The Singapore Law Gazette

Failure of Consideration: Different Facets

Bite-sized primers that summarise contemporary restitution issues in Singapore. This month: a straightforward case that is not.

Introduction

The facts in Benzline Auto Pte Ltd v Supercars Lorinser Pte Ltd [2018] 1 SLR 239 (Benzline Auto) are simple, and the judgment of the Court of Appeal does not really break new legal ground. But it is interesting nonetheless because it highlights the role that the change of position defence can play in the unjust enrichment analysis; which may seem odd, as the defence was not even discussed in the judgment.

The Judgment

Daimler manufactures Mercedes-Benz cars. Lorinser is a company that buys Mercedes-Benz cars from Daimler, modifies them and sells them under the Lorinser brand.

Benzline held the master dealership rights for Lorinser products. For various reasons, Benzline was not keen on being the direct retailer of Lorinser cars in Singapore. But another company, Supercars, was interested. So Benzline and Supercars started discussions under which Supercars would be the exclusive sub-dealer of Lorinser cars in Singapore (with Benzline holding the main dealership). A simplified chart illustrates the parties’ relationships:

The dispute arose because:

1. Daimler wanted a deposit of $300,000 before it would begin production of the cars;
2. at the time the deposit had to be paid, neither the agreement between Lorinser and Benzline (Main Dealership Agreement), nor the agreement between Benzline and Supercars (Sub-Dealership Agreement) had been concluded;
3. so neither Lorinser nor Benzline was prepared to pay the $300,000;
4. hence Supercars paid the $300,000 to Benzline, which paid it on to Lorinser and then to Daimler;
5. subsequently, Supercars was unhappy with the proposed terms of the Sub-Dealership Agreement. Supercars then approached Lorinser directly in an apparent attempt to cut out Benzline as the main dealer;
6. Benzline discovered this, got upset and concluded the Sub-Dealership Agreement with another party (Regal) instead; and
7. Supercars wanted the return of the $300,000 deposit.

Supercars sued Benzline for restitution of the $300,000. Supercars claimed there had been a total failure of consideration justifying repayment of the $300,000. The High Court allowed Supercars’ claim. The Court of Appeal reversed the decision of the High Court.

The Court of Appeal accepted that when a benefit has been conferred on the joint understanding that the recipient’s right to retain is conditional, then if the condition is not fulfilled, the recipient must return the benefit (subject to any defences). Such conditions could be promissory (eg, counter-performance under a contract), or non-promissory (eg, an expected event or state of affairs that neither party is responsible for bringing about).

Supercars argued that it had paid the $300,000 to Benzline on the mutual expectation that the Sub-Dealership Agreement would be entered into. In the end, Supercars was not the sub-dealer. So the expectation failed and Supercars was entitled to restitution of the $300,000 – ie, total failure of consideration.

The Court of Appeal disagreed. In the Court’s view, the mutual expectation was not (a) that the Sub-Dealership Agreement would be entered into; but (b) that Supercars would be offered the choice to enter into the Sub-Dealership Agreement on terms materially similar to the Main Dealership Agreement. That was the basis of the $300,000 payment, and that basis had not failed. Rather, Supercars had chosen to reject the offer (and then try to sideline Benzline). Since the basis did not fail, there was no failure of consideration, so the claim in restitution could not succeed.

A Wrinkle in Benzline Auto

The wrinkle in the case lies with the Court’s characterisation of the basis of the $300,000 payment: according to the Court, the basis was that Supercars would be offered the choice to enter into the Sub-Dealership Agreement on terms materially similar to the Main Dealership Agreement. This characterisation impressed upon the car businessmen a degree of delicate legal reasoning they were unlikely to possess. This is especially since:

1. the material witnesses for both parties did not have legal training;
2. neither Benzline or Supercars had argued that the Court’s characterisation was the basis on which the $300,000 had been paid;
3. at the time Supercars paid the $300,000 to Benzline, “both sides were bullish about the success of the deal and saw the entry into the [Sub-Dealership Agreement] as inevitable or even a mere formality”;¹ See Benzline Auto Pte Ltd v Supercars Lorinser Pte Ltd [2018] 1 SLR 239 (Benzline Auto) at [60]. and
4. on cross-examination, Benzline’s own key witness had agreed that the $300,000 payment had been made “on the basis that the parties were going to sign a sub-dealer contract”.² See Benzline Auto at [65]. The Court explained this aspect of Benzline’s testimony on the basis that the witness lacked legal training, and that it was equally plausible that his answer reflected only that the parties expected or assumed that the Sub-Dealership Agreement would be entered into, and not necessarily that this expectation/assumption was communicated and formed the legal basis of the transfer.

In any event, the Court’s characterisation of the basis of the $300,000 payment did not necessarily preclude the additional basis that the parties would also enter into the Sub-Dealership Agreement. As the court accepted, a transfer can have more than one basis,³ See Benzline Auto at [52]. each of which may be a necessary but not sufficient condition. Hence in this case, the basis of the $300,000 payment could have been (a) Benzline offers Supercars the choice of entering into the Sub-Dealership Agreement on said terms (as characterised by the Court); and (b) Supercars accepts the offer (as characterised by Supercars).

The Court appears to have been troubled by the conduct of Supercars leading up to its attempt to sideline Benzline, and how the parties would have allocated the risk of the deal falling through. In particular, the Court was reluctant to accept that Supercars could be allowed simply to refuse to sign the Sub-Dealership Agreement and thereby claw-back the $300,000 from Benzline (who would already have paid it on to Lorinser).⁴ See Benzline Auto at [67] and [69]. In the Court’s mind, this would come close to allowing Supercars to be rewarded for its own wrong.

Yet this legitimate concern could, I think, have been addressed instead through the application of the change of position defence.

Let us start with a small tweak to the facts: assumei that Benzline had not, for whatever reason, paid the $300,000 on to Lorinser or Daimler. In fact, assume that Benzline had not come under any obligation to pay the $300,000 to Lorinser/Daimler. So Benzline was still sitting on the $300,000, and it then concluded the Sub-Dealership Agreement with Regal. In this counterfactual, there is no good reason why Benzline should be allowed to keep the $300,000.

If we accept that restitution should be ordered in the counterfactual, then we must confront the wrinkle identified at the start of this section. If the basis of the $300,000 payment was, as the court held, the offer of the Sub-Dealership Agreement on said terms, then Benzline would not be obliged to repay the $300,000 even in the counterfactual. It is unclear what policy reason would support such an outcome.

But if we take the view that a basis of the $300,000 payment was the mutual expectation that Supercars would enter into the Sub-Dealership Agreement, then that basis would have failed. The next question would be whether Benzline could avail itself of the change of position defence. On the Court of Appeal’s findings, Benzline could well have argued that (a) it had already paid the $300,000 over to Lorinser; (b) it would not otherwise have paid the $300,000 to Lorinser because Benzline had no interest in importing Lorinser cars, save as the middleman; and (c) the reason why the basis failed was entirely the fault of Supercars. If so, it is difficult to see how the claim by Supercars would have succeeded.⁵ The High Court had touched on the change of position defence and ruled out its applicability. But since Benzline had, remarkably, not pleaded change of position in its defence, the judge’s analysis was understandably brief. The outcome would be the same (ie, restitution is denied).

There is another benefit to laying the weight of analysis on the change of position defence: greater nuance and flexibility to address the justice of the case. To illustrate, a more thorough investigation of the terms of the commercial relationship between Benzline and Regal (ie, the eventual sub-dealer) might have uncovered that Benzline had given Regal say a $150,000 “discount” on the first purchase, thereby effectively dividing up the sum of $300,000 from Supercars between them. If so, we are essentially back to the counter-factual, in which leaving aside Regal’s gain of $150,000, Benzline should have to account to Supercars for the $150,000 gain that it had retained.

Conclusion

In a claim under total failure of consideration, any unpromised basis for a payment should be kept simple and consistent with commercial practicality. Concerns about fairness can be more flexibly addressed when considering whether there is any defence to the claim in unjust enrichment.