Don Nazar

2018868046
NLWIK2AX
Question 3 [ Ethan, Ingrid & Putra Construction ]

Issue

There are 2 issues identify in this matter:

1. Whether Ingrid is responsible to evict the squatters and demolish their family
business factory buildings and workshop on the said land?
2. Whether Putra Construction is liable due to non-completion of the project as per
Clause 7 in Joint Venture Agreement?

Law

The law applicable in these issues are Section 9 of Contract Act 1950 and relevant cases
to support the matter are Shirlaw v Southern Foundries, Arab-Malaysian Merchant Bank
Bhd & Ors v Cour Square Pelita Sdn Bhd & Ors, Liverpool City Council v Irwin, Lynch v
Thorne, The Moorcock 1889, Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong,
Reigate v Union Manufacturing Company (Ramsbottom) Ltd and Elton Cop Dyeing
Company Ltd and BP Refinery (Westernport) PTY LTD v Shire of Hastings.

Application

Section 9 of Contract Act 1950 state that, “ So far as the proposal or acceptance
of any promise is made in words, the promise is said to express. While if the proposal or
acceptance is made otherwise than words, the promise is said to be implied.

An implied term is a term which has not been expressly agreed by the parties. This
may occur, due to the extensive nature of the contract where parties decided to only
record the most important terms and leaving others to be understood, or the parties
might have considered that a particular situation may not arise or it has been a custom
and a normed practice where it is understood and need not be contracted.

There are 3 types of implied terms which can be constructed into a contract; i)
terms implied by custom, ii) terms implied by law and iii) terms implied by court. When
Ingrid denies that there is such obligation stated anywhere in the JVA, it indicates that
there is an integral part of the contract where parties have not expressly provide it.
Therefore, implied term by Court shall be most suitable assessment as it allows for the
unexpressed intentions of the parties to take effect. The court will look at the
content/terms of the contract and the surrounding circumstances. In terms implied by
the courts, there is 3 test for implying terms which are; i) the business efficacy test, ii) the
officious bystander test and iii) a combined test.

As the law on implied terms developed, courts have combined and used both
tests. In Reigate v Union Manufacturing Company (Ramsbottom) Ltd and Elton Cop
Dyeing Company Ltd, Learned Judge Scrutton state that “A term can only be implied if
it is necessary for the business sense to give efficacy to the contract… at a time a
contract is being negotiated, someone can confidently say to the parties. ‘What will
happen in such case’ and they will reply ‘of course, so and so will happen’. The same
goes with Yap Nyo Nyok v Bath Pharmacy held that both tests must be satisfied.
Meanwhile, in BP Refinery (Westernport) PTY LTD v Shire of Hastings, the Privy Council
referred to both tests and supplemented them with other factors. The Lordship view that,
in order for a term to be implied, the following conditions must be satisfied:
1. It must be reasonable and equitable;
2. Must be necessary to give business efficacy to the contract so that the term
can be implied if the contract is effective without it;
3. Must be so obvious that it goes without saying;
4. Must be capable of clear expression; and
5. Must not contradict in any express term of the contract

An example of Malaysian case held in Federal Court which referred to the business
efficacy test and the officious bystander tests in Sababumi (Sandakan) Sdn Bhd v Datuk
Yap Pak Leong and held that both tests (combined test) must be satisfied before a term
can be implied.

Another precedent case which has applied Sababumi facts material in their
judgment is Arab-Malaysian Merchant bank Bhd & Ors vs. Court Square Pelita Sdn Bhd &
Ors. In this case, the plaintiff agrees to provide a term loan to the defendant for the
purpose of land purchasing and to fully developed and construct a two-phase project,
consisting of trade center and a complex. The loan was guaranteed by second, third,
fourth and fifth defendants. In 1997, the trade center was certified to have been
practically completed BUT, the occupation certificate was not issued resulting in
suspension in the sale of the office lots in the trade center, not from the first defendant
fault. This resulted in the first defendant not being able to serve the loan in accordance
with the conditions stipulated in the loan agreement. Summary judgment was served
against the defendants and defendants had appealed inter alia that the following terms
should be implied into the loan agreement:

1) Plaintiff should extend the period of completion of the project so that both
parties would not suffer a loss when the project was stalled through no fault
of defendants
2) Defendants should be given reasonable time to repay the loan when the
buildings could not be sold through no fault of the defendants.

The court held that such terms above could not be implied as it is not reasonable. The
Learned Judge state that, if an extension is given, it could be of indefinite period as the
project could be stalled with no definite completion time; another question arises from
the Judge is, what qualifies as a fault or no fault on the defendant might cause further
argument and lead to litigation. From the question arise, would the plaintiff say “Oh, of
course!” if those questions were included in the loan agreement negotiation? From the
Honourable Judge perspective, he can't foresee the plaintiff or any financial institution
agreeing to such terms. This means those terms would have failed the first test of the
officious bystander. Those terms would also fail the second test of business efficacy where
because it could hardly be efficacious for the parties to be left in a grey area as to
suspend the obligations until defendants could sell the buildings.

However, prior to the application of said test, the Court must determine whether
the terms implied are off for necessity or reasonableness? In Liverpool City Council v Irwin,
Lord Denning held that it was reasonable to imply a term that the landlord had an
obligation to maintain the common parts of the building. Hence, Ingrid as the rightful
owner of the land after Ethan demise had lead Ingrid to clear the land to ensure the
business efficacy of Putra Construction in delivering Ingrid/Ethan 20% of the total units to
be built. In the case of Lynch v Thorne, both parties had entered into an agreement to
build a house for the Plaintiff, Defendant being the contractor had provided the
specification of the suitable wall which may fit the requirement of a house. However, in
the midst of constructing, Plaintiff had instruct Defendant to use different materials which
he himself deem fit for the house. Despite it is not agreeable by the Defendant, the
Plaintiff had enforced his rights as a buyer and had coerced the Defendant to use said
material. Upon completion, the house is not fit to be occupied due to the material faulty
where it could not prevent the rain from coming into the house. Plaintiff brings the matter
to justice and the court had decided that implied terms can only be justified under the
compulsion of some necessity.

That being the case, in dispute between Ingrid and Putra Construction, the Court
shall use the combined test as shown above and shall benchmark the matter with
available precedent cases as Malaysia Contract Act does not provide for implied terms
and Malaysian Courts has used Common Law as a yardstick. In order to resolve the
dispute by way of officious bystander test formulated by MacKinnon LJ in Shirlaw v
Southern Foundries, the Judge imply that what would have happen if when a contract
was drafted and a third party read the content and said “ Would it not be well to remove
Mr. Shirlaw from his directorship and he has no right to resign” Mr. Shirlaw would certainly
have said “Of course that is implied”. Hence, a third party shall by way of officious
bystander be able to answer “Oh of course” if the court were to imply, it is Ingrid
responsibility to clear the land from encumbrances if they were for development by Putra
Construction via JVA even if it is not expressly implied in the JVA.
 Wherein via the business efficacy test, this test was to ask whether would the
contract make business sense without it. Ingrid denies on such obligations (failed to evict
the squatters, demolish family business factory building and workshops on said land)
stated in JVA. In a classic case of The Moorcock, the ship owners who had park its vessel
at the wharfingers were successful in their claim. The Court held that the wharfingers must,
therefore, be deemed to have implied warranty they had taken reasonable steps to
ensure the vessel could safely ground without suffering damage. Therefore, Putra
Construction being the JV partner to Ingrid, with expertise in construction must ask
whether the contract make business sense without the existence of the terms
mentioned? The answer would be yes, it shall not make any business sense if the implied
terms are non-inclusive. Hence, Ingrid being the JVA partner with Putra Construction shall
by way of business audacity to remove all encumbrances from said land to ensure the
business will make sense later for Putra Construction and both parties.

Conclusion

In conclusion, with combined test appraisal and support from precedent cases, it
is Ingrid responsibility to attend to such obligations as the land were pledge for a joint
venture project with Putra Construction. Learned Judge Bowen state in The Moorcock,
“In business transaction, what the law desires to effect by the implication is to give such
business efficacy to the transaction as must have been intended at all events by both
parties who are businessman; not to impose on one side all the perils of the transaction
or to emancipate one side from all the chances failure…”. However, due to the land was
not clear from all encumbrances, Putra Construction could not be able to deliver the
development as promise. As Lord Wilberforce state that such obligation should be read
into the contract as the nature of the contract itself implicitly requires, no more and no
less of necessity. The relationship accepted by Ethan/Ingrid and Putra Construction are
of the landlord and the developer. Hence, indue of the relationship contracted, it is
essential for Ingrid to clear of the land from all obligations exist on the said land to be
developed by Putra Construction.