Time and again, parties to contracts find themselves in situations where issues arise but the contracts are silent on how the issues are to be resolved.  In those situations, lawyers for the parties will look to see whether a term can be implied to allocate responsibility.  In the recent case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 (Marks and Spencer), the UK Supreme Court has clarified the principles involved in determining whether a term can be implied (in fact) into a formal contract.

Background
Since 1977, lawyers around the globe have had the benefit of the Privy Council’s decision in BP Refinery (Westernport) v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20 (BP Refinery), which identified five conditions which must be satisfied before a term will be implied, namely: 

  1. [the term] must be reasonable and equitable; 
  2. 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; 
  3. it must be so obvious that ‘it goes without saying’; 
  4. it must be capable of clear expression; and
  5. it must not contradict any express term of the contract.

It has been well understood that these five conditions, along with a handful of other seminal cases in the area, provide a separate and distinct regime from the normal principles involved in interpreting express terms of contracts.

In 2009, however, the Privy Council released a decision which has given rise to much debate as to whether the five conditions in BP Refinery have been superseded by an approach similar to interpreting express terms.  In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (Belize), Lord Hoffman (delivering the unanimous advice of the Privy Council) summarised that:

  • the implication of a term is an exercise in the construction of the instrument  as a whole, and
  • there is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?

Belize was controversial because it appeared to some that it altered the method by which one approached the task of implying contractual terms so as to broaden the possibility of finding implied terms.

Decision 

The UK Supreme Court decision in Marks and Spencer reads down the effect of Belize and affirms the continuing authority of the approach to implying terms set out in BP Refinery.

That case related to the early termination of a lease under an express contractual clause, which did not provide for the return of excess rent.  Marks and Spencer sought to argue that a term should be implied that the excess rent would be returned to it on a proportionate basis.  Morgan J at first instance held that the term should be implied.  The Privy Council (Arden LJ with whom Jackson and Fulford LLJ agreed), declined to find the implied term on the basis that the contract was carefully drafted and that such a term was against the law of England in respect of apportionment of excess rent.  The Supreme Court unanimously upheld the Privy Council’s decision and dismissed the appeal.

Lord Neuberger delivered the majority judgment and, in doing so, provided some helpful commentary on the five BP Refinery conditions in the following six points (paraphrased): 

  • the implication of a term was 'not critically dependent on proof of an actual intention of the parties' when negotiating the contract
  • 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
  • however, it is questionable whether reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is 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
  • if one approaches the issue by reference to the officious bystander, it is "vital to formulate the question to be posed by [him] with the utmost care", and 
  • necessity for business efficacy involves a value judgment.  The test is not one of 'absolute necessity', not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting the test is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

In respect of Belize, his Lordship found that it did not dilute the BP Refinery ‘requirements which have to be satisfied before a term will be implied’.   Rather, he found that Belize was capable of more than one interpretation and so the ‘right course’ for the Supreme Court to take was ‘to say that those observations should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms’.

Conclusion

The five well-known conditions set out in BP Refinery have long been followed by Australian courts in determining whether a term is to be implied into a formal contract (informal contracts have a slightly different test).  It is a fairly restrictive test that is usually applied after the court has interpreted the express terms of the contract and is therefore a separate regime with its own particular rules.

The decision in Marks and Spencer affirms that approach and should provide clarity on whether a term will be implied.  As always, however, many of the issues which arise in cases such as the present can be avoided by careful and thoughtful drafting when contracts are prepared.  In that regard, it is always important to ensure that the obvious is expressly stated in contracts to avoid unnecessary disputes.  The judicial trend is clear - where there is a detailed commercial contract, the Court will respect the bargain struck and avoid interfering with what the parties have said.