Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

Introduction

At first blush, forming an effective contract might not seem too difficult – two parties just have to agree to a set of terms. However, the act of agreement is often just the starting step, and without proper advice, the rest of the journey may remain uncompleted. The Singapore Court of Appeal case of Teo Chong Nghee Patrick v Han Cheng Fong [2014] SGCA 29 provides a prime example of the risks of trying to govern complex commercial relationships with a D.I.Y. agreement.

The case involved an alleged shareholders’ agreement, which set out the designations and shareholdings of the various signatories, including the Plaintiff and the Defendants. The relationship between the parties soon began to show cracks, and the tension came to a head when the Plaintiff was removed from his position as director.

The Plaintiff sought to establish that he had been illegitimately dismissed under the terms of the alleged shareholders’ agreement. However, the Court of Appeal found numerous inconsistencies and uncertainties in the document, and held that the document was not, in fact, a legally enforceable agreement.

The document in question had been drafted without the benefit of legal advice, and the Court was unable to sort through its flaws and omissions without substantially rewriting it. The decision demonstrates the importance of obtaining proper guidance when creating intricate legal documents.

Brief Facts

The Defendants intended to undertake a project to develop an eco-park in Hangzhou. They decided to involve the Plaintiff for his expertise in the market. The parties wanted the terms of their involvement recorded, and did so in a document signed by all the parties (the “Document”).

The Document was prepared without the benefit of legal advice, and was likely drafted by one of the Defendants. It was titled as “Directors’ Resolution”, and purported to set out the designations and shareholdings of the parties in the proposed enterprise (the “Company”). It also set out the other companies to be set up under the enterprise, and the distribution of income between these companies.

However, disputes soon began to form between the Plaintiff and the Defendants. Eventually, the Defendants removed Plaintiff as director of the Company during an extraordinary meeting, of which the Plaintiff was not informed. The Plaintiff thus brought a claim of wrongful removal and conspiracy against the Defendants.

Holding Of The High Court

The High Court held in favour of the Plaintiff, deciding that the Document was in fact a valid shareholders’ agreement, which gave the Plaintiff a right or legitimate expectation to be appointed as chairman and director of the Company. He thus could not be removed from these positions without justifiable dismissal.

Holding Of The Court Of Appeal

The Court of Appeal disagreed with the High Court’s holding, finding instead that the Document was not an enforceable agreement. The Court of Appeal acknowledged the parties’ intention to regulate their relationship through the Document, but could not move past the numerous uncertainties and inconsistencies in the Document to give it legal force.

Notably, the Court of Appeal observed that the lack of legal input into the document was apparent, as the substance of the parties’ intended relationship never crystallised into the proper form, and that the Document could not be sufficiently construed to interpret their objective intention. Rather than being a shareholders’ agreement or a directors’ resolution, it was “a piece of legal nonsense devoid of any legal effect”.

The Court of Appeal listed a number of clauses which made it difficult to construe the Document as a shareholders’ agreement.

(i) Six of the signatories were expressed to have the power to agree to amend the Document, but the seventh signatory, which was a company, inexplicably had no such power.

(ii) While the Documents attributed positions to the individuals, it did not specify their duties or obligation to remain in the positions.

(iii) The Document said nothing about how the companies would be funded or how the costs of meeting disbursements would be apportioned.

(iv) The companies which were to be set up under the Document were never set up.
The Defendants suggested a number of solutions to these issues, but the Court of Appeal found that these would require the implication of far too many terms just to make the Document a workable agreement. Therefore, the Document could not constitute a shareholders’ agreement.

The Court of Appeal also held that the Plaintiff had no legitimate expectation to be allowed to maintain his positions in the Company, and that he was in any event unable to prove that he had suffered any loss.

Concluding Words

It is of course not impossible for lay parties to construct their own enforceable contract, as long as they have the requisite contractual intention and certainty in the drafted terms. However, the more complicated the commercial relationship governed by the agreement, the more difficult it is for the parties to cover all the necessary aspects of a complete and binding agreement.

Parties seeking to enter into contractual relationships should thus ensure that they obtain appropriate legal guidance to construct an effective agreement. Otherwise, as demonstrated in this case, they run the risk of finding themselves stranded when the obligations agreed upon turn out to be unenforceable.

For further information, please contact:

Desmond O. Wee, Partner, Rajah & Tann

[email protected]

Tracy C. Ang, Partner, Rajah & Tann
[email protected]

Rajah & Tann Dispute Resolution Practice Profile in Singapore

Homegrown Dispute Resolution Law Firms in Singapore

International (with Local Law Capabilities) Dispute Resolution Law Firms in Singapore