Written by David Marchese
The aim of a contract is to set out what has been agreed between the parties, and so to avoid future disagreement. Where a contract is written down, one looks primarily at the written terms. However, in some cases it is not clear from the written terms what should happen in particular circumstances. If a dispute arises, the courts may decide that a term should be read into a contract even though it is not written down in the agreement itelf; this is an implied term (as opposed to an express term). There are some types of contract which will always be found to contain certain terms as a result of laws passed by Parliament whether the terms are expressly set out or not; this is the case with certain terms in some consumer and employment contracts. More generally though, where statute does not prescribe that a term should be included in a contract automatically, the courts may only imply terms into a contract in certain circumstances, taking into account the express terms of the contract (an implied term in such circumstances cannot contradict an express term), commercial common sense and the facts known to both parties at the time when the contract was made.
A recent case, Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another (Marks & Spencer), has clarified the law in this area. The case turned on whether a tenant exercising a break clause in a lease could recover the apportioned rent it had paid in advance, but the decision has general application.
What had previously been considered the leading case in this area, Attorney General of Belize and others v Belize Telecom and another (Belize), is no longer to be considered as such. Belize was a Privy Council decision; these are not technically binding in England and Wales but are highly persuasive. In the leading judgment in Marks & Spencer, Lord Neuberger held that Belize should no longer be considered as a leading case, but should be treated instead as “characteristically inspired discussion rather than authoritative guidance on the law of implied terms.”
The law on implied terms is now much closer to where it was before Belize. In Belize, Lord Hoffman had created uncertainty as to whether the two major tests for implied terms are still applicable; Marks and Spencer makes it clear that they do. The tests are:
The “business efficacy test” as set out in Reigate v Union Manufacturing Co (“a term can only be implied if it is necessary in the business sense to give efficacy to the contract” ie, the contract would not work properly without a term being implied into it); and
The “officious bystander test” as laid out in Shirlaw v Southern Foundries (a term can only be implied “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!’” ie, the term should obviously be included).
A number of articles and comments by judges (noted in Lord Neuberger’s judgment) had suggested that, following Belize, the business efficacy and officious bystander tests were not central to the implication of terms; it was thought instead that “reasonableness” alone might be a sufficient ground for implying a term. Following Marks & Spencer it is clear that this is not the case.
The business efficacy and officious bystander tests are not both necessary in every case: only one of them needs to be satisfied in order for a term to be capable of being implied. Lord Neuberger notes that in practice if one test is made out, the other is likely to be as well, but only one absolutely has to be satisfied in order for a term to be implied.
Both tests have to be applied correctly. The “business efficacy” test should not be thought of as requiring absolute necessity. It is more helpful to consider the test as providing that a term may be implied “if, without the term, the contract would lack commercial or practical coherence.” Similarly, Lord Neuberger notes that, for the purposes of the “officious bystander” test, it is important to ensure that the officious bystander asks the right question, as one can get a very different result depending on the question asked. A text that Lord Neuberger makes reference to in the judgment suggests that practitioners should be wary of having the bystander ask a question that is too geared towards receiving one particular answer.
To imply a term, a court does not have to show or even speculate about the intention of the parties who actually entered the contract; what matters for these purposes is what hypothetical reasonable people placed in the position of the parties at the time when the contract was entered into would have done. The court should not imply a term merely because it appears to have been fair and reasonable to do so or because the parties involved would probably have agreed it at the time.
One probable consequence of this judgment is that the courts will be less likely to imply terms than they were when Belize was still the leading case on this issue, since it has been clarified that the relevant test is a higher one than was thought to have been the case as a result of the judgment in Belize. It may also mean that parties who might be tempted to take court action in hope of having a favourable term implied into their contracts may now think twice before doing so. Lastly, it acts as a reminder that it is important to think carefully about the terms of a contract in the first place, since it is difficult to persuade a court that something should have been included beyond what is expressly set out.
Thank you to Henry Evans, trainee solicitor in our Corporate Department, for his help in preparing this article.
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I graduated from Oxford University before qualifying as a solicitor at Herbert Smith. I went on to work at Richards Butler and then Davenport Lyons, before joining Gordon Dadds in 2014. I have extensive experience advising on the law of intellectual property, information technology and commercial contracts. I am the author of Business Licensing Agreements (Longman, 1995), the section on Supply of Goods and Services in Practical Commercial Precedents (Sweet & Maxwell) and several published articles including Joint Ownership of Intellectual Property (EIPR, 1999) and Warranties and Covenants in IP Licences (OUP, 2009).