Be careful to ensure your contract does what you intended it to
02 / 02 / 2016
Businesses often seek to have terms implied into contracts in situations where no specific term exists to cover unanticipated scenarios. The courts do imply terms, but when?
Contracts (commercial or otherwise) rarely cover every eventuality. They may be agreed many years before a dispute between the parties arises and may well not have envisaged scenarios which ultimately emerge. Parties might also claim that terms are later needed to make the contract “fair”, “reasonable” or “practicable” to favour their interests. However, one party’s view on such concepts may be very different to the other’s view. So how will the court decide?
Marks & Spencer v BNP Paribas
On 2 December 2015 the Supreme Court restated and clarified the legal test on deciding whether or not to imply terms into commercial contracts. This case concerned a claim by Marks & Spencer (M&S) (as business tenant) against its landlord BNP Paribas (BNP) for an apportioned refund of advance quarterly rent for a period when they were not in occupation after exercising a break clause. The drafting entitled M&S to terminate each lease by paying a break premium and giving six months’ notice. M&S exercised this right in July 2011, effecting termination on 24 January 2012.
On 25 December 2011, however, M&S paid BNP an amount equal to the full rent for the quarter from 25 December 2011 to 24 March 2012. There was no provision in the 70 page contract addressing whether and how the overpayment for the two month period after 24 January 2012 would be refunded.
The issue before the Supreme Court
On appeal to the Supreme Court, M&S sought to have a term implied into the leases obliging BNP to refund the rent paid for the period after the termination date.
The law on implied terms and the Belize Telecom case
The English courts are reluctant to intervene in agreements between two contracting parties for a number of reasons.
However, the courts might imply terms where it is:
- reasonable and equitable;
- necessary (to provide business efficacy);
- capable of clear expression; and
- not contradictory with the remainder of the contract.
(see BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings)
However, the decision of the Privy Council in Attorney General of Belize v Belize Telecom Ltd sat uncomfortably with these established principles. In that case, Lord Hoffman suggested that:
- if it is necessary to imply terms into a contract, it should be asked what the instrument “would reasonably be understood to mean” against its relevant background; and
- considering the necessity of a clause should not be a detached process from the ‘construction’ of a contract as this risks making additions to a contract as opposed to clarifying its existing meaning.
The Supreme Court’s clarification of the law
The Supreme Court held that:
- the five points listed in BP Refinery are not an exhaustive list of considerations to be applied rigidly;
- the requirement for a proposed implied term to be ‘necessary’ is not a requirement for absolute necessity, but for commercial or practical coherence;
- settled law at the date of the contract will be taken into account when considering what the parties intended; and
- the law on implied terms has not been diluted in consequence of Lord Hoffman’s comments in Belize Telecom. In particular the Supreme Court noted that:
- Lord Hoffman’s focus on what an instrument “would reasonably be understood to mean” does not lower the threshold for implying terms to one of whether it is reasonable to include the term;
- the above comment does not establish a rule that if contracting parties would have agreed to a term (had it been suggested to them), then that term may be implied; the parties must have actually intended for that term to be included;
- the notion that (a) the interpretation of a contract and (b) the implying of a term should not be detached, obscures the fact that these are distinct processes, governed by distinct rules; and
- the Privy Council’s comments are not authoritative but merely an inspired discussion.
The decision against M&S
The Supreme Court decided that BNP did not need to refund M&S the overpayment of rent because:
- the leases contained detailed provisions for various other payments;
- the Supreme Court therefore concluded that the omission in this regard was deliberate; and
- was not prepared to insert additional wording dealing with the refund of this rental overpayment.
- the law at the date the leases were entered into was that rent paid in advance could not be apportioned and the court was therefore unwilling to infer the contrary without the parties (who had taken professional legal advice) having explicitly accounted for it;
- a term will not be implied simply because it appears “fair” or because the parties would have agreed to it if it had been suggested to them at the outset, and
- for an implied term to be “necessary” you must ask whether it is necessary in order to make the contract work, or without the term, would it lead to absurdity? In this case, the lease was still workable without the implied term, and the proposed implied term’s absence did not render the contract commercially absurd.
Whilst this case concerned a commercial lease, it has universal application to all commercial contracts (i.e. business to business, not consumer contracts). It highlights the need for contracting parties and their legal advisors to try and consider all of the possible eventualities that may arise from entering into a contract, and to account for these eventualities with careful drafting as a restrictive approach is adopted when seeking to imply any term.
The message is clear: in a detailed commercial contract the court will uphold the bargain struck and will be reluctant to interfere with what the parties agreed.
In particular, the case acts as a reminder that, when reading your contract, you should only take the meaning of the contract from drafting itself and not from any prior understanding of what the contract is attempting to achieve. Although seemingly obvious, when you have been involved in the negotiation of a document it is perhaps easy to accidentally assume a meaning, which is not altogether obvious to a third party. In this instance, if M&S had considered that it was not obvious from the drafting how an overpayment of rent on early termination would be apportioned, a dispute may have been avoided altogether.
Nevertheless, if you find yourself prejudiced by a situation like this, it is important to consider the other avenues that may be available to you, such as disputing the interpretation of a specific clause, or rectifying a mistake that has accidentally been made in the body of a contract.
 The Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  UKSC 72 is available at http://www.bailii.org/uk/cases/UKSC/2015/72.html.
 The High Court of Australia decision in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings  UKPC 13 is available at http://www.bailii.org/uk/cases/UKPC/1977/1977_13.pdf.