10 July, 2015
The rules of contractual interpretation are well-established. However, how should the courts interpret a contract that has been drafted, not in English, by laypersons who have had no legal advice?
Recently, in Xia Zhengyan v Geng Changqing [2015] SGCA 22, the Court of Appeal (“CA”) had to interpret a contractual clause, drafted originally in Chinese, which governed the scope of the transfer of one party’s shares and interests to another. The contractual clause had been drafted by the parties themselves, whose first language was not English and who were laypersons acting without the benefit of any legal advice. In interpreting this clause, the CA observed that the context in which the agreement was made was as important as the usual rules of contractual interpretation, and that a different approach was required in interpreting the clause.
Breif Facts
The Respondent was the founder of a child-care business known as “Apple Plus”. The appeal before the CA concerned the purchase by the Appellant of part of the Respondent’s interests in the business, which operated on a franchising model. The Respondent was the sole shareholder of the head or master company (“the Head Company”) that entered into franchise agreements with other companies (“The Franchisees”), under which it granted them the right to use the name “Apple Plus School” and provided them with teaching and operational support and teaching materials. As at 22 September 2011, the Head Company had franchise agreements with four Franchisees in Singapore and one in Malaysia. The Head Company did not own any shares in the Franchisees, although the Respondent herself held shares in most of the Franchisees. The Respondent was also the sole proprietor of an unincorporated entity known as “Apple Plus School” (“the Sole Proprietorship”).
On 22 September 2011, the Appellant met the Respondent to discuss her interest in investing in the Respondent’s business, in particular the Head Company. By 29 November 2011, the negotiations between the parties were sufficiently advanced for the Respondent to send to the Appellant a memorandum of understanding (“MOU”) and a draft sale and purchase agreement (“SPA”). The MOU was drafted by lawyers instructed by the Respondent, but the SPA appeared to have been drafted without assistance from lawyers.
Following further negotiations, the parties signed a Chinese version of a SPA on 17 January 2012. Three days later, the parties signed an English translation of the SPA. The Respondent subsequently transferred 50% of the shares in the Head Company to the Appellant, in return for theAppellant’s investment of USD 1.5m.
The business partnership, however, did not turn out well and by October/November 2012, the parties began to discuss the possibility of one of them buying over the other’s shares. These discussions failed and the Appellant then brought claims for breach of contract and fraudulent misrepresentation against the Respondent. In particular, the Appellant claimed that the Respondent was in breach of contract as she had failed to transfer additionally to the Appellant half of her other shares and interests in the various companies and entities within the Apple Plus business, including the Sole Proprietorship (“the Remaining Shares”).
The Respondent counterclaimed for an amount of SGD 300k which was placed by the parties into a time deposit joint account, but was subsequently transferred into the Appellant’s personal account.
The High Court dismissed the Appellant’s claims in both contract and misrepresentation, but allowed the Respondent’s counterclaim.
Summary Of Decision
The CA, reversing the High Court’s decision, allowed the Appellant’s claims in contract and dismissed the Respondent’s counterclaim. The CA upheld the High Court’s decision in dismissing the Appellant’s claims in misrepresentation.
The Appellant’s claims in contract turned entirely on the interpretation of Clause 1 of the SPA which stated:
“Pursuant to the terms of this Agreement, Party A [ie, the Respondent] shall transfer the 50% share in Apple Plus School International Pte Ltd (specifically including 50% share in Apple Plus School International Pte Ltd, 50% share in Apple Plus School including trade mark and patent of Apple Plus School and Monkey Abacus, 12.5% share in Apple Plus School (Tampines) Pte Ltd, 13% share in Apple Plus School (Bukit Timah) Pte Ltd, 12.5% share in Apple Plus School (Serangoon) Pte Ltd, 12.5% share in Apple Plus School (Thomson) Pte Ltd and 25% share in Apple Plus School (Malaysia)) held by her to Party B [ie, the Appellant] in accordance with the provisions of the law. [emphasis added]”
The dispute over Clause 1 was whether the Respondent was contractually obliged to transfer 50% of the Remaining Shares to the Appellant or whether she was only contractually obliged to transfer 50% of the shares in the Head Company (which she had done).
In interpreting Clause 1, the CA observed that there were two key aspects to the context in which the SPA was made: the SPA was in Chinese and was drafted by the parties themselves with no legal advice as such. Crucially, the terms of the SPA could not be read “as if they had been drafted by lawyers who were … aware of the legal significance of the relevant language of the terms of the [SPA] itself”. In addition, as the SPA was drafted in Chinese, the English translation of the relevant terms could not be “analysed and interpreted in the manner that laypersons whose first language was English would be accustomed to”.
Therefore, although Clause 1 was ambiguous as to whether the Remaining Shares were included as part of the 50% shareholding in the Head Company, the context in which the SPA was made should be borne in mind given that the SPA was drafted in Chinese by parties whose first language was not English and who were laypersons acting without the benefit of legal advice. In construing Clause 1, the CA preferred a “more common-sense approach that consider[ed] the reasonable and probable expectations that parties would have had” as opposed to a strict construction.On the evidence, the CA held that it was more likely than not that the Appellant, as a layperson, was expecting to receive the entire legal and beneficial interest in the Remaining Shares. Among the reasons cited by the CA was the fact that the Appellant had invested a substantial sum of money ($1.5m) for the shares that she was purchasing and it “seem[ed] improbable … that she would have agreed to part with this amount had she not understood that she would receive 50% of all of the Respondent’s shares in the entire Apple Plus business”.
Moreover, the reference to the Remaining Shares in Clause 1, together with the words “specifically including”, suggested that the obligation to transfer 50% of the shares in the Head Company attached equally to the Remaining Shares. Given that the Remaining Shares were owned by the Respondent, and not by the Head Company, “the most plausible reason why the Remaining Shares were even mentioned at all was that parties contemplated that half of the Remaining Shares would also be transferred to the Appellant”.
Conclusion
This case suggests that the courts are prepared to take a more practical approach in interpreting an ambiguous contractual clause which was drafted in a language other than English by laypersons without legal advice and whose first language is not English. On the other hand, as mentioned at various parts of the CA’s judgment, a stricter interpretation is likely to be taken if the clause was: (a) drafted by lawyers or at least drafted with the benefit of legal advice; or (b) drafted originally in the English language by parties whose first language is English.
It remains to be seen how the above-mentioned principles will apply in future cases, given that the CA’s analysis in this case arose from highly specific factual circumstances and the context in which an agreement is made is likely to vary from case to case.
For further information, please contact:
Renganathan Nandakumar, RHTLaw Taylor Wessing
nandakumar@rhtlawtaylorwessing.com
