The Supreme Court has clarified that, for a term to be implied into an agreement, it must be either necessary for business efficacy or so obvious that it goes without saying. This is a significant judgment for commercial practitioners and for those drafting or dealing with contracts generally.

Under English law, a court can imply terms into a contract to supplement its express provisions. However, the Privy Council’s decision in Attorney General of Belize and others v Belize Telecom Ltd and another [2009] UKPC 10 had led to uncertainty about the appropriate test for the implication of terms. The test has since been clarified by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72.

The test for implied terms

Certain academics and judges had interpreted Belize as having diluted the requirements for the implication of a term so that a term can be implied into a contract, provided that it would be reasonable to do so.

In Marks and Spencer, the Supreme Court rejected this interpretation and affirmed the approach of judicial observations prior to Belize. Accordingly, the following requirements must be satisfied before a term can be implied:

  1. The term must be reasonable and equitable.
  2. The term must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it, or the term must be so obvious that it goes without saying.
  3. The term must be capable of clear expression.
  4. The term must not contradict any express term of the contract.

In addition, a court should not use hindsight to fashion a term that reflects the merits of the situation as they then appear. It is also not enough that the parties would have made provision for the eventuality which in fact occurred, unless it can be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred.

Trendspotting

The Supreme Court’s decision represents a further attempt in recent years to refine the correct approach to be taken when determining the scope and meaning of a contract. This appears to involve: (i) the emphasis on the words contained in (or omitted from) the agreement and their natural meaning and (ii) the imposition of limits on the use of concepts such as reasonableness and business common sense that tend to invite judicial creativity and intervention. As stated inArnold v Britton [2015] UKSC 36 in relation to the interpretation of contracts:

… it is not the function of a court … to relieve a party from the consequences of his imprudence or poor advice. Accordingly, … a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

Thus, in Marks and Spencer, the Supreme Court ruled that the appellant was unable to reclaim the proportion of a quarterly rent paid in advance to the respondents under a lease, despite the fact that the lease had been determined part-way through the quarter.

What does this mean for you?

Courts will be slow to imply a term into a contract unless the test for implied terms can be strictly satisfied. More generally, courts will give primacy to the express provisions of the contract. This will be the case even if the result would be unduly harsh (or advantageous) to a party from a commercial perspective. Accordingly, when preparing contracts, parties should take care to include all relevant provisions and to ensure that such provisions are drafted clearly.

You can read the full judgement here