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Implied terms in contracts

On 2 December 2015, the Supreme Court gave judgment in Marks and Spencer v BNP Paribas [2015] UKSC 72.

 In the leading judgment, Lord Neuberger reviewed the authorities on implying terms into commercial contracts. He concluded that they represented a clear, consistent and principled approach. He proceeded to add six comments, which are likely to be regarded as the current leading statement of the law.

First, when considering whether to imply a term, the court considers the perspective of the notional reasonable person in the position of the parties at the time they contracted and not the perspective of the actual parties. Secondly, a term should not be implied into a detailed commercial contract merely because it is fair or would have been agreed by either party if suggested to it. These are necessary but insufficient to permit implication. Thirdly, the requirement that a term must be “reasonable and equitable” will rarely, if ever, add anything to the test. Fourthly, only one of the requirements of business necessity and obviousness need be satisfied. Fifthly, if the issue is approached from the perspective of the officious bystander, it is vital to formulate the question posed with the utmost care. Sixthly, necessity for business efficacy is not absolute necessity but involves a value judgment. It may be more helpful to say that a term can only be implied if, without it, the contract would lack commercial or practical coherence.

Furthermore, the Privy Council’s judgment in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 has not diluted the test for the implication of contractual terms. Reasonableness is not a sufficient ground for implying a term; it must be necessary to do so.

Marks and Spencer claimed recovery of part of an advance rent payment made to enable it to exercise a break clause in its lease. It argued that a term should be implied that the landlord would repay the part of the payment that covered a period beyond the expiry of the lease.

In rejecting this argument, the Lord Neuberger approved the Court of Appeal decision in Ellis v Rowbotham [1900] 1 QB 740 that s. 2 of the Apportionment Act 1870 does not apply to advance rent payments. There were no exceptional circumstances justifying an implied term in the face of the common law position that the landlord could retain the advance payment.

Winston Jacob / 18th Dec 2015


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