Jurisdiction - Singapore
News
Singapore – Agreement To Negotiate In Good Faith Upheld.

7 September, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd [2012] SGCA 48

 

SUMMARY
 
In a recent decision, the Singapore Court of Appeal held that that an express contractual clause directing contracting parties to negotiate in good faith can be valid and enforceable in law. This important ruling has widespread implications
as “friendly negotiation” clauses are commonplace in business and commercial settings. 
 
In its judgment, the Court of Appeal also elaborated on the concept of good faith and examined the issue of confirmation bias. Cavinder Bull, SC, Gerui Lim and Adam Maniam acted successfully for Toshin Development Singapore Pte Ltd (“Tenant”).
 
BACKGROUND
 
HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) (“Landlord”) and the Tenant entered into an agreement (“Lease Agreement”) whereby the Landlord granted a 20-year lease over its premises (“Premises”) to the Tenant. The 20-year term was divided into rental terms of successive 3-year periods, except for the last rental term, which was
for only 2 years (ie from 8 June 2011 to 7 June 2013) (“Last Rental Term”).
 
The Landlord and the Tenant contracted to adopt a 3-stage rent review mechanism (“Rent Review Mechanism”). At the first stage, the Lease Agreement provided that the parties would “in good faith endeavour to agree” on the rental of the Premises. If no agreement was reached by a date three months before the commencement of the new rental term, the second stage in the Lease Agreement was for the parties to jointly appoint “three international firms of licensed valuers” to separately determine the prevailing market rental value of the Premises, the average of which would constitute the new rent. If the parties were unable to agree on the three valuation firms to be appointed, the third stage in the Lease Agreement was for the President of the Singapore Institute of Surveyors and Valuers (“SISV”) to appoint the valuers to conduct the valuation.
 
Between July 2010 and early 2011, for various commercial reasons, the Tenant engaged 7 valuation firms (“2010 Valuers”) to conduct a valuation of the prevailing market rent of the Premises as at 8 June 2010 (with the exception of one valuation firm which was commissioned to provide a valuation as at 31 December 2010)
(collectively, “2010 Valuations”). 
 
On 13 January 2011, the parties met to discuss the new rent for the Last Rental Term, but did not reach a consensus on the new rental. The parties proceeded to engage in discussions on appointing three valuation firms to separately determine the rental. However, the Landlord subsequently refused to proceed with the Rent Review Mechanism after it became aware of the 2010 Valuations.
 
The Tenant thereafter disclosed the 2010 Valuations to the Landlord. However, the Landlord proceeded to commence Court action against the Tenant, claiming that the latter had rendered the Rent Review Mechanism inoperable as the independence of the 2010 Valuers had been compromised. The Landlord also alleged that the Tenant stood to gain an unfair advantage as a result of its prior engagement of 7 out of the 8 valuation firms which could potentially be appointed as valuers.
 
HIGH COURT’S DECISION
 
The High Court took the view that the Rent Review Mechanism was operable. The High Court found that there were no reasonable concerns about the 2010 Valuers
being bound by the professional views expressed in their previous valuations. The High Court held that the 2010 Valuations were irrelevant to the Rent Review Exercise which was for a date one year later. The High Court also held that the three valuation firms eventually appointed were not dutybound to abide by the 2010 Valuations and so were not restricted by those prior valuations.
 
The Landlord appealed to the Court of Appeal against the High Court’s decision.
 
ARGUMENTS MADE BEFORE THE COURT OF APPEAL
 
Before the Court of Appeal, the Landlord’s new lawyers maintained its argument that the Rent Review Mechanism was inoperable.
 
The Landlord argued that the 2010 Valuers were affected by a conflict of interest because they had an existing “confirmation bias” in not deviating from the 2010 Valuations and they were unable to act independently. The Landlord further argued that the applicable test to apply was that of the apparent bias test. In the alternative, the Landlord claimed that the Tenant’s actions were in breach of an implied duty of good faith under the Lease Agreement.
 
The Tenant, on the other hand, argued that the Rent Review Mechanism remained operable for two reasons. First, there could not be a duty of good faith in relation to an agreement to agree as this had no meaning in law. In any event, a breach
of such a duty would not render the Rent Review Mechanism incapable of operating as the Landlord claimed. Secondly, at law, actual bias (and not apparent bias) was required to challenge an expert’s appointment. On the facts, the Tenant argued, there was no evidence of actual bias or even apparent bias.
 
COURT OF APPEAL’S DECISION
 
The Court of Appeal dismissed the Landlord’s appeal and held that the Rent Review Mechanism was operable. The Court of Appeal declined to find an implied duty of good faith under the Lease Agreement. However, it held that that an express contractual clause directing contracting parties to “in good faith endeavour to agree” can be valid and enforceable in law.
 
The Court of Appeal was of the view that the express requirement in the Lease Agreement for parties to “in good faith endeavour to agree” on the new rent at the first stage of the Rent Review Mechanism was not void for uncertainty. It required the parties to co-operate fully to facilitate the determination of the new rental.
 
The Court of Appeal also took the view that the Tenant had initially breached the express duty of good faith by failing to disclose the 2010 Valuations to the Landlord at the start of the parties’ negotiations. However, the Tenant had subsequently remedied its initial breach by disclosing the 2010 Valuations to the Landlord.
The Court of Appeal also held that there was also no issue of bias, whether apparent or actual, in this case. As such, the valuers were eligible to be
appointed for the rent review exercise.
 
Good faith
 
Agreements to negotiate in good faith are in line with public policy
 
The Court of Appeal held that there is no good reason why an express agreement for contracting parties to negotiate in good faith should not be upheld. The Court of Appeal was of the view that “friendly negotiations” and “negotiate in good faith”
clauses are consistent with our cultural value of promoting consensus whenever possible. They are also in the public interest as they promote the consensual disposition of any potential disputes. The Court of Appeal noted that it is “fairly
common” practice for Asian businesses to include similar clauses in their commercial contracts.
 
Concept of good faith
 
The Court of Appeal held that the concept of good faith encompasses the threshold subjective requirement of acting honestly, as well as the objective requirement of observing accepted commercial standards of fair dealing in the performance of the identified obligations. This encompasses a duty to act fairly, having regard to the legitimate interests of the other party. 
 
The Court of Appeal added that there is an obligation during the course of negotiations not to attempt to unfairly profit from the known ignorance of the other party.
 
Duty of good faith
 
The Court of Appeal found the Supreme Court of New South decision of Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236 particularly instructive on contracting parties’ duty to negotiate in good faith.
 
The Court of Appeal held that contracting parties should adopt a consensual approach to negotiate contractual modalities in good faith as part of their
performance of the broader existing agreement, as well as part of the wider contractual duty to cooperate to implement the contract. The Court of
Appeal was of the view that contracting parties are entitled to have regard to their own commercial self-interests in the course of the negotiations as long as their conduct does not involve bad faith. The Court of Appeal held that when the Landlord and the Tenant entered into negotiations on the new rent for the Last Rental Term, the obligation of good faith required the disclosure of all material
information which could have an impact on the negotiations or the ultimate determination of the new rent.
 
The Court of Appeal held that the existence of the 2010 Valuations and the 2010 Valuations were material information, and that the Tenant’s failure to disclose these to the Landlord at the start of the parties’ negotiations on the new rent was a breach of its good faith obligation. However, the Tenant had remedied that breach by its subsequent disclosure of the 2010 Valuations to the Landlord, whereby the Tenant had signalled that it had nothing to hide and was prepared to negotiate the new rent in good faith. The Court of Appeal also stated that an unremedied breach would only have made the rent review exercise voidable, in the sense that any new rent agreed on would not have bound the Landlord.
 
In the circumstances, the Rent Review Mechanism had not been rendered inoperable due to the breach of the obligation of good faith.
 
Confirmation bias
 
Upon an examination of the facts of this case, the Court of Appeal was of the view that there was nothing to suggest that any of the 2010 Valuers, if appointed for the rent review exercise, would be unable to carry out a fair and independent valuation of the Premises simply by virtue of having carried out a prior valuation of the same
premises for the Tenant in 2010. The issue of bias, whether actual or apparent, did not even arise.
 
The Court of Appeal noted that while the methodologies involved in the 2010 Valuations and the fresh valuations to be made might be similar, the fresh valuations would have to take into account consequential changes in market
circumstances since property values in Singapore often change substantially over short periods of time.
 
On the facts, the 2010 Valuers had not been engaged to offer strategic advice to the Tenant, but rather, to render a professional estimation of the prevailing market rent of the Premises as at 8 June 2010 or 31 December 2010. There was no
suggestion that the 2010 Valuations were dishonestly prepared by the 2010 Valuers, or that any of those valuers had professionally compromised itself by manifesting a lack of integrity in exercising its judgment. A prior duty of care to make an honest and accurate valuation assessment would not conflict with the subsequent obligation to prepare a fresh valuation assessment honestly and accurately, even though the first duty was owed to the Tenant and the subsequent duty was jointly owed to the Landlord and the Tenant.
 
COMMENT
 
The Court of Appeal’s decision to uphold express contractual duties to negotiate in good faith will have widespread implications for commercial and business contracts, where good faith negotiation clauses are fairly common. Parties who use such clauses should be mindful that it may no longer be sufficient to avoid making misrepresentations during the course of negotiations; a failure to meet accepted commercial standards of fair dealing will also attract legal consequences.
 
In particular, the non-disclosure of material facts during good faith negotiations may render a concluded agreement voidable for bad faith and allow the other party the option of setting the agreement aside. Although the Court of Appeal has emphasised that parties engaged in good faith negotiations are still entitled to have regard to their own commercial self-interests, the challenge lies in making the distinction between advantages which a party can legitimately exploit to its own benefit, and unfair advantages affording commerciallysignificant insight into the conduct of the negotiating process which must be disclosed to the other party. It remains to be seen how and where subsequent cases will draw that line.

 

It is also interesting that the Court of Appeal commented that in principle, there was no difference between an agreement to negotiate in good faith and an agreement to submit a dispute to mediation. This raises the question of whether parties engaged in mediation (and mediation clauses often expressly state that the parties will participate in mediation in good faith) are subject to an analogous good faith obligation to disclose material information to the other party, or a duty not to attempt to unfairly profit from the known ignorance of the other party, such that a failure to comply with those obligations may lead to a concluded settlement agreement being nonbinding on the other party. It will be interesting to see whether the concept of good faith is able to take root and develop in this area, where the adversarial relationship between parties is more pronounced. 
 
 
For further information, please contact:
 
Cavinder Bull, Director, Drew & Napier
cavinder.bull@drewnapier.com
 

 

Leave a Reply

You must be logged in to post a comment.