Whither the Scope of Sections 94(f) and 95 of the Evidence Act?

The parol evidence rule is revisited in the recent Court of Appeal case of Tan Hock Keng v L & M Group Investments Ltd [2002] 2 SLR 213.

It is a general principle of law that extrinsic evidence cannot be adduced to contradict, add to, subtract from or vary the terms of a contract which has been reduced into writing. In Singapore, this rule has been reduced into a statutory provision, namely, s 94 of the Evidence Act (Cap 97). However, there are statutory exceptions to this rule, which are encapsulated in ss 94 to 100 of the Evidence Act. One of the exceptions for which extrinsic evidence is admissible is to prove a fact ‘which shows in what manner the language of a document is related to existing facts’ (s 94(f)).

The Decision in Tan Hock Keng v L & M Group Investments Ltd

This section was visited in the recent Court of Appeal case of Tan Hock Keng v L & M Group Investments Ltd [2002] 2 SLR 213. In that case, the court was invited to construe the following provision, cl 16.1, in a contract:

The parties hereby agree that the total liability of the Vendor for all claims of any kind whether in contract, warranty, indemnity, tort, strict liability or otherwise arising out of the performance or breach of the Agreement or any of the terms herein shall not exceed the Consideration Sum as determined in accordance with Clause 4.1, or shall not terminate prior to the expiry of three (3) years from Completion Date, whichever occurs first.

The action arose out of a claim by the purchaser (Tan) against the vendor (L & M Group Investments Ltd) (‘L&M’) for sums due under cl 14 of the contract for the sale and purchase of L&M’s shares in a company known as KWF, L&M’s wholly-owned subsidiary, on account of trade debts which had become irrecoverable within 12 months from their due dates, less various sums owing by Tan to L&M. The total sum claimed was S$109,737.55 and US$770,540.75, which exceeded the consideration sum for the contract, which was S$285,900.

Clause 14 governed the post-contract rights and liabilities between Tan and L&M in the event of credit notes being issued by KWF or by its suppliers on KWF’s accounts receivables and payables, written-off debts being recovered by KWF or KWF’s accounts receivables not being recoverable within 12 months from their due date.

Tan filed the writ against L&M within three years of the completion date, which was 2 December 1997.

One of the issues the court had to decide was the actual meaning of the clause. Counsel for Tan submitted that the clause was capable of being interpreted in three different ways:

  1. that L&M’s liability to Tan was limited to the consideration sum simpliciter;
  2. that where Tan made a claim against L&M within three years from the completion date, L&M’s liability was limited to the consideration sum, but if the claim was made after three years, L&M was not liable whatsoever; or
  3. that where Tan made the claim within three years from the completion date, L&M’s liability was unlimited but if it was after three years, L&M’s liability was limited to the consideration sum.

L&M’s counsel contended that the clause, while not a model of good drafting, was nevertheless reasonably clear in that:

  1. if Tan made a claim before the expiry of the three-year period, the liability of L&M was limited to the consideration sum; and
  2. if Tan’s claim was made after the expiry of the three-year period, then L&M would not be liable whatsoever.

Chao Hick Tin JA, giving the judgment of the appeals court, was of the opinion that the clause really was quite obscure. He felt that the following ambiguities arose from the reading of the clause:

  1. It was unclear as to what shall not terminate. Was it ‘total liability’ or ‘all claims’?
  2. It was unclear how ‘whichever occurs first’ could refer to a limitation based on quantum.

The learned judge felt that, while it may well be that cl 16.1 was intended to introduce a two-pronged limitation, one as to quantum and the other as to time, the way the clause was structured did not sufficiently bear this out.

The judge then referred to two other grounds proffered by counsel for Tan:

  1. certain clauses referred to cl 16.1 but cl 14 (which was the liability clause in question) did not; and
  2. the limitation of liability in cl 16.1 worked only to limit Tan’s claims against L&M and did not seem to apply equitably to a cl 14 situation, which was drafted to ensure that the contract was based on the net tangible asset position, and the provisions therein were laid down to achieve that objective. L&M should not be allowed to obtain a windfall, which would occur if cl 16.1 applied to cl 14.

The judge then concluded that for these reasons, the scope and precise restrictions in cl 16.1 were far from clear. Applying the proviso in s 94(f), extrinsic evidence was admissible to assist in the determination of the true construction of the clause. Tan’s claim in the action was subsequently remitted for continued hearing before the trial judge.

The Case of Citicorp Investment Bank (Singapore) Ltd v Wee Ah Kee

Interestingly, the earlier Court of Appeal case of Citicorp Investment Bank (Singapore) Ltd v Wee Ah Kee [1997] 2 SLR 759, was not referred to in Tan Hock Keng. There, extrinsic evidence was not admitted to construe what the court held to be a clear and unambiguous clause.

In that case, Wee obtained an advance of the principal sum of US$4,250,000 from Citicorp for the purchase of shares in a Hong Kong company called CIL. The advance was secured by a first legal mortgage over 11,900,000 CIL shares, which Wee already owned, and all other stocks, shares, property, time deposits and other securities beneficially owned by him after the creation of the charge.

The second security was an option whereby Citicorp was granted an irrevocable call option to purchase 30% of the total number of CIL shares bought by Wee under the advance at a specified price.

Sometime after the loan was advanced and before it was fully repaid, Citicorp and Wee entered into an agreement by letter dated 6 November 1994 (‘the letter agreement’) whereby terms were set for the termination of the call option. The clause for which a dispute in its construction arose was as follows:

The call option as defined under the option agreement dated 22 July 1993 shall be terminated subject to

  1. your payment to Citicorp of a sum of US$800,000 on or before 15 December 1995, and
  2. your fulfilment of your obligation to repay the loan under the loan agreement amended as in the above.

Wee subsequently paid the sum of S$4,313,411.07 in full discharge of the advance made under the loan. However, in purported exercise of their rights under the letter agreement read with the loan agreement, Citicorp only released 5,865,000 of the consolidated CIL shares purchased by Wee using the advance, and held on to the remaining 2,975,000 consolidated shares, claiming that this was a charge for the indebtedness arising from the non-payment of the US$800,000 under the letter agreement.

The issue which the Court of Appeal had to decide was the terms for the termination of the option. Did the letter agreement mean that:

  1. the call option was terminated forthwith in consideration of Wee’s promise to pay US$800,000, as well as the loan under the loan agreement, as contended by Citicorp; or
  2. upon payment of US$800,000 and the loan under the loan agreement, the call option shall be terminated but otherwise to be in full force and effect, as contended by Wee?

The court had to decide whether the case was one justifying the application of s 94(f) of the Evidence Act.

Chief Justice Yong Pung How, giving the judgment of the court, was of the view that there was no ambiguity in the letter agreement such as to allow extrinsic evidence to be admitted under s 94(f) of the Evidence Act. In coming to this decision, the Chief Justice made reference to s 95 of the Evidence Act which states:

When the language used in a document is on its face ambiguous or defective, evidence may not be given of facts which would show its meaning or supply its defect.

Illustration:

The court explained that ss 94(f) and 95 of the Evidence Act, although on its face apparently contradictory, do not conflict with each other. The court explained that while s 94(f) dealt with latent ambiguities, for which extrinsic evidence is admissible, s 95 dealt with patent ambiguities, for which no extrinsic evidence is admissible. Therefore, a document falling squarely within the limits of s 95 may well fail.

The Chief Justice concluded that the words ‘shall be terminated subject to ...’ were not capable of more than the meaning ascribed to it by counsel for Wee. Section 94(f) of the Evidence Act, therefore, did not apply and no extrinsic evidence was admissible to construe the meaning of the words which, in the opinion of the court, was clear. As Wee did not pay the US$800,000, the option remained in full force and effect notwithstanding the existence of the letter agreement, and terminated thereafter upon the total discharge of the loan agreement. The bank was, therefore, bound to return the retained shares to him.

The Scope of the Application of Sections 94(f) and 95 of the Evidence Act

The court in Citicorp delved into the distinction between patent and latent ambiguities, as classified by Lord Bacon in Bacon’s Law of Tracts, Maxims Rule XXV (referred to in Sarkar’s Law of Evidence (15th Ed, 1999) Vol 1, p 1410). As stated by the Chief Justice at p 773 of Citicorp, quoting Phipson on Evidence (14th Ed, 1990) p 1053, a patent ambiguity is ‘that which appears to be ambiguous upon deed or instrument’, and latent ambiguity is ‘that which seemeth certain and without ambiguity for anything that appeareth upon the deed or instrument, but there is some collateral matter out of the deed that breedeth the ambiguity’.

Underlying the distinction is the never-ending tension between two principles which the courts seek to uphold:

  1. the desire to hold contracting parties to what they have actually contracted, and to disallow a party from reneging on their contractual obligations by claiming that a contract is void for uncertainty due to an unresolvable ambiguity; and
  2. the loathing of the courts to rewrite a contract made between commercial men by introducing extrinsic evidence.

The difficulty, as shown by counsel arguing their cases in Tan Hock Keng and Citicorp, is how to determine when an ambiguity is patent, for which no extrinsic evidence is admissible, and when it is latent, for which such extrinsic evidence is admissible.

Practical Difficulty in Applying Sections 94(f) and 95 of the Evidence Act

One practical difficulty in deciding whether an ambiguity is patent or latent is that it is not easy to determine this without recourse first to extrinsic evidence to attempt to explain away the ambiguity. As stated in Sarkar at p 1412:

There are comparatively few cases in which a bare inspection of the instrument will show that no proper extrinsic evidence will afford any light on the construction of the writing. Hence the court cannot generally determine whether there is a patent ambiguity until extrinsic evidence of the surrounding circumstances has been received.

Further on the same page, it is stated:

By patent ambiguity, therefore, must be understood an inherent ambiguity, which cannot be removed either by the ordinary rules of legal construction or by the application of extrinsic and explanatory evidence, showing that expressions prima facie unintelligible, are yet capable of conveying a certain and definite meaning.

Therefore, the exclusion rule for patent ambiguities lies not so much in the inadmissibility of extrinsic evidence per se, but in the futility of admitting such evidence when the document wording by its nature is incapable of being explained away by such evidence.

Examples of patent ambiguities are where a bill of sale stipulated that the principal and interest should be paid by monthly instalments of ‘seven’ per month, it was held, having regard to the amount of interest, that the bill of sale could only be paid off if the repayments were at the rate of £7 per month (Mourmond v Le Clair [1903] 2 KB 216).

On the other hand, where a kabuliat stated interest at ‘one anna per rupee’, oral evidence was not admissible to show whether it was payable monthly or annually (Pratap v Md Ali 19 CLJ 66). In so deciding, Mookerji J did not follow Manmatha v Nabin 14 CWN 110, which decided otherwise, on the ground that that case followed a pre-Evidence Act decision. In our opinion, the approach in Pratap v Md Ali is to be preferred, as it falls under the second illustration to s 95. Imputing the frequency of interest payment would have been tantamount to remaking the contract between the parties.

In the local case of Wong Kai Chung v Automobile Association of Singapore [1993] 2 SLR 577, Karthigesu J, sitting in the Court of Appeal, held that extrinsic evidence was not admissible to contradict the plain and natural meaning of words in a letter of appointment, which allowed commission for procuring a loan to be made to the defendents. The letter contained the phrases ‘provided the loan is successful and the terms are acceptable to us in every respect’ and ‘the interest payable on the loan is from 6% to 9% or any other rate agreed upon’. The court held that in such a case, commission was payable for a loan even when the interest was more than 9% per annum, provided the loan was accepted by the borrower. Counsel’s submission that extrinsic evidence should be admitted to show that commissions were not payable for loans bearing interest at more than 9% per annum was not accepted.

Conclusion

The application of ss 94(f) and 95 of the Evidence Act, though at first sight appears contradictory, is the statutory reflection of the constant tension that the courts have to resolve between holding parties to their actual contracts, and upholding the time-honoured legal principle that contracts must be construed as drafted, and not according to what the contracting parties intended to have drafted: the presumption that parties intended to say what they actually said being a presumption juris et de jure: L Schuler AG v Wickham Machine Tool Sales Ltd [1974] AC 235 at 263. Seen in that light, then both provisions are equally important and useful workhorses to assist the courts in maintaining the proper rule of law in the construction of badly drafted contracts.

Although neither Wong Kai Chung nor Citicorp were referred to in Tan Hock Keng, it is submitted that that case was correctly decided. The propositions which counsel for Tan submitted as to the proper meaning of the vexed cl 16.1 were reasonable constructions which did not detract from the plain meaning of the words (contra the propositions forwarded by counsel in Citicorp and Wong Kai Chung). The clause to be construed was also far more obscure and more badly worded than those in either Citicorp or Wong Kai Chung. The court was not prepared to interpret the clause as contended by counsel for L&M without hearing extrinsic evidence. It may well be that, after hearing such evidence, the construction put upon the clause by counsel for L&M is preferred.

As stated by Phipson on Evidence (14th Ed, 1990) p 1050 and cited with approval by the Chief Justice in Citicorp at 774:

With regards to the limits of interpretation, it is to be remembered that the function of the court is merely declaratory of what is in the document, not speculative as to what was probably intended to be there. Moreover the meaning imputed must be one which the words are reasonably adequate to convey. ‘All latitude of construction shall submit to this restriction, that the words may bear the sense which by construction is put upon them. If we step beyond this line, we no longer construe men’s deeds, but make deeds for them.’ (See Gibson v Minet 1 H Bl 615; Re Lewis’ Will Trusts [1985] 1 WLR 102.) [Emphasis added.]

Therefore, in deciding the applicability of ss 94(f) and 95 of the Evidence Act, the question will always be how much latitude the court should give to the meaning of the words, in the particular circumstances of each case. That latitude will be governed by the court’s need to uphold the two principles cited herein, and will depend on how far the proposed construction of the clauses by counsel submit to the restriction that they must be consonant with the fair meaning of the words contained in the clause.

Vernon Voon
AbrahamLow LLC