High Court · Decided 1 December 2014

Total English Learning Global Pte Ltd and another v Kids Counsel Pte Ltd and another suit

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[2014] SGHC 258Case no. Suit No 420 and 822 of 2013

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Civil Law Act 1909

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Tay Yong Kwang J:
Introduction
[1] This was a dispute arising out of a series of franchise agreements that had been purportedly assigned to the incoming franchisors, Total English Learning Global Pte Ltd (“TELG”) and Total English Learning International Pte Ltd (“TELI”). There were two separate actions before me, namely, Suit No 420 of 2013 (“S 420/2013”) and Suit No 822 of 2013 (“S 822/2013”). TELG and TELI are the plaintiffs (referred to collectively as “the Plaintiffs”) in both actions. Kids Counsel Pte Ltd (“D8”) is the sole defendant in S 420/2013 and the eighth defendant in S 822/2013. There are seven other defendants in S 822/2013:
Therefore, including D8, there are a total of eight defendants (referred to collectively as “the Defendants”) in S 822/2013. With the exception of D1, the Defendants were the franchisees of the English literacy and phonics programme known as the “I Can Read” system (“the ICR system”).
[2] The present dispute arose after the purported assignment of the franchise agreements by the original franchisor, Total Literacy (Singapore) Pte Ltd (“TLS”), to TELG. Given the overlap between both actions, S 822/2013 was scheduled to be heard immediately after S 420/2013 and the parties were directed to file only one affidavit of evidence-in-chief for each witness in both actions. I reserved judgment upon the conclusion of the trial in late August 2014. On 8 September 2014, I delivered judgment as follows:
(a) In relation to S 420/2013:
(i) the Plaintiffs’ claims were dismissed; and
(ii) D8’s counterclaims were dismissed.
(b) In relation to S 822/2013:
(i) the Plaintiffs’ claims were dismissed;
(ii) D1’s counterclaim was dismissed;
(iii) D2–D8’s counterclaim was dismissed; and
(iv) the injunction granted against D1–D8 in Summons No 4816 of 2013 was set aside with no order as to damages.
Each party was to bear its own costs for both actions. TELG (ie, the second plaintiff in S 822/2013) has since filed an appeal against part of my decision. I now set out the grounds for my decision.
The facts
Background to the ICR system
[3] The ICR system was developed by two Australian nationals, Annabel Seargeant (“Annabel”) and Antony Earnshaw (“Antony”). Different entities were set up to market the ICR system internationally. For the purposes of the present proceedings, we need to focus only on two entities controlled by Antony and Annabel: the Australian entity, Total Literacy Pty Ltd (“TLA”), and the Singaporean entity, TLS. The trade marks, copyright and other intellectual property rights were supposedly owned by TLA, which then granted a licence to TLS. The arrangement was for TLS to enter into franchise agreements with franchisees in Singapore. Under those franchise agreements, the franchisees, such as D2–D8, were allowed to operate education centres in Singapore offering the ICR system.
The franchisees
[4] TLS entered into multiple franchise agreements with different franchisees for the purpose of exploiting the ICR system in Singapore. Based on the evidence that has been led in the course of the present proceedings, there appeared to be variations in the franchise agreements entered into with different franchisees. In other words, while the structure of the franchise agreements remained broadly similar, there were significant differences in the wording of specific clauses, such as the confidentiality clause and the non-compete clause. As will be seen subsequently, these differences in wording have, at times, given rise to dissimilar outcomes in respect of D2–D8.
D2–D6
[5] D2–D6 were franchisees owned and operated by Kaske Gerold Ulrich (“Kaske”) at the material time. As at the date of the trial, D2–D6 are dormant companies after having sold their businesses to D1. Nevertheless, Kaske remains the director of D2–D6 and he gave evidence on behalf of D2–D6 in the course of the trial.
[6] Kaske has a background in engineering. He worked in the software industry for about 11 years before setting up his own business. He was first involved in the education industry back in 2006 when he acquired D5. Subsequently, Kaske came to know that the owner of D6 was interested in selling her stake in D6. He proceeded to acquire D6 after obtaining the consent of TLS (ie, the franchisor prior to the purported assignment). Over the course of the next few years, Kaske obtained rights from TLS to set up three other ICR centres in Singapore. D2–D4 were used as corporate vehicles for these additional ICR centres. In total, Kaske owned and operated five ICR centres in Singapore at the material time.
D7
[7] D7 was a franchisee owned and operated by Chih Chien Lih Jennifer (“Jennifer”). Jennifer and her former husband acquired D7 and took over the running of the ICR centre in August 2007.
[8] Jennifer is currently practising as a lawyer in a local law firm. She gave evidence on how Kaske chipped in to lend a hand in the running of her ICR centre as and when she needed assistance. In return, she would reciprocate by helping out with or giving advice on legal matters. Unlike D2–D6, D7 is still operating although no longer as an ICR centre.
D8
[9] D8 was a franchisee owned and operated by Lum Wai Onn (“Lum”) at the material time. The franchise agreement between D8 and TLS was for an initial term of ten years and the agreement was due to expire on 26 October 2012. It was Lum’s case that the term of the franchise agreement was varied from ten years to one in perpetuity but personal to him. This was the main factual dispute in S 420/2013.
[10] In the course of the trial, Lum gave evidence that he was mainly occupied with his family businesses that were unrelated to the education industry. In other words, the acquisition of D8 was only a side venture for Lum. Unlike D2–D6, D8 is still operating but no longer as an ICR centre.
The franchisors and the purported assignment
[11] TLS was originally the franchisor in the franchise arrangements entered into in Singapore. In other words, the contracting parties in the franchise agreements were TLS and the respective franchisees. The Plaintiffs came into the picture when Antony and Annabel decided to sell the business to the Plaintiffs. This was executed by way of three deeds of assignment dated 19 July 2012.
[12] In the first deed of assignment, there was a purported assignment of the business contracts in Singapore, including the franchise agreements, to TELG. In the second deed of assignment, the copyright and all other intellectual property rights (excluding the trade mark rights) concerning the ICR system were assigned to TELI. For the purposes of the present dispute, only the first and second deeds of assignment are relevant. Nevertheless, for completeness, it is noted that the relevant parties also entered into a third deed of assignment where the trade mark rights were assigned to TELG.
[13] On 25 July 2012, an email was sent by Annabel on behalf of TLS to the franchisees to inform them about the change in ownership. As will be seen below, this email was rather misleading in so far as it suggested that there were “new shareholders” in TLS. In particular, there was no mention of the purported assignment of the franchise agreements from TLS to TELG.
[14] This was followed by a letter dated 1 October 2012 sent by TLS to the franchisees to inform them that the business had been sold to the Plaintiffs and that all future payments were to be directed to TELG. The Plaintiffs relied on this letter as the notice of assignment.
The dispute over the purported assignment
[15] Between October and December 2012, there were meetings and negotiations between the representatives of the Plaintiffs and the respective owners of D2–D8 (ie, Kaske, Jennifer and Lum). In this respect, the situation between the Plaintiffs and D8 was slightly different as compared to the other franchisees as the Plaintiffs maintained the position that D8’s franchise agreement had expired on 26 October 2012. The facts unique to D8 are relevant only to the issues arising in S 420/2013 and will be dealt with separately below.
[16] Meanwhile, the general tenor of the evidence was such that D2–D8 had maintained their position that the assignment was invalid in so far as their consent had not been sought. There was some discussion on the possibility of entering into new franchise agreements and the grant of a power of attorney but nothing came out of those discussions. The concept of a novation agreement was also explored by the parties but this did not materialise eventually.
[17] On 7 December 2012, a letter of demand was issued by the Plaintiffs against D8 regarding, among other things, the non-payment of royalties.
The incorporation of D1
[18] D1 was incorporated on 29 January 2013 and David Chong (“David”) was appointed as the sole director. He was also the sole shareholder of D1. This was followed by the appointment of Kaske as a director of Monkwell on 5 February 2013. David’s shareholding in D1 was transferred to another entity known as Monkwell on 19 February 2013. In the course of the trial, it became clear that David was merely acting as a nominee of Kaske.
[19] On 25 March 2013, Monkwell changed its name to MEIL. This was followed by an increase in the number of shares in D1 on 8 April 2013 from one to ten. Out of the ten shares, nine shares were held by MEIL while the remaining share was held by David. On 24 April 2013, Kaske transferred his shares in MEIL to Loh Lye Ai (“Loh”). It appeared in evidence that Loh was also a nominee acting on behalf of Kaske.
[20] On 25 April 2013, Kaske ceased to be a director of MEIL and Loh was appointed as the director of MEIL in place of Kaske.
The termination of the franchise agreements
[21] D2–D7 terminated their respective franchise agreements on 21 June 2013.
The transition to the My English School (“MES”) system
[22] It was not disputed by the parties that the MES system, being an English literacy and phonics programme, was in direct competition with the ICR system. On 10 September 2013, letters were sent to the parents of the students, informing them about the impending switch to the MES system. The week leading up to 16 September 2013 happened to be the term break and D2–D8 took the opportunity to prepare for the migration from the ICR system to the MES system. The ICR signboards were replaced with the MES equivalent at the various centres. On 16 September 2013, the centres started offering the MES programme. Arrangements were made for the unused ICR materials to be returned to the Plaintiffs on or about 12 September 2013.
The commencement of S 822/2013
[23] On 16 September 2013, the Plaintiffs commenced S 822/2013 against the Defendants. On the same day, the Plaintiffs filed an urgent application for an injunction against the Defendants. The matter came before Choo Han Teck J and a limited injunction was granted against the Defendants. The terms of the injunction were subsequently varied on 18 September 2013 when parties appeared before me.
The dispute over D8’s franchise agreement
[24] As mentioned above, D8 is the sole defendant in S 420/2013 and the main factual dispute between the Plaintiffs and D8 pertained to the term of D8’s franchise agreement. The Plaintiffs took the view that D8’s franchise agreement had expired on 26 October 2013 while D8 took the position that its franchise agreement had been varied to one in perpetuity.
[25] According to Lum, at around the time when he was in the process of acquiring D8, he met with the then Managing Director of TLS, Allston Boyer Parkinson (“Allty”). During the meeting, Lum made a request for the term of D8’s franchise agreement to be varied to an open-ended term. In response to Lum’s request, it was alleged that Allty orally agreed to the variation and handed to Lum an addendum to reflect the variation. This addendum will be covered in greater detail later in the judgment.
[26] After Lum acquired D8, there was a period of time when Lum made multiple requests for a formal written confirmation regarding the variation of D8’s franchise agreement. It was undisputed that nothing came out of these requests and that at the time of the trial, the only written documentation available was the addendum given by Allty.
[27] When the Plaintiffs were in the process of acquiring the ICR business, they knew about Lum’s claim regarding the variation of D8’s franchise agreement. Nevertheless, the Plaintiffs and TLS agreed to put the matter on hold. To this end, letters were sent to Lum to assure him that his claim would be looked into and that he need not worry about the dispute.
[28] When the Plaintiffs completed the acquisition of the ICR business, they adopted the position that D8’s franchise agreement was due to expire on 26 October 2012. Towards the end of 2012, the discussions between the Plaintiffs and Lum were largely in relation to the potential sale of D8 to the Plaintiffs. Pursuant to these negotiations, a non-disclosure agreement was signed by both parties on 2 January 2013. Negotiations for the sale of D8 to the Plaintiffs eventually broke down as both parties had fundamental differences concerning the valuation and offer price of D8. A second letter of demand was sent to D8 on 2 May 2013 and S 420/2013 was commenced soon after on 8 May 2013.
The decision
[29] At the outset, I note that the Plaintiffs and the Defendants have raised multiple claims and counterclaims across both S 420/2013 and S 822/2013. Unfortunately, a few of these claims and counterclaims appeared to be sidelined in so far as minimal evidence was led to support the legal arguments. Nevertheless, for completeness, I attempted to deal with all the claims and counterclaims raised by the parties in the present dispute. Although S 420/2013 and S 822/2013 were heard together, the legal issues arising in both actions could be grouped into three broad categories:
(a) the validity of the purported assignment, which affected the outcome in both S 420/2013 and S 822/2013;
(b) the claims and counterclaims in S 420/2013, which affect only D8 given that it was the sole defendant in S 420/2013; and
(c) the claims and counterclaims in S 822/2013.
For ease of reference, I will approach the legal issues in the order set out above.
The validity of the purported assignment
[30] The original franchisor in the various franchise arrangements entered into with D2–D8 was TLS. In this respect, the Plaintiffs derive their standing to commence both actions from the deeds of assignment entered into by the relevant parties, where various assets of the ICR system were purportedly assigned to the Plaintiffs. In the event that the assignment is found to be invalid, TLS will remain as the contracting party and the Plaintiffs will not have the requisite standing to commence the present actions.
[31] At the outset, the Defendants raised the issue of whether TELI had any interest in the present dispute. As discussed above, TELI was the assignee of the copyright and other intellectual property rights (excluding the trade mark rights) pursuant to the deed of assignment dated 19 July 2012. Initially, the Plaintiffs included a few intellectual property claims in S 420/2013. These were, however, abandoned subsequently. There were also no intellectual property claims in S 822/2013. Nevertheless, in the course of the trial, a dispute arose over the issue of whether TELI had any database rights to give it the requisite standing to bring an action against D2–D8 in S 822/2013. In my judgment, the issue concerning the assignment of database rights, if any, was a red herring as there were no intellectual property claims in both S 420/2013 and S 822/2013. The claims brought by the Plaintiffs were based on various breaches of the franchise agreements. In other words, the basis for the Plaintiffs’ claims was in contract and the proper party to commence the actions would be the purported assignee of the various franchise agreements, ie, TELG. Further, both parties did not deal with the threshold issue of whether database rights were capable of existing independently within the intellectual property regime in Singapore. There was no attempt to illustrate how the existence of such database rights would have any bearing on the claims for breach of contract by the Plaintiffs. I was therefore of the view that TELI had no interest in the present proceedings, given that it was the purported assignee of only the intellectual property rights (excluding the trade mark rights).
[32] Moving on to the issue of the validity of the purported assignment, I note the existence of a “no-assignment” clause in D6 and D7’s franchise agreements. This raised a separate issue of whether a purported assignment in the face of a “no-assignment” clause was capable of having any legal effect. As this issue only arose in relation to D6 and D7, I will consider this issue after dealing with the general issues that applied across the board to all Defendants. The general issues concerning the validity of the assignment can be grouped into two broad categories:
(a) whether a franchise agreement comprising both benefits and burdens can be assigned as a whole; and
(b) whether there was a valid notice of assignment on the facts of the present case.
Whether the franchise agreement was assignable as a whole
[33] It is undisputed that the franchise agreements incorporate ongoing rights and obligations vis-à-vis both the franchisor and the franchisee. In this regard, a distinction has to be drawn between an assignment and a novation. In Fairview Developments Pte Ltd v Ong & Ong Pte Ltd and another appeal [2014] 2 SLR 318, the general principles relating to novations and assignments were set out by the Court of Appeal at [46]:
[34] A novation involves the change in the identity of a contracting party with the consent of the other contracting party. Given that a novation involves the wholesale substitution of the original contract, it has the effect of subjecting the incoming third party to both the benefits and burdens of the contract.
[35] This can be contrasted with an assignment, where only the benefit of the contract can be transferred from the assignor to the assignee. Unlike a novation, the consent of the other contracting party is generally not required in the case of an assignment. Given that an assignment involves the transfer of only the benefit of the contract, the assignor remains obligated to perform any remaining obligations under the contract. Difficulties arise when parties purport to assign an entire “contract” as opposed to only the “benefit” of the contract. This problem is compounded when the assignment of the entire “contract” is carried out without the consent of the other contracting party, as in the present case. In the House of Lords decision of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and others [1994] 1 AC 85 (“Linden Gardens v Lenesta”), Lord Browne-Wilkinson made the following observations at 103:
[36] On the facts of the present case, it was undisputed that the purported assignment had been carried out without the consent of the franchisees. Therefore, in the absence of such consent, the arrangement between TLS and TELG could not give rise to a valid novation. The issue was thus whether the franchise agreements were capable of being assigned as a whole to TELG so as to give it requisite standing to commence the present actions.
[37] At the outset, I note that the franchise agreements provided executory rights and obligations on both the franchisor and franchisee. This could be contrasted with a contract where one party has already discharged its obligations in full and the only remaining obligations are owed by the other contracting party. In my view, given that the franchise agreements were ongoing contracts with existing obligations on both contracting parties, they are not capable of being “assigned” as a whole. Any purported assignment of the entire contract would run afoul of the general rule that the burdens and obligations of a contract could not be assigned or transferred without the consent of the other contracting party.
[38] To get around this problem, the Plaintiffs argued that the purported assignment of the franchise agreements could be construed as transferring only the benefits accruing to TLS under the franchise agreements to TELG. On this basis, the purported assignment would not involve the transfer of TLS’ obligations and the consent of the franchisees would therefore be unnecessary. I could not accept the Plaintiffs’ arguments as such a construction was wholly inconsistent with the deed of assignment that was entered into by the parties. The process of ascertaining the scope and effect of the deed of assignment was effectively one of construction. The court has to give effect to the objective intentions of the contracting parties. For ease of reference, the relevant portion of the deed of assignment is set out below:
In this respect, it was obvious that the parties to the deed of assignment had intended the assignment to be in relation to the entire contract, as opposed to only the rights and benefits of the contract. In fact, the parties went so far as to specifically state that the assignment was inclusive of the rights, benefits, liabilities and obligations of TLS as franchisor of the business contracts (ie, the franchise agreements). In the circumstances, the Plaintiffs’ argument that the parties had only intended to assign the benefits of the contract was wholly inconsistent with and would clearly go against the express and unambiguous intent of the parties as embodied in the wording of the clause in question. Upholding the deed of assignment by reading down the scope of the assignment clause would be tantamount to imputing an intention to the parties which they never had. Therefore, I rejected the Plaintiffs’ submission that the parties had only intended to assign the benefits of the franchise agreements.
[39] Moving on, the Plaintiffs submitted that D2–D8 ought to be estopped from denying that there was a valid assignment as they had, through their conduct, accepted the performance of the franchisor’s obligations by the Plaintiffs. In this regard, the Plaintiffs relied on the following evidence:
(a) that D2–D8 had continued to operate as ICR centres even after the purported assignment;
(b) that D2–D8 had continued to receive programmes, workbooks and materials necessary for the operation of the ICR centres; and
(c) that D8 had made payments of royalties to TELG.
[40] In my judgment, the Plaintiffs’ reliance on estoppel or waiver should be rejected for the following reasons. First, it was clear that D2–D8 had maintained their objections to the purported assignment of the franchise agreements in the course of discussions and negotiations among the parties. Their objections and reservations with regard to the purported assignment were set out in a series of letters and emails exchanged between the relevant parties.
[41] Second, in view of D2–D8’s stance towards the purported assignment, they must surely have every right to continue with the franchise agreement as if the assignment had not taken place. D2–D8 were not obliged to terminate the franchise agreement and they were entitled to continue with the arrangement on the assumption that TLS was still the contracting party. This is wholly consistent with the observations made above that the original contracting party remains a party to the contract even after an assignment has taken place. In fact, the original contacting party remains obliged to discharge any of its remaining obligations pursuant to the contract. Therefore, I was not inclined to accept the Plaintiffs’ argument that D2–D8 must be estopped from denying the validity of the assignment when all that they did was to continue with the franchise agreements as if the purported assignment had not taken place. Such conduct on the part of D2–D8 could not give rise to a case for an estoppel or waiver.
[42] For the reasons set out above, I was of the view that the purported assignment was invalid. On that basis alone, the Plaintiffs did not have the requisite standing to commence the present actions against the Defendants in so far as they were not parties to the franchise agreement.
[43] For completeness, D2–D8 also relied on the argument that the franchise agreements were personal contracts which were not assignable at law. D2–D8 attempted to draw an analogy between a franchise agreement and an employment contract. In this respect, it was highlighted that a contractual right to the services of an employee is generally regarded as being personal and incapable of assignment.
[44] I accepted the existence of the general rule that personal contractual rights could not be assigned without the consent of the obligor. A contractual obligation could not be vicariously performed if it required the personal performance of the obligor. This is otherwise known as the “personal rights” rule (see Greg Tolhurst, The Assignment of Contractual Rights (Hart Publishing, 2006) at para 6.68).
[45] I was, however, unable to accept D2–D8’s argument that the “personal rights” rule was relevant to the present case. First, it appeared to me that D2–D8 had, in the course of arguing that the franchise agreement was personal in nature, mainly relied on the franchisor’s obligations, as opposed to the franchisor’s rights. This line of argument was academic in so far as it was accepted that a contractual obligation could not be assigned without the consent of the other contracting party. In this respect, D2–D8 did not highlight any particular right that the franchisor had against the franchisee which was personal in nature so as to prevent any assignment of that right to a third party.
[46] Second, I was not prepared to accept the Plaintiffs’ analogy that a franchise agreement was akin to an employment contract. The franchise agreement in the present case was effectively a business contract entered into between corporate entities. The franchise agreement was not entered with Antony and Annabel on a personal basis. A company has the ability to vary its management and control, and even its ownership, at any time. On the facts, there were also no provisions on change of control in the franchise agreements. There was also no restriction on Antony or Annabel to transfer their shares in TLS to a third party.
[47] Third, it appeared to me that the ICR system was already at an advanced stage of development and there was no evidence to suggest that Antony and Annabel were required to play a major role in the developmental process of the ICR system. Rather, their role was generally that of having oversight of the company. In the circumstances, it was unlikely that the franchise agreements would fall within the scope of personal contracts that would render the rights therein unassignable.
[48] In any event, given the finding that the purported assignment was invalid, my observations on this specific issue of personal contracts are academic.
Whether there was a valid notice of assignment
[49] It was the Plaintiffs’ pleaded case that the letter dated 1 October 2012 (“the 1 October 2012 letter”) from TLS to D2–D8 constituted a valid notice of assignment. The Plaintiffs argued that the test for what amounted to a valid notice of assignment involved a low threshold and that there was no specific requirement for the notice to expressly include the word “assignment”. It was further submitted that the notice would be valid in so far as information relative to the assignment was conveyed to the debtor and the notice expressly or implicitly recorded the fact of the assignment. On this basis, the Plaintiffs argued that the 1 October 2012 letter was a valid notice of assignment.
[50] The Defendants took the position that the 1 October 2012 letter was unclear and capable of different interpretations, regardless of whether it was read alone or in the context of the facts and circumstances then. Specifically, the Defendants referred to the phrase “sold our business” in the 1 October 2012 letter as being vague. The Defendants also highlighted the confusion caused by the earlier email from Annabel to D2–D8 on 25 July 2012 (“the 25 July 2012 email”), where she stated that TLS had “changed the corporate structure of the business by expanding [its] shareholder base”. It was argued that the 25 July 2012 email was misleading. The Defendants also pointed out that there was no communication from either TLS or TELG to correct the inaccurate statement by Annabel.
[51] The Plaintiffs did not offer any arguments on whether the assignment of the business contracts from TLS to TELG could be construed as an equitable assignment. In any event, an equitable assignment would generally require the assignee to join the assignor to the action. It was undisputed that TLS was not joined as a party in the present proceedings. I therefore approached the issue concerning the assignment of the business contracts on the basis that the Plaintiffs were only seeking to rely on the purported assignment as being statutory in nature.
[52] Both parties referred to s 4(8) of the Civil Law Act (Cap 43, 1999 Rev Ed) (“CLA”), reproduced as follows:
The requirements for a statutory assignment were discussed in the High Court decision of Salim Anthony v Sumitomo Corp Capital Asia Pte Ltd and others and another application [2004] 3 SLR(R) 331, where Lai Siu Chiu J observed (at [91]) that compliance with s 4(8) of the CLA was not the only legal requirement. It was emphasised that the notice of assignment must also be clear and unambiguous. In the subsequent decision of Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International), Singapore Branch v Motorola Electronics Pte Ltd [2010] 3 SLR 48 (Cooperatieve Centrale v Motorola”), Lai J acknowledged (at [101]) that “what constitutes adequate notice must depend on the context of each case”.
[53] Apart from that, in approaching the issue of whether there was a valid notice of assignment, it must be acknowledged that there is no prescribed form of notice. There is no requirement for the notice to be embodied in a separate document for the specific purpose of notifying the debtor. This was emphasised in the High Court decision of Lanxess Pte Ltd v APP Chemicals International (Mau) Ltd [2009] 2 SLR(R) 769, where Andrew Ang J observed (at [8]) that the fact of assignment may be implicitly recorded and it would suffice for information relative to the assignment to be conveyed to the other contracting party in writing.
[54] In the present case, the Plaintiffs relied on the 1 October 2012 letter as being the notice of assignment. For ease of reference, the main text of the 1 October 2012 letter is reproduced below:
It was undisputed that the 1 October 2012 letter was sent to Kaske, Jennifer and Lum. The 1 October 2012 letter was signed off by Antony as Director of TLS.
[55] In my view, the phrase “sold our business” was inherently vague in so far as it was capable of supporting multiple interpretations. From one perspective, the sale of the business could have been achieved through a transfer of assets belonging to TLS, presumably including the franchise agreements, to TELG. From another perspective, the sale of the ICR business could also have been carried out by TELG acquiring the shares of TLS. The latter scenario involving a transfer of shares would not be entirely inconsistent with the direction to pay the royalties, marketing fees and other payments to TELG. In the event that TELG had acquired the shares of TLS, TELG would be the parent company and would be entitled to receive payments on behalf of TLS. Finally, the reference to TELG as being the “new owner” was also unclear in so far as it was capable of supporting either scenario.
[56] Looking at the 1 October 2012 letter as a whole, I was of the view that the requirement for a notice of assignment to be clear and unambiguous was not satisfied. In fact, it was recognised that such a requirement would not be met if the language of the notice was equally capable of a contrary interpretation (Cooperatieve Centrale v Motorola at [97]). As explained above, the 1 October 2012 letter was capable of supporting multiple interpretations due to the vague language used. Any reference to the franchise agreements, which were the subject matter of the assignment, was also conspicuously absent from the 1 October 2012 letter. It was almost as if the parties to the deed of assignment did not wish the other franchisees to know the exact mechanism by which the sale of the ICR business was carried out.
[57] In my judgment, the adequacy of a notice of assignment must also be considered within the context and circumstances of each case. The 1 October 2012 letter was preceded by the 25 July 2012 email, where Annabel made the following statements:
The 25 July 2012 email suggested that the incoming franchisors had acquired the business by acquiring shares in TLS. There was no mention of any assignment of the ongoing franchise agreements. In fact, reading both the 25 July 2012 email and the 1 October 2012 letter together, the more likely interpretation would be that of an acquisition of the business by way of a share transfer. Up to the point in time when the 1 October 2012 letter was sent to Kaske, Jennifer and Lum, there was no attempt made by either TLS or TELG to clarify or correct the misleading statement made by Annabel in the 25 July 2012 email. Therefore, looking at the evidence as a whole, I was of the view that the 1 October 2012 letter was not a valid notice of assignment.
[58] The parties had further communications after the 1 October 2012 letter and these exchanges could have been reduced into writing. Under such circumstances, these written further communications could very well constitute a valid notice of assignment under s 4(8) of the CLA. Nevertheless, both parties did not make any arguments to this effect and the Plaintiffs’ pleaded case was confined to the 1 October 2012 letter being relied upon as the notice of assignment. I therefore confined my observations to the 1 October 2012 letter for the purposes of ascertaining whether there was a valid notice of assignment. As discussed above, the 1 October 2012 letter did not fulfil the requirements of being clear and unambiguous for it to be regarded as a valid notice of assignment.
The “no-assignment” clause
[59] Apart from the general issues concerning the validity of the assignment that affected all the Defendants, there was a specific issue which concerned only D6 and D7. This was the “no-assignment” clause incorporated into their respective franchise agreements with TLS. Both clauses were worded exactly the same and were in the following terms:
On this basis, it was argued on behalf of D6 and D7 that the “no-assignment” clause would prohibit the assignment of even the benefit of the contract and any purported assignment in the absence of the other contracting party’s consent would be invalid. The House of Lords decision of Linden Gardens v Lenesta was cited in support of this proposition.
[60] In response, the Plaintiffs relied on the Court of Appeal decision of Jubilee Electronics Pte Ltd and others v Tai Wah Garments and Knitting Factory Pte Ltd [1996] 1 SLR(R) 352 (“Jubilee Electronics v Tai Wah”), where an assignment of a lease was held to be valid in spite of a clause in the lease agreement prohibiting any such assignment without the consent of the landlord. On this basis, the Plaintiffs argued that an assignment in breach of a “no-assignment” clause did not render the assignment void but merely provided an opportunity for the other contracting party to terminate the agreement. It was further submitted that D7 did not exercise its right to terminate the agreement as it had continued to receive ICR materials and performed its obligations under the agreement.
[61] I was of the view that the purported assignment from TLS to TELG was wholly ineffective in the light of the “no-assignment” clause in D6 and D7’s franchise agreements. The Plaintiffs’ reliance on Jubilee Electronics v Tai Wah was misconceived given that it was a case dealing with the assignment of a lease. In Linden Gardens v Lenesta, a similar argument was raised to the effect that the assignment of a leasehold term in breach of a covenant against assignment was effective to vest the term in the assignee. Lord Browne-Wilkinson, in tracing the differences in approach between the assignment of property rights and contractual rights, made the following observations at 109:
He concluded that it was therefore not surprising that the law applicable to the assignment of contractual rights would differ from that applicable to the assignment of leases (at 109).
[62] In arriving at the conclusion that the assignment of a lease was valid in spite of the covenant not to assign without the consent of the landlord, the Court of Appeal in Jubilee Electronics v Tai Wah relied on English authorities such as Williams v Earle (1868) LR 3 QB 739 and Old Grovebury Manor Farm Ltd v Seymour (W) Plant Sales & Hire Ltd (No 2) [1979] 1 WLR 1397. These authorities were also cited by Lord Browne-Wilkinson in Linden Gardens v Lenesta. However, both cases dealt with the assignment of leases and the legal principles governing the assignment of contractual rights differ from those applicable to the assignment of property rights.
[63] Moving on, counsel for the Plaintiffs, Mr Mark Goh (“Mr Goh”), highlighted that the House of Lords decision of Linden Gardens v Lenesta was not binding on the local courts. He submitted that in the absence of any binding local authority on the legal effect of such “no-assignment” clauses, I was free to, and should, in fact, depart from the English position set out in Linden Gardens v Lenesta.
[64] In my view, cl 26 of D6 and D7’s franchise agreement was drafted in a straightforward and unambiguous manner. The franchise agreement shall not be assignable or transferred by any party unless otherwise agreed to by the other party in writing. Clearly, neither TLS nor TELG obtained the consent of D6 and D7. In the circumstances, the assignment would be ineffective. As it was held in Linden Gardens v Lenesta, an attempted assignment of contractual rights in breach of a contractual prohibition, as in the present case, would be “ineffective to transfer such contractual rights” (at 108). Lord Browne-Wilkinson regarded the law as being “satisfactorily settled” and he went on to make the following observation at 108:
Although Mr Goh urged me to depart from the English position set out in Linden Gardens v Lenesta, there was no reason to suggest why the legal reasoning adopted therein would be inapplicable to the local context.
[65] I was also unable to accept the Plaintiffs’ argument that D6 and D7 had somehow waived their rights to terminate the franchise agreement when they elected to continue receiving ICR materials and running the ICR centre. The purported assignment was legally ineffective in so far as D6 and D7’s consent in writing had not been sought. It was surely within the rights of D6 and D7 to treat the assignment as invalid given that their consent had not been obtained and to continue performing the contract on the basis that TLS was still the contracting party. There was no argument to suggest that D6 and D7’s actions in continuing with the contract could be regarded as a manifestation of their consent to the assignment for the purposes of cl 26 of the franchise agreement. In the light of the above, the purported assignment from TLS to TELG was invalid.
The claim in S 420/2013
[66] In S 420/2013, it was the Plaintiffs’ pleaded case that D8 breached cl 13 of the franchise agreement when it failed to comply with the procedure stipulated therein after the expiry of the franchise agreement on 26 October 2012.
[67] In response, D8 argued that there had been a variation of the term of the franchise agreement from ten years to one in perpetuity. This variation supposedly took place in 2008 when Lum was in the process of acquiring D8. Lum stated that the then managing director of TLS, Allty, had agreed to vary D8’s franchise agreement by waiving the ten-year period. A handwritten note that was purportedly initialled by Allty was adduced as evidence.
[68] Initially, there was some concern about whether Allty had the requisite authority to vary D8’s franchise agreement on behalf of TLS. Antony had sent an email to Lum dated 2 December 2012, where he had stated:
Nevertheless, in the course of the trial, it became clear that the Plaintiffs were not entirely in agreement with Antony’s position that Allty did not have the authority to enter into agreements on behalf of TLS. In fact, during the course of cross-examination, Tan stated unequivocally that he did not agree with Antony in relation to this issue. In my judgment, Antony’s argument was a non-starter as it was undisputed by all parties that Allty was the managing director of TLS at the material time. In the absence of any evidence to the contrary, Allty must be regarded as having the requisite authority to enter into binding agreements on behalf of TLS.
[69] I was of the view that there was an oral variation of the contract as stated by Lum. First, Lum’s evidence with regard to the oral variation of the franchise agreement by Allty remained largely unrebutted even under cross-examination. Second, Lum produced the handwritten note to support his position that the franchise agreement had been varied to an open-ended term. In that note, it was stated that the term of the franchise agreement would be “open ended for the current buyers of the Goldhill Centre”. There was also a further qualifier that the extension was not to be “granted to anyone/entity buying from them”. The period of ten years for the further term upon the expiry of the franchise agreement was also struck off and replaced with “N/A”. Both variations were accompanied by an initial which was purportedly Allty’s. During cross-examination, when Tan was asked to compare the initials in the handwritten note with another specimen of Allty’s signature, he agreed that they looked “similar”.
[70] More significantly, while the parties were having a dispute over whether the term of D8’s franchise agreement had been varied, the handwritten note produced by Lum was brought to the attention of Allty. In an email to Chan dated 24 June 2013, Allty stated the following in relation to the handwritten note:
In this email, it is obvious that when Allty was referred to the handwritten note with his purported initials, he did not deny that the initials were his. In fact, Allty chose to emphasise the fact that there was no new franchise agreement entered into by the parties. In my view, if the handwritten note or the purported initials were doctored or forged, a reasonable person in Allty’s position would have given a straightforward denial that there was either no such document or that the initials were not made by him. Allty, however, chose to side-step the issue of the handwritten note by highlighting the fact that there was no formal agreement concerning the open-ended term.
[71] In the circumstances, given the substantial factual dispute between the Plaintiffs and D8, it would have been prudent for the Plaintiffs to call Allty to give evidence in the present proceedings. However, the Plaintiffs took the position that D8 ought to have called Allty as a witness in so far as D8 was the party asserting that such an oral variation existed. Unsurprisingly, D8 adopted the contrary position and argued that the Plaintiffs should be responsible for calling Allty given that the evidential burden had shifted to the Plaintiffs after Lum’s testimony.
[72] In my opinion, the Plaintiffs should have called Allty to give evidence on their account of events. As mentioned above, Lum’s evidence on how Allty had agreed to a variation of the term of the franchise agreement remained largely unrebutted. The handwritten note purportedly initialled by Allty was also produced to support Lum’s account of events. Coupled with the fact that Allty did not deny that the initials were his when the handwritten note was brought to his attention, it would have been prudent for the Plaintiffs to call Allty as a witness to the present proceedings so as to allow him to give his side of the story.
[73] In the absence of any evidence to the contrary, I was prepared to accept that the handwritten note was initialled by Allty and there had been a variation of the franchise agreement to an open-ended term. At this juncture, I note that the Plaintiffs also attempted to suggest that they encountered difficulties in trying to contact Allty. The Plaintiffs stated that they could only communicate with Allty via Antony or Annabel. I could not accept this part of their evidence as it was apparent that the Plaintiffs did, in fact, manage to contact Allty directly without going through Antony or Annabel. In an email dated 18 June 2013 from Chan to Antony, it was stated that she needed Antony’s “assistance to drop a note to Allty to inform him that [she] will be calling him”. Subsequently, Allty replied via email directly to Chan on 24 June 2013. This was the email in which Allty emphasised that there was no formal agreement to extend the term of D8’s franchise agreement as discussed above. In the circumstances, I was not convinced that the Plaintiffs were not able to contact Allty for the purpose of inviting him to give his evidence in the present proceedings. This was also consistent with Tan’s evidence that the Plaintiffs had not tried to contact Allty after the email dated 24 June 2013. Tan clarified that it was not a case where they had tried to contact Allty but there was no response.
[74] Finally, I note the presence of an entire agreement clause in D8’s franchise agreement, where it was stated that:
Both parties did not make any submissions on the effect of this clause on the oral variation by Allty or the handwritten note purportedly bearing Allty’s initials. I therefore say no more about this issue.
The counterclaims in S 420/2013
[75] D8 had two main counterclaims against the Plaintiffs in S420/2013:
(a) breach of the non-disclosure agreement (“the NDA”); and
(b) fraudulent misrepresentation.
Breach of the non-disclosure agreement
[77] In this respect, D8 referred to cl 7 of the NDA which stated that the parties agreed “to negotiate in good faith with each other” for the acquisition. With regard to the term of the NDA, D8 referred to cl 8 of the NDA, reproduced as follows:
On this basis, D8 submitted that the NDA gave rise to a one-year moratorium on the commencement of legal proceedings by either party. It was therefore argued that the Plaintiffs’ act in commencing S 420/2013 against D8 amounted to a breach of the NDA.
[78] In response, the Plaintiffs submitted that the one-year period only pertained to the protection of confidential information and did not extend to the agreement to negotiate in good faith. It was further argued that the parties to the NDA did not intend to negotiate in good faith for twelve months and the argument raised by D8 was merely an afterthought for the purpose of vexing the Plaintiffs.
[79] In HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd [2012] 4 SLR 738 (“HSBC v Toshin”), the Court of Appeal had the opportunity to explore the content of an express agreement between contracting parties to negotiate in good faith. On the facts of that case, the lease agreement incorporated a rent review mechanism, which stated that the parties “shall in good faith endeavour to agree on the prevailing market rental value of the Demised Premises” prior to the appointment of the valuers (at [6]). At the outset, the Court of Appeal drew a distinction between pre-contractual negotiations and negotiations between parties who were already in an existing relationship (at [37]). In the English decision of Walford v Miles [1992] 2 AC 128, Lord Ackner, in delivering the leading judgment of the House of Lords, observed that the concept of a duty to carry on negotiations in good faith was inherently repugnant to the adversarial position of the parties when involved in negotiations (at 138). Lord Ackner further stated that a duty to negotiate in good faith was therefore unworkable in practice as it was inherently inconsistent with the position of a negotiating party (at 138). The Court of Appeal in HSBC v Toshin sought to reason that the observations in Walford v Miles may not be strictly applicable to a situation where parties to an existing relationship commit themselves to a mechanism to resolve how the rental was to be set. Unlike parties who were merely in pre-contractual negotiations, the Court of Appeal observed that the landlord and tenant were “not free to simply walk away from the negotiating table for no rhyme or reason” (at [37]).
[80] Returning to the facts in the present case, while D8 had referred to the Court of Appeal decision in HSBC v Toshin, there were no arguments on the issue of whether the present case fell within the category of pre-contractual negotiations, as in the case of Walford v Miles, or the category of negotiations within the framework of an existing relationship, as in the case of HSBC v Toshin. The Plaintiffs, in defending the counterclaim for breach of the NDA, did not refer to the decision of HSBC v Toshin.
[81] Even if it was accepted that cl 7 of the NDA was capable of having some form of legal content, I am not prepared to accept D8’s submissions that it would give rise to a moratorium on the commencement of all legal proceedings. In HSBC v Toshin, the Court of Appeal observed (at [45]) that at its core, the concept of good faith encompasses the threshold subjective requirement of acting honestly, as well as the objective requirement of observing accepted commercial standards of fair dealing in the performance of the identified obligations. It was elaborated that this encompassed a duty to act fairly, having regard to the other party’s legitimate interests. More importantly, the Court of Appeal held (at [49]) that what constituted reasonable commercial standards of fair dealing in the context of an express contractual duty of good faith would depend heavily on “the commercial nature and purpose of the contract in question”.
[82] Applying the principles to the present case, it was reasonably clear that the main purpose of the NDA was to protect the confidentiality of the information supplied by D8 to TELG. Clause 7 of the NDA stated that the parties agreed “to negotiate in good faith with each other” for the acquisition of D8 by TELG. In this respect, D8’s interpretation of cl 7 does not accord with commercial sense and reality in so far as it sought to prevent any party from commencing legal proceedings regardless of the stage and progress of the negotiations. It would be highly unsatisfactory if parties were to reach a deadlock in negotiations one month into the term of the NDA and then be precluded from commencing legal proceedings when that was the only way in which the dispute could be resolved. It must not be overlooked that at the point in time when the NDA was entered into, both parties were already locked in a dispute over whether the term of D8’s franchise agreement had been varied to an open-ended term. In the circumstances, I was unable to accept D8’s submission that the parties to the NDA intended to forbear from suing for a period of one year from the specified date (ie, 2 January 2013). While the commencement of legal proceedings could, in certain circumstances, give rise to a breach of an express contractual duty of good faith, the finding of such liability would depend heavily on the facts of the particular case. This was quite different from D8’s argument that the contents of cl 7 of the NDA could give rise to a blanket moratorium on the commencement of all legal proceedings regardless of the circumstances.
[83] There was nothing amiss in the course of negotiations between D8 and TELG that could give rise to a breach of the duty to negotiate in good faith. At the point in time when TELG commenced S 420/2013 against D8, it was clear that the negotiations were not making headway. Both parties had fundamental disagreements in relation to the valuation of D8 and the price offered by TELG. In an email dated 7 April 2013, Lum informed Chan that the offer price by TELG was “still too low”. Apart from the issue concerning the offer price, Lum also brought up two other “commercial points” regarding the term sheet. The first was in relation to the due diligence process while the second concerned the proration of royalties on the part of D8. Lum concluded by stating that the term sheet had expired. Given that the negotiations between TELG and D8 had practically broken down at that juncture, the commencement of S 420/2013 to resolve the outstanding dispute between the parties should not give rise to any breach of the express contractual duty to negotiate in good faith. I therefore rejected D8’s arguments and dismissed the counterclaim in relation to the breach of cl 7 of the NDA.
Fraudulent misrepresentation
[84] D8’s other counterclaim against the Plaintiffs is in the tort of fraudulent misrepresentation. D8 relies on two separate representations that were made by the representatives of the Plaintiffs:
(a) the Plaintiffs’ instructions to Yeo to inform Lum not to worry and that “Antony and Annabel have set time aside to review [D8’s] franchise contract in June/July”;
(b) Chan’s email to Lum dated 15 November 2012 where she made the following representations:
D8 argued that these representations were made in order to lull Lum into not exercising the right to renew the franchise agreement for a further five years pursuant to cl 4 of the agreement. It was submitted that D8 suffered the loss of revenue stream for five years.
[85] The Court of Appeal in Panatron Pte Ltd and another v Lee Cheow Lee and another [2001] 2 SLR(R) 435 held at [14] that the essential elements of the tort of fraudulent misrepresentation were as follows:
(a) a representation of fact made by words or conduct;
(b) the representation must be made with the intention that it should be acted upon by the plaintiff, or by a class of persons which includes the plaintiff;
(c) the plaintiff acted upon the false statement;
(d) the plaintiff suffered damage by so doing; and
(e) the representation must be made with the knowledge that it is false; it must be wilfully false, or at least made in the absence of any genuine belief that it is true.
Looking at the evidence as a whole, I was not satisfied that the fifth element was made out. At the point in time when the representations were made, both parties were still in the process of engaging in negotiations. Lum took the position that the franchise agreement had been varied by Allty while TELG was of the view that it required further documents to ascertain if the term of the franchise agreement had, in fact, been varied. Given that the entire situation was in a state of flux, there was no evidence to suggest that the representation concerning the review of the franchise agreement was made with the knowledge that it was false or in the absence of any genuine belief that it was true. In an email dated 14 May 2012, Annabel asked for suggestions on how to deal with Lum’s queries regarding the term of the franchise agreement. She went on to state that she would “prefer to ignore it for two months”. In the circumstances, given that this email was sent after the said representation was made to Lum on 6 May 2012, there was no reason to suggest that the representation was made in the absence of any genuine belief that it was true. A delay of two months from 14 May 2012 would effectively mean that Annabel would deal with the matter in July, which was consistent with the representation made to Lum. In the circumstances, I was not satisfied that the representation concerning the review of the franchise agreement by Annabel and Antony could give rise to fraudulent misrepresentation.
[86] With regard to the second representation made by Chan in the email dated 15 November 2012, there was no evidence to suggest that it was made fraudulently. At that point in time, the Plaintiffs took the position that Lum’s contract had already expired on 26 October 2012 and this was consistent with their request to enter into a new franchise agreement with D8. In fact, on the very same afternoon the email was sent by Chan, Antony wrote to Lum to reiterate the point that there was no variation of the franchise agreement and that Allty, being a minority shareholder and employee of TLS, did not have the authority to vary the term of the franchise agreement. In that email, Antony concluded by advising Lum to deal with the new management team. This was consistent with Chan’s request for Lum to drop by her office for the purpose of discussing the renewal of the franchise. More importantly, Lum also acknowledged in the course of cross-examination that he did not accept Chan’s invitation. Lum was of the view that they were not the right people to talk to. In the circumstances, given that Lum did not accept Chan’s offer to negotiate and enter into a new franchise agreement, Lum could not now turn around and allege that the offer was made fraudulently. The fact that the Plaintiffs subsequently issued a letter of demand against D8 on 7 December 2012 was also explicable as Lum had failed to respond to Chan’s offer. I was not satisfied that Chan’s offer to Lum was wilfully false or made in the absence of any genuine belief that it was true. D8’s claim for fraudulent misrepresentation was therefore rejected.
[87] D8 also brought a counterclaim against the Plaintiffs for wrongful repudiation or termination of the franchise agreement. Nevertheless, both parties did not make any substantive arguments on this particular issue during the trial. Given that I have already found in favour of D8 in terms of the oral variation of the franchise agreement, I therefore need say no more about this issue.
The claims in S 822/2013
[88] I will now deal with the claims that were brought by the Plaintiffs against the Defendants in S 822/2013. For ease of reference, the claims could be categorised as follows:
(a) In relation to D2–D8:
(i) breach of the non-compete clause in the franchise agreements;
(ii) breach of the non-solicitation clause in relation to the customers;
(iii) breach of the non-solicitation clause in relation to the employees; and
(iv) breach of the confidentiality clause.
(b) In relation to D1:
(i) tort of inducing breach of contract.
(c) In relation to the Defendants (ie, D1–D8):
(i) tort of conspiracy by unlawful means.
I will deal with these claims individually before turning to the counterclaims by the Defendants against the Plaintiffs.
Breach of the non-compete clause
[89] The main dispute concerning the alleged breach of the non-compete clause was in relation to whether the clause should be struck down under the doctrine of restraint of trade. In this respect, D2–D8 argued that the Plaintiffs have not adduced any evidence of a legitimate proprietary interest sought to be protected by the non-compete clause. It was further submitted that the Plaintiffs also failed to demonstrate how the non-compete clause was reasonable in the interests of the parties and in the interests of the public. On this basis, D2–D8 argued that the non-compete clause should be struck down by the court.
[90] In CLAAS Medical Centre Pte Ltd v Ng Boon Ching [2010] 2 SLR 386 (“CLAAS Medical v Ng”), the Court of Appeal set out the following general principles applicable to covenants in restraint of trade at [44]:
The party seeking to enforce a covenant in restraint of trade bears the burden of proving that it has a legitimate proprietary interest to be protected by the covenant and that the covenant is reasonable in the interests of the parties and in the interests of the public. In the application of these legal principles, the court has to adopt a contextual approach and consider the specific circumstances of each case. Although there is no one single decisive factor, the courts have generally approached this issue by considering three main factors: the trade restrained, the geographical area and the duration of the restraint.
[91] As mentioned earlier, there were differences in the wording adopted in the non-compete clauses among the respective franchise agreements. I will first deal with the non-compete clause found in D2, D3 and D4’s franchise agreements. For ease of reference, the entire clause is reproduced as follows:
Although the geographical scope of the clause above was restricted to “within the Territory”, there was no definition of “Territory” in the franchise agreement. “Business” was defined in the interpretation clause as follows:
[92] The non-compete clause in D6 and D7’s franchise agreements was the same as that found in D2, D3 and D4’s franchise agreements but in D6 and D7’s franchise agreements, “Territory” was defined as “the geographical area of Singapore”. The term “Business” was defined as follows:
[93] Finally, the non-compete clause in D5 and D8’s franchise agreements differed from the rest as there was no reference to any geographical scope in the clause itself:
Curiously, although there was no reference to “Territory” in the non-compete clause, “Territory” was defined in cl 1.1 of the franchise agreement to mean “the geographical area of Singapore”.
[94] By way of summary, the differences which existed between the non-compete clauses are summarised below:
The non-compete clause in D2, D3, D4, D5 and D8’s franchise agreements had an unlimited geographical scope. On that basis alone, I was of the view that the scope of the clause was far too wide and that it had gone beyond what was necessary to protect the interest concerned. In the circumstances, the clause should not be upheld by the court.
[95] In respect of the non-compete clause in D6 and D7’s franchise agreements, the geographical scope was restricted to Singapore and the duration of the restraint was limited to 24 months after the expiry or termination of the agreement. In the circumstances, I would uphold the non-compete clause as being reasonable in the interests of the parties. In arriving at this conclusion, I took into account the fact that the franchise agreement in the present case was essentially a business contract entered into by corporate entities. This was not an employment contract between a corporate entity and an individual. There was no evidence to suggest any inequality in bargaining power between the contracting parties.
[96] Apart from that, both clauses were also limited to the business of providing courses of English literacy instruction, as well as educational programmes, products and other resources and services in accordance with the operation manual. There was no evidence to suggest that D6 and D7 were not able to trade outside the scope of the trade restraint. The courts generally adopt a relatively stricter approach towards restraint of trade covenants in the employment context (Man Financial (S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2008] 1 SLR(R) 663 at [81]).
[97] As mentioned above, the franchise agreement was effectively a business contract entered into by corporate entities. Kaske was trained in engineering and Jennifer was a practising lawyer at that point in time. In the circumstances, it was unlikely that the non-compete clause would have a significant adverse impact on their livelihood. I therefore held that the non-compete clause in D6 and D7’s franchise agreements to be reasonable in the interests of the parties.
[98] In respect of the issue of whether the non-compete clause was reasonable in the interests of the public, the Defendants relied on three main arguments. First, it was submitted that the non-compete clause was contrary to the interests of the public given that the education industry was one of the pillars of the Singapore economy. Second, it was argued that the Plaintiffs would effectively be allowed to monopolise the phonics business in the event that the clause was upheld. This would in turn restrict the market’s access to education services. Third, it was highlighted that the customers were young children and enforcing the restrictive covenant would mainly “serve to upset the children”. I was unable to accept these arguments as there was no reason why the education industry should be treated differently from all other industries. The attempt to characterise the Plaintiffs as having a monopoly over the phonics business in Singapore was also unsupported by any evidence. Education is also not all about phonics and language and certainly not all about the English language in any case.
[99] The Plaintiffs did not put forward any arguments on the doctrine of severance, at least in relation to the non-compete clause in D2, D3, D4, D5 and D8’s franchise agreements. I therefore did not have to deal with this issue.
[100] Having found that the non-compete clause in D6 and D7’s franchise agreements ought to be upheld by the court, the only remaining issue was whether D6 and D7 had breached this clause. D7 is operating a MES centre and the MES system is a system of teaching English through phonics. In this regard, D7’s running of the MES centre would therefore fall within the scope of the non-compete clause.
[101] With respect to D6, things were slightly more complicated. Unlike D7, D6 is now a dormant company because it entered into an agreement to sell the business to D1. In other words, D6 was no longer actively trading and the MES centres under Kaske’s control were being operated by D1 instead. It was therefore argued that D1 was not a contracting party to the franchise agreements and could not be held liable for breach of the clauses in the franchise agreements. In my view, such an argument could not be allowed to stand as that would be akin to giving contracting parties a free hand in using the corporate vehicle as an instrument of fraud to avoid existing obligations. On the facts of the present case, Kaske had relied on D1 as a corporate vehicle to avoid being bound by the clauses of the franchise agreement. In a bid to further distance himself from D1, Kaske interposed multiple parties in the chain of ownership. Nevertheless, it was clear from the facts that these parties were mere nominees of Kaske. In fact, David, the director of D1, went so far as to concede that he was merely a “puppet” of Kaske. Although Kaske attempted to justify the setting up of D1 by stating that he was merely trying to “protect” and “ring fence” his existing investments in D2–D6, that did not change the fact that Kaske was effectively using the corporate vehicle of D1 to surreptitiously evade the existing obligations imposed on D2–D6. In the circumstances, I was of the view that this was an abuse of the corporate vehicle, which justified the lifting of the corporate veil to extend liability to D1.
Breach of the non-solicitation clause in relation to the customers
[102] The parties did not make any submissions on whether the non-solicitation aspect of the restrictive covenant should be struck down. All arguments concerning the doctrine of restraint of trade were made in the context of the non-compete clause, as opposed to the non-solicitation clause. I therefore proceeded on the basis that both parties did not contest the fact that the non-solicitation aspect of the clause would be upheld by the court.
[103] With the exception of the duration of restraint, the non-solicitation of customers clause was worded similarly across D2–D8’s franchise agreements:
In my judgment, there was sufficient evidence to prove that D2–D8 actively solicited their previous customers under the ICR system. The general tenor of the evidence throughout the course of the trial suggested that the shift from the ICR system to the MES system was meant to be as seamless and fuss-free as possible. Nicola Jane Smith (“Nicola”), a teacher who used to be employed by D3 and subsequently moved to D1 after the sale of the business from D3 to D1, gave evidence to the effect that a majority of the students in the classes remained the same. Apart from that, the schedule of classes and the respective teachers also remained largely unchanged after the switch to the MES system.
[104] In a letter sent by MES to the parents of the students, it was stated that the fees structure and the curriculum would remain aligned after the switch. The parents were also promised that their children would remain in the same class, with the same teacher at the same designated day and time. This was consistent with the evidence given by Nicola. Apart from that, the parents were also expressly invited to convert to the MES programme. They were assured of a seamless transition and, to further sweeten the deal, the students who converted to the MES programme were promised free gifts and two free lessons. I was satisfied that the Defendants did actively solicit their previous students under the ICR system. Breach of the non-solicitation of customers clause was therefore established. For the avoidance of doubt, the observations in relation to the lifting of the corporate veil as set out above would also apply to the breach of the non-solicitation of customers clause.
Breach of the non-solicitation clause in relation to the employees

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

Total English Learning Global Pte Ltd and another v Kids Counsel Pte Ltd and another suit

Laws this judgment relies on

Grounds of decision

Introduction

The facts

Background to the ICR system

The franchisees

D2–D6

D7

D8

The franchisors and the purported assignment

The dispute over the purported assignment

The incorporation of D1

The termination of the franchise agreements

The transition to the My English School (“MES”) system

The commencement of S 822/2013

The dispute over D8’s franchise agreement

The decision

The validity of the purported assignment

Whether the franchise agreement was assignable as a whole

Whether there was a valid notice of assignment

The “no-assignment” clause

The claim in S 420/2013

The counterclaims in S 420/2013

Breach of the non-disclosure agreement

Fraudulent misrepresentation

The claims in S 822/2013

Breach of the non-compete clause

Breach of the non-solicitation clause in relation to the customers

Breach of the non-solicitation clause in relation to the employees