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Contractual drafting and interpretation - when can the courts imply a term into a contract?

In a case which will interest anyone who is either preparing to enter into a contract or involved in a contractual dispute, the Supreme Court has clarified the law surrounding implied terms in contracts. The facts of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72, though no doubt of interest to property specialists, are fairly unremarkable – a tenant argued that a clause should be implied into their lease which provided that advance rent payments relating to a period after the lease ended following service of a break notice should be refunded to it. However, the court’s comments on implying contractual terms are of much wider interest and provide welcome guidance and clarity on the existing law on implied terms.

Because implying terms into contracts is potentially so intrusive and may not in fact reflect the parties’ intentions (since they have made no express provisions in the contract to deal with a particular issue, and may have deliberately left out such a provision), the courts have historically imposed strict constraints on implying terms into a contract. The courts have acknowledged that it is difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully drafted contract but have omitted to make provision for a particular matter. However, the recent case of Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 has been interpreted by lawyers and judges as having changed or diluted the existing law. The recent Marks and Spencer case restates the case law prior to Belize, and provides an additional six comments concerning the implication of contractual terms, which will be of use to anyone drafting or disputing contractual terms.

Background

Historically, courts have implied terms into contracts in order to fill any gaps in the contract’s drafting to better reflect the intentions of the parties entering into the contract. Case law on implied terms dates back to the nineteenth century and, traditionally, two tests have been most commonly used to determine when a term should be implied into a contract:

  • The “business efficacy” test – a term can only be implied if it is necessary to give business efficacy to the contract – this test derives from The Moorcock [1889] 14 PD 64 and Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592, 605
  • The “officious bystander” test – a term would be implied if it is so obvious that it goes without saying (the test is expressed so that, if an officious bystander had suggested a term to the parties whilst they were drafting the contract, they would have replied with “of course…it is too clear”)  – this test derives from Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227

Later case law provided summaries of the tests for implying a term – the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] 52 ALJR 20, 26 set out the following conditions (which may overlap)

“(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying;” (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”

In Belize, it was suggested that the process of implying terms into a contract was part of the interpretation of the contract, and that the question for the court is whether a term to be implied is what the contract, read as a whole against the relevant background, would reasonably be understood to mean. It was suggested in Belize that the list of criteria set out in BP Refinery was not a series of independent tests, but merely a number of different ways in which the courts have tried to express this central idea – that the term to be implied spells out what the contract actually means.

Analysis of the Marks and Spencer case

In the Marks and Spencer case, it was emphasised that there has been no dilution of the requirements which need to be satisfied before a term is implied, in spite of lawyers and judges interpreting Belize as watering down those requirements. The court in Marks and Spencer considered that construing the actual words the contract used and implying additional provisions were separate processes, governed by separate rules.

The court in Marks and Spencer upheld the existing principles for implying a term into a contract – as set out in Moorgate, Reigate, Shirlaw and BP Refinery above – but also added six observations to expand on the test in BP Refinery:

  1. Whether or not a term should be implied does not depend on proving the actual intention of the parties. What matters is what reasonable people in the position of the parties at the time they were contracting would have agreed.
  2. A term should not be implied into a detailed contract just because it appears fair or because it is considered the parties would have agreed to it if it had been suggested to them. These are necessary, but not sufficient, grounds for implying a term.
  3. The requirement for reasonableness and equitableness from BP Refinery does not add anything to the other requirements – if a term satisfies the other requirements, it is difficult to see a situation where it would not be reasonable and equitable.
  4. Only one of the “business efficacy” and “officious bystander” tests need to be satisfied – they are not cumulative.
  5. If the “officious bystander” test is used, it is vital to correctly formulate the question correctly so that it is not a leading question.
  6. The necessity for business efficacy involves a value judgment – it is not a question of absolute necessity as to whether the term should be implied. Instead, a term can be implied if, without the term, the contract would lack commercial or practical coherence.

What this case suggests in practical terms is that the courts must construe the actual provisions of a contract before attempting to imply any terms. Furthermore, it clarifies any uncertainty following Belize as to the correct tests for implying a term. The case confirms that a party can argue for an implied term on the basis of “business efficacy” or the “officious bystander” – whilst arguably a higher threshold than reasonableness, which some have interpreted as sufficient grounds for implying a term following Belize, this case brings at least some welcome clarity to the area of contract

For further information, Charles ClaisseHead of Corporate.

The article above, current at the dates of publication, is for reference purposes only.It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.