The Supreme Court has unanimously clarified the requirements that must be satisfied before a term can be implied into a contract.

Whilst the decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 does not change the fundamental test for implying terms – i.e. a term can only be implied where it is necessary in order to give business efficacy to the contract or where it is so obvious as to go without saying, the decision clarifies how that is to be assessed.

This decision represents a confirmation of the English courts’ traditional approach to implied terms and provides welcome guidance on this area following the confusion and academic debate that followed the Privy Council decision in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.

Marks & Spencer brought a claim against its landlords, BNP Paribas, for the refund of an advance payment of rent in respect of the period after the lease was terminated following the exercise of a break clause. There was no provision in the lease expressly obliging the landlords to pay this sum, so the issue arose whether such an obligation should be implied into the lease. The full facts and property aspects of the case are discussed by our Property team here.

In the leading judgment, Lord Neuberger recapped the tests set out in the key authorities on implied terms, including the leading case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 which held:

“[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”.

Lord Neuberger approved that summary and then provided the following guidance for applying the test:

  1. The implication of a term was “not critically dependent on proof of an actual intention of the parties” - the court is concerned with what notional reasonable people in the position of the parties at the time of contracting would have agreed.
  2. Care must be taken when using the ‘officious bystander’ test. It is vital to formulate the question posed by the bystander with the “utmost care”.
  3. Business necessity and obviousness are alternative requirements rather than cumulative. Only one of them needs to be satisfied, but it is likely that if one were satisfied the other would be too.
  4. Necessity for business efficacy involves a value judgment; it is not ‘absolute necessity’. Rather, “a term can only be implied if, without the term, the contract would lack commercial or practical coherence”.
  5. A term should not be implied into a detailed commercial contract merely because it appears fair or is what the court considers the parties would have agreed if it had been suggested to them. (Lord Neuberger noted Sir Thomas Bingham’s comments in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, that the parties may have deliberately chosen not to make provision for a particular eventuality for any number of reasons; they may not have been able to agree on what should happen and so chose to leave the matter undealt with in the hope that it did not occur.)
  6. The ‘reasonable and equitable’ requirement will not usually, if ever, add anything to the analysis. If a term satisfies the other implied term requirements, it will almost inevitably be reasonable and equitable.

Lord Neuberger also recalled Lord Hoffman’s suggestion in Belize Telecom that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract. In the present case, Lord Neuberger emphasised that although they both involve determining the scope and meaning of a contract, the interpretation of a contract and the implication of a term are governed by different rules (and occur at different times) and the two processes must not be conflated.

Lord Hoffmann also stated in Belize Telecom that the only question to be asked in the process of a implying a term was: “is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean”? This has subsequently been interpreted by some commentators as meaning that a term may be implied if it is merely reasonable to do so, seemingly diluting the traditional test. In the present case, Lord Neuberger stated that there has been no such dilution and that Lord Hoffmann’s statement should not be interpreted as suggesting that reasonableness is a sufficient ground for implying a term.

Applying the principles to the facts of Marks & Spencer v BNP Paribas, the court found that there was no implied term, noting in particular that the lease was a full, carefully considered and professionally drafted contract of some 70 pages and that the proposed implied term would sit uneasily within the contract’s express provisions.

Comment

The decision confirms that the ambiguous notion of ‘reasonableness’ does not play a central role in the process of implying terms and that the courts will instead take a strict approach. This welcome clarification upholds the principle of contractual autonomy and provides commercial contracting parties with greater comfort that their contracts, particularly where carefully and professionally drafted, will be taken to reflect the entirety of their bargain. However, there inevitably remains some scope for uncertainty in light of the requirement for the court to exercise a value judgment in establishing whether the contract would lack commercial or practical coherence without the implication of the suggested term.

This is consistent with the Supreme Court’s earlier decision on the rules of contractual interpretation in Arnold v Britton and others [2015] UKSC 36 – click here for our coverage of that decision. Both these cases suggest a shift in the court’s approach to determining the scope and meaning of contracts. It is evident from these decisions that the Supreme Court is now favouring a traditional ‘black letter’ analysis of contracts that focuses on the words used by the parties in the contract. This is to be welcomed for the greater certainty it will provide to commercial parties in their business dealings.