Although much of the modern English law of contract derives from the Industrial Revolution, its foundations can be traced back, at least, to the Norman Conquest in 1066. It may therefore come as a surprise that (whilst we no longer have a court of “Common Pleas” or actions in “Assumpsit”) some of the country’s most senior judges are still debating such a fundamental point as to when it is right to imply a term into a commercial contract.
Arguments over implied terms often arise where circumstances occur which were not envisaged by the contract, and the parties cannot agree whether, or how, the consequences should be dealt with by the contract. Until recently, it was thought that the law governing the circumstances where the court could imply a term into a contract to deal with the unforeseen event were settled. For a term to be implied it had to be: (i) a reasonable and equitable one; (ii) one that is necessary to make the contract commercially effective; (iii) so obvious that, if asked at the time the contract was drafted the parties would have replied “of course”; and (iv) was capable of clear and precise expression. Importantly, a term would not be implied just to fill an obvious gap in a contract, unless the proposed term was the only solution that the parties would have adopted to deal with the point.
However, in a decision concerning a dispute between the Government of Belize and Belize Telecom in 2009, Lord Hoffman attempted to reformulate the test and, in doing so, sent legal commentators and judges into a spin of controversy. In his reformulation, Lord Hoffman seemed to abandon the four point approach and suggest that the only question the court needed to ask itself was how the contract, when read as a whole against the relevant background, would be reasonably understood? The concerns created by this approach were that it appeared to be adopting rules applicable to construing contracts, as opposed to implying terms into them, and that test required to imply such terms had been diluted to one of reasonableness (in all the circumstances) was opposed to one of necessity.
Fortunately, the Supreme Court had the opportunity to set the record straight in 2015 (Marks & Spencer plc v. BNP Paribas Securities Services Trust Company (Jersey) Limited). Unfortunately, the judges could not quite agree what Lord Hoffman had meant in his judgment and what status should be given in future to the approach adopted by him.
The President and the majority of the Supreme Court judges advised against treating Lord Hoffman’s approach as authority that a reasonableness test should apply, and made clear that the exercise of implying a term into a contract was fundamentally different to the task of construing what a contract actually means. When ascertaining the contracting parties’ intention, you must first construe the written document (having regard to the circumstances surrounding the agreement) and only then decide whether it is necessary to imply a term into the contract to make it commercial effective. The President said that Lord Hoffman’s observations should be treated as “a characteristically inspired discussion rather than authoritative guidance on the law of implied terms.”
One judge, however, disagreed with the President and described Lord Hoffman’s judgmentas “a valuable and illuminating synthesis of the factors which should guide the court when being asked to imply terms into contract.” Another judge, who in an earlier judgment had followed and approved Lord Hoffman’s approach in Belize, felt the need to clarify his position and align behind the President’s approach.
Whilst it is interesting, as a matter of academic indulgence, to study the different approaches, care needs to be taken to ensure that those who have to follow and apply the law are given as much certainty as possible. Fortunately, in this case, all the judges agreed that a term should only be implied into a contract if it is necessary to give that contract commercial effect and can be clearly identified as the obvious intention of the parties.