Beware of fixing design fees to a project’s gross development value
In the few weeks since the April 2021 Court of Appeal decision in Yoo Design Services Ltd v Iliv Realty PTE Ltd, the repercussions are being realised.
The case centred around a luxury residential development being built in Singapore, consisting of a 16-storey building with 28 apartments. The parties had entered into a design service agreement (DSA) in July 2008, in which the designer’s fees were fixed to 1.4% of the gross development value of the project. The amount of the fee would therefore be dependent on the success of the development.
The designer received one-third of its fee at the outset of the appointment, but the remainder was only due to being paid once the apartments had been sold. Unfortunately, as a result of the 2008 financial crisis, the Singapore property market crashed and despite a huge drop in price, no sales were achieved. The properties, therefore, had to be rented out instead.
The designer argued that the developer was in breach of an implied obligation to sell the apartments within a ‘reasonable time’ and to market them with ‘expedition’.
The court, both at first instance and on the designer’s appeal, rejected this argument, They held that:
1. Such a term would not be implied unless:
A) necessary to give ‘business efficacy to the contract i.e. without the term, the contract would lack commercial or practical coherence;
B) Based on the ‘obviousness/officious bystander’ test i.e. the term would be so obvious that it went without saying.
Neither of those was applicable in the current circumstances, as the DSA clearly worked without the need for implying a term obliging the developer to sell the properties. The parties’ assessment, at the time the DSA was signed, was that there would be early sales and so it was not commercially incoherent for the designer to have agreed to wait.
2. Ultimately the mere fairness of having such an implied term was not a sufficient precondition for it to be included. The concept was fraught with uncertainty and depended on a number of different variables, plus it would be odd to force the developer to sell at a particular point in time, potentially losing large sums of money, in order to trigger payment of the designer’s (comparatively) small fee.
Whilst the use of such fee arrangements is rare in professional appointments, they can be seen where the designer providing the advice has such a good reputation that the association of that designer’s brand is seen to have a direct bearing on the commercial success of the project.
If you are being asked to sign up to similar terms and would like advice on your position or more generally on your terms of contracting, please feel free to get in touch.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org