Case Commentary: Sembcorp Marine
Victor Leong
Introduction
The Singapore Court of Appeal in Sembcorp Marine1 has recently clarified the law as regards, inter alia, the implication of terms in fact. This article will examine three aspects of the court’s decision regarding the implication of terms: the basis of ‘necessity’, the complementary approach towards the common law tests, and the practical framework which the court has chosen to adopt.
It is this author’s view that the court in Sembcorp has laudably confirmed the basis of necessity and clarified the conjunctive nature of the common law tests as applied in Singapore. However, the court unfortunately chose to import the vague concepts of foreseeability and normative bases other than business efficacy into the picture. Finally, the court should have taken the opportunity to clarify the exact scope of application of the common law tests in Singapore – especially what exactly constitutes business ‘efficacy’.
The basis of necessity
The prevailing approach in Singapore towards the implication of terms in fact is a basis of necessity. Although this seems to have been established law2, there was some confusion in the common law recently, given Lord Hoffmann’s seminal decision in Belize3. In the Belize decision, Lord Hoffmann put forth an approach based on the ‘interpretation’ of the contract as a whole – ostensibly a basis of reasonableness. The Court of Appeal in Sembcorp conclusively rejected the Belize test to the extent that it purports to impose this standard of reasonableness to implied terms4, following previous decisions in Foo Jong Peng5 and MFM Restaurants6.
This unequivocal clarification is welcome for law students such as this author for two reasons. First, it reaffirms the Singapore courts’ commitment towards giving effect to parties’ intentions as much as possible. Implying terms into a contract is to give effect to parties presumed intentions, ie, what they must have meant when drafting the contract7. This is as opposed to implying the reasonable rights that the courts would like them to have – even if parties may have meant for a slightly imbalanced bargain to reflect other considerations.
Second, this accords with other areas in contract law. As mentioned, the Singapore courts’ attitude of giving effect to parties’ intentions whenever possible is also currently reflected in other areas of contract law. For instance, in the absence of express stipulation or contextual evidence that parties meant for a term to be a condition, the court will not easily find that the effect of a breach is so severe as to ‘substantially deprive’ the aggrieved party of the benefits of the contract8. This gives effect to the severity that the parties intended (or did not intend) to accord the particular term, rather than the court imposing its own standard by looking at the effect of the breach.
However, a possible problem is that the distinction between what is necessary and what is reasonable is not always clear. For instance, the House of Lords in Liverpool9 purported to apply the standard of necessity to implying terms in law. Accordingly, the term eventually implied was that the landlord would keep the common areas clean and would maintain the lift, among others. However, it is unclear how exactly this is necessary rather than merely reasonable. The occupation of premises in that case would still have been perfectly usable even without the common areas being clean, even though it would have been an annoyance. Similarly, the lift being out of order would have served as an inconvenience for the occupiers, although they could still climb the stairs. Arguably, such annoyances or inconveniences, while reasonable for the landlord to fix, is not entirely necessary for the operation of the contract.
It is thus necessary to analyze the common law tests which were developed to manage this problem (in the area of implied terms in fact), and how they apply in Singapore.
The complementary approach towards the common law tests
The common law has developed two tests to give effect to the basis of necessity. The business efficacy test posits that a term should only be implied if to do so would be the only way to achieve ‘business efficacy’ in a contract. Thus, in The Moorcock10, the court concluded that the only way that a contract to use a wharf could be given business effect was to imply a term in the contract that the wharf would be safe. On the other hand, the court in Shirlaw11 employed the legal fiction of the ‘officious bystander’ to decide whether to imply a term. The term would only be implied if, had the term been suggested by the officious bystander, the parties to the contract would deem it so obvious as to silence him with the obligatory, ‘oh of course!’.
Accordingly, the prevailing approach in Singapore is a complementary approach to these two existing tests12. Under the complementary approach, the officious bystander test is the practical application of the business efficacy test, which provides the theoretical basis. Taking the complementary approach to its logical end, the two tests must then be two sides of the same coin and must necessarily give rise to the same result whenever applied.
However, the Court of Appeal in Sembcorp finessed the complementary approach by preferring to see the two tests conjunctively rather than as two sides of the same coin13. According to the court, the business efficacy test posits that the current state of the contract is lacking because in this current state, it would not achieve business efficacy. However, this test by itself does not inform the court as to exactly which term should be implied14. This is where the so-called officious bystander comes in as a test as to whether a precise term should be implied15. Thus, the two tests are not only complementary insofar as one is the practical application of the other. Rather, they are two different steps in one approach16.
This clarification is helpful for three reasons. First, it provides a cogent explanation of why the complementary approach should be taken as opposed to an alternative approach17, which the court has previously rejected18. Under the alternative approach, either test would be sufficient to indicate that implying a term is necessary. The existence of two tests rather than its amalgamation into one is because the tests may be better suited for different contexts. However, as has just been explained, it is clear that the two tests serve different purposes under the same umbrella of necessity.
Second, the previous interpretation of the complementary approach is not convincing. It is entirely possible that only one of the two tests is satisfied. For instance, it is arguable that even in The Moorcock19, the paradigm case of business efficacy, the officious bystander would not have been silenced in the required manner. The safety of the wharf would not have been such an obvious term to imply into the contract – rather, in the commercial context, such a term should instead be negotiated for by the parties. Arguably, a term which would have prompted the requisite reply from the contracting parties would be one far more obvious – such as the existence of the wharf in the first place. The court in previous cases did not explain how this could be the case if the officious bystander test is identical in substance to the business efficacy test, with the only difference being that the latter is the theoretical underpinning of the former. Thus, the current interpretation of the complementary approach is a much more convincing one.
Third, the court also held that business efficacy is not the only normative standard possible20. The test of business efficacy is only suitable insofar as the contract is meant for businesses in the first place, ie, in commercial contexts. The different attitudes towards different contexts mirrors Singapore’s current approach in other areas of contract law. For instance, the contextual approach towards the interpretation of terms posits that different contracts have different starting points21. Thus, the court would be slower to admit extrinsic evidence in commercial contracts because parties would be presumed to have had independent legal advice and bargained the terms they considered necessary into the four corners of the contract. Applying the same principle in the context of implying terms is satisfactory – it represents a principled approach22 which applies to any stage of the construction process23.
On the other hand, two problems also arise with the court’s decision in Sembcorp.
First, although adopting different normative standards for different contracts is appealing in theory, but it is unclear why other normative standards should exist in the first place. By first principles, the court will only look into implying a term into a contract should a valid contract be found in the first place. A contract lacking in ‘efficacy’ in any context other than a business context should already have failed at the formation stage. This is because a contract lacking in such efficacy would be uncertain in itself24. In a commercial context, it is still arguable that the lack of certainty should not matter so much because, for instance, it is commercial practice to begin part performance before the actual determination of certain terms. However, this is not the case in non-commercial contexts. The presumption that parties intend to create legal relations where they do not deal at arm’s length is much weaker25. Thus, the court should not even need to apply other normative standards because these contracts could not have passed to the stage where implication of terms is necessary. Accordingly, the business efficacy standard should be the only available standard.
Second, it is not entirely clear what exactly the court means by business ‘efficacy’. This problem was explicitly acknowledged by the court in Sembcorp26. Although business efficacy is the standard, it is unclear what degree of efficacy the court strives to achieve. Arguably it should be the minimum efficacy because any higher would betray the basis of necessity, instead importing a standard of reasonableness. But even if the court were to give effect to the minimum efficacy necessary, it is unclear what this minimum level entails27. In fact, it is arguable that given that parties are already performing the contract, it is a pointer that a minimum level of efficacy has already been achieved.
The practical framework in Sembcorp
Finally, the court in Sembcorp laid down a practical framework as to when the common law tests should even be engaged in the first place. Under this framework, the common law tests would only be applied to the factual situation if the gap in the contract arises in a manner which the court deems that it might imply a term28.
To illustrate this, the court provided three situations, although they are non-exhaustive: (a) parties did not contemplate the issue and so left a gap; (b) parties contemplated by chose not to provide because they mistakenly thought express terms provided; (c) parties contemplated but chose not to provide because they could not agree on solution. It is only in the first situation where the court is able to imply a term to fill that gap. The second situation is more amenable to rectification, and the third is a gap which the court should not fill – a function of negotiation that parties were unable to come to a solution29.
Three problems arise with this framework.
The first problem is that the court did not spell out exactly what it is about situation (a) which allows the court to imply the term. This is important because the court itself recognized that these are just three possible situations and that the categories are not closed30. Thus, should a fourth situation appear in future cases, it would be wise for the court to lay down some sort of underlying principle to classify this new situation. Examining the 3 different situations, therefore, it seems that the crucial quality of situation (a) is that parties did not contemplate the issue. However, it is unclear if the crux is that both parties did not contemplate the issue or if one of the parties did not contemplate the issue. Ostensibly it should relate to a situation where both parties did not contemplate. Only in such a situation would the court not be interfering with freedom of contract in implying a term. Thus, this could be applied to a possible fourth situation where only one of the contracting parties had contemplated the term. Adopting the probable reasoning underlying this approach, this fourth situation would probably not be allowed because it did not fall outside the contemplation of both parties; thus, the court would be interfering with freedom of contract in implying a term.
The second problem is that the amorphous concept of ‘foreseeability’ has arguably been introduced by this framework. Looking at what the parties have ‘contemplated’ is in essence a question of foreseeability, which is a slippery term incapable of being defined. As seen in the context of frustration, whether one concludes that foreseeability of a future event ipso facto precludes it from being a frustrating event depends on one’s definition of ‘foreseeability’ in the first place31. Should foreseeability merely mean a ‘possibility’, this would make the test for frustration – and consequently situation (a) in Sembcorp – an inordinately high one to fulfil. Indeed the Singapore position regarding this matter seems to be that foreseeability is inconclusive32. Thus, it is probably unwise that such a problematic concept is seemingly re-introduced in implied terms. Indeed, the Singapore courts seem to have had problems applying even the same test of foreseeability. For instance, even the low threshold of ‘factual foreseeability’ in the tort of negligence33 was later re-applied, arguably erroneously, as the much higher threshold of ‘reasonable foreseeability34.
The third problem is that it is difficult to identify which ‘situation’ any given case falls into in the first place. The contemplation of the parties is evinced by first, the express terms, and second, extrinsic evidence. Requiring extrinsic evidence to be admitted to conclude which situation a case falls into would arguably be too onerous – especially since the law in that area is itself unsettled. The Court of Appeal in Sembcorp itself left it open as to whether prior negotiations are admissible as extrinsic evidence35. Whether such an issue was within parties’ contemplation is ostensibly from this very source of evidence.
Conclusion
Overall, the current Singapore position is as follows: First, identify how a gap in the contract arises. Only where both parties did not contemplate the gap should a term be implied. Second, where there is a gap to be filled, the court will only imply a term where necessary to give business efficacy, although other normative bases are in theory also allowed. Finally, the court will employ the fiction of the officious bystander to determine exactly which term should be implied.
Implying a term into a contract is always tricky business because it is the court’s search for what they presume to be parties’ intentions. Thus, strict guidelines must be put into place. To that end, the clarification of the conjunctive nature of the business efficacy and officious bystander tests is welcome. However, it is this author’s view that this court should clarify the application of the amorphous concepts of foreseeability and efficacy in future cases.
[1] Sembcorp Marine v PPL Holdings Pte Ltd and another and another appeal, [2013] 4 SLR 193, [2013] SGCA 43 [“Sembcorp”].
[2] See generally, Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd, [2006] 1 SLR (R) 927; Panwah Steel Pte Ltd v Koh Brothers Building & Civil Engineering Contractor (Pte) Ltd, [2006] 4 SLR (R) 571.
[3] AG of Belize v Belize Telecom Ltd, [2009] 1 WLF 1988.
[4] Sembcorp at [77], [82].
[5] Foo Jong Peng v Phua Kiah Mai, [2012] 4 SLR 1267 at [31], [36].
[6] MFM Restaurants Pte Ltd v Fish & Co Restaurants Pte Ltd, [2011] 1 SLR 150.
[7] Sembcorp at [29], see also generally Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd, [2006] 1 SLR (R) 927 [“Forefront”].
[8] See generally, Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, [1962] 2 QB 26; RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal, [2007] 4 SLR (R) 413, [2007] SGCA 39.
[9] Liverpool City Council v Irwin, [1977] AC 239.
[10] The Moorcock, (1889) 14 PD 64.
[11] Shirlaw v Southern Foundries (1926) Ltd, [1939] 2 KB 206.
[12] Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd, [2006] 1 SLR (R) 927 at [35].
[13] Sembcorp at [98].
[14] Sembcorp at [90].
[15] Sembcorp at [91].
[16] Sembcorp at [101].
[17] Loh Siok Wah v American International Assurance Co Ltd, [1998] 2 SLR (R) 245.
[18] Forefront at [35].
[19] Supra note 10.
[20] Sembcorp at [85].
[21] Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd, [2008] 3 SLR (R) 1029, [2008] SGCA 27 [“Zurich Insurance”] at [110].
[22] See for e.g., Zurich Insurance at [132].
[23] Sembcorp at [31], referring to the composite process of ascertaining parties’ true intentions.
[24] See generally, Sudbrook Trading Estate Ltd v Eggleton, [1983] 1 AC 444; Tan Yeow Khoon v Tan Yeow Tat, [1998] 2 SLR (R) 19.
[25] See for e.g., Balfour v Balfour, [1919] 2 KB 571.
[26] Sembcorp at [86].
[27] Sembcorp at [87].
[28] Sembcorp at [94].
[29] Sembcorp at [95]-[96].
[30] Sembcorp at [94], referring to “at least” 3 situations.
[31] See generally, Ocean Tramp Tankers Corporation v V/O Soufracht (The “Eugenia”), [1964] 2 QB 226; Walton Harvey v Walker and Homfrays, [1931] 1 Ch 274.
[32] Lim Kim Som v Sheriffa Taibah bte Abdul Rahman, [1994] 1 SLR 393.
[33] Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency, [2007] 4 SLR (R) 100, [2007] SGCA 37.
[34] See for e.g., Animal Concerns Research & Education Society v Tan Boon Kwee, [2011] 2 SLR 146, [2011] SGCA 2 at [106].
[35] Sembcorp at [75], after considering Chartbrook Ltd v Persimmon Homes Ltd, [2009] 1 AC 1101.