Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal

1. Sundaresh Menon CJ (delivering the judgment of the court):

2. Introduction

3. [1]

   [1] In this judgment, we give our decision on two related appeals, namely, Civil Appeal No 75 of 2012 (“CA 75”) and Civil Appeal No 77 of 2012 (“CA 77”) (collectively “the present appeals”). The present appeals arise out of Suit 351 of 2010 (“Suit 351”), which was an action commenced by Sembcorp Marine Ltd (“Sembcorp”) against PPL Holdings Pte Ltd (“PPL Holdings”) and E-Interface Holdings Limited (“E-Interface”) over the corporate affairs and management of their joint venture company, PPL Shipyard Pte Ltd (“PPL Shipyard”). In his judgment in Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another [2012] 3 SLR 801 (“the Judgment”), the High Court judge (“the Judge”) who heard the trial of the matter dismissed Sembcorp’s claims and allowed in part the counterclaim brought by PPL Holdings and E-Interface against Sembcorp and PPL Shipyard (which had also been named as a defendant in the counterclaim). CA 75 is Sembcorp’s appeal against the Judge’s dismissal of its claims, while CA 77 is the appeal of PPL Holdings and E-Interface against the Judge’s partial dismissal of their counterclaim.

4. [2]

   [2] The present appeals raise a number of issues of company law and contract law. In particular, lead counsel for Sembcorp, Mr Davinder Singh SC (“Mr Singh”), and lead counsel for both PPL Holdings and E-Interface, Mr Lee Eng Beng SC (“Mr Lee”), had much to say on the proper approach to the implication of terms as well as to the interpretation of contractual terms under our law. In this judgment, we address these points raised, as well as the construction of contracts in general.

5. Facts

6. [3]

   [3] Most of the relevant facts have been set out at [3] to [25] of the Judgment. We therefore only recite the facts to the extent necessary.

7. Parties

8. [4]

   [4] Sembcorp is engaged in the business of constructing oil rigs and ships. In or around late 2000, one of Sembcorp’s wholly-owned subsidiaries, Jurong Shipyard Pte Ltd, submitted a tender pursuant to an invitation issued by Santa Fe International Corporation for the construction of certain drilling rigs (“the Santa Fe Projects”). PPL Shipyard, which was also carrying on the business of designing and constructing offshore drilling rigs, had likewise put in bids for the Santa Fe Projects. At some point, the management teams of Sembcorp and PPL Shipyard came to learn about their mutual interest in the same Santa Fe Projects. The idea of an alliance was mooted, and a joint venture quickly materialised with the signing of a Sale and Purchase Agreement (“the SPA”) on 29 March 2001, and a joint venture agreement (“the JVA”) on 9 April 2001. Prior to the SPA, PPL Shipyard was effectively owned by PPL Holdings as 97% of PPL Shipyard’s issued share capital was held by PPL Holdings in its own right while the remaining 3% was held by E-Interface, a wholly-owned subsidiary of PPL Holdings.

9. [5]

   [5] The only two directors of PPL Holdings are Dr Benety Chang (“Chang”) and Mr Anthony Aurol (“Aurol”). In addition, Aurol was the Executive Director of PPL Shipyard, as well as the Chief Operating Officer and a director of Baker Technology Ltd (“Baker”), a public company listed on the Stock Exchange of Singapore. Baker owned 100% of the shares of PPL Holdings and as will become apparent, was an important player in the background to the present dispute. Chang is the Executive Deputy Chairman of PPL Shipyard as well as a director and the Chief Executive Officer of Baker. Between them, Chang and Aurol managed the day-to-day operations of PPL Shipyard.

10. Background

11. The JVA

12. [6]

    [6] Under the SPA, Sembcorp purchased 50% of the issued share capital in PPL Shipyard from PPL Holdings. As a result, Sembcorp and PPL Holdings (together with E-Interface) each had an equal interest in PPL Shipyard. The terms on which the joint venture between Sembcorp and PPL Holdings was to be carried out were set out in the JVA.

13. [7]

    [7] The key terms of the JVA which are in dispute in the present appeals include the following:

14. [8]

    [8] Pursuant to cl 31 of the JVA, some of PPL Shipyard’s Articles of Association were amended on 26 September 2001 with the general aim of bringing them into conformity with the terms of the JVA, although it should be noted that the amended articles were not identical to the terms of the JVA. The specific articles of association of PPL Shipyard which were amended are hereinafter referred to as the “the Consequential Articles”, and references herein to the Articles of Association of PPL Shipyard refer to the version of the Articles of Association post 26 September 2001.

15. The Supplemental Agreement and the change in shareholding

16. [9]

    [9] On 5 July 2003, Sembcorp and PPL Holdings entered into an agreement supplemental to the JVA (“the SA”). The SA provided, amongst other things, for the sale of 35% of PPL Holding’s shareholding in PPL Shipyard to Sembcorp. Following this, Sembcorp owned 85% of PPL Shipyard while PPL Holdings (together with E-Interface’s 3%) owned the remaining 15%. The SA, which took the form of a letter from Chang on behalf of PPL Holdings to Sembcorp’s then President, Mr Tan Kwi Kin, also provided for a “put” option in favour of PPL Holdings enabling it to sell its remaining 15% in PPL Shipyard to Sembcorp within a period of 36 months (“the Put Option”). Sembcorp had actually wanted a “call” option entitling it to purchase the remaining 15% of PPL Shipyard from PPL Holdings, but Chang did not agree to this.

17. [10]

    [10] The SA is a brief document. Despite the change in the shareholding of PPL Shipyard following the SA, no specific changes were made to the JVA, and in particular, to those provisions which regulated the management of PPL Shipyard such as cll 5.1 to 5.8. Nor were any amendments made to PPL Shipyard’s Articles of Association. Notwithstanding this however, subsequent to the SA, Sembcorp appointed three more directors to the PPL Shipyard board, such that there were then six Sembcorp-appointed directors and three PPL Holdings-appointed directors. There was and is no dispute between the parties as to the validity of these appointments.

18. [11]

    [11] It is evident from the Put Option that the possibility of PPL Holdings and E-Interface eventually exiting from the joint venture was contemplated. This possibility, however, did not eventuate as the Put Option was never exercised. Instead, PPL Holdings and E-Interface continued with the joint venture on the basis of the revised shareholding structure. As for Sembcorp, although it had a majority interest in the equity of PPL Shipyard and majority board representation after the SA, the real limits of its power as the majority shareholder were not tested until several years later. In the meantime, the parties proceeded more or less as they had from the outset, working consensually to address the issues that arose from time to time.

19. Yangzijiang’s bid for Baker’s shares in PPL Holdings

20. [12]

    [12] On 16 April 2010, almost seven years after the SA, Baker received a “binding” letter of offer from Yangzijiang Shipbuilding (Holdings) Limited (“Yangzijiang”) to purchase all its shares in PPL Holdings for an aggregate sum of US$155m. Yangzijiang’s offer was calculated using, inter alia, the net book value of PPL Shipyard based on the latter’s full year accounts for 2009 (“the 2009 Accounts”). As at the date of the offer, PPL Shipyard’s 2009 Accounts had not been published. It later emerged that Aurol had furnished a copy of the 2009 Accounts to a broker for Yangzijiang on 13 April 2010. Sembcorp took an adverse view of these developments when it learnt of them.

21. Sembcorp’s response

22. [13]

    [13] At a PPL Shipyard quarterly board meeting that was held on 28 April 2010 which all the directors attended, the Chairman, who was a Sembcorp-nominated director, tabled three resolutions for approval under “Other Matters”. These resolutions sought to appoint:

23. (a) a new designated Managing Director to phase in and succeed the incumbent who was a PPL Holdings-nominated director;

24. (b) a new Chief Financial Officer; and

25. (c) two Joint Company Secretaries to replace the existing one.

26. None of these resolutions (“the 28 April 2010 resolutions”) were listed on the agenda for that board meeting; nor were the PPL Holdings-nominated directors given notice that these resolutions would be tabled. The three PPL Holdings-nominated directors voted against the 28 April 2010 resolutions, while the six Sembcorp-nominated directors voted in favour of them. The 28 April 2010 resolutions were thus purported to have been passed by a vote of 6 to 3. Clause 5.3 of the JVA, which on one reading appears to provide that each party shall have three votes at board meetings regardless of the number of directors present, was brought to the attention of the Sembcorp-nominated directors by the PPL Holdings-nominated directors, but the clause gained no traction with them at that meeting.

27. [14]

    [14] Several other resolutions were subsequently passed on 11 May, 3 June, 14 June and 21 June 2010. These revolved primarily around the appointment of a firm of solicitors, WongPartnership LLP, to act for PPL Shipyard and to receive instructions from the Chairman of PPL Shipyard (a Sembcorp-nominated director) on matters pertaining to Suit 351 which was commenced on 15 May 2010 (“the WongPartnership resolutions”). The WongPartnership resolutions were passed at board meetings at which no directors nominated by PPL Holdings were present.

28. [15]

    [15] On 8 June 2010, the six Sembcorp-nominated directors sent a letter to Aurol (“the 8 June 2010 letter”). The letter, amongst other things, invited Aurol to vacate his office as a director of PPL Shipyard pursuant to Art 90(g) of the Articles of Association in the light of his admission that he had disclosed the 2009 Accounts of PPL Shipyard to Yangzijiang.

29. [16]

    [16] On 15 June 2010, the six Sembcorp-nominated directors commenced proceedings against the three PPL Holdings-nominated directors in Originating Summons No 590 of 2010 (“OS 590”). Pursuant to OS 590 (Amendment No 1) dated 26 August 2010, the six Sembcorp-nominated directors sought, amongst other things, a declaration that the WongPartnership resolutions were valid pursuant to s 392(2) of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”). This was heard by a High Court judge who declared that some but not all of the resolutions were invalid: Tang Kin Fei and others v Chang Benety and others [2011] 1 SLR 568 (“Chang Benety (HC)”). On appeal, the Court of Appeal held that the resolutions which the High Court judge had found to be valid were in fact invalid: Chang Benety and others v Tang Kin Fei and others [2012] 1 SLR 274 (“Chang Benety (CA)”).

30. Suit 351

31. [17]

    [17] In Suit 351, Sembcorp asserted that PPL Holdings had breached the following two express terms and three implied terms in the JVA and the SA:

32. (a) Express Terms

33. (a) Clause 13 of the JVA (“the Confidentiality Clause”), on the ground that Aurol had wrongfully disclosed the 2009 Accounts to Yangzijiang in order to enable Yangzijiang to refer to PPL Shipyard’s net book value for the 2009 financial year in calculating its offer price.

34. (b) Clause 24 of the JVA (“the Spirit Clause”), on the ground that PPL Holdings failed to exercise reasonable efforts to uphold the “spirit” of the JVA and to ensure that the offer from Yangzijiang was rejected by Baker.

35. (b) Implied Terms

36. (c) That such of the provisions of the JVA and the SA, as were premised upon the existence of the equal shareholding interest of Sembcorp and PPL Holdings (together with E-Interface) in PPL Shipyard, would cease to subsist or apply upon either party acquiring a majority of the issued and paid-up share capital in PPL Shipyard, and the JVA itself would terminate and the Consequential Articles would no longer subsist or apply upon either party ceasing to hold any beneficial interest in PPL Shipyard (“the Equality Premise Clause”).

37. (d) That neither party will, without offering its shares to the other, act in any manner which would cause the other to be a “partner” in PPL Shipyard together with a party owned or controlled by someone other than the principals of the parties to the JVA (“the Change of Control Clause”).

38. (e) That each party will ensure that its wholly owned subsidiary, its holding company and/or the wholly owned subsidiaries of its holding company would not do anything which would undermine the benefits conferred on the parties by cl 11.7 of the JVA (“the Benefits Guarantee Clause”).

39. [18]

    [18] PPL Holdings and E-Interface counterclaimed, seeking, inter alia:

40. (a) a declaration that the 28 April 2010 resolutions were invalid;

41. (b) a declaration that the removal of Aurol as a director of PPL Shipyard was invalid and that his employment as an executive of PPL Shipyard had not been terminated;

42. (c) a declaration that PPL Holdings and E-Interface are entitled to seek the reliefs in (a) and (b) on the grounds of minority oppression under s 216 of the Companies Act;

43. (d) a declaration that PPL Holdings and E-Interface are entitled to mount a statutory derivative claim under s 216A of the Companies Act to invalidate the WongPartnership resolutions;

44. (e) a declaration that PPL Holdings has the right to nominate the Managing Director of PPL Shipyard; and

45. (f) an order compelling Sembcorp to join PPL Holdings and E-Interface in passing a special resolution to resolve and remove any conflicts between the JVA and the Consequential Articles.

46. [19]

    [19] In essence, Sembcorp by these proceedings sought to establish that it was in a position to exercise effective control over the management of PPL Shipyard, whereas PPL Holdings and E-Interface through their counterclaim sought to establish that they continued to retain equal voting rights at board meetings as well as executive control of PPL Shipyard.

47. The decision below

48. The Judge’s decision on Sembcorp’s claim

49. [20]

    [20] The Judge made the following findings on Sembcorp’s claim:

50. (a) The Equality Premise Clause could not be implied into the JVA or the SA because of the absence of any mechanisms to effect the changes in management once the equal proportions of shareholding were disturbed. Furthermore, Sembcorp’s subsequent conduct in appointing three more directors to the board of PPL Shipyard after the parties entered into the SA was not sufficiently compelling to warrant the implication of the term.

51. (b) The Change of Control Clause could not be implied into the JVA or the SA because of the “black holes in the factual matrix” that Sembcorp put forth. It was not clear that a change of the principals who controlled the parties was thought to be an issue which needed resolution by a share offer.

52. (c) The Benefits Guarantee Clause could not be implied because it was to the same effect as saying that no party should breach cl 11.7 and was therefore superfluous.

53. (d) There was no breach of the Confidentiality Clause because the information contained in the 2009 Accounts was not confidential at the time of release. In any event, the breach was not repudiatory since the clause was neither a condition nor was it one which would deprive Sembcorp of substantially the whole benefit of the JVA if it was breached.

54. (e) There was no breach of the Spirit Clause because the identity of the parties to the JVA had not changed, even though PPL Holdings was now owned by Yangzijiang.

55. The Judge’s decision on PPL Holding’s counterclaim

56. [21]

    [21] As for PPL Holdings and E-Interface’s counterclaim, the Judge held that:

57. (a) The 28 April 2010 resolutions were invalid because they were passed at a meeting without the necessary quorum.

58. (b) The removal of Aurol was invalid because it was not effected at or pursuant to a properly constituted directors’ meeting.

59. (c) However, PPL Holdings and E-Interface were not entitled to seek the reliefs in (a) and (b) under s 216 of the Companies Act on the basis of minority oppression because this would amount to a circumvention of their lack of standing to do the same under s 216A.

60. (d) PPL Holdings and E-Interface were not entitled to seek relief under s 216A of the Companies Act to invalidate the WongPartnership resolutions because they were shareholders and had no standing to pursue a claim on behalf of the company.

61. (e) It was not necessary to compel Sembcorp to work with PPL Holdings to iron out any inconsistencies between the JVA and the Consequential Articles as this was a matter of contract.

62. Issues before this Court

63. [22]

    [22] In CA 75, Sembcorp pruned its arguments and submitted that the Judge erred in finding that:

64. (a) the Equality Premise Clause could not be implied into the JVA or into the Articles of Association of PPL Shipyard;

65. (b) there was no breach of the Confidentiality Clause;

66. (c) the 28 April 2010 resolutions were invalid because they were made at a meeting without the necessary quorum; and

67. (d) the removal of Aurol was invalid because it was not made at a properly constituted directors’ meeting.

68. [23]

    [23] In CA 77, PPL Holdings and E-Interface submitted that the Judge erred in:

69. (a) finding that PPL Holdings and E-Interface were not entitled to seek relief under s 216 of the Companies Act to invalidate the 28 April 2010 resolutions, the removal of Aurol, and two of the WongPartnership resolutions;

70. (b) finding that independently of s 216 of the Companies Act, PPL Holdings and E-Interface were not entitled to a declaration that the WongPartnership resolutions are invalid under s 392(2) of the same;

71. (c) not dealing with the issue of whether PPL Holdings in its own right has the right to nominate any successor as the Managing Director of PPL Shipyard; and

72. (d) not making an order compelling Sembcorp to join with PPL Holdings to iron out any inconsistencies between the JVA and the Consequential Articles and further, in not granting liberty to apply for the said order.

73. Analysis

74. Interpretation, implication and construction

75. [24]

    [24] After a detailed analysis of the law on implied terms, the Judge adopted the position in Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 1 WLR 1988 (“Belize”), holding (at [60] and [64] of the Judgment) that “[i]f a term is thought fit for implication on the satisfaction of either of the traditional tests, Belize demands that the term implied must be checked for consonance with a reasonable interpretation of the contract”, based on the “particular factual matrix before [the court]” [emphasis in original]. It should be noted that the Judgment pre-dated our judgment in Foo Jong Peng and others v Phua Kiah Mai and another [2012] 4 SLR 1267 (“Foo Jong Peng”), where we declined to follow Belize.

76. [25]

    [25] Belize belongs to a pentalogy of English cases including Investor Compensation Scheme Ltd v West Bromwich Building Society and Others [1998] 1 WLR 896 (“ICS”), Jumbo King Ltd v Faithful Properties Ltd and others [1999] 3 HKLRD 757 (“Jumbo King”), Belize, Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2009] 1 AC 61 (“The Achilleas”), and Chartbrook Ltd and another v Persimmon Homes Ltd and another [2009] 1 AC 1101 (“Chartbrook”) that has brought about significant developments in contract law. The leading judgments in all of these cases were either delivered by Lord Hoffmann or referred to a leading judgment of his. We have already commented, in some detail, on The Achilleas which deals with the law on remoteness of damage in MFM Restaurants Pte Ltd and another v Fish & Co Restaurants Pte Ltd and another appeal [2011] 1 SLR 150 and in Out of the Box Pte Ltd v Wanin Industries Pte Ltd [2013] 2 SLR 363. In the present judgment, we will consider in particular ICS, Jumbo King and Belize, as these cases address issues relating to the implication of terms and the construction of contracts.

77. [26]

    [26] Before turning to consider the approach to be taken in Singapore law, it would be helpful first to set out precisely the meaning to be ascribed to the key terms used in this discussion. Words such as “interpretation”, “implication” and “construction” despite being loaded with legal meaning, have generally been used loosely. Oftentimes, the level of specificity in terminology that is suggested below is not necessary. But occasionally, as in the present appeals (see [78]–[81] below), it may be beneficial and desirable to pay attention to these details.

78. Interpretation of terms

79. [27]

    [27] First, by “interpretation”, we refer to the process of ascertaining the meaning of expressions in a contract. The presence of expressions, primarily in the form of words constituting an express term, is an essential prerequisite to invoke the process of interpretation. This view (ie, that interpretation concerns the meaning of words) is supported by academics in the United States of America such as Professor Allan Farnsworth, Professor Arthur Corbin (“Prof Corbin”) and Professor Samuel Williston: Allan Farnsworth, “‘Meaning’ in the Law of Contracts” (1966-1967) 76 Yale LJ 939 at 939–940. We find Prof Corbin’s explanation of the process of interpretation particularly apt (Margaret N Kniffin, Corbin on Contracts vol 5 (Joseph M Perillo ed) (LexisNexis Law Publishing, 1998 Rev Ed)) at para 24.1:

80. [28]

    [28] Since the process of interpretation entails ascribing meaning to the parties’ contractual or contractually relevant expressions, there cannot be interpretation of a non-expression, ie a non-existent expression. As Lord Steyn observed in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 (“Hyman”) at 458, the purpose of interpretation is “to assign to the language of the text the most appropriate meaning which the words can legitimately bear” [emphasis added]. It is through such a process of interpretation that the parties’ intentions as expressed in the contract are objectively ascertained.

81. Implication of terms in fact

82. [29]

    [29] The interpretative process does not always provide a complete picture of the parties’ intentions. Such a process necessarily falls short where there is a gap in a contract arising from its silence on a particular issue, because where a contract is silent on a particular issue, there will plainly be no language to which an appropriate meaning can be ascribed. There is no principle of contract law that every gap must be filled; but the law provides that in some cases, the gap ought to be filled because the parties are presumed to have intended that to be so. In the words of Lord Wright in Luxor (Eastbourne) Ltd and others v Cooper [1941] AC 108 at para 10.04, “what is sought to be implied is based on an intention imputed to the parties from their actual circumstances”. The implication of terms in fact is the process by which the court fills a gap in the contract to give effect to the parties’ presumed intentions.

83. [30]

    [30] None of this is especially new. We refer to Goh Yihan, “Terms Implied in Fact Clarified in Singapore” (2013) 2 JBL 237 (“Goh (JBL)”) where Assistant Professor Goh Yihan (“Asst Prof Goh”) highlighted (at p 244) the views of Professor Gerard McMeel (“Prof McMeel”) and Sir Thomas Bingham MR (as he then was) on the distinction between the interpretative and implication process, both of whose views we agree with. Prof McMeel proposes that the process of implication “goes further [than interpretation] and permits the court to plug what it perceives to be gaps in the express terms or explicit language of the parties’ agreement”: Gerard McMeel, The Construction of Contracts (Oxford University Press, 2nd Ed, 2011) (“McMeel”) at p 315. Similarly, Sir Thomas Bingham MR in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 (“Philips Electronique”) observed (at 481):

84. Construction of a contract

85. [31]

    [31] Next, the “construction” of a contract refers to the composite process that seeks to ascertain the parties’ intentions, both actual and presumed, arising from the contract as a whole without necessarily being confined to the specific words used. Construction, in this sense, encompasses both the interpretation of express terms as well as the implication of terms to fill gaps. Rectification too may be seen as part of the process of construction as it is a mechanism by which the parties’ true common intentions are given effect to.

86. [32]

    [32] That the word “interpretation” has been used interchangeably with the word “construction” is unsurprising. It might be somewhat more unusual for the implication of terms to be mentioned in the same breath. Nonetheless, the place of implied terms within the concept of the construction of contracts is not without sound authority: Hyman at 459, and McMeel at para 1.17. In Liverpool City Council v Irwin and another [1977] 1 AC 239 (“Liverpool City Council”), Lord Wilberforce stated (at 253):

87. So too in South Australia Asset Management Corporation v York Montague Ltd [1997] 1 AC 191, Lord Hoffmann stated (at 212) that “[a]s in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting” [emphasis added].

88. [33]

    [33] It follows then that the first of Lord Hoffmann’s five principles in ICS (at 912) that “[i]nterpretation is the ascertainment of the meaning which the document would convey to a reasonable person” [emphasis added], can be restated in terms that interpretation is the ascertainment of the meaning which the expressions in a document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the time of the contract.

89. The contextual approach revisited

90. [34]

    [34] Having clarified the scope of the relevant terminology, we turn to consider the contextual approach to the interpretation of terms as encapsulated by Lord Hoffmann’s five principles in ICS. The philosophy that underlies the contextual approach is one that seeks the common intention of the parties, even if, occasionally, this might yield an understanding that departs from the literal meaning of the words used in the contract. We have largely adopted the contextual approach to interpretation under our law in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich Insurance”), where this court held (at [132(d)]) that extrinsic evidence is admissible if it “[goes] towards proof of what the parties, from an objective viewpoint, ultimately agreed upon”, subject only to the limitation that the extrinsic evidence “is relevant, reasonably available to all the contracting parties and relates to a clear or obvious context”. As we shall later see, in many respects, the adoption of the contextual approach to interpretation might entail a migration towards the principles adopted in civil law jurisdictions.

91. The robust approach to the admissibility of extrinsic evidence

92. [35]

    [35] In ICS, Lord Hoffmann explained that the factual matrix to be considered when construing a contract could include “absolutely anything” other than evidence as to previous negotiations and declarations of subjective intent, such evidence being admissible only in an action for rectification (see ICS at 913). This was emphasised in Jumbo King where Lord Hoffmann explained (at 773) that “[t]he court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession” (see also Chartbrook at [30]).

93. [36]

    [36] This court hinted of a possible willingness to venture further than Lord Hoffmann in Jumbo King and Chartbrook by observing in Zurich Insurance (at [132(d)]) that “there should be no absolute or rigid prohibition against evidence of previous negotiations or subsequent conduct, although, in a normal case, such evidence is likely to be inadmissible”. The New Zealand Supreme Court has gone even further by holding that evidence of both pre-contractual negotiations and subsequent conduct may be admissible to aid in contractual interpretation: see Wholesale Distributors v Gibbons Holdings [2008] 1 NZLR 277 (“Gibbons”) and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (“Vector Gas”). We refer to the New Zealand approach as the “robust approach”.

94. [37]

    [37] The robust approach towards the admissibility of extrinsic evidence bears a strong resemblance to the civil law approach which allows contracts to be proven by “any means” (see Art 1341 of the French Civil Code (consolidated version of 2 June 2012) read with Art 110-3 of the French Commercial Code (Rev Ed 2010)), and this includes the examination of “all the corresponding circumstances”, including pre-contractual negotiations and correspondence, business practices and customs, and subsequent conduct (see Art 431 of the Russian Civil Code (enacted 18 December 2006)). This is also similar to the position in German law viz, the German Civil Code (promulgated on 2 January 2002) (see Stefan Vogenauer, “Interpretation of Contracts: Concluding Comparative Observations” in Contract Terms (Oxford University Press, 2007) (Andrew Burrows and Edwin Peel eds) (“Contract Terms”) ch 7 at pp 137–139) and Chinese law viz, the Contract Law of the People’s Republic of China (enacted on 15 March 1999) (see Bing Ling, Contract Law in China (Sweet & Maxwell Asia, 2002) at para 5.007; and Mo Zhang, Chinese Contract Law: Theory and Practice (Martinus Nijhoff, 2006) at p 137). Transnational conventions dealing with contractual construction also permit the admission of such evidence, including pre-contractual negotiations, business practices and subsequent conduct (see Art 4.3 of the UNIDROIT Principles of International Commercial Contracts (Rev Ed 2010); Art 5:102 of the Principles of European Contract Law (Rev Ed 2002); and Art 8(3) of the United Nations Convention on Contracts for the International Sale of Goods (enacted on 11 April 1980)).

95. [38]

    [38] The fact that the robust approach is prevalent in the civil law legal systems and transnational conventions is of course not a reason for a common law system such as ours to eschew it. Indeed, at a conceptual level, harmonization and convergence in commercial laws is generally to be welcomed. But at the practical level of implementation, this must be assessed in the round taking into account how this dovetails with our legal system and our laws on the admissibility of evidence and the litigation process in general. In this regard, there are at least two noteworthy aspects of the Singapore legal system that bear on this. First, the law of evidence in Singapore is governed primarily by the Evidence Act (Cap 97, 1997 Rev Ed) (“the EA”), and secondarily by the common law. Second, the common law adversarial litigation process which is adopted under our system is structurally different from the inquisitorial process of the civil law system. These differences warrant a careful examination of the extent to which we should adopt the robust approach. We elaborate on the significance of both these differences below.

96. The EA

97. [39]

    [39] The law governing the admissibility of extrinsic evidence in Singapore is primarily statutory in the form of the EA. Since jurisdictions such as the United Kingdom, Hong Kong, and New Zealand do not have equivalent provisions of the EA, the cases of ICS, Chartbrook, Jumbo King, Gibbons and Vector Gas must be treated with a degree of caution. As was observed by Lord Hoffmann in Chartbrook (at [39]), courts should be careful about transposing rules formulated by and for a particular legal system operating under a particular philosophy into another legal system premised on another philosophy.

98. (1) Rules of evidence and rules of contractual construction

99. [40]

    [40] We begin with a fundamental, even obvious, proposition of law. The EA only governs the admissibility of evidence. It is not concerned with and so does not prescribe rules of contractual construction. The province of the EA is the treatment of evidence, and this is conceptually independent and distinct from rules of contractual construction. Of course, rules of evidence under the EA may affect the application of specific rules of contractual interpretation; but they do not prescribe how a contract should be interpreted and construed.

100. [41]

     [41] Sir James Fitzjames Stephen (“Sir James”), the drafter of the Indian Evidence Act of 1872 (Act I of 1872) (“Indian EA”) – from which the Singapore EA was derived – was also very much alive to this distinction, as recorded in his book, A Digest of the Law of Evidence (Sir Harry Lushington Stephen and Lewis Frederick Sturge eds) (MacMillan and Co Limited, 12th Ed, 1936) (“Stephen’s Digest”). Stephen’s Digest provides significant insight into the thinking behind the drafting of the Indian EA as it was a commentary on an English Bill similar to the Indian EA (which Bill was never passed in England despite being the subject of a few words in Parliament). Sir James explained in the Introduction (at p xviii) that he was conscious of the overlap between the law of evidence and the law of contract while drafting the Indian EA and strived to keep the two separate.

101. [42]

     [42] Using s 94(f) of the EA – which has been held to embody the contextual interpretation approach (see [45]–[48] and [63] below) – as an example, Stephen’s Digest supports the view that the predominant purpose of the provision is to address the question of when (and what type of) evidence may be admissible, as opposed to how a document is to be construed. As was noted in Zurich Insurance at [73], the rule in s 94(f) was classified in Stephen’s Digest (at pp 115–117) under the heading “What evidence may be given for the interpretation of documents”. The illustrations to s 94, and indeed to ss 93 to 101 are therefore, unsurprisingly, centred on the type of evidence that may be given, and not on the meaning to be ascribed to the expressions for which the evidence may be admitted.

102. [43]

     [43] It is also not coincidental that s 94(f) is in Part II of the EA which Sir James stressed was concerned with “the mode of proving relevant facts” [emphasis added]: James Fitzjames Stephen QC, An Introduction to the Indian Evidence Act (Thacker, Spink & Co, 1904) (“An Introduction to the Indian Evidence Act”) at p 8. Most significantly, Sir James himself explained the true role of the law of evidence in An Introduction to the Indian Evidence Act in these terms (at pp 10-11):

103. The distinction between rules of contract law viz, the substantive law which determines rights and liabilities, and rules of evidence, viz, the procedural law which determines what and how facts may be proved, could not be clearer.

104. [44]

     [44] Having regard to this distinction between the rules of evidence and the rules of contract law, the question that then arises is whether the EA affords the sort of latitude in the admissibility of extrinsic evidence that would be necessary in order to give full mileage to the robust approach?

105. (2) Sections 94, 95 and 96 of the EA

106. [45]

     [45] This brings the interaction between the contextual approach and ss 93 to 100 of the EA to the fore. In Zurich Insurance, this court considered the effect of ss 93 to 100 on the admissibility of evidence for the purposes of the contextual approach. After a comprehensive survey of the relevant provisions in the EA, we concluded (at [121]) that the contextual approach is “statutorily embedded in proviso (f) to s 94”, even though we also cautioned (at [122]) that extrinsic evidence cannot be employed “as a pretext to contradict or vary” the contractual language. We went on to hold (at [125]–[128]) that under s 94(f), extrinsic evidence which was relevant and reasonably available to all the contracting parties and which would go towards establishing the relevant context of the contract would be admissible.

107. [46]

     [46] There is no doubt that our decision in Zurich Insurance on the compatibility of the contextual approach with the provisions of the EA is correct. Here, we supplement our earlier observations in Zurich Insurance.

108. (A) Section 94 of the EA

109. [47]

     [47] Section 94 of the EA reads:

110. [48]

     [48] Unlike the other provisos under s 94 of the EA which serve as specific exceptions to the general rule in s 94 that no evidence of an oral agreement of statement is admissible for the purpose of contradicting, varying, adding to or subtracting from the terms of the instrument, proviso (f) is of general application. It permits the admission of any fact which shows in “what manner the language of a document is related to existing facts”. It is, so to speak, a general rule which seems to permit wide recourse to extrinsic evidence. However, we recognised in Zurich Insurance that the scope and limitation of s 94(f) is delineated by ss 95 to 100. In our view, ss 95 and 96 are of particular interest and importance because of their exclusionary effect.

111. (B) Sections 95 and 96 of the EA and admissible extrinsic evidence

112. [49]

     [49] Sections 95 and 96 of the EA read:

113. [50]

     [50] Since the exclusionary nature of ss 95 and 96 pulls in the opposite direction to the permissive nature of s 94(f), it is arguable that when s 94(f) is read with ss 95 and 96 as it must be, the extent of extrinsic evidence that may be admitted under s 94(f) is not as extensive as one might otherwise expect.

114. [51]

     [51] It must be recalled that the rules contained in the EA were intended to be a codification of the common law in 1872, that being the year of the enactment of the Indian EA. Sir James’s view on the admissibility of extrinsic evidence to influence the interpretation of a written document was generally strict (An Introduction to the Indian Evidence Act at p 178):

115. This excerpt should be taken to be referring to ss 93 to 100, even if Sir James did not give a section-by-section commentary on the Indian EA. The reference to “exceptions” is likely a reference to the provisos in s 94, as well as ss 97 to 100, which permit the admission of extrinsic evidence to a limited degree.

116. [52]

     [52] What exactly did Sir James intend to be caught by the exclusionary provisions, viz, ss 95 and 96 of the EA? In his commentary on Art 98 of the Bill (see [41] above) which is substantively similar to ss 94 to 99 of the EA, Sir James referred to several English cases to explain his concerns, and two of these are instructive in ascertaining not just his stance generally towards the admissibility of extrinsic evidence, but also and more pertinently, the main type of extrinsic evidence that he had intended to preclude by way of ss 95 and 96.

117. (C) Parol Evidence of subjective intent and other Extrinsic Evidence

118. [53]

     [53] In the first case, Charter v Charter (1871) 2 LR 2 P & D 315 (“Charter”), a testator appointed as his executor “[his] son Forster Charter”. However, at the time of the making of the will, he had no son of that name. He had two sons. The older son was William Forster (who was always addressed as “William”), and the younger son was Charles Charter. The testator did have a son called Forster Charter, but that son had died in infancy many years before the will was made. When the testator died, probate was granted to the older son. The younger son challenged this, seeking to admit extrinsic evidence, which included an affidavit made by family members and independent witnesses setting out declarations of the testator made at the time of and subsequent to the date of the making of the will. The older son objected to the admission of such evidence on the ground that there was no ambiguity, and absent this, parol evidence could not be admitted.

119. [54]

     [54] Lord Penzance rejected this contention. Referring to a principle laid down by Lord Abinger in Doe D Simon Hiscocks v John Hiscocks (1839) 5 M & W 363 (“Hiscocks”), Lord Penzance held (at 317–318):

120. However, Lord Penzance did not stop there, for this principle by Lord Abinger was one of general application rather than one governing the admissibility of the declarations of the testator, which was the real issue in the case. As to that, Lord Penzance held (at 324):

121. [55]

     [55] Three points are clear. First, the admissibility of surrounding circumstances to place the court in the position of the party which drafted the instrument (dealt with in the first extract quoted at [54] above) is a separate and distinct question from whether parol evidence of the drafter’s subjective intention (dealt with in the second extract quoted at [54] above) may be admitted. Evidence of surrounding circumstances is admissible without restriction. Second, ambiguity is required before the court would be permitted to admit parol evidence of the drafter’s intentions. Third, if surrounding circumstances are sufficient to resolve the interpretative exercise, there would be no ambiguity and such parol evidence should not be admitted.

122. [56]

     [56] Even so, Sir James had misgivings over Lord Penzance’s decision to admit the declarations of the testator’s intentions: Stephen’s Digest at pp 210–211. He contrasted Charter to a subsequent case, Allgood v Blake (1873) LR 8 Ex 160 (“Allgood”), and also pointed out that when Charter went on appeal (William Forster Charter v Charles Charter (1874) LR 7 HL 364 (“Charter (HL)”), the House of Lords unanimously disapproved of Lord Penzance’s decision to admit evidence of the testator’s declarations of intention.

123. [57]

     [57] In Charter (HL), Lord Chelmsford (at 370) rejected evidence of the testator’s intentions on the basis that this was not a case that featured the sort of ambiguity that would be required for such evidence to be admitted. Citing Sir James Wigram, An Examination of the Rules of Law Respecting the Admission of Extrinsic Evidence in aid of the Interpretation of Wills (Butterworths, 4th Ed, 1858) (“Wigram”) at p 160, Lord Chelmsford held (at 370–371) that extrinsic evidence “including proof of declarations of intention” was only admissible when the description of the person or thing in the written instrument was applicable to each of several subjects. To Lord Chelmsford, the kind of ambiguity, which was necessary before extrinsic evidence that goes to proof of intention would be permitted, is latent ambiguity. In Lord Hatherly’s words (at 375), no “doubt or ambiguity exists in applying the words of the will, so as to authorize (sic) the introduction of parol evidence to solve that doubt”. There was no doubt or ambiguity because one son had the name “Forster” and the other did not. He went on to explain (at 376) that Lord Penzance had miscarried in admitting “evidence of declarations of intention by the testator”.

124. [58]

     [58] Lord Cairns LC too held (at 376– 377):

125. [59]

     [59] Therefore, under the common law in the late 19 century, the parol evidence rule precluded admissibility of evidence of the intention of the drafter save where the expression in the instrument was latently ambiguous. That there was this distinction between latent and patent ambiguity is unexceptional, as the textbooks of that time also confirm: Joseph Chitty, Treatise on the Law of Contracts, and upon the Defences to Actions Thereron (John Archibald Russell ed) (H. Sweet, 9th Ed, 1871) (“Chitty”) at p 98; C G Addison, Addison on Contracts Being a Treatise on the Law of Contracts (Lewis Cave ed) (Stevens, Sons & Warwick, 7th Ed, 1875) (“Addison”) at pp 165–166.

126. [60]

     [60] This is an apposite point at which to return to Allgood, which Sir James thought was inconsistent with Lord Penzance’s holding in Charter. Quoting Blackburn J’s judgment in Allgood, Sir James said (Stephen’s Digest at p 211):

127. [61]

     [61] It might at first be thought that the italicised portion in the latter part of the excerpt at [60] above reflects Sir James’s preference for a more restrictive approach to the admissibility of extrinsic evidence so as to also exclude evidence of surrounding circumstances. However, one must not lose sight of the context in which Sir James referred to Allgood. He was only concerned with evidence of expressions of intentions and not extrinsic evidence in the general sense. This is unmistakable as he had prefaced his discussion on Charter, Allgood and Charter (HL) with the opening observation (Stephen’s Digest at p 210) that “[i]t is difficult to justify the line drawn between the rule as to cases in which evidence of expressions of intention is admitted and cases in which it is rejected”. Nowhere in his judgment in Allgood was Blackburn J suggesting that background circumstances are inadmissible. On the contrary, he said (at 162):

128. [62]

     [62] Sir James was cognisant of the principle espoused in Allgood, as evidenced by his observation below which prefaced the excerpt at [60] above (Stephen’s Digest at p 211):

129. [63]

     [63] Our view that the common law at that time permitted the admission of extrinsic evidence of surrounding circumstances to aid in the interpretation of words used in a contract is confirmed by both contract and evidence law textbooks of that time: Chitty at p 72; Addison at pp 164–165; John William Smith, The Law of Contracts (Vincent T Thompson ed) (Stevens and Sons, 6th Ed, 1874) at pp 484–486; Simon Greenleaf, A Treatise on the Law of Evidence vol I (Charles C Little & James Brown, 3rd Ed, 1846) at para 277; Wigram at pp 95–95. There is therefore no doubt in our minds that the EA, which codified the common law position at that time, also permits the admissibility of extrinsic evidence of surrounding circumstances. This is effected by s 94(f) of the EA.

130. [64]

     [64] A lingering question remains: what exactly is extrinsic evidence of surrounding circumstances that is admissible without restriction under s 94(f) of the EA? The short answer, as suggested by the cases referred to by Sir James, would be such extrinsic evidence of “facts and circumstances which were (or ought to have been) in the mind of the [drafter] when he used those words” (see [62] above). Parol evidence of the drafter’s subjective intention does not constitute such surrounding circumstances. Of course, the line between these two types of evidence may not always be clear, but that is an issue that can be developed through case-law.

131. [65]

     [65] Where then does this leave us in relation to the robust approach? The following propositions seem clear:

132. (a) First, the admissibility of extrinsic evidence generally is governed by the rules of evidence and not by the rules of contractual interpretation (which are governed by the substantive law of contract).

133. (b) Second, the rules governing the admissibility of extrinsic evidence in Singapore are to be found first in the EA, then in the common law.

134. (c) Third, the general admissibility of extrinsic evidence under s 94(f) of the EA must be read together with the exclusionary provisions of the EA, in particular, ss 95 and 96.

135. (d) Fourth, extrinsic evidence of surrounding circumstances is generally admissible under s 94(f). However, it was and properly remains the position that extrinsic evidence in the form of parol evidence of the drafter’s intentions is generally inadmissible unless it can in some way be brought within the exceptions in ss 97 to 100.

136. The common law litigation process

137. [66]

     [66] As alluded to earlier at [38] above, the EA is not the only constraint on the wholesale adoption of the robust approach in Singapore law. In our view, there are significant features of the common law litigation process which also militate against the unqualified acceptance of the robust approach. Specifically, the adversarial process leaves it to the parties to seek to admit any evidence which they think might be helpful to their case. This can induce the parties to seek to admit a tsunami of evidence, leaving it to the judge to sift through what is relevant or irrelevant, admissible or inadmissible, useful or useless. In Zurich Insurance, we referred to Wire TV Ltd v CableTel (UK) Ltd [1998] CLC 244 (“CableTel”) where Lightman J lamented (at 257):

138. [67]

     [67] Indeed, Lord Hoffmann himself recognised the practical knock-on effects of an overly robust approach towards admitting extrinsic evidence. In Chartbrook, he explained (at [34]–[38]) that it was pragmatism and policy considerations which militate against the admission of evidence of pre-contractual negotiations and subsequent conduct under English law:

139. [68]

     [68] There is considerable force in these concerns. The Honourable James Jacob Spigelman, then Chief Justice of the Supreme Court of New South Wales (“Spigelman CJ”), quite recently echoed these concerns. Having noted the common law’s drift towards the civil law approach to contractual construction, he argued forcefully that, from a practical and economic perspective, there is cause to reconsider its wisdom (James Spigelman, “Contractual Interpretation: A Comparative Perspective”, 3 Judicial Seminar on Commercial Litigation (Sydney, 23 March 2011) (“Spigelman”) at pp 58–60):

140. [69]

     [69] Spigelman CJ further explained that there are inherent “control valves” within the civil law system that allow an expansive approach to construction to work (Spigelman at pp 61–63):

141. [70]

     [70] We find Spigelman CJ’s words of caution cogent and relevant. The shaping of the law is an exercise that must not lose congruence with its surrounding social, political and economic context. The shift towards an expansive theory of contextual construction has not always been accompanied by evidentiary discipline and procedural rigour. Not infrequently, we see litigants seeking to admit all manner of evidence under the guise of the context without any governing rules of engagement. Of course, one would expect judges to have varied experiences with the incidence of overwhelming documents. For instance, Lord Bingham of Cornhill and Arden LJ thought that Lightman J’s experience in CableTel (see [66] above) was the exception rather than the norm: see Lord Bingham of Cornhill, “A New Thing Under the Sun? The Interpretation of Contracts and the ICS Decision” [2008] 12 Edin LR 374 at 387–388 and Egan v Static Control Components (Europe) Ltd [2004] 2 Lloyd’s Rep 429 at [29]. So too does Rajah JA, writing extra-judicially in “Redrawing the Boundaries of Contractual Interpretation: From Text to Context to Pre-text and Beyond” [2010] 22 SAcLJ 513 at para 39.

142. [72]

     [72] From this perspective, a robust approach unaccompanied by sufficient safeguards may be counterproductive. More fog, not less, might ensue. In our judgment, it is time to refine our approach by synchronising our rules of pleading and evidence with the contextual approach to contractual construction laid down in Zurich Insurance. This is necessary because the broad language associated with the contextual approach is susceptible to being misunderstood and misapplied. The utility of the contextual approach is to place the court in the best possible position to ascertain the parties’ objective intentions by interpreting the expressions used by the parties in the relevant instrument in their proper context; it is not a licence to admit all manner of extrinsic evidence. To do otherwise would be to ignore the salutary words of caution in Zurich Insurance (at [127] and [129]):

143. [73]

     [73] We hasten to add that although the contextual approach is most frequently engaged in the context of interpretation, this is not to say that the contextual approach is irrelevant when it comes to other aspects of construction such as implication or rectification. Indeed, it is trite that the court must have regard to the context at the time of contracting when considering the issue of implication. Therefore, to buttress the evidentiary qualifications to the contextual approach to the construction of a contract, the imposition of four requirements of civil procedure are, in our view, timely and essential:

144. (a) first, parties who contend that the factual matrix is relevant to the construction of the contract must plead with specificity each fact of the factual matrix that they wish to rely on in support of their construction of the contract;

145. (b) second, the factual circumstances in which the facts in (a) were known to both or all the relevant parties must also be pleaded with sufficient particularity;

146. (c) third, parties should in their pleadings specify the effect which such facts will have on their contended construction; and

147. (d) fourth, the obligation of parties to disclose evidence would be limited by the extent to which the evidence are relevant to the facts pleaded in (a) and (b).

148. [75]

     [75] Before leaving this issue, we make one final observation. Asst Prof Goh has, after a comprehensive survey of the historical literature on the law governing the admissibility of prior negotiations, argued that the seemingly blanket exclusionary rule against the admissibility of prior negotiations was a product of a historical misstep by the courts and is inconsistent with the EA: Goh Yihan, “The Case for Departing From the Exclusionary Rule Against Prior Negotiations in the Interpretation of Contracts in Singapore” (2013) 25 SAcLJ 182. We prefer to leave for another occasion the consideration of whether this argument is to be accepted in principle; and if so, whether evidence of prior negotiations should nonetheless be excluded as irrelevant or unhelpful for the policy reasons set out by Lord Hoffmann in Chartbrook at [34]–[38]; or on the ground that it may amount to parol evidence of subjective intent and not fall within ss 97 to 100 of the EA. Whichever way that may eventually be resolved, any future attempt to rely on such material should be made with full consciousness of the concerns already expressed and in compliance with the pleading requirements we have just prescribed.

149. Implication of terms in fact

150. [76]

     [76] We turn to the analysis of the law on the implication of terms in fact in Singapore. This was the subject of our very recent decision in Foo Jong Peng where we made several important observations, most notably rejecting the approach taken by Lord Hoffmann in Belize. We recognise that there are still some doubts over this difficult and controversial area of contract law. Before Belize, there was little doubt over the applicable test for the implication of terms in fact. However, Belize, as Asst Prof Goh has pointed out, has introduced conceptual uncertainty and its application has not been uniform in the English courts: Goh (JBL) at 240–242. We therefore take this opportunity to supplement what we have said in Foo Jong Peng.

151. Foo Jong Peng and Belize revisited

152. [77]

     [77] Lord Hoffmann’s propositions in Belize have often been cited as representing an “interpretative” approach to the implication of terms: Paul S Davies, “Recent Developments in the Law of Implied Terms” [2010] LMCLQ 140; Lord Grabiner QC, “The Iterative Process of Contractual Interpretation” (2012) LQR 41 at 59; Crema v Cenkos Securities plc [2011] 1 WLR 2066 at [37]–[39]; Chantry Estates v Anderson [2010] EWCA Civ 316 at [14]–[16]. On the premise that Belize subsumes implication within the process of interpretation as we have defined (see [27]–[28] above), we reiterate our position in Foo Jong Peng that Belize is not part of Singapore law.

153. [78]

     [78] In Foo Jong Peng, we recognised (at [31] and [36]) that it is possible to fit the implication of terms within the concept of interpretation “in a more general sense”, which is what we have referred to above as construction of the document as a whole. This may be contrasted with “the interpretation of the express terms of a particular document”:

154. [79]

     [79] In our judgment, it is possible to bridge the gap with Belize on this point, if one concludes that Lord Hoffmann was saying that the implication of terms is to be seen as part of the overall process of construing the document as a whole, and no more. In this regard, it is pertinent that the relevant passages in Belize do not use the word “interpretation”, but rather, “construction”. Moreover, they also speak of the construction of the instrument or document as a whole rather than of specific express terms: see especially Belize at [16]–[19], [21], [25] and [27].

155. [80]

     [80] Indeed, this seems to be how Lord Clarke of Stone-Cum-Ebony MR explained Belize in Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc (The “Reborn”) [2009] 2 Lloyd’s Rep 639 (“Seamar Trading”) at [9] and [15]:

156. [81]

     [81] As Lord Clarke noted in [9] of Seamar Trading, Lord Hoffmann in Belize had referred approvingly to Hyman, where Lord Steyn had categorically held (at 458) that the processes of interpretation and implication must be distinguished:

157. [82]

     [82] But this does not help us with the other parts of Belize. In so far as Lord Hoffmann in Belize proposed a standard of reasonableness for the implication of terms, we had respectfully registered our disagreement in Foo Jong Peng (at [36]), and we reaffirm that disagreement here. The standard for the implication of terms remains one of necessity, not reasonableness. Reasonableness is a necessary but insufficient condition for the implication of a term: Reigate v Union Manufacturing Company (Ramsbottom), Limited and Elton Dyeing Company, Limited [1918] 1 KB 592 (“Reigate”) at 605.

158. The business efficacy and officious bystander tests

159. [83]

     [83] We turn now to consider the business efficacy and officious bystander tests, articulated in The Moorcock (1889) 14 PD 64 (“The Moorcock”) at 68 and Shirlaw v Southern Foundries (1926) Limited [1939] 2 KB 206 (“Shirlaw”) at 227 respectively.

160. [84]

     [84] The business efficacy test is applied to identify gaps in the contract that need to be filled for it to be commercially workable. This much was established in The Moorcook, where the plaintiff’s vessel was damaged when docking at the defendant’s jetty. The contract required the plaintiff to bring his vessel alongside the wharf but said nothing about any warranty that the riverbed at that location would permit this. It was argued that a term should be implied imposing on the defendant wharfingers a duty to exercise reasonable care to ascertain that the riverbed adjacent to the jetty would not damage the vessel. The court implied the term, and the business efficacy test as conceived by Bowen LJ in the following formulation was birthed (at 68):

161. (1) Limitations of the business efficacy test

162. [85]

     [85] The business efficacy test has its share of criticism. Indeed, MacKinnon LJ in Shirlaw expressed concern (at 227) at the trend of over – and seemingly undue – reliance on The Moorcock. First, it must be remembered that the test was propounded in the context of what must have been intended by parties to a business transaction. But not all contracts involve commercial transactions between businessmen. Depending on the nature of and the parties to the contract, for instance one between family members, there could conceivably be some other external normative standards which may be more appropriate than business efficacy in distilling the parties’ presumed intentions.

163. [86]

     [86] Second, the business efficacy test suffers from an inherent blind spot: what does it mean to invoke business efficacy? The efficacy of a contract or a transaction invariably straddles a spectrum. Many contracts might, to some degree, be efficacious and inefficacious at the same time. This explains why the contracting parties often end up in disagreements and disputes. Even if a contract or transaction can be said to be efficacious, there might be room for it to be more efficacious. Where then should the line be drawn? Indeed, this was alluded to by Bowen LJ himself in The Moorcock (at 69):

164. [87]

     [87] What is the “minimum of efficacy” and why should the court stop there? Is it the bare minimum without which, as Bowen LJ said (at 71), “business could not be carried on”? It is also useful to note the oft-overlooked judgment of Lord Esher MR in The Moorcock in which he justified (at 67) the implication of the term on the basis that “honest business could not [otherwise] be carried on”. In the same breath, he framed the term necessary to be implied as the “least onerous” one that could be implied. But why should the court stop at implying the “least onerous” outcome or the “minimum of efficacy”? If the court is presuming what the parties must have intended, might it not be sensible to transpose the most efficacious outcome that the parties must have sought or could have secured?

165. [88]

     [88] The answer to these questions, we think, is to be found in the conservatism which ensures that the court will not rewrite the contract for the parties based on its own sense of what is fair and just: Panwah Steel Pte Ltd v Koh Brothers Building & Civil Engineering Contractor (Pte) Ltd [2006] 4 SLR(R) 571 at [8]. As Lord Pearson said in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 (“Trollope”) at 609, the court will not improve the contract which the parties have made for themselves, however desirable the improvement might be. But the fact remains that a rewritten bargain is a rewritten bargain, and business efficacy, as a normative concept, is inherently imprecise. On its own, it might help identify a gap, but it cannot supply the answer to whether a specific term should be implied. This is where the officious bystander test is instrumental.

166. (2) Relevance of the officious bystander test to the business efficacy test

167. [89]

     [89] We appreciate that there persists much debate amongst commentators on the interaction between the two tests. On one end of the spectrum, as John McCaughran QC has argued, the implication of a term to give effect to the parties’ commercial expectations is intrinsically different from the implication of a term which both parties would have agreed to had that term been proposed by an officious bystander: John McCaughran QC, “Implied Terms: The Journey of the Man on the Clapham Omnibus” (2011) 70(3) CLJ 607 at 612. On the other hand, Professor Andrew Phang (“Prof Phang”), as he then was before his elevation to the bench, has argued that the officious bystander test is “the practical mode for effecting the general principle [of the business efficacy test]”: Andrew Phang, “Implied Terms Revisited” [1990] JBL 394 at 397. Dr Richard Austen-Baker characterises the officious bystander test as an “explanatory gloss” to the business efficacy test: Richard Austen-Baker, “Implied Terms in English Contract Law: The Long Voyage of The Moorcock” (2009) 38 Common Law World Review 56 at 70.

168. [90]

     [90] Nor do the judicial authorities sing a common tune, as Phang J (as he then was) illustrated in Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] 1 SLR(R) 927 (“Forefront Medical”) at [34]–[39]. In so far as the law in Singapore is concerned, we affirm the “complementarity” characterisation of the business efficacy and officious bystander tests in Forefront Medical at [35]–[38], for the reasons provided by Phang J. As Phang J observed at [35] of Forefront Medical, Scrutton LJ in Reigate clearly had in mind business efficacy as the basis for the implication of a term (Reigate at 605):

169. Not only was business efficacy at the forefront of Scrutton LJ’s mind, it is also telling from the use of the words “that is” that Scrutton LJ’s articulation of the officious bystander yardstick was intended to serve as an elaboration of the business efficacy test. We find the following excerpt from Jacob Petrus Vorster, “The Bases for the Implication of Contractual Terms” (1988) Journal of South African Law 161 illuminating (at p 171):

170. [91]

     [91] In our judgment, this excerpt precisely isolates the core of the officious bystander test: it is the device that enables the court to define that term which can be said to reflect the parties’ presumed intention vis-à-vis the gap in the contract. While the business efficacy test is helpful to identify the existence of a lacuna, that is to say that for the sake of the efficacy of the contract something more needs to be added into the contract, it does not assist in identifying what that “something more” is with any degree of precision. That is where the officious bystander test serves an instrumental function.

171. [92]

     [92] The business efficacy test nonetheless reminds the court that the implementation of the officious bystander test must be conducted within the normative framework of business efficacy as its overarching theme. In this regard, we adopt the cogent explanation of Phang JA and Asst Prof Goh in Contract Law in Singapore (Wolters Kluwer Law and Business, 2012) at para 1063:

172. (3) The law on implied terms in Singapore

173. [93]

     [93] In the light of these observations, we summarise our views on the implication of terms into a contract. First, this process is best understood as an exercise in giving effect to the parties’ presumed intentions. It is presumed because the parties have not expressed any words, which are capable of bearing the meaning sought to be achieved by the implied term. Were there to be any express words, that would be a matter of interpretation, not implication: see [27]–[30] above. It is thus an exercise in filling the gaps in the contract. But in doing so, it is of paramount importance that the courts do so with due regard to what the parties would be presumed to have intended.

174. [94]

     [94] This leads us to the second point. Although the prayer to imply a term might imply that there is a gap in a contract, which needs to be filled, not all gaps in a contract are “true” gaps in the sense that they can be remedied by the implication of a term. There are at least three ways in which a gap could arise:

175. (a) the parties did not contemplate the issue at all and so left a gap;

176. (b) the parties contemplated the issue but chose not to provide a term for it because they mistakenly thought that the express terms of the contract had adequately addressed it; and

177. (c) the parties contemplated the issue but chose not to provide any term for it because they could not agree on a solution.

178. [95]

     [95] In our view, scenario (a) is the only instance where it would be appropriate for the court to even consider if it will imply a term into the parties’ contract (see Socimer International Bank Ltd (In Liquidation) v Standard Bank London Ltd (No 2) [2008] 1 Lloyd’s Rep 558 at [105]). This pertains to what the parties would be presumed to have agreed on had the gap been pointed out to them at the time of the contract. Scenario (c) is not a proper instance for implication because the parties had actually considered the gap but were unable to agree and therefore left the gap as it was. To imply a term would go against their actual intentions.

179. [96]

     [96] Scenario (b), also, is not a proper situation in which to imply a term. What drives this scenario is not the parties’ presumed intentions, but rather their objectively ascertained actual intentions. Oftentimes, what is sought to be corrected through the process of implication is the mistaken belief that “the document accurately records the transaction” (see for instance, Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA (The “Olympic Pride”) [1980] 2 Lloyd’s Rep 67 at 72). The proper remedy for such a situation is the rectification of the instrument in equity: see Codelfa Construction Prop Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 348.

180. [97]

     [97] We note the suggestion of some commentators that rectification has been swallowed up by the contextual approach to interpretation, following ICS and Chartbrook: Andrew Burrows, “Construction and Rectification” in Contract Terms ch 5 at pp 90–91; and Sir Richard Buxton, “Construction’ and Rectification after Chartbrook” [2010] CLJ 253 at 260–262. It follows from the analytical clarification we have restated above, that in our judgment, rectification continues to serve a useful role and purpose in the common law. We note that the English Court of Appeal recently expressed similar views in Cherry Tree Investments Ltd v Landmain Ltd [2013] 1 Ch 305 at [73], [98] and [120].

181. [98]

     [98] Third, the business efficacy and officious bystander tests used in conjunction and complementarily remain the prevailing approach for the implication of terms under Singapore law. We note that the multi-pronged formulation advanced in BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 (“BP Refinery”) which builds on these tests has gained some favour: see Philips Electronique at 481. In BP Refinery, the court held (at 282–283) that in addition to business efficacy and obviousness, the implied term must be reasonable and equitable, capable of clear expression; and not contradict any express term of the contract. But these additional requirements – if they may be called that – simply restate the basic overriding principle that a term is not to be implied into a contract lightly. It goes without saying that a term that is not reasonable, not equitable, unclear, or that contradicts an express term of the contract, will not be implied. Such a term will necessarily fail the officious bystander test.

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