In Yoo Design Services Ltd v Iliv Realty PTE Ltd, the Court of Appeal has, once again, shown itself to be averse to exercising the ‘extraordinary power’ to intervene in a contract by implying a term in anything other than the most clear-cut cases. While it is understandable that claimants, in the absence of any helpful express terms, make claims based on the implication of terms, a party doing so must appreciate the height of the hurdle to be cleared.
Yoo Design Services Ltd (‘Yoo’) and Iliv Realty PTE Ltd (‘Iliv’) had entered into a design service agreement in relation to a high-value residential property development in Singapore comprising 28 apartments. Yoo’s fee was US$1.6 million, one-third of which was to be paid at the outset and the remainder on the sale of all 28 apartments.
Under Singaporean property law, foreign property developers (which Iliv was) are required to sell their properties within two years or risk significant financial penalties. However, by the time the development was complete in 2013, the Singapore property market had suffered a significant downturn. No sales were achieved and the apartments were instead rented out.
Yoo commenced proceedings contending that Iliv was in breach of implied obligations to market and sell the apartments. Yoo submitted that it was abundantly clear, particularly in light of the financial penalties that would be imposed in the event of no sales after two years, that the common intention of the parties was that the apartments should be sold within a reasonable time. Accordingly, Yoo reasoned, a term should be implied to that effect.
Iliv (sensibly) did not dispute that there was a common intention that the apartments should be sold within a reasonable time, but instead submitted that that common intention was not a sufficient basis for the implication of such a term.
Having lost at first instance, Yoo appealed.
The Court of Appeal’s decision
The Court of Appeal dismissed Yoo’s appeal. While the presumed common intention of the parties had been the starting point for the implication of terms in the past, that was no longer the case. Since Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd, the courts have been consistent in their approach: either the term must be necessary to give business efficacy to the contract (so that no term will be implied if the contract is effective without it); or it must be so obvious that it goes without saying. Nothing less will do.
While the test may be briefly stated, the Court of Appeal went on to set out the following comprehensive list of principles relevant to its application:
- The business efficacy and the obviousness tests are alternative test. However, it will be a rare (or unusual) case where one, but not the other, is satisfied.
- The business efficacy test will only be satisfied if, without the term, the contract would lack commercial or practical coherence.
- The obviousness test will only be met when the implied term is so obvious that it goes without saying. It needs to be obvious not only that a term is to be implied, but precisely what that term (which must be capable of clear expression) is.
- A term will not be implied if it is inconsistent with an express term of the contract.
- The implication of a term is not dependent on proof of an actual intention of the parties. If one is approaching the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time.
- The question is to be assessed at the time the contract was made. It is wrong to approach the question with the benefit of hindsight in the light of the particular issue that has in fact arisen. Nor is it enough to show that, had the parties foreseen the eventuality which in fact occurred, they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred.
- The equity of a suggested implied term is an essential but not sufficient precondition for inclusion. A term should not be implied into a detailed commercial contract merely because it appears fair or merely because the court considers the parties would have agreed it if it had been suggested to them. The test is one of necessity, not reasonableness. That is a stringent test.
Applying these principles, the Court of Appeal found that Yoo’s claim failed in every respect.
The agreement had practical and commercial coherence as it stood. Iliv owned the development and had invested vast sums in the development of the apartment with a view to making a profit. It would be commercially counterintuitive for it to have anything other than absolute control over the timing and circumstances of sale. It would be an oddity to force Iliv to sell at a particular point in time (potentially losing very large sums of money) in order to trigger payment of Yoo’s relatively small retainer fee.
While the parties may have had a common intention that the apartments would be sold in reasonable time, that did not mean that Iliv would have agreed to an obligation to sell regardless of the state of the market. It was far from obvious that, had the parties considered the issue, they would have agreed that any additional term should be included, let alone what the precise term should be.
In any event, a duty to sell the apartments within ‘a reasonable time’, rather than providing practical or commercial coherence, would introduce a hopelessly uncertain obligation.
Claims based on an implied term are often claims of last resort, made when the contract in question does not operate as one of the parties would like it to. Before embarking on such a claim, prospective claimants must understand that however reasonable they consider the proposed term to be, this will be irrelevant to the court’s analysis. The court will only determine that a term is to be implied if it meets one or other of the necessary / obvious tests. This is not a regular occurrence.
  EWCA Civ 560
  UKSC 72