In the recent case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72, the Supreme Court considered the rules on implying terms into contracts.

In summary, the majority of the Supreme Court said that the correct test was whether the proposed implied term was (1) necessary to give business efficacy to the contract or (2) so obvious that it went without saying.

This is a reversion to the more traditional tests for implying terms and a clear departure from the approach adopted by Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd  [2009]  1  WLR 1988.

THE DISPUTE

The dispute was between a landlord and tenant. In December 2011, the tenant paid a full quarter’s rent in advance to the landlord. However, the lease came to an end part way through the quarter, on 24 January 2012, because the tenant had exercised a break right. The tenant sought to recover the proportion of the rent already paid that related to the period after the lease had come to an end. The tenant argued that there was an implied term requiring the landlord to refund this element of the rent.

The Supreme Court rejected that argument.

The key point for landlords and tenants is that rent will generally only be repayable in such circumstances if there is an express term in the lease providing for this. This aspect of the judgment – the question of the apportionment of rent - is considered in more detail here.

However, it is the Supreme Court’s comments on implied terms that are likely to have the greatest impact and which are the focus of this note.

Attorney General of Belize

In Attorney General of Belize, Lord Hoffmann had said that implying terms into contracts was part of the same process as interpreting the express terms. He said that “[t]here is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”. Other tests for implying terms, such as the requirement that the proposed implied term must be necessary to give business efficacy to the contract, or the “officious bystander” test, should not be treated “as if they had a life of their own”.

Although decisions of the Privy Council are technically only persuasive, and not binding, Lord Hoffmann’s comments were generally regarded as heralding a change in the law on implied terms and Lord Hoffmann’s test has been applied in a large number of cases since  2009.

M&S v BNP Paribas

In an unexpected turn of events, however, the majority of the Supreme Court in M&S v BNP Paribas said that Lord Hoffman’s judgment in Attorney General of Belize should no longer be treated as authoritative.

Implying terms, said the Supreme Court, is not the same process as interpreting express terms and it involves applying different rules. In most cases, the correct approach will be first to identify the meaning of the express words used in the contract and then to decide whether it is necessary to imply any further terms.

The key points to be derived from the majority judgment of the Supreme Court (delivered by Lord Neuberger) are as follows:

  • A term should only be implied into a contract where this is: (1) necessary to give business efficacy to the contract; or (2) so obvious that it goes without saying.
  • These are alternative tests: it is not necessary to satisfy both of them. However, it will be a rare case where one test is satisfied and the other is not.
  • It is not sufficient to show that the proposed implied term is fair or reasonable or that the parties would have agreed to the implied term if it had been suggested to them.
  • The question of whether a term should be implied should be determined as at the date of the contract. Hindsight should not be applied.
  • No term can be implied into a contract if it contradicts an express term.
  • In this case, the lease was a very full and detailed document, which covered a wide range of contingencies and which had been entered into by two experienced parties with the benefit of legal advice. In those circumstances, the court should be slow to imply further terms into the lease.

DISSENT IN THE RANKS

It is worth noting that one member of the Supreme Court, Lord Carnwath, disagreed with the majority. He clearly took the view that Attorney-General of Belize should continue to be treated as the leading case on implied terms.

THE FINAL SAY

In view of the comments of the majority of the Supreme Court, however, courts are likely to apply the more “traditional” tests to implying terms - obviousness and/or necessity.

This should, therefore, now be the starting point whenever parties and their advisors are considering whether or not a contract contains any implied terms.