CHARACTERISATION AND SHAMS FOLLOWING CONTEXTUAL CONTRACTUAL INTERPRETATION: A VIEW FROM SINGAPORE
EC Investment v Ridout Residence
There has been a recent movement in the UK towards a wider, contextual interpretation of contracts following the landmark cases of Investors Compensation Scheme Ltd
v West Bromwich Building Soc
and Chartbrook Ltd
v Persimmon Homes Ltd
On the path towards liberalisation, the Singapore courts have gone even further than the UK in the admission of extrinsic evidence in aid of contractual interpretation.3
But going so far might have had the unintended impact of eroding the coherence of other well-established doctrines, such as the doctrines of sham and characterisation. There appears to have been some conceptual confusion, as was shown by how the terms sham, characterisation, and contractual interpretation were employed almost interchangeably by the court in EC Investment Holding Pte Ltd
v Ridout Residence Pte Ltd
demonstrates the strain posed by liberalising the approach of the Singapore courts towards contractual interpretation, serving as a useful point of comparison with the UK position, especially for those who would advocate further liberalisation in the UK.
This was an action by EC Investment for specific performance of an option to purchase a good-class bungalow, of which Ridout was registered proprietor. Ridout was a $1 company, which held the bungalow for Anwar, sole director and shareholder and “directing mind behind the sale”, under a trust deed.5
Anwar had bought the bungalow on mortgage to a bank. After the 2009 global financial crisis, Anwar was in financial distress, facing the bank-mortgagee's threat to foreclose unless he paid up his outstanding loan of close to $20m. He thus sought to borrow money to pay off the bank loan, using the bungalow as security. EC, a property developer, answered the call. With their respective solicitors, a transaction was structured so that Ridout would grant EC an option to purchase the bungalow at $20m for an upfront $1.5m option fee, with Ridout having the right to cancel that option within 60 days after refund of the $1.5m plus a cancellation “compensation” fee of $180,000. This right to cancel was contained in a deed of settlement executed contemporaneously with the option to purchase, but post-dated three days later to give the impression that it was a subsequent agreement. Unfortunately, Ridout did not cancel the option in time. At the time the option was granted, the bungalow's forced sale valuation was $23.2m. Property prices soared. Six months later, a second option to purchase the bungalow at $37m was granted to a subsequent innocent purchaser, Thomas Chan. Eyeing a golden opportunity, EC sought specific performance of the first option to purchase at $20m.