A recent case highlights the courts’ continued reluctance to imply terms into effective and coherent contracts and reaffirms the position established in Marks & Spencer PLC v BNP Paribas that an implied term must not contradict an express term as a ‘cardinal rule’.
The UK Court of Appeal has reaffirmed the criteria to be applied in determining whether a term should be implied into a contract:
- In determining whether a term should be implied, it is necessary to first interpret the express terms;
- An implied term must not contradict any express term of the contract as “a cardinal rule”; and
- Where the contract is lengthy and carefully drafted, the courts will be very reluctant to imply a further term even if it does not actually conflict with the express terms.
In February 2013, Irish Bank Resolution Corporation Limited (“IBRC”) was placed into special liquidation and KPMG, acting as special liquidators, began marketing its loan book.
Included in IBRC’s book was a loan for £195 million to Camden Market Holdings Corporation (“Camden”) for the redevelopment of Camden Market, London.
According to the Camden loan agreement, IBRC could assign its rights to another lender, with the consent of Camden, and was permitted to disclose any information which it considered appropriate in order to market the loan. Camden’s consent was not required in relation to IBRC’s right to disclose information.
Camden was marketing the properties related to the Camden loan at the same time that IBRC was marketing the Camden loan.
Camden argued that the marketing by IBRC of the Camden loan as part of a portfolio which contained distressed debt suggested that the Camden loan was also distressed. It argued that this hindered its own efforts to sell the underlying property as some potential purchasers implied that they would acquire the loan from IBRC instead of acquiring the underlying properties from Camden in order to indirectly acquire the properties for less than their market value.
Camden commenced proceedings against IBRC, claiming that the loan contained an implied term that IBRC would not do anything which would hinder Camden’s ability to market the properties. IBRC applied to the High Court to have the claim struck out on the grounds that it had no real prospect of success. The Judge at first instance decided that Camden’s argument needed to be determined at trial and so IBRC’s application was dismissed.
The Court of Appeal decision
IBRC appealed on a number of grounds, arguing that the implied term relied on by Camden was contradictory to the express terms of the loan. IBRC argued that considering the express terms should have been the default starting position when approaching the question of whether the implied term should be incorporated.
The Court of Appeal overturned the High Court decision holding that when a court is implying terms, it is required to consider the effect the implied term would have on the express terms of the loan. It concluded that, in this case, the alleged implied term was substantively inconsistent with the express terms of the loan.
Implying an obligation on IBRC not to do anything to hinder Camden’s marketing of the underlying properties would run contrary to the express and unfettered right of IBRC to market the loan by disclosing information to interested parties. The Court of Appeal, therefore, allowed IBRC’s appeal and entered summary judgment in its favour
The case highlights the courts’ continued reluctance to imply terms into effective and coherent contracts and reaffirms the position established in Marks & Spencer PLC v BNP Paribas in which a majority of the Supreme Court restated the principles governing the implication of contractual terms.
The judgement makes clear that this is the case even where the implied term does not conflict with the express terms of the contract.