Implied Terms in Supplementing the Written Contract

2654 words (11 pages) Essay in Commercial Law

02/02/18 Commercial Law Reference this

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The terms of a contract agreement would have been agreed upon, most obviously, through express terms; these are terms which have been explicitly communicated either orally or in writing. So, initially it would seem that the legality of a contract would be clear in respect of both parties. In circumstances, as to where there has been a dispute in the terms agreed, the courts would have to construe the contract to establish any terms which are implied. Implied terms are imperceptible, as they are not explicitly stated, orally or in writing, and so it is clear that one may assume as to the ambiguity which may arise as a result. Nevertheless, these terms automatically make parties implicitly bound, and at times they are understood indirectly. The courts have the discretion to incorporate implied terms, even though the parties have failed to include them.

In the English legal systems; implied terms can derive from three possible sources; the court, custom or statute. Terms that are implied into contracts by the courts, can be broken down into two subsections; implied in fact and implied in law. ‘A term is implied in fact when it is implied into the contract in order to give effect to what is deemed by the court to be the unexpressed intention of the parties.’ [1] As a matter of fact, the term in question is obviously included and apparent to the parties that it need not be mentioned. However, it’s not as simple as it may initially seem as there may be further conditions to fulfil. The leading authority in this matter is the case of The Moorcock [2] . The defendant entered into a contract to unload the goods from the claimant’s ship. However, the ship was damaged in this process. The claimant sued for damage to the ship, whilst the defendants argued that there was no expressed term in relation to the safety of the ship. The court in this case introduced the business efficacy test; in which the term in question is essential to include in order to gain business efficacy within the contract. Therefore, it was held that there was indeed an implied term as a matter of fact relating to the condition of the ship, and that if the parties were to have thought of this matter prior to contracting, they would have explicitly expressed it.

In Shirlaw v Southern Foundaries Ltd [3] , the courts applied the officious bystander test, which MacKinnon LJ introduced within his judgement; ‘Prima facie that which is left to be implied 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 the agreement, they would testily suppress him with a common “oh, of course!”’ [4] Therefore, if any term in dispute was to undergo the ‘officious bystander test’, and pass, then it would be fair to imply the term into the contract.

Implied terms in law relates to concerns of public policy, and how parties should behave within a specific type of contract. The main authority in this matter is Liverpool City Council v Irwin [5] , the defendant held back rent payments due to the claimants not maintaining various parts of a council tower block (the stairs, lifts and rubbish chute). The tenancy agreement did not mention any obligations of the Landlord to maintain any part of the tower block, but the defendant refuted this. In the Court of Appeal, Lord Denning held that it was appropriate for a term to be applied, as it was reasonable in the circumstances. The House of Lords acknowledged a duty of the landlord to maintain common areas, but not in these particular circumstances. It was a term implied in law as a general rule in all tenancy contracts that the Landlord of any tower block is under a legal obligation to take reasonable care to keep the common parts in repair. [6] Also, a legal test of strict necessity was established in this case, which sought to imply a term in only circumstances where it was deemed essential.

Whilst pondering over these terms it is important to recognise that implied terms in fact and in law have important roles in ‘promoting the reasonable expectations of the parties’. It is fairly obvious that the two tests mentioned above facilitate for terms to be implied in only circumstances in which it is deemed to be realistically and understandably expected from parties. Also, the test of strict necessity to imply terms, has also been developed; ‘the courts ought not to supplement a contract by an implication unless it is perfectly obvious that it is necessary to give effect to the reasonable expectations of parties.’ [7]

The second way in which terms can be implied into a contract is by custom or usage. Custom or usage refers to the particular market or industry in which the parties’ partake business in. The relevant authority is Hutton v Warren [8] ; the claimant, a farmer had his agricultural lease terminated, and was told to stop farming the land by the defendant, who was the owner of the land. However, by local custom the tenant was entitled to a fair allowance for seed and labour. It was held by the court that by custom there was an implied term to give effect to the termination of the lease. Parke B said that ‘in commercial transactions extrinsic evidence of custom and usage is admissible to annex incidents to written contract, in matters with respect to which they are silent’ [9] . “The assumption is that usages are taken for granted and therefore not spelled out in writing. The recognition of trade usages protects the reasonable expectations of the parties.” [10] This statement reiterates the fact that the implied terms help promote the reasonable expectations of the parties. It is the reasonable expectations of the parties, as two parties may have been so regular in transacting with each other that they have a set procedure that they follow, and so it would be reasonably expected of the parties to follow this running procedure. This procedure would automatically be implied in the contract if not explicitly expressed, as it is custom for the parties to act in that particular manner. Furthermore, it is also important to note that terms cannot be implied by custom if they are contrary to the express terms.

Finally, parties within a contract often have statutory footing to rely on when a dispute over terms arise. Statutes that govern certain areas aim ‘to give effect to the presumed intentions of the parties’, ‘to reduce uncertainty by enacting a default rule of which the parties can contract if they do not like the term that parliament has seen fit to apply’, and to protect parties when there is an inequality of bargaining power. [11] Using the Sales of Goods Act 1979 as an example of terms implied by statute; sections 12-15 governs this area. Under Section 13(1) it says ‘Where there is a contract for the sale of goods by description, there is an implied term that the goods will correspond with the description.’ This provision (as does the whole of section 13) protects the buyer, from goods that might not meet the original description given to them. Also, Section 14 (2) states, ‘Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.’ Section 14 primarily governs that products are of ‘satisfactory quality’, and inserts a definition of what exactly is meant by ‘satisfactory quality’. In instances where products break soon after purchase, the consumer will be protected by an implied term under Section 14 of The Sales of Goods Act 1979.

As is fairly evident, implied terms by statute has an imperative role in governing not only consumer contracts, but many other contracts such as contracts of employment. Basically, the law is limiting the power that a large corporation has and giving more rights to a normal everyday individual. Essentially, these implied terms fulfil ‘the reasonable expectations’ of the buyer when they enter into a contract with a seller. Reasonable; as these provisions state what is only fair and judicious towards the weaker party.

Good faith in the performance of a contract is a beneficial component when establishing a successful contract. Good faith essentially requires both parties to act in honesty and without deception. The duty that burdens the parties in an agreement is to act in a fair and equitable manner towards each other, which will in turn guarantee each party freedom from coercion, intimidation or threats. [12] However, parties are not under any legal constraint to enter into a contract with good faith, but it is in the interest of the parties to enter into a contract with the right intentions. After all, the English legal system gives permissibility to the right of freedom of contract. This doctrine allows parties to build contracts with whosoever and with any terms they wish, without the interference of any governance. The notion of good faith has failed to develop as a doctrine in the English legal system, but auspiciously thrives in other parts of the world (USA and parts of Europe). In The United States, § 1-201(b) (20) of the Uniform Commercial Code has defined good faith as ‘…honesty in fact and the observance of reasonable commercial standards of fair dealing.’ [13] In German contract law, good faith has successfully developed into a doctrine and ‘has ripened into a judicial oak that overshadows the contractual relationship of private parties.’ [14] S.242 of The German Civil Code BGB states that ‘An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.’ The doctrine is also predominant within French contract law.

In the US, there is a distinct rule of ‘default rules’. T Rakoff describes ‘default rules’ as being implied terms for standardised situations. [15] For example, there are set regulations for relationships such as landlord and tenant, doctor and patient, buyer and seller and etc. ‘Default rules’ endeavour to fill gaps in incomplete contracts. However, it is up the court to find the so called ‘gap’ within the contract. To put this into context, an example of a default rule can be found within the The Uniformal Commercial Code; it includes an implicit idea of “warranty of merchantability” in contracts. However, the fact that this provision can be waived by agreement characterises it as a default rule. This rule is essentially very similar to implied terms as it involves inferring ‘as to what the parties had in their minds but failed to say.’ [16]

Courts have left contracts to interpret as they wish; either broadly or narrowly according to the specific type of contract in question. For example in Liverpool City Council v Irwin [17] , the House of Lords did not label this contract specifically pertinent to all tenancy agreements, but only to Council high-rise building tenancy agreements. [18] Even in Lister v Romford Ice [19] , the courts specifically labelled the contract as one between an employer and a driver of a motor vehicle, rather than one of employer and employee. [20] The courts have very astutely left room for flexibility in order to achieve justice and fairness in their judgements, according to the reasonable expectations of the parties.

As recognised by Lord Steyn; good faith sets an objective standard where parties are expected to act with reasonable fair dealings, and subjective standard, which requires the party to act honestly. [21] It would be reasonable to say that the notion of good faith would be credible to any legal system as it provides confidence in the formation of contracts between parties. [22] In essence, if a party was to act in bad faith then they would be held accountable for the loss which may have been caused as a result.

However, some may argue that adopting the notion of good faith in the English legal system would cause conflicts as it undermines the doctrine of freedom of contract; as our legal system prospers as a result of this underpinning principle. Adopting the notion of good faith could be the result of potential predicament between parties in contractual relationships. Nevertheless, academics such as E Peden seem to agree in the view that ‘these notions are evolving, and ideas of co-operation and good faith are gaining ground’. [23]

In conclusion, English law involuntarily requires parties to act in good faith; however, this principle has not been adopted as it would adhere limitations on parties, which would oppose the principle of freedom of contract. The need for implied terms is fundamentally still required in order for contract law to prosper. Countries such as the US (who have implemented the notion of good faith) have not adopted implied terms within their legal system, but instead have the default rule system in place which is fairly analogous to the implied terms in the English legal system. Therefore, the notion of good faith on its own cannot replace and undertake the whole burden of implied terms; this explaining why the US has introduced default rules to assist. It is true to say that the implication of terms does fulfil an important function in promoting the reasonable expectations of the parties, as courts have to come to an impartial decision which is fair as just for both parties. The law has developed tests such as the officious bystanders test and business efficacy test, and the legal test for the implication terms is one of strict necessity which sought to govern and bring about an outcome that is a fair on the part of both parties and not prejudiced towards one party.

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