Court Clarifies Position On Implied Contractual Terms

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A contractual relationship between two parties is often not just about the written terms set out by the parties, but also about the terms which are not discussed when agreeing the contract. These terms are referred to as implied terms and are assumed by the court to be intended to be included in the contract.

Some terms are implied by statute. For example in B2B contracts, according to section 14 of the Sale of Goods Act 1979, the goods being sold must be of “satisfactory quality”.

Other terms are implied by the courts as a matter of fact. As of 2 December 2015, for terms to be implied into a contract by the courts, it must be obvious to do so or necessary to make the contract work. This is a significantly higher threshold than the previous test of “reasonableness”.

The Tests

The UK Supreme Court has now set out a clearer and principled approach. It will no longer be satisfied that the term is reasonable in the circumstances. Instead, there are two tests which must now be met; these are the “officious bystander” test and the “business efficiency” test. Only one of these need to be met.

  1. To meet the “officious bystander” test, a term must be obvious to be implied into a contract – i.e. “it goes without saying” that the term should be included in the contract.
  2. If a term is commercially necessary to be included in the contract, it may be implied into the contract under the “business efficiency” test.

Before implying a term into a contract, the starting point for a court would be to review the contract (if any) to determine the express terms stipulated within it. It would then decide whether further terms were implied in the contract.

You will not be required to prove that you actually had the intention to include the proposed implied term. Instead, the court will look objectively at what the intentions would be of reasonable people put in the situation of when the contract was agreed.

It is now more difficult to correct errors in drafting and therefore it is important that care is taken to include everything in your contract. To avoid problems arising, don’t weaken your position by negotiating a term which you think is reasonable. Finally, whilst evidence of contractual negotiations cannot be used as evidence of your actual intention, it may help the courts to illustrate the objective intentions of the parties in light of that ‘reasonable term’.

To avoid contractual disputes and claims, our commercial solicitors ensure contracts are well drafted, that you understand the contracts and that you know how to use and implement them. If you require assistance with the negotiation and preparation of your commercial contracts or would like assistance on any other commercial law matter, please do not hesitate to contact either Ismaeel Waseem or John Pickervance by email or on 0800 689 0831.

Ismaeel Waseem

About Ismaeel Waseem

Ismaeel Waseem is a Solicitor in the Corporate & Restructuring team at Forbes Solicitors. Ismaeel’s blogs cover the drafting of commercial contracts including, amongst others, those for the provision of both goods and services (including both business to business and business to consumer contracts); commercial agency and franchisee agreements; manufacturing and distribution; sport and charities. Ismaeel also writes on the identification, protection and exploitation of intellectual property and on a variety of IT issues.
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