#3508 - Implied Terms And Construction Of Terms Theory - Contract Law

Implied Terms

Justification for implied terms -e.g. necessity; wider considerations of policy; to give effect to partiesunexpressed intent

1. Terms implied by statute

• Precise reason depends on particular statute:

1. give effect to presumed intentions of parties

2. reduce uncertainty by enacting a default rule out which parties can contract out of

3. protect weaker party in the transaction

• E.g. s12 – 15 SGA 1979, supply of goods, hire purchase contracts etc. protects the buyer by providing minimum floor of rights + placing considerable limits on the seller’s right to contract out of those terms (can’t exclude as again consumer; can against business if reasonable)

• Lord Bingham in Phillips Electronique Grand PubliqueSA v British Sky Broadcasting – courts won’t ordinarily hesitate to imply into a contract of unseen goods that they should be of satisfactory quality b/c hard to imagine a trade conducted on some other terms.

• Hard but not impossible!A landlord doesn’t give implied undertaking that premises leased will be fit for occupation, no implied term that house is fit for habitation or any particular purpose, caveat emptor rule (now longer operative) in 19^th cent.

• On that basis, unlikely to be based on presumed intentions but rather to protect what are perceived to be legitimate expectations of buyers in sale of goods contracts esp. b/c can’t contract out off them!

2. Terms implied by custom

• Unwritten customs & usages of merchants is the reason why commercial lawyers must be responsive to changes & continue questioning whether particular doc, despite having been previously ruled non contractual, may now be contractual b/c of different circs b/w parties & generally [Debate to be viewed in context of int. commercial arbitration]

• B/c of different interpretations which people put on meaning/content of custom, businesses operating in areas of business/finance normally tend to have public a code of rules;e.g. ICC (internationally on banking, insurance, int. trade& transport). In English law operation of customs depends on express or implied incorporation into contracts (v. often will be the latter – e.g. banks too important to be left to courts).

3. Terms implied by courts

• In fact – to give effect to unexpressed intentions of the parties

• Traditional test – necessity

• In law – all particular contracts of that type b/c of nature of the contract rather than intentions

• Test is less stringent – unclear but b/w reasonableness & necessity

1. Gives effect to presumed intentions of parties

2. Court’s view of reasonable expectations of the parties

1. Collins -economic analysis: courts should provide a set of default rules to govern transactions in absence of express terms allowing parties to save transaction costs by not having to negotiate every detail

1. But any party w/sufficient resources draftsa set of terms to suit his purposes.

2. On this basis, courts would imply terms which parties would have agreed on but for transaction costs – doesn’t accord w/ case law e.g. Liverpool CC v Irwin

3. Model reasoning for courts’ selection of implied terms rests on incorporation of fair & practical allocation of risks. E.g. introduction of implied terms to employment contracts reflect the views about fair treatment of employees & risk of losing the job.

Conclusioneconomic analysis = misleading description. Through implication of terms courts achieve fair & practical allocation of risks ultimately rests on court’s view of parties’ reasonable expectations

2. Lord Steyn– no gen. duty of good faith in English law, so need to supplement written contracts. Justification = give effect to reasonable expectations of parties.

1. implied by usage of trade/commerce – assumption is that they’re usually taken for granted & not spelled out in writing

2. implied in fact – ad hoc gap fillers b/c expectation of party would often be defeated otherwise. Legal test – necessity courts shouldn’t supplement unless it’s necessary to give effect to parties’ reasonable expectations. Though it’s a myth to say that it’s inferred from their intentions.

3. implied by law – operate as default rules. Broader approach than in (b). Court must take consider reasonableness in laying down the scope of terms to be implied. The function is to provide a reasonable & fair framework for contracting. This also fulfils promotion of parties’ reasonable expectations.

Applicable Test

• Related to 1^st issue

1. if the aim is to give effect to presumed intent of parties, the likely test is necessity

2. if it’s done for broader policy considerations, criteria a la reasonableness may apply

1. Business Efficacy(The Moorcock) - to give such business efficacy to transaction as parties as businessmen must have intended

2. Officious Bystander

• So obvious as to go w/out saying – if officious bystander had suggested it, parties wouldn’t have hesitated.

• Bystander isn’t the arbiter of whether term should be implied asks the question, parties answer it

• A stiff test not many terms which both parties would agree to unequivocally.

• But business efficacy & officious bystander have gone hand in glove

• Liverpool CC v Irwin – HL held term should be implied into tenancy agreements b/w LA & tenants of council flats that it would, as landlord, use reasonable care to keep common areas in good repair. Implied as a matter of law into common type of contract rather than based upon intent of parties.

• Denning: the real test is whether it’s reasonable in all circs to do so. quoted Lord Wright: court decides the question in acc to what seems just/reasonable in their eyes. It’s in that sense making a contract for parties, although it’s almost blasphemy to say so.

• Phillips Electronique Grand Public SA v BSkyB – pursuing to contracts b/w them, Phillips undertook to manufacture electronic equipment capable of receiving signals from BSkyB’s satellite, BSB then merged w/Sky & adopted their technology, largely destroying the market for equipment being manufactured. Ph. alleged implied terms that BSkyB undertook not to do anything of its own motion to destroy/impede the market but none were implied.

Sir Thomas Bingham

1. Distinguish b/w approach of courts in

1. Construing terms of contract

2. Implying terms – an altogether more ambitious undertaking, so potentially intrusive that strict constraints on exercise of this power are imposed by the law

2. Court comes to the task w/benefit of hindsight but it shouldn’t be tempted to fashion a term which will reflect the existing merits of situation endorsed officious bystander test

3. New Test?

• Lord Steyn – commercial rationale behind provisions + parties’ reasonable expectations. Test: strict standard of necessity.

• McCaughran – test is different from officious bystander b/c implies a term to give effect to reasonable expectations of parties, having regard to commercial purpose of the bargain. On bystander’s test, term wouldn’t be implied b/c EL would have said ‘of course not!’

• Equitable Life Assurance Soc v Hyman – EL entered into w/profits retirement policies w/90K policy holders. Under terms, they were entitled, upon maturity, to annuity @ guaranteed rate + bonuses, or alternatively could take annuity out @ soc’s rate. Under Arts of Assoc. amount of bonus was within absolute discretion of directors, whose decision was final & conclusive. When current annuity rate started to fall below rate guaranteed, EL adopted policy of declaring lower bonuses for those taking @ guaranteed rate. HL: not entitled to do so b/c policies contained an implied term restricting directors’ use of discretion so as to preclude them from discriminating b/w policy holders.

• Lord Hoffman – court has no power to improve upon the contract& can’t introduce terms to make it more fair & reasonable. Most usual inference = no term should be implied. Process is concerned to discover only what the instrument means; i.e. meaning it would convey to reasonable person w/all background knowledge available to parties when contracting. Business efficacy/officious bystander aren’t to be treated as different tests b/c there’s only one question... Test that term should be so obvious as to go w/out saying is no more than expression of what reasonable person would understand it to mean.

• McCaughan – this assimilates the exercise w/construction of express terms & directly contradicts Bingham’s approach.

• AG of Belize v Belize Telecom (PC) – under express terms of Arts of Assoc, special shareholder who held C class shares @ 37.5% or more of company’s issued share capital could appoint/remove directors. Following appointment, shareholder defaulted on certain obligations & lost significant portion of ordinary shares by process of seizure, taking it below 37%, and so no person existed who could remove existing directors. Held: implied term that Dir. appointed by virtue of specified shareholding must vacate office b/c no holder of such shareholding exists.

• McCaughan–now TP observer has also become the arbiter – he’s become reasonable & it’s for him to answer, not to ask, the relevant question. He’s a man on Clapham omnibus - a fictional embodiment of good sense of the judge trying the case see Lord Radcliffe: “the spokesman for fair & reasonable man who represents after all no more than conception of justice is and must be the court itself”. His task is to consider background, express terms, commercial aim & parties’ reasonable expectations & decide if implication is necessary ultimately, a matter of judgment & good sense. Business efficacy test is...