In the recent High Court decision of Jackson v Dear & Anor
[2012] EWHC 2060 (Ch), the judge considered the extent to which traditional tests for implying terms into contracts have been superseded by Lord Hoffmann’s decision in the Privy
Council case of Attorney General of Belize & Others v Belize
Telecom & others [2009] UKPC 11.
Historically, the English courts have applied a variety of tests to the question of whether a term can be implied into a contract.
These included the “business efficacy” test and, perhaps most famously, the statement by Mackinnon LJ in Shirlaw v
Southern Foundries (1926) Ltd [1939] 2 KB 206, that a term can be implied into a contract where it 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 their agreement, they would testily suppress him with a common ‘Oh, of course!’ ”
However, the judge rejected the defendant’s argument and in his analysis provided a useful summary of the relevant principles for the implication of terms:
Š Š “ The implication of terms is no less a part of the process of ascertaining the meaning of an agreement than interpretation of express terms. Implication addresses events for which the express language of the agreement makes no provision.
Š Š In such a case the usual starting point is that the absence of an express term means that nothing has been agreed to happen in relation to that event. But implied terms may be necessary to spell out what the agreement means, where the only meaning consistent with the other provisions of the document, read against the relevant background, is that something is to happen.
However, in the Belize case, Lord Hoffmann advocated a more general approach to the implication of terms. He outlined the various different approaches taken by the courts in earlier cases and said that they were “ best regarded, not as 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 means… ”
Š Š Although necessity continues (save perhaps in relation to terms implied by law) to be a condition for the implication of terms, necessity to give business efficacy is not the only relevant type of necessity. The express terms of an agreement may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. In such a case an implied term is necessary to spell out what the contract actually means.
” According to Lord Hoffmann’s formulation, the implication of a term is “ an exercise in the construction of the instrument.
” He went on to say 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 a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean .”
The dispute in the Jackson case concerned a contractual agreement into which the claimant claimed there should be construed an implied term. Against the implication of the term, the defendants argued that the Court of Appeal had, in subsequent decisions, rowed back from the Belize case or declined fully to accept it into English law.
It is therefore now clear that, as a result of Lord Hoffmann’s judgment in the Belize case, the processes of contractual interpretation and implication of terms have become
“assimilated”. The question in both cases is, in broad terms: what would the contract, read against the relevant background, reasonably be understood to mean? It remains the case that the proposed implied term must be “necessary” but, it would seem that this is a broader concept than the old “business efficacy” test and an implied term will be “necessary” if it is required to spell out what the contract actually means. It is important to appreciate that the English courts will not imply a term simply because it would be fair or reasonable to do so.
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GEOFF STEWARD
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OCTOBER 2012
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This note is intended to provide general information about some recent and anticipated developments which may be of interest.
It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
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