Implied Terms in Contracts PDF

8. Filling the gaps Implied terms Contract Law (3rd edn) TT Arvind p. 206 8. Filling the gaps Implied terms TT Arvind, Professor of Law and Head of Department, York Law School, University of York https://doi.org/10.1093/he/9780198867777.003.0008 Published in print: 12 July 2022 Published online: September 2022 Abstract This chapter focuses on contracts which leave some issues unaddressed and the law of implied terms used by the courts to deal with such situations. It first explains the nature of implied terms and the process of implication that requires the court to strike a difficult balance, along with the tests for implication. It then considers terms implied in law, paying attention to implication by statute and at common law, before discussing terms implied in fact. More specifically, it explores the tests of business efficacy, obviousness, and the officious bystander, and the approach used based on Lord Hoffmann’s judgment in the Privy Council in Attorney General of Belize v Belize Telecom. The chapter also analyses implication by custom, along with good faith and cooperation as requirements for parties to a contract. Keywords: contract, implied terms, implication, terms implied in law, terms implied in fact, business efficacy, obviousness, officious bystander, good faith, implication by custom ‘The things we leave unsaid’ 8.1 Introduction: implicit understandings and contractual gaps 8.1.1 The nature of implied terms 8.1.2 Striking a balance 8.1.3 The tests for implication 8.2 Terms implied in law 8.2.1 The context Page 1 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms 8.2.2 Implication by statute 8.2.3 Implication at common law Established terms Novel terms Applying the tests 8.3 Terms implied in fact 8.3.1 The test of business efficacy 8.3.2 Obviousness and the officious bystander 8.3.3 The Belize approach 8.3.4 The retreat from Belize 8.4 Implication by custom 8.5 Good faith and cooperation 8.5.1 Good faith 8.5.2 Cooperation 8.5.3 Contractual discretion 8.6 In conclusion: words, intentions, and objectivity p. 207 Problem 8: setting the context Read the following letter, and think about the legal issues it raises. Page 2 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms The Surtees Trust Surtees Hall, Mainsforth, Co. Durham Rebecca Mainwaring Furton Associates Durham Dear Rebecca, I’m writing to ask if you can give us some advice on a dispute we’re having with the photographer and print-maker Anthony Musgrave. As you may know, Musgrave rose to prominence in the 1960s and 1970s for his iconic photographs of everyday life in the pit towns of Yorkshire and County Durham. Twenty of these, known as the Fairford Set, are particularly celebrated. In 2007, he released what he said would be a ‘limited edition, restricted to 100 copies’ of poster-sized prints of the Fairford Set, to be sold on the basis of sealed bids through the auction house Linford’s. Because they were announced as being a limited edition, they sold for a very high price. Our bid, which was successful, was for £12 million, and we know it was at the lower end of the successful bids. To our dismay, in 2012 Musgrave announced that he was going to reissue the same set of 20 prints in a new edition, of 500 copies, this time in a larger size, and once again sold by sealed bids. According to the advance publicity material, the prints are to be made using a superior digital technique, and will be of far higher quality in comparison with the earlier edition. Issuing another edition of the Fairford Set seems to us to be completely contrary to the terms of the previous sale. The description in the sale catalogue of the prints we bought, and the final terms of sale, described it as a ‘limited edition, restricted to 100 numbered copies, of poster-sized prints of the Fairford Set’. However, both Musgrave and Linford’s claim that neither the catalogue description nor the terms of sale in any way restricted Musgrave’s ability to issue further editions in a different size or using a different technique. We would like your advice on where we stand. As we see it, if a contract describes something as a ‘limited edition’, then surely it must be implicit in the contract that the artist will not issue future editions of the same material. What sense would there be otherwise in terming anything a ‘limited edition’? We think Musgrave is being disingenuous and dishonest, and is in breach of the terms of the sale. We would like your view on the legal position before we take further action. Yours sincerely, Page 3 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Thomas Surtees p. 208 8.1 Introduction: implicit understandings and contractual gaps The focus of previous chapters has been on issues, terms, and clauses that parties have actually discussed. But the process of determining the content of a contract will sometimes pose questions relating to matters which the parties’ contract does not expressly cover and which they may not even have discussed. In English law, issues of this type are dealt with through implied terms. 8.1.1 The nature of implied terms As the name suggests, implied terms are terms that were not expressly discussed by the parties, but which are nevertheless treated as forming part of the parties’ contract. It may at first sight seem counter- intuitive to suggest that a contract could contain terms that the parties did not discuss or reach agreement on, but such terms are in fact a fundamental part of how contracting works in the real world. Consider the following scenario: In terms of the formation process, the display of the headphones is an invitation to treat. By taking them to the counter, you make an offer to purchase then, which the person at the counter accepts on behalf of the store. At no stage in the process of offer and acceptance do you discuss or reach agreement on any terms other than the price and the goods that are the subject of the sale. Nor do stores display terms and conditions of sale in the way car parks, for example, do. What happens if the headphones turn out to be defective? Does the absence of express agreement mean that selling defective headphones is not a breach of contract? Clearly not. That is not what sellers and 1 buyers in such a situation expect, and English law does not hold to a strict understanding of caveat emptor in contracts for the sale of goods. Nor should it. A rule that required a buyer to strictly inspect goods and ascertain their every conceivable attribute before committing to purchasing them would make commerce impossible. Parties frequently leave issues thrown up by their transaction to an implicit understanding of what their rights and obligations are. In a scenario like Illustration 8.1, your contract is based on several things you implicitly assume, but are unlikely to expressly discuss with the seller. If you buy headphones in a sealed box, for example, you will usually operate on the assumption that the box actually has headphones in it, that the headphones are as described and similar to the display model, that they will work when plugged in, and so on. Page 4 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Illustration 8.1 You go into a shop to buy a pair of noise-cancelling earphones for your new phone. You find a pair that you like, pay for them, and take them home. p. 209 ↵ People contract without expressly discussing any of this with the shop because they take these things for granted. Implicit expectations like these are also present in commercial transactions. In Problem 8, for example, it seems clear that the parties must have contemplated that the description of the set of prints as a ‘limited edition’ would impose some sort of limit on Musgrave’s legal privilege to make further prints of the set: otherwise the phrase ‘limited edition’ would be pointless. Yet the contract does not tell us what these limits are and where they lie, and it would not be unusual to find—as in this case—that the parties never discussed them. The law relating to implied terms is concerned with situations such as these. In legal terms, the Surtees Trust is arguing that the contract contained an implied term that Musgrave would not produce future prints of the Fairford Set, based on their implied understanding of what they agreed. The question for the law is when to recognize and give effect to these implicit understandings. The process by which the courts decide what terms to imply and what those implied terms say is referred to as implication. When, then, will the courts imply terms into contracts? And how do we decide what these terms say, and what they require of parties? These questions are the subject of this chapter. 8.1.2 Striking a balance To understand the nature of the balance the process of implication requires the court to strike, consider the following example: Here we are, once again, faced with a minimalistic contract. The parties face a situation not dealt with in the contract, which specifies little beyond the price. What, then, are their rights and duties in this situation? Does Norman have to keep the path free of all obstacles? Free of minor obstacles, but not major ones? Or is he under no obligation to do anything? Situations like these are difficult because they require the courts to tread a fine line between filling gaps in the contract and rewriting the contract. Implication in English law is about the former and not the latter. Implication is not about improving the contract, making it fairer or more just, or even making it work better. The courts will give effect to matters that are implicit in the parties’ contract, but they will not rewrite the contract. As Lord Pearson put it in Trollope & Colls Ltd v 2 North West Metropolitan Regional Hospital Board: the court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The p. 210 court’s function is to interpret and apply the contract which the ↵ parties have made for themselves … An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract … a term which, though tacit, formed 3 part of the contract which the parties made for themselves. Page 5 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Much of the law in relation to implied terms is about determining the line between recognizing dimensions implicit within the contract, which the courts will do, and adding things to the contract for the sake of improving it, which they will not do. Courts prefer to err on the side of caution, as the decision of the Court 4 of Appeal in Fitzhugh v Fitzhugh illustrates. Case in depth: Fitzhugh v Fitzhugh EWCA Civ 694 Mr Fitzhugh died intestate, leaving behind a farm amongst other properties. The claimant, Harry Fitzhugh, and the defendant, Anthony Fitzhugh, were his only surviving sons at the time of the litigation. They were joint administrators of Mr Fitzhugh’s estate. As administrators, they granted a licence over some fields and outbuildings to Anthony Fitzhugh and his partner, Karen Boddey, in consideration of the payment of an annual fee of £1. This meant that Anthony was both a licensor (in his capacity as joint administrator) and a licensee (in his personal capacity). The licence provided that it could be terminated on a number of grounds, one of which was the following: The Licensee commits any grave or persistent breaches of this Licence and the Licensor having given written notice to the Licensee of such breach or breaches the Licensee fails within such period as the Licensor may specify to rectify such breaches if capable of 5 rectification. Anthony and his partner failed to pay the annual licence fee of £1 for seven years. Harry Fitzhugh, as one of the licensors, then sent them a notice giving them seven days to pay the fee, but they did not do so. He thereupon brought proceedings seeking possession of the licensed land. Anthony argued that the notice was invalid, as it had to come from all the licensors under the contract, and it had not—Anthony, as a joint licensor, had not consented to its issue. It was argued on behalf of Harry Fitzhugh that a term should be implied into the contract permitting Harry to act without Anthony’s participation where Anthony faced a conflict of interest, as he did here. To do otherwise would be to enable Anthony to take advantage of his own breach. 6 Morgan J, who decided the case at first instance, agreed. His decision was, however, overruled on appeal. Rimer LJ in the Court of Appeal said that the appropriate action for Harry to take would be to invite Anthony to participate in the issue of a notice to himself. If he declined, ‘he would be failing in his duties as an administrator of the estate’, which meant that Harry could seek to have him removed. Once this happened, Harry would be in a position to issue a notice without Anthony’s 7 participation. It was true that this was a cumbersome procedure, which could give rise to practical difficulties and unwanted expenses, but the court would not imply a term into a contract just 8 because the alternative was cumbersome. Page 6 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms p. 211 ↵ 3Fitzhugh v Fitzhugh demonstrates that the courts will not fill a contractual gap simply because it would be fair or reasonable to do so. Something more is needed. The case must be brought within one of a small number of categories of cases in which terms will be implied. 8.1.3 The tests for implication English courts imply terms into contracts in two types of situations. First, courts may imply a term into a contract based on facts specific to that particular transaction. Here, there is something about that specific contract that leads the court to conclude that a particular term should be read into it. In law, we refer to these as terms implied in fact, because the court is implying a term on the basis of the specific facts before it. The second category consists of terms that, as a matter of precedent or statute, are implied into all contracts of a particular type. These are referred to as terms implied in law. Terms implied in law are implied not because of the specifics of a particular contract, but because they are seen as belonging in all contracts of that type. Unlike terms implied in fact, terms can be implied in law for a range of reasons, including reasons of policy that have little to do with the parties’ bargain. In this chapter, we will study how the law in relation to implied terms functions. We will begin with the sort of circumstances that lead courts to imply terms in law (section 8.2), before considering terms implied in fact (section 8.3). Sections 8.4 and 8.5 consider how implied terms draw on commercial custom, and how they are used in transactions which require the parties to cooperate. 8.2 Terms implied in law 8.2.1 The context Think once again about the example of the purchase of headphones in Illustration 8.1. Now consider the following, similar, examples: p. 212 ↵ Two points unite these illustrations. First, although the parties have reached agreement on terms of the sort you need if everything in the contract goes right—dates, payment, and so on—they have neither discussed nor reached agreement on terms that cover situations where things go wrong—warranties, consequences of breach, and so on. This is not because the parties have been lazy or failed to spend enough time thinking about their transaction. Rather, it is because of the social and commercial context of the contracting process. Dentists and their patients do not haggle over liability for malpractice. A customer in a bike shop, similarly, does not engage in detailed negotiations in relation to the shop’s liability for work poorly done. Doing so would be socially unacceptable. Secondly, every one of these examples relates to relatively common transactions. Thousands of contracts involving the sale of goods, or the rendering of services, or the making of commercial payments, are entered into every month. As a result, the gaps that arise in relation to these contracts also tend to be fairly standard. In contracts for the sale of goods or services, we can be pretty sure that a significant proportion Page 7 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms of disputes will relate to the quality of the goods or services—for example, that the headphones fail miserably at reproducing the subtleties of deep basses, that the false teeth are ill-fitting, that the bike was not really fixed, and so on. Similarly, in a contract that involves the making of a commercial payment, many disputes will relate to payment not being made on time. Terms implied in law deal with situations where the nature of the contracting process makes gaps inevitable, and where gaps are relatively easy to predict. Situations involving transactions that are less standard, or gaps that are harder to predict, are dealt with through the rules and process governing the implication of terms in fact (discussed in section 8.3). 8.2.2 Implication by statute The first and most straightforward type of terms implied in law are statutory implied terms. These are terms that are implied by primary or secondary legislation in all contracts of a particular type. The paradigmatic example of terms implied by statute are the terms implied by the Sale of Goods Act 1979 into all commercial contracts under which goods are bought or sold, and the similar, but broader, terms implied by the Consumer Rights Act 2015 into all consumer contracts. Let us return to Illustration 8.1, involving a person buying headphones at a shop. The 1979 Act and the 2015 Act flesh out the very basic terms on which the parties have reached agreement. Under both, the following terms, amongst others, are deemed to be implied in any contract under which goods are sold. p. 213 The right to sell: the law implies a term into contracts to the effect that the seller has title to the goods at the time of sale—or, to put it differently, that the seller actually has (or will have) the right to sell the 9 goods at the time she sells them. So if you buy a used bicycle, or a car, or a smartphone, there is an implied term in your contract to the effect that the person who is selling the goods to you has the right to sell them. He does not need to be the owner necessarily—he might, for instance, be selling the goods on behalf of, or with the permission of, the owner. Correspondence to samples: if the goods are sold by sample, then the law will imply a term into the contract to the effect that the goods will correspond to the sample in terms of quality, and that they will be 10 free from defects which would not be apparent on an examination of the sample. Correspondence to description: if the goods have been sold by description, the law implies a term to the 11 effect that the goods will correspond to the description. So, for example, there is an implied term to the effect that a sealed box which says it contains a pair of headphones really will contain headphones, that a phone which is described as having an ‘aluminium body’ really will be made of that metal (and not merely be painted that colour), and so on. The concept of a sale by description is very broad, but not infinitely broad. Statements that simply relate to the quality of the thing being sold are not considered part of its description. The satisfactoriness of the goods’ quality: if the seller is transacting in the course of her business, the law 12 will imply a term into the contract of sale to the effect that the goods will be of satisfactory quality. ‘Satisfactoriness’ refers to the state and condition of the goods, and is considered with reference to a range 13 of factors. These include matters such as the goods’ safety and durability, their freedom from minor defects, and their appearance and finish. Most importantly, goods will not be of ‘satisfactory quality’ Page 8 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms 14 unless they are ‘fit for all the purposes for which goods of the kind in question are commonly supplied’, 15 as well as any specific purpose made known to the seller. The description of the goods and their price are 16 also relevant: something branded as a ‘premium’ product will ordinarily be held to a higher standard than products from the bottom of the bargain bin. Each of these terms has been the subject of an intricate body of case law, which considers in great detail precisely what they require the parties to do. This is entirely typical of statutory implied terms, whose full ramifications only become clear through studying the case law. In addition, these terms also give significant room to take account of context-specific factors. The result is that this relatively short list of implied terms successfully deals with the vast majority of things that might go wrong in the course of a transaction of sale. p. 214 ↵ To see this, let us relate these terms back to the illustrations, starting with the headphones. Let’s say the packaging describes the headphones in these terms: Illustration 8.6 Premium high-sensitivity audiophile headphones gold plated jack for secure signal transition plush cushioned panels for ultimate comfort closed over-ear design for superior noise control classic black and red design for a premium look If the headphones turn out to have fairly standard sensitivity (eg 100db), or low sensitivity (eg 90db), or if the jack turns out to have simply had a couple of licks of cheap yellow paint, there will have been a breach of the implied term that the goods will correspond to their description. Similarly, the presence of the words ‘premium’, ‘audiophile’, ‘comfort’, and ‘superior noise control’ on the packaging will affect what the courts deem to be ‘satisfactory quality’ (as will the price). If the headphones turn out to be supremely uncomfortable, poking and prodding the ear in all sorts of places, or if they break easily, or produce audio of very poor quality, it is likely that the buyer will have strong grounds to argue that the implied term of satisfactory quality was breached. What about Illustrations 8.3 and 8.4—the broken derailleur and Great Aunt Agatha’s false teeth? The Sale of Goods Act 1979 does not apply to either of these contracts, because neither is a contract for the sale of goods in the strict sense. Both are, primarily, contracts for services, which incidentally involve the transfer of property in goods. To understand the distinction, it may be helpful to think in terms of a contract with a builder to build an extension onto your house. You would not ordinarily say that the builder is ‘selling’ you bricks, cement, floorboards, and paint. What you have, instead, is a contract for a builder’s services, with property in certain objects being transferred to you in the course of the performance of those services. The Page 9 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms situation is much the same with a contract with a dentist for fitting dentures or with a bike shop to repair a bicycle. Property in goods is likely to be transferred in the course of both contracts (property in the false teeth in the first case and property in spare parts in the second case), but neither is a contract for the sale of goods. Illustration 8.3 Your bicycle’s derailleur keeps slipping the chain when you try to change gear. You take it to the neighbouring bike shop to get it fixed. Illustration 8.4 Great Aunt Agatha needs a new set of false teeth. She makes an appointment with her dentist, who takes measurements and says that she will arrange to have a new set made. In English law, commercial contracts of this type are dealt with under the Supply of Goods and Services Act 1982. The 1982 Act contains three sets of implied terms. The first set deals with goods which are 17 transferred in the course of performing services (and in some other transactions). These terms are 18 substantially similar to the terms implied under the Sale of Goods Act 1979. The second set deals with p. 215 terms implied ↵ into contracts for the hire of goods. These, too, are very similar to the terms implied 19 under the Sale of Goods Act. The third set deals with terms relating to the services themselves. The key term implied into such contracts is that any service provider who is acting in the course of a business will 20 ‘carry out the service with reasonable care and skill’. The Consumer Rights Act 2015, similarly, contains three sets of implied terms dealing with contracts for the sale of goods, contracts for digital content, and contracts for services. Their provisions are substantially similar. The contracts between Great Aunt Agatha and the dentist (Illustration 8.4) and between the bike shop and customer (Illustration 8.3), therefore, will be dealt with in substantially the same way as the contract for the sale of headphones (Illustration 8.1). Why do we have separate statutes implying similar terms, rather than a single statute? English law tends to eschew broad statements of principle when it comes to implying terms in law, preferring to be quite specific. Implied terms relating to goods transferred under hire-purchase contracts, to take another example, are governed by yet another statute, the Supply of Goods (Implied Terms) Act 1973, whose provisions on implied terms are once again substantially identical to those set out in the Sale of Goods Act 21 1979. In principle, there is no reason at all why these could not be consolidated into a hypothetical Contracts (Implied Terms) Act. A consolidated statute of this type would certainly make the lives of Page 10 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms business people (and even lawyers) easier. However, this is not how English law works. Statutes on implied terms are narrow and particular, because that is how statutes dealing with private law have always been written. A specific statute also applies to Illustration 8.5—the contract between DJ Bling and the club. Under the Late Payment of Commercial Debts (Interest) Act 1998, there is an implied term in all contracts for the sale 22 or transfer of property in goods, or the carrying out of services, that a debt created under the contract 23 carries with it a right to simple interest at a rate fixed by the government. As a result, DJ Bling will have a right to demand the payment of interest on all fees not paid on time, even if the contract itself makes no mention at all of interest. Illustration 8.5 DJ Bling is a semi-professional DJ, who does regular gigs at clubs and events. One of his clubs is regularly several weeks late with its payments. His contracts with the club consist of one-page letters of engagement issued by the club, which say nothing about the consequences of late payments. The statutes we have considered in this section are not exhaustive—there are far more statutes implying terms into contracts than could be conveniently listed in a textbook. The point to keep in mind is that the statutes which act as a source of implied terms under English law are very varied, cover a wide variety of issues, and tend to be quite specific. 8.2.3 Implication at common law Let us return now to Illustration 8.2, involving a dispute between Edith and Norman. Although there are no relevant terms implied by any current statute, the courts also retain the power to imply terms as a matter of common law. This process is often referred to as implication at common law, to distinguish it from implication under statute and implication in fact. Illustration 8.2 Edith verbally agrees with Norman, her neighbour, to pay £100 a year in return for being allowed to drive across a path on his land to get to the main road. A storm causes a tree to fall across the path rendering it inaccessible. Norman asks Edith to pay 75 per cent of the cost of having the tree removed. Page 11 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms p. 216 ↵ As with terms implied through statute, terms implied at common law apply to all contracts of a particular type. Many statutory implied terms are codified versions of terms that were first implied at 24 common law. Terms implied at common law are created through precedent, rather than primary or secondary legislation. We can classify the process of implication at common law into two types: the implication of terms established by precedent and the implication of novel terms which have not previously been implied by the courts and which the courts are asked to imply for the first time. Established terms The first of these types is relatively straightforward. There is a considerable body of terms which existing precedent requires to be implied into all contracts of a particular type. Employment contracts are a classic example. Case law has established that every contract of employment contains an implied term to the 25 effect that the employee will serve the employer faithfully. Similarly, it also contains an implied term obliging both parties not to act in a manner that damages the relationship of trust and confidence that 26 subsists between employer and employee. Crucially, neither of these terms is set out in statute. They are implied into all contracts of employment because the courts have decided that they should be implied. 27 In Lister v Romford Ice & Cold Storage Co, the first of these—the implied duty of faithful service—was at issue. Lister, a lorry driver working for Romford, accidentally drove over the foot of a fellow employee (who also happened to be his father) when out on a job. The injured employee was awarded compensation, and an action was brought against Lister by the company’s insurers to recover the money from him. In the House of Lords, Lord Tucker set out the following duties of an employee which would be implied into every contract of employment: (1) the duty to give reasonable notice in the absence of custom or express agreement; (2) the duty to obey lawful orders of the master; (3) the duty to be honest and diligent in the master’s service; (4) the duty to take reasonable care of his master’s property entrusted to him and generally in the performance of his duties; (5) to account to his master for any secret commission or remuneration received by him; 28 (6) not to abuse his master’s confidence in matters pertaining to his services. The result was that Lister was liable to indemnify his employer’s insurers for the loss his negligence had 29 caused. 30 p. 217 ↵ Malik v BCCI related to a different term—the implied duty not to damage the relationship of trust and confidence. Malik worked for a bank, BCCI, which collapsed after regulatory investigations suggested that it had engaged in ‘widespread fraud and manipulation’, including facilitating money laundering and corruption. He alleged that BCCI’s conduct was so egregious that his past employment with BCCI tainted Page 12 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms him and adversely affected his employment prospects. The question for the House of Lords was the preliminary one of whether Malik had a cause of action. The House of Lords held that he did, on the basis that BCCI had violated the implied obligation of trust and confidence in an employment relationship. Common law precedent has similarly established a range of terms that are implied into several types of other agreements, including tenancy agreements, contracts for the carriage of goods, guarantee agreements, contracts with innkeepers, and so on. Once again, there are far more of these terms than a textbook can conveniently discuss. The point to keep in mind is that terms implied at common law are a diverse bunch, covering a wide range of transaction types. Novel terms More difficult questions are raised when one party seeks to have the courts imply a new type of term into a particular type of contract. Although any judge has the power to imply a new term at common law, this is not a power which judges exercise frequently. Broadly speaking, the case law suggests that the courts imply novel terms if four relatively stringent conditions are met. 31 First, the contract must belong to a ‘definable category of contractual relationship’, capable of definition 32 33 with ‘sufficient precision’ and of ‘common occurrence’. The courts will not in general imply terms at common law into a contract if the category of relationships involved is either too broad or too narrow. In 34 Ashmore v Corp of Lloyd’s (No 2), Gatehouse J held that a set of contracts which were identical except for the parties’ names was not a sufficiently broad category for terms to be implied at common law: the fact that the contracts were all identical made them sui generis. In Scally v Southern Health and Social Services 35 Board, in contrast, the court held that a category consisting of employment contracts which were not individually negotiated, and under which the employee had valuable rights of which he was unlikely to be aware, was sufficiently precise and well defined to form the basis for a term implied at common law. The distinction between the two cases lies in the fact that Ashmore really just involved one contract, which had been entered into multiple times by different parties, whereas Scally involved a category of contracts which had several features in common, but which were not necessarily identical. Ashmore did not constitute a ‘category’ of contracts because a single contract can hardly be said to form a ‘category’ of its own. Scally, in contrast, did. p. 218 ↵ Secondly, the term must relate to a matter not dealt with in the contract. The contract must be one where the parties have not themselves ‘fully stated the terms’, and where the court is seeking to imply 36 terms to determine what the contract actually is. The courts must be faced with a contract that is only 37 partly in writing, which they have to complete from the materials available to them. In Liverpool City 38 Council v Irwin, the contract in question was a tenancy agreement for flats in an apartment block. The signed document was headed ‘Conditions of Tenancy’ and contained a list of obligations imposed upon the tenant, without mentioning any obligations upon the landlord. The House of Lords held that it would be appropriate to imply terms at common law to determine the scope and extent of the landlord’s liability to maintain common areas of the apartment block. A tenancy contract must be mutual, and if the obligations of one side were not set out in the contract the court would have to derive them through the process of implication. Page 13 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Thirdly, the term that is implied must flow from the nature of the contract and the relationship it 39 40 establishes. It must be a ‘legal incident’ of that kind of contract or that category of relationship. In Sim 41 v Rotherham Metropolitan Borough Council, a group of teachers were taking industrial action, as part of which they refused to provide cover for colleagues who were absent from work. The council argued that their failure to provide cover was in breach of their contract of employment. The teachers argued that the contract did not impose an express duty to provide cover for absent colleagues. The High Court agreed that there was no express duty, but nevertheless upheld the council’s argument by implying a term to that effect. Scott J based his decision on the nature of teachers’ professional obligations to their pupils and their institutions. The running of a school requires a framework of administrative rules and an administrative hierarchy, and employment as a teacher therefore carries with it an obligation to cooperate with, and abide by, directions from the head so long as they are not unreasonable. Accordingly, the teachers were in breach 42 of their contracts by refusing to provide cover when directed to do so by their head. Finally, the term that is sought to be implied must meet the threshold of necessity. Necessity has two distinct dimensions. First, it affects respectively the question of whether to imply a term into a contract. No term will be implied into a contract unless it is necessary to do so. In Sim, Scott J was quite strongly influenced by his view that schools could not operate without clear administrative rules enforced by a clear 43 administrative hierarchy. This made complying with reasonable directives a necessary incident of 44 employment as a teacher. Similarly, in Scally v Southern Health and Social Services Board, the House of Lords was influenced by the fact that the employees acquired contractual rights to a full pension only if they made additional contributions, and were unlikely to know this if it was not brought to their attention, thus making action by the employers necessary. p. 219 ↵ In addition, however, necessity also affects the question of what to imply, in that the court will read 45 into the contract no more than the nature of the contract implicitly requires. Although the courts have referred to ‘wider considerations’ and to considerations of policy in deciding whether or not to imply a term, the essential character of the enquiry remains rooted in the incidents arising out of the relationship and transaction in question. Thus in Liverpool City Council v Irwin, the House of Lords held that in a tenancy agreement relating to a high-rise building, it was necessary for the landlord to have some obligations in 46 relation to essential facilities such as the staircase and lifts. At the same time, the House of Lords refused to impose an absolute obligation to repair these facilities: to impose such a stringent obligation would go beyond what is necessary. All that was necessary was an obligation ‘to take reasonable care to keep in 47 48 reasonable repair and usability’. Similarly, the House of Lords in Lister was unwilling to imply a term to the effect that an employer must indemnify employees against any loss suffered for acts done in the course 49 of employment. Such a term, it was held, did not meet the threshold of being necessary, and would be socially harmful: The common law demands that the servant should exercise his proper skill and care in the performance of his duty: the graver the consequences of any dereliction, the more important it is that the sanction which the law imposes should be maintained … to grant the servant immunity from such an action would tend to create a feeling of irresponsibility in a class of persons from 50 whom, perhaps more than any other, constant vigilance is owed to the community. Page 14 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Applying the tests The manner in which these tests are applied in practice will become clearer if we return to Illustration 8.2. No statutory implied term covers either situation. Will the courts be willing to imply a term at common law to require Norman to keep the path clear—or, alternatively, requiring Edith to contribute to the costs of clearing the path after a storm? Of the four conditions examined in this section, the first condition is clearly met: a licence agreement to use a path is a common occurrence, and the category of which it is part can be defined with sufficient precision. The second condition, too, is met: the contingency in question—a tree obstructing the path—is not discussed in this contract, and is likely to remain undiscussed in a significant proportion of contracts of this type. The sticking points, however, are the third and fourth conditions. Can it be said that an obligation to clear a path is a ‘legal incident’ of granting a licence? It is difficult to see how such an argument could be sustained. In Liverpool City Council v Irwin, Lord Wilberforce pointed out that keeping an access path clear was often the responsibility of the licensee, and could not be attributed to the licensor unless it was necessary to do so. It is also difficult to see how the implication of a term could be said to meet the two dimensions of the element of necessity, and particularly the second—that the courts p. 220 ↵ will imply no more than is necessary. Under the circumstances, it appears most likely that the courts will not imply a term regarding clearing obstacles into the contract. The consequence of the refusal to imply a term is that the loss lies where it naturally falls. Neither party is under any obligation to the other. It is for the parties to renegotiate their contract if they wish to allocate responsibilities or re-apportion their losses. This means the tree will (literally) lie where it has fallen, with neither party being under any contractual obligation to take any steps to remove it. In Problem 8, there will be a statutory implied term that the goods sold to the trust—the prints—will correspond with the description ‘limited edition, restricted to 100 numbered copies, of poster-sized prints of the Fairford Set’. If the prints were not poster-sized, or not from the Fairford Set, or not part of an edition of 100, Musgrave will have breached the contract. As far as the question at issue is concerned, however, terms implied in law do not help. This is unsurprising. As we saw in this section, terms implied in law tend to be of greatest use where gaps are both relatively standard and easily filled. The point of contention between the trust and Musgrave is neither. In English law, questions of this type are typically resolved by asking whether the situation is one in which a term can be implied in fact. These are discussed in section 8.3. Debates in context: default rules and mandatory rules Traditionally, all implied terms were treated as being overridden by express terms. A term would only be implied into a contract if it did not contradict an express term. If any term—whether implied in law or fact—was contradicted by or incompatible with a term on which the parties had expressly agreed, that term would no longer be implied. For this reason, implied terms were often Page 15 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms referred to as default rules, indicating that they only applied by default, in situations where the parties had not agreed to the contrary. It was always possible to contract out of an implied term by simply adding a provision in a contract to the effect that that term would not apply. In the 19th century, for example, parties could contract out of all terms implied into a contract for the sale of goods, by providing expressly that they would not apply, or even simply by stating that no warranties in relation to title, condition, or quality were made except to the extent expressly set out in the contract. This remains true of terms implied in fact, as we will see in the next section. It also remains true of all terms implied at common law, and of a significant proportion of statutory implied terms. But it is no longer universally true. In recent years, there has been a growing tendency for statutes to provide that some or all of the implied terms they contain cannot be excluded by the parties, and that they will prevail notwithstanding anything to the contrary in the contract. Because these laws set out rules that mandatorily apply to all contracts of a particular type even if the parties do not want them to apply, they are called mandatory rules. Many mandatory rules concern contracts entered into between a business and a consumer, and form part of a broader agenda of consumer protection. Here, the idea underlying the use of mandatory, non-derogable implied terms is one of protecting the weaker party. Think back to the discussion in Chapter 2 about the formation process. In terms of the threefold distinction made in that chapter, virtually all consumer contracts are contracts of adhesion. The consumer has neither p. 221 the opportunity nor the bargaining power to renegotiate contract terms, ↵ and is typically in a position of having to take it or leave it when it comes to contractual terms. As a result, there is a growing body of consumer-oriented legislation which implies terms into consumer contracts which the seller cannot exclude. The Consumer Rights Act 2015, for example, sets out several terms which are mandatory and cannot be excluded. In contrast, as far as commercial contracts are concerned, the terms implied by the Sale of Goods Act 1979 are only default rules which the parties can exclude. Mandatory terms are not confined to consumer contracts. Similar principles are applied to certain types of commercial contracts where inequalities of bargaining power are common. The implied term in relation to interest under the Late Payment of Commercial Debts (Interest) Act 1998 cannot be excluded by the parties, even in commercial contracts, unless they provide for some other effective mechanism that has an equivalent effect. The Housing, Grants, Construction and Regeneration Act 1996, similarly, imposes a large number of restrictions on the types of terms that can be put into a commercial construction contract. The trend towards the greater use of mandatory rules has divided legal scholars. Most scholars agree with the thesis put forward by Professors Adams and Brownsword, discussed in Chapter 1, that the trend represents a move away from market individualism towards consumer-welfarism. But there are disagreements on whether or not this is a good thing. Some scholars, particularly those writing from a law and economics perspective, argue that extensive use of mandatory rules Page 16 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms threatens the idea of freedom of contract, and will often be inefficient, leaving all parties worse 51 off. Others argue that some restrictions on freedom of contract are necessary in order to meet 52 broader social and political values that a legal system pursues. 8.3 Terms implied in fact Unlike implication in law, a court implying a term in fact expresses no opinion as to whether that term belongs in all contracts of a given type. A term is implied in fact into a contract because something about that specific contract suggests that it belongs there. If the contract, when properly read and construed, suggests that a particular term was implicitly part of the parties’ agreement, then the courts will read that term into the contract as an implied term. The court holds, in effect, that that term formed part of the contract even though the parties did not actually write it into the contract. As with much of contract law, this principle is simple to articulate but difficult to apply. On what basis do courts hold that a particular term belongs in a contract? In English law, there are two elements to implication in fact. First, much like terms implied at common law, terms implied in fact, too, must meet the threshold test of necessity. Terms are not implied in fact just because they are fair, or because it is reasonable to do so. They are only implied if it is necessary to do so. Necessity by itself is not sufficient, however. Implication in fact also requires the court to ask whether the proposed term belongs in the specific contract before it. The approach to be taken in answering this question has been articulated in two different ways, both of which are grounded in an objective assessment p. 222 of the parties’ intention: ↵ the business efficacy approach, which focuses on whether a particular term is necessary to give effect to the parties’ commercial intention, and the officious bystander approach, which asks whether the term in question would have been regarded by the parties as an obvious part of the contract. Although some attempts have been made in recent years to replace these with an approach which subsumes implication within the broader process of interpretation, this new approach was decisively 53 rejected by the Supreme Court in 2015. In what follows, we will look at the details of each approach in turn. 8.3.1 The test of business efficacy 54 One of the earliest formulations of the test for implication was set out in The Moorcock. The Moorcock was a ship owned by the claimants. The defendants owned a wharf, at which the Moorcock had docked to discharge its cargo. The ship docked safely, but when it was in dock it hit a concealed ridge as a result of the ebbing of the tide. The claimants sued the wharfingers, arguing that they were contractually obliged to ensure the vessel’s safety when docked. The written document contained no such term, so the Court of Appeal had to consider whether there was an implied warranty to that effect. Page 17 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms The court held that there was an implied duty on the wharfingers to ascertain the state of the riverbed, and to warn shipowners of potential hazards. This was not because it was in some inchoate way ‘fair’ to do so, but because such a duty must have been part of the implied intention of the parties acting as businessmen. In so holding, the Court of Appeal was influenced by the fact that the wharfingers could easily have ascertained whether there were any underwater hazards to docked ships: In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events as it must have been in the contemplation of both parties that he should be responsible for 55 in respect to those perils or chances. Bowen LJ’s ruling has three limbs: the necessity of the term to make the contract work, the business efficacy of the contract with and without the term, and the fact that the term must reflect the intention of the parties (assessed objectively rather than subjectively). Terms must fit with all three of these to be implied. The test itself came to be known as the business efficacy approach, but it is important not to overstate its breadth. The Moorcock did not hold that the courts can imply terms into contracts simply to make the contract more efficacious: the term must also satisfy the tests of intention and necessity. Judges are not trying to decide what would make a contract more efficient, but to ensure that the contract works as the parties intended. p. 223 ↵ The case law following The Moorcock demonstrates how the relationship between these three limbs 56 functions. In Hamlyn & Co v Wood & Co, decided two years after The Moorcock, counsel for the defendants argued the import of The Moorcock’s business efficacy test was that terms should not be implied into contracts ‘unless, without such a term, the whole agreement would be frustrated, or there would be a 57 failure of consideration’. The bench hearing the case, which included two of the judges who had decided The Moorcock, agreed. The point to the decision in The Moorcock, Bowen LJ said, was to ask whether the implied term was necessary. If the contract could work with a ‘very reasonable effect’ even without the 58 implication, no term would be implied. Lord Esher MR was even clearer. In English law, he held: the Court has no right to imply in a written contract any such stipulation, unless, on considering the terms of the contract in a reasonable and business manner, an implication necessarily arises that the parties must have intended that the suggested stipulation should exist. It is not enough to say that it would be a reasonable thing to make such an implication. It must be a necessary 59 implication in the sense that I have mentioned. 60 Subsequent case law continued to read the limbs of The Moorcock together. In Ogdens Ltd v Nelson, it was cited as authority for the proposition that ‘no stipulation or agreement which is not expressed ought to be implied, unless it is necessary to give to the transaction the effect or efficacy which both parties must have 61 62 intended it should have’. Similarly, in Ellis v Glover and Hobson, the Court of Appeal pointed out that the parties’ intention was central to the test in The Moorcock: Page 18 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms The law implies a contract only for the purpose and with the object of giving such efficiency to the transaction as must have been intended by both parties, to make each party promise in law as 63 much as was in the contemplation of both parties that he should be responsible for. 8.3.2 Obviousness and the officious bystander 64 In Reigate v Union Manufacturing Co (Ramsbottom) Ltd, Scrutton LJ attempted to explain more clearly how the elements of necessity, business efficacy, and intention relate to each other, by introducing a thought- experiment as to how the parties might react if the term were put to them in the process of contracting: an implied term is not to be added because the Court thinks it would have been reasonable to have inserted it in the contract. A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, ‘What will happen in such a case,’ they would both have replied, ‘Of course, so and so will happen; we did not trouble to say that; it is too clear.’ Unless the Court comes to some such conclusion as that, it ought not to 65 imply a term which the parties themselves have not expressed. 66 p. 224 ↵ This formulation was taken further by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd. MacKinnon LJ was concerned that the language of ‘business efficacy’ could lead to courts being asked to 67 imply terms ‘upon vague and uncertain grounds’. In response, he sought to limit the scope of 68 implication by putting the focus not on the effect of the term but on its obviousness. A term would be implied, he held, if it was so obvious that it in effect went without saying. To make this point, he came up with an imaginary figure which he called an ‘officious bystander’—less politely, a busybody. How would the parties react if such a busybody were to intervene in their negotiations to suggest that they consider adding a particular term? It would only be appropriate to imply the term if—and only if—their response suggested that it went without saying: 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!’ … [I]f a term were never implied by a judge 69 unless it could pass that test, he could not be held to be wrong. This has since come to be called the officious bystander test. Despite MacKinnon LJ’s stated intention in Shirlaw, it did not replace the business efficacy test. Instead, the two were in practice treated as being alternative formulations of the test for implication, either of which could be used in argument as a reason to imply a term into a contract. As a result, around 40 years later, the Privy Council attempted to 70 consolidate these tests in BP Refinery (Westernport) Pty Ltd v Shire of Hastings. The board outlined five factors that were relevant in considering whether to imply a term into a contract: Page 19 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms (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 71 contradict any express term of the contract. These five factors are not intended to be a cumulative test. They do not represent five boxes that must be checked for a term to be implied. Nor do they represent five alternative approaches to implication. They represent, instead, different ways of articulating the underlying issue with which the court is dealing when considering questions relating to implication—namely, determining the tacit terms on which the parties contracted. Taken together, however, they represent a cautious approach to implication, which seeks to carefully circumscribe the courts’ power to imply terms into contracts. p. 225 8.3.3 The Belize approach In 2009, the English law on interpretation appeared to undergo a dramatic shift following Lord 72 Hoffmann’s judgment in the Privy Council in Attorney General of Belize v Belize Telecom, which recast implication as an exercise in interpretation. Implication, in this view, is simply a question of ascertaining the objective meaning of the contract seen in its commercial context. For a term to be implied in fact, it must be suggested by the contractual document itself, in addition to being necessary. The process of deciding whether it is so suggested follows the same logic as the Investors approach to interpretation: the contract is read as a commercial document set in a commercial context, and its significance and meaning are understood against the background of that context. As a Privy Council decision, this case was a decision on the laws of Belize rather than the laws of England, 73 but it is clear that Lord Hoffmann also believed himself to be stating the position at English law. The approach was not without logic. Contract gaps arise for much the same reasons as problems of interpretation, and it therefore makes some sense to treat implication and interpretation as being on a continuum, rather than as being two entirely different tasks. Indeed, it had long been recognized that implication must always be contextual, and must be related to the express terms of a contract. Well over 74 100 years ago, the Court of Appeal in Krell v Henry observed that: one must, in judging whether the implication ought to be made, look not only at the words of the 75 contract, but also at the surrounding facts and the knowledge of the parties of those facts. 76 More recently, in Equitable Life Assurance Society v Hyman, Lord Steyn drew an express parallel between the Investors approach to interpretation and what he thought the judicial approach to implication should be: If a term is to be implied, it could only be a term implied from the language of [the instrument] 77 read in its commercial setting. Page 20 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms Nevertheless, Belize was seen as marking a significant shift. Prior cases used contextualism as a guide to applying the standard tests for implication. Belize inverted this hierarchy, making contextualism the 78 conceptual basis of the process of implication. Implication under the Belize approach was primarily a 79 textual exercise. The traditional tests were only to be used to the extent that they help to answer the core question of the contextual approach to interpretation and implication: what would the contract mean to a reasonable person who reads it against the background of its commercial context. p. 226 8.3.4 The retreat from Belize Over the next six years, the Court of Appeal developed an elaborate jurisprudence around the new 80 approach, centring around the idea of using the ‘reasonable addressee’ as the basis for implication. The approach was particularly useful in transactions involving detailed written instruments which recorded 81 the contract either in its entirety or in part. However, the shift remained controversial, and other common law countries, such as Singapore, rejected Lord Hoffmann’s suggestion that interpretation and 82 83 implication were closely linked. In 2015, the Supreme Court in Marks & Spencer v BNP Paribas changed direction, rejecting the Belize approach and reinstating the traditional approach to implication based on the business efficacy and officious bystander tests. In the course of doing so, they restated the test for implication in what must now be taken to be the definitive summary of the legal approach to implication. Case in depth: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd UKSC 72 Marks & Spencer had sub-leased four floors in a building in Paddington, owned by BNP Paribas. The lease had a break clause, under which Marks & Spencer could terminate it by giving six months’ notice on either of two ‘break dates’. The first break date was 24 January 2012. Marks & Spencer gave notice that it would exercise its option to terminate the lease on that date. However, the contract also required it to pay rent in advance every quarter. It could not invoke the break clause if it was in arrears. This meant that at the time of termination on 24 January, it had paid rent for the quarter from 25 December to 24 March, even though the lease was scheduled to be terminated on 24 January. Marks & Spencer argued that it was entitled to a refund of the rent for the period between 24 January and 24 March. The contract had no provision requiring reimbursement, and Marks & Spencer therefore argued that a term to that effect should be implied into the contract. They succeeded at first instance. Morgan J held, applying Belize, that if the lease was read against the relevant background, it would reasonably be read to mean that the rent must be refunded. This was because it used the word ‘instalment’, which would ordinarily be understood to mean that the 84 lessee should not pay more than the full amount due. The Court of Appeal disagreed, and held 85 that a term should not be implied. The court had to show ‘a high level of loyalty to the parties’ Page 21 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms agreement, read against the admissible background’. A term should not be implied if the party seeking to have it implied only manages to show that it ‘could be a part of the agreement’. To imply 86 a term, the party urging implication must show that it ‘would be part of the agreement’. p. 227 ↵ Marks & Spencer appealed to the Supreme Court. The Supreme Court upheld the decision of 87 the Court of Appeal, but went much further. Whereas the Court of Appeal had reached its decision by applying the Belize approach, the majority of the Supreme Court called the entire approach into question insisting that interpretation and implication were fundamentally different exercises, despite the seeming similarities: I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann’s analysis in Belize Telecom could obscure the fact that construing the words used and implying additional words are different processes 88 governed by different rules. The result was that in implication it was the traditional tests of business efficacy and the officious bystander that should be applied. Belize should not be seen as having changed ‘the law governing the circumstances in which a term will be implied into a contract’, even though the court acknowledged that the case ‘has been interpreted by both academic lawyers and judges as having 89 changed the law’. The judges were not uniform on this point. Lord Carnwath agreed that no term should be implied, but took the view that the Belize approach was ‘a valuable and illuminating synthesis of the factors 90 which should guide the court’, whose continuing authority should not be questioned. He was, however, in a minority, and it is Lord Neuberger’s judgment that now represents the law. In the course of his judgment, Lord Neuberger offered six comments on the approach to be taken to implication, which should be seen as supplementing the five factors set out above (section 8.3.2) in BP 91 Refinery (Westernport) Pty Ltd v Shire of Hastings: ‘the implication of a term is “not critically dependent on proof of an actual intention of the parties” when negotiating the contract … one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time 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 including a term.’ ‘it is questionable whether … reasonableness and equitableness, 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.’ Page 22 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms ‘business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied.’ p. 228 ‘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 … the test is not one of “absolute necessity” … It may well be that a more helpful way of putting [it is] … that a term can only be implied if, without the 92 term, the contract would lack commercial or practical coherence.’ 93 Despite the attractions of Belize, the return to orthodoxy in Marks & Spencer v BNP Paribas is welcome. Treating the question of implication as a question of interpretation requires the courts to ascribe an intention to parties which they could not possibly have had, in that it necessarily assumes that the answer to the point at issue can be found in the written document if we just read it in the right way. The court is in effect seeking to discover a solution that is ostensibly already present in the contract, even though the parties never intended to actually provide that particular solution. Such an approach may work well in transactions involving lengthy and complex documents, but is considerably less useful in transactions with oral contracts, or brief written contracts. Relating this back to Problem 8, under the approach restated in Marks & Spencer v BNP Paribas, the court will begin by looking at what the commercial purpose of the contract was. If the court comes to the conclusion that the commercial purpose was simply to sell a small number of prints, it will leave the trust in the position in which it finds itself. It is only if it finds that the commercial purpose of the contract, judged with reference to what the parties must objectively be taken to have intended, included an element of exclusivity, that it will imply a term into the contract (under the Moorcock approach), and even then only if such an implication is necessary to give effect to the contract. Similarly, it will also only imply such a term (under the officious bystander approach) if it believes that the parties at the time of contracting would have treated it as obvious that the words ‘limited edition’ applied to future editions as well as the present edition. Practice in context: implication and the civil litigation process In order to understand how implied terms function in English law, it is useful to keep the nature of the English civil litigation process in mind. As you should be aware, the civil litigation process in common law jurisdictions is adversarial. This has ramifications for how terms are implied into contracts in the course of adjudication. It means that, in practice, a judge does not of her own accord look at the contract and work through possible terms that might be implied into the contract. Instead, she is dealing with terms suggested, and forcefully argued for, by lawyers for every side involved in the litigation (in complex disputes, there may be more than two sides). Page 23 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms The terms that are implied into contracts, and which we see in reported case law, therefore do not usually originate from the court, and it is not the court’s job to formulate them. The terms originate p. 229 from the parties’ lawyers, and the court’s role in practice is to decide which, if ↵ any, of the rival terms that are urged upon it should accept. From a judge’s point of view, therefore, the process which the rules of implication are intended to guide and support is not one of drafting or formulating implied terms, but of choosing between rival formulations of implied terms (or, indeed, having no implied terms at all). Judicial statements in relation to implication—and, indeed, the caution with which common law courts approach the task of implication—make far more sense when considered against this background. Some judges—most notably, Lord Denning—sought to broaden the type of circumstances in which they could imply terms into contracts, to encompass all situations in which 94 it would be reasonable to do so. These attempts were strongly resisted by their colleagues, who took the view that to give courts such a wide power would be ‘dangerous’. The more appropriate 95 position would be to imply terms only when it was necessary to do so. The reason the courts emphasize the importance of necessity as heavily as they do, for example, is that it is relatively easy for a well-paid and skilled lawyer to make an argument that a contract would work better, or more smoothly, if a particular term were implied. It is, in contrast, significantly harder for even a skilled lawyer to argue that a term is necessary. In the latter case, what needs to be shown is not that the contract would work badly without the term, but that it will not work at all if that term were not implied. This is obviously considerably more difficult than merely demonstrating that it would be inconvenient or inefficient. This is also true of the requirement that the term be capable of clear formulation. This rule is not just a guideline for judges, but also for the lawyers who actually propose draft terms for implication into contracts. The link between pleading practice and the strictness of the test for implication has been made by 96 the courts themselves. In Shirlaw v Southern Foundries (1926) Ltd, MacKinnon LJ described the ‘occasional impatience’ of judges with the very broad use that lawyers sought to make of the ruling 97 in The Moorcock, and added that he thought Bowen LJ would have been ‘rather surprised’ to see how his decision had become a ‘favourite citation’ of lawyers seeking to have a term implied into a contract. It was this underlying concern that led him to seek an alternative, and less easily stretched, formulation. The focus on necessity and certainty, and the willingness of the courts to hold the parties to a position which is inconvenient or a contractual framework which works badly, is therefore at least in part a pragmatic response to the aggressive litigation strategies that lawyers adopt, particularly in high-stakes commercial cases. Page 24 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8. Filling the gaps Implied terms 8.4 Implication by custom A third way of implying terms into a contract is through implication by custom. Under this approach, a term will be implied into a contract if it is part of standard usage or custom in the field or market within which the parties are operating. As with all classes of implied terms, the onus of establishing the p. 230 conditions for ↵ implication is on the party seeking to have the term implied into the contract. In relation to customary implied terms, this requires producing evidence that the custom or usage in question actually exists, and that it has general acceptance. It is insufficient to show that there was a trade practice to that effect, or even that it was regarded as best practice. The practice must be shown to be invariable to be regarded as custom or usage, and it must be sufficiently certain to form the basis of an implied term. Implication by custom can seem similar to implication in law, because the term in question is implied into all contracts of a particular type, unless excluded by the parties. However, there are two important differences. First, in implying a term by custom, the court itself expresses no opinion on whether the term belongs in contracts of that type. The term is implied because the commercial world tends to put it into contracts of that type. As a result, unlike implication in law or fact, there is no need to prove that the term is necessary. All that needs to be shown is the existence of a custom or usage regarding that term. Secondly, unlike terms implied in law, there is no such thing as a ‘mandatory’ term implied in custom. Terms implied in custom, like all terms implied in fact, can be excluded by the parties. The most obvious way of doing this is to insert an express provision to that effect, but a term implied by custom will also be taken to have been excluded if it can be shown that the parties’ decision not to include that term was deliberate, or if it is inconsistent with an express term of a contract. The result is that customary terms will not be implied if they contradict the terms of the contract. That said, the courts do not take a very literal approach to assessing whether a customary implied term is in 98 conflict with an express term. In Peter Darlington and Partners Ltd v Gosho Co Ltd, the claimant and defendant had contracted for the sale of canary seed. It was an express term of the contract of sale that the seed would be ‘pure’. The seed which the seller supplied under the contract was 98 per cent pure. The purchaser refused to accept it, on the basis that it was not pure. In court, however, the seller adduced evidence to demonstrate that in the birdseed trade, ‘pure’ canary seed was understood as meaning canary seed which was ‘almost pure’. The court held that there was an implied term in the contract permitting the canary seed to be almost pure, which was implied as a result of custom. Let us relate this to the context of Problem 8—the dispute between the Surtees Trust and Anthony Musgrave—to understand how it actually works. Here, the court will begin by asking whether there are any customs in the art community, or the community of producers and collectors of prints, that pertain to the releases described as ‘limited editions’. Are there any customs in relation to limited edition prints? Is there any customary understanding of the nature and role of describing a particular run as a ‘limited edition’? If the answer to these questions is ‘yes’, and if the court is satisfied that parties to such contracts invariably treat that term as a part of their contract, the court will imply that term into the parties’ contract, unless there is an express term which is inconsistent with it. Page 25 of 38 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 05 February 2025 8.

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