Yoo Design Services Ltd v Iliv Realty PTE Ltd

A term may be implied into a commercial contract only where it is necessary for business efficacy and/or is so obvious that it goes without saying. Necessity is not established because the proposed term would be fair, improve the bargain, or address a difficulty revealed by hindsight.

An agreement under which payment depends on a future sale can remain commercially coherent even though that sale may be delayed or never occur. A proposed obligation to sell within a reasonable time failed both tests where its content depended on numerous commercial and subjective variables, and several contractual solutions were possible. Without such a sale obligation, no corresponding obligation to market for sale arose.

Yoo Design Services Ltd provided design, licensing and marketing-related services for a luxury Singapore residential development owned by Iliv Realty Pte Ltd. Under their Design Service Agreement, Yoo received part of its retainer in advance, but the balance and potential incentive payments depended on sales of the apartments.

Yoo alleged that Iliv was subject to implied obligations to market the apartments diligently and to sell them within a reasonable time. The Commercial Court rejected those terms and dismissed the claim: [2020] EWHC 1077 (Comm). Yoo appealed only the findings on the proposed marketing and sale obligations.

The central issue was whether those obligations were necessary for business efficacy or so obvious as to be implied into the parties’ detailed commercial agreement.

1. The appeal was dismissed. Carr LJ gave the judgment with which Coulson and King LJJ agreed. The judge below was right not to imply either a sale obligation or a related marketing obligation.
2. The applicable law was the stringent modern test for implication of contractual terms. Under Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, a court must not rewrite a negotiated bargain. A term must be necessary for business efficacy and/or so obvious that it goes without saying. It must also be capable of clear expression and consistent with the express contract. The assessment is objective and made when the contract was formed, without hindsight.
3. The agreement had practical and commercial coherence without an obligation requiring Iliv to sell. Yoo accepted a payment structure under which most of its fee depended on sales. It therefore assumed, with Iliv, the risk of late or no sale. That allocation of risk was commercially intelligible because Yoo had an advance payment, expenses and a possible share in the upside through the incentive fee. The agreement did not become unworkable merely because Yoo might wait indefinitely for the balance of its fee.
4. The proposed obligation to sell within a reasonable time was not sufficiently clear or obvious. Its operation would depend on market conditions, marketing history, an acceptable price and profit, Iliv’s financial position, and the quality of prospective purchasers’ covenants. The question posed to an officious bystander would have generated substantial negotiation about a long-stop date, a different fee structure, or a sharing of downside risk. There was no single answer which both parties would plainly have accepted.
5. The Singaporean statutory regime did not change that conclusion. It did not itself oblige Iliv to sell within a specified period, and its time limits did not match Yoo’s proposed term. The detailed agreement’s silence on sale timing, despite express provisions on other timing matters, further confirmed that implication was not justified.
6. Since no implied obligation to sell existed, an obligation to market the apartments in order to achieve sales was neither necessary nor obvious. Sparks v Biden [2017] EWHC 1994 (Ch) was materially different and did not assist.

• Court of Appeal (Civil Division) — dismissed Yoo’s appeal: [2021] EWCA Civ 560.
• High Court, Commercial Court — rejected the proposed implied sale and marketing obligations and, following its determinations of the preliminary issues, dismissed the claim: [2020] EWHC 1077 (Comm).