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Singapore Court of Appeal stresses limits in interpretation of contracts

A recent Singapore Court of Appeal judgment showed the importance of "conceptual clarity, evidential discipline and procedural rigour" in interpreting contracts, the judge said.23 Dec 2016

The appeal related to a contract between two parties that collaborated to help a Chinese company, Goldrooster, become listed on the Frankfurt Stock Exchange in return for shares in the company.

Once the company was successfully listed, 5.5 million shares were to be paid to the first party, Malaysian businessman Yap Son On, who would then pay some of them to the second party, a Chinese business woman called Ding Pei Zhen. The dispute arose over how many shares Ding was entitled to, and what the contract, or allotment agreement, between them actually said on the matter.

The contract consisted of eight handwritten lines in Mandarin at the bottom of a page of a company prospectus. This contact, "which could not have taken long to draft", led to an eight-day inquiry that brought "less, rather than more, clarity", chief justice Sundaresh Menon said.

The contract stated that the parties’ combined entitlement of post-listed shares would be 19%, out of which 10.35% were to be transferred from Yap to Ding. The main issue in this appeal centred on the interpretation of that '19%' meant. Ding believed that it referred to the total number of shares received by Yap, while Yap said it referred to the total number of post-listing shares in Goldrooster.

The Court of Appeal allowed Yap's appeal against a High Court ruling in Ding's favour.

Menon said that extrinsic evidence should only be allowed to interpret a contract if there was ambiguity in the language, but that tthe words used in the allotment agreement were clear and unequivocal.

Menon said that such evidence also needs to be pleaded with precision, and will only be admitted if it is relevant, reasonably available to all parties and relates to a clear or obvious context.

A "contextual approach" towards contracts can lead to greater uncertainty and a "needless increase in the cost of litigation if parties treated the contextual approach as giving a licence to admit all manner of extrinsic evidence", he said.

The High Court was wrong to allow Ding to substitute the term 19% with 5.5 million shares in the contract, as this crossed the line from interpretation to a variation of the contract, he said.

This is not a "retreat to literalism" Menon said. "In ascertaining the meaning that the words of a contract would convey to a reasonable person with the relevant background knowledge, the words used by the parties occupy primacy of place."

The judgment also clarified an earlier decision on the treatment of agreements that were concluded in another language, and later translated to English for scrutiny in trial. This would involve a "common sense approach that considers the reasonable and probable expectations that parties would have had". However, the Court should not expect that parties to such agreements to be perfectly fluent in "the technical niceties of the English language," the judgment said.