Justification for the Implication of Terms

This essay will set out the reasons as to why the implication of terms into a contract is more favourable, and how it has become more prominent than the application of good faith in English Contract Law, by examining Steyn’s single justification for it; the promotion of reasonable expectations of the parties.

However, historically, implied terms were not the only means of governing contracts related to the sale of goods. In the nineteenth century, there existed in common law, ‘caveat emptor’ (let the buyer beware) which upheld a more dominant role than it does today. The concept of caveat emptor worked more in the seller’s favour as it was up to the buyer to seek information regarding the quality of the goods being sold. Why, then, did the courts start to believe that they could ascertain the intentions of the parties more readily using the implication of terms? In the following paragraphs, this question will be answered by referring to the development of certain tests, and ‘alternative functions’ of implying terms, such as protecting the public, and of the broader allocation of risk, and of the aid given by statute to the parties to certain ‘standard form’ contracts; reference will also be made to the downside of the implication of terms such as excessive contract categorization.

We begin by touching briefly upon the origins of the two doctrines involved; the implication of terms, and good faith. In the Slade case of 1602, the implication of terms was first identified under ‘assumpsit’. However, after the Judicature Acts of 1873 and 1875 were passed, ‘assumpsit’ became obsolete . This brought about certain ‘implied warranties’ which benefited the seller, although it wasn’t until 1829, in the case of Jones v. Bright that the implication of terms began to apply to differing contracts and to both parties. The role that implied terms would take on as Contract Law developed was shown in The Moorcock case of 1889.

The facts of the case were that the plaintiff had an agreement with the defendants that the defendants could dock their ship, The Moorcock, to unload cargo at the plaintiff’s wharf, by anchoring themselves next to a jetty owned by the defendants. While docked, the tide went so far down that the hull of The Moorcock hit a ridge causing damage to it, owing to the uneven riverbed. The plaintiff brought action against the defendants; it was held that the defendants had not taken the necessary precautions to determine whether the riverbed was in a safe condition. The defendants appealed. However, the appeal was dismissed; the court upheld the trial judge’s decision that an implied term existed in the agreement that the defendants would ‘take reasonable care to ascertain that the bottom of the river at the jetty was in such a condition as not to endanger the vessel’. Bowen LJ outlined what the ‘presumed intention’ of the parties were in these circumstances. The jetty was hired out to unload cargo from The Moorcock, which could only take place if the defendants were anchored at the jetty. Thus if the conditions of the riverbed did not permit safe grounding then the contract would be void. Bowen LJ argued that the defendants would only do business at the wharf, if the riverbed was in a suitable condition. It would be implied, in their agreement, that they had taken reasonable steps to ensure this and that the plaintiff would reasonably expect this because of their lack of experience of the wharf. Thus, when making the contract, the implication of terms formed part of what the plaintiff could reasonably have expected. The judgment shows that the implication of terms plays a pivotal role in determining the reasonable expectations of the parties. However, it also shows that an implied term must comply with the nature of the contract and its implementation.

Another justification for implied terms is that it maintains fairness in proceedings. Lord Steyn’s justification of ‘promoting reasonable expectations’ is familiar with the duty of fairness. Bowen LJ spoke of fairness, ‘…to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.” The cases of Malik v BCCI confirmed the application of Bowen LJ’s definition.

In Malik v Bank of Credit and Commerce International S.A., a case dealing with liquidation, there is an implied term stating that the employer will not conduct business in a fraudulent manner which would cause damage to the employee’s reputation and subsequently place them at a disadvantage in the labour market. In Malik, which concerned a claim by employees that the behaviour of their employers in the way they had run the Bank of Credit and Commercial International S.A. , the House of Lords held that this behaviour had breached this implied term and so the employees were entitled to ‘stigma damages’, i.e. for future job applications. In the House of Lords, Lord Steyn stated that: ‘The evolution of the implied term of trust and confidence is a fact… proved a workable principle in practice. It has not been the subject of adverse criticism in any decided cases and it has been welcomed in academic writings. I regard the emergence of the implied obligation of mutual trust and confidence as a sound development.’

In Liverpool City Council v Irwin terms were implied in law. This is different from terms implied in fact. This is because a term implied in law does not have to reconcile the individual wishes of the parties. It exists to promote fairness in contractual dealings, often for the protection of the weaker party as the courts are more likely to impose obligations on the stronger party.

In this case, the defendants had held tenancy in a property belonging to the plaintiff. They claimed that the plaintiff had not maintained the upkeep of the common parts of the building, breaching of the covenant of quiet enjoyment and the implied covenant of section 32(1) of the Housing Act 1961 and thus they were in breach of their duty as the landlord. This was denied by the plaintiffs who claimed that these ‘duties’ could only be of an implied nature. In the Court of Appeal, the plaintiffs won, the majority decision being that it such terms did not counteract the business efficacy of the contract and thus the implication of terms here was not required. The importance of this decision is that courts do not imply terms readily, and so the reasonable expectations of parties may not always be promoted or protected. However, in the House of Lords, it was the defendants who found some success, as the Lords upheld that the under section 32(1) and in maintaining the upkeep of the common parts of the building, the plaintiffs did have an implied obligation. However, it was held that in the latter the plaintiffs were not in breach of their duty. In the Court of Appeal, Lord Denning cited the dictum of Lord Radcliffe who stated that the parties should replace themselves with the ‘fair and reasonable man’ whose spokesperson ‘is and must be the court’ when dealing with the implication of terms. Lord Denning argued that a fair and reasonable man would enter into a tenancy agreement assuming that the landlord would attend to the upkeep and maintenance of the property. Lord Wilberforce expressly stated which situations the landlord would be expected to maintain the upkeep of common areas, notwithstanding the fact that there should also be a responsibility for the tenants. It could be argued that this creates equilibrium regarding the reasonable expectations of both parties. Despite this partial success on the defendant’s behalf, it can be argued that the reasonable expectations of the tenants, the weaker party, were not protected and promoted as much as they ought to have been. Mindy Chen-Wishart identified the danger in applying the doctrine of implied terms in contracts similar to that in Irwin, ‘since implied terms invariably add to the burdens or reduce the benefits of one party, that party is unlikely to have consented to them, at least not without some quid pro quo from the other.’ This restriction and disadvantage of the weaker party is in directly contentious with the concept of ‘fairness’ ‘ a major part of what the implication of terms stands for.

In comparison, good faith tends to apply principles of dispute; shown by the Commercial section of the French Civil Code i.e. it is too inflexible. In our system, where fairness is promoted, the implication of terms promotes the reasonable expectations of parties through the neutrality and objectivity concepts exercised by judges.

Implied terms can be applied in several ways, and an important one is terms implied by custom. The term has to be certain, it must be recognised as binding, it must be clear enough in industries to third parties should they require it, it ought to deal with legal requirements as opposed to circumstantial requirements, it must not deal with what the parties desire if this is contradictory to the term, and it ought to be reasonable. The requirements concerning the reasonableness of the term and the fact that it must be consistent with the law, upholds the reasonable expectations of the parties. This is illustrated in the case of Les Affr’teurs R’unis Soci’t’ Anonyme v Leopold Walford. The plaintiff, a charter party, had expressly agreed with the defendant, a charter broker, that the 3% commission on all profits made that would normally be paid by custom upon hire of the ship would not be payable to the broker if no hire ensued. However, the court held that the term was implied by custom as it directly conflicted with the express written intention of the plaintiffs. However, this case shows that implied terms may not always be consistent in maintaining the reasonable expectations of both parties, as one party was more advantageous in this case. This case shows that the courts use legal devices to control the implication of terms and try to maintain the reasonable expectations of the parties.

The fact that there are certain tests associated with the implication of terms adds to its strength. Bowen LJ in The Moorcock established the business efficacy test. MacKinnon LJ in Shirlaw v. Southern Foundries Ltd established the officious bystander test. These tests are important as they address the ‘necessity’ in the implied term. However, it is important to question whether these tests aid in maintaining the reasonable expectations of the parties.

In Equitable Life Assurance Society v Hyman, Lord Steyn implied a term that was ‘essential to give effect to the reasonable expectations of the parties’ i.e. to do with reasonable expectations.

The use of the ‘officious bystander’ test inhibits the parties’ individual freedom to contract on their own terms. This is because it encompasses what a third party would say from a neutral viewpoint. However, courts are very much aware of the inhibition that implied terms can have and as can be seen in Les Affreteurs, express terms take precedence over implied terms.

Terms are also implied by statute. These compulsory terms have been enacted by Parliament, and must not be expressly excluded by parties. They provide protection for the weaker party and also act as consumer protection. The Sale of Goods Act 1979, and the Unfair Contract Terms Act 1977, are two important statutes regarding implied terms. It is significant that the doctrine of implied terms is implemented through statutes, as it shows that Parliament set implied terms to protect the reasonable expectations of weaker parties.

In contrast, America and Europe, have both favoured the doctrine of ‘good faith’. Lord Steyn even considers good faith, stating ‘Since English law serves the international market place it cannot remain impervious to ideas of good faith”

However, he maintains the fairness that implied terms has in maintaining the reasonable expectations of the parties. Steyn idealised the law of contract as being an ‘effective’ and ‘fair’ framework for contractual dealings. To conclude, I agree with Lord Steyn’s prescient justification, as the doctrine of implying terms embraces the concept of freedom of contracts. The fact that implied terms can be implemented through many systems show its flexibility, and thus its constant evolution is something which favours its use in our law system over good faith.