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19 January 2016
The Supreme Court(1) has clarified the law on implied terms: in order for a term to be implied, it must be necessary for business efficacy or alternatively be so obvious as to go without saying. In practice, it will be a rare case where one of these conditions is satisfied, but not the other.
The court confirmed, in light of the widespread misinterpretation of Lord Hoffman's judgment in Attorney General of Belize v Belize Telecom Ltd, that this judgment has not diluted the traditional tests.
Although the case related to a property transaction, the decision has wider implications across all commercial contracts.
The appeal arose following the exercise of a break clause in a lease between Marks and Spencer (the tenant) and BNP Paribas (the landlord). The lease had been granted for a term expiring in February 2018 and the rent was payable in advance on the usual quarter days. The tenant exercised its right under the break clause to determine the lease in January 2012, after it had already paid the full quarter's rent in advance in December 2011.
The issue was whether the tenant could recover the apportioned rent in respect of the period from January to March 2012. This turned on the interpretation of the lease and required the court to consider the principles relating to when a term is to be implied into a contract.
At first instance, the court held that the tenant was entitled to a rebate of the future rent. The Court of Appeal reversed that decision. The question went up to the Supreme Court, which unanimously dismissed the appeal.
There was no provision in the lease that expressly obliged the landlord to pay the apportioned sum to the tenant. The question was therefore whether such an obligation should be implied.
Lord Neuberger, giving the lead judgment, noted that two tests are commonly used when determining whether a term should be implied into a contract:
The modern authority is Attorney General of Belize v Belize Telecom Ltd ( 1 WLR 1988). In that case Hoffman suggested that the process of implying terms into a contact is simply part of the exercise of construing the contract, saying: "There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
The Supreme Court held that this formulation in Belize has been misinterpreted as suggesting that reasonableness is itself a sufficient ground for implying a term and suggested that the right course is for Hoffmann's speech in Belize to be treated as a "characteristically inspired discussion rather than authoritative guidance on the law of implied terms". The court confirmed that Belize has not diluted the traditional business efficacy and officious bystander tests and that, to the extent that subsequent judgments suggested that it has, that approach was mistaken.
Neuberger confirmed that the pre-Belize authorities "represented a clear, consistent and principled approach". He referred in particular to BP Refinery (Westernport) Pty Ltd v Shire of Hastings ( 52 ALJR 20) and Philips Electronique Grand Public SA v British Sky Broadcasting Ltd ( EMLR 472).
In BP Refinery the court said that for a term to be implied, the following conditions (which may overlap) must be satisfied:
In Philips the conditions in BP Refinery were described as a summary whose simplicity could be misleading. The court stated that 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.
In the present case, Neuberger made the following comments in addition to the conditions set out above:
On the facts, the court found that the conditions for implying a term into the lease were not satisfied, in particular because the implied term would have sat uneasily with the fact that the parties had agreed a very comprehensive (70-page) lease and the fact that there was clear case law establishing that rent payable and paid in advance can be retained by the landlord. As such, very clear express words would have been needed in order to find in the tenant's favour.
The court went on to consider whether it is correct that the processes of contractual interpretation and implication of terms are part of the same exercise. Neuberger stated that they are separate and that therefore in most – and possibly all – disputes about whether a term should be implied, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered.
The case brings clarity to this area of the law after the uncertainty following Belize and confirms that the traditional business efficacy and officious bystander tests are alive and well.
The decision reinforces that the courts will be slow to imply terms into a professionally drafted commercial agreement – even where, as in this case, the court acknowledges the "real force" in the tenant's argument that allowing the landlord to retain the entire rent payment is unfairly prejudicial to the tenant and a windfall for the landlord.
The issue as to whether the implication of terms is part of or separate from the proper interpretation of a contract was referred to by Lord Carnwath as "an interesting debating point", but of little practical significance. That may be the case, although following Neuberger's approach, the process of interpretation should take place before the question of implied terms is considered, which would suggest that a clearer distinction does exist.
For further information on this topic please contact Chris Ross or Parham Kouchikali at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited  UKSC 72.
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