Case Summaries

Leiman, Ricardo and another v Noble Resources Ltd and another [2020] SGCA 52

SUPREME COURT OF SINGAPORE

28 May 2020

Case summary

Leiman, Ricardo and another v Noble Resources Ltd and another [2020] SGCA 52
Civil Appeal No 153 of 2018

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Decision of the Court of Appeal (delivered by Chief Justice Sundaresh Menon):

Outcome: CoA allows the appeal in part, and sets aside the decision of the second respondent’s committee disentitling the first appellant from his severance payments and benefits.

Pertinent and significant points of the judgment

  • The rule against penalty clauses applies only to clauses that impose secondary obligations to pay compensatory damages to remedy breaches of contract. Whether a clause imposes a primary or a secondary obligation is a matter of substance, and depends on (among other factors) whether the clause was entered into and contemplated as part of the parties’ primary obligations under the contract to secure some independent commercial purpose, or to hold the affected party in terrorem in order to secure his compliance with his primary obligations (at [99]–[101]).
  • A party purporting to exercise a particular contractual right, or to act in a particular way that might be prejudicial to the other party, does not have a general duty to act fairly nor a more specific duty to observe any particular requirements of natural justice. This general position may, however, be displaced by express or implied contractual terms (at [133]–[134]).

Background to the appeal

1 The first respondent, Noble Resources Ltd (“NRL”), employed the first appellant, Mr Ricardo Leiman (“Mr Leiman”), as the Chief Operating Officer of the second respondent, Noble Group Ltd (“NGL”), in 2006 under an “Employment Agreement”. NGL and NRL are part of the Noble group of companies (“Noble”). Mr Leiman was subsequently appointed the Chief Executive Officer of NGL in 2010.

2 During his employment with Noble, Mr Leiman was awarded NGL share options pursuant to the Noble Group Share Option Scheme 2004 and NGL shares pursuant to Noble’s Annual Incentive Plan (“AIP”). Mr Leiman assigned some of his NGL shares and NGL share options to a trust that was administered by the second appellant, Rothschild Trust Guernsey Limited (“Rothschild Trust”).

3 In late 2011, the parties began to plan for Mr Leiman’s exit from Noble. Following negotiations between Mr Leiman and Noble, Mr Leiman and NRL entered into an agreement dated 9 November 2011 that regulated the terms of his resignation (“the Settlement Agreement”). Mr Leiman and NRL also entered into an agreement under which Mr Leiman would provide advisory services to NRL for a minimum term of nine months (“the Advisory Agreement”).

4 Mr Leiman’s severance payments and benefits under cl 3 of the Settlement Agreement were as follows:

  1. Clause 3(a) provided that Mr Leiman was entitled to receive the payments and benefits set out in cl 3 and the payment schedule attached to the Settlement Agreement only if he complied with his non-competition and confidentiality obligations under the Employment Agreement and the Settlement Agreement.
  2. Clause 3(b) provided for Mr Leiman’s remuneration under the Advisory Agreement.
  3. Under cl 3(c), Mr Leiman was entitled to exercise 7,727,272 NGL share options that were to vest on 2 April 2012 as well as all vested but unexercised NGL share options (collectively, the “Share Options”). Under cl 3(d), 17,276,013 NGL shares awarded to Mr Leiman under the AIP (the “Shares”) would vest in him on specific dates. Mr Leiman’s entitlements under cll 3(c) and 3(d) were subject to the condition that he “not act … to the detriment of Noble”. On this issue, NGL’s Remuneration and Options Committee (“R&O Committee”) was to make a “final determination in the event of any dispute”.
  4. Under cl 3(e), Mr Leiman was entitled to be considered for a discretionary bonus for 2011 (“the 2011 Bonus”).

5 Apart from the 17,276,013 Shares referred to in cl 3(d) of the Settlement Agreement, Mr Leiman was also awarded 5,652,421 NGL shares under the AIP by way of a letter dated 4 May 2011 (“the 4 May 2011 letter”).

6 Noble hired a private investigator (“the PI”) in November 2011 to monitor Mr Leiman’s activities. The PI obtained e-mails between Mr Leiman and Summa Capital, one of Noble’s business partners, which showed them discussing a plan to start a new commodities business. Noble also engaged a consulting firm, Wolfe Associates, in February 2012 to investigate Mr Leiman’s dealings with two individuals (collectively, “Messrs Carlier and Ozeias”) whom he had been involved in hiring in 2006 to run one of Noble’s sugar mills in Brazil.

7 On 29 February 2012, Rothschild Trust made a request to exercise five million of Mr Leiman’s Share Options. After reviewing the e-mails between Mr Leiman and Summa Capital as well as Wolfe Associates’ preliminary findings on (among other things) Mr Leiman’s involvement in the hiring of Messrs Carlier and Ozeias despite his knowledge of various allegations against them, the R&O Committee decided on 1 March 2012 to refuse to approve the request. Noble informed Rothschild Trust of this decision on the same day.

8 Rothschild Trust protested the R&O Committee’s decision and made multiple requests for the information upon which the decision had been based, but to no avail. The R&O Committee reconvened on 27 March 2012 and reaffirmed its 1 March 2012 decision. Noble informed Rothschild Trust of this on the same day, explaining that Mr Leiman’s right to exercise the Share Options was “conditional on [his] not ‘acting in any way to the detriment of Noble prior to exercise’”. The R&O Committee considered that this condition had not been satisfied as Mr Leiman had breached his non-competition and confidentiality obligations, and had appointed certain persons to run Noble’s operations in Brazil from 2006 even though they were unqualified and might have participated in “fraudulent conduct at a previous employer”.

9 Noble subsequently also informed the appellants that: (a) Mr Leiman was not entitled to the 17,276,013 Shares referred to in cl 3(d) of the Settlement Agreement; (b) the R&O Committee did not approve the vesting of the 5,652,421 shares awarded to Mr Leiman by way of the 4 May 2011 letter; and (c) Mr Leiman was not awarded the 2011 Bonus. The appellants brought an action for a declaration that the R&O Committee’s decisions pertaining to Mr Leiman’s benefits were invalid. They also sought damages for conspiracy by unlawful means, wrongful inducement of breach of contract and unlawful interference or causing loss by unlawful means.

The decision below

10 The High Court judge (“the Judge”) dismissed the appellants’ action. He held that the R&O Committee had not failed to accord Mr Leiman due process, and that its findings that Mr Leiman had acted to Noble’s detriment were valid as Mr Leiman had breached his non-competition and non-confidentiality obligations. He held, however, that the R&O Committee should not have relied on Mr Leiman’s involvement in the hiring of Messrs Carlier and Ozeias as the condition that Mr Leiman “not act … to the detriment of Noble” did not apply retrospectively to cover detrimental acts prior to the parties’ entry into the Settlement Agreement.

11 The Judge further held that cl 3(c) of the Settlement Agreement was not a penalty clause, and that the Settlement Agreement did not cover the 5,652,421 shares that were not expressly mentioned in cl 3(d). The Judge held that given Mr Leiman’s improper acts of competition, these shares were validly forfeited pursuant to cl 5 of the AIP, which provided for the forfeiture of shares issued under the AIP if the employee concerned engaged in activity or conduct that was “inimical or contrary to or against the interests of [Noble]”. Separately, there was no breach of cl 3(e) of the Settlement Agreement in respect of the 2011 Bonus as Noble was only required to consider Mr Leiman’s entitlement to the bonus in a rational and bona fide manner, and that had been done. As the R&O Committee’s decisions were valid, the appellants’ economic tort claims were dismissed.

The Court of Appeal’s decision

The interpretation of cl 3 of the Settlement Agreement

12 The Court of Appeal held that the Settlement Agreement was a mutually beneficial arrangement pursuant to which Mr Leiman was granted some rights that he would not otherwise have had or been entitled to exercise, while Noble was allowed to end NRL’s employment relationship with Mr Leiman without terminating him for cause, thereby avoiding potential legal disputes with him and preserving business confidence. This was the context in which the terms of the Settlement Agreement were to be construed (at [62][63]).

13 The plain language of cl 3(a) encompassed Mr Leiman’s severance entitlements generally and conditioned his receipt of them on his compliance with his contractual non-competition and confidentiality obligations. Any dispute as to whether or not he was in such compliance was a matter solely for the court. Clauses 3(c) and 3(d), on the other hand, dealt with the entirely separate commercial question of whether he had acted to Noble’s commercial detriment, and this was to be determined by the R&O Committee (at [64][65]).

14 Any determination under cll 3(c) and 3(d) that Mr Leiman had acted “to the detriment of Noble” had to involve some particularisation of actual loss, harm or damage to Noble that could fairly be said to be a consequence of the relevant acts by Mr Leiman. These acts related only to conduct taking place after the parties’ entry into the Settlement Agreement. This interpretation was in line with the parties’ purpose in entering into the agreement, which was to regulate Mr Leiman’s post-resignation conduct and relationship with Noble in a mutually beneficial way. In assessing whether Mr Leiman had acted to Noble’s detriment, the R&O Committee was not to consider whether he had complied with his contractual obligations. Interpreting cll 3(c) and 3(d) as covering Mr Leiman’s compliance with his contractual obligations would effectively render cl 3(a) redundant in many instances of disputes concerning such compliance, and it was unlikely that Mr Leiman would have assented to the possibility of the court’s legal determination on this issue being annulled by the R&O Committee. The Committee’s task was also never to determine the appropriate remedies in law for any breach of contract by Mr Leiman. Instead, it was concerned only with Mr Leiman’s Noble-related severance entitlements (at [68][71] and [73][78]).

Whether the disputed clauses were void for being penalty clauses

15 In line with the principle of freedom of contract, the law allowed parties to break their contractual undertakings if they so wished, albeit at a price. To address this, the common law imported into contracts a secondary obligation to pay compensatory damages to remedy breaches of contract. The rule against penalty clauses applied only to clauses imposing secondary obligations. Where a clause imposed a stipulated consequence following a breach of contract by one party and that consequence was not reflective of the innocent party’s interest in being compensated but was in fact stipulated in terrorem of the contract-breaker, that clause would be regarded as an unenforceable penalty clause (at [99][100]).

16 Whether a clause imposed a primary or a secondary obligation was a matter of substance. The court’s inquiry was directed towards: (a) the overall context in which the bargain in the clause was struck; (b) any reasons why the parties agreed to include the clause in the contract; and (c) whether the clause was entered into and contemplated as part of the parties’ primary obligations under the contract to secure some independent commercial purpose, or whether it was to hold the affected party in terrorem in order to secure his compliance with his primary obligations (at [101]).

17 Although cl 3(a) of the Settlement Agreement was phrased as a primary obligation, it was not clear what independent commercial purpose would be served by NRL requiring Mr Leiman to continue to comply with his contractual obligations in order to be entitled to the benefits under cll 3(b) and 3(e) as well as the “Final Due Payments” that were incidental to his resignation. It was evident that cl 3(a) was included in the Settlement Agreement in terrorem of Mr Leiman and any thought he might have had of breaching his contractual obligations. Clause 3(a) therefore imposed a secondary obligation on Mr Leiman and was an unenforceable penalty clause (at [104][108]).

18 In contrast, cll 3(c) and 3(d) were not penalty clauses. The bargain in cl 3(c) was reached in the context of Mr Leiman agreeing to forgo his unqualified ability to exercise some vested rights in return for an extension of time within which he could exercise those rights and the grant of more rights that he would not otherwise have been entitled to. The consummation of those enhanced rights was subject to the condition that he not act to Noble’s detriment. The parties mutually arrived at this condition, and the R&O Committee’s determination of whether the condition was met was not concerned with whether Mr Leiman had complied with his contractual obligations. Clauses 3(c) and 3(d) imposed a primary obligation on NRL to honour Mr Leiman’s enhanced rights in respect of the Share Options and the 17,276,013 Shares on the condition that he not act to Noble’s detriment, and did not engage the rule against penalty clauses as they did not impose on Mr Leiman a secondary obligation to pay damages to or otherwise compensate Noble for any breach of his contractual obligations (at [109][114]).

The validity of the R&O Committee’s decisions under cll 3(c) and 3(d) of the Settlement Agreement

19 A party purporting to exercise a particular contractual right, or to act in a particular way that might be prejudicial to the other party, did not have a general duty to act fairly nor a more specific duty to observe any particular requirements of natural justice. This general position might, however, be displaced by express or implied contractual terms. In assessing whether the general position was displaced, the court would consider the particular contractual right that was being exercised, the language of the provision setting out or conditioning the right, the consequences of any decision made under that provision and what, if anything, was contemplated by way of any procedural requirements (at [133][134]).

20 Clauses 3(c) and 3(d) of the Settlement Agreement prescribed, firstly, that the R&O Committee’s jurisdiction would only be triggered if Mr Leiman had allegedly acted “to the detriment of Noble”. Secondly, the Committee was to determine whether Mr Leiman had acted to Noble’s detriment “in the event of any dispute”. Thirdly, in the event of a dispute, the R&O Committee’s determination as to whether Mr Leiman had acted to Noble’s detriment would be final. If the R&O Committee made a determination against Mr Leiman, he would lose his financial rights in the Share Options and the Shares. It was implicit from the combination of these three points that Mr Leiman had to be given notice of Noble’s allegations that he had acted to its detriment, and if necessary, the basis for its allegations, so that he could decide whether to dispute the allegations. It was only if the allegations were disputed that the Committee’s jurisdiction would be engaged. The Committee then had to afford Mr Leiman an opportunity to put forward his reasons for disputing the allegations before it exercised its power to make a final determination as to whether he had acted to Noble’s detriment (at [136][140]).

21 In the present case, the R&O Committee purported to make a “final determination” under cll 3(c) and 3(d) on 1 March 2012, and it reaffirmed its decision on 27 March 2012. The Committee did not inform Mr Leiman of the allegations against him or afford him the opportunity to decide whether he disputed them, and if so, to respond to them, before either 1 or 27 March 2012. As Mr Leiman was never in a position to decide whether to dispute the allegations against him, the Committee was not properly convened, and there was no valid “final” determination for the purposes of cll 3(c) and 3(d). The Committee’s purported refusal to grant Mr Leiman his entitlements under these two clauses was therefore invalid (at [156][157]).

Mr Leiman’s other entitlements

22 In view of the respondents’ evidence that a general decision had been taken not to award Noble’s top management any bonus for 2011 and the fact that other members of Noble’s top management had not received bonuses in 2011, there was no basis for disturbing the Judge’s finding that the R&O Committee did not fail to properly consider Mr Leiman’s entitlement to the 2011 Bonus (at [168]).

23 The 5,652,421 shares awarded to Mr Leiman by way of the 4 May 2011 letter were expressly excluded from cl 3(d) of the Settlement Agreement and continued to be governed by the terms of the AIP. To the extent that the R&O Committee purported to forfeit these shares pursuant to a “reasonabl[e] determin[ation]” under cl 5(iv) of the AIP that Mr Leiman had engaged in conduct or acts that were “injurious, detrimental or prejudicial” to Noble’s interests, there was no basis for such a determination as the conduct referred to had not resulted in any actual detriment or damage to Noble’s business interests (at [176][178]).

The appellants’ economic tort claims

24 There was no reason to interfere with the Judge’s dismissal of the appellants’ economic tort claims as the appellants had not adequately proved the elements of the pleaded economic torts (at [180]).

The remedies for the appellants

25 The R&O Committee’s decisions to disentitle Mr Leiman from the Share Options and the 17,276,013 Shares under cll 3(c) and 3(d) of the Settlement Agreement and to forfeit his right to the 5,652,421 shares awarded by way of the 4 May 2011 letter were null and void. The Court of Appeal ordered damages to be assessed for the losses sustained by the appellants as a consequence of these wrongful decisions by the Committee (at [181], [182] and [184]).

 

This summary is provided to assist in the understanding of the Court’s judgment. 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 judgment.

 

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