Tiger Airways Pte Ltd v Swissport Singapore Pte Ltd

Judith Prakash J:

[1] The plaintiff, Tiger Airways Pte Ltd, commenced this action by way of originating summons against the defendant, Swissport Singapore Pte Ltd, alleging breach of contract for wrongful termination of an agreement (the “Agreement”) dated 16 January 2006, between them.

[3] When the parties entered into the Agreement, the defendant held a licence (the “Licence”) to provide ground handling services at Changi Airport. This Licence was granted to the defendant by the Civil Aviation Authority of Singapore (“CAAA”) pursuant to Clause 2 of a Ground Handling Services Agreement (“GHSA”), dated 26 August 2004, between the defendant and CAAA. This Licence allowed the defendant to operate at Changi Airport.

[4] However, due to continuing losses amidst the global economic downturn, the defendant decided to exit the Singapore market. It gave notice to CAAS on 15 December 2008 to terminate the GHSA. That notice was accepted by CAAS and it was agreed that the GHSA would be terminated on 31 March 2009, which meant that the Licence would, effectively, also be terminated on 31 March 2009.

[5] It was against that background that, on 12 January 2009, the defendant gave the plaintiff notice to terminate the Agreement on 1 April 2009 in reliance of Clause 9.3 of the Agreement (“Clause 9.3”), which reads:

[6] The issue was whether a proper construction of Clause 9.3 allowed the defendant to serve notice to terminate the Agreement after the defendant had effectively terminated its own Licence.

[7] Although counsel for the defendant disagreed with the way the issue was framed, it was not disputed that it was the defendant who had requested that the Licence be terminated and that CAAS had acceded to the defendant’s request.

[8] Counsel for the plaintiff maintained that the defendant was not entitled to terminate the Agreement because Clause 9.3 did not apply to a situation where the licence was voluntarily terminated by the holder of the licence itself.

[9] Counsel for the defendant contended that Clause 9.3 was not concerned with the reasons why or the circumstances in which the licence was cancelled. It was argued that Clause 9.3 was an “exit” clause that gave either party the right to terminate the Agreement unilaterally.

[10] I accepted the plaintiff’s interpretation of Clause 9.3 as correct. I also agreed that the Licence was, in substance voluntarily terminated by the defendant. Therefore, I ordered that the defendant pay damages for breach of the Agreement, and that the damages, if any, be assessed by the Registrar. I now set out the reasons for my decision.

[11] The law in the area of the interpretation and construction of contracts has received a fair bit of attention lately, and was comprehensively examined in the recent Court of Appeal decision of Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029 (“Zurich Insurance”).

[12] As both parties urged this court to consider the surrounding circumstances and the object of the Agreement to advance their respective interpretations of Clause 9.3, it is necessary for me to set out the law in Singapore regarding the admissibility of extrinsic evidence when interpreting and construing contractual documents.

[13] The Court of Appeal summarised the contextual approach to extrinsic evidence (Zurich Insurance at [132]):

[14] The parol evidence rule lives on in s 94 of the Evidence Act (Cap 97, 1997 Rev Ed). However, the parol evidence rule only operates where the contract was intended by the parties to contain all the terms of the contract. If the contract is one to which the parol evidence applies, then no extrinsic evidence is admissible to contradict, vary, add to or subtract from a contract (Zurich Insurance at [111] ­–[113]).

[15] Notwithstanding the parol evidence rule, extrinsic evidence may still be admissible for the purpose of interpreting a contract (Zurich Insurance at [122]):

[16] Zurich Insurance is significant in its pronouncement that there is no absolute rule that excludes extrinsic evidence from being admissible for the purpose of interpreting a contract. Crucially, ambiguity is no longer a prerequisite for admitting extrinsic evidence to assist the courts in construing contractual documents. There are still, however, a number of hurdles for the party that seeks to admit extrinsic evidence for the court’s consideration.

[17] The first requirement is that the evidence must be relevant. Secondly, the evidence must have been reasonably available to all the contracting parties (Zurich Insurance at [125]):

[18] First, the evidence must be relevant to determining the context of the contract. In Bank of Credit and Commerce International SA v Ali [2002] AC 251 Lord Hoffmann clarified that (at [39]):

[19] The test of relevancy is an objective one that asks whether a reasonable man would have regarded the extrinsic evidence as relevant to determining the context of the contract. In applying the test of relevance, the courts are, in effect, being more sensitive to all available material that might assist the court in arriving at the correct interpretation of the contract.

[20] The second requirement is a straightforward one. The extrinsic evidence that is being relied on must have been reasonably available to all the contracting parties. Actual knowledge is irrelevant as this is an objective inquiry.

[21] Additionally, in Zurich Insurance, the Court of Appeal added a threshold requirement and cited its earlier decision of Sandar Aung v Parkway Hospitals Singapore Pte Ltd [2007] 2 SLR 891 (“Sandar Aung”) with approval (at [128]-[129]):

[22] This means that the extrinsic evidence that is tendered before the court must point to a clear or even obvious context before the court can say with any certainty that such evidence is of assistance to the court. This makes logical sense because if the extrinsic evidence points to a context that is far from clear or obvious, then the court would be acting within the realm of speculation.

[23] If the context is found to be clear and obvious, extrinsic evidence might well lead to an interpretation that is different from the construction placed on the plain language of the contract. In such circumstances, any inconsistency between the clear and obvious context and the language of the contract may be evidence of ambiguity (Sandar Aung at [29], cited in Zurich Insurance at [106]).

[24] The objective approach is employed throughout the entire process in determining whether extrinsic evidence should be admissible for the purpose of ascertaining the parties’ intentions (Zurich Insurance at [125]):

[25] The usual canons and techniques of contractual interpretation have been endorsed and continue to be relevant in Singapore. The Court of Appeal endorsed the summary of principles from Gerard McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (Oxford University Press, 2007) (“McMeel”) (Zurich Insurance at [131]). The principles relevant to this case are reproduced here:

[26] The defendant argued that because its Licence was issued by CAAS, only CAAS had the authority to cancel its Licence. Thus, when read literally, Clause 9.3 gave the defendant the right to serve notice within 24 hours to terminate the Agreement because the Licence was in fact cancelled by CAAS. The defendant suggested that the proper interpretation to be placed on Clause 9.3 was that the clause was not concerned with the reasons why the Licence was cancelled. It claimed that Clause 9.3 was, in effect, an “exit” clause that allowed a party who could no longer continue its operations in Singapore to prematurely terminate the Agreement by giving notice of at least 24 hours.

[27] To support its argument, the defendant submitted that both the plaintiff and the defendant were new companies and faced “various uncertainties and imponderables”. Therefore, it made good business sense to include an exit clause that allowed either party to prematurely terminate the Agreement if it turned out that it would be unprofitable to continue with the Agreement. I was unable to accept this argument. First, the plain and ordinary language of Clause 9.3 itself did not lend itself to being read as an exit clause. Also, it must be recalled that extrinsic evidence must be relevant, reasonably available to both parties, and point to a context that is clear or obvious (see [22] – [24] above).

[28] In Zurich Insurance, the Court of Appeal held that the correspondence between two insurance agents (“Lee” was procuring insurance on behalf of the respondent and “Long” was under the employment of the appellant) was not precise enough to point to a clear or obvious context. Therefore, the Court of Appeal held that it was legally impermissible for the High Court judge to have taken that correspondence into account in determining what the insurance policy in question covered. The Court of Appeal’s reasons, found in paras [135] and [139] of the judgment, are as follows:

[29] Similarly, the defendant was unable to point to any evidence or circumstance that would objectively show that both parties were concerned with preserving an exit clause that allowed either one of them to unilaterally escape from a bad bargain. The defendant could not show any supporting evidence that the parties had intended specifically for Clause 9.3 to address that alleged concern. Contrary to the defendant’s argument, it might even be possible for one to counter-argue that, as new companies, both parties would have been interested in securing a long-term relationship in an attempt to reduce the inherent uncertainties in the market. The mere fact that both parties were new companies when they entered into the Agreement was not sufficient, in itself, to point to a clear or obvious context that would allow it to be taken into account as part of the relevant background matrix.

[31] Clause 9.1 of the Agreement (“Clause 9.1”) expressly provided for a five-year term for the Agreement subject to a probation period for the first six months. During the six-month probation period, the plaintiff would have had the right to terminate the Agreement by giving two months’ notice if the defendant’s performance was deemed to be in material breach of the Agreement and if the plaintiff could demonstrate evidence that it made reasonable efforts to resolve the problems in good faith. Clause 9.1 reads:

[32] Clause 9.1 clearly worked against the defendant’s argument that there was an intention to preserve an exit clause. Since it listed, in detail, the events that were required to have transpired before the right to terminate could arise during the probation period. First, the defendant would have to be in material breach of the Agreement. The parties were then required to attempt to resolve any problems in good faith. Finally, the Agreement could only be terminated by serving two months’ written notice. All these requirements in Clause 9.1 were inconsistent with the idea that Clause 9.3 would operate as a unilateral exit clause. The probation period would be completely unnecessary if the parties could unilaterally terminate the Agreement by serving notice within 24 hours.

[33] Clause 9.2 of the Agreement set out the other situations in which the Agreement could be terminated:

Again, it would have been unnecessary to list the circumstances that gave rise to a right to terminate if Clause 9.3 was truly an exit clause that was indifferent as to the reasons for termination.

[34] The recitals of the Agreement also accorded with the plaintiff’s submission that the business purpose of the Agreement was to secure a long-term relationship:

While recitals do not impose legal obligations on the parties, they can often be of assistance to the courts in the construction of contractual terms. McMeel explains that (at para 4.25):

It was also stated in the Court of Appeal decision of Management Corporation Strata Title Plan No 1933 v Liang Huat Aluminium Ltd [2001] 3 SLR 253 (at [7]):

[35] Construing the Agreement as a whole and reading Clauses 9.1 to 9.3 together with the recitals, I found that it was a reasonable interpretation that the defendant and the plaintiff had intended to contract for a fixed term of five years subject only to the satisfactory performance of the defendant within the first six months and the occurrence of the specific events listed in Clauses 9.2 and 9.3 (insolvency, force majeure, breach of the Agreement, and cancellation of licence by the relevant authority). This interpretation was consistent with the business purpose of the Agreement to create a long-term relationship between the parties. I found nothing in the evidence that could have led to any other conclusion. The defendant’s argument that Clause 9.3 was an exit clause was patently unsustainable. Once the defendant had asked for the cancellation of its own Licence, the defendant could not rely on Clause 9.3 because it could not have been reasonably intended by the parties for Clause 9.3 to apply in such an event.

[36] The defendant argued that the plaintiff’s interpretation was illogical. Its argument was that if Clause 9.3 gave rise to a right to terminate the Agreement in the event that the Licence was cancelled by CAAS due to the defendant’s misconduct or breach of the GHSA, then similarly, it ought to give rise to the same right if the defendant voluntarily terminated the Licence. This was because, defendant contended, a cancellation of the Licence due to misconduct or breach would be analogous to a cancellation due to voluntary termination. In both situations, the defendant’s own conduct would be the reason why the Licence was cancelled.

[37] The defendant submitted that Clause 9.3 should be interpreted to allow the defendant to terminate the Agreement for voluntary termination of the Licence as well as for situations where the Licence was cancelled due to the defendant’s own misconduct or breach. I found this interpretation to be inconsistent with the business purpose of the Agreement which was to preserve a long-term relationship.

[38] Further support to the interpretation I adopted was given by Clause 2.1 which reads:

Clearly, this clause envisaged the need for the defendant to perform its obligations in accordance with all mandatory rules, regulations, and procedures. Any breach or misconduct on the defendant’s part that resulted in its Licence being cancelled might very well result in a breach of Clause 2.1 by the defendant. The defendant’s interpretation would render clauses like Clause 2.1 completely superfluous. I thought that it was unlikely that parties would contract on the basis that a licence holder would be entitled to escape its part of the bargain through misconduct or by being in deliberate breach of its licensing requirements. Nevertheless, the issue of misconduct or breach of the GHSA did not arise on the facts. It is sufficient for me to say that Clause 9.3 did not entitle the defendant to voluntarily terminate its Licence.

[39] In summary, I found in favour of the plaintiff’s interpretation of the Agreement and held that the defendant was not entitled to terminate the Agreement pursuant to Clause 9.3.