The above question was considered by the Court of Appeal recently in Burgundy Global Exploration Corp v Transocean Offshore International Ventures Ltd and anor appeal [2014] SGCA 24.

THE PARTIES

The plaintiff, Transocean Offshore International Ventures Ltd (Transocean), supplies mobile offshore drilling units and provides drilling services for oil and natural gas reserves.

The defendant, Burgundy Global Exploration Corporation (Burgundy), is a Philippines company engaged in the business of exploring and developing oil and gas resources in the Philippines.

BACKGROUND FACTS

Transocean and Burgundy entered into a drilling contract (Drilling Contract) where Transocean agreed to supply a semi-submersible drilling rig and provide offshore drilling services to Burgundy. It was a condition precedent of the Drilling Contract that parties shall enter into an escrow agreement (Escrow Agreement) under which Burgundy was to deposit certain amounts into an escrow account following a specified timeline. The Escrow Agreement provided that a breach of its terms would give Transocean the right to terminate the Drilling Contract.

Burgundy failed to make the initial deposit of US$16.5 million into the escrow account by the stipulated time in the Escrow Agreement. Transocean thus exercised its right under the Escrow Agreement to terminate the Drilling Contract. Transocean also regarded Burgundy’s failure as a repudiatory breach of the Escrow Agreement which it accepted as terminating the same.

The two contracts provided for distinct dispute resolution mechanisms. The Drilling Contract was governed by an arbitration agreement while the Escrow Agreement was governed by a jurisdiction clause in favour of the Singapore courts.

LITIGATION HISTORY

In January 2009, Transocean commenced a suit in the Singapore High Court against Burgundy for breach or repudiation of the Escrow Agreement. Transocean claimed, amongst other things, damages to the tune of US$105,937.952.00 as its lost profits arising from the termination of the Drilling Contract.

Burgundy responded with an application for a stay of the proceedings in favour of arbitration pursuant to the arbitration agreement in the Drilling Contract. No stay was ordered. The arbitration agreement was held not to apply to Transocean’s pleaded cause of action for a claim arising from Burgundy’s failure to pay the requisite deposit into the escrow account in accordance with the terms of the Escrow Agreement. The further question of whether Transocean could recover the specific losses it claimed to have suffered was not considered at this stage.

Transocean subsequently obtained summary judgment against Burgundy for damages to be assessed. In the first instance, Transocean was awarded damages of some US$106m representing, in bulk, Transocean’s lost profits under the Drilling Contract.

With a view to enforcing the final judgment, Transocean pursued an order for examination of judgment debtor (EJD Orders) against Burgundy’s directors who were foreign nationals ordinarily resident overseas. No leave to serve the EJD Orders out of jurisdiction was obtained. Transocean subsequently applied for and obtained an order for substituted service of the EJD Orders in Singapore. It was this order that Burgundy’s directors applied unsuccessfully in the first instance to set aside.

The High Court judge dismissed both Burgundy’s appeal against the first instance award of damages granted in favour of Transocean and Burgundy’s directors’ appeal against the dismissal of the setting aside application. Further appeals were filed to the apex court. They were allowed by the Court of Appeal (CA). This update will focus on the CA’s decision on Burgundy’s appeal against the damages awarded.

COURT OF APPEAL’S DECISION

On appeal, Transocean’s awarded damages was significantly cut down by more than 99% from the lost profits claim under the Drilling Contract of US$106m to its alternative claim for wasted costs and expenses in entering into the Escrow Agreement of US$55,001.46.

The CA held that while the two contacts are closely linked, Transocean’s performance interest under the two contracts was nonetheless different. The escrow matters were deliberately carved out from the transaction and subjected to a separate agreement. Transocean’s performance interest under the Escrow Agreement was to obtain security for Burgundy’s performance of its payment obligations under the Drilling Contract. This was distinct from Transocean’s performance interest under the Drilling Contract, which was to make profits from carrying out the contracted services.

Hence, the true damage caused by Burgundy’s breach of the Escrow Agreement was the loss of its security, and not the loss of profits under the Drilling Contract. The CA was of the view that Transocean cannot seek to vindicate its performance interest under the Drilling Contract by bringing a claim founded on breach of the Escrow Agreement.

That the Escrow Agreement entitled Transocean to terminate the Drilling Contract upon a breach of the Escrow Agreement was regarded irrelevant. A breach of the Escrow Agreement was not necessarily a breach of the Drilling Contract. A contractual right to terminate does not serve to import all the obligations under the Drilling Contract into the Escrow Agreement and allow Transocean to treat them as a single composite contract.

To recover its losses flowing from the termination of the Drilling Contract, the proper course for Transocean to take would have been to bring a claim in arbitration under the dispute resolution clause in that agreement, prove that the Drilling Contract had been breached and that it was entitled to damages for those losses. Such damages cannot be claimed in the court proceedings.

CONCLUDING THOUGHTS

The decision provides finality to the “long and somewhat convoluted procedural course” of litigation spanning more than 5 years between the parties. It serves as a timely reminder of the importance for the claimant to ensure that it makes its claims in the proper forum using the proper procedure. As the CA commented, some part of the litigation had been in vain because Transocean’s claim for damages was premised on a fundamental conceptual error.

Having the right under a contract to terminate another related contract does not necessarily mean that there is a breach of the latter contract and that one is entitled to recover damages arising from termination of the latter contract. Damages should reflect the true loss caused by the contract-breaker’s breach of that contract sued upon.

This case demonstrates the importance of parties’ decision on structuring and inking their transaction. Where the transaction is to be contained in more than one document, parties should be mindful of how one document interplays with the other. The contractual documents, when read together as a whole, should evidence parties’ intentions on how the deal is to be carried out and what happens when a dispute arises. Particular attention should be paid to the dispute resolution process that will apply when distinct mechanisms are stipulated in the interrelated contracts.