Marks and Spencer v BNP Paribas Securities Trust

The Supreme Court has clarified the law on implied terms: to be implied it must be necessary for business efficacy or alternatively be so obvious as to go without saying. The court held that given the widespread misinterpretation of the decision in Attorney General of Belize and others v Belize Telecom Ltd (Belize), it should no longer be treated as authoritative guidance on the law.

Facts

Although the facts relate to a property transaction, the underlying test will be adopted when implying terms into a contract of employment. This appeal concerned a tenant’s break clause in a lease. The lease had been granted for a term expiring in February 2018 and the rent was payable in advance in quarters. The tenant exercised its right under the break clause to determine the lease in January 2012, after it had already paid the full quarter’s rent which was due in December.

The issue was whether the tenant could recover the apportioned rent in respect of the period from January to March. The resolution of this issue turned on the interpretation of the lease and required the court to consider the principles relating to when a term is to be implied into a contract.

Pre-Belize tests for implying terms

The following two tests have been most commonly used when determining whether a term should be implied into a contract:

  • business efficacy test: the proposed term will be implied if it is necessary to give business efficacy to the contract (The Moorcock)
  • officious bystander test: the proposed term will be implied if it is so obvious that, if an officious bystander suggested to the parties that they include it in the contract, ‘they would testily suppress him with a common ‘oh of course’’ (Shirlaw v Southern Foundries). In other words, the proposed term must be so obvious that it goes without saying.

The test in Belize

The most recent commonly cited test is taken from Belize, where Lord Hoffman said “there is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood?”

Outcome

The Supreme Court held that this formulation in Belize has been misinterpreted as suggesting that reasonableness is a sufficient ground for implying a term. The court confirmed that business necessity is required for a term to be implied into a contract and that the decision in Belize has been misinterpreted as diluting this requirement.

Furthermore, the court considered whether the processes of contract interpretation and implication of terms are separate. The court held that they are and that it is, therefore, important that the terms of the contract are construed before the process of implying terms.

The test for implying terms into contracts

The court held that Belize should no longer be treated as authoritative guidance on the law of implied terms. Instead, the pre-Belize authorities should be considered, notably the summary of the conditions in BP Refinery v Shire of Hastings (BP Refinery), as extended in Philips Electronique v British Sky Broadcasting Ltd (Philips). Lord Neuberger also added six comments to theses authorities.

The summary of conditions for implication in BP Refinery

In BP Refinery, Lord Simon said that for a term to be implied, the following conditions (which may overlap) 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
  • it must not contradict any express term of the contract.

Conditions in Philips

In Philips, the conditions in BP Refinery were described as a summary whose simplicity could be misleading. The court stated it is difficult to infer with confidence what the parties to a lengthy and carefully drafted contract must have intended. An omission may be the result of the parties’ oversight or their deliberate decision. It is tempting, but wrong, for a court, with the benefit of hindsight, to imply a term which reflects the merits of the situation as they then appear. The term to be implied must be either the only contractual solution or the one which would, without doubt, have been preferred.

Lord Neuberger’s six comments on the test for implying terms

Lord Neuberger offers six comments on the requirements for implication set out in BP Refinery as extended in Philips. These are as follows:

  • what matters is not the hypothetical answer of the actual parties, but that 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.
  • the requirement from BP Refinery that implied terms must be reasonable and equitable adds nothing. If a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable
  • business efficacy and the officious bystander tests are not cumulative. Only one of these requirements needs to be satisfied (although the other requirements in BP Refinery are cumulative)
  • it is important to correctly formulate the question asked by the officious bystander. Lord Neuberger cited Lewison in The Interpretation of Contracts, 5th ed (2011), para 6.09; the book criticises questions which suggest only one answer
  • necessity for business efficacy involves a value judgment. The test is not one of “absolute necessity”. A term can only be implied if, without the term, the contract would lack commercial or practical coherence (Lord Sumption’s suggested reformulation of the business efficacy test).

Points to note

This is an important judgment which re-states the law on implied terms and is therefore relevant to drafting contracts or contractual disputes.

This case reinforces the current judicial trend against implying in terms into a contract unnecessarily. The judgment confirms that courts and litigants can safely argue for an implied term on the basis of “business efficacy” or the “officious bystander” test, without inciting an appeal about the correct formulation for finding an implied term.