Developments in contract: implied terms

The principles

Terms not stated in the contract but which are implied into it fall broadly into two categories - (i) those implied by law ie implied by default where parties enter into a particular type of contract; and (ii) those implied by fact ie implied in order to give effect to the intention of the parties.

No term will be implied in a contract unless:

• it does not contradict an express term of the contract
• it is capable of clear expression
• it is reasonable, and
• it is necessary to give business efficacy to the contract, and/or
• it is so obvious that it goes without saying.

Implying terms into a contract is a different process from construing the express terms of a contract, governed by different rules.

Recent developments

The Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor has effectively reinstated the test for implied terms as it was before Lord Hoffman’s judgment in Attorney General of Belize and others v Belize Telecom Ltd.

Lord Hoffman’s comments in Belize were referred to as “a characteristically inspired discussion rather than authoritative guidance”, which have been misinterpreted as having changed the law on implied terms. The Supreme Court in Marks and Spencer cited with approval the authorities prior to Belize and held that a term cannot be implied purely because it is reasonable; it must also be so obvious as to go without saying or necessary for business efficacy.

Giving the leading judgment in Marks and Spencer, Lord Neuberger noted that the process of implication involves a different exercise from that of construction. Speaking of construing the contract as a whole, including the implied terms, as Lord Hoffman had done in Belize, could obscure the fact that the processes are separate and governed by separate rules. This point was recently reiterated by the Court of Appeal in Globe Motors, Inc & Ors v TRW Lucas Varity Electric Steering Ltd & Anor.

It is notable that the Privy Counsel in Hallman Holding Ltd v Webster and another cited Marks and Spencer but made no reference to Belize.

What this means

Now that the Supreme Court has confirmed that Belize did not water down the test for implied terms, courts may be more reluctant to imply terms into a contract going forward. Contracting parties should, therefore, seek to ensure that all terms are expressly set out in the contract, regardless of how obvious they appear to those contracting parties.

For those involved in litigation, the Supreme Court has also clarified that a term can be implied where it is either obvious or necessary for business efficacy. Litigants can feel more comfortable that terms do not need to fulfil both requirements before it is possible to successfully argue for their implication. However, it should be noted that the question of business efficacy remains a value judgment and thus involves a level of uncertainty.