Welcome guidance from the Supreme Court on implied terms

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Summary: When should the courts imply a term into a contract? The Supreme Court recently gave guidance in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] that will be of interest to contracting parties and practitioners alike.

When should the courts imply a term into a contract? The Supreme Court recently gave guidance in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] that will be of interest to contracting parties and practitioners alike.

What happened?

M&S as tenant had entered into several leases containing a 6 month break clause. The break clause was subject to certain conditions, including that notice given under it would only be effective if there were no arrears of rent and a break premium of one year's rent was paid. Having exercised its right to break several leases in January 2012, M&S claimed a refund from BNP Paribas, its landlord, of part of the rent it had paid in December 2011, and other outgoings that were attributable to the period after the break date.

There was no express provision in the leases entitling M&S to a refund in those circumstances. M&S therefore had to persuade the court that it should imply at term into the leases entitling it to reclaim these sums from the landlord.

The judge at first instance held that a term to this effect should be implied into the leases. The Court of Appeal disagreed and M&S appealed to the Supreme Court.

Court’s decision

The Supreme Court ruled in favour of the landlord, upholding the Court of Appeal’s decision.

Although the case concerns commercial leases, and the judgment considers the apportionment of rent in advance (see the BLP Expert Insight Supreme Court upholds Court of Appeal break clause decision against M&S for more on this), the Supreme Court also took the opportunity to provide further guidance on when terms should be implied into contracts.

Guidance on when terms will be implied

The court recognised that there are two types of implied term: those which are implied into a contract in light of its express terms, commercial common sense and the facts known to both parties at the time; and those which are imposed by law (either by statute or the common law). This judgment concerns the first type of implied term.

The court started by reviewing the authorities, stating that they provided a “clear, consistent and principled approach”.

The court approved Lord Simon’s statement in the Privy Council case of BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) (the BP case), ”:

“[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (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.”

To this formulation, the Supreme Court added the following six comments:

  • The implication of a term is “not critically dependent on proof of an actual intention of the parties” when negotiating the contract.  When considering what the parties would have agreed, the court should not consider the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time when they were contracting.
  • A term should not be implied into a detailed commercial contract merely because it appears fair or because one considers that the parties would have agreed it if it had been suggested to them.  Those are necessary, but not sufficient, grounds for implying a term.
  • It is questionable whether the first requirement in the BP case (of reasonableness and equitableness) adds anything.  If a term satisfies the other requirements, it is likely to be reasonable and equitable.
  • The second and third requirements in the BP case, business necessity and obviousness, are alternatives. Only one of them needs to be satisfied, although practically speaking, it is rare for one to be satisfied without the other.
  • Approaching the issue of whether a term should be implied by reference to the officious bystander, it is vital to formulate the question to be posed by him with the utmost care.
  • The second requirement of the BP case is necessity for business efficacy. This is not an objective test, but involves a value judgment.  A more helpful way of putting it would be that a term may only be implied if, without it, the contract would lack commercial or practical coherence.

The court also took the opportunity to clarify that the law on implied terms had not been diluted by the judgment of Lord Hoffman in Attorney General of Belize v Belize Telecom [2009], as some commentators had suggested. Reasonableness is not a sufficient ground for implying a term. Furthermore, the exercises of construing a contract and implying terms into that contract are different processes governed by different rules, and until the express terms of the contract have been decided, one cannot say whether it is necessary to imply a term.

Practical tips

For those involved in administering contracts, this judgment helpfully clarifies the circumstances in which terms can be implied into a contract.

For contract draftsmen, who will be keen to avoid their contracts being subject to such detailed judicial consideration, care should be taken to ensure that the contract expressly and adequately reflects the parties’ agreement. With any luck, the implication of terms will prove unnecessary!

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