Persuading an English court that it should imply a term into a contract, especially where the parties are sophisticated, well-advised companies, is a difficult task for any lawyer.

In order to succeed it is necessary to satisfy the test which was set out clearly in BP Refinery (Westernport) Proprietary Ltd v Shire of Hastings (Victoria) [1977] UKPC 13, and then refined by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72. A term will only be implied if:

i)   it is necessary to give business efficacy to the contract (business efficacy test); or

ii)  it is so obvious that it goes without saying (officious bystander test); and

iii)  it is capable of clear expression; and

iv)  it does not contradict any express terms of the contract.

Three recent cases illustrate how the courts apply this stringent test in practice.

Sparks v Biden [2017] EWHC 1994 Ch

The two parties signed an Option Agreement in respect of the purchase of a piece of land which provided, inter alia, that overage (an additional payment on top of the original sale price to be paid on the occurrence of a specific event), would be paid by the buyer for each sale of newly constructed dwellings. The Claimant seller, Mr Sparks, was successful in arguing that the Option Agreement contained an implied term which imposed an obligation on the buyer to market and sell the newly developed houses within a reasonable period of time.

The High Court concluded that such a term ought to be implied as a matter of business efficacy as without such a term, the Option Agreement lacked practical or commercial coherence. In particular, the obligations on the buyer (i) to use all reasonable endeavours to obtain planning permission, (ii) to begin construction as soon as practicable, and (iii) to pay overage on the sale of the new houses, led to the conclusion that the aim of the Option Agreement was for the realisation of the full value of the development. The fact that the buyer was obliged to sell the constructed houses was so obvious that it went without saying that such a term should have been included in the agreement. As a result both the business efficacy and the officious bystander tests were satisfied.

Takeda Pharmaceutical Company Limited v Fougera Sweden Holding 2 AB [2017] EWHC 1995 (Ch)

Fougera agreed a Sale and Purchase Agreement (SPA) with Takeda for the sale of a Danish company. There was an issue as to whether the Danish company owed any taxes to the Danish tax authorities. The SPA contained an indemnity in favour of Takeda in respect of any such taxes that became payable, subject to a cap and a time limit for resolving the dispute. Takeda argued that it needed information on the ultimate investors in Fougera’s parent company in order to negotiate a settlement of the tax liability. The High Court refused to imply a duty on Fougera to cooperate with, or at least a duty not to obstruct Takeda’s efforts to provide information to, the tax authorities. The court was not persuaded that such a term was necessary to make the contract workable.

The reason for this decision was, firstly, the lack of an express provision to provide the information and, more importantly, the fact that a duty to cooperate was not necessary to give life to the SPA, therefore failing the business efficacy test. There were other express duties of cooperation within the SPA and therefore the lack of an express one regarding the provision of this specific information could not easily be implied.

The court also refused to imply a duty not to obstruct Takeda’s efforts to procure the information because it was not necessary and, in the absence of a positive obligation, the court felt that it could not imply a negative one. The fact that the contract was negotiated and drafted by well-informed and advised parties was also a factor in the court’s decision.

Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132

The rules on implied terms have also recently been re-examined by the Court of Appeal. In this case, a company had gone into administration and the company’s administrators entered into two Asset Sale Agreements, including the sale of IP rights, one with Kason Kek-Gardner (KKG) and the other with Process Components. In parallel, Process Components agreed to licence some of the acquired IP rights to KKG. This Licence Agreement included a confidentiality obligation. The shares in KKG were subsequently sold and, during the due diligence process, the Licence Agreement was disclosed.

KKG argued that a term had to be implied into the Licence Agreement to the effect that it was allowed to disclose the agreement for reasonable business purposes, and that this would include the disclosure to a potential purchaser of KKG’s shares. The Court of Appeal rejected the proposed implied term on the basis that it was too wide to meet either the business efficacy or the officious bystander tests.  In particular, the court’s justification entailed that “the necessity required by the test is necessity for the business efficacy of the contract, not some wider business purpose of a contracting party”. In this case, the business purpose of the Licence Agreement was to enable KKG to operate the relevant business, not to sell it, and therefore the term was not necessary to that agreement.