‘JUDGES HAVE ALTOGETHER TOO MUCH INPUT INTO THE TERMS OF LEGALLY BINDING CONTRACTS IN ENGLISH LAW.’
Fernanda De Faria
When considering the English courts’ approach to contracts, the main practice is to respect the principle of freedom of contract and not interfere. This is supported by the increase in judges encouraging alternative dispute resolutions (ADR), such as arbitration, to both decrease the backlog of the courts and provide an alternative solution. Implied terms, according to Robert Megarry, are “so often the last resort of counsel in distress”. Nevertheless, there are situations that require terms to be implied, when the expressed terms — which hold precedence and should not be ignored or changed by those implied— cannot lead to a resolution. Implied terms may arise from common law (by custom, by law or in fact) or statute. This essay will look at how each of these occur, considering whether the judiciary has too much input or if their limitations are sufficient.
Terms implied by custom require the custom to be clearly established. A popular case is Hutton v Warren where the decision on allowance for seed and labour was made to be included in all contracts of that type. A more recent case demonstrates the strict approach as to the notoriousness of the custom. In Allen v TRW Systems Ltd the court of appeal did not find the argument of three previous payments sufficient to imply a legal obligation on the employer. Although this method may be criticised for possibly binding a party to a custom they are unaware of, the previous case demonstrates the rigidity followed when determining its use.
Terms by statute are inevitably included in all relevant contracts, although they can be expressly excluded. These aid the parties by making the process more efficient as certain clauses are already covered by law. An example of this is the Unfair Contract Terms Act which excluded the possibility of implied terms being rebutted in business-consumer contracts. They also support the court by giving a guideline as to whether other implications would be unreasonable, confirmed by the case Wong Mee Wan v. Kwan Kin Travel Services Ltd where terms regarding quality of skills were found reasonable due to the Package Travel, Package Holidays and Package Tour Regulations 1992. On the other hand, this can be seen as infringing the freedom of contract by imposing an obligation and interfering with trade which is so vital in our society.
Terms implied by law are irrespective of parties’ intentions and are characterised by their aim of regulating specific types of contracts. This entails the contract to be of common type (so standard requirements can be set) and an unfilled gap in the already expressed terms of the contract. When judges are implying terms they must first define the type of contract. This is of essential importance as they serve as precedence. It can be as broad or narrow as they find just, however courts tend to be cautious. This can be seen in Liverpool City Council v Irwin where the House of Lords specified the type of tenancy, as well as in Lister v. Romford Ice and Cold Storage Co. Ltd where the contract was not of general employment, but of employer and driver of motorcycle. This is vital to avoid unfairness in decisions, such as the one in Reid v. Rush & Tompkins Group Plc where the Court of Appeal was not ready to imply the term due to it leading to imposition into future contracts even though it did not represent all employment contracts given its specific context. Thus, terms implied in law have a broader nature due to the wider considerations of public policy and so, arguably, require more care from the judiciary.
Terms implied in fact are based on the subjective analysis of a contract and its context. They differ according to each contract, ensuring commercial or practical coherence within the given situation. Before the implication occurs it is required that the judges analyse the express words of the contract to be able to do so according with the parties’ intentions. There are requirements when implementing a term and these were stated by Lord Simon:
“(a) it had to be reasonable and equitable; (b) it had to be necessary to give business efficacy to the contract, so that no term would be implied if the contract was effective without it; (c) it had to be so obvious that "it went without saying"; (d) it had to be capable of clear expression; (e) it could not contradict any express term of the contract.”
For this to be accomplished judges could use the officious bystander test or the business efficacy test. The first was established in the case of Shirlaw v Southern Foundries and revolves around the question of obviousness, whether if an “officious bystander” was to make a suggestion regarding the term to the parties, they would, according to MacKinnon LJ, reply with an ‘Oh, of course!’…
Written by Fernanda De Faria