Yoo Design Services Limited v. iLiv Reality PTE Limited  EWHC 1077 (Comm)
Dentons successfully defended a claim against the developer for non-payment of a US$1.12 million fee. The court decided that an agreement requiring payment only on the sale of a property did not contain an implied term requiring the developer to sell within a reasonable time. The implied terms alleged by the claimant designer did not satisfy the test of business necessity set out in Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Ltd.
Whilst such cases are determined on their facts, the judgment highlights the practical difference between construction and implication of contract terms, and the difficulties in persuading the court to imply terms.
The defendant developer constructed a block of luxury apartments and engaged the claimant to provide interior design services. Under the parties' agreement, the fixed US$1.6 million retainer was staged. Part was payable on exchange and legal completion of all the apartments.
The agreement anticipated a construction completion date in 2010, with marketing to begin during construction and anticipated sales to be made off plan. The claimant designer commenced court proceedings in 2018 for the balance of its retainer after the developer failed to sell any of the apartments due to the recession in the Singapore property market. The agreement contained no express term requiring the developer to sell the apartments by a certain date and thereby trigger payment of the fee. So the designer claimed that either: (i) the express terms of the agreement ought to be construed in such a way as to make the developer's actions a breach of contract; or (ii) terms should be implied into the agreement obliging the developer to sell the apartments within a reasonable time. It was argued that the sales should have taken place, even if the consequence was a sale of the apartments at a loss.
Construction of terms v. implication of terms
The court's usual role in interpreting, or construing, contracts is to resolve ambiguities and/or reconcile inconsistencies and thereby attribute the true meaning to the words that the parties used in the contract. Implying terms into contracts involves a different and more invasive exercise: the creation of terms to deal with matters for which the parties themselves made no provision. Consequently, the law imposes strict constraints on the court's power to imply terms.
The express terms of the agreement could not be construed to put the developer in breach
The designer alleged that the developer had only made two attempts to sell the apartments in over 10 years and had instead rented them out. The designer argued that the express terms ought to be construed as imposing obligations on the developer to market with due diligence and expedition and to sell within a reasonable time, thereby putting the developer in breach. The judge rejected these arguments on the basis that the designer was seeking to start with the alleged breach and then ask the court to construe the contract terms in a way that covered the purported breach. The judge refused to be drawn into creating more extensive obligations by a process of construction. He would only look at whether the alleged breach was capable, if proved, of being in breach of the express terms as drafted. Essentially the claimant was confusing construing the contract with the implication of terms.
The test for implying terms into a contract
The judge then applied the test set out by the Supreme Court in Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Ltd  UKSC 72  AC 742.
In light of the express terms, commercial common sense and the facts known to both parties at the time the contract was made, a term will only be implied if it satisfies the test of business necessity. The term to be implied must:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
- be so obvious that it goes without saying (the officious bystander test);
- be capable of clear expression; and
- not contradict any express term of the contract.
The application of the test to the facts of this case
The judge found it unsurprising that the developer accepted an express term for completing the construction within a set period (an obligation it had control over) but not selling (since that also depended on third parties). The parties could have included a long-stop date for payment in the agreement (which was comprehensive and negotiated/drafted by lawyers) but they chose not to structure the agreement in this way.
The judge placed importance on the relative financial investment in the project made by each party. The designer's contribution, the deferment of part of its fee, contrasted with the developer's cost of acquiring the land and financing the build. In that light, the designer's claim that the developer should be obliged to sell at a loss in a depressed property market, so the designer could earn the balance of its fee, was neither obvious nor necessary to give business efficacy to the agreement.
If a term requiring sale at a particular time were to be implied, the judge considered that one would expect both parties to share in the downside following sale at a lesser value. The agreement did not reduce the amount of the designer's fee in such a scenario, although it did provide for an additional fee to the designer if the apartments sold at a higher value. That imbalance in the risk profile of the agreement made it unnecessary to imply a term that the apartments should be sold merely to enable the designer to earn its fee. The developer therefore retained its discretion on when to sell the apartments, though the judge acknowledged that the purpose of the agreement was ultimately to sell.
If the officious bystander had highlighted the absence of a term imposing on the developer a set time for sale (irrespective of the state of the property market), the judge thought it highly unlikely that the parties would have turned to him, rolled their eyes and said "well of course that would be included": instead he considered that would be a highly contentious issue.
COVID-19 has the potential to change the strict constraints on the court's power to imply terms. The British Institute of Commercial and Comparative Law has issued a Concept Note highlighting the need to consider the "necessary contribution of the law to safeguard commercial activity" by, amongst other things, encouraging further judicial creativity and intervention in areas such as implied terms.
The case is published here.