Article: Measure of Loss for Breach of Warranty in Sale of Shares

If A buys shares from B, and B made certain warranties to A about the company which turned out to be false, A can sue B for breach of warranty. Separately, if B had made misrepresentations to A to induce A to purchase the shares, A can sue B for misrepresentation in addition to breach of contract.

This may occur for example where it was falsely warranted that the company’s profits were higher than they in fact were, or that certain machinery or property of the company was in good working condition and free of defects.

How is the loss measured in such a scenario?

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Ochroid Trading Ltd and another v Chua Siok Lui [2018] SGCA 5 – illegality, contracts and unjust enrichment

Significance

In Ochroid Trading Ltd and another v Chua Siok Lui (trading as VIE Import & Export) [2018] SGCA 5 and another (“Ochroid”), the Court of Appeal established a structured framework for dealing with illegality and contracts in Singapore.

In doing so, the Court categorically rejected the ‘range of factors’ test adopted by the UK Supreme Court in Patel v Mirza [2016] UKSC 42 (“Patel”) and subsequently reaffirmed the approach set out in Ting Siew May v Boon Lay Choo and another [2014] SGCA 28 (“Ting Siew May”). The Court also established that a claim in unjust enrichment as an independent cause of action would not be barred due to a claimant’s reliance on the illegal contract, thus rejecting the contrary position taken previously in Top Ten Entertainment Pte Ltd v Lucky Red Investments [2004] 4 SLR(R) 559 (“Top Ten Entertainment”).

 

Facts

The appellants (Ochroid Trading) advanced money to the respondents (VIE Import and Export) pursuant to several investment loan agreements, which provided that the loans were to be repaid with a “profit” on the stipulated date. When the respondents defaulted, the appellants sued for breach of contract to recover both the loan amount and the “profit”, and also advanced an alternative claim in unjust enrichment for only the loan amount itself. The appellants further brought claims in tort for fraudulent misrepresentation and conspiracy to defraud. The High Court rejected the appellants’ claims on the basis that the loan agreements were prohibited under the Moneylenders Act (Cap 188) (“MLA“) as the appellants’ were not licensed moneylenders. Their alternative claim in unjust enrichment was also dismissed as it was seen to be a “backdoor attempt” to enforce the illegal contracts. Lastly, their claims in tort were found to be wholly unmeritorious. Upon appeal, the Court of Appeal dismissed the appeal primarily on the same grounds.

 

Key Principles

The Court of Appeal adopted a two-stage inquiry in dealing with illegality:

  • First, it must be established whether the contract is prohibited under a statute (impliedly or expressly) and/or an established head of common law public policy. If this is established, no recovery in contract can be made. However, this strict position does not apply to contracts which are not unlawful per se but are entered into with the object of committing an illegal act. For such contracts and only such contracts, the principle of proportionality elucidated in Ting Siew May would apply in determining their enforceability. If the illegality is insignificant and it would be disproportionate to hold the contract unenforceable, recovery may still be possible.
  • Second, even if the contract is prohibited, a claimant could nevertheless recover benefits on a restitutionary basis, through three possible avenues:
  1. If the parties are not in pari delicto (ie. the claimant was less blameworthy than the defendant). This only applies in three established situations:
    1. Where the contract is held void by a statute protecting the class of persons to which the claimant belongs;
    2. Where the claimant entered into the contract under fraud, duress or oppression;
    3. Where the claimant entered into the contract as a result of a mistake as to the facts constituting the illegality;
  2. Through the doctrine of locus poenitentiae, which would apply if there was a ‘genuine and voluntary’ withdrawal from the illegal enterprise before the illegal purpose is effected. This would not apply where the illegal purpose was frustrated by circumstances outside the claimant’s control, or was rendered unnecessary.
  3. Through an independent cause of action (ie. the claimant does not need to rely on the illegal transaction to make out his cause of action). This could be a claim in unjust enrichment, or a claim in tort or the law of trusts. However, this is subject to whether allowing such a claim to succeed to result in undermining the legislative intent behind the law prohibiting the illegal contract in the first place.

 

The first stage – is the contract prohibited?

The Court of Appeal considered whether to incorporate into the first stage inquiry the English approach towards illegality established in Patel – better known as the ‘range of factors’ test. The Patel approach applies to only common law illegality and not contracts prohibited by statute. It allows the illegality defence to succeed if enforcing the claim would undermine the legal system. Determining whether this is the case requires the court to conduct a ‘balancing exercise’ and exercise broad discretion by considering the legislative intent of the law which has been broken, any relevant public policy, and whether it would be a proportionate response to deny the claim. This differs from the current ‘Ting Siew May’ approach in Singapore, where there can strictly be no recovery under contract if an agreement is held to be void due to either statutory or common law illegality. In definitively rejecting Patel, the Court took the view that there was no principled reason for adopting different approaches towards common law-prohibited and statute-prohibited contracts. Thus, the law on the first stage of the inquiry in determining whether a contract is prohibited remains unchanged.

 

The second stage – can the claimant still recover on a restitutionary basis?

The first and second avenues for recovery were not applicable to the present case, and while the Court offered the view that the doctrine of locus poenitentiae only applied if there was a genuine and voluntary withdrawal from the illegal enterprise, it declined to make a definitive pronouncement on the issue.

For the third avenue, Top Ten Entertainment was the only Singapore case prior which had touched on restitutionary recovery through unjust enrichment – albeit through obiter remarks that the “reliance principle” established in Tinsley v Mulligan [1994] 1 AC 340 would preclude a claim in unjust enrichment. The reliance principle is the notion that a claimant cannot succeed if he has to “rely on” the illegal transaction in order to make out his cause of action.

In the present case, the Court rejected the Top Ten Entertainment position on the basis that the reliance on the illegal contract in raising a claim for unjust enrichment is simply a “procedural” one. A restitutionary claim, even if technically “relying” on the illegal contract, merely allows the parties to revert to the position they would have been in if not for entering the illegal contract, as opposed to allowing the claimant to profit from enforcing the agreement.

The Court found that the appellants had satisfied the requirements for a claim in unjust enrichment (that the respondents had been enriched, that the enrichment was at the appellants’ expense, and that the enrichment was unjust as there was a total failure of consideration as the respondents had failed to repay the loans which was the promised counter-performance based on which the loans were disbursed).

However, the independent claim in unjust enrichment could be defeated by the defence of illegality if permitting the recovery of the benefit would stultify or undermine the fundamental policy that rendered the the underlying contract void and unenforceable in the first place.

The appellants’ claim did not succeed as it was held that permitting the restitution of the principal sums would render the prohibition in s 15 of the MLA ineffectual. Allowing unlicensed moneylenders to recover compensation through a claim in unjust enrichment cannot be allowed as it would essentially undermine the fundamental social and public policy behind the MLA, which was enacted to tackle the ‘social menace’ of illegal moneylending in Singapore.

(This case summary was written by Nee Yingxin.)

Case Update: Cavendish Square Holding BV v Talal El Makdessi (Cavendish) and ParkingEye Limited v Beavis UKSC – penalty clauses

Cavendish Square Holding BV v Talal El Makdessi (Cavendish) and ParkingEye Limited v Beavis [2015] UKSC 67

Significance: the true test for whether a clause is unenforceable as a penalty clause is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

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