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Did you mean to say that? Implied terms in contracts Rainer Evers 30 March 2009.

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1 Did you mean to say that? Implied terms in contracts Rainer Evers 30 March 2009

2 Framework Implied term may be found from:  Express terms of contract  Terms plus surrounding circumstances  Nature of legal relationship of parties  Statute (some statutory implied terms can be expressly excluded)  Custom

3 Traditional pre-conditions Usually said that no term can be implied unless it:  is reasonable and equitable  is necessary to give business efficacy  is so obvious as to go without saying  is capable of clear expression; and (or is it “or”?)  does not contradict any express term

4 Traditional pre-conditions 2 In fact, all of the above are probably untrue and may well be contradictory, or, as Dyson LJ said in Crossley v Faithful [2004] 2 All ER 447 This is judicial code for “we’ll do what we think best.” “It seems to me that, rather than focus on the elusive concept of necessity, the existence and scope of standardised implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations”.

5 Implied by custom  Contracts are not formed in a vacuum  Ordinary consumer contract  On-going trading relationship  Generic – landlord and tenant, sale of property Term sanctioned by custom: “in commercial transactions, extrinsic evidence of custom and usage is admissible to annex to written contracts… matters with respect to which they are silent” Parke B Hutton v Warren (1836) 1 M&W 466

6 Implied by Custom 2  Cannot import “usage” if language of contract suggests contrary intention  Supposition is that parties knew the usage and chose to exclude it Les Affreteurs Reunis SA v Walford [1918] AC 801  “Custom comes not to destroy but to fulfil the law”

7 Implied by Custom 3  A two-fold test: “An alleged custom can be incorporated into a contract only if there is nothing in the express or necessarily implied terms of the contract to prevent such inclusion and, further that a custom will only be imported … where it can be … imported consistently with the tenor of the document as a whole” Jenkins J London Export Corp. v Jubilee Coffee Roasting [1958] 2 All ER

8 Why custom matters: commercial law 1.Practice shown to exist and parties to have relied on it 2.Over time, courts assume it applies to all contracts in that trade or locality unless excluded 3. Legislature adopts it as standard rule for the business “the greater part of modern commercial law and… no small part of the law governing landlord and tenant have been constructed upon” custom and usage Cheshire, Fifoot and Furmston

9 Commercial law 2  Illustration of point 2 occurs as long ago as 1757. In Pelly v Royal Exchange Assurance 1 Burr. 341: Ship’s rigging removed at end of a voyage and stored in warehouse which then burnt down. Insurers refused to pay as not part of the voyage “What is usually done by such a ship with such a cargo and in such a voyage is understood to be referred to by every policy and to make part of it as much as [if] it was expressed” Lord Mansfield

10 Commercial law 3 And again: Now forms part of Marine Insurance Act 1906, but, as with many implied terms, this can be expressly excluded by contractual wording “In the case of an insurance for a certain voyage, it is clearly established that there is an implied warranty that the vessel shall be sea- worthy” Parke B Dixon v Sadler (1839) 5 M& W 405.

11 Implied by Usage and then Statute  Previous instance of warranty of sea-worthiness is now an example of such pre-statutory origins.  Most common application is in sale of goods – originally courts would not imply a “fit for purpose” warranty: caveat emptor  Implied terms from market usage  Sale by sample  Sale by description – including merchantable quality  Fit for purpose, if buyer made this known  Seller has title (from 1864)  Sale of Goods Act 1893: codified usage

12 Terms implied by the courts 1  Furnished house on lease is habitable (unless expressly/implicitly excluded)  Employee will act with “good faith and fidelity” Hivac v Park Royal [1946] 1 All ER 350  Employee will use reasonable care and skill Harmer v Cornelius (1858) CBNS 236  Employer must not require employee to commit an unlawful act Gregory v Ford [1951] 1 All ER 121

13 Terms implied by the court 2  Couches in a Turkish bath free from vermin Silverman v Imperial London Hotels (1927) 137 LT  Plates used for printing banknotes would not be allowed to get into unauthorised hands Banco de Portugal v Waterlow [1932] AC 452  Vehicle used for driving instruction would be insured BSM v Simms [1971] 1 All ER

14 Standardised terms implied by the court  “the court is really deciding …the content of a paradigm” (Cheshire) contract of the relevant type  It does this without reference to the parties’ actual intention except where the contract specifically excludes the implied term  The question the courts asks: what obligations “the nature of the contract itself implicitly requires”. Is it a “legal incident” of such a contract? Liverpool CC v Irwin [1977] AC 239  “Factual matrix” may be relevant to assumed intent or implicit requirements

15 Terms otherwise implied by the courts  Open to very extensive application.  In Scally v Southern Health [1991] 4 All ER, claimants were not told of changed pension rights allowing them to buy extra years, but only within a 12 month window. Claimants said there was an implied term that the 12 month time limit should have been drawn to their attention.  Despite this, general presumption is against implying terms, and the more detailed the contract, the stronger the presumption: “The general presumption is that the parties have expressed every material term” Lord Wright Luxor v Cooper [1941] AC 108

16 Terms otherwise implied by the courts 2  Quite impossible to see how the parties could have had such terms in contemplation. Is the court perfecting an incomplete contract?  Finding implied terms may be judicial cover for court to introduce what it thinks is fair/needed to do justice  Liverpool CC v Irwin. Implied duty on council to keep lifts and access points in reasonable state of repair? Was this completing an incomplete contract, a term implied for “business efficacy” or simply a “fairness” implication? A classic compromise – not an absolute duty, but a duty to take reasonable efforts

17 Terms otherwise implied by the courts 2  A term will not be implied unless it is equitable and reasonable Young v MacManus [1969] 1 AC 454  However, “The touchstone is always necessity and not merely reasonableness” Lord Edmund-Davies LCC v Irwin  “A minimalist approach is called for. An implication may only be made… of what is necessary and no more” Lightman J Robin Ray v Classic FM 1998] FSR 622  “The implication is essential to give effect to the reasonable expectations of the parties” Lord Steyn Equitable Life v Hyman [2002] 1 AC

18 “Business efficacy”  Not a pre-condition to an implied term being found  Term implied if necessary for the contract to work or if obvious what the contract would have said if the parties had turned their minds to it  A “term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract” Lord Pearson Trollope v NW Metropolitan Regional Hospital Board [1973] 2 All ER – but if that’s what they intended, why have they subsequently gone to court?

19 Business efficacy 2  Irrelevant whether it would have been reasonable for a term to  have been included and implied terms “must … always yield to the express letter of the bargain” Evershed MR Lynch – Thorne 1956] 1 WLR 303 Can have extreme result: in Lynch building contract specified particular construction method which was defective, but no room for implied term that building should be constructed so as to be fit for human habitation. In Miller v Emcer [1956] Ch.304 because there was an express covenant for quiet enjoyment, the traditional implied covenant as to title was deemed to have been excluded.

20 Business efficacy 3  Implied term only if, while being negotiated, someone had said:  But this applied only if both parties, as reasonable people, would have responded in such a way and starting point is that parties have expressed all their contractual intentions “a last desperate expedient in a tenuous case” Cheshire “what will happen in such a case? [parties] would both have replied ‘Of course so and so will happen; we did not trouble to say that; it is too clear’” Scrutton LJ Reigate v Union Manufacturing [1918] 1 KB

21 Miscellaneous  Duty to co-operate will be implied if contract cannot be performed without it  Contract may say explicitly that no terms can be implied, but potential problems where express terms implicitly exclude normal implied terms  Can the court imply a term to deal with an unexpected contingency? I.e. where the parties cannot have had an expectation  Implied term must be capable of clear formulation

22 Miscellaneous 2  Exclude implied terms by entire agreement  Performance to be delivered within reasonable time  If “price to be agreed”, price will be reasonable – Foley v Classique Coaches [1934] 2 KB. A question of fact – in some instances, there may simply have been no concluded contract  Contract may be determined on reasonable notice, but court may also find that there are no limits to contract length and that notice may not be given  Fit for purpose/reasonable care and skill

23 Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

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