Implied term

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Stay tuned for a Coronavirus update, where new jurisprudence may develop as to implied terms regarding the means of serving close-out notices under the ISDA Master Agreement.

Courts will imply terms only where the contract does not work without them. They are terms that “go without saying”. It is simply a matter of making a contract functional which otherwise would not be.

For a court to imply a term that is not stipulated, it must be needed to give the contract business effect. If the contract makes business sense without it, the courts will not imply a term. This principal of “business efficacy” was first articulated in the great case of The Moorcock [1889] 14 PD 64 and in the equally great case of Shirlaw v Southern Foundries [1939] 2KB 206, cited with approval in Shubtill v Director of Public Prosecutions [2022] JCLR 86, MacKinnon LJ in the King’s Bench described it as the “officious bystander test”: if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common “Oh, of course!”

For my part, I think that there is a test that may be at least as useful as such generalities. If I may quote from an essay which I wrote some years ago, I then said: “Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’” At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong.

The law of implied terms develops, minutely. In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 Lord Neuberger drew a distinction between “officious bystander” implications of the Shirlaw variety, and “legal” implications:

As Lady Hale pointed out in Geys v Société Générale [2013] 1 AC 523, para 55, there are two types of contractual implied term. The first, with which this case is concerned, is a term which is implied into a particular contract, in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made. The second type of implied terms arises because, unless such a term is expressly excluded, the law (sometimes by statute, sometimes through the common law) effectively imposes certain terms into certain classes of relationship.

One can get tangled up in intentionality, of course. To avoid the same public policy outcomes that the criminal law solves by ignorance is no excuse — implausible special pleading that that is not what I understood the contract to mean when plainly it could not mean anything else, there is a degree of objectivity, if not intentionality:

In Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn rightly observed that the implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting.

A single holistic exercise? No, sir.

In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 Lord Hoffmann looked longingly towards this all being part of a single exercise of construction:

“There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

Lord Neuberger, however, looked resolutely away.

It is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied, because it is apparent that Belize Telecom has been interpreted by both academic lawyers and judges as having changed the law.

And later

However, Lord Hoffmann’s analysis in Belize Telecom could obscure the fact that construing the words used and implying additional words are different processes governed by different rules.

[27] Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context.

[28] In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term.

Implying commercially reasonable behaviour

English law

Under English law at least, legally the statement “Party A may do X” is the same as “Party A may, in its sole and absolute discretion, do X”, by simple application of the above principle. Reasonableness cannot be implied as a matter of common law as the term makes perfect sense without it.

But, as any fule kno, adding “, in its sole and absolute discretion,” to a contract and asking a diligent opposing solicitor to evaluate it is to wave a red rag at a bull. This will inevitably be adjusted to “, in a commercially reasonable manner”. It will be hard to resist that change. Why should your client be able to do x, after all, in a manner which is not commercially reasonable?

So under English law, if one really wants a “sole and absolute” right to do something, one's best tactic is to not bang on about it. If we say “Party A may do X” we have a fighting chance that our opponent won’t think “crikey! That means they have an unfettered right to do that however they please!” and seek to negotiate the language.

New York law

Under NY law I believe the Uniform Commercial Code, which assumes parties will be obliged to act in good faith (honestly in fact and in the observance of reasonable commercial standards of fair dealing) unless they agree otherwise, means that you would need to state “sole and absolute” if you wanted it in a NY law contract.

But before inserting that clause and girding your loins for a forensic fight you're not likely to win, ask yourself this: why do you want a right to act in a way which is not honest or observing of reasonable commercial standards of fair dealing?

See also

• LIBOR rigging part 2
• commercially reasonable manner: A long and (cough) erudite discussion about the concept.
• Shubtill v Director of Public Prosecutions [2022] JCLR 86