High Court · Decided 30 May 2012

Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another

Feedback & support

[2012] SGHC 118Case no. Suit No 351 of 2010/H

What happened, in plain English

There is no plain-English summary of this judgment yet.

Ask about this judgment

Laws this judgment relies on

Companies Act 1967

Grounds of decision

Official text from eLitigation

Tay Yong Kwang J :
[1] This case concerns the aftermath of a joint venture deal that turned sour. The plaintiff, Sembcorp Marine Ltd (“Sembcorp”), and the first defendant, PPL Holdings Pte Ltd (“PPL Holdings”) entered into a joint venture arrangement in 2001 in order to capture a segment of the offshore oil rig construction market. The joint venture company was the second defendant in the counterclaim, PPL Shipyard Pte Ltd (“PPL Shipyard”), with Sembcorp and PPL Holdings each holding 50% of the shares in PPLS. In brief, Sembcorp contended that PPL Holdings had acted in such a way as to drop out of the joint venture arrangement, leaving a Chinese company, Yangzijiang Shipbuilding (Holdings) Limited (“Yangzijiang”), in its place. This would be a highly undesirable situation for Sembcorp, because Yangzijiang is a Chinese rig building company which wishes to enter the Singapore market and which Sembcorp alleged to be its competitor. Sembcorp’s case was that PPL Holdings’ actions left Sembcorp in the unenviable position of being a partner in a joint venture with a competitor.
[2] The issues that arise in this case pertain mainly to the question of whether certain terms can be implied into the agreements between the parties and also other questions of contractual interpretation. The reliefs claimed by Sembcorp include an order that PPLH transfer to Sembcorp the shares in PPLS that PPLH had agreed to transfer to Yangzijiang and declarations to the effect that the joint venture agreement between the parties has been terminated. In the counterclaim, PPLH claimed, inter alia, declaratory relief that certain resolutions passed by directors nominated by Sembcorp to the PPLS board of directors be invalidated.
The background
The parties
[3] Quite apart from the named parties to this action, there were also a number of companies and natural persons who played pivotal roles in this case. The parties and their relationships listed here are set out as around 2001 before the joint venture arrangement was entered into between the parties and before the ownership structure of some of the companies changed significantly.
[4] Sembcorp Marine was a publicly listed company incorporated in Singapore and in the business of constructing oil rigs and ships. It was a company linked to the Government of Singapore. Sembcorp Marine was represented in many of its negotiations in relation to the joint venture by its then President, Mr Tan Kwi Kin (“TKK”).
[5] PPL Holdings was a private company incorporated in Singapore. Before the joint venture arrangement was entered into between the parties in 2001, PPL Holdings held 97% of the issued share capital of PPL Shipyard. The remaining 3% share capital was held by E-Interface Holdings Limited (“E-Interface”), the second defendant. E-Interface was a private company incorporated under the laws of the British Virgin Islands and was a wholly-owned subsidiary of PPL Holdings. In other words, prior to the joint venture arrangement, PPL Holdings held 100% of PPL Shipyard’s shareholding; 97% directly and 3% indirectly through E-Interface. There were only two directors of PPL Holdings, one Dr. Benety Chang (“Chang”) and one Mr. Anthony Aurol (“Aurol”). As will be seen, Chang and Aurol were the key figures in the events that were to follow. PPL Holdings and E-Interface will be referred to jointly as “the defendants”.
[6] PPL Shipyard was in the business of design and construction of offshore drilling rigs. It was a private company incorporated in Singapore and its day to day operations were managed by Chang, who was the Executive Deputy Chairman, and by Aurol, the Executive Director.
[7] On the same side of the fence as PPL Holdings and PPL Shipyard were two other companies, Baker Technology Limited (“Baker”) and Saberon Investments Pte Ltd (“Saberon”). Baker was a public company listed on the Stock Exchange of Singapore. It owned the entire issued share capital of PPL Holdings. Chang was the Chief Executive Officer of Baker and Aurol was the Chief Operating Officer. Chang and Aurol also served as two of the six directors of Baker. The defendants’ position is that although Chang and Aurol were the only directors of PPL Holdings (the first defendant), the exercise of their powers was with reference to the directors of the board of directors of Baker.
[8] Saberon held approximately 67% of the issued and paid up share capital of Baker. Chang held 67% of the shares in Saberon and his wife, Doris Heng, held another 15%. Aurol held 15% of the shares in Saberon. The remaining 3% of Saberon was held by Tan Yang Guan.
The events surrounding the joint venture agreement
[9] On 9 April 2001, the joint venture agreement (“the JVA”) was signed between Sembcorp and PPL Holdings. At least part of the motivation for the joint venture was the opportunity to launch a strong joint vehicle to bid for a project put out for tender by Santa Fe International Corporation to build two semi-submersible drilling rigs. Neither party to the JVA was believed to have been able to successfully bid for this project on its own. The parties to the JVA were at the outset a very complementary match for one another, although in this litigation the parties dispute the extent to which this was so. Sembcorp’s case is that PPL Holdings was experienced in constructing drilling rigs but did not have sufficient financial and other resources to successfully bid for the semi-submersible project. Sembcorp on the other hand was able to procure finance and provide corporate guarantees for the joint venture and also had ample shipyard space. PPL Holdings’ case was similar, save that it preferred to state that PPL Holdings entered into the joint venture for Sembcorp’s yard space and not its financial resources. Despite this, PPL Holdings acknowledged that Sembcorp was a desirable business associate because it was financially strong and was a government linked company. Sembcorp claimed that the whole chronology of events was relevant to the question of the backdrop of facts for the implication of certain terms into the JVA and the parties took care to state their positions carefully.
[10] Chang, on behalf of PPL Holdings, initially offered in a memorandum of 27 February of 2001 to TKK that the joint venture be between the publicly listed Baker and Sembcorp, with PPL Shipyard as the joint venture vehicle. Chang recognised that Sembcorp’s concerns with this proposal were that Baker as a listed company might be restricted in its flexibility to make decisions and that the shareholders of Baker would be able to dispose of their shareholding easily in the market. To allay Sembcorp’s concerns, Chang was willing to subject his entire shareholding of about 83% in Baker to a moratorium on disposal and commit himself to a management contract with the joint venture company. TKK, on behalf of Sembcorp, rejected this proposal and preferred that the joint venture be between Sembcorp and the private company PPL Holdings, with PPL Shipyard as the joint venture vehicle. Chang subsequently agreed to this.
[11] On 29 March 2001, Sembcorp and PPL Holdings entered into a Sale and Purchase Agreement (“S&P”) by which PPL Holdings agreed to sell, and Sembcorp agreed to buy, 10,000 shares representing 50% of the issued share capital of PPL Shipyard. The price of the shares was about $16 million, which was calculated with reference to PPL Shipyard’s Net Asset Value at that time. Pursuant to cl 4(H) of the S&P, Sembcorp and PPL Holdings were obliged to enter into a joint venture agreement which had as its main objective the expansion of the business of PPL Shipyard.
[12] The JVA was entered into between Sembcorp and PPL Holdings on 9 April 2001. Several clauses of the JVA were highly relevant to the proceedings at hand and they are set out in full below. A significant part of Sembcorp’s case hinged on its argument that the JVA was premised on the ongoing participation of Sembcorp and PPL Holdings as equal business partners holding equal shares in PPL Shipyard. In this regard, cls 4 and 5 of the JVA were particularly relevant. Sembcorp also alleged that PPL Holdings had breached cl 13, which was entitled “Confidentiality”, and cl 24, which was entitled “Good Faith”. Additionally, cl 11 was relevant as it set out Sembcorp’s right of pre-emption over PPL Holdings’ shares in PPL Shipyard.
[13] Pursuant to cl 31.2 of the JVA, PPL Shipyard’s Articles of Association were amended on 26 September 2001 to incorporate the terms of the JVA. The amended articles will be referred to as the “Consequential Articles”. Soon after the S&P and the JVA were entered into, PPL Shipyard was awarded the contract from Santa Fe International Corporation for the project to build two semi-submersible drilling rigs.
The change in the proportions of ownership of PPL Shipyard
[14] Almost two years after these events occurred, a change in the proportions of ownership of PPL Shipyard took place with the signing of a Supplemental Agreement (“the SA”) on 5 July 2003. This change is important because part of Sembcorp’s case argues for the implication of the term that certain provisions in the JVA premised on an equal shareholding in PPL Shipyard held by the parties to the JVA ceased to apply when this change occurred. The defendants dispute this and maintain that despite the change in ownership, those provisions remained. Therefore, Sembcorp and the defendants put forward two different versions of the events leading up to the SA; Sembcorp’s version supports its position that Chang behaved in such a way as to force Sembcorp to enter the SA while the defendants’ version denies this.
[15] Sembcorp stated that Chang approached TKK in late 2002 with the proposal that Sembcorp purchase PPL Holdings’ entire interest in PPL Shipyard, which was 50% of PPL Shipyard’s issued share capital. This would give Sembcorp a 100% shareholding in PPL Shipyard. TKK offered a counter-proposal for a two-tiered staggered purchase of the PPL Shipyard shares, first 20% and then 30%, with the total consideration being $17 million. Chang agreed to this in principle. On 25 June 2003, Chang met TKK and told him that Keppel Offshore & Marine Ltd (“Keppel”) had approached Chang with an offer to purchase PPL Holdings’ entire shareholding in PPL Shipyard for $21 million. Chang gave TKK 48 hours to respond to this.
[16] On 30 June 2003, Chang met TKK at the Starhub canteen at Cuppage Centre. At this meeting, TKK revised Sembcorp’s offer for the PPL Shipyard shares upwards to $21 million with the following terms. Sembcorp would purchase 35% of PPL Shipyard’s share capital immediately and oblige Chang and Mr TK Ong to remain with the management of PPL Shipyard for another three years, after which Sembcorp would purchase the remaining 15% of PPL Shipyard’s share capital on the basis of a call option. At Chang’s request, TKK agreed that Sembcorp would pay Chang interest at the prevailing bank rates on the remaining 15% of PPL Shipyard’s share capital and would grant Chang a right to 15% of the undeclared profits of PPL Shipyard.
[17] In contrast, the defendants’ denied that TKK offered Chang a two-tiered staggered purchase of PPL Holdings’ shareholding in PPL Shipyard and claimed that there was only an in-principle agreement between Chang and TKK for the sale of 20% of PPL Shipyard’s share capital as held by PPL Holdings, without mention of an agreed price. The defendants say that Chang met TKK on 20 June 2003 at TKK’s request. TKK informed Chang that Keppel had offered to buy both Sembcorp’s and PPL Holdings’ interests in PPL Shipyard and that Chang should ignore Keppel’s offer. The next day, Chang received a letter containing an offer from Keppel to buy the defendants’ interest in PPL Shipyard for $21 million. Chang informed TKK about this, to which TKK responded by saying that Sembcorp wanted to continue the business of PPL Shipyard and proposed that Sembcorp proceed with the purchase of 20% of PPL Shipyard’s share capital from PPL Holdings.
[18] On 30 June 2003, Chang met TKK at the Starhub canteen at Cuppage Centre at which Chang proposed that Sembcorp should match Keppel’s offer, and purchase PPL Holdings’ 50% shareholding in PPL Shipyard for $21 million. On 5 July 2003, the men met at TKK’s office and agreed that Sembcorp would purchase 35% of PPL Shipyard’s share capital from PPL Holdings, that Chang and Aurol would remain with the management of PPL Shipyard for three years and that PPL Holdings would have a put option in respect of the remaining 15% PPL Shipyard shareholding exercisable after three years and that the PPL Shipyard staff would receive share options from Sembcorp. TKK agreed to pay Chang interest on the remaining 15% of PPL Shipyard and agreed to grant Chang a right to 15% of the profits of PPL Shipyard.
[19] There are two main points of difference between the parties’ accounts. The first relates to the manner in which Chang and TKK were apprised of the Keppel offer; Sembcorp said that Chang forced its hand with the Keppel offer and the defendants said that TKK was the one who told Chang about the Keppel offer. The second relates to the nature of the option in respect of the 15% PPL Shipyard shareholding; Sembcorp said it should be entitled to a call option but the defendants said they should be entitled to a put option.
[20] In any event, the SA, as it was signed on 5 July 2003, was in the form of a letter addressed to TKK from Chang and it provided as follows:
It is clear that the SA was for the sale and purchase of 35% of PPL Shipyard’s share capital. Clause 2 of the SA gave a put option to PPL Holdings and cl 4 of the same made it clear that the SA was supplemental to the earlier JVA.
[21] Sembcorp’s position was that this letter was merely meant to reflect the main heads of agreement relating to its purchase of additional shares in PPL Shipyard and that TKK and Chang both understood that subsequent to the SA, Sembcorp and PPL Holdings would enter into a formal sale and purchase agreement, amend the JVA and change the composition of the PPL Shipyard board to reflect Sembcorp’s rights as a majority shareholder.
[22] The defendants disputed this. They denied the contention that what was agreed was no more than the main heads of argument and that TKK and Chang understood that further formalities were necessary. According to the defendants, the entire agreement clause contained in Clause 34.1 of the JVA applied to the SA and operated to exclude any alleged agreement that fell outside these documents.
[23] Completion of the sale and purchase of the PPL Shipyard shares took place on 9 July 2003 as stipulated in the SA. However, no formal agreement in furtherance of the SA was ever entered into between the parties and PPL Shipyard’s Articles of Association were not formally amended to take into account these changes. Sembcorp contended that it was implied in the SA that once this change in ownership of PPLS occurred, certain provisions of the JVA and PPL Shipyard’s Articles that were premised upon the existence of equal shareholding ipso facto ceased to apply. Sembcorp cited two changes in PPL Shipyard which it claimed showed that PPL Holdings acted in a manner consistent with Sembcorp’s alleged 85% majority control of PPL Shipyard.
[24] The first was that PPL Shipyard was treated as a subsidiary of Sembcorp, which implemented certain policies in order to bring PPL Shipyard’s operations in line with those of Sembcorp’s larger group of companies. These policies included those relating to human resource, publicity and finance. PPL Holdings admitted that most of these policies were indeed implemented but stated that this was done in accordance with the terms of the JVA and the Consequential Articles, and with the consent of the directors nominated by PPL Holdings to the PPL Shipyard board.
[25] The second was that there was also a change in the composition of the PPL Shipyard board. Prior to the change in proportions of ownership, Sembcorp and PPL Holdings each nominated three directors to the board of PPL Shipyard board. After the change, Sembcorp nominated an additional three directors to the board, which left it with six nominated directors as compared to PPL Holdings’ three. PPL Holdings did not dispute this change but contended that the directors it had nominated only agreed to this change in the belief that the allocation of votes would remain as that stated in Clause 5.3 of the JVA, namely three votes each for both sets of directors nominated by Sembcorp and PPL Holdings, regardless of the number of directors on each side.
Sembcorp’s claims
[26] The catalyst for the dispute in this case arrived on 17 April 2010 when Baker made a public announcement that on 16 April 2010, it had received a binding letter of offer from Yangzijiang to purchase all the issued and paid up share capital in PPL Holdings, which was a wholly owned subsidiary of Baker. PPL Holdings’ assets at the time comprised some cash and more importantly, from Sembcorp’s point of view at least, 15% of the issued and paid up share capital of PPL Shipyard. Solicitors for Sembcorp, Drew & Napier LLC (“Drew and Napier”) sent a letter dated 22 April 2010 to Baker seeking confirmation that Baker would not accept the Yangzijiang offer. Baker replied through its solicitors Straits Law Practice LLC (“Straits Law”) by a letter dated 23 April 2010 (“the Straits Law letter”), stating that it had already accepted the offer.
[27] On 15 May 2010, Sembcorp filed this writ and Statement of Claim, alleging in main part that PPL Holdings had breached two express and two implied terms contained in the JVA and the SA. On 26 July 2011, Sembcorp applied to amend the Statement of Claim for the third time to include a third implied term. Sembcorp alleged that PPL Holdings breached the following two express terms (the terms are excerpted at [12] above). First, cl 13 of the JVA entitled “Confidentiality” was breached in that Aurol had wrongfully disclosed PPL Shipyard’s accounts to Yangzijiang and Baker in order that Yangzijiang could calculate the price for the offer with reference to PPL Shipyard’s net book value for the 2009 financial year. Second, cl 24 of the JVA entitled “Good Faith” was also breached in that PPL Holdings failed to exercise any reasonable efforts to uphold the “spirit” of the JVA and ensure that the offer from Yangzijiang was rejected by Baker.
[28] Sembcorp also alleged that there was a breach by the defendants of the following terms which were implied in the JVA and SA (which will be referred to respectively as the First, Second, and Third Implied terms):
(a) that such of their provisions as were premised upon the existence of the equal shareholding of Sembcorp and the 1 Defendant in PPL Shipyard would cease to apply and subsist upon either party acquiring a majority of the issued and paid up share capital in PPL Shipyard and the JVA would terminate and the Consequential Articles would cease to subsist or apply upon one party ceasing to hold any beneficial interest in PPL Shipyard;
(b) that neither party will, without offering its shares to the other, act in any manner which would cause the other to end up being a “partner” in PPL Shipyard with a party owned or controlled by someone other than the principals of the parties to the JVA; and
(c) that each party will ensure that its wholly owned subsidiary, its holding company or the wholly owned subsidiaries of its holding company (as defined in the Companies Act (Cap. 50)) would not do anything which would undermine the benefits conferred on the parties by Clause 11.7 of the JVA.
[29] Based on these alleged breaches, Sembcorp claimed the following reliefs which are briefly stated here. First, a declaration that when the change in the proportions of ownership of PPL Shipyard occurred, the provisions of the JVA and the Consequential Articles that were premised upon the existence of equal shareholding ceased to apply. Second, an order that the defendants transfer their 15% shareholding of PPL Shipyard to Sembcorp against payment of the sum of $59,433.522 or, alternatively, an order that the defendants offer their 15% shareholding to Sembcorp pursuant to the put option contained in cl 2 of the SA. Third, a declaration that Sembcorp became the owner of 100% of PPL Shipyard and that the JVA was terminated.
[30] The defendants filed a counterclaim and claimed in the main several declaratory and injunctive reliefs pertaining to resolutions passed by the board of PPL Shipyard, in particular, certain resolutions relating to the requested vacation of office of some members of the board nominated by PPL Holdings. These claims will be dealt with after the plaintiff’s claims have been considered.
The issues
[31] Sembcorp’s allegations all related to its concern that it was placed in a position of being a partner in a joint venture with its competitor, Yangzijiang. If the Yangzijiang offer to Baker were consummated, then although formally PPL Holdings still remained Sembcorp’s partner in the JVA, in reality PPL Holdings would be a wholly owned subsidiary of Yangzijiang and would have to dance to its tune. The reliefs Sembcorp claimed all appear to be premised on the need to avoid this arrangement and put an end to such an unwanted union. Therefore, Sembcorp prayed that the provisions in the JVA relating to equal control and management be disapplied such that Yangzijiang would not be able to influence its management of PPL Shipyard and, further or alternatively, that the JVA be terminated such that it would not need to deal with Yangzijiang in PPL Shipyard at all.
[32] The first issue is whether the defendants have to offer their 15% shareholding of PPL Shipyard to Sembcorp. This would depend on whether the Second Implied Term could be implied into the JVA and the SA, whether it was breached by the defendants and whether Sembcorp should be entitled to specific performance of the same; alternatively whether the put option contained in cl 2 of the SA was triggered as Sembcorp contended. If this issue is answered in favour of Sembcorp, then it would follow that Sembcorp should be entitled to a declaration that it is the owner of 100% of PPL Shipyard. The second issue is whether the provisions in the JVA and the Consequential Articles that were premised on equal shareholding ceased to apply when there was a change in the proportions of ownership of PPL Shipyard. The answer to this would depend on whether the First Implied Term could be implied into the JVA and the SA and whether the defendants breached this term. The third issue is whether Sembcorp should be entitled to terminate the JVA on the basis of a breach by the defendants of cl 13 or cl 24 of the JVA or of the Third Implied Term.
The first issue: Whether the defendants have to offer their 15% shareholding of PPL Shipyard to Sembcorp
[33] The first stage of the inquiry examines whether the Second Implied Term was implied into the JVA and the SA, whether there was breach of this term and what the relief for this breach should be. The second stage of the inquiry examines whether the put option in Clause 2 of the SA was triggered by the Straits Law letter of 23 April 2010 informing Sembcorp that Baker had already accepted the Yangzijiang offer, such that Sembcorp had the right to purchase the remaining 15% shareholding of PPL Shipyard from PPL Holdings.
The Second Implied Term
[34] The Second Implied Term reads:
(b) that neither party will, without offering its shares to the other, act in any manner which would cause the other to end up being a “partner” in PPL Shipyard with a party owned or controlled by someone other than the principals of the parties to the Joint Venture Agreement;
The law on implied terms
[35] The law on implied was disputed by the parties. Since three terms have been put forward for implication, it would be useful to discuss the principles which are to apply to each. This case is concerned with terms implied in fact, that is, terms which are implied into particular contracts in particular cases, and therefore does not create any precedent for different cases in the future. This is to be distinguished from terms implied in law, which are of no concern to the present case. Such terms if implied in law, will be implied into all contracts of a similar type in the future (see Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] 1 SLR(R) 927 at [41] and [42]).
[36] The exercise of implying terms into contracts is essentially one of inserting terms into a contract that did not exist at the time the contract was made. Frequently, the need for this arises where the contract is silent as to what should happen in the event of a particular contingency; which contingency eventuates and the parties are caught in a bind because the contract does not stipulate what should happen next. Lacking such direction, the obvious answer is simply that nothing should happen and the loss should lie where it falls. In that sense, the contract is capable of functioning but it may not “work” to give effect to the business purpose of the contract as the parties had intended. This of course would be an unsatisfactory answer to the party who has to shoulder the loss, who would argue for the implication of a term to redistribute the same. Overshadowing this exercise are the principles of sanctity and freedom of contract. The danger of implying terms too freely is that the court would be ex post facto rewriting the contract which the parties had written for themselves and allowing a party to weasel out of a bargain (however badly drafted) which it had struck.
[37] The long-standing tests for the implication of terms are known as the “officious bystander” and the “business efficacy” tests (henceforth referred to collectively as the “two traditional tests”). Both emanated from decisions of the English Court of Appeal and both are part of Singapore law (see for example Forefront at [29]–[32], Ng Giap Hon v Westcomb Securities Pte Ltd [2009] 3 SLR(R) 518 at [36] and Chua Choon Cheng and others v Allgreen Properties Ltd and another appeal [2009] 3 SLR(R) 724 (“Chua Choon Cheng”) at [63]). The officious bystander test was stated by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Limited [1939] 2 KB 206 (“Shirlaw”) (affirmed, [1940] AC 701) at 227:
The business efficacy test was stated by Bowen LJ (as he then was) in The Moorcock (1889) 14 PD 64 at 68:
In Singapore, the two traditional tests are complementary and their relationship, as stated in Forefront at [36] and approved in Chua Choon Cheng at [63], is that the officious bystander test is the practical mode by which the business efficacy test is implemented.
[38] Notwithstanding the vintage of these tests, Sembcorp argued that another approach to the implication of terms in fact should be adopted. This was stated by Lord Hoffmann in the Privy Council decision of Attorney General of Belize and others v Belize Telecom & another [2009] 1 WLR 1988 (“Belize”) at [21] as follows:
[39] This test put forward by Lord Hoffmann will be referred to as the “Belize test” or the “Belize statement” (to account for the view that it does not strictly constitute a separate test). From Sembcorp’s point of view, the difference that the Belize test would make to its case is evident from its submissions, in that the Belize test would oblige the court to consider principles of contractual interpretation, including principles of admitting extrinsic evidence for this interpretation, in the process of implying terms into the agreements between the parties. Sembcorp’s submissions on the facts were premised on the notion that more of the “relevant background” would be under consideration if the Belize test was adopted. The precise points of difference between the Belize test and the two traditional tests will be considered in greater detail below (see [49], [56] and [60] below). The difference that the introduction of the Belize test would make to Sembcorp’s case remains to be seen.
[40] Sembcorp’s arguments for the adoption of the Belize test were rather bare and relied on a decision of this court in Kim Eng Securities Pte Ltd v Goh Teng Poh Karen [2011] SGHC 201 (“Kim Eng”), which Sembcorp claimed was an instance where Belize was applied in Singapore law. In Kim Eng, the plaintiff stockbroking firm sought, inter alia, to imply a term, that the defendant dealer was to indemnify the plaintiff for losses arising out of share trades executed by the defendant, into the defendant’s terms of employment. The precise dicta relied on were at [66] and [67]:
[41] From the excerpt above, it is clear that Kim Eng did not constitute an application of Belize in Singapore law. Belize was merely cited in the plaintiff’s submissions in that case and no comment was made on the authority, with the court choosing to agree with the plaintiff on the facts. The decision in Kim Eng did not engage in a discussion of the Belize test and ask what would be the relevant background and what the instrument would reasonably be understood to mean. Instead, it determined the issue based on the subjective knowledge and actions of the defendant there at various points in time, as would be appropriate in reliance on the traditional tests. The question of whether Belize should be a part of Singapore law therefore remains an open one.
[42] The defendants submitted that Belize should not be applied in the instant case and put forward two arguments. First, that normatively, implication of terms and interpretation of contracts should remain two separate doctrines and Belize subsumed implication into interpretation, thus liberalising the process of implication beyond acceptable limits (the defendants cited Paul Davies, “Recent Developments in the Law of Implied Terms” [2010] LMCLQ 140 (“Davies’ article”) and Elizabeth Macdonald, “Casting Aside ‘Officious Bystanders’ and ‘Business Efficacy’? (2009) 26 JCL 97) (“Macdonald’s article”). Second, the Singapore Court of Appeal in MFM Restaurants Pte Ltd and another v Fish & Co Restaurants Pte Ltd and another appeal [2011] 1 SLR 150 (“MFM”) at [98] disapproved of the Belize test because it did not provide normative guidance to the process of implication and would result in much practical uncertainty. It should be noted that MFM was a case about the remoteness of contractual damages and the discussion on implied terms, though highly instructive, would be, strictly speaking, obiter.
[43] Before determining the applicability of the Belize test to the present dispute, it should be determined what the Belize test actually is and how it differs from the two traditional tests. The facts of Belize are not of real interest and can be stated shortly. In Belize, what was at issue were the articles of association of Belize Telecommunications Ltd, which was founded as part of the process of the privatisation of telecommunication services in Belize. The articles provided for the nomination of certain directors by the holder of a special share, if that holder also held a certain percentage of a class of ordinary shares. Subsequently, the special shareholder’s shareholding of the ordinary shares dropped below the requisite percentage and the question was what should happen to the directors it had previously nominated since the articles were silent on this. The defendants claimed that the director would be irremovable and the claimants claimed that it should be implied into the articles that a director appointed by virtue of a specified shareholding should be removed if there was no longer such a shareholding. Lord Hoffmann delivering the advice of the Privy Council agreed with the claimants. Belize concerned articles of association but the principles it cited and propounded were expressly with reference to contracts as well.
[44] After stating the test in Belize, Lord Hoffmann went on to say (also at [21]) that the officious bystander and business efficacy tests were really reformulations of the Belize test as stated above:
[45] The learned judge then went on to quote Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 226, 282-283 on the conditions that must be satisfied for the implication of a term in a contract (at [26] and [27] of Belize):
[46] The dicta quoted above would suggest that the Belize test is really the same two traditional tests combined into a minimalist package. There has been some disagreement over this and commentaries have stated that the Belize tests is in fact a new approach to the implication of terms that stretches the doctrine into the territory of the interpretation of contracts in a manner that is unacceptable. The learned author of Davies’ article states (at 140) that the Belize test “appeared to subsume implication of contract terms within a broad , liberal doctrine of interpretation”; and (at 143) that it suggests “that reasonableness is crucial when deciding whether to imply a term.” According to the author, this should not be welcomed because interpretation and implication are two conceptually separate doctrines and should remain that way. Interpretation considers what the actual instrument means but implication involves adding to the actual instrument. Implication is a far more intrusive and powerful doctrine and should be circumscribed narrowly. Furthermore, under the Belize approach, the “subjective intentions of a party are now irrelevant, and [the] only matter of importance is what the reasonable observer would understand the contract to mean” (at 144). The learned author also indicated that the threshold for the implication of terms may be lowered and that “Lord Hoffmann’s approach in Belize affords the court greater room to alter the bargain made.... it may be difficult to control the scope given to the term “reasonableness” and its objective nature” (at 145). In other words, the learned author’s main fears are that in the process of implication, the parties’ subjective intentions would have to yield to the objective meaning of the contract and that Belize would lower the threshold for the implication of terms.
[47] The learned author of Macdonald’s article has as her main concern that the process of implication should be based on the intention of the parties. The role of the two traditional tests “has been to limit the implication of terms in fact to try to ensure that the courts do not go beyond the parties’ intentions and ‘improve’ their bargain” and the tests limit the implication to the “least disputable area of the intention of the parties” (at 98). The Belize test, in her view, while reflecting the search for the intention of the parties, did not also have any limiting effect on that search.
[48] It is clear that in Belize, Lord Hoffmann was explicitly positioning the process of implication very closely to that of interpretation. At [17], his Lordship stated:
[49] This does not appear to be an overhaul of the process of implication of terms. The process of implication is closer to the process of interpretation than might have been explicitly stated before Belize, in that both exercises aim to give effect to the meaning of the contract, objectively assessed. Starting from first principles, it would be uncontroversial to state that the contracting parties make the bargain for themselves and the principle of freedom of contract mandates that the court should not rewrite the instrument which the parties have produced. This is subject to at least one exception, that is, the court’s ability to imply terms into the contract to deal with contingencies for which the contract does not provide.
[50] As mentioned above, at [36] and at [17] of Belize, if the contract is silent as to a particular contingency which eventuates, then the most literal interpretation of the contract is that the loss should lie where it falls. This however, cannot be the outcome if it would contradict the common intention of the parties as expressed in the words of the contract. It would be an absurdity for the loss to lie where it falls if such a situation clearly would not be coherent with the common intention of the parties. If terms cannot be implied where they would contradict the express terms of the contract, then terms should not be implied where they would contradict the overall scheme of the arrangement which the parties have made for themselves or the business purpose of the contract. Similarly, the loss should not lie where it falls if this would contradict either the express terms of the contract of the overall scheme of the same. As was stated by Bowen LJ in The Moorcock at 68:
[51] When implying terms into a contract, the court must necessarily interpret the contract to ascertain the parties’ presumed common intention before the court can determine what term to imply (if at all) to give effect to such intention. Lord Hoffmann’s statement that the implication of a term is not an addition to the instrument must be understood in that sense. Of course, formally, implication involves adding a term to the instrument where none existed but in substance, the implication of terms should not add to or vary the meaning of the contract. The implied term should simply give effect to what the contract must mean. The court should not re-allocate the risk of the silent contract except to the extent to which the parties would have done so themselves. In order to figure out what the parties would have done, it is necessary to ascertain their presumed common intention by interpreting the contract and that common intention is given effect to in the event of a contingency by implying the relevant term. All Lord Hoffmann was saying was that the term to be implied should accord with a reasonable interpretation of the contract.
[52] Indeed, the Singapore Court of Appeal in Ng Giap Hon at [74] approved of Lord Wright’s dicta in Luxor (Eastbourne), Limited v Cooper [1941] AC 108 at 137–138:
[53] The process of implication has always been an objective exercise. The parties’ presumed common intention is ascertained objectively and this must be so in order to avoid interminable argument over what the parties’ subjective intentions really were at the time of contracting (see Belize at [25]; Chitty on Contracts Volume I General Principles 30 ed (H.G. Beale QC gen ed) (Thomson Reuters, 2008) (“Chitty”) at para 13-004; The Moorcock at 68 excerpted at [49] above; and Forefront at [41] (the determination of the “presumed common intention” of the particular contracting parties must invariably adopt an objective approach)). Furthermore, the inquiry into the parties’ subjective intentions is really more a matter for the doctrine of rectification, in which it is alleged that the parties at the time of contracting had made a mistake and their subjective intention is sought in order that this can be rectified (see Sir Kim Lewison, The Interpretation of Contracts, 5 Ed, Sweet & Maxwell 2011 (“Lewison”) at 6.01, p 272). The parties’ subjective knowledge is only relevant insofar as that provides the relevant background against which the contract should be interpreted and the term should be implied (see The Moorcock at 68–69). If the term implied would require the parties to have knowledge which they did not actually have at the time of contracting, then such implication would be impossible.
[54] What then, of the arguments that implication and interpretation should be kept separate? The defendants pointed to Sir Bingham M.R.’s (as his Lordship then was) caution in the English Court of Appeal decision Philips Electronique Grand Publique SA v British Sky Broadcasting [1995] EMLR 472 at 481:
[55] Implication and interpretation are indeed separate doctrines. Implication sits precariously on the boundary between the parties making their own contract and the courts making their contract for them. This potential intrusion into the freedom of contract must be narrowly circumscribed in order that the court only implies those terms which would give effect to the parties’ presumed common intention.
[56] While separate, the doctrines are related and the relationship between the two is very succinctly stated in Belize: the process of implication must accord with the process of interpretation. It should also be recognised that the interpretation of the contract is often a preliminary step to the implication of a term. This must be so because if the parties’ intention could not be ascertained, it would be impossible to give effect to the unknown. The discerning of intention is conducted via the process of interpretation. The author of Davies’ article thinks it a mistake to say that interpretation and implication are points on a continuous spectrum (at 144). A wanton exercise of the power to interpret a contract will inevitably reach the point where the interpreter reads too much into the contract, almost as if he were reading in terms that were not there. Notwithstanding the creative extremes possible, the legal doctrines of implication and interpretation remain separate and distinct. Interpretation, if done correctly within the confines of its principles, will not tip over into implication and implication is circumscribed by such high and tight boundaries that a term would not be easily implied at all.
[57] In Belize, Lord Hoffmann explicitly preserved the high threshold for the implication of terms into a contract, stating (at [16]):
At [19], his Lordship approved of Lord Pearson’s dicta in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 at 609:
At [22], his Lordship acknowledged that the business efficacy test was a reformulation of the Belize test, which reformulation embodied the requirement of necessity:
[58] The discussion above should provide sufficient response to the criticism referred to at [46]–[47] above. The subjective intention of the parties is relevant only insofar as it can be objectively ascertained but this was the longstanding approach in any case. The threshold for the implication of terms would not be lowered by Belize and would definitely not be lowered to the threshold of “reasonableness”: Lord Hoffmann took pains to point this out twice at [19] and [22]. The threshold remains that of necessity, subject to the qualification that this necessarily implied term must also accord with a reasonable interpretation of the contract (see also [23] of Belize).
[59] How should one approach the criticism in MFM that the Belize approach provides little normative guidance? Granted, the Belize test is bare and simple and following the words of the test alone does not provide that much direction. However, Lord Hoffmann did not purport to supersede or render obsolete the traditional tests for the implication of terms and in fact referred to them as reformulations of the Belize test which “a court may find helpful in providing an answer” (at [21]). Therefore, the guidance and direction of the two traditional tests remain very much available.
[60] If the above is true, then it may be asked, what purpose does the Belize test serve? If it purports to state nothing new, then why bother with it at all? The value of the Belize test lies in its clear elucidation of the relationship between interpretation and implication, which relationship may have been a necessary incident of all prior implications of terms in fact but which did not find expression until Belize. The Belize statement is not so much a stand-alone test as it is a final hurdle. If a term is thought fit for implication on the satisfaction of either of the traditional tests, Belize demands that the term implied must be checked for consonance with a reasonable interpretation of the contract. In Belize, it was stated that the officious bystander and business efficacy tests were not to be treated as different or additional tests from the Belize statement (at [21]). Notwithstanding that, it is clear that Belize has made explicit a process which must have been impliedly carried out in all previous instances where terms were implied in fact. The approach to be adopted in this case will therefore proceed on similar lines.
[61] Before returning to the facts of this case, the question of what should constitute the “relevant background” must be answered. In Belize at [16], Lord Hoffmann stated this as:
This relevant background was stated with reference to his Lordship’s own words in Investors on the interpretation of express terms of a contract.
[62] In Singapore, the interpretation of express terms adopts the Investors approach and goes one step further. In Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design Construction Pte Ltd [2008] 3 SLR(R) 1029 (”Zurich”) at [132] it was held that extrinsic evidence of, inter alia, pre-contractual negotiations and the subsequent conduct of the parties was admissible as long as it was relevant, reasonably available to the parties and related to a clear context. This is in clear contrast to the English position which prohibits the admission of such extrinsic evidence.
[63] In Zurich, it was also pointed out that if the court was satisfied that the parties intended to embody their entire agreement in a written contract, no such extrinsic evidence would be admissible to contradict, vary, add to, or subtract from its terms. However, at the same time, entire agreement clauses would not necessarily preclude the implication of terms.
[64] There is a clear difference between the philosophies of Zurich and Investors and if the Belize statement was founded on the philosophy of Investors, would it mean that the Belize statement should be confined to the principles of Investors? The difference between Zurich and Investors relates to ascertaining the express meaning of the contract, with which the implied term must accord. The difference does not itself impact on the doctrine of implication. Evidence of pre-contractual negotiations, even if this skates a little close to the thin ice of rectification, is admissible as is evidence of the subsequent conduct of the parties, although some view inconsistent subsequent conduct of the parties as a plain and simple breach. Zurich and Belize would therefore be compatible. As always, the focus of the court is on the particular factual matrix before it (see generally, Forefront).
Whether the Second Implied Term should be implied into the JVA
[65] The structure of the inquiry is as follows. The court has to ascertain whether the particular factual matrix of the case (see Ng Giap Hon at [89]) gives rise to circumstances that would make it necessary to imply the Second Implied Term into the JVA and the SA, with reference to the business efficacy, officious bystander, and Belize requirements. Satisfaction of either the business efficacy or officious bystander tests would suffice for the implication of the term and the Belize statement requires that the term implied be checked for consonance with a reasonable interpretation of the JVA and the SA.
[66] The precise factual matrix surrounding the claimed implication of the Second Implied Term revolved around two issues put forward by Sembcorp. First, that the identity of the parties was important to the parties to the JVA. Second, that co-operation, trust and confidence between the parties to the joint venture was critical to the joint venture.
[67] The identity of the parties was critical because the joint venture was premised on both Sembcorp and PPL Holdings contributing their particular respective resources in order to achieve the objectives of the joint venture, which were primarily to expand the business of PPL Shipyard. Sembcorp pointed to cl 4(H) of the S&P which stated that the parties would combine the existing resources of PPL Holdings with those of Sembcorp and cl 3 of the JVA which stated that the parties would contribute marketing contacts, facilities, financial backing and other resources. Clause 8.1 of the JVA purportedly required the parties to provide reasonable support to PPL Shipyard with the consent of the other party and cl 8.2 stated that the parties would provide PPL Shipyard with reasonable goods, services and equipment.
[68] Sembcorp argued that its expected contribution to the joint venture was essentially to provide financial facilities, corporate guarantees and yard space. On the other hand, PPL Holdings’ expected contribution to the joint venture was the expertise and experience of Chang, TK Ong, and Aurol. It cited the fact that TKK had rejected Baker as a counterpart to the joint venture for the precise reason that it would have been too easy for Chang to sell his shares in a public company and exit the joint venture. Furthermore, it relied on the many instances in cross-examination in which it alleged that Chang had admitted he was aware of Sembcorp’s concern that he was to remain in control of PPL Holdings. According to Sembcorp, Chang was aware of this to the extent that he offered a moratorium on his shares in Baker if Sembcorp would accept Baker as a counterparty in the JVA. Chang did not offer a moratorium on his PPL Holdings shares because he understood that he was to remain in control of PPL Holdings.
[69] Co-operation, trust and confidence between the parties to the joint venture was critical, according to Sembcorp, because it was inherent in the nature of the rig building industry that extensive investments of time and money were required for each rig project and because the joint venture was entered into in order to build a good track record for PPL Shipyard to attract more business. Each party had the ability to veto proposed actions of PPL Shipyard, given the equal shareholding, Sembcorp also pointed to the deadlock clause in cl 12 of the JVA which showed that the parties were obliged to co-operate and cl 11.2 – 11.6 of the JVA which, it alleged, were clauses on the parties’ rights of pre-emption to the effect that a party who wanted to sell its shares in PPL Shipyard first had to offer those shares to the other party. That envisioned that the parties were to have some control over their counterparty to the joint venture. Lastly, Sembcorp relied on the good faith clause in cl. 24 of the JVA and the “spirit” and “interest” of the joint venture.
[70] In response to this, the defendants contended that the JVA was a carefully crafted agreement, the negotiations for which benefited from the input of the parties’ legal counsel. Therefore, there should be a presumption against the implication of terms. Furthermore, cl 11 of the JVA expressly dealt with the subject of restrictions of share dealings and expressly limited its own ambit to dealings in the shares of PPL Shipyard itself without extending to the shares of shareholders of PPL Shipyard. No term should be implied where this would contradict any express term. The simple reason why Chang had not offered a moratorium of his PPL Holdings shares was because he was not asked to provide one, even though he was aware that Sembcorp wanted Chang to be committed to the project.
[71] The defendants maintained that the Second Implied Term was in itself vague. It should be obvious both that a term should be implied and the contents of the term to be implied. The Second Implied Term failed on both counts. The definition of “controlled” and when such control would change was nebulous. If Chang and Aurol, as the purported principals of PPL Holdings at the time the JVA was signed, were so important to the joint venture, then there should have been every reason for them to sign the JVA in their personal capacities. It was also not obvious that the issue of a change of control of one of the parties to the JVA should be addressed by allowing the other party the chance to purchase that party’s shares, given that there were other possible ways to do this and it was not obvious which way the parties would have chosen. The Second Implied Term did not provide guidance as to the price of the share offer or any mechanism by which the price could be fixed and was therefore too vague as to be legally enforceable. Finally, the Second Implied Term was not limited as to time, which, in the defendants’ view, unrealistically and unreasonably expected Chang and Aurol to commit to the joint venture for an indefinite amount of time.
[72] The contrast between the parties’ submissions is clear. On the one hand, Sembcorp presses the more abstract, purposive elements of the joint venture and the alleged shared understandings of the parties surrounding the signing of the JVA. On the other hand, the defendants did not mount an outright denial of these abstract elements but chose to focus the mechanics of the JVA and the Second Implied Term. In the final analysis, even if both parties’ versions of the facts are themselves accurate, the question really is which set of arguments is more relevant to the implication of the Second Implied Term. Here we are concerned with implying that particular term into the particular document of the JVA. The JVA itself, and the reasonable meaning it conveys, would be of paramount importance. Sembcorp contends that the purposive elements of the parties’ relationship are also obvious from the terms of the JVA and to this I now turn. The point of view to be adopted in this exercise is that of a reasonable observer who is reading the JVA. As mentioned above, we are searching for the presumed common intention of the parties, objectively ascertained, not the parties’ subjective intentions since that would amount to rectification of the contract which is not the case argued before me. When considering all the evidence relied upon, it must always be borne in mind that the thrust of the Second Implied Term was really to pre-empt a situation where the principals of either party to the JVA were to lose control of that party. What Sembcorp would have to show therefore, is that the JVA conveyed the reasonable meaning that the principals of both the parties were to remain in control of those parties and that there was a gap in the JVA because it did not provide for the situation where one such principal lost control. The Second Implied Term suggests that Sembcorp was concerned to vet the party it would go into partnership with.
[73] In the first place, cl 4(H) of the S&P which Sembcorp relied on is unlikely to be relevant because the S&P is a document which is external to the JVA and neither party argued for its incorporation. Moving on to consider cls 3, 8.1 and 8.2 of the JVA (see [12] above), it is clear that these clauses oblige the parties to the JVA to bear these objectives in mind and provide the operational support. As defined in cl 1.1 of the JVA, “Party” or “Parties” refers to any of the parties named in the JVA and their respective successors-in-title. The only parties named in the JVA are Sembcorp and PPL Holdings, without mention of the principals or personalities behind these parties. How then, would these clauses convey the reasonable meaning that the principals behind the parties were to retain control of each party? Clauses 3, 8.1 and 8.2 may force the principals behind the parties to bear the onus of ensuring that the parties comply with the obligations in those clauses but they say nothing about the identity of the principals themselves or the amount of control they were to exert over the parties. In any event, the JVA itself seems to contemplate that the identities of the parties to the JVA could change, since “parties” included the successors-in-title thereof. Further, cl 11 provided a mechanism by which the parties could dispose of their shares in PPL Shipyard.
[74] What about the expected contributions of the parties at the time the JVA was signed? Sembcorp argued that PPL Holdings was expected to contribute Chang and Aurol’s expertise and experience to the joint venture. The inference is that there should be some sort of understanding that Chang and Aurol were expected to remain and contribute these. Chang also knew that TKK was concerned about Chang easily exiting the joint venture and he (Chang) even offered a moratorium of his Baker shares. Therefore, Sembcorp suggested, Chang should have understood that he was to remain in control of PPL Holdings. Two points can be made here. The first is that Chang’s alleged awareness of all these notions really is ambivalent. Even if Chang was aware of these, was there a sufficient nexus of thought between him and Sembcorp or TKK for this to constitute a common intention of the parties? It is equally plausible for Chang to believe that since Sembcorp was aware of all these concerns and yet did not take any steps to assuage them, Sembcorp did not see them as sufficiently weighty concerns for inclusion in the terms of the JVA. There were no express clauses in the JVA requiring Chang or Aurol to remain for any specified period of time or to subject their shares to a moratorium. There were no conditions on the disposal of their shares. There was also no allegation that Chang was aware that Sembcorp was labouring under any sort of mistake as to the understanding between the parties and that he sought to take advantage of this.
[75] The second point to be made is that these expectations run counter to cl 11.7 of the JVA. Clause 11 provides a mechanism for the disposal of shares by the parties. If a transfer of all or part of a disposing party’s shares was proposed to be made to a third party, cl 11.2 requires the disposing party to first offer the shares to the other party. However, cl 11.7 states that this restriction did not apply if either party wanted to divest all of its shares to a related company. Such divestment could be done without the need for such an offer and without conditions attached. This suggests that if PPL Holdings were to divest all of its shares in PPL Shipyard to a related company, it could do so without having to first offer its shares to Sembcorp. This related company may not necessarily be controlled by the same principals which controlled PPL Holdings, namely Chang and Aurol. How then could it be said that the parties to the JVA had signed it on the premise that Chang and Aurol would remain in control of PPL Holdings? Hypothetically, Sembcorp could argue that the entire group related to PPL Holdings was ultimately controlled by Chang and Aurol, since they together held a significant proportion of the shares in Saberon, which could be taken as the overall parent company of the group. Although this was the state of affairs at the time the JVA was signed, there was no warranty that it would be preserved for the duration of the joint venture and neither were there any provisions in the JVA to ensure that it would remain unchanged.
[76] Sembcorp also relied on the proposition that co-operation, trust and confidence between the parties to the joint venture was critical to its success. That may be true, but this would be so no matter who the principals of the parties were and the clauses relied on, cls 11.2–11.6, 12 and 24, did not provide that the principals of the parties would not be able to divest their control of the parties. Nothing much changes even if Sembcorp was able to show that at the time the JVA was signed, the parties and their respective principals were particularly able to co-operate with each other. That would be good for the joint venture but there was nothing to suggest that this situation must be preserved for the future. Parties to a joint venture would have entered into it because they thought they would be able to co-operate with each other for the foreseeable future but it would be difficult to infer from this premise that the parties’ principals should remain in control in order for that to happen.
[77] This would also contradict the put option contained in cl 2 of the SA. If Sembcorp could conceive of ending the joint venture by buying over all of PPL Shipyard’s shares, then it seemed that Sembcorp would have been happy for PPL Shipyard to function without Chang and Aurol. It was not clear whether Sembcorp was really anxious for Chang and Aurol to stay or more anxious to preclude the entry of a competitor. It was more likely that the latter was true.
[78] Moving on to the defendants’ submissions, I saw merit in their contention that the court should be slow to imply terms into the rather detailed JVA which comprised thirty-five clauses and governed many aspects of the relationship between the parties. As for the contention that the Second Implied Term would contradict cl 11, which expressly dealt with the subject of share transfers, I was a little less impressed. Clause 11 addressed the situation where shares of PPL Shipyard were proposed for disposal, not the shares of the parties themselves which is a wholly different consideration. If the shares of PPL Shipyard were disposed of, the parties to the joint venture would change. It is different to contemplate the situation where the principals of the parties would change as a result of the disposal of the parties’ own shares. It is not accurate to say that the issue of share transfers in general was addressed by cl 11. The nature and consequences of the different types of share transfers still differed. In the light of the conclusions reached below, it is not necessary to consider the defendants’ submissions on the contents of the Second Implied Term.
[79] Looking through the haze of facts and clauses, the final picture that emerges to the reasonable observer is that the JVA and the circumstances surrounding it pointed to the importance of the particular parties to the joint venture remaining parties. However, it was not obvious how important the principals of those parties were. There was a gap in the JVA in that it did not provide for the situation where one of the principals of the parties lost control of that party but it would not occur to the reasonable observer that the parties would have necessarily have intended this to trigger a responsive event. Sembcorp allegedly held the belief that Chang and Aurol were important players in PPL Holdings and that their presence was important but the Second Implied Term does not quite sing the same tune. Rather, the Second Implied Term suggests that Sembcorp wanted to vet the proposed new principals of PPL Holdings and to decide if it wished to continue the joint venture under those circumstances. If Sembcorp really wanted Chang and Aurol to stay, the Second Implied Term would have taken the form of a prohibition on the disposal of their shares or an undertaking by the two men to remain in the joint venture. Instead, the said Term indicates that if Sembcorp was not fond of the proposed changed principal, then it would buy up all the offered PPL Shipyard shares and effectively terminate the joint venture. Sembcorp would then have to fulfil all the outstanding rig building contracts on its own without the expertise and experience of Chang and Aurol. This ran contrary to its rhetoric on PPL Holdings’ expected contributions to the joint venture and the co-operation and trust between the parties.
[80] Given the black holes in the factual matrix that Sembcorp put forth and therefore the lack of a compelling case on the facts for the implication of the Second Implied Term, it is clear what the conclusion on this matter ought to be. There was little impetus to proceed to the stage of applying the tests for implication but they will be considered nevertheless. Should the officious bystander have posed the Second Implied Term to the parties at the time the JVA was entered into, it was not obvious that the parties would have retorted in the necessary “testy” manner. It did not go without saying that they envisioned the change in control of the principals of the parties to be an issue which needed resolution or that the resolution was to be effected by a share offer. Further, it was not necessary for business efficacy that the Second Implied Term be read into the joint venture. Even if the principals of the contracting parties were to change, PPL Shipyard could still work effectively towards its desired purpose of expanding its business and it would still benefit from the financial resources and yard space of Sembcorp coupled with the intellectual property of PPL Holdings. Necessity must be assessed from the point of view of both parties. It is uncertain that PPL Holdings would have thought it necessary that the principals of Sembcorp would remain. Notwithstanding that PPL Holdings had considered Sembcorp an attractive counterparty because it was a government-linked company, that situation did not remain static and it did not mean that Sembcorp would be considered an unattractive counterparty just because it ceased to be linked to the government.
Whether the Second Implied Term should be implied into the SA
[81] The SA was a shorter but no less detailed document which was incorporated into the JVA by virtue of cl. 4 of the SA. The SA effected the sale of 35% of the shares in PPL Shipyard by PPL Holdings to Sembcorp and provided a put option for the sale of the remaining 15% of the PPL Shipyard shares. Sembcorp’s case was that the Second Implied Term should be implied into the SA for two reasons.
[82] First, that the parties in the course of the negotiations leading to the SA were aware that it was important that Chang and the management team remain with PPL Holdings even after the sale of 35% of the PPL Shipyard shares. Sembcorp relied on evidence from Chang’s cross-examination to show that he was aware that Sembcorp was concerned to retain Chang after the sale of the shares. There was also an email from Chang containing his earlier proposal that Sembcorp purchase PPL Holdings’ entire shareholding in PPL Shipyard, which email contained certain proposals to satisfy Sembcorp’s concern that Chang retain an interest in the joint venture after the sale of the shares. This included the proposals that Chang would use part of the sale proceeds to purchase Sembcorp shares in the open market and that he would offer a profit guarantee.
[83] Second, that PPL Holdings was aware that Sembcorp’s intention in entering into the SA was to prevent the situation where Sembcorp was to be a partner in the joint venture with a competitor. The SA for the sale of the shares was entered into by Sembcorp at that price allegedly to stave off an offer for the shares by Keppel, also a competitor of Sembcorp (see above at [14] to [16]). Therefore it must have been clear that at least part of the purpose of the SA was to avoid the situation where Sembcorp would have to be a joint venture with a perceived competitor.
[84] I was not convinced that it was necessary to imply the Second Implied Term into the SA. Even if Chang knew that Sembcorp was concerned to see that he retain an interest in PPL Shipyard, this was no basis for saying that Chang and PPL Holdings similarly intended the same. TKK had made it clear to Chang that he wanted Chang to remain. Unfortunately, there was little provision for this in the SA. The only clause to that effect is the put option in cl 2, which could be read as obliging PPL Holdings to retain its 15% shareholding of PPL Shipyard for at least 36 months. An alternative interpretation of the ambiguous words of cl 2 would be that PPL Holdings could sell its shares to a third party at any time but Sembcorp would only be obliged to purchase those shares if PPL Holdings gave them written notice of the same, 36 months after the date of the SA. Sembcorp’s case is that both parties were well aware of Sembcorp’s concerns. Yet, if such concerns were already addressed by way of cl 2 only, however weak a protection it might offer to Sembcorp, the obvious inference to be drawn is that both parties had intended to assuage Sembcorp’s concerns in such a manner. Why should the court see any reason to imply anything stronger? On Chang’s part, even if he knew that Sembcorp was so concerned, all that he saw before him was that Sembcorp agreed to a weak mode of protection by including a put option instead of the stronger shield of a call option (which was mentioned but not agreed to).
[85] I was also not convinced by Sembcorp’s allegation that the SA was entered into to stave off competition from Keppel. The facts supporting these allegations were hotly contested and even if Sembcorp’s account could be accepted at face value, the conclusion drawn in the preceding paragraph still stands. If Sembcorp was so concerned to avoid partnership with a competitor, why did it not protect itself in a better way?
[86] Finally, the terms of the SA do not give reason to imply the Second Implied Term. The strongest argument for implication would probably be based on cl 2 of the SA, a put option which states that Sembcorp shall purchase PPL Holdings’ remaining 15% shareholding of PPL Shipyard as long as notice is given of PPL Holdings’ intention to sell those shares at least 36 months from the date of the SA. However, the shares referred to are clearly the shares in PPL Shipyard held by PPL Holdings. It might even be said that since the term only provided for that situation, a reasonable inference that is to be drawn from reading the contract is that the parties only thought it important to protect the disposal of PPL Shipyard shares and not the disposal of shares of the parties to the joint venture.
[87] The officious bystander suggesting the Second Implied Term to the parties at the time the SA was signed would be likely to receive a mixed response. Sembcorp might very well have answered “Oh of course!” but Chang and PPL Holdings would be far more likely to say “But of course not. Sembcorp may have been concerned to avoid the sale of PPL Shipyard to a competitor but this was all it agreed to in the SA. What is more, Sembcorp’s concerns seem to revolve around the sale of PPL Shipyard, not the sale of PPL Holdings.” The Second Implied Term would also not be necessary for business efficacy. The business purpose of the SA was to effect the sale of PPL Holdings’ shares in PPL Shipyard in a staggered manner. The SA would achieve its purpose even without the Second Implied Term. Lastly, the Second Implied Term did not accord with a reasonable interpretation of the SA.

The judgment continues past this page. Read the rest at eLitigation.

Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another

Laws this judgment relies on

Grounds of decision

The background

The parties

The events surrounding the joint venture agreement

The change in the proportions of ownership of PPL Shipyard

Sembcorp’s claims

The issues

The first issue: Whether the defendants have to offer their 15% shareholding of PPL Shipyard to Sembcorp

The Second Implied Term

The law on implied terms

Whether the Second Implied Term should be implied into the JVA

Whether the Second Implied Term should be implied into the SA