When will a term be implied into a carefully drafted commercial contract?
In Marks and Spencer plc (Appellant) v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  UKSC 72 the Supreme Court reviewed the applicable test for implication of a contractual term (paras 14-32). In particular it clarified the test and noted that some interpretations of Lord Hoffman’s observations in Attorney General of Belize v Belize Telecom Ltd  1 WLR 1988 were “wrong in law”.
Noting that there had been a number of judicial observations as to the nature of the requirements which have to be satisfied before a term can be implied into a detailed commercial contract, Lord Neuberger (who gave the leading judgment) highlighted three judicial observations which he considered represented a clear, consistent and principled approach:
- “[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it 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; (5) it must not contradict any express term of the contract” (BP Refinery (Westernport) Pty Ltd v President,Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR);
- “[I]t is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred …” (Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472, 481); and
- “… the omission of an express warranty may well have been deliberate, because such an implied term is not necessary for the business efficacy of the …[contract] and because such an implied term would at best lie uneasily beside the express terms of the …[contract]” (The APJ Priti  2 Lloyd’s Rep 37, 42).
Considering it dangerous to reformulate the principles Lord Neuberger instead added six comments, summarised below, to the above principles when considering whether to imply a term:
- the test is that of notional reasonable people in the position of the parties at the time at which they were contracting, not the actual parties;
- a term should not be implied into a detailed commercial contract merely because it appears fair or because one considers that the parties would have agreed it if it had been suggested to them;
- it is questionable whether reasonableness and equitableness will usually add anything. If a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable;
- only one of business necessity and obviousness needs to be satisfied, although in practice it would be rare 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 [him] with the utmost care”; and
- necessity for business efficacy involves a value judgment. It may well be that a more helpful way of putting it is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
In relation to Belize v Belize Telecom where Lord Hoffman said “[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?” Lord Neuberger noted that Lord Hoffman’s observations were open to more than one interpretation and that some of those interpretations were “wrong in law”. Accordingly Lord Neuberger suggested that “those observations should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.
Impact – the Supreme Court’s decision marks a return to core principles when considering whether a term may be implied into a carefully drafted agreement. In this case the appeal concerned a tenant’s break clause in a lease. The issue for consideration by the court was whether in the absence of an express term, a term should be implied into the lease allowing the tenant to recover pre-paid rent which covered the period after the lease had ended. The lease was described as a very full and detailed document. Lord Neuberger emphasised that both parties had obviously directed their minds to the financial consequences of the tenant exercising the break clause, by providing for a break fee and a payment from the landlord to the tenant in the event that it chose not to exercise the break rendering it “inappropriate for the court to step in and fill in what is no more than an arguable lacuna”. The appeal was dismissed.
Market abuse regulation – UK’s preliminary draft secondary legislation available
Following the FCA’s recent publication of its proposed changes to the FCA’s Code of Market Conduct the Listing Rules and the DTRs, a draft statutory instrument amending the Financial Services and Markets Act 2000 (“FSMA”) has been made available (on application) by BIS. The measures are intended to meet the UK’s obligation to implement the EU market abuse regulation (“MAR”) which will apply from 3 July 2016. Under the EU’s legislative procedure MAR, as a regulation, will be directly effective i.e. the UK will not need to implement legislation to adopt MAR in order for it to be applicable. The UK does however have to review existing legislation and regulation to ensure that it is not contrary to MAR and the FCA will no longer be able to issue binding rules on market abuse where it is within MAR’s scope. Key proposed changes include:
- the deletion of sections 118-122 of FSMA which amongst other things currently set out the UK’s market abuse offences;
- the addition of new sections giving the FCA power to require information from, and publication by, issuers of specified information or statements (including correcting false or misleading public information) and suspend trading; and
- certain consequential amendments to other legislation including the Criminal Justice Act 1993 to conform it with MAR.
Impact – implementation of MAR will significantly change the regulation of market abuse in the UK (and EU) and require increased safeguarding measures to be employed by both individuals and corporates to avoid falling foul of the provisions. Comments on the draft legislation are requested by 4 February 2016.
- A recent High Court case has clarified that a document correctly executed by a company in accordance with section 44 of the Companies Act 2006 will be valid notwithstanding that one of the signatories was no longer an officer of the company at the date the document became effective. In this case a director had executed a loan agreement and debenture in relation to a transaction which completed after the director’s resignation. The court also noted that section 44 applied to execution of the debenture, regardless of whether it was a deed, noting the Court of Appeal’s decision in Hilmi & Associates Ltd v Pembridge Villas Freehold Ltd  1 WLR 2750.
- Pre-empting implementation of the UK’s requirement that from April 2016 English companies will be required to identify their beneficial owners, Transparency International has released a report highlighting progress made to date and progress that “needs to be made” in the UK’s overseas territories. It also notes publication of a Joint Ministerial Council Communique following a meeting of political leaders and representatives of the UK and the Overseas Territories last week, at which agreement was reached to hold beneficial ownership information in the respective jurisdictions “via central registers or similarly effective systems”.
- The European Commission has published a proposal for a directive to repeal and codify various company law directives to ensure that current provisions can be identified and are clear and transparent. No changes of substance are proposed.
- The FCA’s quarterly consultation (No.11) includes: proposed changes to its enforcement guide following implementation in November 2015 of the Transparency Directive Amending Directive 2013/50/EU (requiring Member States to provide competent authorities with the power to suspend voting rights for shareholders who do not comply with certain transparency requirements); and minor clarificatory amendments to the Listing Rules following proposed changes to the Prospectus Rules.