‘JUDGES HAVE ALTOGETHER TOO MUCH INPUT INTO THE TERMS OF LEGALLY BINDING CONTRACTS IN ENGLISH LAW.’
Antonio Garibaldi Rodrigues
Implied terms are defined as a provision of a contract not agreed to by the parties in words. Terms implied by the courts are divided into two categories, namely terms implied in law and terms implied in fact. In most of the contracts, the main primary obligation can be found in the express terms. The unexpressed intention of the parties will give rise to many disputes in the civil courts, because sometimes the express terms of a contract do not answer the particular question raised by the circumstances. Therefore, the courts will have to imply terms into a contract.
Terms implied in law are those terms that are implied in all contracts of the same type because of its nature and not the parties’ intentions. As Lord Denning described, this occurs in all common contractual relationships. In Liverpool City Council v Irwin, the Court of Appeal decided to imply a term which stated that the landlord must take reasonable care towards the conditions of the building. In his judgement, Lord Denning made reference to a statement made by Lord Wright extra-judicially. Lord Wright claimed that the court is making a contract to the parties when deciding what is just or reasonable in its eyes, he also described the role of a judge as being a “criterion of what is reasonable”. It can be argued that the implication of terms in law is potentially intrusive because the finding of a term may be binding in terms of precedent in subsequent cases and that the judges are the “criterion of what is reasonable”.
Nevertheless, in Liverpool City Council v Irwin in the Supreme Court, Lord Salmon stated that “the courts do not have any power to imply a term into a contract merely because it seems reasonable to do so.” The fact that Lord Denning’s test was rejected suggests that the judiciary is mindful of the risk of becoming unreasonably interventionist and that the principle of freedom of contract is respected and preserved. Additionally, it can be argued that the courts are only protecting the interests of the party with less bargaining power. Lord Denning argued in George Mitchell (Chesterhall) Ltd. v Finney Lock Seeds Ltd that in the name of the principle of freedom of contract the little man was often neglected. In Crossley v Faithful & Gould Holdings Ltd, it was recognised that terms in law raise questions of fairness, reasonableness and balancing of competing policy considerations. Moreover, the Sale and Supply of Goods Act 1994 add further weight to the argument that the principle of freedom of contract is only undermined so that both parties can enjoy equal and adequate protection from the law. One may conclude that the protection of the parties’ rights justifies the undermining of the principle of freedom of contract and that the courts have not become unreasonably interventionist in regard to terms implied in law.
Terms implied in fact are those terms that are implied on a basis of the unexpressed and presumed intention of the parties as described by Bowel LJ in The Moorcock case. Bowen LJ developed a test based on the need to give ‘business efficacy’ to the transaction. This is a test based on necessity rather than reasonableness. Without this term, the contract would have not worked. In Shirlaw v Foundries MacKinnon, LJ created the ‘officious bystander’ test. This test established that a term should only be implied if it is something so obvious that it would be implied without saying. This might amount to a violation of the principle of freedom of contract because the court is filling the gaps of the contract. One may say that if the parties wanted a specific term in the contract, then it is expected they would have put it in the contract.
However, it can be argued that implying terms into a contract is compatible with the principle of freedom of contract. The courts will only imply terms into a contract if the term is necessary for the contract to work or if the term would have been agreed by both parties. This seems to be a good reason to imply terms into a contract because the aim of the law of contract is to make business. One may say that the parties would have intended that their contract worked. Nevertheless, there is some limitation on the ability of the courts to imply terms, developed through case law, which protects the principle of freedom of contract. In Hillas & Co. (1932) Lord Wright stated that the courts should not rewrite the parties’ contract whilst implying terms. Furthermore, Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings summarized five conditions necessary to imply a term into a contract. This shows that there are several limitations to this “extraordinary power” to imply terms into a contract. Yet, only with the purpose of giving effect to the parties’ intentions, either to make the contract work or to imply a term which would have been agreed by the parties if it has been proposed. The latter requirement imposes a very strict standard for the imposition of terms. For these reasons stated previously, it seems that the principle of freedom of contract is not lost.
After Belize, the claims that judges have become overly interventionist in implying terms into contracts have become more vocal. Until Belize, it was thought that the implication of a term was a process of addition. However, Lord Hoffmann stated that “the implication of a term is an exercise in the construction of the instrument as a whole”. It was also decided that when applying a term in fact “the question for the court is whether such a provision would spell out in express words what the instrument, against the relevant background, would reasonably be understood to mean?”. The “business efficacy” and “officious bystander” tests were considered by the Board as not being different or additional tests. One may argue that these tests amounted to a restriction on the ability of the courts to imply terms and that after Belize the court had a greater power to imply terms. There was a concern shared by several authors that Belize took the law into a direction where the power to decide whether a term is to be implied has been removed from the contracting…
Written by Antonio Garibaldi Rodrigues