English law and implied terms – when does the court step in and imply terms into a contract?
John Habergham, Myton Law, Hull U.K.
As might be apparent, implied terms are terms that have not been expressly agreed by the parties, the latter being stated in the contract..
Implied terms are not as straight forward and require the courts to insert a term into a contract where the contract is incomplete and / or it is required for the contract to operate effectively. However, the purpose of implied terms is not to rewrite the contract because it would be just and equitable to one party to do so. They exist as a form of redress filling in the contractual gaps and principally seeking to preserve the legitimate expectations of the contracting parties.
The common law conditions
English law takes a strict approach when implying terms into a contract. A list of conditions the law will consider are:
- Firstly, the term must be reasonable and equitable for both parties and must not enrich one party to the contract. It will not re-write what one party sees as a bad bargain
- Secondly, implying the term must make the contract work commercially – the law will not imply a term if in doing so, it will be re-writing the contract. So the implied term is needed to make the contract work, not make it easier or more profitable for one of the parties
- Thirdly, it must be obvious – ‘it goes without saying’ that the term would have been the intentions of the parties.
- Fourthly, the implied term must be reasonably clear or capable of clear expression; and
- Lastly, the term must not contradict an express term this is an absolute fundamental rule. The court will not imply a term into a contract if it challenges express terms thereby, controverting the original intentions of the parties.
How the conditions are applied
The list of conditions is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which the law has tried to express the central idea that the proposed implied term must spell out what the contract actually means.
So how does it work?
A couple of examples from Myton’s cases might help.
Well in the forwarding or agency context, the law will readily imply a term that although an agent, such as a commission agent, can never prevent the principal from doing what it is lawfully entitled to do with its property, by the same token the principal cannot by sharp practice cut the agent out of his commission.
So where the agent has negotiated a series of aircraft leases, it cannot stop the lessor from selling the aircraft (if it is entitled to do so under the lease) and thereby bringing the leases and the agent’s right to commission to an end.
But the law will prevent the lessor and lessee from novating the leases to cut the agent out of its right to commission. It will imply a term into the agency agreement that the lessor cannot act with sharp practice to the detriment of the agent.
It doesn’t matter that the agreement may be lengthy and drafted with legal assistance. There is still room for implication of terms.
Myton recently acted for a franchisee against a well know global fast food chain – the franchisor in the international franchise agreement wanted to award a concession to a third party in a geographical zone which would have had a crushing impact on the finances of the franchisee. The franchisee was willing to operate the new concession.
Although, as might be expected having been drafted by them, the agreement was heavily weighted in favour of the franchisor, Myton was able to persuade them to desist by arguing that there were two terms that should be implied. Both were interlinked.
First that the franchisor to act in good faith towards the franchisee. Although the common law has set its face against a general good faith obligation in mercantile contracts, it will recognise such an obligation in long-term relational contracts.
As part of this good faith obligation, where the franchisee has discretion in how it conducts itself in the agreement, it should exercise that discretion in favour of a potentially prejudiced existing franchisee rather then in favour of any third party.
So, in short, wherever there is a contract, however lengthy and sophisticated, in the right circumstances, it might not be the whole contract – there may be room for an implied term.