The Supreme Court recently handed down a judgment that has clarified the law relating to implied terms.

The traditional approach has been that a term will only be implied into a contract if the term is so obvious that it goes without saying or that it is necessary to give business efficacy to the contract. The Supreme Court has confirmed that this approach remains good law and the Privy Council decision in AG of Belize –v- Belize Telecom [2009] 1 WLR 1988, which suggested that a term may be implied if it was reasonable to do so, should not be followed.

Background

Whether or not a term can be implied into a contract was developed through case law and summarised in BP Refinery (Westernport) Pty Ltd –v- Shire of Hastings (1977) 52 ALJR 20 as follows:

"The following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

In Belize Lord Hoffman suggested that the list of criteria set out in BP Refinery (above) were not different or alternative ways of testing for an implied term but different ways of expressing the same central proposition and that a term will be implied if a reasonable reader of the contract, with the relevant background knowledge, would understand the contract to include the implied term.

The M&S judgment

The recent case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Another [2015] UKSC 72 related to a dispute between M&S and its landlord. M&S had paid quarterly rent in advance and sought to reclaim that element of the rent that related to the period after its lease had expired (following service of a break notice). There was no express clause in the lease entitling M&S to a refund and the Supreme Court held that no such term should be implied.

The Supreme Court (led by Lord Neuberger) confirmed that the traditional approach was correct and that the criteria set out in BP Refinery (above) represented a clear, consistent and principled approach. He also added six comments as follows:

• The implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating a contract;
• A term should not be implied into a detailed commercial contract merely because it appears fair or because the court considers that the parties would have agreed it if it had been suggested to them; 
• The requirement from BP Refinery that an implied term be reasonable and equitable will not usually add anything. If a term satisfies the other requirements, it is likely to be reasonable and equitable;
• Only one of the business efficacy and obviousness requirements needs to be satisfied. Although it is likely in practice that if one is satisfied, the other will be too;
• If considering whether a term is implied by reference to the officious bystander it is “vital to formulate the question to be posed by [him] with the utmost care”; 
• Necessity for business efficacy involves a value judgment. The test is not one of "absolute necessity". A more helpful way of putting the requirement may be that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

Lord Neuberger also stated that Lord Hoffman’s observations in Belize are open to more than one interpretation and some of those interpretations are wrong in law. The right course should, therefore, be to treat those observations as “characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.