Legal Briefing

M&S and implied terms: better not left unsaid…

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Real Estate | 16 March 2016

Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] is set to be the leading authority on implied terms for some time to come. The Supreme Court confirmed that the more restrictive test of strict necessity remained applicable in all cases. All practitioners must understand the impact of the decision both for the drafting of instruments, the exercise of contractual rights and before commencing potentially costly litigation.

Facts

Briefly, the appeal concerned a tenant’s break clause in four identical commercial leases. The leases had been granted for a fixed term expiring on 2 February 2018, and the rent was payable in advance on the usual quarter days. The tenant, M&S, exercised its right under the break clause to determine the lease on 24 January 2012, after it had paid the full quarter’s rent due on 25 December 2011. The break clause contained only two pre-conditions: (i) the payment of a break premium equivalent to one year’s rent, and (ii) ‘on the break date there were no arrears of Basic Rent or VAT on Basic Rent’. The key issue before the Supreme Court was whether such a term for repayment could be implied into the four leases, given that there was no such express provision.

The competing tests

All lawyers will be familiar with the nominal tests for implied terms: whether it was necessary to give business efficacy to the contract. Alternatively, whether it went without saying. The expression ‘business efficacy’ can be traced back to The Moorcock (1889), in which Bowen LJ stated that the objective of the implication of a term was:

‘to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men.’ [Emphasis added.]

The strictness of the necessity appeared early on when Scrutton LJ transformed The Moorcock dicta into a test, adding the ‘of course’ response to the officious bystander requirement, in Reigate v Union Manufacturing Co [1918] and has been reaffirmed for many years; for example, in Liverpool City Council v Irwin [1977] where Lord Edmund-Davies confirmed that ‘the touchstone is always necessity and not merely reasonableness’.

However, a movement away from such a strict approach culminated in Lord Steyn’s comments in Equitable Life Assurance Society v Hyman [2002] that: ‘The implication is essential to give effect to the reasonable expectations of the parties’.

It would appear that what Lord Steyn had in mind was that necessity is to be determined by asking whether, without the implied term, the contract would work in the way that the parties might reasonably have expected it to, as opposed to whether it would work at all.

Put simply, no-one doubted that the test was one of necessity; but necessary for what? To make the contract workable (in a commercially efficacious way) or to make it work in accordance with the reasonable expectation of the parties?

Belize

In Attorney General of Belize & ors v Belize Telecom Ltd [2009] Lord Hoffmann appeared to adopt the latter approach, reasoning:

‘It is frequently the case that a contract 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.’

The historic formulation of the ‘business efficacy’ test was merely to emphasise that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.

Numerous contrary decisions followed. The strict necessity/workable test was supported in cases such as:

  1. The Reborn [2010] – the test was: ‘Is the proposed implied term necessary to make the contract work?’
  2. Consolidated Finance Ltd v McCluskey [2012] – the test is whether: ‘the agreement cannot work perfectly well without it’.

By contrast, the reasonable expectations of the parties test was applied in:

  1. Lancashire Insurance Co Ltd v MS Frontier Reinsurance Ltd [2012] – In order to give business efficacy to the bargain which the parties have made it is necessary to imply a term.
  2. Eastleigh BC v Town Quay Developments Ltd [2010] – the term is obviously required to give effect to the party’s intention having regard to the reasonable expectations of the parties.
M&S

In M&S the Supreme Court rejected the dilution of the strict test of necessity.

Belize was relegated to the status of an ‘inspired discussion’. The test remains that of strict necessity for business efficacy. In summary, the Supreme Court made the following observations on the law of implied terms:

  1. The process of implication is distinct from the process of construction. It is only after the question of construction has been considered that the question of implication can arise.
  2. A term will only be implied where it is strictly necessary for business efficacy.
  3. The test is not one of absolute necessity but whether, without the term, the contract would lack commercial or practical coherence.
  4. It is not enough that the parties would have agreed to it had it been suggested to them.
  5. The five tests set out by Lord Simon in BP Refinery (Westernport) Pty Ltd
    v The President, Councillors and Ratepayers of Shire of Hastings (1977) remain useful tests which are not to be applied too rigidly.
  6. The settled law as at the date of execution will continue to inform the reasonable man’s view of the contract.
  7. A term will not be implied where it ‘lies uneasily’ with the express terms
    in the contract.

In M&S the Court accepted that it was a curious outcome that the landlord could retain almost £1m ‘overpaid’ rent for a period in which the tenant was not in occupation. The court rejected the tenant’s submissions for three principal reasons:

  1. The leases were between commercial parties.
  2. The leases made provision for the repayment of rent by the landlord in circumstances where the tenant had not exercised the break – and therefore such an implied term would ‘sit uneasily’ with this express provision.
  3. The reasonable man is taken to know the law when reading the lease and the law on apportionment of rent (at least in forfeiture cases) was clear.
Practical implications of the judgment

Irrespective of the confirmatory language employed by the Supreme Court, there is no mistaking the shift in emphasis. Their Lordships reasoned that such a term could not be implied into the leases as it was not necessary to make them ‘workable’ or for its ‘commercial or practical coherence’.

The decision represents a step change; foreshadowed in the previous decision of the Supreme Court in Arnold v Britton [2015]. The test for implied terms will be even more strictly applied in the years to come. Implied terms are oft-pleaded. Very few contracts are unworkable. Most, if not all, will be sufficiently internally coherent to be workable.

The upshot of the decision in M&S is simply put: nothing is ever best left unsaid. Implied terms were difficult to begin with: they just got a lot harder.