It is important for the companies while rolling out the policies to ensure the policy is free from any ambiguity and is not inconsistent with other policies of the company. If a term of the employment contract is vague or ambiguous, the contra proferentem rule, that is, interpretation against the draftsman would be applied against employers. Interesting update on recent Singapore High Court decision in HP case of wrongful termination.

Singapore High Court resolves ambiguity in employment contract in ex-employee’s favour

Baker & McKenzie

Singapore August 28 2015

 If a term of the employment contract is vague or ambiguous, is the employee bound by the meaning which the employer attributes to it? This was the issue which the Singapore High Court had to consider in a recent case1 . 

The employee, Corinna Chin Shu Hwa ("Chin"), was formerly employed by Hewlett-Packard Singapore (Sales) Pte Ltd ("HP"). A dispute had arisen between the parties as to the correct interpretation of several terms of Chin’s employment contract. These terms concerned the payment of various incentive compensation. Chin commenced legal proceedings against HP for monies which she claimed were owed to her under those provisions. Following the trial of the action, the Court allowed Chin's claim and held that she was entitled to the full sum of $627,369.54 being claimed. From this sum, $584,613.19 was awarded as outstanding incentive compensation under HP's performance metric. The other sum of $42,756.35 was awarded on the basis that Chin's final sales incentive compensation should have been measured against her annual targets, as calculated on a pro-rated basis rather than on an aggregate basis. Facts Chin was employed by HP between January 2005 and June 2012, when she was retrenched. In the course of her employment, Chin worked as a product sales specialist and was actively involved in HP's dealings with Network for Electronic Transfers (Singapore) Pte Ltd ("NETS"). NETS had been using HP's servers to support its e-payment system until late-2010, when HP's servers became due for replacement. NETS had initially rejected HP's proposal for a new system and had entered into a contract with IBM, one of HP’s competitors, for the purchase and installation of its servers. However, there were problems with the migration from HP’s servers to IBM’s servers. Chin and her colleagues heard about the migration problems and successfully clinched a deal with NETS for it to use HP’s new system instead. By this time, HP had introduced the New Business Metric ("NBM"), which was a new performance metric to encourage sales specialists to bring in new business. Chin made repeated queries as to whether the NETS contract constituted "New Business"2 as defined in the NBM. 

Chin did not obtain any confirmation and was eventually retrenched, whereupon she was notified that the amount of her final sales incentive compensation was calculated on an aggregate basis by measurement of her sales performance against her goals for the full financial year (as opposed to being pro-rated against the period of her employment for that financial year). She also later received an official response indicating that her claim for incentive compensation under the NBM was unsuccessful as the NETS contract did not amount to "New Business". 

The issues in contention were whether NETS qualified as a "new end-user customer" on a proper construction of the NBM so as to entitle Chin to incentive compensation (the "NBM Issue"), and whether, on a proper construction of HP’s Global Sales Compensation Policy (the "GSC Policy"), Chin's sales incentive compensation on retrenchment should have been measured against her annual targets as calculated on a pro-rated basis or an aggregate basis (the "Pro-Rating Issue"). Chin’s case was that: 

(a) NETS qualified as a "new end-user customer", so as to entitle her to a sum of $584,613.19 under the NBM; and 

(b) the sales incentive compensation should have been calculated on a prorated basis as opposed to an aggregate basis, so as to entitle her to a sum of $42,756.35 under the GSC Policy. Decision Contractual Interpretation 

The Court found that the issues concerned the contractual interpretation of the NBM and the GSC Policy respectively. The process of contractual interpretation involves ascribing to the words the meaning which the parties, using those words against the relevant background, would have reasonably understood them to mean3. This may not always accord with a party’s subjective intention as the purpose of the process of construction is to identify and give effect to the parties’ intention, objectively ascertained. Extrinsic evidence may also be admitted in aid of the interpretation of written words4 so long as they meet three criteria5 : 

(a) relevance (it would affect how the language would have been understood by a reasonable man); 

(b) reasonable availability to the contracting parties; and 

(c) relation to a clear or obvious context (i.e. the context must allow the court to objectively ascertain a clearly defined or definable intention held by both parties with respect to how the contractual term in question should be interpreted6 ). 

In other words, extrinsic evidence that is sought to be admitted must always go towards proof of what the parties, from an objective viewpoint, ultimately agreed upon. Such extrinsic evidence may be of surrounding circumstances, previous negotiations, subsequent conduct and even subjective intent (especially where the ambiguity arises when the language is applied to the factual situation). If, pursuant to the foregoing, there remains ambiguity or doubt about the meaning of a contract, the words will be construed against the person who put them forward, in accordance with the contra proferentem rule7 . 

This rule should, however, only be applied as a tool of last resort8 when the Court is unable to arrive at a conclusion of the meaning of the term in question after undergoing the interpretative process. The NBM Issue The Court was concerned with the interpretation of the contractual term "new end-user customer". It considered whether a customer like NETS, who was described as a “win back” customer by HP, could be considered a "new enduser customer" as alleged by Chin (thereby falling within the definition of “New Business”), or whether only a customer with no prior relationship with HP could ever be considered new. On the facts, the evidence was unclear as to whether the parties had intended for "new end-user customer" to include a "win back" customer. Accordingly, the Court concluded that the meaning of "new end-user customer" remained objectively ambiguous. On the basis that HP had drafted the NBM and had implemented the same without any opportunity for mutual negotiations with HP’s employees beforehand, the Court held that the term should be construed contra proferentem against HP as the party who had drafted the definition. The Court therefore found that a “win back” customer was a “new end-user customer”. 

Accordingly, the deal for NETS to use HP’s new system amounted to “New Business” and Chin was therefore entitled to her incentive compensation, amounting to $584,613.19, under the NBM. The Pro-Rating Issue In respect of the GSC Policy, the question which arose for the Court's consideration was whether, on a proper construction of the relevant terms, the employee’s entitlement to sales incentive compensation upon retrenchment should be measured against her annual targets, as calculated on a pro-rated basis or on an aggregate basis . In this case, the Court adopted a contextual approach to interpreting the GSC Policy as a whole taking into account, amongst other things, the interrelation of several clauses in the Policy and HP's previous inconsistent approach in calculating incentive compensation for employees who had been involuntary terminated. The Court concluded that the GSC Policy was unclear as to which calculation method should apply to a person who was involuntary terminated. In particular, the Court also highlighted that HP’s previous inconsistent calculation of annual targets for the purpose of paying incentive compensation to retrenched employees reinforced its finding that the Policy was ambiguous as to which basis should apply to the present case. 

Accordingly, the Court construed the GSC Policy contra proferentem against HP. It held that since Chin had been involuntarily terminated, the calculation of her incentive compensation should be measured against her annual targets, as calculated on a pro-rated basis and not on an aggregate basis. She was therefore entitled to her sales incentive compensation, amounting to $42,756.35, under the GSC Policy. Comment This case illustrates the potential complications and financial consequences that may arise from poorly drafted contractual provisions. If the employer had set out clearly and unambiguously that "new end-user customer" was intended to exclude "win back" customers, and that sales incentive compensation would be measured against annual targets, as calculated on an aggregate basis and not on a pro-rated basis, the outcome of this case may have been different. This point is particularly relevant for companies who generally offer standard form contracts to employees, and who implement remuneration and incentive policies unilaterally with little or no opportunities for mutual negotiations beforehand. 

In the absence of clear and unequivocal evidence to indicate the objective intentions of the contracting parties as to the meaning of such ambiguous terms, the contra proferentem rule would more often than not be applied against employers. And as seen in this case, the application of the contra proferentem rule may result in adverse financial repercussions to employers. This case thus serves as a useful reminder for companies to ensure that their compensation policies are clear, express and unambiguous. In respect of employees engaged in sales and other commission-based work, the Court recognised that incentive payments are extremely important to such employees as they usually form the bulk of their compensation. Therefore, if companies wish to offer contracts or policies that contain provisions that may be unfair to employees, they must not only give notice of such terms to their employees but also ensure that these terms are put across in a way that is clear and unambiguous, leaving no room for any doubt. It should be noted that HP has since appealed the decision and much remains to be seen if the Court of Appeal will affirm or overturn the decision of the High Court in due course. 

1 Corinna Chin Shu Hwa v. Hewlett-Packard Singapore (Sales) Pte Ltd [2015] SGHC 204 
2 Under the NBM, “New Business” was defined to mean, amongst other things, as “new end-user customer”, “new application and/or new area for the existing end-user customer”, “new NonStop system sale as pre-requisite to new business entitlement” and “to differentiate new biz from upsell”. 
3 Andrew Phang Boon Leong, Gen Ed, The Law of Contract in Singapore (Academy Publishing, 2012) at para 06.042, citing the House of Lords decision of Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896 at 913 
4 Zurich Insurance (Singapore) Pte Ltd v. B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029 ("Zurich Insurance") 
5 Zurich Insurance at 132(d) 
6 Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stewart [2012] 4 SLR 308 at [43] 3 Client Alert August 2015 
7 Kim Lewison, The Interpretation of Contracts (Sweet & Maxwell, 5th Ed, 2011) at p.360. 
8 LTT Global Consultants v. BMC Academy Ptd Ltd [2011] 3 SLR 903 at 56. 4 Client Alert August 2015 
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