Practical Law

Parties are often so concerned about getting the express terms of the contract right that they forget about implied terms.

Following the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd, this blog looks at some of the key statutory and common law terms which may be implied into construction contracts. It concludes with some practical tips to bear in mind when navigating this tricky field.

Key statutory implied terms

The key statutes which may imply terms into construction contracts include:

Construction Act 1996

If a contract is a “construction contract” for the purposes of the Construction Act 1996, its payment and adjudication provisions must comply with the terms of the Act. Failing that, the Scheme for Construction Contracts 1998 will be implied into the contract on a piecemeal basis (in the case of payment) or wholesale (in the case of adjudication).

If the employer fails to pay the amount due by the final date for payment and no effective pay less notice has been served section 112 of the Construction Act 1996 provides that the unpaid party may suspend the works and defines the timeframe for suspension and the costs which it can recover. The Construction Act 1996 does not require the right to suspend to be recorded in the construction contract but if a construction contract does not include Act-compliant suspension provisions, the statutory rules for suspension will apply. Parties cannot contract out of the Construction Act 1996.

Defective Premises Act 1972 (DPA)

For contracts relating to the construction of a new dwelling, the DPA implies a condition that the dwelling, when completed, will be fit for habitation. It also requires professional consultants, contractors and property developers working on a dwelling to work in a professional or workmanlike manner and to use proper materials. Parties cannot exclude or restrict the effect of the DPA.

Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act)

The Late Payment Act gives businesses the statutory right to claim interest on late payments for goods and services from other businesses as well as a fixed sum and reasonable costs of recovering the debt. The current rate is 8% above the prevailing base rate. Parties to commercial contracts can exclude the right to interest under the Late Payment Act, but only if the contract provides an alternative “substantial contractual remedy” for late payments. An express interest clause can therefore displace interest under the Late Payment Act, but if it doesn’t provide a substantial remedy the Late Payment Act will apply as if the contract did not contain any interest clause.

Consumer legislation

Since 1 October 2015, two separate regimes apply. Business to consumer contracts fall under the Consumer Rights Act 2015, while business to business contracts remain governed by the Sale of Goods Act 1979 (SGA 1979), the Supply of Goods and Services Act 1982 (SGSA 1982) and the Unfair Contract Terms Act 1977 (UCTA).  Both regimes imply certain minimum standards into contracts for the sale of goods and the supply of goods and services.

Focusing on business to business contracts for the supply of goods and services, SGSA 1982 may imply the following key terms into commercial construction contracts:

• goods will be of satisfactory quality (section 4(2))
• where the employer makes known any particular purpose for which it is acquiring the goods and relies on the contractor’s skill or judgment, the goods will be reasonably fit for that purpose (section 4(5))
• the contractor will carry out the services with reasonable skill and care (section 13).
• services should be carried out within a reasonable time (if no time is specified) (section 14).
• a reasonable amount will be paid for the services (if no amount is agreed) (section 15).

These terms may be excluded or varied by express agreement or by a course of dealing between the parties. An express term will only be upheld if it is reasonable for the purposes of UCTA. SGSA 1982 designates sections 4(2) and 4(5) as “conditions”, breach of which, depending on severity, may be repudiatory. To exclude these terms, the best practice approach is expressly to use the word “condition” in the exclusion wording, despite more recent authority which held that an exclusion clause that did not expressly use the word “conditions” was nevertheless successful to exclude the conditions implied under SGA 1979 (which are largely the same as those relating to the supply of goods under SGSA 1982).

Key common law implied terms

There are many terms that are capable of being implied into construction contracts by common law. However, the courts will not imply terms merely to make the contract reasonable or to iron out the nonsenses and inconsistencies that frequently appear.

A number of terms first implied by common law have now been codified by legislation. For example:

• contractors must carry out work with all proper skill and care (Young & Marten Ltd v McManus Childs Ltd).
• materials should be reasonably fit for purpose and of satisfactory quality (Young & Marten v McManus Childs)
• an implied obligation of fitness for purpose may arise on a design and build contract where the purchaser is relying on the contractor’s design skills (IBA v EMI Electronics and BICC Construction Ltd) although beware Trebor Bassett Holdings Ltd v ADT Fire and Security Plc.

Other terms which may be implied into construction contracts include:

• A duty to co-operate. The employer must do all that is necessary to bring about completion of the contract but this must be determined by reference to the terms of the contract and not by what may appear to be reasonable.
• A duty to give possession of the site within a reasonable time. This only applies to certain types of contract and does not apply to contracts for refurbishment or maintenance.
• An obligation not to hinder or prevent the contractor from carrying out its obligations in accordance with the terms of the contract and from executing the works in a regular and orderly manner.
• Where a contract confers a discretion, an obligation to exercise this discretion honestly and in good faith, for the purpose for which it was conferred and not arbitrarily, capriciously or irrationally. However, this obligation is limited and it will not prevent a party from exercising an absolute contractual right.

All of these terms may be excluded, either expressly, or by any admissible surrounding circumstances.

Practical tips to consider when negotiating a construction contract

It is always better to record all of the terms of the contract expressly in writing and not to rely on provisions being implied.  After all, you don’t want to end up in the Supreme Court. Key tips include:

• Be aware of terms that might be implied by common law or statute, and whether or not you can exclude them.
• If attempting to exclude implied terms, use very clear language.
• Consider using an entire agreement clause to expressly exclude implied terms.