Case Summaries

Hai Jiao 1306 Ltd and others v Yaw Chee Siew [2020] SGHC(I) 16

SUPREME COURT OF SINGAPORE

13 July 2020

Case summary

Singapore International Commercial Court Suit Nos 7–9 of 2018

Hai Jiao 1306 Ltd and others v Yaw Chee Siew [2020] SGHC(I) 16

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Decision of Kannan Ramesh J, Patricia Bergin IJ and Sir Henry Bernard Eder IJ (delivered by Justice Eder)

Outcome: SICC awards damages for breach of contract in the sum of US$32,869,114 to the plaintiffs, Hai Jiao 1306 Ltd, Hai Jiao 1207 Ltd and Hai Jiao 1307 Ltd, against the defendant, Mr Yaw Chee Siew.

 

Pertinent and significant points of the judgment

  • The SICC’s approach to best endeavours obligations
  • The operation of best endeavours obligations in the context of charterparties
  • The scope of best endeavours obligations in the context of the insolvency of one or more relevant entities
  • Assessment of damages for breaches of best endeavours obligations

 

Background facts

The plaintiffs, Hai Jiao 1306 Ltd, Hai Jiao 1207 Ltd and Hai Jiao 1307 Ltd, are three special purpose vehicles (“SPVs”) incorporated by ICBC Financial Leasing Co Ltd (“ICBCL”). ICBCL is a state-owned company in the People’s Republic of China, and is a wholly-owned subsidiary of Industrial and Commercial Bank of China (ie, ICBC). The defendant, Mr Yaw Chee Siew, was the sole director and Executive Chairman of Otto Marine Limited (“OML”). OML was a Singapore-incorporated company originally listed on the main board of the Singapore Stock Exchange until its delisting on 6 October 2016. Before the onset of financial difficulties, OML controlled a large fleet of offshore vessels through its group of companies, the Otto Marine Group (“OM Group”).

 

Between 2013 and 2014, ICBCL provided substantial financing to OML, up to the value of US$255m, in relation to three super-large anchor handling tugs: the Go Phoenix, Go Pegasus and Go Perseus (“the vessels”). This financing took the form of what was in effect a sale-and-leaseback of each of the vessels. Each of the plaintiffs became registered owners of one of the vessels and chartered them back to companies in the OM Group under separate bareboat charterparties.

 

The Go Phoenix was chartered by the second plaintiff, Hai Jiao 1207 Ltd, to Otto Fleet Pte Ltd (“Otto Fleet”), a subsidiary of OML, under a bareboat charterparty (“the Go Phoenix BBC”). The Go Pegasus was chartered by the third plaintiff, Hai Jiao 1307 Ltd, to Otto Fleet under a separate bareboat charterparty (“the Go Pegasus BBC”). OML issued a corporate guarantee in favour of the second and third plaintiffs, guaranteeing as primary obligor the due and punctual performance by Otto Fleet of its obligations under the two BBCs.

 

The Go Perseus was chartered by the first plaintiff, Hai Jiao 1306 Ltd, to Go Offshore (L) Pte Ltd (“Go Offshore”) under a bareboat charterparty (“the Go Perseus BBC”). Go Offshore’s parent company, Go Marine Group Pty Ltd (“Go Marine”), was a wholly owned subsidiary of OML. Go Marine and OML issued a corporate guarantee jointly and severally in favour of the first plaintiff, guaranteeing as primary obligors the due and punctual performance by Go Offshore of its obligations under the Go Perseus BBC.

 

(Go Offshore and Otto Fleet are referred to as “the Charterers”. OML and Go Marine are referred to as “the Guarantors”. The three bareboat charterparties are referred to as “the BBCs”)

 

Thereafter, the marine and offshore market hit a severe downturn, leading to inter alia sharp declines in oil prices and depressed demand for offshore vessels. As a result, the Charterers and the Guarantors struggled to perform their payment obligations under/in respect of the BBCs and the guarantees. The BBCs were consequently restructured three times between August 2015 and September 2017 by way of various addenda – on each occasion, the terms of the BBCs including, inter alia, charter hire rates were amended.

 

During this period of downturn, in early-2016, the defendant proposed delisting OML so that it would be easier for him to personally fund the Charterers/the Guarantors in order to enable punctual performance of the payment obligations under the BBCs. The plaintiffs consented to OML’s delisting around mid-2016, and OML was delisted on 6 October 2016. The plaintiffs only agreed to the delisting after several rounds of discussions and negotiations, and in consideration of the defendant agreeing to issue letters of support. These letters of support had been drafted by ICBCL and sent to the defendant in May 2016 for execution. After extensive delay and further negotiations, the defendant executed three letters of support, one in favour of each plaintiff, in September 2017 (“the Letters of Support”). The Letters of Support were to take effect retrospectively, from 7 October 2016 (the day after OML’s delisting).

 

Under the Letters of Support, the defendant was obliged to, inter alia, use his best endeavours to:

 

  • “support the Charterer[s] and the Guarantor[s] in meeting all obligations under or in relation to [the BBCs]” (“the opening unnumbered paragraph”);

     

  • “procure the Guarantor and the Charterers to have sufficient liquidity to make timely payment[s] [under the BBCs]” (“clause 2(a)”);

     

  • “procure the Guarantor and Charterers to remain solvent and a going concern at all times” (“clause 2(b)”); and

     

  • “procure for the Charterer… sufficient funds… to meet such obligations in full as they fall due” (“clause 3”). Clause 3 stipulated that the obligation therein is only relevant “[i]f the Guarantor and Charterers at any time have insufficient liquidity or cashflow to meet any obligations under… [the BBCs]”.

 

Despite OML’s delisting, substantial amounts due under the BBCs remained unpaid from late-2016 onwards. Apart from a few sporadic part-payments, the charter hire instalments due under the BBCs for the whole of 2017 were unpaid and overdue. Consequently, the first plaintiff terminated the Go Perseus BBC on 15 November 2017; the second and third plaintiffs terminated the other two BBCs on 31 January 2018. OML was placed under judicial management on 21 March 2018, and subsequently entered liquidation on 5 October 2018.

 

The plaintiffs commenced proceedings via three separate writs of summons which were consolidated by the court. The plaintiffs advanced three heads of claim against the defendant: (1) damages for breach of contract, specifically the defendant’s failure to use best endeavours to support the Charterers and the Guarantors under the Letters of Support; (2) damages for misrepresentation; and (3) damages for breach of collateral undertaking.

 

The Court’s decision

On the plaintiffs’ claim in breach of contract, the parties agreed that the Letters of Support were binding on the defendant retrospectively, from 7 October 2016. The key issues were the interpretation of the clauses of the Letters of Support, whether these clauses had been breached, and if so the extent of damages payable by the defendant.

 

The opening unnumbered paragraph stood as a general undertaking that the defendant “…will use best endeavours to support the Charterer[s] and the Guarantor[s]”. This undertaking was given in consideration of the plaintiffs’ consent to the restructuring of the BBCs, the delisting of OML, and the plaintiffs’ “forbearance” towards the Charterers and the Guarantors (at [190]).

 

Further, a distinction had to be drawn between clauses 2(a) and 2(b), and clause 3 of the Letters of Support. Clauses 2(a) and 2(b) were limited to the defendant procuring the Charterers and OML to use their own resources to (a) maintain sufficient liquidity to make timely payments under the BBCs/the guarantees; and (b) maintain solvency and going concern status. In the event these outcomes were not achieved despite the defendant’s best endeavours, clause 3 required the defendant to use his best endeavours to procure for the Charterers sufficient funds from other sources available, including the defendant’s own personal wealth and that of his family, to meet the obligations under the BBCs (at [192]). This was consistent with the factual matrix that formed the backdrop to the defendant’s agreement to the Letters of Support, including the depressed offshore and shipping market, and the defendant’s representations that he and his family had already been utilising, and would continue to utilise, their own financial resources to fund the Charterers (at [193]).

 

Crucially, clause 3 did not impose on the defendant an open-ended and unqualified obligation to use his personal resources to fund the Charterers, still less an obligation on the defendant’s family to use their financial resources in that manner. In line with existing authorities, the defendant need only do that which had a significant or real prospect of success in procuring the contractually stipulated outcome. He was not required to throw good money after bad (at [171] [174], [184] and [194]). This conclusion was unaffected by the terms of clause 4 of the Letters of Support, which provided that the obligations thereunder remained valid and binding notwithstanding any bankruptcy, receivership or liquidation of, or moratorium involving, the Charterers/the Guarantors (at [289]).

 

Thus, vis-à-vis the Go Phoenix and Go Pegasus BBCs, the defendant’s obligation under clause 3 of the Letters of Support ended on 31 January 2018, the date of termination of those two BBCs. By that date, the companies in the OM Group was too far gone to be saved without the intervention of a formal insolvency and restructuring process. Go Offshore had filed for judicial management on 30 November 2017; charter hire instalments for all the BBCs dating back at least a year remained outstanding; the plaintiffs terminated the Go Phoenix and Go Pegasus BBCs on 31 January 2018 and issued statutory demands on 6 February 2018 which were not satisfied; and on 20 February 2018, OML filed for judicial management. These confirmed that the situation for the OM Group was no longer salvageable by 31 January 2018. At this point, it would not have been reasonable to expect the defendant to throw good money after bad (at [290] to [292]).

 

As for the Go Perseus BBC, the defendant’s obligation under clause 3 ended on 15 November 2017, the date of termination of the Go Perseus BBC. Formal insolvency proceedings were commenced by Go Offshore (the Charterer in the Go Perseus BBC) on 30 November 2017, just 15 days after the termination of the Go Perseus BBC. It was thus clear that by 15 November 2017, Go Offshore was no longer financially viable. The above reasoning thus applied, ie, the defendant was not expected, from that point on, to throw money after a lost cause (at [293]).

 

Based on the abovementioned interpretation of the relevant clauses, the defendant breached several of his best endeavours obligations under the Letters of Support. The defendant breached the opening unnumbered paragraph and/or clause 2(a) by: (a) failing to utilise sums available in OML’s bank accounts which could have been used to pay outstanding charter hire; (b) diverting funds from OML to companies owned/controlled by the defendant; (c) making excessive “bonus” payments to an employee, one Mr Michael See; (d) failing to collect receivables due to OML; and (e) diverting the vessels’ earnings from a designated and secured earnings account, which could have been applied in satisfaction of outstanding charter hire payments (at [223] to [268]).

 

The defendant breached clause 3 by failing to utilise his personal financial resources to procure sufficient funding for the Charterers. The defendant had ample funds in his personal bank accounts, shares in multiple listed companies, as well as shares in substantial private companies. The funds could have been applied in satisfaction of the Charterers’ outstanding obligations under the BBCs, and the shares in various companies could have been sold or used as collateral to raise funds which could have been similarly utilised (at [302] to [358]).

 

The defendant also breached clause 3 of the Letters of Support by failing to exercise his best endeavours to procure a mortgage over the Parkcity Everly Hotel Bintulu (“Bintulu Hotel”) (at [371] to [381]). The Charterers were obliged, under addenda entered into with respect to each of the BBCs in September 2017 (the “September 2017 Addenda”), to deliver to the plaintiffs a mortgage over the Bintulu Hotel (at [142] and [363]). Based on a proper interpretation of the September 2017 Addenda, this was to be a single mortgage in favour of all three plaintiffs (at [363] to [369]). The defendant could, but failed to, procure this mortgage in favour of the plaintiffs. He thereby deprived the plaintiffs of a security interest worth about US$14m.

 

For the aforementioned breaches, the plaintiffs were entitled to damages amounting to the value of all outstanding charter hire instalments under the BBCs that fell due before 15 November 2017 or 31 January 2018 (as the case may be for the Go Perseus, Go Phoenix and Go Pegasus BBCs). The defendant had to pay for all these outstanding instalments in full because at the relevant points in time when each instalment fell due, OML/the Charterers or he had more than sufficient sums/assets that could have been applied in full satisfaction of the Charterers’ obligations under the BBCs (at [386] and [387]). After deducting various sporadic part-payments made by the Charterers/OML/the defendant, the outstanding sum was US$18,869,114 (at [384] to [391]). In addition, the plaintiffs were entitled to damages in the sum of US$14m as a result of the defendant’s breaches of the Letters of Support in failing to procure a mortgage over the Bintulu Hotel in favour of the plaintiffs. This sum reflected the value of the security the plaintiffs would have obtained but for the defendant’s breaches of his best endeavours obligations (at [392]).

 

The plaintiffs were not awarded damages for losses that accrued after 15 November 2017 or 31 January 2018 (as the case may be). This included post-termination losses that accrued by way of the acceleration clauses in the BBCs (eg, clause 49.4.3 of the Go Perseus BBC), which stated that all balance charter hire “which [would have] become due and payable… if [the BBC] was not terminated” would become payable by the Charterers upon termination. As explained, at the respective dates of termination of the BBCs (ie, when post-termination losses began accruing), the respective Charterers were too far gone; the defendant would have been throwing good money after bad at this stage (at [394] to [396]).

 

The plaintiffs’ claims for misrepresentation were dismissed. While the defendant did make multiple representations (on his own or through his representatives) to the plaintiffs throughout 2016, these were too vague to be actionable misrepresentations (at [443], [444], [452(c)], [453], [455] and [458]). Several of these representations had not even been pleaded by the plaintiffs. In any event, there was no reasonable reliance on the plaintiffs’ part. It is evident that throughout the relevant period (ie, from mid-2016 onwards), the plaintiffs sought and eventually successfully procured the Letters of Support. It was the Letters of Support that the plaintiffs relied upon in forbearing to terminate the BBCs earlier and/or commence earlier legal action against the defendant (at [446], 454], [456] and [459]). The plaintiffs, as SPVs owned and controlled by large financial institutions, would not have relied on loose representations of the sort made by the defendant – that is not how large financial institutions do business (at [446]). Similarly, the plaintiffs’ claims for breach of collateral undertaking were dismissed. The only undertaking between the parties was in the form of the Letters of Support (at [462]).

 

This summary is provided to assist in the understanding of the Court’s grounds of decision. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s grounds of decision.

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