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] 14PD 64 and in the equally great case of Shirlaw v Southern Foundries [1939] 2KB 206 the King’s Bench division 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!”

===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

• commercially reasonable manner: A long and (cough) erudite discussion about the concept.