Contract Law: Implied Terms & Construction of Terms
Implied Terms, Construction of Terms
Context
Contracts consist of express and implied terms.
Terms are implied.
Once all terms are identified, their meaning is determined.
Learning Outcomes (Module 10a)
Introduction and reluctance of the court.
Terms implied by prior dealings.
Terms implied by trade usage or custom.
Terms implied in law.
Terms implied in fact.
Conclusions.
Readings and Key Cases (10a and 10b)
Readings
Chapter 10: Implied Terms
None: Terms Implied by Prior Dealings
10.200 to 10.230: Trade Usage or Custom
10.150 to 10-190: Terms Implied in Law
10.30 to 10.50: Consumer Guarantees (lightly)
10.60 to 10.140: Terms Implied in Fact
Chapter 11: Construction of Terms
11.10 to 11.230
Key Cases
Con-Stan Industries v Norwich Insurance
BP Refinery v Shire of Hastings
Codelfa Construction v SRA NSW
Byrne v Australian Airlines
Pacific Carriers v BNP Paribus
Royal Botanic Gardens v South Sydney SC
Electricity Generation Corporation v Woodside
Overview (Recap from Module 8)
Terms can come from many sources and can be mixed.
Written Contract (‘In Writing’)
Documents other than contracts (‘Evidenced in Writing’)
Verbal Statements
Implied
By Law
By Fact
Collateral Contract
Overview (Recap from Module 8)
Module 8:
Identifying & classifying verbal & written statements
Pre-Contractual Statements / verbal statements (Express Terms)
Parol Evidence Rule
Categories of Terms (Classification)
Module 10:
Implied Terms
Construction of Terms
Module 11:
Excluding, Limiting, Exempting Terms
Overview Problem-Solving Steps
What are the express terms?
What are the implied terms?
How important is a term (Condition / Warranty / Innominate)?
What is the remedy if it is breached?
Advanced Contract
What are implied terms?
NOT directly written or spoken, ‘Goes without saying’
Implied by FACT
Common sense, context
Conduct of the parties
Prior dealings
The party claiming they apply must prove it
Implied by LAW
Law (sometimes can be excluded)
Trade usage or custom
The party claiming they do NOT apply must prove it
Intro & Reluctance
Implied Terms
Definition
Reluctance of the courts
Role of the court
Freedom of contract
Meeting of the minds
Business confidence?
Categories (overlapping)
Terms Implied by Prior Dealings
Question of fact
Hillas & Co v Arcos Ltd (1932) 147 LT 503 [11.180]
Hollier v Rambler Motors [1972] 1 All ER 399 [9.410]
Hillas & Co v Arcos Ltd (1932) 147 LT 503
The parties entered into a written contract for the supply by Arcos Ltd of “22,000 standards of softwood goods of fair specification over the season 1930”. (A standard was a measure of timber, 165 cubic feet.)
The contract also contained an option in favour of Hillas & Co to purchase a further 100,000 standards in 1931.
The option, however, made no reference to items such as the type of timber, its size or how the timber was to be delivered.
There were no problems with the initial purchase of timber.
However, in 1931 when Hillas sought to exercise its option, Arcos argued that the option was not enforceable because it did not contain any particulars of the agreement: Arcos said it was just meant to be a basis for future agreement.
The House of Lords held that the option was enforceable because it was sufficiently certain. This was because the terms left undecided could be implied from the previous dealings between the parties: the court looked to the dealings between the parties in the previous year. The court also looked at the usual practice in the timber industry that equivalent timber would be supplied. Consequently, Arcos would have to supply the timber or they would be in default.
Hollier v Rambler Motors [1972] 1 All ER 399
This case illustrates the fact that it can sometimes be difficult to establish a course of dealings.
Hollier left his car with Rambler Motors to be repaired.
He had taken his car to Rambler Motors for repairs 3 or 4 times over the last 5 years.
On each of these previous occasions he signed a form which provided that Rambler Motors was “not responsible for damage caused by fire to the customers’ cars on the premises”.
But this time Hollier did not sign a form. An on this occasion, when he left his car for repairs, it was damaged by fire!
Hollier sued Rambler Motors and Rambler Motors tried to rely on the exclusion clause to escape liability.
Even though Hollier had not signed a form this time, Rambler argued that the exclusion clause should be implied into the contract on the basis of a prior course of dealings.
The court held that 3 or 4 occasions over a 5-year period did not constitute a course of dealings from which a term would be implied. (Perhaps, the court’s decision may have to do with the fact that courts have a general hostility to exclusion clauses and in this case the outcome was perhaps to be expected).
Terms Implied by Trade Usage or Custom
Hutton v Warren (1836) 1 M & W 466 at 475
“It has long been settled that in commercial transactions extrinsic evidence of custom and usage is admissible to annex incidents to written contracts in matters with respect to which they are silent … this has been done upon the principle or presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages.” (Baron Parke)
Must be clearly established
“It must be so notorious that everyone in the trade enters into a contract with that usage as an implied term” (Lord Jessel MR in Nelson v Dahl (1879) 12 Ch D 568 at 575)
10.200 to 10.230
Con-Stan industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226
Con-Stan Industries engaged Bedford Insurances Pty Ltd as its insurance broker.
Bedford arranged insurance for Con-Stan with an insurance company called Norwich Winterthur Insurance
Con-Stan paid the money for the insurance premiums to Bedford, but Bedford failed to forward them to NW. Bedford went into liquidation and Norwich sued Con-Stan for the premiums.
Con-Stan argued an implied term in the insurance contract on the basis of custom or trade usage in the insurance industry, that an insurer could only seek payment from the broker.
HC held that Con-Stan was not able to establish that the practice was so relied upon in the industry that everyone making a contract in that situation could reasonably imply it.
The court said that (at 238):
“In order to establish a custom to the effect that a broker is alone liable to an insurer for payment of a premium on a policy of insurance, it is not sufficient to show that in the ordinary course of events the premium is paid to the insurer by the broker ,… nor…that where a broker has failed to pay a premium the insurer makes its first demand from the broker…It is necessary to establish a clear course of conduct under which insurers do not look to the assured for payment of the premium. This may be established by proving either an absence of claims by insurers against the assured, or the existence of claims directed exclusively to brokers as a practice rarely if ever departed from…we do not think this requirement is satisfied. The evidence…revealed a number of instances of insurers seeking a second payment from the assured notwithstanding that they had already paid their brokers.”
Terms Implied by Trade Usage or Custom
Con-Stan industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226 [10.210]
Question of fact not law
Well known and agreed (not necessarily universally accepted)
Cannot contradict the express terms
Summers v Commonwealth (1918) 25 CLR 144
Can apply if particular party is not aware but should be
Cannot offend any statutory provisions
10.200 to 10.230
Terms Implied in Law
General law e.g. common law
Specific types of contracts
Employer/employee – good faith, fidelity, duty to provide work
Contracts – good faith, best endeavours
Shipping – seaworthiness
Property – bailment – keep, care, return
Banking / legal etc – confidentiality
Specific circumstances
E.g. if time is not specified it is implied as ‘reasonable time’, mitigation
Statute eg Consumer Law
10.150 to 10.190
Terms Implied in Law
Statute – example – Competition and Consumer Act 2010 (Cth)
Consumers, reasonable lifespan, cannot exclude, remedies
Guarantees
Safe goods
Merchantable quality
Fitness for purpose
Correspond with description
Services with due care and skill
10.30 to 10.50 (lightly)
Terms implied in Fact (by the court)
Parties cannot expressly include ALL reasonable terms
Terms can be implied to give efficacy, to give effect to the parties’ intentions or to complete the contract (fill in the blanks)
Care must be taken because we are implying…
Terms are not implied by fact if the contract expressly deals with a matter
“Because the importation of the term rests on the presumed intention of the parties, it must yield to the actual intention embodied in express terms of the contract whether the contract be written or oral.”
Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 440 per McHugh and Gummow JJ
10.60 to 10.140
Terms Implied in Fact
Courts can imply a term into the contract because on the facts the contract would not work without it)
Intention
‘Officious bystander’ test
McKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 (at 227:
“Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, 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!’
The Moorcock (1889) 14 PD 64 [10.90]
10.60 to 10.140
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Full Court of the Supreme Court of Victoria case that was appealed to the Privy Council.
Shire entered into a contract with a company who was the occupier of a refinery site. The agreement was for a term of 40 years, after which time it would cease to have effect. The agreement resulted in the company having to pay substantially less rates to the Shire. The company went into liquidation and the parent company took over.
There was a dispute as to whether the preferential rating agreement still applied. The Shire argued that the agreement did not apply to the parent company so it could charge more for the rates ( as opposed to if the preferential rating agreement applied). There was no provision in the agreement for what would happen in these circumstances.
FC of SC Vic - the agreement would only apply to the original company, not the parent.
Privy Council reversed the decision - held that there was an implied term that the assignee of the original company’s rights would continue to receive the preferential rate.
Lord Simon of Glaisdale said (at 379:
“Such a term would be both reasonable and equitable. It does not contradict any express term of a contract, but adds to it; and gives business efficacy to the contract…it was something so obvious that it went without saying and if an officious bystander had asked whether that was the common intention of the parties the answer would have been ‘of course’.”
The BP Refinery case is important because the court discusses five conditions which have to be satisfied before a court will imply a term into a contract on the basis of business efficacy.
Terms Implied in Fact
Onus on party claiming
Becomes more difficult if a written contract is in place (parol evidence rule) (i.e. more likely for verbal contracts)
Must be so obvious that it goes without saying (Byrne)
The BP Test
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 [10.70]
Reasonable and equitable;
Gives business efficacy (no term will be implied if the contract works without it;
Must be obvious so that is ‘goes without saying’;
Must be capable of clear expression; and
Must not contradict any express terms of the contract
10.60 to 10.140
Apply in tests the BP Case:
There were no express terms dealing with the rates. Favors BP.
This is not necessary for the purchase. Not material Favors Shire
Is it obvious that the discount stays with the site for 40 years? Perhaps. Favors BP
Equitable? Shire is no worse off if rates discounted. BP is worse & Shire better otherwise. Favors BP
Efficacy?
Obvious?
Contradict?
Expression? Is capable of clear expression. Merely a rates discount. Favors BP
10.60 to 10.140
Terms Implied in Fact
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 41 ALR 367; 149 CLR 337 [10.140]
Byrne v Australian Airlines Ltd (1995) 185 CLR 410 [10.160]
Employment issue, terminated for stealing, argued that there was an implied term protecting against unfair dismissal. Held not implied. NB was that the 5 tests in BP could be reduced to a general test in ‘informal’ contracts i.e. NOT standard form or detailed written contracts
For ‘informal’ contracts
Is the implication of a term necessary for the “reasonable or effective operation of a contract of that nature in the circumstances of the case.”? (at 422)
10.60 to 10.140
Module 10b Learning Outcomes
Introduction
Document construed as a whole
Objective approach to construction
Parol evidence rule and the “true rule”
Construction and the commercial purpose of contracts
Conclusions
Introduction
Once terms are identified, it must be determined what they mean
This is to give effect to the parties intentions as expressed in the words actually used by the parties
Literal meaning of words
Consider the document as a whole
Include the surrounding circumstances and context
11.10
Objective Approach
What is the point of view of a reasonable person in the position of the parties?
Pacific Carriers v BNP Paribus (2004) 218 CLR 451 [11.30]
Facts, p255
What the terms would convey to a reasonable person rather than to one or both of the parties
11.20 to 11.30
Document Construed as Whole
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR [11.40]
Courts will give words their “natural and ordinary meaning read in light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature and object of the contract…”
Royal Botanic Gardens and Domain Trust v South Sydney City Council [11.50]
Facts, p257
4(b)(iv) “…may have regard to additional costs and expenses…’
Sought to increase rent based on increased commercial value of the land
Held (HC) that could not be taken into account. The clause was ambiguous and there was no arbitration clause
4(b) contained, as a whole, the matters taking into account the rent increases
But denying a landlord the ability to charge ‘market rent’ is unfair
But the parties are public authorities and the lessee historically invested a lot and has significant obligations for upkeep and outgoings
Parties had never historically considered commercial value re rent increases
Kirby (dissenting) ‘may’ is permissive and it does allow other things to be considered
11.40 to 11.60
Parol Evidence Rule and the “True Rule”
See Parol Evidence Rule and its exceptions from Module 8
Rule – written, detailed (entire), presumption, not ‘black letter’, ‘4 corners rule’
Exceptions - Partly written / oral, trade usage / custom, suspension by oral agreement, rectification, prove identity or invalidity, resolve uncertainty or ambiguity
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 [10.140 and 11.100]
Facts, p236 and 261
Evidence of the surrounding circumstances was admissible to establish an implied term of increased costs due to injunction
They did not ‘offend’ the rule – they did not have the character of negotiations that were ultimately embodied into the written document
BUT the term was NOT implied as it offended the BP Refinery Tests as it would directly contradict the written contract (fixed price and variations)
11.70 to 11.170
Parol Evidence Rule and the “True Rule”
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 [10.140 and 11.100]
The ‘True Rule’ is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible to of mor than one meaning
But is is not admissible to contradict the language of the contract when it has a plain meaning
Generally facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties (or are notorious)
The surrounding circumstances may assist in determining the subject matter but not the actual intentions or expectations of the parties and the parol evidence rule excludes them from being admissible as terms (except for rectification)
In reality there is a tension between considering the circumstances as an aid to establishing the subject matter v the terms as we try to balance meeting of the minds and freedom of contract (in my view)
11.70 to 11.170
Construction and the Commercial Purpose of Contracts
Courts will give a construction (interpretation) of the contract that upholds the ‘bargain’ rather than destroying it
Hillas & Co v Arcos Ltd (1932) 147 LT 503 [11.180]
Courts will avoid constructions that result in absurdity, inconsistency or invalidity
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 [11.190, see p 270) (Wider, more modern approach to construction)
Objective (reasonable person) approach
Consider language, surrounding circumstances and the commercial purpose or objects
Understand the genesis of the contract, background, context and market
Unless otherwise indicated, interpret in a businesslike manner (this is a commercial dispute…)
Constructions should lead to results that accord with ’commercial reality’ or ‘business common sense’ rather than ‘commercial nonsense’ or ‘working commercial inconvenience’
But this is NOT a departure from Codelfa Construction v SR NSW
11.180 to 11.230