IMPLICATION

KEY CASE: The Moorcock [1889]

Facts: Arranged that the plaintiff — owner of the Moorcock steamship — would discharge and take on cargo at the defendant's wharf on the River Thames. No charge made for mooring. Plaintiff was to pay for use of the cargo handling facilities. Obvious to both parties the vessel would take the ground at low water. When this occurred the vessel was damaged due to state of river bed. Defendants didn't own riverbed and had no control over it. HELD: TRIAL JUDGE — defendants had given no warranty or representations as to the state of the river bed, but had impliedly represented that they had taken such reasonable care to ascertain if it was safe.

The present case, in my opinion, represents a fourth category, or I would rather say a fourth shade on a continuous spectrum.

The court here is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms. In this sense the court is searching for what must be implied.

LORD WILBERFORCE:

"At the end there is a form for signature by the tenant stating that he accepts the tenancy. On the landlords' side there is nothing, no signature, no demise, no covenant: the contract takes effect as soon as the tenants sign the form and are let into possession.

In Equitable Life Assurance Society

"If a term is to be implied, it could only be a term implied from the language of [the instrument] read in its commercial setting."

the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points.

The first, conveyed by the use of the word "business" -- whether a different construction would frustrate the apparent business purpose of the parties. The second, conveyed by the use of the word "necessary", is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.

My Lords, in order to be able to choose between these, it is necessary to define what test is to be applied, and I do not find this difficult. In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less:

a test in other words of necessity.

HoL —

accepted that Council was in breach of implied covenants to do what was reasonable to keep the block repaired and lit.

IMPLICATION FROM THE PARTIES' LEGAL RELATIONSHIP (terms implied in law) Definition...

an an alternative to the implication of a term because it is necessary to make the contract work (or by reference to what it necessarily means), may be possible to imply a term because the contract is within a recognised class, but lacks terms which are normally found in that class of contracts.

There can be no doubt that there must be implied

an easement for the tenants and their licensees to use the stairs, a right in the nature of an easement to use the lifts an easement to use the rubbish chutes.

The formulated tests

are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant".

Would have been more straightforward to concede that the test for whether to imply a term is necessity,

but that the test for the specific term then to imply is reasonableness or proportionality.

HOWEVER,

court is equally interpreting the parties' contract contextually, taking into account the matrix of fact in order to discover the meaning which the parties must be deemed to have intended their contract to bear.

NECESSITY ESTABLISHED...

court then implies the reasonable term — defendant cannot be taken to warrant something over which they have no control but can be taken to warrant that they have found out the facts, and that if they had disclosed a hazard the plaintiffs would have been warned.

LORD HOFFMAN

explained view of relationship between interpretation of contracts and the implication of terms from the presumed intention of the parties — they were one and the same process, based on the court's objective construction of what the parties must be deemed to have meant.

There is only one question:

is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?

The question to be answered—and it is the only question in this case—

is what is to be the legal relationship between landlord and tenant as regards these matters.

LORD BRIDGE — full accepted that the criterion to justify implication of this type was necessity, not reasonableness, he found in the authorities a distinction:

necessity which operated in the business efficacy cases; and "the search, based on wider considerations, for a term which the law will imply as a necessary incident of a definable category of contractual relationship.

TEST is said again to be

necessity, in the sense that a term will be implied if the nature of the relationship between the parties requires it.

Exception is...

oral evidence may be admitted to show that a contract should be construed in accordance with local custom.

But it carries the danger of barren argument

over how the actual parties would have reacted to the proposed amendment. That is irrelevant.

CoA —

put the same implication in the form of a term rather than representation. Necessary in order to give such business efficacy to the contract as the parties, as reasonable businessmen, must have intended it to have. Plaintiff could have known nothing about the riverbed whilst the defendants might know everything. In the absence of the implied term, the plaintiff would merely have been buying the opportunity to put his vessel at risk.

CoA —

reversed first instance judgement on ground that Council not in breach of covenant.

The question for the court is whether

such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.

Likewise, it is not necessary

that the need for the implied term should be obvious in the sense of being immediately apparent

In such circumstances,

the fact that the actual parties might have said to the officious bystander "Could you please explain that again?" does not matter.

Underlying presumption was that

the parties had not meant to express in wiring the whole of their agreement, but had contracted by reference to known usage.

IMPLICATION FROM CUSTOM Definition...

the parties may be deemed to have contracted with reference to a custom objectively known to operate within a certain activity or area.

In the case of an implied term,

the stipulation has no existence in relation to the contract until the case is before the court.

IMPLICATION FROM PRESUMED INTENTION (terms implied in fact) Definition...

this category of implication gives effect to what the parties must be deemed to have intended. The term to be implied is identified by the court exclusively by reference to the parties' conduct, instead of being drawn from some sub-stratum of relevant practice.

BECAUSE... the two stage test from The Moorcock is used:

use of the facilities — therefore the implication of the term — are necessities. term to be implied should not go beyond what is necessary (expression limiting the obligation to the one appropriate in all the circumstances).

NB:

view of Lord Hoffman is that the first three are nothing more than aspects of the contextual interpretation of contracts.

BUT,

wrong to conclude on that basis that there is a close link between implication in fact and in law.

Correct approach is for the construction of the contract to come first

— and that will answer the question whether the parties have or have not contracted by reference to local custom.

CRUCIAL POINT

— court will not imply a term simply because it thinks it reasonable to do so.

DYSON LJ

— necessity as a standard in cases of this sort as elusive and protean, adding that it was preferable to recognise the rule of reasonableness, fairness and the balancing of competing policy considerations. Doubted whether necessity had in fact been the test applied in certain recent cases.

HOWEVER

— no general rule that business can only be done on the basis that the risk has been allocated in a reasonable way between the parties.

BEST EXPLANATION

— some intervention by the courts was justified on the basis of necessity because it was unthinkable that something as fundamental as the safety of the vessel would have been disregarded by reasonable people.

SCRUTTON LJ:

"The first thing is to see what the parties have expressed in the contract; and then an implied term is not to be added merely because the court thinks that it would have been reasonable to have inserted it into the contract. A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is , if it is such a term that it can confidently be said that if at the time the contract was being negotiated someone had said to the parties, "What will happen in such a case?" they would have both replied: "Of course, so and so will happen; we did not trouble to say that; it is too clear." Unless the court comes to such a conclusion as that, it ought not to imply a term which the parties themselves have not expressed."

The proposition that the implication of a term is an exercise in the construction of the instrument as a whole is not only a matter of logic

(since a court has no power to alter what the instrument means) but also well supported by authority.

This is an exception to the parole evidence rule

(which prevents a party to a written contract from presenting extrinsic evidence that dislocates an ambiguity and clarifies it or adds to the written terms of the contract that appears to be whole).

Q1: Does the existence of various practices tending in the same direction strengthen the submission that a certain custom exists?

A1: No, this state of affairs tends to undermine it, by showing that practice is still in a state of flux.

Q2: Can custom stand against a HoL decision tending against it?

A2: It depends how long ago the decision was made, and by reference to which facts. If there have been more recent developments in the relevant field of activity, it may be that the authority in question could not be distinguished on its facts.

Q: will the law come to accept that it includes a jurisdiction to supply default clauses into classes of legal relationship on the basis of reasonableness rather than necessity?

A: Perhaps not.

In Trollope & Colls Ltd

An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract.

KEY CASE: Attorney General of Belize v Belize Telecom [2009]

As a result of this case, the independent existence of (a) contractual interpretation and (b) the implication of terms in fact effectively ended. Facts: Privatisation and reorganisation of Belize telecommunications service. Two special directors sat on board of Belize Telecom, power to appoint and dismiss them belonged to holder of certain quantity and class of shares in company. No such entity now had requisite shareholding.

In such a case, it is said that the court implies a term as to what will happen if the event in question occurs.

But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.

There is no need to be persuaded that the parties would at once have agreed the term had their attention been drawn to it.

Courts are deciding whether to modify a paradigm contract of a certain type, and policy is arguably the principal consideration.

Went too far to submit that the custom was operative unless the agreement excluded it in express terms.

Custom would apply unless the agreement, on its true construction, either expressly or impliedly excluded it.

IMPLICATION OF TERMS

Differs from the incorporation of terms, where the stipulation in question is extant (it has been stated, written, displayed or referred to be one of the parties at some time before the contract is concluded).

PARKE B:

Extrinsic evidence of custom had long been admissible to annex incidents to written contracts with respect to which they were silent.

KEY CASE: Crossley v Faithful & Gould Holdings Ltd [2004]

Facts: An employee resigned on mental health grounds and followed employer's advice to backdate his resignation for tax reasons. As a result he lost his entitlement to benefits under his employer's insurance scheme. Argued that his employer was in breach of implied term to take reasonable care of his well-being. HELD: CoA — rejected term as too broad and nebulous to be implied generally into contracts of employment, and too burdensome if it were.

KEY CASE: Liverpool City Council v Irwin [1976]

Facts: Council was the owner of a large block of flats. Defendants were tenants of the flats within it. No complete tenancy agreement between the parties, but merely a document headed "Conditions of Tenancy" which was a list of obligations placed upon the tenants. Landlord had no express obligations. Block had been subject to neglect/vandalism and was not kept in good repair. Following a rent strike, Council took proceedings against tenants for possession of the flats. Tenants counterclaimed for damages and injunction requiring the council to maintain the block. HELD: FIRST INSTANCE — possession order granted, defendants received £10 damages as Council in breach of implied and statutory covenants.

KEY CASE: Scally v Southern Health & Social Service Board [1992]

Facts: One way of employees completing the legislatively required 40 years of qualifying service to be eligible for a state pension was to purchase additional years at a favourable rate. Plaintiffs brought case against their employers on the basis that the latter were in breach of an implied term to notify their employees of that right. HELD: HoL accepted that such a term was implied, subject to restriction on category of contracts to which it would apply. Necessary, because if there was no such obligation on the employer, then employees might have now way of knowing about a right which had been created for their benefit and it would be stultified.

KEY CASE: Smith v Wilson [1832]

Facts: Plaintiff promised the defendant 10,000 rabbits, and was to pay £60 per 1000, but refused to pay the sum, contending that in Suffolk 1000 rabbits actually meant 1200 rabbits. HELD: This was correct.

KEY CASE: Reigate v Union Manufacturing Co [1918]

Facts: Q arose in connection with a seven year agency agreement whether the agency might be terminated at any point though one party ceasing to do business. Parties had in fact specified two grounds on which the agency could terminate (death of agent or by period of notice). HELD: Refused to imply term — had the parties had to put to them they would probably have disagreed, and they had contractually recorded the extent of their agreement.

KEY CASE: Shirlaw v Southern Foundries [1939]

Facts: Shirlaw had been managing director of Southern Foundries. Contract stated he would hold the post for 10 years. During his tenure the company was taken over and its articles changed to permit two directors and the sectary to dismiss Shirlaw. They did. He sued for damages. HELD: Damages obtained at first instance. Appeal against award dismissed. Contract deemed to contain an implied term that the company's articles would not be altered to create the right to dismiss Shirlaw. Appeal to HoL unsuccessful.

KEY CASE: Hutton v Warren [1836]

Facts: Tenant of farm given notice to quit by landlord. Landlord later served notice that the tenant was bound — in accordance with custom of country — to continue the farm in a regular way until leaving. Tenant did so and duly quit, but claim the custom of the country entitled him to an allowance for the cost to him of seed and his labour in ploughing and sowing before he went. HELD: Court upheld the claim.

Q: whether the company's articles of association should be construed to allow for termination of the directors' ensure of office once the special shareholding had ceased to exist.

HELD: Implication was correct — required to avoid defeating what appeared to have been the overriding purpose of the machinery of appointment and removal of directors. Namely, to ensure that the board reflected the appropriate shareholder interests in accordance with articles' scheme.

"Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily surprise him with a common "Oh, of course!"

I think that if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong."

LORD WILBERFORCE envisages THREE accepted situations in which terms may be implied, and a fourth which he rejects.

Implication from custom. Implication from fact to make the contract work. in either of these cases the contract may appear complete without the implied term, although it will not work in accordance with what must be taken to be the parties' intentions. Implication in law — contract is manifestly incomplete and must necessarily be supplemented.

BROADLY, THE COURT RECOGNISES FOUR RATIONALES FOR IMPLICATION:

Implication from custom. Implication from presumed intention (terms implied in fact). Implication from the parties' legal relationship (terms implied in law). Implication from statute.

The danger....

It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean.

The imaginary conversation with an officious bystander in Shirlaw v Southern Foundries

Like the phrase "necessary to give business efficacy" vividly emphasises the need for the court to be satisfied that the proposed implication spells out what the contact would reasonably be understood to mean.

these instances of implication exist upon a spectrum insofar as the notion of necessity links them.

Lord Denning's willingness to imply terms which are reasonable must be wrong.

BUT, different view is possible.

Lord Hoffman. Implication based on presumed intention of the parties is now an extension of contractual interpretation. That has sundered it from interpretation in law. Implication of terms in law may come to look more like process by which courts define whether duties should be imposed in the field of tort. Appeals to necessity would then begin to sound beside the point.

TWO STAGE PROCESS:

Necessity establishes the power of the court to intervene. Reasonableness dictates the manner of its intervention.

KEY CONCEPT in this case — business efficacy.

Presumption that the parties, as reasonable business people, must have intended their contract to work. This necessity enables the court to imply a term to which the parties could not but have agreed as reasonable people had it been put to them.