Inaugural SICC decision turns up heat on coal contract

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The first written judgment of the Singapore International Commercial Court (SICC) provides insight into Singapore’s approach to contractual interpretation. The case involved a joint venture dispute between parties in Australia and Indonesia, with associated companies in Singapore, over the construction and commissioning of a coal briquette processing plant in Indonesia. In a very comprehensive judgment, the SICC considered the obligations of the parties under a joint venture deed, along with other project agreements and side deeds.

KEY FACTS

An Australian company, Binderless Coal Briquetting Company (BCBC), held an exclusive licence for the “binderless coal briquetting process” (BCB process), by which raw coal is processed into briquettes with higher calorific value and lower moisture content than normal. Bayan International (BI), a Singaporean entity, was part of the Bayan Resources Group (BR), an Indonesian group of companies with interests in coal.

inaugural-sicc-decision-turns-up-heat-on-coal-contractBCBC and BI agreed to construct and commission a plant in Indonesia employing the BCB process, and that companies related to BI would supply coal to the facility. In January 2007, the parties established the joint venture company Kaltim Supacoal (KSC) in Indonesia. BCBC Singapore (BCBCS), a Singaporean company in the same corporate group as BCBC, would hold 51% of the shares, with PT Bayan Resources TBK, a publically listed Indonesian entity in the Bayan Resources Group, holding the remaining shares.

The project’s construction and commissioning costs exceeded budget, so BCBCS committed more funds and requested BR to do the same. Further, KSC obtained a US$10 million working capital loan facility from Standard Chartered Bank (SCB).

In December 2011, BR sent a default notice to BCBC’s publically listed parent company, White Energy Company (WEC) and BCBCS, alleging breaches of the JV deed by BCBCS and a total failure of consideration and purpose of the same.

WEC responded by alleging that BR was in breach of its funding obligation and requesting confirmation that BR would meet the same. Without admitting liability, and to mitigate further loss and damage, BR agreed to transfer certain funds.

CONTRACTUAL INTERPRETATION

In considering the funding issues and BR’s obligations, the SICC provided some interesting comments on the approach to contractual interpretation under Singaporean law, including where extrinsic evidence can be utilized, and what form that might take.

It focused on whether BR was obliged to:

1. Provide funding for the commissioning, operations and maintenance of the project in accordance with a funding memorandum of understanding (MOU);

2. Consent to KSC obtaining an advance from SCB to repay monies lent to it by BCBCS; and

3. Contribute 49% of KSC’s care and maintenance costs.

The SICC looked at the terms of the JV deed and funding MOU, which were both expressly governed by Singaporean law, under which a contextual approach is taken to contractual interpretation (objective intention, i.e., “the intention of the parties at the time they entered into a contract based on all relevant evidence”]. Extrinsic evidence, including subsequent conduct, can be used to interpret a contract if it is “relevant, reasonably available to all the contracting parties and relates to a clear or obvious context”.

In considering the JV deed, the SICC looked at the natural and ordinary meaning of the funding obligations clauses and held that had the parties intended to give up their “significant right” to withhold consent to calls for funding, they would have articulated this in the funding MOU.

The SICC also commented on what it considered to be relevant extrinsic evidence. It looked at BR seeking clarification of the costs associated with its funding obligations, and did not consider this to be relevant contextual evidence of BR’s awareness of its legal obligation to contribute to such costs under the funding MOU.

Ultimately, it determined that BR was under no obligation to:

1. Provide funding for commissioning costs or care and maintenance costs, even though it was subject to good faith obligations under the JV deed; or

2. Consent to KSC obtaining a further advance to repay debts owed to BCBCS.

ILLEGALITY CONSIDERED

The SICC considered whether the coal supply agreements and related side agreements for the supply of coal in 2011 and 2012 were illegal or entered into for an illegal purpose under Indonesian law, and thus unenforceable in Singapore. This economic model used for pricing the coal triggered possible transfer pricing and tax implications following the Indonesian government’s introduction of regulations on mandated minimum benchmark prices for various types of coal in 2010.

The SICC explored the two distinct strands that comprise illegality in Singapore. First, as a matter of public policy … a Singapore court will not enforce a contract or award for damages for its breach, if its object or purpose would involve doing an act in a foreign and friendly state which would violate the law of that state.

Second, on an independent conflict of laws basis, the SICC confirmed that a contract would be … invalid insofar as the performance of it is unlawful by the law of the country where the contract is to be performed. BR’s argument that the coal supply agreement and associated side letter were illegal was dependent upon them being illegal under Indonesian law. After considering expert evidence from both sides, the SICC found that while there were common grounds on which an agreement would be held to be unenforceable, the agreements were not tainted by illegality as they were consistent with the regulations introduced by the Indonesian government.

Notably, the judgment provides detailed consideration of the pricing mechanisms in the coal supply agreements and related side letter, which may prove useful in similar commercial settings.

IMPLIED TERM

One of the contentious counterclaim issues was whether there was an implied term in the JV deed that BCBCS was required to use skill and care when providing technical assistance to KSC.

The SICC addressed the approach to implied terms in Singapore noting that a court must:

1. Ascertain how the gap in the contract arises, as the implication will only be considered where parties did not contemplate the gap;

2. Consider whether it is necessary in a business or commercial sense to imply the term to give the contract efficacy; and

3. Consider if the specific term to be implied is one that the parties would have responded ‘Oh, of course!’ had the proposed term been put to them at the time of the contract.

The SICC held that the obligation in the JV deed on BCBCS did not go so far as to impose an obligation to provide the assistance as it related to design, building or operating of coal preparation and briquetting plants.

As such, there was no implied contractual duty to use the reasonable care and skill expected of a competent designer, builder or operator of the same.

ANDREW STEPHENSON is a partner with Corrs Chambers Westgarth in Melbourne.
LINDSAY HOGAN, a senior associate at the firm, and JACLYN SMITH, an associate, also contributed to this article.