Parties arguing that the express terms of a contract do not apply to the circumstances that have arisen will often contend for the existence of an implied term. Whether a term should be implied is often dependent on the facts of a case. Contractual terms can be implied:
- to reflect the intentions of the contracting parties;
- through usage and custom of a particular trade, if the proposed term is notorious, certain, reasonable and not contrary to law;
- through a previous course of regular dealing between the parties, if it is demonstrated that the parties would reasonably have expected that it would apply to the contract; and
- under legislation or common law(an obvious example being the Saleof Goods Act 1979 or consumerprotection legislation).
In complex and carefully negotiated commercial contracts it is typically difficult to contend for an implied term. A term will only be implied if it is not contrary to the express terms of the contract. It must also be capable of being articulated clearly.
Previous formulations of law
The courts have no power to imply a term to ‘improve’ a contract, or to make it fairer or more reasonable. Their task is to discover what the contract means, not to alter the agreement of the parties. Various formulations of the test have been stated by the courts over time. The business efficacy test (that the proposed term is necessary to give business efficacy to the contract) was applied in The Moorcock [1889] and the ‘officious bystander’ test (that the proposed term must be so obvious that it goes without saying) in Shirlaw v Southern Foundries [1939]. In the 1977 case, BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977], the Privy Council attempted a consolidation of earlier formulations. Lord Simon said that the tests should be regarded as cumulative, and that it is not necessary to ‘review exhaustively the authorities on the implication of a term in a contract’ where certain conditions are met (see box on p15). The question was revisited, again by the Privy Council, in Attorney General of Belize & ors v Belize Telecom Ltd [2009].
Attorney General of Belize& ors v Belize Telecom Ltd
Belize Telecom concerned the articles of association of Belize Telecom (the articles), under which the only person able to appoint or remove certain government-appointed directors was the holder of a special share and a certain percentage of the issued share capital. The government held the requisite shares and appointed two directors. It then reduced its shareholding, leaving no single person with the shareholding required bythe articles, to exercise the power to remove the directors. This created a situation in which the government-appointed directors could not be removed. The Privy Councilwas asked to incorporate an implied term that the directors should leave office in these circumstances.
The court held that it was necessary to imply such a term in the articles. In reaching this decision, Lord Hoffmann stated (albeit obiter) that the various formulations of the test for implying a term in a contract could be reduced to a single objective question: would the implied term spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean? This test would reveal the parties’ intentions. Earlier formulations were not to be regarded as a list of criteria to be satisfied. Lord Hoffmann was concerned that the test of whether the contract was ‘necessary to give business efficacy’ might cause the court to consider the subjective intentions of the parties, rather than what a reasonable person would understand the contract to mean at the time that it was executed. It is worth noting that Lord Hoffmann stated that the meaning of a contract is not necessarily or always what the contracting parties would have intended. It is the meaning that the contract would convey to a reasonable person with all the background knowledge, and which would reasonably be available to the audience to whom the contract is addressed. Such a meaning is deemed to represent the mutual intention of the parties.
Mediterranean Salvage & Towage Ltdv Seamar Trading & Commerce Inc
This case was heard in the Court of Appeal after Belize Telecom and considered the test that had been created by Lord Hoffmann. Sir Anthony Clarke gave the leading judgment and praised Lord Hoffmann’s approach, predicting that it will soon be as much referred to as his approach to the construction of contracts in Investors Compensation Scheme v West Bromwich Building Society [1998]. The question in Mediterranean Salvage [2009] was whether a term should be implied in a contract that the charterers of a ship would nominate a safe berth, in circumstances where the contract contained no express warranty as to the safety of the berth, or of the port. The court refused to do so.
The leading judgment emphasised that necessity was a key consideration, stating that the question of implication arises when the contract does not expressly provide for what is to happen when some event occurs. That was of particular significance because Mediterranean Salvage was not a case in which each party needed to establish a competing implied term to succeed. Without an implied term, the owners would have to bear the loss. The charterers successfully argued that the warranty sought was a matter of choice, and there was no basis for concluding that it was necessary to make the contract work.
Has belize telecom been followed?
Privy Council judgments are not binding on other English courts but do carry considerable weight. Lord Hoffmann’s judgment was followed by the High Court in Inta Navigation Ltd & anor v Ranch Investments Ltd & anor [2009]. However, the High Court case of Adler v Ananhall Advisory & Consultancy Services Ltd [2009] instead applied the ‘officious bystander’ test.
Conclusion
Past cases specify criteria for the implication of a term to reflect the intention of the contracting parties. In Belize TelecomLord Hoffmann sought to consolidate previous tests into a single objective question. To some extent, the test makes it more difficult to predict whether or not a term should be implied into a contract. However, a party seeking to imply a term into a contract to reflect the intentions of the parties faces considerable obstacles.In Belize Telecom Lord Hoffmann emphasised that the question of implication only arises when the contract is silent. He added that the most usual inference of a silent contract is that nothing is to happen when some event occurs. If the parties had intended something to happen, the contract would have said so. If the event in question has caused a loss, the loss should lie where it falls. That approach was subsequently endorsed by the Court of Appeal in Mediterranean Salvage, which has stressed that the court should only imply a term when it is necessary to do so. In addition, an implied term must not contradict the express terms of the contract, and must be capable of being articulated in a way that is clear and certain. It remains to be seen to what extent the consolidated test put forward by Lord Hoffmann in Belize Telecom will be embraced by the English Courts.
By Charlotte Bunn, associate, and Andrew Short, trainee,Edwards Angell Palmer & Dodge UK LLP.E-mail: cbunn@eapdlaw.com;ashort@eapdlaw.com.
- Terms can be implied in a contract to reflect the intentions of the contracting parties, through usage and custom, or a previous course of regular dealing, or by operation of law.
- Courts have suggested various formulations of the test for implying a term to reflect the intention of the parties.
- In 2000 the Privy Council suggested that a term would be implied where the following conditions are met:
- it is reasonable and equitable to do so;
- it is necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- it is so obvious that ‘it goes without saying’;
- it is capable of clear expression; and
- it does not contradict any express term of the contract.
- The test has recently been revisited by Lord Hoffman in the Privy Council and, subsequently, in the Court of Appeal.
- Lord Hoffmann reduced the test to single objective question: would the implied term spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean?
- However, the question of whether a term should be implied only arises when the contract does not expressly provide for a particular situation.
