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Last updateWed, 23 Aug 2017 3pm

Legal

Implied terms in contracts – isn’t it obvious?

Everyone likes the word “reasonable”, especially lawyers. It is an objective term that has been analysed and tested over the years. The popularity of the concept also means that it is perceived as an acceptable compromise position to allow contracts to be signed (and argued about later). A similar line of analysis applied to understand when terms will be implied into contracts has now been clarified and overturned.

Until 2009, it was generally recognised that to imply a term into a contract, the courts would consider whether it was necessary to give business efficacy to the contract (make it work properly) or whether the implied term was so obvious that it goes without saying (if one party suggested it, the other party would impatiently reply “of course”).

Belize case

Then the Privy Council looked at the ‘Belize case’ and confused the matter by linking reasonableness and interpretation of contracts and implied terms. The Privy Council is not a binding authority in the English legal precedent hierarchy, but very persuasive, in the same way that Australian and Singapore courts can be mentioned to aid understanding but do not directly define English law. The Privy Council said that to imply a term into a contract, the court would have to assess whether the implied term would say what the agreement was reasonably understood to mean. So the concept of reasonableness appeared.

Academics and practitioners alike have been studying the Privy Council judgment but the Supreme Court has now used a rental advance payment rebate case as an opportunity to restate the law on implied terms. The facts of the case are that Marks & Spencers wanted to imply a term into their lease that if they properly exercised the break clause between payment dates, then advance rental payments that covered the entire period should be refunded by BNP Paribas.

Arnold v Britten

Lord Neuberger in the Supreme Court took the opportunity to say that academics and practitioners had placed too much emphasis on the Privy Council’s explanation and it had not changed the law.  His Lordship also said that interpreting a contract came first – you may not reach the point of needing to imply a term – and the (separate) law on contract interpretation was recently clarified by the Supreme Court in Arnold v Britten, a case on service charge clauses for holiday home ownership which, ultimately, meant what they said.

So one must go back to the tests explained above – is it necessary to make the commercial deal work (described by Lord Sumption as commercial or practical coherence) ? Or is it so obvious that everyone knows? However there is now more help in the form of the following judicial guidance

  • Implying a term into a contract is not critically dependent upon proving the actual intention of the parties
  • The fairness of a term or whether the parties would agree to it is not sufficient to justify implying a term
  • A pre-requisite that the term is reasonable adds nothing (if a term satisfies the other requirements, it probably is reasonable, but one does not follow the other)
  • You only need to show either business efficacy or obvious nature
  • When considering the issue ask an open question (don’t formulate a theory assuming one answer is right)
  • The test for business efficacy is a value judgment (not absolute necessity but commercially important)

So bear in mind that if the contract works with its ordinary meaning then you may never reach implied terms – but if you do, you don’t have to be reasonable. 

Originally posted here by Michael Hiscock from Wright Hassall LLP