Developments in contract: Implied terms

Principles

• Implied terms are terms that have not been expressly agreed between the parties to a contract, but which are implied into the contract by the court.
• In order for a term to be implied into a contract that term must (1) be reasonable and equitable; (2) be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) be so obvious that it ‘goes without saying’. (4) be capable of clear expression; and (5) not contradict any express terms of the contract.
• A term will not be implied into a detailed commercial contract merely because it appears fair or because the parties may have agreed it had they thought about it. Instead, a term should only be implied if, without it, the contract would lack commercial or practical coherence.

Recent developments

• In Yoo Design Services Ltd v Iliv Reality PTE Ltd the claimant sought to imply a term into a Design Services Agreement (DSA) that the defendant developer should market and sell some apartments in Singapore as soon as possible. Yoo argued for a further implied term that the developer should not be able to let the apartments before sale.
• The dispute arose because under the DSA, Yoo would only receive its fee for design work upon the sale of the apartments. A fall in the Singapore property market made it unviable for Iliv to sell the apartments, despite offering them to the market on two occasions at less than the originally anticipated value. As a result, Iliv decided to let the apartments out rather than sell them, meaning that Yoo was not paid its fee. The contract did not provide for what would happen if the apartments did not sell.
• The High Court refused to imply either term sought by Yoo, finding that neither was ‘so obvious it goes without saying’. As the DSA was the product of detailed negotiations between lawyers, had it been intended that the contract would involve a long stop date, that would have been included in the drafting.
• Further, if the intention of the parties was that the apartments had to be marketed immediately or within a reasonable time, even if that was against the wishes of Iliv, then one would expect that risk to be split between the parties and for the DSA to provide for a reduction in the fee due to Yoo in the event of any difficulty selling the apartments. The court stated that forcing Iliv to sell the apartments in a depressed climate in order to enable Yoo to receive its fee (a relatively low sum in the grand scheme of the project) was contrary to the business efficacy of the contract.

What this means

• This case reinforces the difficulty of persuading the court to imply a term into a commercial contract, particularly one that has been heavily negotiated by legal representatives and between commercial parties.
• It demonstrates the need to consider all eventualities at the outset of negotiating a commercial arrangement and the importance of not presuming that the status quo (in this case the buoyancy of the property market) will continue. As shown in this case, and the current Covid-19 world, changes to the commercial background can happen very quickly and parties need to consider where risk will lie in as many situations as possible.