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IMPLIED TERMS – COMMON LAW
All contracts have terms, these are the elements of the contract that set out what each party expects of the other. Terms are either express or implied. Express terms are those specifically agreed between the parties; I will promise to pay you £50 for which you promise to give me a pair of shoes, these are two express terms of the contract.
Implied terms are not specifically agreed by the parties but can be implied by statute or common law into any contract; for example the Sale of Goods Act implies a term of satisfactory quality into all consumer contracts. Terms implied by common law are the courts trying to realise the unexpressed intentions of the parties. This can be based on trade custom, previous dealings, or what is required to make the contract work.
In limited circumstances the courts will imply a term based on the custom, or common knowledge, of the industry (British Crane Hire v Ipswich Plant Hire (1975) (CoA)).
In this case the courts implied terms into a contract, even though they had not been specifically stated at the time, because the terms were so standard within the plant hire industry as to be customary.
This rule will only apply to two parties who work in the same industry and are of equal bargaining power (Scheps v Fine Art Logistics (2007) (HC)).
If the parties have had regular and consistent dealings then the courts may imply a term from a previous contract (McCutcheon v David MacBrayne (1964) (HoL)).
McCutcheon had used MacBrayne’s ferry service on a number of occasions. On some of those journeys he had signed a slip that included a clause exempting liability. On one trip, for which no slip had been signed, the ferry sank. MacBrayne was unable to rely on the exemption clause because the signing of the slip had not previously been consistent enough to constitute a previous course of dealing.
Also see J Spurling v Bradshaw (1956) (CoA) in which an exemption clause could be incorporated through a course of dealing because every other transaction between the two parties had included the same clause.
The courts are much more likely to imply a term into a B2B rather than a B2C contract (Hollier v Rambler Motors (1972) (CoA)).
MAKING THE CONTRACT WORK
Sometimes the courts will imply a term in order to make the contract work, or be business efficient. Two different tests have been developed by the courts; the Business Efficacy Test and the Officious Bystander Test.
BUSINESS EFFICACY TEST
If a term is absolutely necessary to make a contract business efficient (not just reasonable) then the courts may imply it into the contract.
In The Moorcock (1889) (CoA) the claimant contracted to moor his boat at the defendant’s wharf on the Thames. Both knew that the tide would go out, when it did the boat hit hard ground rather than mud and was damaged. The claimant argued that there was an implied term of reasonable care without which the contract would not work or have no business efficacy. The court agreed.
OFFICIOUS BYSTANDER TEST
If a term is so obvious that if it were suggested by an officious bystander both parties would say ‘Oh, of course!’ then it may be implied by the court.
In Shirlaw v Southern Foundries Ltd (1926) (CoA) the claimant was employed as Managing Director of Southern Foundries for a term of 10 years. When the company was taken over the new owners dismissed Shirlaw as a Director. He took them to court for wrongful dismissal on the basis that he could not be Managing Director without also being a Director. The court agreed and implied a term into his Managing Director’s contract that he must also be a Director.
The law in this area was directed by Lord Hoffmann’s influential comments in Attorney General of Belize v Belize Telecom (2009) (PC Belize) until the more recent case of Marks and Spencer v BNP Paribas (2015) (SC) in which the Supreme Court reasserted the use of the two tests outlined above. In Lord Neuberger’s words the test remains whether a term ‘is necessary for business efficacy or that it is so obvious that it went without saying’, being reasonable and equitable is not enough.
In order to be implied into a contract a term must ‘be formulated with sufficient precision’ (Shell UK v Lostock Garage (1976) (CoA)).
In this case Lostock wanted the courts to imply a term into his contract with Shell that they should not ‘abnormally discriminate’ against Lostock in favour of competing garages. The court refused for several reasons. The term lacked certainty and was not precise enough, Shell would probably never have agreed to this term at the time of contracting (therefore it would not reflect the intentions of the parties) and although equitable it was not necessary for business efficacy.