Test for implying a term in to a contract is stringent and has not been diluted

For more detail on the property law aspects of this judgment please contact Imogen Moss or Jane Fox­-Edwards. This article focuses on the general contractual principles.

Lord Neuberger gave the lead judgment. Very much in keeping with his judgments in Arnold v Britton [2015] UKSC 36 and Cavendish v Makdessi; ParkingEye v Beavis [2015] UKSC 67, he emphasised the importance of respecting the bargain struck by parties in detailed commercial contracts.

Lord Neuberger thought that the principles in the classic authorities as to the test for implying a term into a contract represent a clear and consistent approach which it would be dangerous to reformulate. One way of putting the test was as expressed by Lord Simon in the Privy Council case of BP Refinery (1977) 52 ALJR 20: "[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."

To these classic statements Lord Neuberger added the following observations:

• There is no need to show actual intention. Rather, one is concerned with the notional intention of notional reasonable people in the position of the parties at the time at which they were contracting.
• 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 implying a term.
• It is questionable whether reasonableness and equitableness (Lord Simon's first requirement), 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.
• Business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisfied, although in practice it would be a rare case where only one of those two requirements would be satisfied.
• 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."
• Necessity for business efficacy involves a value judgment. It was 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 this is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence. 

Lord Neuberger, Lord Carnwath and Lord Clarke all set out how to approach the dicta of Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988: "[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?" All of the Supreme Court Justices agreed that nothing in what Lord Hoffmann had said should be taken as diluting the test of necessity: "[t]he legal test for the implication of … a term is … strict necessity", which [was] described as a "stringent test". Lord Neuberger added that, in his view, the exercise of implying a term in to a contract is not one and the same as the exercise of interpreting a contract, not least because the express terms of a contract must be interpreted before one can consider any question of implication.

Lord Carnwarth was not as critical as Lord Neuberger, if that is the word, of Lord Hoffmann's dicta, describing it as a valuable and illuminating synthesis of the factors which should guide the court. Lord Clarke found a way to reconcile what Lord Hoffmann had said on the one hand with the agreement by all the Supreme Court Justices in this case that the test had not been watered down on the other hand.

COMMENT

This judgment re-emphasises the stringent nature of the legal test which must be met before a term will be implied into a contract. Fairness or reasonableness alone will not be sufficient, even if, as claimed unsuccessfully here, the result can be harsh. Lawyers who have previously been confused by Lord Hoffmann's exposition of the test in the Belize case will now be able to refer to Lord Neuberger's clarification. This case will undoubtedly be the starting point, in place of Belize, when thinking about whether a term may be implied. This gives greater power to those who pay close attention to drafting their contracts since the message from the Supreme Court in a number of cases this year points to upholding party autonomy and away from interfering with what the parties have said.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.