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Implied Term of Contract
Last updated: 05-Jun-2015

Per Lord Ellenborough in Atkinson v Ritchie (1809) 10 East 530 at p.531:

No exception (of a private nature at least) which is not contained in the contract itself, can be engrafted upon it by implication, as an excuse for its nonperformance.

Per Bowen LJ in The Moorcock (1889) 14 PD 64:

The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe if one were to take all the cases, and they are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have. In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.

…it may well be said that the law will not imply that the persons who have not the control of the place have taken reasonable care to make it good, but it does not follow that they are relieved from all responsibility. They are on the spot. They must know that the jetty cannot be used unless reasonable care is taken, if not to make it safe, at all events to see whether it is safe. No one can tell whether reasonable safety has been secured except themselves, and I think if they let out their jetty for use they at all events imply that they have taken reasonable care to see whether the berth, which is the essential part of the use of the jetty, is safe, and if it is not safe, and if they have not taken such reasonable care, it is their duty to warn persons with whom they have dealings that they have not done so.

Per Earl Loreburn in FA Tamplin SS Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 at pp 403, 404:

… a court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract … no court has an absolving power, but it can infer from the nature of the contract and the sur-rounding circumstances that a condition which is not expressed was a foundation on which the parties contracted.

Necessity test was by Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at p. 605:

A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, ‘What will happen in such a case', they would both have replied, “Of course, so and so will happen; we did not trouble to say that; it is too clear".

Bell v Lever Bros Ltd [1932] AC 161, [1931] All ER Rep 1, per Lord Atkin on pages 31-32:

Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just.  The implications to be made are to be no more than are "necessary" for giving business efficacy to the transaction, and it appears to me that, both as to existing facts and future facts, a condition would not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts.

Shirlaw v Southern Foundries (1926) Ltd [1939] 2 All ER 113,  Mackinnon LJ at  p.124 stated a test which concentrates on the intention of the parties:

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!’

Exxonmobil Sales and Supply Corp v Texaco Ltd [2003] EWHC 1964 (Comm) per Nigel Teare QC:

… the suggested implied term may make it easier in some circumstances to establish a manifest error. It was therefore said that the suggested implied term was very important. However, terms are not implied on the grounds of importance, ease of proof, convenience or reasonableness but on the grounds that they are necessary to make the contract work.

Liverpool City Council v Irwin [1975] 2 All ER 39 per Lord Wilberforce re-affirmed that the test for implying a term is based on necessity and not simply on reasonableness, his lordship further stated that the term also can be implied by the court when parties failed to state all the terms in full:

Where there is, on the face of it, a complete, bilateral contract, the courts are sometimes willing to add terms to it, as implied terms: this is very common in mercantile contracts where there is an established usage: in that case the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain.

In other cases, where there is an apparently complete bargain, the courts are willing to add a term on the ground that without it the contract will not work…

There is a third variety of implication, that which I think Lord Denning MR [in his speech in the Court of Appeal] favours, or at least did favour in this case, and that is the implication of reasonable terms. But though I agree with many of his instances, which in fact fall under one or other of the preceding heads, I cannot go so far as to endorse his principle; indeed, it seems to me, with respect, to extend a long, and undesirable, way beyond sound authority.

The present case, in my opinion, represents a fourth category, or I would rather say a fourth shade on a continuous spectrum. The court here is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms. In this sense the court is searching for what must be implied.

And Lord Cross of Chelsea at p 47 distinguished two types of cases when the court is deciding whether the term has to be implied:

When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type—sale of goods, master and servant, landlord and tenant and so on-some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will naturally ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert.

Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type but what the court is being in effect asked to do is to rectify a particular - often a very detailed - contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give - as it is put - 'business efficacy' to the contract and that if its absence had been pointed out at the time both parties - assuming them to have been reasonable men - would have agreed without hesitation to its insertion.

Hospital Products Ltd v United States Surgical Corpn [1985] LRC (Comm) 411 at pp. 429-430, Aust HC, Gibbs CJ citing words of Lord Simon of Glaisdale  in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1978) ALJR 20 said:

For a term to be implied the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that it goes without saying; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

Phelps Electronique Grand Public SA v British Sky Broadcasting Limited  [1995] EMLR 472, per Sir Thomas Bingham MR at p.482:

The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power.

Attorney General of Belize & Ors v Belize Telecom Ltd & Anor  (Belize), [2009] UKPC 11, per Lord Hoffman at [16] – [18]:

[16] … The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable.  It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913.  It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.

[17] The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

[18] In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument.  It only spells out what the instrument means.

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