The implications of implied terms

Implied contract terms-Where are we?

When considering the terms that may be implied into contracts it is always important to note that courts are in no way inclined to ‘rewrite’ legal documents. There are very few situations where a term is deemed to be ‘implied’ under English Law. Indeed many of the relevant authorities on implied terms are not even from this century, as the law on the subject has changed so little!

When do we ‘imply’ a term?

Terms can be deemed to be implied in a contract through custom, fact, or law. Of these custom and law are the most straightforward. Terms implied by custom are found where a particular custom is prevalent and well known in a certain trade and are restricted to agreements of the same type of trade (such as agriculture, as in Hutton v Warren). When terms are implied in law it is a result of existing statute or through the existence of ‘protected relationships’ such as landlords and tenants or employment contracts

When considering terms implied in fact there are two aspects to consider. Firstly, the ‘business efficacy’ test applies where, without the implied term the contract does not make business sense to one or both parties. The authority for this is the case of The Moorcock (1889) 14 PD 64, where a claimant sought damages after a contract was undertaken for the right to moor a boat at a wharf on the Thames, which at low tide caused damage to the vessel due to the uneven surface of the river bed. It was deemed that an implied term of the contract was that the wharf was a safe place to moor a boat, as without this term the contract would make little commercial or business sense.

The second test when considering whether a term can be implied in fact is the ‘officious bystander’ test, whereby had an officious bystander butted in during the drafting of the initial contract asking if a particular term would be included both parties would have indicated without hesitation that it would have. It must be obvious in this case that both parties would have agreed to it, and it is “vital to formulate the question to be posed [by the officious bystander] with the utmost care” to avoid expanding its ambit.

Conditions which must be satisfied for the inclusion of an implied term are as follows “(1) it must be reasonable and equitable (to imply the term); (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.”

These concepts appeared to be expanded in 2009 in the Privy Council case of Belize Telecom. Here Lord Hoffman suggested that an implied term should be taken to as “what the instrument, read as a whole against the relevant background, would reasonably be understood to mean”. This was speculated by some commentators as a ‘dilution’ of the hitherto stringent tests on the existence of an implied term as it seemed to expand the latitude for courts to imply terms where it would have been ‘reasonable’ to do so when considering the interests of the two parties. Concerns arose that this focused too much on the assumed intentions of the parties entering into a contract and not enough on what the contract explicitly stated. Critics believed that this led to further uncertainty in the area.

The Impact of Belize Telecom

More recently the scope for implied terms has been narrowed again by decisions taken in Marks & Spencer plc v BNP Paribas and earlier this year in Irish Bank v Camden Market, both of which focused on the ‘cardinal rule’ that implied terms cannot contradict any express terms. This creates a starting point, when considering implied terms, of establishing the express terms within the agreement and the powers these confer under the law before any implied terms are considered. Particular attention was also paid to the simple question of whether “without the term, the contract would lack commercial or practical coherence”? This shows a clear return to the stricter ‘business efficacy’ test. Both cases also emphasise that where there is no scope to imply the argued term it is not within the courts power to do so, even when not doing so would fly in the face of what one could term ‘commercial common sense’ or what could be considered fair and equitable.

Marks and Spencer, in particular, can be seen as a clear attempt to narrow the impact of Lord Hoffman’s statement in Belize Telecom by clarifying without doubt that ‘reasonableness’ is in no way sufficient grounds for an implied term, particularly in a commercial setting. Further attempt was made to limit the application of the statement by Lord Neuberger, who noted that “[Lord Hoffman’s] observations should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”. In other words, some of the interpretations drawn from his statement were simply too broad and by virtue of this should be considered incorrect in law.

Consideration was also given in Marks and Spencer to the circumstances, where a rent payment made in advance prior to the breaking of the lease (within the contract) represented a ‘windfall’ to one party. This payment for unused office space was not so unfair as to become an absurdity, or to make the contract unworkable. Express terms dictated payment in advance and it is long established that rent, whether payable in arrears or advance, is not apportionable in time in common law. In light of this it was deemed that the indication of payment in advance should also be taken to indicate lack of apportionability and to imply a term negating this would go against the wording of the original contract.

In Irish Bank it was argued that an implied term of a loan agreement was that Irish Bank was in breach of contract by classifying the loan within part of a package which contained distressed debt. This made the loan itself appear to be distressed and affected the value buyers were willing to pay for the property provided as security against the loan. However an express term of the contract stated that Irish Bank were entitled to assign rights to another financial institution and to disclose information on Camden Market Holdings to any potential signees. To imply a term that they could not do this in certain circumstances was seen to be placing restrictions on a right given by an express term. This proved a sufficiently substantive inconsistency so much as to rule out the existence of an implied term, regardless of the fact that doing so made commercial business sense.

Implied terms in the ISDA Master Agreement

In Lomas v Ors, the Court of Appeal decided that the ISDA master agreement worked ‘perfectly well’ without the need to imply a term to the effect that that the condition precedent in Section 2(a)(iii) suspending the obligation to pay or deliver would come to an end upon expiry of: (i) such time as was necessary in order to allow the non-defaulting party to elect an Early Termination Date; or (ii) a “reasonable” time; or (iii) all relevant transactions; or (iv) all transactions governed by the ISDA Master Agreement. In light of the widespread use, multiple carefully drafted editions and comprehensive nature of the ISDA Master Agreement it was always highly unlikely in law that implied terms would be considered. Given the global use of the agreement the inclusion of additional implied terms may well have had a significant unintended consequences on well-established industry practices and norms and, to that extent, Lomas provided welcome clarity.

Final thoughts

The ability to change the terms of a contract by implying additional terms after the fact is not one that a court will exercise lightly. There has been a definite trend towards limiting the scope for implied terms in recent years. In particular where commercial parties contract together, the courts place a far greater weight on the literal interpretation of the contract, rather than perceived intentions of the parties. To this end it is essential to be clear on the rights you require and the obligations by which you are prepared to be bound. It may also be worth considering document the intention (the ‘why’) behind your agreement.

Put simply, hoping that a court will provide sanctuary by implying a favourable contractual term is the first step on the road to disappointment.

 

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