh Cheng Chew was helpful in identifying a further factor to consider when balancing public policy interests – namely the need to uphold professional accountability – it caveated that the balance that is to be struck will depend on the facts of each case, there being no universal calculus.

    Reflections and Ramifications

    Poh Cheng Chew adds to the law on illegality by proposing a framework for dealing with attempts to contract out of regulatory oversight. It identifies "interference with the administration of justice” as the operative criterion, and communicates the following general principles: (a) The purpose of the specific regulation or legislation is key in determining if precluding regulatory oversight would interfere with the administration of justice; (b) The more serious the misconduct, the stronger the reason it should not be precluded from oversight; (c) Attempts to stifle prosecution of non-compoundable offences/misconduct are more likely to be invalid than attempts to stifle prosecution of compoundable offences/misconduct; and (d) A promise to refrain from filing a complaint is generally invalid, whereas a promise to withdraw an existing complaint may be valid.

    One key ramification is on industry practice. Poh Cheng Chew sounds the death knell for the practice of contracting out of regulatory oversight, which has hitherto been attractive given that it serves both parties’ primary interests. The case highlights the boundaries within which party autonomy can operate, and serves as a reminder to engineers, and professionals in general, that they are held to certain standards – and subject to oversight – that cannot be simply contracted out of.

    Lastly, when fact patterns include trans-border issues, complexities may arise. In this case, the nexus between illegality and public policy was fortunately uncomplicated, as only local regulation was concerned. Whether Singapore courts will uphold parties’ promises to refrain from filing complaints with regulatory agencies abroad is less straightforward (see AJU v AJT [2011] 4 SLR 739 at [21], where the Court of Appeal summarised the position in Singapore when a promise involves a foreign illegality).

    * This blog entry may be cited as: Devathas Satianatha, "Illegality in Contract: Poh Cheng Chew v K P Koh & Partners Pte Ltd [2014] 2 SLR 573" Singapore Law Blog (25 May 2014) 

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

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

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