#2153 - Implied Terms - Contract Law

Implied Terms

When can Terms be implied?

Implication by custom

• Terms can be implied from custom of market, trade of locality where contract made

  • Ungoed Thomas J in Cunliffe-Owen v Teather & Greenwood [1967]:

    • Must be certain

      • analogous/consistent cases where applied

    • Notorious

      • so well known, capable of being found with effort

    • Recognised as binding

      • compliance seen as legal obligation not matter of choice/commercial convenience

    • Reasonable

    • Not contradicted by express term or nature of contract

Implication by fact

• The business efficacy test

  • The Moorcock [1889]: C owned a steamship and contracted D. Parties agreed that steamship would be discharged and loaded at D’s wharf at low tide so that it would run aground. When in wharf, the ship was damaged by a ridge of hard ground. C tried to recover damages for breach of contract.

    • Bowen LJ:

      • The implication which the law draws on is the intention of the parties,

        • with the object of giving efficacy to the transaction

          • and preventing such a failure of consideration as cannot have been in the contemplation of either side

      • In business transactions, 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 of both parties who are business men

  • Phang: Clear that there is perhaps an underlying hint of a doctrine of fairness used by the courts

    • Fry LJ (other judge in CoA) ex-judicially: Law is like living organisms which biologists say are governed by the two laws of hereditary and the tendency to variation,

      • useful variations tending to permanency and useless ones tending to disappear

  • Moi: although still an emphasis on express evidence showing intention superseding what court thinks

    • Interesting use of “must” – not what they “did”- intend

• The officious bystander test

  • Shirlaw v Southern Foundries Ltd:

    • MacKinnon LJ

      • That which in any contract is left to be implied and need not be expressed is something so obvious that is goes without saying

        • So that while the parties were making their bargain, if an officious bystander were to suggest some express provision for it in their agreement,

          • they would testily suppress him with a common “oh, of course!”

  • Phang: In judgement, Mackinnon LJ refers back to a lecture he presented, where he acknowledged that the court, when implying terms

    • Has to find the obvious common agreement which must have the strongest suspicion that neither party thought of all

      • This shows that the court is acknowledging that the implied term is a device used by the court to arrive at what it perceives to be a just outcome.

• Relationship between the two tests

  • Test was actually formulated by Scrutton LJ before Mackinnon LJ

    • Scrutton LJ in Regiate:

      • A term can only be implied if it is necessary in the business sense to give efficacy to the contract;

        • that is, if it is such a term it can be said at the time the contract was being negotiated someone has to said the parties “what about X”

          • they would have replied “of course X will happen, we did not trouble to say that, it is too clear”

      • Phang: words “that is” seem to show that officious bystander is merely an extension of the test

        • The practical mode of giving effect to the theory (business efficacy)

  • Applied by Steyn J in Japanese Bank v Credit du Nord

    • In the circumstances of the case, though the business efficacy test would not be satisfied

      • The officious bystander test would be

        • This being a broader test than the former.

  • Phang: this view doesn’t give effect to the historical link between the two

    • Although could be argued to be broader in scope because it is the practical application of the test.

  • Moi: interesting, but judges still keen to ensure that they are seen to be giving effect to intentions, not to what they believe is just.

Terms implied by law

• Liverpool CC v Irwin [1977] Tenants had large code of conduct they had to abide by, but no clear idea what Liverpool CC’s obligations were towards the public areas of the tower block which were routinely vandalised.

  • Lord Wilberforce:

    • Courts will generally imply terms

      • 1. Where it is common practise in those sort of contracts

      • 2. Where there is apparently complete contract

        • But without an implied term, the contract will not work.

      • 3. Where Court establishes what terms of contract are since parties have not fully stated them.

        • Test here = Those obligations which the nature of the contract implicitly requires

          • i.e. what terms are necessary having regard to the circumstances so that they should be implied into the contract

            • e.g. Here = access and potentially lighting – but not necessarily a working lift or stairs w/o graffiti.

  • Lord Cross:

    • In contracts of a certain type, some provision is to be implied unless the parties have expressly excluded it

      • In deciding this, the courts will take a view on the question on whether it would be reasonable to insert it

    • But where the contract is of a undefined type

      • It is not enough to ask the court to imply a term based on reasonableness – it can only be one where the insertion is necessary to give effect to the business efficacy of the contract

  • Lord Edmund Davies:

    • Can’t imply a term just because it would be reasonable in the eyes of a judge to do so

      • Should actually look at the intentions of the parties

        • Naturally, some concern over what is reasonable will come into this assessment

        • But you also need necessity, not merely reasonableness

• Interpretation?

  • Atiyiah: no real difference between “reasonable” and “necessary”

    • What judges mean is “reasonably necessary” not the term in isolation.

  • Phang: With Lord Wilberforce, baseline of whether term existed appeared to be necessity

    • But the actual substance of the test utilised centred around the concept of reasonableness.

      • And when proceeding to determine the contents, reasonableness was also implied

      • This may have something to do with the fact that the distinction between existence and content would in practise be considerably blurred

        • inasmuch content would play a significant part in the court’s decision as to whether or not the term sought to be implied ought to be implied in the first place.

• Scaly v Southern Health and Social Services Board: D failed to draw to C’s attention that C’s employment contract, negotiated by professional body, had scheme which could benefit C’s pension if C took advantage of it within a limited period of time.

  • Lord Bridge:

    • Law can imply a term where it is necessary to place an obligation on an employer in order to benefit the employee

      • Where representative body has negotiated contract on behalf of the party for party’s benefit.

      • And where it would not be reasonable for employee to find out themselves

• Mahmud v Bank of Credit and Commerce International [1998]:

  • Lord Steyn:

    • Applicants don’t rely on term implied by fact - an individualised term to be implied from the particular provisions of their employment contract and context.

      • They rely on a standardised term implied by Law – a term incident of all contracts of employment (or a common type of contract)

        • These implied terms operate on default rules

          • BUT parties are free to exclude or modify them [unless Law says otherwise].

• AG of Belize v Belize Telecom [2009]: the PC concerned the implication of a term into the Articles of Association of a complaint to enable the removal of directors.

  • Lord Hoffmann:

    • Implication of term is an exercise of construction of the instrument as a whole

      • (McKendrick: law relating to implication is closely linked to law relating to interpretation of contract terms

        • Where an express term of the contract, what you’re trying to do is to ascertain the meaning of the term – how would parties as reasonable people see this?)

    • Implied terms follow same process

      • No writing or oral terms – but trying to ascertain meaning of the contract

      • Court has no power to make contract fairer

        • It is concerned only to discover what the instrument means...

        • It follows in every case, the question for the court is whether such an implied provision would spell out in express words what the instrument

          • Read against the relevant background

            • Would reasonably be understood to mean

    • The following conditions must be satisfied:

      • Must be reasonable and equitable

      • Business efficacy

      • But be so obvious goes w/o saying

      • Must not contradict express terms

        • Proposed implied term must spell out what the contract actually means

  • McKendrick: Is interpretation the same as implying terms?

    • There is a superficial attraction to the idea that we’re giving effect to people’s intentions

      • But the idea of “intention of parties” is rather broad – any counsel is going to be saying that their client intended something

      • Re Born [2009] EWCA Civ 531

        • CoA

          • Lord Hoffmann was not resiling from the proposition that terms are implied on the basis of necessity

            • It is not enough that the term is reasonable

          • McK: so it must be the intention of both parties, not just one

    • Second difficulty is that interpretation is a different business from implying terms

      • In interpretation, there is not difficulty in finding the term you’re meant to be interpreting – with implied terms there isn’t anything to go on

      • i.e. interpretation - have...