Implied Terms

Courts are reluctant to give effect to terms that are not expressly stated in contracts - Justin Santiago

Contracts have to be precise in order for it to be enforced by either party. Only if there is a dispute will the courts play a role in interpreting the contract. There is not much contention with regard to express terms in writing as long as they are precise and can stand by itself : Scammell & Nephew Ltd v Ouston. Parties are bound by the terms which have been signed : L’Estrange v Graucob (there must be a belief that the other party did assent to the onerous terms – Ontario Court of Appeal case Tilden Ren-a-Car Co. v Clendenning and there is no plea of non est factum – Saunders v Anglia Building Society but not carelessness : United dominions Trust Ltd v Western) and generally parties will be prevented from adducing extrinsic evidence to add, vary or contradict what is written in the contract via the parole evidence rule : Jacobs v Batavia & General Plantations Trust Ltd.

However not all contracts are so straightforward and there may be times when terms will have to be implied into the contract. In such cases courts will take the purposive approach and will strive to uphold the contract as far as possible. The purposive approach validates the argument that agreements should always be enforced. The courts will do their best to give effect to the contract and will step in to give effect to terms not expressly stated in the contract which are as follows :-

Intention of the parties

There may be times when a particular statement made or assurance given in the course of negotiations leading up to the contract forms part of the contract. In such cases the courts will look into the intention of the parties which will be assessed objectively. Lord Moulton in Heilbut, Symons and Co v Buckleton set out the various criteria to ascertain this intention.

Verification : a statement is likely to be a term of the contract if the maker of the statement dissuades the other party from verifying the statement : Schawel v Reade on the other hand it is unlikely to be a term if the maker of the statement asks the other party to verify its truth : Ecay v Godfrey.

Importance : a statement is likely to be a term of the contract where it is of such importance to the person to whom it is made that had it not been made he would not have entered into the contract : Couchman v Hill.

Special Knowledge : a statement is likely to be a term if the maker of the statement has some special knowledge or skill compared to the other party : Oscar Chess Ltd v Williams.

Timing : a statement is likely to be a term if the lapse of time between the making of the statement and the contract’s conclusion is short : Routledge v McKay

Incorporation of terms into a contract

The incorporation of terms into a contract can be agreed upon by the contracting parties based on the following rules depending on whether they are written or oral terms.

Written terms may be incorporated into the contract but 3 hurdles must be overcome :-

1. Notice of the terms must be given at or before the time of concluding the contract :Olley v Marlborough Court
2. The term must be contained in a document which was intended to have contractual effect : Chapleton v Barry UDC
3. Reasonable steps must be taken to bring the terms to the attention of the other party : Parker v South Eastern Railway (must make special effort if it is known that the other party is disabled : Richardson, Spence and Co Ltd v Rowntree

Oral terms may be incorporated by way of course of dealing which is regular and consistent : McCutcheon v David MacBrayne. (however contrast with Hollier v Rambler Motors where three or four contracts over a period of five years was held not to be consistent). Courts are also more inclined to infer incorporation of terms if the parties are of equal bargaining power and if both were in the trade and such terms were habitually incorporated into these contracts : British Crane Hire Corporations Ltd v Ipswich Plant Hire Ltd.

Implication by way of statute, custom or common law

A court may imply terms based on statute such as the Sale of Goods Act 1979 which implies certain terms into contracts for the sale of goods namely that the goods are of satisfactory quality and that the goods supplied are reasonably fit for that purpose. The function of these implied terms is to provide some protection for the expectations of purchasers, particularly consumers and because it is governed by statute is one of the rare exceptions where the courts will give effect to an implied term.

A court may also imply terms based on by custom – a contract may be deemed to incorporate any relevant customer of the market, trade or locality in which the contract is made : Hutton v Warren.

A court may imply terms at common law to give the transaction such business efficacy as the parties must have intended : The Moorcock. However high standards must be satisfied. Both parties must know that the term is implied : Spring v NASDS and it must be clear that both parties would in fact have agreed to the term : Luxor (Eastbourne) Ltd v Cooper. Secondly terms implied in law as a general incidence involving particular relationships such as employer and employee Lister v Romford Ice and Cold Storage, Mahmud v BCCI and landlord – tenant : Liverpool CC v Irwin.

Once the terms of the contract have been ascertained, they must be interpreted to establish their true meaning. The starting point is that it is for the courts, not the parties, to decide what is the proper interpretation of the contract. There has been a marked shift in the approach of the courts away from a literal approach towards a more purposive approach to interpretation with particular emphasis being laid upon the adoption of an interpretation which has regard to the commercial purpose of the transaction – Lord Steyn’s dissenting speech in Deutsche Genossenschaftsbank v Burnhope. He again reiterated the approach in Mannai Investments Col Ltd v Eagle Star Life Assurance when he said that the terms would be interpreted in a way in which a reasonable commercial person would construe them.

Lord Hoffman in Investors Compensation Scheme v. West Bromwich Building Society recapitulated the concept of the modern approach emphasising the role of language according to common sense principles bereft of the old intellectual baggage of legal interpretation.