HSBC Institutional Trust Services v Toshin Development Singapore Pte Ltd

Judgment Date27 August 2012
Date27 August 2012
Docket NumberCivil Appeal No 108 of 2011
CourtCourt of Appeal (Singapore)
HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust)
Plaintiff
and
Toshin Development Singapore Pte Ltd
Defendant

Chan Sek Keong CJ, Andrew Phang Boon Leong JA and V K Rajah JA

Civil Appeal No 108 of 2011

Court of Appeal

Contract—Remedies—Agreement to in good faith endeavour to agree—Consequence of breach of such obligation

Contract—Remedies—Express terms—Agreement to in good faith endeavour to agree—Scope and content of obligation created

Contract—Remedies—Express terms—Agreement to in good faith endeavour to agree —Whether such contractual term was valid

Landlord and tenant—Express terms—Rent review mechanism—Whether action by party rendered mechanism inoperable

Professions—Adjudicators or experts—Prior relationships with appointer—Duty of disclosure

Professions—Valuer—Allegation of bias—Prior appointment—Whether there was duty to disclose prior relationship with appointer

The lease agreement between the appellant qua landlord and the respondent qua tenant contained a rent review mechanism (‘the Rent Review Mechanism’), which provided that the rent for each new rental term after the first rental term was to be determined by agreement between the appellant and the respondent (‘the parties’), or, failing agreement, by ‘three international firms of licensed valuers’ (‘Designated Valuers’) appointed either jointly by the parties or by the President (or other designated officer) of the Singapore Institute of Surveyors and Valuers (‘the SISV’). Specifically, the Rent Review Mechanism provided that the parties ‘shall ingood faith endeavour to agreeon the prevailing market rental value of the Demised Premises’ [emphasis added] prior to the appointment of the Designated Valuers.

Between July 2010 and early 2011, the respondent unilaterally approached all eight ‘international firms of licensed valuers’ present in Singapore to prepare valuation reports on the market rental value of the demised premises (‘the Demised Premises’). The respondent subsequently engaged the seven firms which agreed to prepare the requested valuation reports (‘the Toshin valuations’).

On 13 January 2011, the parties arranged for a meeting to discuss the new rent for the upcoming rental term. The respondent did not disclose the existence of the Toshin valuations during the meeting.

The appellant was dismayed when it subsequently discovered what had transpired. It called for a meeting with the respondent on 5 April 2011. At that meeting, the appellant highlighted its concern that the respondent, by procuring the Toshin valuations between July 2010 and early 2011, had unfairly procured an advantage for itself in relation to the rent review exercise.

The respondent then provided the appellant with copies of the rental valuation reports produced by five of the firms. The parties had earlier, before the appellant learnt about the Toshin valuations, jointly issued Requests for Proposals to these five valuation firms, inviting them to provide rental valuation services for the rent review exercise. The respondent hoped that this would assuage the appellant's ‘perceived concerns about its alleged disadvantage in selecting the 3 valuers’ which were to be the Designated Valuers for the Rent Review Exercise. The respondent further suggested that the parties issue joint instructions to the three valuation firms eventually appointed as the Designated Valuers stating that in determining the prevailing market rental of the Demised Premises, the valuers ‘shall be independent and fair to both parties and in particular shall not be bound by any previous valuations which they have carried out for either party’.

The appellant was not placated by this gesture. It claimed that the Rent Review Mechanism had been rendered inoperable by the respondent's actions and commenced legal proceedings seeking a declaration to this effect. The High Court concluded that the Rent Review Mechanism remained operable and dismissed the appellant's application.

Held, dismissing the appeal:

(1) The House of Lords' decision in Walford v Miles[1992] 2 AC 128 (‘Walford’) did not have the effect of invalidating an express term in a contract which employed the language of good faith. A valid distinction could be drawn between the pre-contractual negotiations in Walford and the ‘negotiations’ between the parties under the rent review exercise. Unlike parties who were merely in pre-contractual negotiations, the parties here were not free to simply walk away from the negotiating table for no rhyme or reason as, by virtue of entering into the lease agreement, they had committed themselves to a rent review exercise for the purposes of determining the new rent for each new rental term after the first rental term: at [37].

(2) There was no reason why an express agreement between contracting parties that they had to negotiate in good faith should not be upheld. Such an agreement was valid because it was not contrary to public policy. Parties were free to contract unless prohibited by law. Indeed, ‘negotiate in good faith’ clauses were in the public interest as they promoted the consensual disposition of any potential disputes: at [40].

(3) The choice made by contracting parties, especially when they were commercial entities, on how they wanted to resolve potential differences between them, should be respected. Courts should not be overly concerned about the inability of the law to compel parties to negotiate in good faith in order to reach a mutually-acceptable outcome. ‘Negotiate in good faith’ agreements did serve a useful commercial purpose in seeking to promote consensus and conciliation in lieu of adversarial dispute resolution. These were values that the Singapore legal system should promote: at [45].

(4) The obligation to ‘in good faith endeavour to agree’ on the new rent for each new rental term after the first rental term was both certain and capable of being observed by the parties. It was not difficult to ascertain what reasonable commercial standards of fair dealing required in such a context. As far as the Rent Review Mechanism was concerned, the ultimate purpose was the determination of the prevailing market rental value of the Demised Premises, which was to be the new rent for each new rental term after the first rental term. Both of the Parties were required to faithfully co-operate with each other to achieve this common purpose. Faithfulness to the common purpose incorporated an obligation during the course of negotiations not to attempt to unfairly profit from the known ignorance of the other: at [48] and [50].

(5) Reasonable commercial standards of fair dealing calls for the disclosure of all material information which could have an impact on the negotiations and/or the ultimate determination of the new rent. The fact that the Toshin valuations had been carried out would surely have qualified as material information. Given that the respondent commissioned valuation reports from, not one or two, but seven of the eight international valuation firms present in Singapore - that is to say, all of the valuation firms eligible for appointment as the Designated Valuers which were willing and available to act for the respondent - its failure to disclose the existence of the Toshin valuations and the corresponding valuation reports during the 13 January 2011 meeting could be said to constitute a breach of its ‘good faith’ obligation. For disclosure of time-sensitive information to have any real impact, disclosure had to be made as soon as practicable. The respondent was contractually obliged to make full disclosure of these valuations in a timely manner as part of the parcel of obligations imposed on the Parties to ‘in good faith’ negotiate the new rent for the Last Rental Term: at [51], [52] and [54].

(6) While there was, at the onset of the parties' negotiations, a breach of this obligation by the respondent, since all the Toshin valuations were eventually disclosed by the respondent before the negotiations were completed or an agreement reached, the respondent's initial breach was remedied and the parties ought to have resumed their endeavours to ‘in good faith ... agree on the new rent for the Last Rental Term’: at [55].

(7) The Rent Review Mechanism remained workable so long as the independence and probity of the valuation firms eligible for appointment as the Designated Valuers for the Rent Review Exercise had not been irretrievably compromised. There was nothing to suggest that any of the seven 2010 Valuers, if appointed as one of the Designated Valuers for the Rent Review Exercise, would be unable to carry out a fair and independent valuation of the Demised Premises simply by virtue of having carried out a prior valuation of the same premises for the respondent. When a prior retainer of a valuer by one of the parties to a lease agreement had ended, the valuer in question no longer owed any competing legal duties that might give rise to a conflict of interest in the preparation of a fresh valuation of the property concerned. The three valuation firms eventually appointed as the Designated Valuers for the Rent Review Exercise would not be bound or compromised by the Toshin valuations, especially since any fresh valuations of the market rental value of the Demised Premises would be made in the context of market conditions different from those prevailing at the time of the Toshin valuations: at [57] to [59].

(8) As the seven 2010 Valuers were both willing and perfectly capable of carrying out independent valuations of the new rent for the Last Rental Term, the Rent Review Mechanism remained operable and the parties therefore ought to proceed in accordance with the agreed procedure to determine the new rent. There would be no actual bias in the appointment of the three valuation firms which were to act as the Designated Valuers if the appointment was made by...

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