The Jurisprudence of Implied Terms: Reconciling Necessity, Obviousness, and Policy in Financial Contractual Relationships

A vanilla contractual agreement

Contractual terms may be express or implied[1]. Express terms are explicitly agreed upon, while implied terms are recognised by the courts to fill gaps in the agreement. When parties leave certain details unstated or more commonly fail to address unforeseen contingencies, courts may imply terms to resolve these gaps[2]. Terms may be implied by either statute, or common law[3]. Terms implied by common law arise as a matter of custom, fact, or law; this paper considers only the latter two[4], examining their tests, ambiguities in case law, providing reasoned recommendations to limit two ambiguities concerning the scope of the tests.

Terms implied in fact are introduced into individual contracts to give effect to the presumed intentions of the parties, determined objectively with respect to the express terms, surrounding circumstances and commercial common sense[5]. The implication of terms is justified when it is necessary for business efficacy or is so obvious that both parties would have accepted it when contracting. Terms are only implied if they do not contradict an express term[6]; necessary, but contradictory terms would render the contract unworkable ab initio, undermining the parties’ intention for contractual efficacy.

The classic test for implying terms in fact, established in The Moorcock[7], relies on the presumed intentions of the parties to ensure business efficacy. Courts imply the minimum term necessary to maintain contractual efficacy, thus imposing the least onerous obligation upon the liable party[8]. The term is not absolutely necessary, instead it is to ensure ‘commercial or practical coherence’[9], as confirmed in Barton[10]. This was supplemented by the officious bystander test in Shirlaw[11]: for a term to be implied it must be so obvious that, were a bystander to propose an express provision for it within the agreement, the parties would dismiss the suggestion with “Oh, of course!”[12]. Simply, the term must "go without saying" [13] reflecting a mutual, implicit understanding that it governs the contractual relationship. Importantly, the bystander does not determine implication, but merely raises the issue, from which the parties' assent may be inferred[14]. This test is strict, requiring mutual assent: it is insufficient if the bystander’s question would have prompted negotiation resulting in an express provision[15]. Accordingly, courts must identify a single term both parties would accept. If a precise term cannot be clearly stated, obviousness and necessity are undermined, precluding implication in fact[16].

Lord Hoffmann argued that implying terms in fact and construing express provisions are aspects of the same exercise (Belize[17]). His Lordship stated courts should imply a term if it expresses what the contract, read in context, would reasonably be understood to mean[18]. This can be respectfully criticised: interpretation naturally precedes[19] and remains distinct from implication, as gaps can only be confidently identified after fully construing the agreement[20]. In Marks and Spencer[21], Neuberger PSC rejected this approach and reaffirmed the traditional tests. More recently, following Neuberger PSC, the test has been formulated as requiring the term to be[22]: (a) reasonable and equitable, (b) necessary to give business efficacy, or (c) obvious, so as to go without saying, (d) capable of clear expression and (e) consistent with express terms. Importantly, (b) and (c) are alternatives[23], not cumulative as some earlier judgments suggested[24].

The abovementioned test is well-established in recent decisions[25], yet one fundamental element remains unclear: how should the officious bystander's question be framed? [26] Neuberger PSC stressed the need to frame the question with ‘utmost care’[27]. This caution is well founded, as the question’s framing will often determines the answers given[28]. Since judges ultimately frame this question, they inevitably influence the hypothetical answer that ostensibly reflects the parties' mutual intentions. This discretion undermines certainty, as parties cannot foresee how a judge might address any omissions. To mitigate this, we recommend judges frame the question as neutrally as possible. This guideline has advantages. Firstly, neutral framing minimises the potential for inadvertent judicial influence, ensuring the term satisfies (a). Secondly, neutral framing increases the likelihood of mutual assent, thus also that a term can be implied to salvage an otherwise ineffective contract, thereby supporting the continuity and promotion of commerce. Lastly, this approach reflects the essence of terms implied in fact, by allowing the test to adapt to the specific context of each contract. Nevertheless, the law concerning the implication of terms in fact is settled at present: courts will imply a term in fact if it is reasonable and equitable, necessary for business efficacy or obvious, capable of clear expression, and consistent with express terms.

Terms implied in law are considered ‘necessary incidents’[29] of specific contractual relationships, such as buyer-seller agreements. These terms apply universally as default rules[30] unless expressly excluded or modified by the parties[31]. Unlike terms implied in fact, there is no need for the term to be capable of singular expression[32], as the implication is not based upon the parties’ intentions.

The leading case here is Irwin[33], where tenants in a council block sought to imply a term requiring the landlord to maintain the common areas in reasonable repair. In his judgement[34], Lord Denning M.R., dismissing the rigid necessity tests[35], proposed that terms could be implied in law based on what is reasonable, rather than solely on necessity or presumed intention: ‘[t]he courts imply a term according to whether or not it is reasonable in all the circumstances to do so’[36]. On appeal, Lord Wilberforce delivering the lead judgment[37], varied this decision, holding terms implied in law must arise from necessity within the contractual relationship, not reasonableness alone: an obligation should only be read into the contract as the nature of the contract itself requires[38]. Lord Salmon’s statement[39], as subsequently approved[40], reinforced necessity as the basis for implication. The court held, as with terms implied in fact, only the minimum term necessary for the particular contractual relationship will be imposed. Subsequent cases, however, complicated this test.

In Scally[41], while ostensibly applying Lord Wilberforce's necessity test[42], Lord Bridges’ emphasis on reasonableness introduced ambiguity, suggesting the term implied was reasonable rather than necessary[43].  However, the suggestion that implication should be based on reasonableness, fairness and policy, rather than the ‘elusive’ concept of necessity[44], introduced uncertainty. Nonetheless, precedent dictates that, strictly, the test in Irwin remains the law, yet one particular element remains unclear, as discussed below.

The scope of a contractual “type” is crucial for determining when the courts will imply a term in law. Courts imply terms as necessary incidents of a ‘genus’[45] (e.g., buyer-seller, employment, landlord-tenant), not sui generis contracts or standardised forms, regardless of how frequent their usage[46]. This generates several issues, with the central being: how broadly should genera be framed? Despite academic[47] and judicial[48]  recognition of these issues, no clear thresholds exist.  Here, the tension between generality and specificity is central. Broadly framed genera reduce the likelihood that a term is necessary for all contracts within them, while narrow genera risk undermining the distinction between terms implied in fact, which ostensibly reflect the parties’ mutual intent, with terms implied in law, which arise regardless of intent.  As no guideline exists to determine the framing of genera, judges retain a discretion to determine their scope, thus inevitably, if a term is a necessary incident thereof. As with terms implied in fact, this latitude risks unfairly favouring one party. Accordingly, we propose that, while terms should still be necessary incidents of a particular genus, the genera’s scope itself should be shaped by relevant policy considerations and commercial circumstances. This approach has several advantages. Firstly, it allows the test to evolve with the invariably dynamic commercial context within which contractual relationships arise. Secondly, is also resolves case law tension by affirming necessity while integrating reasonableness and policy to define the scope of genera. Finally, this differs from the dismissed approach taken by Lord Denning M.R. in Irwin, as necessity is still the decisive factor for determining implication, yet his Lordship’s underlying consideration of reasonableness here is being given effect in defining the genus.

To summarise, terms are implied in fact when they are reasonable, necessary for business efficacy, obvious, capable of clear expression, and consistent with express terms. Terms are implied in law when they are necessary incidents of the particular contractual relationship, irrespective of the parties' intentions. The key differences between the two categories lie in the basis for implication - terms implied in fact reflect the presumed intentions of the parties, while terms implied in law are imposed based on necessity within the specific contractual context. While the tests for implication in both categories are well-established, uncertainties persist, particularly regarding the framing of the bystander’s question for terms implied in fact and the scope of contractual types for terms implied in law. While we submitted reasoned recommendations for minimising these uncertainties, these particular ambiguities require further judicial consideration to bring greater certainty to this area of contract law.

Bibliography

ABL Phang, ‘Implied terms in English law - some recent developments’ [1993] JBL 242

E Peden, ‘Policy concerns behind implication of terms in law’ [2001] LQR 459

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[1] ‘Contractual terms’ include conditions, innominate terms and warranties (Chitty, [17-001]; Wuhan Ocean Economic and Technical Co-operation Co Ltd v Schiffahrts-Gesellschaft “Hansa Murcia” mbH & Co KG [2012] EWHC 3104 (Comm), [2013] 1 All E.R. (Comm) 1277.)

[2] Chitty, [17-002].

[3] An alternative three-fold classification was provided by Lord Wright in Luxor (Eastborne) Ltd v Cooper [1914] AC 108, 137-38 (HL); cf. Andrews, Contract Law in Practice, [18.01]; O’Sullivan and Hilliard, The Law of Contract, para 7.81.

[4] Terms implied by statute and custom are significant, but beyond the scope of this paper. For more on terms implied by statute, see O’Sullivan and Hilliard, The Law of Contract, para 7.80; R Merkin KC and S Saintier Poole’s Textbook on Contract Law, s. 5.4.2.4; Arvind, Contract Law, s. 8.2.2; Andrews (n. 3) para. 18.02.  For more on terms implied by custom, see: Hutton v Warren (1836) 10 ER 517; British Crane Hire Corporation v Ipswich Plant Hire Ltd [1973] EWCA Civ 6, [1975] QB 303; R Merkin KC (n. 4) s. 5.4.2.1; Arvind (n. 4) s. 8.4; Andrews (n. 3) paras. 18.136-18.138; K Lewison, The Interpretation of Contracts, ch.6, s.12.

[5] Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] A.C. 742 at [15]; Andrews (n. 3) para. 18.35

[6] Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283.

[7] Per Bowen LJ [1889]14 P.D. 64, 68 (CA); cf. Marks & Spencer Plc (n 5) at [18]; Andrews (n. 3) [18.37].

[8] Per Lord Esher MR in The Moorcock (n. 7) at [67].

[9] Per Neuberger PSC in Marks & Spencer Plc (n 5) at [21]; cf. O’Sullivan (n. 3) para.7.86; R Merkin KC (n. 4) s. 5.4.2.3; Arvind (n. 4) s. 8.3.4.

[10] Per Rose JSC in Barton v Morris and another in place of Gwyn-Jones [2023] UKSC 3, 40; cf. O’Sullivan (n. 3) para.7.87 – 7.88.

[11] Shirlaw v Southern Foundries Ltd [1939] 2 K.B. 206; note, this was originally introduced in Reigate v. Union Manufacturing Company [1918] 1 K.B. 592, 605.

[12] Ibid, 277.

[13]  BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).

[14] Lewison, The Interpretation of Contracts, ch.6, s.9, para 6.99; O’Sullivan (n. 3) para.7.90; J McCaughran, ‘Implied Terms: The Journey of the Man on the Clapham Omnibus’ 608, p.614.

[15] Jackson v Dear [2013] EWCA Civ 89; cf. O’Sullivan (n. 3) para.7.90, citing Yoo Designs Services Ltd v Iliv Realty Pte Limited [2021] EWCA Civ as a clear example where a term would never be mutually assented to.

[16] As noted in Ashmore v Corporation of Lloyds (No. 2) [1992] 2 Lloyd’s Rep 620; cf. Lord Goddard CJ in R v Paddington and St Marylebone Rent Tribunal, ex p Bedrock Investments [1947] KB 984, 990 and Lord Denning M.R. in Shell UK v Lostock Garages [1977] 1 All ER 481, 488.

[17] Attorney General of Belize v Belize Telecom Ltd [2009] 1 W.L.R. 1988

[18] Belize (n 17), at [18, 21-22]

[19] Hodge JSC in Trump International Golf Club Scotland Ltd v Scottish Ministers [2015] UKSC 74, [2016] 1 W.L.R. 85, 35.

[20] Neuberger PSC in Marks & Spencer Plc (n 5) at [28].

[21] (n 5)

[22] As laid out by Coulson LJ in Candey Ltd v Bosheh [2022] EWCA Civ 1103, [2022] 4 WLR 84, at [29], citing Reigate (n 11) [at 605] for (c), Shell UK (n 18) at [2104] for (d) and Marks and Spencer Plc (n 5) at [28] for (e).

[23] Per Neuberger PSC in Marks and Spencer (n 5), [21]. This approach has been followed in numerous senior court judgments, including, but by no means limited to: Steyn LJ in Mosvolds Rederi A/S v Food Corpn of India, The Demoder General T J Parke and King Theras [1986] 2 Lloyd’s Rep 68, 70; Kerr LJ in Barrett v Lounova (1982) Ltd [1989] 1 All ER 351, 354; May LJ in Marcan Shipping (London) Ltd v British Steamship Co, The Manifest Lipkowy [1989] 2 Lloyd’s Rep 138, 142; Parker LJ in Industrie Chimiche Italia Centrale and Ceralfen SA v Alexander G Tsavlisis & Sons Maritime Co, The Choko Star [1990] 1 Lloyd’s Rep 516, 524.

[24] Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337; Libra Bank plc v Financiera de la Republica AS [2002] EWHC 1480, 80.

[25] Cases where a term implied in fact was found, applying the orthodox tests: Devani v Wells [2019] UKSC 4, [2020] AC 129; Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, [2017] ICR 531; Harcus Sinclair llp v Your Lawyers Ltd [2019] EWCA Civ 335, [2019] PNLR 19, [2019] 4 WLR 81; Bates v Post Office Ltd (No 3: Common Issues) [2019] EWHC 606 (QB); Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL); Triple Point Technology Inc v PTT Public Co Ltd [2017] EWHC 2178; JN Hipwell & Son v Szurek [2018] EWCA Civ 674; Clin v Walter Lilly & Co Ltd [2018] EWCA Civ 490, [2018] BLR 321; Duval v 11-13 Randolph Crecent Ltd [2018] EWCA Civ 2298, [2019] Ch 357, [2020] UKSC 18, [2020] AC 485. Where a term implied in fact was not found, applying the orthodox tests: Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 990, [2017] 1 WLR 1893; Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132, [2019] 1 All ER (Comm) 381; Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525, [2019] 1 All ER (Comm) 955; Ukraine v Law Debenture Trust Corpn plc [2018] EWCA Civ 2026, [2019] QB 1121; Harry Greenhouse v Paysafe Financial Services Ltd [2018] EWHC 3296 (Comm); Al Jaber v Al Ibrahim [2018] EWCA Civ 1690, [2019] 1 WLR 885; Sports Mantra India Private Ltd v Force India Formula One Team Ltd (In Liquidation) [2019] EWHC 2514 (Ch).

[26] For a further academic treatment of this issue, see J McCaughran, ‘Implied Terms: The Journey of the Man on the Clapham Omnibus’ 608, p. 612.

[27] In Marks and Spencer Plc (n. 5) at [21], citing Lewison, The Interpretation of Contracts 5^th ed (2011), p. 300, para 6.09. For a more recent reference, see Lewison, The Interpretation of Contracts, ch.6, s.9, para 6.93.

[28] Per Aicken J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 C.L.R. 337, 374.

[29] Bridge LJ in Scally v Southern Health and Social Services Board [1992] 1 AC 294, 307; cf. Scarman LJ in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, 107.

[30] Lord Steyn in Malik (and Mahmud) v Bank of Credit and Commerce International SA [1998] 1 AC 20, 45 (HL); cf. Andrews, (n. 3) para. 18.03. The phrasing ‘standardised default rule’ is also present within modern US terminology, per Lord Steyn in Society of Lloyd’s v Clementson [1995] CLC 117, 131.

[31] This exclusion must be explicit, as an entire agreement clause does not seem to prevent either the implication of terms in fact or law (Andrews (n. 3) para. 18.130).

[32] Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555, 576: ‘If I were to try to apply the familiar tests where the question is whether a term should be implied in a particular contract in order to give it what is called business efficacy, I should lose myself in the attempt to formulate it with the necessary precision. […] But this is not conclusive; for, as I have said, the solution of the problem does not rest on the implication of a term in a particular contract of service but upon more general considerations.’ (Viscount Simmonds)

[33] Liverpool City Council v Irwin [1976] QB 319 (CA), [1977] AC 239 (HL)

[34] Irwin (n 32) [1976] QB 319 (CA) at [329-333].

[35] ‘I do not think the courts should ask what the parties intended, or what is necessary to give business efficacy to the contract. What is necessary is to ask: what is reasonable in all the circumstances?’ Irwin (n 32), at [331]

[36] Ibid

[37] Irwin (n 30) [1977] AC 239 (HL), 251-258.

[38] Ibid, 254.

[39] Ibid, 262.

[40] Scarman LJ in Tai Hing, (n 28), at [105] and Coulson QC in Jani-King (GB) Ltd v Pula Enterprises Ltd [2007] EWHC 2433 (QB), 1 Lloyd’s Rep 305, at [47].

[41] Scally v Southern Health and Social Services Board [1992] 1 A.C. 294 at [307].

[42] ‘A clear distinction is drawn […] between the search for an implied term necessary to give business efficacy to a particular contract and the search, based on wider considerations, for a term which the law will imply as a necessary incident of a definable category of contractual relationship. If any implication is appropriate here, it is, I think, of this latter type.’ [emphasis added], Ibid.

[43] “I fully appreciate that the criterion to justify an implication of this kind is necessity, not reasonableness. But I take the view that it is not merely reasonable, but necessary, in the circumstances postulated, to imply an obligation on the employer to take reasonable steps to bring the term of the contract in question to the employee's attention, so that he may be in a position to enjoy its benefit.” Ibid.

[44] Crossley (n 44), [36].

[45] Per Gatemore J in Ashmore v Corpn of Lloyds (No 2) [1992] 2 Lloyd’s Rep 620: ‘it is not part of a genus it is sui generis […] there must first be established a genus’ at [630].

[46] Shell UK (n 18) [1977] 1 W.L.R. 1187: ‘Into which of the two categories does the present case come? I am tempted to say that a solus agreement between supplier and buyer is of such common occurrence nowadays that it could be put into the first category [terms implied in law]: so that the law could imply a term based on general considerations. But I do not think this would be found acceptable. Nor do I think the case can be brought within the second category [terms implied in fact].’ [Emphasis added], 1197

[47] See O’Sullivan (n. 3) para 7.100, citing ABL Phang, ‘Implied terms in English law - some recent developments’ [1993] JBL 242 and E Peden, ‘Policy concerns behind implication of terms in law’ [2001] LQR 459; cf. Stone and Devenney, The Law of Contract, para. 3.23; Owens, ‘Contract - Implied Terms’ [1984] CLJ 230, 232.

[48] Lord Bridge in Scally (n 41): ‘… any formulation of an implied term of this kind which would be effective to sustain the plaintiff’s claim in this case must necessarily be too wide in its ambit to be acceptable as of general application. I believe however that this difficulty is surmounted is the category of contractual relationship in which the implication will arise is defined with sufficient precision.’ 307.