April 1, 2015
The Court of Appeal made inroads into the law of contract and misrepresentation in the recent decision of RBC Properties Pte Ltd v Defu Furniture Pte Ltd  SGCA 62. The insights given by the apex court in Singapore would be of interest to any commercial person interested in negotiating exclusion clauses and the possible pitfalls of pre-contractual representations.
In 2011, Defu Furniture Pte Ltd and RBC Properties Pte Ltd entered into a 5-year lease agreement for premises which RBC had represented (during the negotiations process) was approved for use as a furniture showroom. The showroom was to be housed within the first storey of a business centre which was built on land leased by the State to RLG Development Pte Ltd (subsequently assigned to Prologis Changi South 1 Pte Ltd) (the State Lease). The building was then leased to RBC under a head tenancy agreement (the Head Lease). Under the Head Lease, RBC was obliged not to put Prologis in breach of any of the terms of the State Lease. The State Lease only permitted the entire development to be used for B1 light industrial purposes. The State Lease provides that other use required the approval of the SLA (acting on behalf of the State) and may be subject to payment of a differential premium. The first-storey premises was sub-leased to Defu. Defu entered into the lease agreement on the faith of RBC’s representation that no further approvals were necessary and commenced fitting out works shortly thereafter. Upon near-completion of fitting out works, the Singapore Land Authority indicated that the premises could not be used as a furniture showroom unless a substantial differential premium was paid under the terms of the State Lease. Upon RBC’s insistence that Defu pay the differential premium, Defu rescinded the lease agreement and commenced a suit against RBC in the High Court on several grounds including:
(a) RBC’s negligent (alternatively, innocent) misrepresentation that the premises were approved for use as a showroom, and
(b) RBC’s repudiatory breach of contract for its failure to fulfil its obligation to make the premises available for Defu’s use as a showroom and its attempt to pass on the differential premium under the State Lease to Defu.
In defence, RBC raised Clause 6.9 of the lease which purported to be a clause excluding RBC’s liability from misrepresentations (the Exclusion Clause). The Exclusion Clause states:
The tenant shall accept the Demised Premises ‘as is where is’ on the Handover Date. The Landlord shall not be bound by any representations or promises with respect to the Building and its appurtenances, or in respect of the Demised Premises, except as expressly set forth in this Lease with the object and intention that the whole of the agreement between the Landlord and the Tenant shall be set forth herein (save for any terms or modifications thereof or supplements thereto which may be expressly agreed in writing between the parties), and shall in no way be modified by any discussions which may have preceded the signing of this Lease. The landlord does not expressly or impliedly warrant that the Demised Premises are now or will remain suitable or adequate for all or any of the purposes of the tenant and all warranties (if any) as to the suitability and adequacy of the Demised Premises implied by law are hereby expressly negated.” (emphasis added)
RBC also asserted that it had reasonable grounds for its belief since it consulted the Urban Redevelopment Authority, which confirmed that the premises were approved for use as a showroom according to the Master Plan. At no point in time did RBC check the State Lease.
Finally, on the issue of repudiatory breach of contract, RBC raised the Clauses 3.14.2 and 3.14.3 in defence (the Approvals Clauses):
“3.14 Permitted use and conduct of Business
3.14.2 Not to use or permit the use of the Demised Premises or any part thereof:-
(c) for the purpose(s) specified in Schedule 4, until and unless all necessary approvals, consents, licences and permits shall have been obtained by the Tenant from the relevant government authorities and such approvals, consents, licences and permits remain valid and subsisting.
3.14.3 All times during the Term:-
(e) to be responsible at [the Defu’s] own expense for obtaining and keeping in force all approvals, consents, licences and permits necessary for the conduct of its business at the Demised Premises and for ensuring that the terms and conditions of such approvals, consents, licences and permits are strictly adhered to and to indemnify the Landlord against any consequences or proceedings arising from the Tenant’s default in complying the provisions of this sub-clause.”
Findings of the Court
For the purposes of this article, we focus on the Court’s findings in respect of the following issues:-
(1) The effect of the Exclusion Clause and the scope of protection it offers to the representor
The material portion of the Exclusion Clause which RBC relied on was the entire agreement clause highlighted above. The issue before the Court of Appeal was whether this was sufficiently worded to exclude liability for the tort of misrepresentation.
According to the Court of Appeal, the exclusion of liability for the tort of misrepresentation has to be clearly stated. There are three ways in which this can be effected:
(a) Parties agreeing that no representations had been made,
(b) Parties agreeing that there was no reliance on any representations, and/or
(c) An express exclusion of liability for misrepresentation.
RBC argued that the entire agreement clause in the Exclusion Clause amounted to an agreement by parties that no representations had been made, and that parties had agreed to exclude liability for misrepresentation.
The Court of Appeal rejected RBC’s arguments and held that the Exclusion Clause was ineffective to exclude liability for misrepresentation. The effect of the entire agreement clause only deprived representations external to the lease agreement of contractual effect. Although RBC was not contractually bound by the representation, the entire agreement clause did not exclude RBC’s liability in a claim grounded in the tort of misrepresentation.
(2) “Reasonable grounds for belief” under section 2(1) of the Misrepresentation Act
In the High Court, the Trial Judge found that RBC had no reasonable grounds for belief since they did not consult the State Lease before representing to Defu that no approvals were required. The High Court was of the view that since RBC was in possession of the Head Lease and the State Lease, and since RBC had an obligation under the Head Lease not to put Prologis in breach of the State Lease, RBC ought to have checked the terms of the State Lease. The terms of the State Lease would have revealed that approval from the SLA was required for a change in the use of the premises and that a differential premium may have to be paid. Therefore, RBC had no reasonable grounds for believing the truth of its representations to Defu.
On appeal, the Court of Appeal differed with the Trial Judge on this issue and laid down a two-stage test for determining whether a representor has reasonable grounds for believing the truth of its representation(s):
(a) First, the Court will determine what was subjectively in the mind of the representor.
(b) Second, the Court will objectively assess what was subjectively known to the representor, to determine if the representor had reasonable grounds for his belief in the representation made based on the full factual context.
On an application to the facts, the Court of Appeal found that RBC had reasonable grounds for belief. Since the building was developed, the premises had been approved for use as a single-user light industrial development comprising showroom with a single restriction against retail sales. There was no evidence of record of any further change to this use which may have put RBC on notice that a differential premium under the State Lease could be incurred. During the contractual negotiation process, there was also no
reference to any approvals from SLA under the State Lease. The Court of Appeal also was of the view that RBC’s enquiry with the URA and Prologis on the issue of approvals was sufficient.
(3) Whether the Approvals Clauses extend to all forms of approvals including contractual approvals
At the appeal, RBC argued that the Approvals Clauses imposed an obligation on Defu to obtain all necessary approvals for the purpose of carrying on a furniture showroom at the premises. Since the approval from the SLA was not obtained, RBC argued that Defu was in breach of its obligations and was thus liable to indemnify RBC against the differential premium.
The Court of Appeal rejected RBC’s argument.
The Court of Appeal was mindful of the dichotomy between contractual and regulatory/governmental approvals. In this case, the SLA was wearing the hat of a contractual party and not its usual governmental/regulatory hat. The Approvals Clauses only imputed the obligation of obtaining governmental approvals on Defu and did not extend to include contractual approvals. Even if it did, Defu was not able to as it was not a party to the contract between the State and Prologis (the head landlord) and was therefore not in a position to seek any such approval.
Business implications and takeaways from the decision
Clauses excluding liability for misrepresentation
The apex court’s decision highlights the importance of careful drafting in contracts. Parties who are in the process of negotiating a contract and wish to incorporate a clause excluding liability for misrepresentation would have to ensure the clause clearly states and incorporates parties’ agreement that (1) there was no representation made, (2) there was no reliance on any representation when entering into the contract, and/or (3) that parties have clearly and unequivocally excluded liability for misrepresentation. A simple entire agreement clause would be insufficient to exclude tortious liability for misrepresentation.
Additionally, it bears noting that a clause which successfully excludes liability for misrepresentation may be deemed unreasonable and void under section 3(b) of the Unfair Contract Terms Act. Section 3(b) provides that a contractual term which would exclude or restrict any remedy available to another party to the contract by reason of the misrepresentation (i.e. including tortious claims) must satisfy the requirement of reasonableness. If the clause is found to be unreasonable, it will be void. Though this was not featured in the Court of Appeal’s decision, it was of concern to the Trial Judge. The trouble is that the requirement of reasonableness is imprecise and largely depends on the factual circumstances known to parties at the time of entering into the contract. As such, some risk is to be expected when relying on an exclusion clause. One way to minimise the risk would be to highlight and explain the nature of the exclusion clause during the negotiation process to ensure there is a meeting of minds when entering into the contract. Even so, it does not preclude a later finding that a clause is unreasonable in view of the circumstances surrounding the creation of the contract (e.g. where there are uneven bargaining positions).
In summary, only a carefully drafted exclusion clause which satisfies the requirement of reasonableness would pass muster. This is of no surprise in view of the potentially oppressive nature of an exclusion clause purporting to preclude liability for misrepresentations made. This is also necessary to ensure the tort of misrepresentation is not easily subverted by contract.
Reasonable grounds for belief under section 2(1) of the Misrepresentation Act
When making representations to other contracting parties, it would be a mistake for commercial parties to assume that they may be exonerated for negligent misrepresentation even if proper checks are not conducted.
Notwithstanding the outcome of the Court of Appeal’s decision, the fact that RBC had not checked the terms of the State Lease prior to making the representations to Defu was troubling to the Court of Appeal. The Court of Appeal had noted that checking the State Lease or inquiring with the SLA appeared to be obvious and simple checks to an established business entity like RBC. However, it was due to the specific and unique factual circumstances which allowed the Court of Appeal to determine that RBC nevertheless had reasonable grounds for belief.
Commercial parties should note that the decision of the Court of Appeal to exonerate RBC of liability for negligent misrepresentation far from reduces the threshold of reasonable grounds for belief. The Court of Appeal’s decision in fact reaffirms that the facts known to the representor up to the time the representation was made would be subject to an objective assessment. Even where initially, the representor may have had reasonable grounds for belief, if due to a change in circumstances, those grounds were no longer objectively reasonable by the time parties entered into the contract, the representor cannot rely on the defence under section 2(1) of the Misrepresentation Act.
Ultimately, the assessment of reasonable grounds for belief is a fact-centric exercise, which unfortunately begets some uncertainty to commercial parties. Due to the factual nature of such an enquiry, the Court of Appeal was understandably unable to lay down more specific guidelines governing the assessment of the representor’s grounds for belief. Prudent commercial parties should therefore ensure that proper checks are undertaken before representing a certain state of affairs to the other contracting party.
Clauses seeking to place the obligation of obtaining approvals on tenants
It is commonplace for landlords/main tenants to include in a lease/sub-lease agreement, an obligation on the part of the tenant/sub-tenant to obtain all necessary approvals. Often, such a clause would be similarly worded to the Approvals Clauses in this case.
However, the Court of Appeal’s decision is a timely reminder of the need to ensure precise drafting and proper due diligence. Clauses seeking to place the obligation of obtaining approvals on tenants must ensure, where possible, that such approvals extend not only to government/regulatory approvals but also to contractual approvals under head leases higher up on the chain of agreements.
Even then, obtaining contractual approvals may be an impossible task like in Defu’s case. Landlords and head tenants should be careful to read any head leases higher up the chain of agreement, which bind them and thus oblige them to obtain such approvals. It may not be possible (as in RBC’s case) to pass on such liability to an incoming tenant. This is especially so where the property in question is built on state-owned land, such that the SLA would be involved, potentially as regulator and as landlord. One possible way to manage such risk would be to incorporate the terms of the head leases higher up the chain of agreement into the terms of any sub-tenancy agreements.
RBC Properties Pte Ltd v Defu Furniture Pte Ltd is a seminal decision which has made significant inroads into the law of contract and misrepresentation. Despite the uncertainties common to the interpretation of exclusion clauses and to the assessment of reasonable grounds of belief, these uncertainties are expected to be reduced in time to come once the Court has had more opportunities to apply general principles to various factual circumstances. In the meantime, to the careful businessman, prudence is key to reducing any commercial risks brought about by exclusion clauses and pre-contractual representations, and to ensure compliance with any obligation imposed to obtain the necessary approvals.