This case here related to a claim by a tenant who argued that a term should be implied into a lease to the effect that certain advance payments relating to a period after the lease ended should be refunded. It is important because the Supreme Court took the opportunity to clarify the legal test for implying terms into contracts and also to comment upon what the following words of Lord Hoffman in the 2009 case of Attorney General of Belize v Belize Telecom actually meant:
“There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”
Whilst the Supreme Court confirmed that the judgment was not to be read as involving any relaxation of the traditional, highly restrictive approach to implication of terms, Lord Neuberger stressed that these words did not mean that Lord Hoffman was suggesting that reasonableness alone was a sufficient ground for implying a term. Indeed, because the Supreme Court considered that some had wrongly suggested that this was what Lord Hoffman had meant, Lord Neuberger noted that these words should be treated as observations and:
“characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.
This lead the Supreme Court to restate the law on the implication of terms. There are two types of contractual implied term. The first, with which this case was concerned, is a term which is implied into a particular contract, in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made. The second type arises because, unless such a term is expressly excluded, certain statutes can impose certain terms into contracts - for example through the Supply of Goods & Services Act 1982.
In relation to the first type of implied term, the Supreme Court went back to the 1977 Privy Council case of BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings  UKPC 13, 26, where Lord Simon said that for a term to be implied, the following five conditions must be satisfied:
- “it must be reasonable and equitable;
- 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;
- it must be so obvious that ‘it goes without saying’;
- it must be capable of clear expression; and
- it must not contradict any express term of the contract.”
Lord Neuberger added six comments to those principles:
- The implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If you approach the question by reference to what the parties would have agreed, what matters is not the hypothetical answer of the actual parties, but the answer of notional reasonable people in the position of the parties at the time at which they were contracting;
- A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds alone for including a term;
- It was questionable whether Lord Simon’s first requirement, (reasonableness and equitableness) , will usually, if ever, add anything. If a term satisfied the other requirements, it was hard to think that it would not be reasonable and equitable;
- Business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisfied, although the Judge suspected that in practice it would be a rare case where only one of those two requirements would be satisfied;
- If one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed by that bystander with “the utmost care”; and
- The necessity for business efficacy involves a value judgment. A more helpful test would be that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
The Supreme Court said that in most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until you have decided what the parties have expressly agreed, it is difficult to see how you can decide whether or not a term should be implied and if so, what term. Remember that no term can be implied into a contract if it contradicts an express term. Therefore when deciding whether or not a term can be implied as a logical starting point, you cannot proceed to decide whether a term should be implied until the express terms of a contract have been considered and understood.