#19861 - Implied Terms In Fact And Law Textbook Notes - Contract Law

Implied Terms in Fact Textbook Notes

OVERVIEW:

• A term can be implied to give effect to parties’ intentions – implication in fact

• Whether a term is to be applied for in fact depends on whether term was so obvious to both parties it went without saying (officious bystander) or it was necessary to make the contract work – business efficacy

• Recent trend: equate implication in fact with modern interpretation approach

The original test comes from The Moorcock. It is the Business Efficacy Test. As per Bowden LJ, the courts will imply a term in fact into a contract to make it work the way the parties intended.

MacKinnon LJ suggested a different test in Shirlaw v Southern Foundaries. This is the Officious Bystander Test – it says a term will be implied in fact if it is so obvious as to make an officious bystander say ‘oh, of course’ when reminded to add it to the contract.

Two tests often overlap – what is necessary to make the contract work will generally go without saying.

In AG Belize v Belize Telecom (a Privy Council case), Hoffmann a new test - suggested the question is what the instrument, read as a whole against the relevant background, would reasonably be understood to mean. This is the reverse officious bystander test (McCaughran) – instead of the bystander asking the parties what they meant to agree, the parties ask the bystander what they are actually agreeing to. Peters notes the PC framed it as a simplification of existing tests, and this represents a trend toward a term being implied when reasonable rather than necessary set out by Hoffmann in ICS. There are three criticisms:

1. Hoffmann tries to assimilate his approach to interpretation with implication. But there’s a difference between the two: if parties have clearly chosen particular words, the language should be interpreted straightforwardly. Silence – which is where implication flourishes – is ambiguous: you can’t interpret silence. Courts shouldn’t imply a term because it’d be reasonable: Bou-Simon v BGC Brokers. Would intrude too greatly into the parties’ bargain. Should only imply when necessary. Bingham in Phillips Electronique v Sky Broadcasting said the court implicates with the benefit of hindsight, and it’s tempting for the court to fashion a term to reflect the merits. This would be wrong. Implying a term the parties didn’t expressly say they wanted is more of an intrusion on freedom of contract than trying to determine what they meant using interpretation.

2. Hoffmann’s test makes it too easy for courts to impose terms the parties didn’t want to be part of the contract on the grounds a reasonable person with a similar background would’ve thought the term part of the contract

3. It’s vague and creates commercial uncertainty – hard to predict what implied terms the Hoffmann test might come up with.

Hoffmann’s Belize approach likely isn’t current law:

• CA in Mediterranean Salvage & Towage v Seamar endorsed the Business Efficacy Test

• CA in Groveholt v Alan Guhes endorsed the Officious Bystander Test

• USKSC in M&S v BNP Paribas Securities Services disowned Hoffmann’s test, saying they’d imply a term either where the Business Efficacy or Officious Bystander tests were satisfied. Neuberger said the emphasis of the business efficacy test is not where it is absolutely necessary to imply a term in order to make the contract to work, but is instead on whether the contract would lack commercial or practical coherence without the implied term. All the justices agreed Hoffmann in Belize did not affect the traditional tests. O’Sullivan notes at a highly abstract level interpretation and implication have something in common – giving effect to what the parties wanted, judged objectively.

So, let’s work through a scenario to see how the three tests might differ. Finance Corp sells an investment product to Mug knowing it is worthless and that Mug will probably lose a lot of money. Mug loses lots of money and wants to sue. He argues there is an implied term Finance Corp would tell him if the product were worthless.

1. Under the Moorcock Business Efficacy Test, the term doesn’t need to be implied to make the contract work. In fact it would defeat the contract since Mug couldn’t agree to buy the product if he knew it was worthless.

2. Under the Shirlaw Officious Bystander Test, Mug will argue of course there is an implied term saying Finance Corp will warn him if the product is worthless. Finance Corp will argue no there isn’t – it’s for Mug to decide if the product is worth his money. Could go either way.

3. Under Hoffmann’s Belize approach, it’s a little more uncertain. Read against the background, are the parties actually agreeing that Finance Corp would warn Mug if the product were worthless?

Can imply terms if they’re customary in a particular trade, or because of a particular locality. Theory is you implement intention of the parties assuming they intend to contract with reference to the known usages of the trade, profession, or locality of both parties. Customary terms must be certain, well-known, and recognised as binding (Cunliffe-Owen v Teather & Greenwood). An express exclusion of the custom will be effective: Les Affreteurs Reunis v Leopold Walford.

Terms Implied in Law – Textbook Notes

Certain contract types have a host of terms implied in them unless they are expressly excluded by the written contract. These are sort of like default rules for well-established contract types. This makes some types of contract very efficient to make. Example: there’s lots of implied terms in the sale of goods:

• Goods will be of satisfactory quality and fit for the buyer’s purpose they told the seller (Sale of Goods Act 1979 s.14)

• Where goods are sold by description, they must match the description (s.13)

• Goods sold by sample will correspond with the sample in quality (s.15)

• The seller must have title to sell the goods (s.12)

By virtue of the Consumer Rights Act 2015, implied terms can’t be excluded by the seller (s.9-18, same for service contracts – s.51-2, and contracts for digital content – s.34-40).

Implying statutory implied terms is straightforward. Implying common law implied terms is a bit dodgier – courts have to make quasi-policy decisions. Could interfere with freedom of contract – courts cautious.

Liverpool City Council v Irwin – tenants in a tower block flat had a contract which said nothing about the obligations of the landlord council. Condition of block deteriorated. D refused to pay rent. One of the ensuing questions in the mess of litigation was whether the council was in breach of contract of implied term. Courts held an implied term that the council take reasonable care to keep the block in reasonable repair. Lord Edmund-Davies generalised this: obligation on landlords in all lettings of multistorey premises. Court implies the minimum obligation possible – only what is necessary. So, only an obligation to take reasonable care to repair the block, not that they must repair it. ‘Necessary’ here doesn’t mean the courts will imply the minimum to make a contract work. It means the courts will imply a term they think is reasonable to be implied into that contract type.

However, courts have taken implied terms in law as a chance to develop the law in some areas¹. In Malik v Bank of Credit and Commerce International, HL said in a contract of employment there’s an implied term the employer won’t, without reasonable cause, act in a way likely to seriously damage the relationship of trust and confidence between it and employee. Bank broke this by carrying on notorious fraud resulting in the company’s collapse and redundancy of employee who could sue for damages for any disadvantage to his reputation as a result of association with the fraudulent bank such that he couldn’t get another job.

Statute can influence whether a term is implied in law. In Goold v McConnell, Morison J held the statutory obligation on employer to provide a written terms of employment, including how to apply for compensation of grievances, meant there was an implied term the employer will provide an opportunity for the prompt and reasonably redress of employee’s grievances. But in Johnson v Unisys, the existence of elaborate mechanisms for compensation for unfair dismissal meant the court couldn’t imply a term forcing employer to only dismiss employee for a good cause.

Implying Terms into Law: Reasonable...