Our website is set to allow the use of cookies. For more information and to change settings click here. If you are happy with cookies please click "Continue" or simply continue browsing. Continue.

Company Law

Analysis - guidance - compliance

08 MAR 2017

A problem with contracts

Michael Griffiths LL.B LL.M

formerly Deputy Head of the School of Law, University of Wolverhampton and Company Law Conference Speaker

A problem with contracts

For all that contracts have been an essential part of English law for many centuries, and for all that contract law, being a creature of common law rather than of statute is based more on basic common sense than most other areas of law, problems can nevertheless arise even today. It may be that the average layman assumes that because he has at one time seen a written contract, perhaps for the purchase of a new car or for the provision of a package holiday for himself and his family, that he understands what a contract is and how the law applies to it. While this may be the case, anyone with any understanding of the law knows that there are essential key components without which a contract cannot exist – offer, acceptance, consideration and an intention to create legal relations. There is, however, one further element and this is certainty of terms.

Here we move into what might be regarded as far more difficult territory. What is a term? To a layman it may take some colour from the person using the word. To a teacher it might imply those weeks which have to be devoted to the drudgery of teaching until the next much needed holiday arrives. To the convicted criminal it might imply the length of time he has to spend either inside gaol or on parole before he can return to his career of choice. To the leader of a political party it might imply the length of time he is primus inter pares until either an election defeat or a successful coup within his party demotes him to the status of an also ran. However, to the person with some legal training it means something very different from these popular interpretations. A term is a provision within a contract. It may be a condition, something which is absolutely central to the contract or it may be a warranty, something which is incidental or collateral to that main purpose of the contract.

The majority of contracts never get reduced into writing. When you buy a newspaper or packet of sweets from a shop the contract is almost certainly going to be entirely oral. However, it is probably fair to say that the more important the contract, the more likely it is to be reduced into writing by one of the parties, usually with the agreement of the other party.

Some lawyers would argue that when a contract is to be reduced into writing then absolutely every term should be recorded. Others are more pragmatic. The written contract should record the main points of agreement between the parties rather than perhaps allowing the best to become the enemy of the good and trying to cover every eventuality. Indeed, often there are good reasons for not covering every term, for example in the case of the terms of a contract for a package holiday where, for reasons of constraints of space, the terms have to be reduced to no more than a single page in a brochure.

When, for whatever reason, all the terms of a contract are not reduced into writing, any gaps in the written agreement may be filled by terms which are implied either by the common law or by custom or by statute law. This is an area where even the most experienced lawyer can find himself in difficulties, especially where the terms are being implied by the common law.

In any event, the process of implication of terms into a contract involves a rather different exercise from that of construction of the written terms of the same contract. As Sir Thomas Bingham MR trenchantly explained in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at p 481:

'The courts' usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.'

This approach has long been one adopted by the courts. For example, Bowen LJ expressed it thus in his well-known judgment in The Moorcock (1889) 14 PD 64:

'In business transactions …  what the law desires to effect by the implication (of terms) is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men.'

However, in the Philips Case, Sir Thomas Bingham MR went on to say that: “where parties have entered into a lengthy and carefully drafted contract but have omitted to make provision for the matter in issue, it is difficult to infer with confidence what the parties must have intended – the parties may have chosen to leave the matter uncovered in their contract in the hope that the relevant eventuality will not occur”.

In the Privy Council decision in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Lord Simon of Glaisdale, giving the advice of the majority of the Board, said that it was "not … necessary to review exhaustively the authorities on the implication of a term in a contract" but that 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".
The Board considered that this list was best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.

Article continues below...
Gore-Browne on Companies

Gore-Browne on Companies

The pre-eminent source for interpreting and applying company legislation

More Info £1,476.00
Available in Lexis®Library
Loose & Griffiths on Liquidators

Loose & Griffiths on Liquidators

The Role of a Liquidator in a Winding Up

A guide to the law relating to company liquidations

Available in Lexis®Library

Moreover, the following were all good reasons for saying that a reasonable man would not have understood that the alleged implied term was meant as a provision of the contract:

  1. the fact would be inequitable or unreasonable,
  2. or it would contradict what the parties have expressly said,
  3. or that it is incapable of clear expression.

In Autoclenz Ltd v Belcher [2009] EWCA Civ 1046 Aikens LJ and Lord Clarke MR stated that the question regarding the incorporation of implied terms is whether such proposed implied term is inconsistent with the express provisions of the contract and whether the court is able to find this to be the case.

The most recent case in which implied terms have been considered by a senior court is Irish Bank Resolution Corporation Ltd (in special liquidation) v Camden Market Holdings Corporation [2017] EWCA Civ 7. The Bank is incorporated in the Republic of Ireland and at the time of the trial had gone into special liquidation. This is a modified form of the statutory rules on the liquidation of a company within the Republic, the principal differences being the greatly reduced roles of the High Court and of the Central Bank in the case of the winding up of a bank. The Irish Bank Resolution Corporation Act 2013 requires the Minister for Finance to issue instructions as to how the winding up of the company should proceed to the special liquidator. Immediately following the passing of the Act, the Minister for Finance (the “Minister”), further to an obligation imposed on him by the Act, appointed a special liquidator to the Bank. The Act prevents the bringing of any other insolvency proceeding against the Bank without the consent of the special liquidator. Further, the making of the special liquidation order  suspends all legal proceedings against the Bank and prevents the commencement of any further legal proceedings against it.

The Bank had a loan book which included amongst its borrowers the Camden Market Group of companies. These facilities were for the Camden Group to purchase and develop properties at Camden Market. The special liquidators were instructed by the Minister of Finance to sell the loan book. At the same time the Camden Group was itself trying to sell properties which were the subject matter of the loans. Under the facilities agreement the Bank was permitted to disclose information about the Camden Group together with the finance documents to any potential purchaser of the loan book.

This was duly done but the Camden Group was unhappy that in marketing the loan book as part and parcel of a package containing not only debts which had been properly serviced but also certain distressed debts, the Bank’s liquidators had given such an impression that would make the sale unattractive to potential purchasers. The argument was that this put the Bank in breach of an implied term that the Bank would do nothing which might hinder the ability of the Camden Group to market the properties. Thus the Camden Group commenced proceedings against the Bank for breach of this implied term. 

The Bank sought an order for a summary striking out of the claim. This was refused at first instance on the ground that there was an argument that the implied term existed and so the matter should go to trial. The Bank duly appealed, claiming that such an implied term could not be read into the contract since it would, if permitted, expressly contradict an express provision of the contract.

The Court of Appeal allowed the Bank’s claim for a striking out. The Camden Group’s case was bad in law and, as such, had no prospect of succeeding. Beatson LJ, in giving the judgment of the Court, stated that “an implied term must not contradict any express term of the contract”, pointing out in such a case that this is a “cardinal rule” in the interpretation of contracts in such circumstances.     

The decision in the Camden Case is of great importance in that it highlights that when asking whether a term can be implied into a contract which has been reduced into writing the court must look at whether the term which is claimed to be implied is inconsistent with express provisions of the contract. In particular, where an express power is given to one of the parties to  the contract it cannot be restricted in its interpretation by an implied term.