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Supreme Court clarifies law on implied terms

In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd, the Supreme Court has clarified the law on implied terms. In doing so, it appears to have consigned Lord Hoffmann’s decision in Attorney General of Belize v Belize Telecom Ltd to history.

Implied terms: the traditional understanding

Prior to 2009, it was generally recognised that the courts would imply a term into a contract only where certain discrete legal tests were satisfied, either where:

“…it is necessary in the business sense to give efficacy to the contract.”

(Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd.)

Or where:

“…that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common, ‘oh, of course’.”

(Shirlaw v Southern Foundries.)

Building upon such statements, in the 1970s, the Privy Council (in BP Refinery v Hastings) drew together the various “traditional” principles in a short summary:

“[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

The impact of Belize

The traditional understanding of the doctrine of implication was rocked by the Privy Council’s unanimous decision in Attorney General of Belize v Belize Telecom Ltd, where Lord Hoffmann held that:

“…in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such provision would spell out in express words what the instrument read against the relevant background, would reason- ably be understood to mean…”

That the traditional case-law on the implication of terms:

“…is best regarded not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually meant, or in which they have explained why they did not think that it did so…”

And that the implication of terms was part of the process of construing a contract, such that:

“…[t]here is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

Since 2009, the courts have tended to treat Belize as the leading modern authority on the implication of terms into a contract. However, ever since that judgment was handed down, there has been debate among academics and practitioners as to:

  • Whether the process of implication could or should properly be assimilated with that of contractual interpretation.
  • Whether (and, if so, to what extent) Belize has in fact altered or diluted the traditional tests.

Marks & Spencer v BNP Paribas

On 2 December 2015, the Supreme Court handed down judgment in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd. From that decision, it seems that the approach to implication heralded by Lord Hoffmann in Belize (and the concomitant practical confusion arising from that approach) has been consigned to history.

In M&S v BNP Paribas, the Supreme Court was concerned with a tenant’s break clause in a lease. It was common ground that the express terms of the lease did not compel the respondent (BNP Paribasto pay the appellant (M&S) a specific sum of money upon the appellant’s exercise of the relevant break clause. Nonetheless, the appellant contended that a term to that effect ought to be implied into the lease in question.

Lord Neuberger’s “explanatory gloss”

Lord Neuberger gave the first judgment, with which Lord Sumption and Lord Hodge agreed (thus making Lord Neuberger’s judgment the majority view of the court).

Lord Neuberger began by referring to the “traditional” authorities cited above (among one or two others), describing them as “a clear, consistent and principled approach” to the implication of terms. Noting the danger associated with seeking to reformulate those principles, Lord Neuberger merely added six “comments” by way of explanatory gloss to Lord Simon’s summary in BP Refinery v Hastings:

“First, in [Equitable Life v Hyman] Lord Steyn rightly observed that the implication of a term was ‘not critically dependent on proof of an actual intention of the parties’ when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting.

Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term.

However, and thirdly, it is questionable whether Lord Simon’s first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.

Fourthly, as Lord Hoffmann I think suggested in [Belize], although Lord Simon’s requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied.

Fifthly, if one approaches the issue by reference to the officious bystander, it is ‘vital to formulate the question to be posed by [him] with the utmost care’, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), para 6.09.

Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of ‘absolute necessity’, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.”

Lord Neuberger then went on to give answers to the questions that have vexed academics and practitioners alike since the Belize judgment was handed down. His Lordship made a number of observations on Lord Hoffmann’s judgment in Belize:

“It is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied, because it is apparent that Belize Telecom has been interpreted by both academic lawyers and judges as having changed the law… The Singapore Court of Appeal were in my view right to hold that the law governing the circumstances in which a term will be implied into a contract remains unchanged following Belize Telecom.”

Moreover, while the construction of a contract and the implication of terms requires focus upon similar factors, “construing the words used and implying additional words are different processes governed by different rules”. The fact that similar factors are relevant to both interpretation and implication:

“…does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation.”

Lord Neuberger also observed that:

“…in some cases it could conceivably be appropriate to reconsider the interpretation of the express terms of a contract once one has decided whether to imply a term, but, even if that is right, it does not alter the fact that the express terms of a contract must be interpreted before one can consider any question of implication.”

As such, Lord Neuberger held that Lord Hoffmann’s comments in Belize should “henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

Conclusion

From the foregoing, several matters are clear:

  • As far as the Supreme Court is concerned, the law took a wrong step when it treated Lord Hoffmann’s comments in Belize as altering the law on implication.
  • Those comments in Belize (which should be disregarded for all practical purposes), have not diluted the tests traditionally used to determine whether or not to imply a term into a contract.
  • The interpretation of a contract and the implication of terms into contracts remain different concepts, to which different rules apply.
  • Interpretation invariably comes before implication (except in the rare case where the court may have to re-visit the process of interpretation following implication).
  • In the future, the courts should consider Lord Neuberger’s explanatory gloss to the traditional tests, as set out above, when deciding whether to imply a term into a contract.
Keating Chambers Matthew Finn

One thought on “Supreme Court clarifies law on implied terms

  1. It is a mistake to speak of the Supreme Court’s needle-point ballet in M&S v Paribas as “clarifying” the law on implication of terms; on the contrary, it has shrouded it in an additional layer of fog.

    One would need to be a lawyer (encumbered with all the accumulated baggage of landlord & tenant precedent) to have decided that case as the Supreme Court did. No-one but a lawyer could possibly have imagined that a rent of “£x per year and proportionately for any part of a year” did not mean exactly what it said.

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