Gateway 21 Pte Ltd v Gateway 21 Consultants Pte Ltd (Formerly Known as Gateway 21 Business Consultants Pte Ltd)

Suit No:	DC Suit 2623/2006
Decision Date:	18 Jan 2010
Court:	District Court
Coram:	Loo Ngan Chor
Counsel:	Solomon Richard, for the plaintiff, Rasanathan and Luo Ling Ling for the defendant

1. This suit concerned a dispute arising out of the sale by the plaintiff to the defendant of the plaintiff’s clients.

2. The plaintiff was a company engaged in providing corporate secretarial and business advisory services. It was incorporated on 20^th November 1999.

3. The defendant is in the business of providing business management and consultancy, taxation, secretarial and book keeping services. It was incorporated on 17^th September 2004 specially to take over the plaintiff’s then clients. On incorporation, the defendant’s name was Gateway 21 Business Consultants Pte Ltd.

4. The plaintiff, through Ms Valerie Lim Lee Huang (“Valerie”) had advertised the sale of their clients through a broker. The plaintiff said that they received a number of serious responses but eventually decided to sell the clients to the defendant, which had acted through Mr Luk Chiew Peng (“Luk”).

5. The parties entered into a written agreement dated 5^th October 2004[note: i] (“the sale agreement”). The sale agreement was prepared by the defendant’s lawyers. It was signed by the defendant under their old name. The clientele to be sold by the plaintiff to the defendant is in the First Schedule[note: ii] to the sale agreement.

6. The price agreed for the sale was $200,000. The clients were to be transferred on the transfer date which was fixed for 1^st January 2005. Under clause 3.1 of the sale agreement, payment of the consideration was to be made by ten instalments. The first instalment was $5000, which was paid upon the defendant’s issuing a letter of intent. The second instalment of $35,000 was paid on the signing of the sale agreement. The subsequent eight instalments were to be made, between 31^st March 2005 and 31^st December 2006, at the end of each of the quarters for the period just mentioned[note: iii]. The third and fourth instalments of $25,000 each were also paid, although the plaintiff said that these were paid late. By the fourth instalment, the defendant had paid the plaintiff $90,000 towards the consideration of $200,000. The balance of the consideration outstanding was $110,000/=. This constituted the main claim of the plaintiff in this suit.

7. A proviso to clause 3.1 of the sale agreement provided that the instalments were to be paid subject to actual annual turnover meeting the plaintiff’s “guaranteed annual turnover” of $180,000 and $220,000 for the years ending 2005 and 2006, respectively. The sale agreement contained claw-back provisions with the effect of achieving a reduction of the consideration should the “actual turnover” for 2005 and 2006 fall below the supposed guaranteed annual turnover.

8. The defendant’s case is that the actual turnover that they achieved for 2005 and 2006 fell far short of the plaintiff’s “guarantee”. By an amendment, made at trial with my leave, to their Defence and Counter-claim, the defendant maintained that (a) against the guaranteed turnover of $180,000 for 2005, the actual turnover was $125,966.89 and (b) against the guaranteed turnover of $220,000 for 2006, the actual turnover was $95,971. Thus, the defendant alleged, the resultant shortfalls were respectively $54,033.11 and $124,029, totalling $178,062.11. The defendant wanted the consideration of $200,000 reduced by $178,062.11 so that the revised consideration would be $21,937.89. Having paid $90,000, they therefore counter-claimed $68,062.11.[note: iv]

9. In addition, the defendant counter-claimed for two sums of $28,898.97 (“the first sum”) and $29,552.63 (“the second sum”)[note: v]. In respect of the first sum, the plaintiff had in 2004 billed their clients for secretarial services to be done, so the defendant claimed, in 2005. As for the second sum, the defendant had requested the plaintiff to continue to bill the transferred clients in 2005 in the plaintiff’s name. The second sum represented the balance of what the defendant said had been collected by the plaintiff on the defendant’s behalf, which the plaintiff had not handed over.

10. Having made provisions for instalment payments of the consideration and the proviso, the rest of clause 3 of the sale agreement went on to deal with the adjustments to be made respecting any supposed shortfalls, how and when they were to be made and the verification process of any alleged supposed shortfall. Leaving aside clause 3.9 for the moment – I explore this at [38] below - it would be fair to summarise the “adjustment” provisions, clause 3.2 to 3.4, by saying that the defendant was to continue paying the instalment payments of the consideration to the plaintiff. In the relevant parts, these three paragraphs read as follows:

3.2 … the consideration required to be paid by the purchaser in progress payments … shall be adjusted by way of set-off and/or deduction in the next progress payment due to the vendor and the amount to be adjusted shall be the difference between the vendor’s guaranteed annual turnover and the actual turnover achieved by the purchaser for the relevant year.

3.3 In the event that the actual annual turnover for the year ending 31^st December 2005 falls short of the vendor’s guaranteed annual turnover for that year ie the sum of … (S$180,000) the purchaser shall be entitled to set-off the shortfall against the amount payable to the vendor in the next progress payment ie 31^st December 2005.

3.4 In the event that the actual annual turnover for the year ending 31^st December 2006 falls short of the vendor’s guaranteed annual turnover for that year ie the sum of $220,000 and if the shortfall exceeds the amount payable on 31^st December 2006, no payment shall be made by the purchaser to the vendor … but instead the vendor and/or the shareholders shall pay the shortfall amount (ie the shortfall less amount payable on 31 December 2006) to the purchaser on or before 31^st January 2007 …

11. Clause 3.8 of the sale agreement provides the mechanism for verifying an alleged shortfall by requiring the purchaser to “furnish to the vendor copies of invoices, bank deposits and credit notes, correspondence with the clientele during the 24 months’ period from the transfer date.”

12. Clause 3.9 goes on to say “that in the event that the actual annual turnover for the respective years ending 31^st December 2005 and/or 31^st December 2006 is less than the vendor’s guaranteed annual turnover … the purchaser shall not have to pay the instalment payments [for 2005 and 2006] (as the case may be) pending all adjustments via set-offs and deductions are duly made.”

13. Clause 13 makes a number of provisions relating to warranties. Clause 13.5(a) goes on to say that “the vendor warrants and guarantees” the two amounts jointly referred to in the proviso to clause 3.1 as the guaranteed annual turnover (referred to at [7] above). At paragraph (b), the plaintiff warranted that the consideration of $200,000 was just right and expressly excluded “the principle of caveat emptor”. At paragraph (d), the plaintiff was required to co-operate with the defendant by disclosing “all information required by the purchaser during their due diligence exercise into the business”.

14. Clause 18.3 was an “entire agreement clause” which said: “This agreement and the schedules to it shall constitute the entire agreement and understanding between the parties with respect to all matters which are referred to and shall supercede any previous agreement between the parties in relation to the matters referred to in the agreement.”

15. Parties spent much time canvassing issues that had to do with the background to the sale agreement, including the pre-contractual negotiations. If the object of this was to assist me in understanding the sale agreement, this was largely an exercise in futility. In the nature of a commercial contract, particularly one containing an entire agreement clause such as the sale agreement, extrinsic evidence to lend meaning to the contract is off limits. See Zurich Insurance (Singapore Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] SGCA 27 from [114] to [132], particularly, [132].

16. The key to understanding the dispute lay in the threshold issue: what does the guaranteed annual turnover mean? Unfortunately, this was not an issue that either party attempted to answer.

17. That the word “guarantee” in the sale agreement was used, in my view, in the sense of a “warranty” is clear. Evidently, it did not mean a collateral promise for another person’s liability. Can one guarantee or warrant, with all seriousness and without qualification, that a future turnover will be $x? Looked at in another way, if such a guarantee were given, can it be taken seriously? I should think not in the circumstances of this case, as I shall explain. Had the guarantee or warranty been expressly qualified by a proviso that other things be equal, it could possibly be taken more seriously except that it would open up a Pandora’s box of exceptions larger than the guarantee or warranty itself so that the qualification itself would have to be carefully defined.

18. The plaintiff had no crystal ball, not that the law takes account of mirages in any crystal ball. There would obviously be forces beyond the control of the plaintiff, such as the state of the economy or of demand and supply, which would affect the outcome of whether or not the promised turnover would happen. Even were other things equal, the plaintiff was no longer in the driver’s seat, as it were; control over the management and operations of the business impacting the transferred custom passed to the defendants.

19. I propose to take a leaf from the law on representations. First, like a representation, a warranty is meant to be relied on by another and to induce the other to act. A representation, like a warranty, is merely a cause, of which the inducement is the effect. Secondly, as concepts go, representations and warranties are logically overlapping, even as one recognizes that warranties could have a promissory character. It is established law that an actionable representation must be one of present or past fact. Statements of opinion and salesmen’s puffs are not actionable. See Bestland Development Pte Ltd v Thasin Development Ltd [1991] SGHC 27 at pages 4 and 7 of the report, in particular.

20. I shall discuss the question of whether the guaranteed turnover was an actionable statement of opinion at [27] to [28] below.

21. Purely as an issue of interpreting the sale agreement, objectively and on its own terms without reference to extrinsic material, I am of the view that, like a representation, the supposed guaranteed annual turnover was really in the nature of a salesman’s puff and not an actionable warranty. Bearing in mind that the Misrepresentation Act has since been enacted, and the reservations of Zurich Insurance on post-contractual conduct, it has been said by Denning LJ in Oscar Chess Ltd v Williams [1957] 1 AER 325 at 328 and 329:

… The material distinction here is between a statement which is a term of the contract and a statement which is only an innocent misrepresentation. This distinction is best expressed by the ruling of Holt CJ, “Was it intended as a warranty or not?”, using the word “warranty there in its ordinary English meaning: because it gives the exact shade of meaning that is required.

… The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts…

… So also if the seller makes a promise about something which is or should be within his own control: see Birch v Paramount Estates, Ltd (7) ((1956), 16 Estates Gazette 396), decided on Oct 2, 1956, in this court, where the seller stated that the house would be as good as the show house.

22. Even if I were entitled to look at the extrinsic evidence, at most within a narrow band, to form a view about the true nature of the guaranteed turnover, my view in [21] does not change. The extrinsic evidence to which I advert: (a) is the fact is that Valerie herself had offered to give a “guarantee” while she marketed her clientele through her broker[note: vi]; (b) Moreover, Valerie tried to back away from giving the guaranteed turnover in question when she presumably became conscious of how unrealistic the purported guarantee was (such being the character of all puffs). In her email dated 1^st October 2004 to Luk, Valerie said: “Almost half a million dollars guarantee over a long period of 24 months is rather onerous as no one can predict the future nor avoid any unforeseen circumstances. Added with a progressive payment over 9 instalments, which could be set off for shortfall, this could result in my getting a far lower sale price, while protecting fully the purchaser’s interest.”[note: vii]; and (c) Finally, as can be seen under the next sub-heading, I believe that the defendant did conduct their due diligence. Thus, even the relevant matrix of evidence beyond the cold print of the sale agreement pointed to the fact that the parties understood the guaranteed turnover to be no more than a representation of an uncertain future event over which the plaintiff had no control.

23. Luk denied that the defendant did any due diligence equal to the name. He said that he had only done a cursory check, that he had not done any proper due diligence because of the plaintiff’s guaranteed turnover.[note: viii] I am conscious of the fact that the sale agreement was one for the purchase of “assets” as opposed to the shares in a company so that the level of due diligence required would be of a lower order when compared with the latter situation where a take-over was involved. Be that as it may, the issue here is whether the defendant would have done a level of due diligence that sufficed for the purpose of assuring themselves that the plaintiff’s custom was worth paying the sum of $200,000 for.

24. In spite of Luk’s testimonial protestations to the contrary, I find it objectively incredible that Luk did not do his due diligence (parenthetically, on the facts of this case, before he signed the sale agreement). He was an accountant of 19 years standing. Luk and his wife, who was also an accountant, both attended at the plaintiff’s office on 16^th September 2004 expressly for the purpose of inspecting the plaintiff’s documents.

25. That the defendant did do more than a cursory due diligence inspection is evinced by two documents from Luk, both dated 15^th September 2004, which pointed to the defendant’s wanting to perform a due diligence. The first document was a letter from Luk’s other company called Coleads Business Consultants Pte Ltd to the plaintiff’s broker providing, apparently for the purpose of the due diligence inspection, an undertaking not to disclose any confidential information.[note: ix] By his email to Valerie, Luk said this: “For the due diligence exercise tomorrow, I would be extremely grateful if Valerie could arrange for the following to be made available: (a) list of clientele (ideally this should be the list to be included in the S&P agreement (b) estimated annual fee for each clientele for the year 2005 (c) latest accounts receivable, if available (This is to see the payment trend) (d) client’s secretarial records (e) Company’s invoices”[note: x].

26. I am therefore satisfied that Luk, in the company of his wife, did in fact perform the defendant’s due diligence checks before entering into the sale agreement.

27. Even if I were wrong, and the defendant did not perform their checks of an order they should have, the defendant cannot, in good faith, now be heard to say that (a) they did not in fact do the due diligence that they were contractually entitled to do pursuant to clause 13.5(d); and (b) they did not themselves think that the guaranteed turnover was achievable based on whatever information and documents were supplied by the plaintiff to the defendant during the due diligence inspection on 16^th September.

28. Adverting to Bowen LJ’s dictum cited by Bestland, the case referred to at [19] above, the defendant knew, or at any rate should have known, whatever information was available to the plaintiff which led to the guaranteed turnover clause. The guaranteed turnover clause, qua a statement of opinion of the plaintiff, remained an opinion rather than rather than a statement of an operative fact.

29. The defendant was or should have been aware of what they set about to purchase from the plaintiff. The question of caveat emptor (ie, let the buyer beware), the application of which was expressly excluded by the sale agreement, does not arise as the buyer was aware.

30. In case I am wrong above, and the guaranteed turnover is actionable in law, I now proceed to set out my other findings of fact.

31. The plaintiff did not dispute that there was a shortfall as alleged by the defendant[note: xi]. Although the defendant amended their Defence and Counter-claim, the plaintiff did not choose to amend their Reply and Defence to Counter-claim.

32. The question that falls to be determined is really what brought about the shortfall. The defendant made myriad complaints ranging from how clients pulled out their custom from the defendant, had never given business to the plaintiff to start with or had ceased after the transfer date, how the plaintiff’s audited accounts were exaggerated or otherwise erroneous in that they included disbursements and failed to comply with the Singapore Financial Reporting Standards issued by the Council on Corporate Disclosure.[note: xii] The plaintiff’s position, as set out in their Reply, was that the defendant had been generally slipshod and tardy in their dealings with the transferred custom which resulted in clients losing confidence in the defendant.

33. Parties implicitly went into the foregoing factual issues without articulating the legal principle involved. In my view, with respect, they were right to do so although it would have been useful had they articulated why so far as the defendant’s obligations were concerned. The plaintiff’s guaranteed annual turnover was worded as an absolute guarantee. It was literally independent of any question whether either party was to be blamed for any shortfall. Nonetheless, I take it that the defendant accepted that they had a duty in law not to act in any way that might stymie the sale agreement[note: xiii]. In Barque Quilpu Ltd v Brown [1904] 2 KB 264, VaughanWilliams LJ stated that:

There is an implied contract by each party that he will not do anything to prevent the other party from performing a contract or to delay him in performing it. I agree that generally such a term is by law imported into every contract.

34. The burden of proof that clients were lost through no fault of the defendant was clearly on the defendant as what they had done with the transferred custom was well within their knowledge: s 108 Evidence Act. The defendant did not make any serious attempt to prove that clients were lost for reasons that had nothing to do with poor service on their part. None of the lost clients was called in defence.

35. On the other hand, certain undisputed factors objectively corroborated the plaintiff’s counter-point that the defendant’s service was poor in respect of the custom taken over from the plaintiff. First, the defendant admittedly required the plaintiff’s assistance, well into 2005, to issue bills in respect of the transferred clientele. Indeed, this was their very reason for the defendant’s counter-claim for the second sum (at [9] above). The defendant’s remarkably weak excuse was that there was a delay in their printing their letter heads.[note: xiv] Secondly, the defendant had further enlarged its secretarial practice by a merger with Nuovo Consulting Pte Ltd on 1^st January 2005, which coincided with the transfer date of the plaintiff’s custom to the defendant, resulting in the defendant’s total billing per annum of S$900,000[note: xv]. If there was a serious deficit in the turnover of the plaintiff’s transferred custom, the substantial billings must have been the product of much attention to that other part of the defendant’s business by the defendant.

36. It is my finding that in all probability the shortfall in the turnover was substantially caused by the defendant’s inattention to the clientele that they had bought from the plaintiff.

37. The defendant unilaterally suspended all instalment payments after June 2005. Having fired an opening salvo on 2^nd March 2005[note: xvi], Luk made the defendant’s intention clear in his letter dated 18^th October 2005[note: xvii]. The defendant was suspending all further payments.

38. I am of the view that the defendant was in breach of the contract in withholding further instalments after the June 2005 instalment. The defendant was in breach on several fronts. First, they acted on the basis of the guaranteed turnover, which did not impose a valid obligation in law on the plaintiff and thus vested the defendant with no corresponding rights purportedly under clause 3.9 of the sale agreement. Secondly, in purporting to withhold payment, the defendant altogether failed to furnish the plaintiff with relevant documents in support of their allegation of a shortfall as required by clause 3.8. Thirdly, and alternatively, the shortfall was brought about substantially by the defendant’s own inability to work at the transferred custom. Fourthly, clause 3.9 grated against the sense of clause 3.2 to 3.4 and 3.8, even making some allowance for the fact that the latter clauses too were logically inconsistent. It is reasonably clear that these last-mentioned clauses of the sale agreement envisaged that all adjustments would be made retrospectively when the figures had become crystallized when the actual annual turnover was known. Clause 3.9 purported to say that the defendant was entitled to withhold all instalments (from the inception) when actual annual turnover fell short of the guaranteed sums. The proposition about withholding all instalments was meant to be prospectively applicable. Yet since reliance for such withholding was to be based on the actual annual turnover, this could only happen retrospectively. Clause 3.9 was illogical in itself and in the context of clause 3 as a whole. Hence, clause 3.9 was meaningless. If I were required to breathe meaning into it, the interpretation most favourable to the defendant would only be that it could only operate, at the earliest, in 2006 after the actual annual turnover for 2005 was known. Even on this basis, the defendant had no contractual right to withhold the September and December 2005 instalments.

39. For the reasons given above, I find in favour of the plaintiff in respect of their claim for $110,000 against the defendant. I dismiss the defendant’s counter-claim for $68,062.11 for the alleged over-payment of the consideration.

40. The defendant wants the plaintiff to pay the first sum (S29,898.97[note: xviii]). This is the amount the defendant says that the plaintiff billed before the date of transfer when the work was carried out post-transfer in 2005 by the defendant. The list of bills produced by the defendant showed bills going back to 1^st January 2004 with one bill dated 31^st December 2004. The description given by the defendant for each bill was purportedly for “corporate secretarial services from 1.1.2005 to 23.12.2005.” I do not believe that the plaintiff would have rendered bills going back to 1^st January 2004 for work to be done wholly in 2005. While it was possible that for some bills, some work had straddled 2004 and 2005 and been done by both parties, there was no evidence as to who did what part of the work for which parts of this claim. The sale agreement contained no provision for such a payment inasmuch as clause 11.4 of the sale agreement envisaged only bills rendered by the plaintiff where the work was wholly done by the defendant. Hence, contra proferentum.

41. In respect of the amount of $29,552.63 (the second sum) claimed by the defendant, this was allegedly for payments billed and received by the plaintiff in 2005 on the defendant’s request. The defendant says that the second sum was the balance that the plaintiff had failed to pay the defendant. The plaintiff’s position in regard to this claim was simply a denial that there was such a balance due. In my view, the plaintiff had the burden of proving that all the amounts billed had been paid over to the defendant. None was seriously forthcoming[note: xix]. In the circumstances, I find that in all probability the second sum was indeed a balance sum billed by the plaintiff that they should have paid, but failed to pay, to the defendant. I allow the defendant’s counter-claim for the second sum.

42. My judgment is therefore that: the defendant do pay the plaintiff the sum of $110,000 together with interest of 5.33% per annum on that sum from the date of the writ to the date of this judgment; and further that the plaintiff do pay the defendant the sum of $29,552.63 together with interest of 5.33% per annum on that sum from the date of the original counter-claim to the date of this judgment. The counter-claim for $68,062.11 and for the first sum is dismissed.

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[note: i]DB 181 – 203.

[note: ii]DB 197 – 122.

[note: iii]Clause 3.1 of the sale agreement, DB 183 – 185.

[note: iv]BP 77.

[note: v]BP 76.

[note: vi]DB 4 – 5.

[note: vii]DB 14 – 15, at 15.

[note: viii]NE 224, 228 – 232.

[note: ix]DB 39 – 40.

[note: x]DB 41.

[note: xi]Paragraph 30 of the Defence to Counter-claim at BP58.