Implied terms

Implied Terms

Introduction to Implied Terms

Contracts are often drafted without addressing every conceivable issue, whether due to oversight or the belief that certain elements are self-evident. This can lead to ambiguities, causing disputes over terms that weren't explicitly stated but are nonetheless essential to the agreement's execution. The law has recognized the need to fill these gaps with implied terms, which can be classified into three primary categories:

• Terms Implied in Fact: These are terms that the parties intended to include in their agreement, which may not be explicitly stated but are necessary for the contract to function as they intended.

• Terms Implied in Law: This refers to standard terms defined by law that apply to certain types of contracts, regardless of the parties' explicit intentions.

• Terms Implied by Custom: These terms arise from established practices in particular industries or localities, which are recognized as part of the contractual agreement.

Terms Implied in Fact

Objective Intention of Parties

Courts focus on discerning the objective intention of the parties rather than rewriting their agreement based on perceived fairness. This judicial approach is grounded in various legal precedents, such as the landmark case of Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board, which emphasizes that courts should ascertain the intent derived from the contract's language and context.

Tests for Implied Terms

To determine the necessity of implied terms, two main tests are traditionally employed:

• Business Efficacy Test: A term must be indispensable to achieve the business efficacy intended by the parties. This principle was exemplified in the case of The Moorcock (1889), where the court ruled that a term requiring care during a low tide was implicit for the safe navigation of the vessel.

• Oicious Bystander Test: As illustrated in Shirlaw v Southern Foundries Ltd (1939), if a hypothetical observer at negotiations would find a term self-evident, it should be implied into the contract. This highlights a standard expectation in contractual relationships, reflecting what reasonable parties would assume.

Judicial Examples

• The Moorcock (1889): In this case, the defendants had a duty not to damage a vessel left at their wharf during low tide. The court implied a term mandating that they take due care, underscoring the importance of upholding commercial obligations and protecting parties involved in business transactions.

• Shirlaw v Southern Foundries (1939): The removal of Mr. Shirlaw without adhering to the protective articles from his original contract prompted the court to endorse a breach of an implied term, affirming judicial support for implied terms in safeguarding parties' intentions to maintain their rights and expectations.

• Lord Hoffmann’s Perspective on Implied Terms: In Attorney General of Belize v Belize Telecom Ltd (2009), Lord Hoffmann distinguished between interpreting and implying terms. He asserted that implied terms serve to elucidate and refine contractual meanings based on what the parties reasonably expected, highlighting the interpretive role of courts in upholding and enforcing contractual agreements.

The Necessity of Implied Terms

Interpretation of Contracts

Judicial discretion in implying terms is exercised with caution, necessitating clear justification for their inclusion. A term should not merely be viewed as equitable but must serve an implicit understanding critical for the contract's functionality. In the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (2015), the Supreme Court exhibited a preference for express terms, implying terms only when they are vital for business efficacy or unmistakably evident to the parties involved.

Further Judicial Clarifications

• Wells v Devani (2019): This case involved questions about commission payments arising from contractual obligations. The Supreme Court favored a refined interpretation of implied terms, permitting inclusion under narrow conditions where clarity on contractual binding was essential for fairness and functionality.

• Liverpool City Council v Irwin (1976): In this instance, the court recognized the necessity for landlords to maintain common areas within multi-tenancy arrangements, thereby implying necessary obligations even in the absence of specific wording in the contract. This further establishes the importance of implied terms in protecting the rights and safety of tenants.

Terms Implied in Law

These are terms that the law imposes due to the nature of the contractual relationship involved, irrespective of the parties' intentions, such as in employment contracts or leases. Common examples include obligations such as the duty to maintain a safe work environment, which is enforced to protect employees' welfare and promote safety standards, and a landlord's obligation to maintain the habitability of rental properties, ensuring adequate living conditions for tenants.

Contracts and Customary Implications

Custom as a Basis for Implied Terms

Implied terms may also derive from established practices within a particular industry, profession, or locality. Judicial precedent necessitates that such customs must be well-recognized and reasonable to be applied:

• Notable Case: Hutton v Warren (1836): This case found that a tenant was entitled to allowances grounded in established local customs, giving rise to the notion that customary practices can serve as a foundation for implied contractual terms.

Establishing Customary Terms

To successfully imply terms based on custom, several criteria must be met:

• Clear Establishment: The practice must be clearly established and regularly practiced within the industry, signifying its recognition among professionals and stakeholders.

• Notoriety: The practice should be commonly known within the relevant market to ensure that all parties involved are aware of its implications and acceptability.

• Reasonableness: The practice must be reasonable to be deemed acceptable for inclusion as an implied term in a contract, balancing the interests and expectations of all parties involved.