On the 2 December 2015, the UK Supreme Court clarified the law for implying terms into commercial contracts and confirmed that the "reasonableness" standard applied by the Courts since the Belize ruling in 2009 is no longer correct. Terms will now only be implied where it is obvious to do so or where it is necessary to make the contract work which is a significantly higher threshold.
Grounds for an implied term: "Officious Bystander" test or the "Business Efficiency" test
Outside statutory implied terms (such as "satisfactory quality" in the sales of goods), the "officious bystander" test and the "business efficiency" test are the only grounds on which to imply a term. They are alternative tests and therefore only one of the tests must be satisfied in order for a term to be implied into a contract.
The officious bystander test is satisfied where a term is implied into the contract because it is obvious. The Courts frequently use the phrase "it goes without saying" that the term should be implied into the contact.
The business efficiency test is applied where an implied term is necessary to make the contract work. Put another way, without the proposed term, the contract would make no commercial sense or would lead to a logical dead-end.
Parties must remember that under no circumstances can a term be implied into a contract where there is a contradictory express term in the contract.
The Court must therefore first determine the meaning of the contract without the implied term and then decide whether a term should be implied. A party cannot therefore look to imply a term into a contract to make their favoured interpretation of that contract look more plausible.
- Subjective views
Parties to a contract do not need to prove that they had an actual intention of including the proposed implied term when the contract was originally entered into. The Court will therefore not review what the parties actually intended when they themselves were negotiating the contract. Evidence of contractual negotiations therefore remains inadmissible.
The proposed implied term will be viewed through the perspective of reasonable people put in the position of the parties at the time when the contract was entered it.
- Reasonableness or fairness
A term will not be implied into a commercial contract simply because a party to the contract thinks that it is fair or that the other parties to the contract would have agreed the term at the time of negotiation if it had been proposed.
Likewise, business efficacy does not mean making the contact more commercially fair. A term will not be implied to redress an imbalance in contractual rights or to relieve a party from a commercially bad deal.
The Court confirmed that the standard of "reasonableness" set out in Belize is not sufficient to imply a term into a contract. By setting out a clearer and more principled approach to considering whether a term should be implied into a commercial contract, the Court has minimised the opportunity for parties to try imply terms into contracts simply because it is reasonable in the circumstances.
The Courts remain hesitant implying terms into commercial contracts that were originally carefully drafted and that cover a large number of contractual issues. This is based on the principle that the Court is generally to be used to interpret contractual terms, not to draft the terms.
- No safety net. If you forget to include something in a contract when it is being drafted, it will now be much more difficult to imply a term to correct that error.
- Recitals. Although evidence of contractual negotiations are inadmissible, the recitals to a contract can be used to show the objective intention of the parties. Recitals should therefore be carefully drafted to set out your objectives and desired outcomes.
- Stand your ground. If you're happy with your contract terms, don't let the other party try to soften your rights by saying they are unreasonable. There is now very limited scope for the Court to consider reasonableness.