Revised guidance on when terms will be implied into contracts
MARKS AND SPENCER v BNP PARIBAS (SC) [2015]
The Supreme Court (“SC”) has ruled that a term can only be implied if it is so obvious as ‘to go without saying’ or if without it the contract would lack ‘commercial or practical coherence’. Also if the agreement is very detailed and has been negotiated by lawyers, the Courts are less likely to imply a term.
Facts:
- The facts are as set out in our report on the judgment of the Court of Appeal ("CA") but essentially Marks and Spencer (“M&S”) was a tenant who terminated a lease with BNP Paribas in accordance with the notice provision. However, M&S had already paid a rent instalment in advance and the rental covered a period after termination took effect. There was no express provision for a proportionate refund of rent so M&S argued that a term should be implied into the lease to this effect.
- The CA had concluded that no such term should be implied and so M&S appealed to the SC.
Decision:
- The SC dismissed the appeal, upholding the CA’s decision and rejecting M&S’ arguments that the proposed term should be implied.
- First interpretation, then implication - The SC said that the express words of the contract have to be interpreted first to see what the parties have agreed before looking at whether any terms should be implied, commenting that, “it is a cardinal rule that no term can be implied into a contract if it contradicts an express term”.
- Term should not be implied - Having considered the express terms, the SC concluded that the proposed term should not be implied, highlighting the following factors:
- the lease in question was a very detailed document, which had been entered into between two substantial and experienced parties and had been negotiated and drafted by expert solicitors. It provided expressly for other cases where a partial refund was due. This, said the SC, suggested that the parties’ intentions were clearly documented in the lease and so if they had planned for the disputed refund to be made, this would have been set out in the contract;
- as a matter of property law, it is clear that rent paid in advance can be retained by the landlord, except in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) and so express words would be needed before it would be right to imply a term to the contrary.
- Therefore the SC’s view was that such an implied term would “lie somewhat uneasily” with some of the express provisions and this meant it was inappropriate for the Court to “step in and fill in what is no more than an arguable lacuna”. Even though the judge said the result, “can fairly be said to be capricious or anomalous, it does not begin to justify a suggestion that the contract is unworkable”.
- Test for implying terms - The SC confirmed the test
summarised in BP Refinery v Shire of Hastings [1977] which said an implied term must:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract (ie the term is essential to make the contract work or to produce the intended results) (the ‘business efficacy’ test);
- be so obvious that 'it goes without saying' (the so-called ‘officious bystander’ test);
- be capable of clear expression;
- not contradict any express term of the contract.
- This test was then extended in Philips Electronique Grand Public v British Sky Broadcasting [1995], when the CA made the following points:
- because the implication of terms is potentially so intrusive (as the parties have not made an express provision), the law imposes strict constraints on it;
- it is difficult to infer with confidence what the parties to a lengthy and carefully drafted contract must have intended. An omission may be the result of the parties' oversight or their deliberate decision;
- it is tempting, but wrong, for a Court with the benefit of hindsight, to imply a term which reflects the merits of the situation as they then appear;
- the term to be implied must be either the only contractual solution or the one which would, without doubt, have been preferred.
- The judge then added some comments to the tests as set out in the BP Refinery and Philips cases:
- the implication of a term is not dependent on proof of the parties’ actual intention when negotiating the contract. It is not the hypothetical answer of the actual parties that matters but that of notional reasonable people in the position of the parties at the time at which they were contracting;
- a term should not be implied into a detailed commercial contract merely because it appears fair or merely because it is considered that the parties would have agreed it if it had been suggested to them;
- if a term meets the other conditions, it will also be reasonable and equitable;
- only one of the tests needed to be satisfied;
- necessity for business efficacy involves a value judgment but the test is not one of ‘absolute necessity’. A more helpful way of putting the business efficacy condition is that a term can only be implied if without it the contract would lack ‘commercial or practical coherence’.
Points to note:
- This final judgment of the SC is in large part a return to a very traditional position. Cases over the last few years, notably Attorney General of Belize v Belize Telecom [2009], had suggested that a different test applied but that has now clearly been rejected. What this decision particularly emphasises is that in relation to contracts negotiated at length by sophisticated businesses with professional legal support, arguing successfully for terms to be implied will be an uphill battle and even where that does not happen, it will still be quite a hurdle to overcome.
- This highlights once again that contracting parties should always strive to anticipate possible scenarios and have clear, concise and comprehensive drafting to deal with each of them. This will hopefully avoid a dispute arising in the first place.