In the case of Mediterranean Salvage & Towage Limited v Seamar Trading Inc, the Court of Appeal has reformulated the test to be used by the courts in deciding whether a term should be implied into a commercial agreement.
Over time, the courts have created a number of tests for determining whether a term should be implied into a contract. These include the officious bystander test, the necessity test and the business efficacy test. There has been some confusion over whether these tests are different with different outcomes or the same and leading to the same result.
In the recent case of Attorney General of Belize v Belize Telecom Limited (reported in the April edition of this bulletin), Lord Hoffman in the Privy Council condensed these various tests into one namely, ‘would the implied provision spell out in express words what the contract would be reasonably understood to mean?’ He said that there was no requirement that the implied term be fair, reasonable or obvious.
In the Mediterranean Salvage case the Court of Appeal accepted this new test but expanded it by adding a further question, namely ‘is implication of the term necessary to make the contract work?’
We now have greater certainty about the test that the courts will apply in deciding whether to imply a term into a contract, which is will the implied provision spell out in express words what the contract would be reasonably understood to mean and is implication of the term necessary to make the contract work? However, how this test will be applied in practise will vary from court to court and so we do not have greater certainty of likely outcome. In this sense, we are no further forward. It is still the case that it is difficult to persuade a court to imply a term into a commercial agreement, particularly where the parties to the agreement are commercial organisations that contract regularly and have received legal advice. A commercial agreement should always be drafted carefully and comprehensively to avoid the question of whether a term should be implied ever arising.