In our July 2012 issue, we explored the impact of the case of Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2012] 3 SLR 801 on the implication of contractual terms into an agreement. There, the High Court had affirmed the traditional tests to determine whether terms should be implied into a contract  – the ‘officious bystander’ and the ‘business efficacy’ test. The High Court also adopted the test advanced by the Judicial Committee of the Privy Council in Attorney General of Belize v Belize Telecom & another [2009] 1 WLR 1998 (Belize), which requires the court to consider whether implying such a term into a contract “would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean”.

On appeal, the Court of Appeal ([2013] SGCA 43) has overruled the High Court on the test for the implication of contractual terms into an agreement, and has also ruled on when evidence outside of the contract will be admissible for the purposes of interpreting a contract. The Court of Appeal’s judgment is likely to come to be the seminal authority in Singapore law on how to interpret and to construe a contract, and be of daily relevance to practitioners.

THE RESULT

The dispute between Sembcorp Marine Ltd (Sembcorp) and PPL Holdings Pte Ltd (PPL Holdings) was set out in our earlier note here.

The High Court rejected Sembcorp’s contention that there was an implied term in the agreements that the provisions therein were premised upon the existence of the equal shareholding interest of Sembcorp and PPL Holdings in PPL Shipyard, and would cease to subsist or apply upon either party acquiring a majority of the issued and paidup share capital in PPL Shipyard. On appeal, the Court of Appeal reversed the High Court’s decision and held that there was such an implied term.

THE TEST FOR IMPLYING TERMS INTO A CONTRACT

It is the approach taken by the Court of Appeal that is of wider interest and importance. It thought that a more rigorous test than the  Belize test of reasonableness was required.

The Court of Appeal laid out a three-step process to decide whether a term should be implied into a contract:

  1. The court must first ascertain how the gap in the contract arises Implication will only be considered if the gap arises because the parties did not contemplate the gap.
  2. The court should then consider if it is necessary in the business or commercial sense to imply a term in order to give the contract efficacy.
  3. Lastly, the court is to consider the specific term to be implied, which must be one which the parties, having regard to the need for business efficacy, would have responded “Oh, of course!” had the proposed term been put to them at the time of the contract.

ADMISSIBILITY OF EXTRINSIC EVIDENCE

The Court of Appeal also shed further light on the extent to which evidence outside of a contract may be admitted for the purposes of contractual interpretation. While the court continued to endorse the contextual approach to the interpretation of contracts put forward in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029, it  held that only extrinsic evidence of the surrounding circumstances of the contract is admissible, but generally not extrinsic evidence to show the drafter’s subjective intentions. Adapting the common law to the challenges of the contextual approach (which comes from the civil law), the court emphasised the need to parties to plead the precise extrinsic and relevant evidence to be relied upon. In short, parties have to indicate what clarity a particular piece of extrinsic evidence will bring to the words used in a contract before they are allowed to adduce evidence and require the other party to disclose evidence of particular realms of the factual matrix. A Supreme Court Practice Direction has since been issued to codify this.

CONCLUSION

Singapore law continues to seek to ensure that one party cannot unjustly benefit from a purely strict and technical interpretation of the words used in contract.  Practical limits have now been placed on what evidence can be adduced or sought in respect of the circumstances that led to the choice of particular words. Advisers will now have to consider carefully what is said at the outset about why the plain meaning of the words in a contract might not apply, and not trawl through disclosure in the litigation process before doing so. This is to be welcomed in the continuing efforts to manage the costs and time of litigation.