Contract: Implied Terms

Implied Contract Terms

Terms Implied in Fact

Factually Implied Terms

Two tests are used to imply terms in fact: Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72. 

The Business Efficacy Test: is the term necessary to give the transaction the business efficacy the parties must have intended? In other words, does the contract lack commercial or practical coherence without the suggested term?

The Officious Bystander Test: if, when the parties were making the contract, an officious bystander had asked them if they intended to include a particular provision, would they have responded ‘of course’ as if it were obvious?

Both tests are an attempt to determine the objective intention of the parties. The courts will not imply a term merely because it is fair, equitable or reasonable to do so. Factors relevant to whether either test is satisfied include:

Reasonable Knowledge
Knowledge, books

If a reasonable person in the parties’ position would be unaware of the subject matter of the proposed term, or would not have anticipated it, it is unlikely that either test will be satisfied: Spring v National Amalgamated Stevedores and Dockers Society [1956] 1 WLR 585.

Express Terms
Express contract terms

If the express terms of the contract appear to cover the situation in dispute, this indicates that the parties would not have agreed to additional terms: Trollope & Colls Ltd v North West Metropolitan Regional Hospital [1973] 1 WLR 601.

Clarity
Clear swimming pool

The less clear it is what the contents of the implied term should be, the less likely that either of the two tests are met: Trollope & Colls v North West Metropolitan Regional Hospital [1973] 1 WLR 601. 

Ease of Agreement
Agreement, handshake, contract

It must be obvious that the parties would have agreed to the term at the time of contracting had they thought of it: National Bank of Greece SA v Pinios Shipping Co [1989] 1 All ER 213.


Terms Implied in Law

Legally Implied Terms

Some terms are implied by the operation of law. This might be due to statute, such as the Sale of Goods Act 1979, or the common law. When a term is implied in law, the courts are not seeking to determine the parties’ intention: Liverpool City Council v Irwin [1977] AC 239

The Test for Implying Terms in Law

There are two requirements for a term to be implied in law: El Awadi v Bank of Credit and Commerce International SA [1989] 1 All ER 242. Firstly, the contract must be of a ‘defined type’. Secondly, the term must be ‘necessary’.

What is a ‘Defined Type’ of Contract?

The right kind of contract is normally one which is very common and whose terms do not differ much. Examples include:

  • Sale of goods contracts;
  • Employment contracts;
  • Landlord and tenant contracts;
  • Banker and customer.

The contract in question must be a ‘normal’ contract of its type rather than a special, customised contract: National Bank of Greece SA v Pinios Shipping Co [1989] 1 All ER 213. 

When is a Term ‘Necessary’?

The test of necessity asks whether contracts of the relevant type ought to all carry the implied term. This is a wider test than the business efficacy test: Scally v Southern Health and Social Services Board [1992] 1 AC 294. 

When determining if the term is ‘necessary’, the court may consider whether the term is reasonable, fair and balance competing policy considerations: Crossley v Faithful & Gould Holdings Ltd [2004] EWCA Civ 293. The contemporary social policy behind a particular kind of contract is particularly important: The Star Texas [1993] 2 Lloyd’s Rep 445. However, the courts will not imply a term in law if the matter is better dealt with by Parliament: Reid v Rush Tompkins Group plc [1990] 1 WLR 212.


Terms Implied by Custom

Customary Contract Terms

The final way a term can be implied into a contract is by trade custom. When a term is implied on customary grounds, the courts make a presumption about the parties’ intentions based on that custom: Hutton v Warren (1836) 1 M&W 466.

The Test for Implying Customary Terms

A customary term will only be implied if the practice is clearly established, notorious and reasonableCunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421. If this test is met, then it is presumed that the parties intended to include the term in their contract.

A term is notorious if it is ‘so well known in the [relevant] market…that those who conduct business in [that] market contract with the usage as an implied term’: Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421. This essentially requires ‘evidence of a universal and acknowledged practice of the market: Baker v Black Sea & Baltic General Insurance Co Ltd [1998] 1 WLR 97.

Rebutting the Presumption of a Customary Term

The presumption in favour of the customary term can only be rebutted if it is contradicted by express terms or terms implied in fact or law, or is ‘inconsistent with the tenor’ of the contract: London Export Corporation v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 271.


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Express and Implied Terms Quiz

Test yourself on the principles governing express and implied contract terms.

1 / 12

If the literal wording of an express term does not make commercial sense, the courts will intervene to make it more commercially efficient. True or false?

 

2 / 12

When will the courts imply a customary term into a contract?

3 / 12

When will the courts imply a term into a contract in fact? (Two answers)

4 / 12

What factors indicate that an oral statement is a term of the contract? (Three answers)

5 / 12

When interpreting an express term of the contract, what information may the court take into account?

6 / 12

The courts may imply terms in law into custom, specialised contracts. True or false?

 

7 / 12

Which four factors indicate that a court should not imply a term in law?

8 / 12

When the courts imply a term in law, they are seeking to give effect to the parties' intentions. True or false?

 

9 / 12

What is the parol evidence rule?

10 / 12

How do the courts determine the meaning of an express term of the contract?

11 / 12

Which three factors indicate that a court should not imply a term in fact?

12 / 12

If the written contract contains a 'no oral variation' clause, in what circumstances can the contract be altered by oral statements?

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