IMPLIED TERMS - UPDATE
LITIGATION AND DISPUTE RESOLUTION
In the recent High Court decision of Jackson v Dear & Anor
[2012] EWHC 2060 (Ch), the judge considered the extent to
which traditional tests for implying terms into contracts have
been superseded by Lord Hoffmann’s decision in the Privy
Council case of Attorney General of Belize & Others v Belize
Telecom & others [2009] UKPC 11.
Historically, the English courts have applied a variety of tests to
the question of whether a term can be implied into a contract.
These included the “business efficacy” test and, perhaps
most famously, the statement by Mackinnon LJ in Shirlaw v
Southern Foundries (1926) Ltd [1939] 2 KB 206, that a term
can be implied into a contract where it is “something so obvious
that it goes without saying; so that, if, while the parties were
making their bargain, 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!’”
However, in the Belize case, Lord Hoffmann advocated a more
general approach to the implication of terms. He outlined the
various different approaches taken by the courts in earlier
cases and said that they were “best regarded, not as series of
independent tests which must each be surmounted, but rather
as a collection of different ways in which judges have tried to
express the central idea that the proposed implied term must
spell out what the contract actually means…”
According to Lord Hoffmann’s formulation, the implication of a
term is “an exercise in the construction of the instrument.” He
went on to say that “in every case in which it is said that some
provision ought to be implied in an instrument, the question
for the court is whether such a provision would spell out in
express words what the instrument, read against the relevant
background, would reasonably be understood to mean.”
The dispute in the Jackson case concerned a contractual
agreement into which the claimant claimed there should be
construed an implied term. Against the implication of the
term, the defendants argued that the Court of Appeal had, in
subsequent decisions, rowed back from the Belize case or
declined fully to accept it into English law.
However, the judge rejected the defendant’s argument and in
his analysis provided a useful summary of the relevant principles
for the implication of terms:
ŠŠ “The implication of terms is no less a part of the process
of ascertaining the meaning of an agreement than
interpretation of express terms. Implication addresses
events for which the express language of the agreement
makes no provision.
ŠŠ In such a case the usual starting point is that the
absence of an express term means that nothing has
been agreed to happen in relation to that event. But
implied terms may be necessary to spell out what the
agreement means, where the only meaning consistent
with the other provisions of the document, read against
the relevant background, is that something is to happen.
ŠŠ A
lthough necessity continues (save perhaps in relation to
terms implied by law) to be a condition for the implication
of terms, necessity to give business efficacy is not the
only relevant type of necessity. The express terms of
an agreement may work perfectly well in the sense that
both parties can perform their express obligations, but
the consequences would contradict what a reasonable
person would understand the contract to mean. In such
a case an implied term is necessary to spell out what the
contract actually means.”
It is therefore now clear that, as a result of Lord Hoffmann’s
judgment in the Belize case, the processes of contractual
interpretation and implication of terms have become
“assimilated”. The question in both cases is, in broad terms:
what would the contract, read against the relevant background,
reasonably be understood to mean? It remains the case that the
proposed implied term must be “necessary” but, it would seem
that this is a broader concept than the old “business efficacy”
test and an implied term will be “necessary” if it is required to
spell out what the contract actually means. It is important to
appreciate that the English courts will not imply a term simply
because it would be fair or reasonable to do so.
CONTACT DETAILS
If you would like further information or specific advice please contact:
GEOFF STEWARD
DD: +44 (0)20 7849 2341
[email protected]
OCTOBER 2012
MACFARLANES LLP
20 CURSITOR STREET LONDON EC4A 1LT
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This note is intended to provide general information about some recent and anticipated developments which may be of interest.
It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
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