‘JUDGES HAVE ALTOGETHER TOO MUCH INPUT INTO THE TERMS OF LEGALLY BINDING CONTRACTS IN ENGLISH LAW.’

Eaad Albar

Introduction

This essay will critically examine the view that ‘judges have altogether too much input into the terms of legally binding contracts in English law’. In particular, it examines contracts under English Law, terms implied in law and in fact, and limits to the implication of terms. The essay will achieve this through the examination of legislation, case law, and expert academic commentary in the field. Ultimately, it finds that the view in question is accurate. Finally, it recommends points of view which may improve upon the current legal position.

 

Contracts under English Law

A contract is a legally binding agreement between two or more parties. Several requirements are needed for a contract to be formed; an agreement, consideration and intention to create legal relations.

Within the civil courts, judges seem to play the most important role in contract law. They are tasked with ruling on the most appropriate remedy, its precise terms[1] as independent and impartial assessors of the facts.

Two distinct types of terms may appear to exist in a contract, respectively, they are expressed and implied terms. The former is a term which has been specifically stated and agreed by both parties at the time of the contract’s formation. Moreover, the latter is a term which is implied by judges, providing that the parties have not expressed all the primary obligations or do not provide for every eventuality.[2]

Additionally, only implied terms shall be examined in detail as they seem to be the most relevant for the purposes of this essay’s aims and objectives.

 

Terms Implied in Law and in Fact

Traditionally, implied terms have been categorised into two groups; terms implied in fact and terms implied in law.

Terms implied in law are ones which are consistently implied into all contracts of a certain nature, without regard to the intentions of the parties.[3] The Court in Crossley v Faithful & Gould Holdings Ltd[4] appears to have suggested that the decision to imply a term in law relied on questions based on the reasonableness, fairness and balancing of competing policy, rather than necessity.

Poole argues that the desire to regulate contracts is apparent in the decisions of courts.[5] Furthermore, Lord Denning MR in Shell UK Ltd v Lostock Garages Ltd[6] argued that the process of implication encompasses that the questions to ask were not necessarily about the intention of the parties, but whether the law has already defined the obligation or its extent. Furthermore, it seems that this is done to prevent parties from taking an unfair advantage, whilst also adequately protecting all parties involved.[7]

Lord Wilberforce in the landmark decision of Liverpool City Council v Irwin[8] argued that the test which should be employed is one of necessity. The courts later dealt with the same issue in Tai Hing Cotton Mill Ltd v Chong Hing Bank Ltd[9] and Scally v Southern Health and Social Services Board[10] where Lord Scarman and Lord Bridge respectively concurred with the earlier argument of Lord Wilberforce by referring to terms as a “necessary incident” of a “definable category of” contractual relationships.

Although the language used seems to be similar, it appears that “necessary on the facts” related to terms implied in fact, whereas “definable category of contractual relationship” related to terms implied in law, thus, they seem to be distinct.

Finally, it appears that “necessary incident” holds a wider set of criteria to determine the meaning. Thus, terms implied in law on the basis of being a necessary incident of such contracts seem to be founded upon reasonable expectation.

Terms are deemed to be implied in fact when applied on the basis of an intention imputed to the parties, from the actual circumstances as a process of addition of terms to ensure that the particular contract does not lack “commercial or practical coherence”.[11] Moreover, this seems to function to ensure that a contract is effective.

In order to identify the intentions of the parties, the courts must interpret the expressed terms contained in the contract. This will allow the courts to imply terms without interfering with the expressed meaning of a contract.

Lord Hoffman in Attorney-General of Belize v Belize Telecom Ltd[12] (Belize) argued that by nothing happening, it results in the most usual type of interference. Furthermore, the Court in Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc., The Reborn[13] (Mediterranean Salvage) concluded that if parties had wanted to include a term, they would have done so.[14]

Furthermore, Lord Cross in Liverpool City Council v Irwin[15] argued against Lord Denning’s proposal to allow a term to be implied where it was simply just and reasonable to do so, this was followed by the House of Lords’ rejection of such a test.[16]

Additionally, the Court of Appeal corrected the decision in Dear v Jackson,[17] as it appears that it became threateningly close to changing ‘reasonableness’ under the guise of contractual construction. Ultimately, the decision stated that the implication of a term can only occur when the term is a necessary inclusion in the contract.[18]

Prior to Belize,[19] the conditions thought necessary to imply a term in fact were summarised by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[20] Firstly the terms must be reasonable and equitable.[21] Secondly, it must be necessary to give business efficacy.[22] Thirdly, it must be so obvious, that it goes without saying.[23] Fourthly, it must be capable of clear expression.[24] Fifthly, it must not contradict any express terms.[25] Finally, to imply a term in fact, it was considered that the term had to satisfy either the ‘officious bystander’ test or the ‘business efficacy’ test.

The ‘officious bystander’ test was established in Shirlaw v Southern Foundries,[26] which imposed a strict standard for the imposition of terms. Prima facie, the test considered that what is left to be implied is something so obvious that it goes without saying. This is best demonstrated in Shell UK Ltd v Lostock Garage Ltd,[27] where a term could not be implied as it could not be formulated with sufficient precision.[28]

The courts use the ‘business efficacy’ test to imply a term with the objective of improving the effectiveness of contract. Poole argues that this is done as it is assumed that it was the intention of the parties.[29] The requirement is derived from The Moorcock[30] where the Court implied terms in order to create a working contract…

 

Written by Eaad Albar

 

[1] ‘Courts and Tribunals’ <https://www.judiciary.uk/about-the-judiciary/the-justice-system/jurisdictions/civil-jurisdiction/>  accessed 4th December 2018

[2] J. Poole, Contract Law (13th edn, Oxford University Press, New York 2016) 216

[3] E. Mckendrick, Contract Law Text, Cases and Materials  (7th edn, Oxford University Press, New York 2016) 352

[4] [2004] EWCA Civ 293

[5] Poole (n 2) 218

[6] [1976] 1 WLR 1187

[7] Poole (n 2) 218

[8] [1977] AC 239

[9] [1986] AC 80

[10] [1992] 1 AC 294

[11] Poole (n 2) 221

[12] [2009] UKPC 10

[13] [2009] EWCA Civ 531

[14] Poole (n 2) 221

[15] [1977] AC 239

[16] Poole (n 2) 221

[17] [2013] EWCA Civ 89

[18] Poole (n 2) 221

[19] [2009] UKPC 10

[20] (1977) 180 CLR 266

[21] ibid

[22] ibid

[23] ibid

[24] ibid

[25] ibid

[26] [1939] 2 KB 206

[27] [1976] 1 WLR 1187

[28] Poole (n 2) 223

[29] ibid

[30] (1889) 14 PD 64

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