Implied Terms PDF

1 Implied Terms  2 Introduction  When the written contract is silent, terms can be implied …  Through custom  By statute  By courts  However, it is not up to the court to make ‘a better c...

1 Implied Terms  2 Introduction  When the written contract is silent, terms can be implied …  Through custom  By statute  By courts  However, it is not up to the court to make ‘a better contract’ for the parties © Izura M Zakri (UM)  3 Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong Implied terms are of three types. The first and most important type is an implied term which the court infers from evidence that the parties to a contract must have intended to include it in the contract thought it has not been expressly set out in the contract …  Inferred by courts © Izura M Zakri (UM)  4 The second type of implied term is one by operation of law , and not based on the inference just explained. By operation of law, I mean that a large number of specific implied terms have been held in to arise from previous decided cases on certain specific facts. Such ratio decidendi in respect of such decided implied terms are normally adopted by courts in subsequent cases on similar facts as a matter of course without the necessity of any court to decide afresh whether it ought to draw the inference as explained above  Inferred by statute © Izura M Zakri (UM)  5 The third kind of an implied term is one that is implied by custom or usage of any market or trade which is reasonable, and again it is not dependent on a court’s inference explained above but by virtue of such a custom or usage from the market or trade  Inferred by custom or trade usage © Izura M Zakri (UM)  6 1. Implied by Custom  If the custom exists, then it can be implied  Even if the custom is not mentioned  As long as:  the written contract is silent about it,  It does not contradict express terms, and  the custom will reflect the intention of the contracting parties © Izura M Zakri (UM)  7 s.92(e) Evidence Act … any usage or custom by which incidences not expressly mentioned in any contract are usually annexed to contracts … if the annexing … would not be repugnant to or inconsistent with the express terms of the contract © Izura M Zakri (UM)  8 Primary Rule Produce Brokers Co. Ltd. v Olympia Oil and Cake Co. Ltd 1 AC 314 … custom cannot be implied if there are specific contractual terms which will either give a different meaning to, or contradicts, the custom. © Izura M Zakri (UM)  9 Criteria required  There are three basic requirements of a custom that is to be implied  Certain  Notorious generally known / widely known  Reasonable © Izura M Zakri (UM)  10 Certain, Notorious and Reasonable Cunliffe-Owen v Teather &Greenwood “Usage” as a practice which the court will recognise is a mixed question of fact and law. For the practice to amount to such a recognised usage, it must be certain, in the sense that the practice is clearly established; it must be notorious, in the sense that it is so well known in the market in which it is alleged to exist that those who conduct business in that market contract with the usage as an implied term, and it must be reasonable … © Izura M Zakri (UM)  11 Reasonable, certain and notorious Lee Eng Joo v Kok Boon Keng [1948-49] MLJ Supp 144 The custom claimed: full payment made at the start of the contract, and fishermen to repay if he leaves early. Custom was not recognised as it was NOT:  certain (except what was in the minds of the respondents)  notorious (others seemed unaware of it)  reasonable (unreasonable that full payment made at the start) © Izura M Zakri (UM)  12 Note: ‘Unreasonable’ custom  A custom must be certain, notorious and reasonable  Thus, if the practice is certain and notorious but unreasonable …  It cannot constitute a usage which the courts will enforce UNLESS  The party knows of it and agrees to it,  he will then be bound by it Cunliffe-Owen v Teather & Greenwood © Izura M Zakri (UM)  13 Is knowledge required?  No –  Common law: Cunliffe Owen v Teather Greenwood 3 All ER 561  “A party to a contract is bound by usages applicable to it as certain, notorious and reasonable, although not known to him.”  Yes –  De Cruz v Seafield Amalgamated Rubber Co. Ltd MLJ 154  Where the parties have not declared their intention as to notice, then the notice will be such as custom or usage prescribes, provided of course the custom or usage was known to the parties at the time the contract was made © Izura M Zakri (UM)  14 Points to ponder:  Common law case (Cunliffe) was decided after the local (De Cruz) case.  In addition, there seemed to be conflicting ‘customs’ in the De Cruz case:  Plaintiff: When his services with Lapan Utan Estate was terminated in 1956, after he had served for 3 years, he was given 3 months pay in lieu of notice  Defendant: In all of the years he has been in the rubber industry, he has known that the normal notice for terminating services of an estate conductor is one month © Izura M Zakri (UM)  Pembangunan Maha Murni Sdn 15 Bhd v Jururus Ladang Sdn Bhd 2 MLJ 30 With regards to custom and usage, they are required to be proved in any one of these four ways: 1. Direct evidence of witnesses [positive, not mere opinion], or 2. By a series of particular instances in which it has been acted upon, or 3. Proof of similar customs in the same or analogous trades in other localities, or 4. When ancient – eg declaration of deceased persons of competent knowledge or other forms of reputation. Note: Judicial notice will be given to any custom or usage which has repeatedly been recognised by the courts and it passes into the law of the land.  Thus, no longer need to prove the existence of the custom © Izura M Zakri (UM)  16 Summary  To imply a term through custom:  Contract is silent about it, and  Custom does not contradict contract  Then:  Prove the custom exist  Custom must be certain, notorious and reasonable to be binding  The requirement of knowledge …? © Izura M Zakri (UM)  17 (2) Implied by COURTS © Izura M Zakri (UM)  18 Introduction  Terms are implied in order to give meaning to the contract  To determine whether term is to be implied, certain tests are used:  Business efficacy  Officious bystander test  Intention of the parties © Izura M Zakri (UM)  19 Sababumi (Sandakan) v Datuk Yap The first and most important type is an implied term which the court infers from evidence that the parties to a contract must have intended to include it in the contract thought it has not been expressly set out in the contract … … to the first type of implied term … there are two tests to fix the parties with such an intention … the first test is a subjective test, as stated by MacKinnon LJ in Shirlaw v Shouthern Foundriesb … The a second test is that the implied term … will give business efficacy to the transaction of the contract of both parties … © Izura M Zakri (UM)  20 a. Business Efficacy  To give the transaction such business efficacy as the parties must have intended  In other words, without such implied term, the business transaction appears to be inefficient © Izura M Zakri (UM)  21 The Moorcock 14 PD 64 D agreed to allow P (shipowner) to discharge his vessel at D’s jetty. During low tide, vessel got grounded and sustained damages.  The law is raising an implication, from the presumed intention of the parties, with the object of giving to the transaction, such efficacy as both parties must have intended that at all events it should have  Here, the business of a jetty cannot be carried out unless the jetty is safe for ships to use  Thus, the term implied due to business efficacy: the ship would not be damaged when using its jetty. © Izura M Zakri (UM)  22 Easton v Hitchcock 1 KB 535 P is a P.I. Client’s husband under surveillance from January to April. Davis did some surveillance in early part of Jan and left P’s service in Feb. Told Gardiner, who told client’s husband.  For P.I. job, secrecy is of the utmost importance. Knowledge of surveillance also crucial  However, in this case, the surveillance was rendered useless by the act of a person for whom P is not responsible for ie the people are not under her employment any longer.  Cannot imply such a term. © Izura M Zakri (UM)  23 b. “Officious Bystander”  So obvious that it goes without saying  Normally used with business efficacy, but is of wider implications © Izura M Zakri (UM)  24 Shirlaw v Southern Foundries (1926) Ltd. 2 KB 206 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” © Izura M Zakri (UM)  25  One of the purpose behind the contract between Shirlaw and Southern Foundries is to bind Shirlaw to the company for 10 years  Thus, if Shirlaw is to be bound (cannot resign) in 10 years, then the company also should not be able to fire him in that 10 years  So if someone was to ask, during the signing:  “Would it not be well to put in a provision that the company shall not exercise or create any right to remove Mr. Shirlaw from his directorship, and he have no right to resign his directorship?”  “Of course that is implied” would be the answer by both parties © Izura M Zakri (UM)  26 Link between the two tests  The officious bystander test and the business efficacy test have often been combined  Opinion: officious bystander is wider whereas business efficacy deals primarily with ‘business’  Note: there is no implied duty of good faith in Malaysia (yet)  Hewlett-Packard (M) Sdn Bhd & Anor v Agih Tinta Sdn Bhd MLJU 1510 © Izura M Zakri (UM)  27 c. Intention of Parties  The intention of the parties at the time the contract is entered into will be taken into consideration  Contract must be read as a whole © Izura M Zakri (UM)  28 Trollope and Colls Ltd v N.W.Metro 2 All ER 260 Contract to build a hospital and clinical center. Work to be done in three phases. Phase I to start in 30 April 1969, and to be completed by Phase III in 30 April 1972. Phase III was to start 6 months after Phase I completed. However, Phase I took too long. Completed in 22 June 1970: 59 weeks (47 weeks allowed, 12 not). Phase III began in 22 December 1970. Argued: as Phase I completed late, implied term that Phase III’s completed date to be extended as well. © Izura M Zakri (UM)  29 House of Lords:  Courts only to look at the contract and see what was the parties intention at the time of contract  It can ONLY be implied if it was within the intention of the parties  Here, undisputable fact, and very clear that the date of completion for Phase III is to be 30 April 1972.  In addition, extension of time was anticipated and clauses were made to refer to it – but this did not include if the Phase was completed late. © Izura M Zakri (UM)  30 3. Implied by Law: statute/cases  Some legislations allow terms to be implied in  Sale of Goods Act 1957, for example:  Implied that goods bought are free from encumbrances © Izura M Zakri (UM)  31 Sababumi (Sandakan) v Datuk Yap The second type of implied term is one by operation of law , and not based on the inference just explained. By operation of law, I mean that a large number of specific implied terms have been held in to arise from previous decided cases on certain specific facts. Such ratio decidendi in respect of such decided implied terms are normally adopted by courts in subsequent cases on similar facts as a matter of course without the necessity of any court to decide afresh whether it ought to draw the inference as explained above  Inferred by statute/law © Izura M Zakri (UM)  32 © Izura M Zakri (UM)  33 © Izura M Zakri (UM)  34 © Izura M Zakri (UM)  35 End