Examine the criteria by which the courts,
independently of the
legislature, decide
whether and what terms to imply into contracts.
Is there anything more to be said of these
criteria than that the
courts imply
whatever terms are reasonable in all the
circumstances?
The implication of terms into contracts is often present in the
zeitgeist of contract law. Not every term that ‘should’ be in a contract is
always expressly entered so sometimes terms need to be implied. This essay will
discuss the factors behind whether a term will be implied into a contract. It
will address the tests followed by the courts in deciding whether and what
terms to imply. It will also address the proposition that the courts imply
whatever terms are reasonable.
Implied terms generally fall into three categories, the latter two of
which will be discussed in this essay. These categories are terms implied by
Parliament, terms implied by fact or custom and terms implied by Law.
Terms implied by fact or custom relate to terms which are implied to
give effect to the presumed but unexpressed intentions of the parties. A parties
desire to look after its own interests by not always owning up to having
intended terms has left the courts having to look at contracts objectively-that
is what they believe were the parties
intentions were.
A common custom of a market, trade or locality may also be implied if
both parties have knowledge of it. For example in Hutton V Warren 1, a term was implied that a farmer should cultivate his land during the
notice period of his leaving given to his landlord. This was a relevant custom
of the market which both parties were aware of when the contract was entered
and therefore were bound by.
The test for implied terms by fact was largely based on the leading case
of The Moorcock 2 where Bowen L.J held that “An implied warranty,…as distinguished from
an express contract or express warranty, really is in every instance founded on
the presumed intention of the parties and upon reason... the implication must
be necessary to give the transaction such business efficacy as the parties must
have intended.” The test of Business efficacy in The Moorcock 2 of the presumed intention
of the parties has since been followed as good law and has also been modified.
Notably in Reigate V Union Manufacturing Co 3 the test was modified to preclude the need for reasonableness but still include
the need for a common presumed intention. Scrutton
L.J held “implied term is not to be added
because the court thinks it would have been reasonable….a term can only be
implied if it is necessary in the business sense to give efficacy to the
contract.”
However in the topic of customs it is not entirely clear whether both parties
would have had to have a common intention to be bound. It is unclear in the
light of recent case law (discussed later) whether a judgement in Reynolds V
Smith 4 is still good
law. In that case the court held that a custom which is reasonable binds both
parties irrespective of whether they knew about it whilst an unreasonable
custom only binds parties who were aware of it. This may now bad law after the
ruling in Spring V NASDS 5 which held that both
parties would have to have knowledge of the implied term/custom to be bound by
it. The requirement for reasonableness was not discussed. It is clear however that
when the parties express wishes contradict customs, the court will favour the
parties’ common intentions. This was shown In Palgrave,
Brown & Son V S.S Trurid 6 where an express term which
was inconsistent with a custom was held to be valid. However a qualification was
placed on this in the case of Kum V Wah Tat Bank Ltd 7 where it was held that if
a custom was so obvious that an outsider making enquires could not fail to
discover it, then both parties are to be bound by it
irrespective of Knowledge.
The test of the presumed intentions of the parties set out in The
Moorcock 2 was moderated in Shirlaw V Southern Foundries
Ltd 8. It was clarified that a common intention must be obvious for a
term to be implied. LJ Mackinnon stated that “Prima facie that which any contract is left to be implied need not be
expressed is something so obvious that it goes without saying (emphasis
added).” This of course follows Bowen, LJ in The Moorcock 2 when he stated that “The implication which the law draws is from
what must obviously have been the intention of the parties (emphasis
added).” This strict test of what must be obvious was characterised by LJ Mackinnon in Shirlaw 8 where he added “If while the
parties were making their bargain an officious bystander were to suggest some
express provision for it in the agreement, they would testily suppress him with
a common “Oh, of course”.
The ‘Officious bystander’ test has arguably become the principle test
for whether a term should be implied by fact or custom. Because of the
strictness of what was ‘obviously’ the parties
intentions, the courts have often been unwilling to imply terms where there has
been doubt whether any of the parties would have agreed to the term when
entering the contract. This was the case in Luxor (Eastborne Ltd) V Cooper
9 where it could
not be proven that the defendant would have agreed to an implied term that they
were not permitted to sell two cinema’s to anyone other than the those
introduced by the plaintiff who were estate agents acting for them. Similarly
where a contract is carefully drafted containing very detailed terms, the court
is likely to presume that the written contract constitutes a complete code and
therefore refuse to imply terms into it (Shell UK Ltd V Lostock
Garrages Ltd 10). This is because it is
unlikely that the officious bystander test could then be satisfied.
The officious bystander test also precludes the use of implied terms in
unilateral contracts. The need for agreement of both parties imposing
obligations on each other destroys the nature of a unilateral contract as held
in Little V Courage Ltd where it was stated that it is “Impossible to imply terms(which impose legal obligations)… into a
unilateral contract.” However I would suggest that an obligation can be
imposed by implication only on the promisor or only on the promisee.
It is also the case that if one party does not know of the term to be
implied, the officious bystander test cannot be satisfied. Similarly the
business efficacy test from The Moorcock 2 also cannot be satisfied (a distinction between the tests is discussed
later). In K.C Sethia Ltd V Partabmull
Rameshwar 11
the
court refused to imply a term that a contract for the sale of Indian Jute to
Italian buyers was subject to the sellers obtaining a quota for
So far the court has steered clear of using the term ‘reasonable’ in any
test for implied terms by fact or custom. This approach was changed, although
with subsequent criticism (see below) in BP Refinery (Westernport) Pty Ltd V
Shire of Hastings 12
where
Lord Simon summarised and expanded the tests to date-
“for 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….(3)it must be so obvious that “it goes
without saying”; (4) It must be capable of close expression and (5) I must not
contradict any express term of the contract.”
This five stage test uses ideas developed in cases discussed,
most notably The Moorcock 2, Shirlaw 8
and
Palgrave 6. The
requirement for an implied term to be ‘reasonable and equitable’ however has
seen much criticism and has been overruled in Mears V Safecar
Security 13 where the court
refused to imply a reasonable term that an employee would be granted sick pay
because it was not necessary for the performance of the contract. It failed the
test of business efficacy. Similarly in Liverpool CC V Irwin 14, the courts refused to
imply a term that the council would maintain the lifts in a block of flats. The
House of Lords overruled Lord Denning’s opinion in the Court of Appeal that
whatever terms are reasonable should be implied. This case is discussed further
in terms implied by law.
The two major tests discussed thus far for terms implied by fact or
custom are the ‘Business efficacy’ and ‘Officious bystander’ tests. Whilst the
Business efficacy test relates to the nature of the parties original
intentions, the Officious bystander test relates to
the level of evidence of those intentions. Though clear that the Officious bystander test requires a more stringent
examination of the parties intentions, they are not necessarily mutually
exclusive of one another. It can be argued that business efficacy is a
practical test for determining the intention of the parties and therefore the Officious bystander test.
One view is that both tests need to be satisfied-that is the party
seeking to establish the term must show “that
the implication was necessary….and that the term was omitted…because it
was so obvious that there was no need to make it explicit”(emphasis added-Stubbs
V Trower Still and King 15). Another view however is that either test will
suffice as shown in The Manifest Lipkowy 16
where “a term will be implied only
where it is necessary in a business sense to give efficacy to a contract or
where the term is one which the parties must obviously have intended.”
The other type of terms which can be implied to
be discussed in this essay are ‘Terms implied by Law.’
Health and Social Services Board 17 lay out “the clear distinction
(between terms implied in fact and those implied in law)… lay between the
search for an implied term necessary to give business efficacy to a
particular contract and the search, based on wider considerations, for a
term which the law will imply as a necessary incident of a definable
category of contractual relationship (emphasis added).” We see here that
whilst the court recognises a degree of necessity in both types of
implications, they justify them differently.
With terms implied by law, the courts major concern is not putting into
effect the parties intentions but imposing obligations
more as a matter of public policy. In fact, unlike with terms implied by fact
where implied terms cannot negate express terms (Palgrave
6), implied terms
by law can. In Johnstone V Bloomsbury Health
Authority 18 an implied term
for a HA to look after its employees wellbeing was valid despite an express
clause in the employment contract of a junior doctor requiring him to be
available for an extra 48 hours overtime per week on top of his contracted 40 hours.
The definition of public policy has not been precisely given although Scally 17
did
provide for the requirement of necessity. However, a strain of ‘reasonableness’
does run through it. The court have however been
unwilling to use reasonableness as a test. In Liverpool CC V Irwin 14 the House of Lords refused
to follow Lord Denning’s test of reasonableness in a case which concerned both implications
by fact and implication by law. The court used wordplay to avoid the term
reasonableness and Lord Wilberforce again adhered to the test of necessity in
finding that the council only had a general duty to maintain the flats. A
specific duty to maintain the lifts were not implied by law because of public
policy. It was found that reasonable steps had been taken.
These matters of necessity in public policy have still followed a test
of reasonableness though no test has been expressly stated and remained good
law. In Lister V Romford Ice & Cold Storage Co Ltd 19, it was implied that an
employee will serve his employer faithfully and indemnify him for liability
caused by the employer’s wrongful acts during the course of his employment.
Similarly in Gardner V Coutts & Co 20 the court implied a term that the granting of an option to the
appellants regarding the sale of a house included an implied condition that it
could not be conveyed by way of gift to another.
Entire contracts will however not be implied from a course of dealings
as a matter of public policy as the court follows a laissez faire model of
contract law (Baird Textile Holdings V Marks & Spencer 21).
The test of necessity is a loose one broadly based on reasonableness and
an overall matter of public policy. Terms implied by law do not fall into neat
and tidy rules; they are based on wider considerations of public policy and
operate in the world of doctrine.
It must not be thought that the all cases where a party seeks to rely on
an implied term, must follow one of the two types of implications discussed. In
some cases (such as Liverpool CC 14
discussed
above) the court can to discuss both types. For example in Reid V Rush &
Tompkins Group plc 22
an
employee argued for an implied term in both fact and law that his employer
should have warned him of a risk of injury. There was no implication by fact as
the parties would not have agreed and no implication by law as the courts held
the policy issues should only be resolved by the legislature.
In conclusion, based on the above facts, implied terms vary in their
ability to enter contracts according to whether they are implied by fact or
custom or by law. The test for terms implied by fact or custom of Business
efficacy is a practical test for the very strict test of the Officious
bystander. The strictness of this test leaves it very hard for parties to successfully
introduce implied terms. The test is not satisfied if either party would not
have agreed to the term or if the contract is so carefully detailed that it
constitutes a complete written code. The question of reasonableness in terms implied
by fact is irrelevant. I believe that the decision in Palgrave
6 leaves the requirement of reasonableness in customs from Reynolds 4 as bad law although it is not
yet entirely clear which the courts will follow. Unilateral contracts cannot
imply obligations on both parties as that would defy the very nature of them.
Terms implied by law are loosely based on reasonableness although the
courts are wary about naming the term. Instead they skirt around it by
referring to public policy and a need for necessity. Unlike terms implied by
fact, terms implied by law can overrule express terms to the contrary. Entire
contracts will not be implied from a course of dealing as a matter of public
policy.
The courts are generally reluctant to imply terms into contracts as they
seek to interfere only when strictly necessary. The requirement of
reasonableness is much more evident in matters of public policy in terms
implied by law, than those implied by fact but are still hard to establish. The
message sent out to contracting parties is to be very careful what they enter
into. They could end up being caught between the Devil, the deep blue sea and a
generally unobtrusive court system.
1. HUTTON V
2. THE
MOORCOCK (1889) 14 PD 64
3. REIGATE
V UNION MANUFACTURING CO (1918) 1 KB 592
4. REYNOLDS
V SMITH (1893) 9 T L R 494
5. SPRING V
NASDS (1956) 1WLR 585
6.
PALGRAVE, BROWN & SON LTD V S.S TRURID (1922) 1 AC 397
7. KUM V
WAH TAT BANK LTD (1971) 1 LLOYDS REP 439
8. SHIRLAW
V SOUTHERN FOUNDRIES LTD (1939) 2 KB 206
9.
10. SHELL
UK LTD V LOSTOCK GARAGES LTD (1976) 1 ALL ER 481
11. K.C
SETHIA LTD V PORTABMULL RAMESHWAR (1944) 1 ALL ER 51
12. BP
REFINERY (WESTERNPORT) PTY LTD V SHIRE OF
13. MEARS V
SAFECAR SECURITY (1982) 2 ALL ER 865
14.
15. STUBBS
V TROWER STILL AND KING (1987) I.R.L.R 321
16. THE
MANIFEST LIPKOWY (1989) 2 LLOYDS REP 138
17. SCALLY
V SOUTHERN HEALTH & SOCIAL SERVICES BOARD (1992) 3 WLR 778
18.
JOHNSTONE V
19. LISTER
V ROMFORD ICE & COLD STORAGE CO LTD (1957) AC 555
20. GARDNER
V COUTTS & CO (1967) 2 ALL ER 1064
21. BAIRD
TEXTILE HOLDINGS V MARKS & SPENCER (2001) WLR 98172
22. REID V
RUSH & TOMPKINS GROUP PLC (1990) 1 WLR 212
ESSAY WORD COUNT 2483
Bibliography
Contract Law-Ewan McKendrick
English Law-Denis Keenan
Casebook on contract law-W
T Major
Revision work book:
Contract Law-P A Read
Essential contract law: Marnah Suff
Law of Contract: Richard D
Taylor
The Law of Contract: G H Treitel
Websites-westlaw and lawtel sites