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Dispute Resolution
Highlights
When Is An Innocent Party Entitled To
Introduction
Terminate A Contract?
...................................................1
Introduction
Brief Facts It is often not difficult deciding if a party can terminate a contract if the
...................................................1 written document contains express terms dealing with parties’ rights in
this regard. The degree of difficulty increases when the contract is silent
Issue and one has to decide based on the facts whether there is a right to
...................................................2 terminate at common law.
Ruling Of The Court The decision of the Singapore Court of Appeal in Sports Connection Pte
...................................................2 Ltd v Deuter Sports GmbH [2009] SGCA 22 is therefore of importance to
lawyers who are routinely faced with this question. The decision below not
only conveniently summarises the law in Singapore in this regard but also
Concluding Words considers and lays down useful guidance on the following issues:
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a) What is the relationship between the condition-warranty approach
and the Hongkong Fir approach?
c) What are the relevant factors when ascertaining whether or not the
breach is sufficiently serious such that the innocent party is entitled
to terminate the contract pursuant to the Hongkong Fir approach?
Rajah & Tann LLP’s Francis Xavier SC, Mohammed Reza and Tang Hui
Jing successfully represented the Appellant in this case.
Brief Facts
© Rajah & Tann LLP, Knowledge & Risk Management August 2009
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Contacts
The Distributorship Agreement contained a non-competition clause which
Francis Xavier SC stated that “[p]roducts which are in competition with Deuter range of
Partner products may not be sold by [the Appellant] without prior written consent
from [the Respondent]" ("the Non-Competition Clause").
Direct: (65) 6232 0551 The Trial Judge accepted that there was an "understanding" between
Facsimile: (65) 6533 0827 the parties that the Non-Competition Clause in the Distributorship
E-mail: francis.xavier Agreement would not be activated if the Appellant purchased US$1
@rajahtann.com million worth of Deuter products annually ("the Purchase Target"). This
understanding is not in dispute between the parties for the purposes of
the present appeal.
Mohammed Reza
Partner On 27 January 2005, the Respondent issued a notice of termination and
terminated the Distributorship Agreement on four grounds.
Direct: (65) 6232 1197
One of the grounds relied upon was that the Appellant had, in breach of
Facsimile: (65) 6533 0827
the non-competition clause, sold competing products without obtaining
E-mail: mohammed.reza
the Respondent’s written consent.
@rajahtann.com
At the appeal, this was the sole ground relied upon by the Respondent as
forming the basis for terminating the Distributorship Agreement.
Issue
The only issue before the Court of Appeal was whether or not the
Appellant’s continued sale of competing products in contravention of the
Non-Competition Clause constituted a breach which entitled the
Respondent to terminate the Distributorship Agreement.
The Court of Appeal affirmed the principles laid down in the decision of
RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR 413 as to
when the innocent party can terminate a contract.
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In the Court’s view, "legal space" must be made for the application of the
Hongkong Fir approach, which itself embodies its own conception of
fairness. The fairness in this regard would lie in avoiding the potentially
grave injustice which could be occasioned to the innocent party who could
potentially suffer the serious consequences of the breach but is unable to
terminate the contract because the term is given the legal status of a
"warranty" (pursuant to the condition-warranty approach).
The Court therefore reaffirmed the approach laid down in RDC Concrete
for the reasons set out above, subject to the extremely limited exception
that, where the term itself states expressly (as well as clearly and
unambiguously) that any breach of it, regardless of the seriousness of the
consequences that follow from that breach, will never entitle the innocent
party to terminate the contract, then the court will give effect to this
particular type of term (viz, a warranty expressly intended by the parties).
In dealing with this question, the Court quoted extensively from the Man
Financial decision. In brief, the principles are summarised below:
a) Many factors would come into play in making this determination but
the overall focus is on ascertaining the intention of the contracting
parties themselves by construing the actual contract itself (including
the contractual term concerned) in the light of the surrounding
circumstances as a whole (see the classic exposition on this point by
Bowen LJ (as he then was) in the oft-cited English Court of Appeal
decision of Bentson v Taylor, Sons & Co (No 2) [1893] 2 QB 274 at
281).
c) The second factor: Where the contractual term itself expressly states
that it is a "condition", then that term would generally be held by the
Court to be a condition.
However, there is case law that suggests that the express use on
the word "condition" might (on occasion, at least) be insufficient to
render that term a condition in law. In this regard, see the House of
Lords decision of L Schuler AG v Wickman Machine Tool Sales Ltd
[1974] AC 235.
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1 QB 164 ("The Mihalis Angelos"), where the court held (at 194, 199-
200 and 205-206) that an "expected readiness" clause was a
condition on the ground, inter alia, that the same conclusion had
been reached in by its own previous decision (in Finnish
Government v H Ford & Co, Ltd (1921) 6 L1 L Rep 188).
There is no magic formula. In the final analysis, much turn on the precise
factual matrix of the case.
On the facts, the Court found that the Non-Competition Clause was not a
condition. The parties (in particular, the Respondent) had no intention of
treating the Non-Competition Clause as a strict prohibition. In fact, the
Respondent had always known (and openly stated that it did not want the
Appellant to stop the practice) that the Appellant not only sold competing
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products but also that that was the Appellant’s business strategy which
actually gave maximum exposure as well as sales to the Respondent’s
products.
The Court also found that even if the objectives of market penetration and
brand positioning might have been compromised as a result of the
Appellant selling competitive products, there has been no evidence of a
substantial deprivation of benefit arising from the Appellant’s actions. The
fact that the amount of purchases by the Appellant had dropped from
US$1 million to US$788,031.45 (due to the Appellant’s strategy of selling
competing products) did not amount to a substantial deprivation of
benefit.
Concluding Words
If you would like more information on the above, please contact Francis
Xavier SC or Mohammed Reza, whose contact details appear on page 2,
or contact the Knowledge and Risk Management Group at
eOASIS@rajahtann.com and we would be happy to assist you.
Rajah & Tann LLP is one of the largest law firms in Singapore, with a representative office in Shanghai. It is a full service firm
and given its alliances, is able to tap into resources in a number of countries.
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The information contained in this Update is correct to the best of our knowledge and belief at the time of writing. The contents of
the above are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific
professional advice for any particular course of action as the information above may not necessarily suit your specific business
and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call
the lawyer you normally deal with in Rajah & Tann LLP or e-mail the Knowledge & Risk Management Group at
eOASIS@rajahtann.com.
© Rajah & Tann LLP, Knowledge & Risk Management August 2009