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On 2 December 2015, the Supreme Court clarified the law relating to implied terms in contracts, in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72.

Court of Appeal

The case related to a dispute between M&S and its landlord over whether M&S could reclaim rent it had paid in advance relating to a period after its lease had come to an end. There was no express provision entitling M&S to do this, so the court considered whether a term should be implied. The High Court held that such a term should be implied. The Court of Appeal overturned that decision and the Supreme Court unanimously dismissed the appeal against the Court of Appeal’s decision.

Much of the law relating to implied terms was established in 19th and early 20th century cases, which broadly established the conditions to be satisfied for a term to be implied into a contract. These were summarised in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings [1977] 52 ALJR 20 as being:

1. It must be reasonable and equitable;
2. It must be necessary to give business efficacy to the contract;
3. It must be so obvious that ‘it goes without saying’;
4. It must be capable of clear expression; and
5. It must not contradict any express term of the contract.

There was some controversy and debate over whether the law in this area was changed by the 2009 Privy Council case of Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988. In this case, Lord Hoffman suggested that implying terms was part of the construction of the contract. In summary, he said that the only question to answer regarding implied terms is whether that is what the contract, read as a whole against the relevant background, would reasonably be understood to mean.

Implied terms

In the M&S case, Lord Neuberger, who gave the leading judgment, said that the traditional conditions (listed above) represent a clear, consistent and principled approach. However, he made the following six additional points:

1. The implication of a term is not critically dependent on proof of an actual intention of the parties; if approaching the question by reference to what the parties would have agreed, what matters is not the hypothetical answer of the actual parties but that of notional reasonable people in the position of the parties at the time they were contracting;
2. It is not sufficient to imply a term into a contract just because it appears fair or that the parties would have agreed it had it been suggested (it is necessary but not sufficient alone);
3. Reasonableness/equitability will usually be satisfied if all other requirements are satisfied;
4. Crucially, either the ‘business efficacy’ test or the ‘obviousness’ test need be satisfied, not both (although he accepted that in practice it is unlikely one would be satisfied without the other);
5. If approaching the issue by reference to the officious bystander (as the courts had previously suggested for the ‘obviousness’ test), it is “vital to formulate the question to be posed by [him or her] with the utmost care”; and
6. The test for business efficacy is not one of “absolute necessity”; rather it may be more helpful to say that without the term the contract would lack commercial or practical coherence.

There was some disagreement between the Law Lords as to whether Lord Hoffman’s judgment in the Belize case was authoritative guidance on implied terms. Lord Neuberger was of the view that it had not changed the law (although he did say that his test would be “quite acceptable”, provided that (i) the reasonable reader is treated as reading the contract at the time it was made; and (ii) the reasonable reader would consider the term to be so obvious as to go without saying or to be necessary for business efficacy), whereas Lord Carnwath did not consider there was sufficient reason to question its authority. In any event, it was agreed that Lord Hoffman’s test is not to be read as involving any relaxation/watering down of the traditional, highly restrictive approach to the implication of terms set out above.

Effect of judgment on implied terms

The Supreme Court has helpfully clarified the law in this area, largely endorsing the courts’ traditional and restrictive approach to implied terms.

There is still scope for parties to a contract to argue that terms should be implied, for example, where the express terms appear to give an unfair or uncommercial outcome. When in dispute, it is always worth considering whether the written terms adequately reflect what was agreed or if there is scope to introduce more creative arguments.

However, it is now clear that the party seeking the implied term must be able to persuade the court that to do so is either necessary to give business efficacy to the contract or the term must in any event be so obvious that it goes without saying. In many cases this will not be an easy task; the decision certainly buttresses arguments that implied terms should be resisted and it reinforces the court’s general reluctance to interfere with contract terms.

For more information on any of the issues raised in this article contact the Commercial Litigation team.