3 August, 2017
In December 2016, the Singapore Court of Appeal ("Court of Appeal") in Yap Son On v Ding Pei Zhen [2017] 1 SLR 219, reversed the decision of the Singapore High Court ("High Court") in Ding Pei Zhen v Yap Son On [2015] 5 SLR 911. In doing so, the Court of Appeal clarified that the courts should only consider extrinsic evidence in relation to contractual interpretation in very narrow circumstances, thus underscoring the need for clear drafting of contractual terms.
The Facts
Yap and Ding had agreed to work together to procure the listing of a Chinese company, Jinjiang Goldrooster Sports Goods Co. Ltd., on the Frankfurt Stock Exchange through a listing vehicle incorporated in Germany, Goldrooster AG. The shares in Goldrooster AG were held by Zhuo Wei Investments Ltd., which held 14.5 million shares, and three other companies owned by Yap ("Yap Companies"), which held a total of 5.5 million shares. After the listing, an agreement was reached as to how the respective shareholdings were to be distributed ("Allotment Agreement"), and this was scribbled in Chinese on page 157 of the listing prospectus of Goldrooster AG as follows:
[Yap Son On]: For Ding Peizhen’s investment in Jinjiang Goldrooster Co., her shareholdings after listing in Germany is confirmed as follows:
Total 19%
Ding Peizhen confirmed holding 10.35% in Goldrooster Co., to be gradually held on behalf by [Yap Son On].
[Yap Son On] confirmed holding 6.65% in Goldrooster Co.
Xinye, Zhong Yedian holding 2% in Goldrooster Co.
/Total 19%
Xinye and Zhong Yedian were the names of two individuals who served as the auditors and accountants of Goldrooster AG.
Ding contended that the term "19%" was not in fact meant to be an expression of a percentage at all, but referred instead to the totality of the 5.5 million shares held by the Yap Companies. On this interpretation, Ding would be entitled to 2,996,053 shares.
Yap, on the other hand, argued that the term "19%" referred to 19% of the post-listing total of 20.7 million shares. On this interpretation, Ding would only be entitled to 2,144,541 shares.
The High Court Proceedings
The High Court held, inter alia, that:
- An investigation of the deeper background to the Allotment Agreement was required and not simply a consideration
- of the immediate context in which it was made;
- It was necessary for the court to consider the circumstances of the transaction in order to appreciate the context of what the "19%" in the Allotment Agreement was intended to convey; and
- The extrinsic evidence considered went to show the circumstances in which the Allotment Agreement was made, rather than merely to demonstrate the plaintiff’s subjective intent, which in any case was not precluded in the interpretation of ambiguous terms. Here, the ambiguity was as to what the "total 19%" referred to.
The Judge eventually preferred Ding’s version of events and gave judgment in her favour.
The Court of Appeal Proceedings
The Court of Appeal allowed the appeal and reversed the decision as:
the extrinsic evidence sought to be admitted should not have been taken into consideration and because the interpretation preferred by the Judge is one which – in our judgment and with the greatest respect to the Judge – was not permissible in the present circumstances.
The Court of Appeal stated that, even under a contextual approach, the "meaning imputed by the court [must] be one which 'the words are reasonably adequate to convey'".
Applying that to the present case, the Court of Appeal held that the term "total 19%" referred to the shareholdings after listing in Germany as a percentage is, by any definition, a fraction out of 100. The Court of Appeal also stated that, in interpreting the term "total 19%" as a reference to a fixed allotment of shares, the Judge had crossed the line from interpretation to a variation of the contract.
The Court of Appeal then went on to consider the law governing the admissibility of extrinsic evidence, and held that extrinsic evidence ought not to be admitted as: (i) they were not pleaded with sufficient specificity; (ii) they did not satisfy the criteria of being relevant, reasonably available to all the contracting parties, and related to a clear or obvious context; (iii) the language used was plain in itself; and (iv) this was not a case of latent ambiguity as the words are plain and they apply to the existing facts.
Conclusion
The above ruling of the Court of Appeal signifies a strong reluctance by the Singapore courts to adduce extrinsic evidence in the interpretation of contractual terms except in very narrow circumstances. Thus, it is useful to bear in mind that contractual terms should be drafted with clarity, even if the agreement is in the context of a seemingly informal supplemental note.
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For further information, please contact:
Mark Wong, Director, Duane Morris & Selvam LLP
mwong@duanemorrisselvam.com
