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Implied Terms - Terms may be implied by the courts in fact or in law
Terms implied in Law
Implied in law by statute, custom or common law (X3)
ONLY in relation to contracts of particular types
o Statute - e.g. the rights of consumers implied into B-->C contracts by CRA 2015;
o Custom – e.g. implied on the basis of an established custom or implication based on
business practice – British Crane Hire
o Common law, i.e. by the courts (subject to the necessity test)– see below
The courts have a limited power to imply terms in law – Liverpool CC v Irwin HoL
The contract must belong to a definable category of contractual relationship
o E.g. employment contracts
o Building contracts
o Contracts for the sale of goods (or services – different chapter of CRA 2015)
The implication must fit the generality of contracts of that class. Not just particular instances
Necessity (rather than reasonableness) test: court considers whether it is necessary for the...
Lower threshold (i.e. more easily satisfied) than the reasonableness test for implication ‘in fact’.
Liverpool CC v Irwin – HoL implied a term in law into tenancy agreements & necessity test
“the touchstone is always necessity and not merely reasonableness”
Implied term: Landlords have an obligation to their tenants to take reasonable care to maintain the
common parts of tower blocks under their control e.g. the lifts, staircases, rubbish chutes.
HoL Lord Wilberforce applied the necessity test (rejected Lord Denning’s reasonableness approach, CoA).
Atiyah has attacked the HoL’s necessity test.
He argues that it is not necessary to have lifts in blocks of flats ten storeys high (because high rise blocks
of flats existed before the invention of lifts), but it would be inconvenient not to have them. The test
applied by the HoL is reasonable necessity, having regard to the context (potential benefit) and the price,
so there is not much difference between the reasonableness test and the necessity test.
Peden
Rather than the necessity test in Irwin, the courts should consider a wide range of policy considerations
because the underlying rationale of implied terms is to maximise the social utility of the relationship.
≠ Collins
Collins
Argues that Peden’s open-ended examination of poilcy is neither appropriate nor necessary
Sets out a 2-stage inquiry instead to avoid granting one party an unexpected advantage:
(i) Find a default rule which achieves an efficient allocation of risks between the parties;
(ii) That rule should conform to the reasonable expectations of the parties (informed by
commercial practices, customs, usages etc).
Restrictions on the court’s ability to imply terms in law:
Necessity test (see above) – Liverpool CC v Irwin;
The proposed implication must fit the generality of contracts in that class (Reid v Rush);
BUT the courts can get round Reid v Rush by deciding on a narrow class of contract (Scally)
This narrows the distinction between terms implied in law (here) and in fact
1
, Eliza Parr
Indeed, McMeel warns against exaggerating the differences b/e in law & in fact:
Today’s implied terms in law commenced as incidents of particular transactions (in fact)
Terms implied in Fact - ‘iterative process’ to the tests (going back and forth)
Terms will be implied by the court according to the circumstances of a particular case/contract.
ANY specific contract can have a term implied in fact (unlike terms implied in law)
Terms are implied into contracts from their factual context in order to give effect to the parties’
unexpressed intention.
Theory behind terms implied in fact: the parties did not include a term which they would have
done if they had thought about it or had the time to draft the contract properly.
This gives rise to two different tests for implying terms by reference to necessity
Lord ? in Belize at [27] : the different stated tests are not different or cumulative tests;
they are ‘best regarded as a collection of different ways’ in which the judges go about
rectifying the parties’ failure to give effect to their unexpressed intentions.
The tests for implication in fact (not really tests/ just considerations)
Both seem to come from The Moorcock
(i) Business efficacy test
In order to be implied in fact, the term in question must be necessary to give the transaction such
business efficacy as the parties must have intended
Business efficacy (test) will be applied where, without the implied term, the contract would not be
workable.
(ii) Officious bystander test
Shirlaw v Southern Foundries – in order to be implied in fact, the term in question must be
‘something so obvious that it goes without saying; so that, if, while the parties were making their bargain,
an officious bustander were to suggest some common provision for it in the agreement, they would testily
suppress them with a common ‘oh, of course’’.
If the contract was written down and drafted carefully, the court will be reluctant to apply the OB
If the contract is particularly risky, likewise the court will be reluctant to apply the OB test.
The term implied must, in all the circumstances, be reasonable and it must not be inconsistent
with the express terms of the contract. Overall (more importantly), the term must be necessary
Lord Hoffmann in Belize criticsed the officious bystander test on the grounds that it risks
“diverting attention from objectivity [of the process of contracting] into speculation about what the
actual parties to the contract would have thought about the proposed implication”, which is irrelevant.
Lord Hoffmann‘s “recasting of the law” (Anson) in Belize (PC) : single question approach to implication.
Looks very similar to Lord Hoffmann in ICS [1998], 11 years previously.
Implying terms in fact is an exercise in the construction of the contract as a whole
Lord Hoffmann’s central question: whether the implication ‘would spell out in express words what the
instrument, read against the relevant background, would reasonably be understood to mean’
Applied the same reasoning as he had applied 11 years ago in ICS (contextal approach to interpretation)
Give the meaning of the contract the meaning which the instrument would convey to a
reasonable person having regard to all the background knowledge which would reasonably be
available to the audience to whom the instrument is addressed.
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