Reasonable Expectations of Parties Concept

In systems of law where there is a general duty of good faith in the performance of contracts the need to supplement the written contract by implied terms is less than in the English system. In our system, however, the implication of terms fulfils an important function in promoting the reasonable expectations of parties.

Do you agree with this justification of implied terms?

I fundamentally agree with the statement that ‘…the implication of terms fulfills an important function in promoting the reasonable expectations of parties. However, whether implied terms always promote the reasonable expectations of parties is an area which is debatable. The thesis of this essay is to explore whether implication of terms in the English legal system is justified and how the courts imply terms and the premise for doing so.

The ‘reasonable expectations of parties’ is a concept which differs in different parts of contract law [1] . However this principle is one that is important and is the basis for much of contract law. As Lord Steyn suggests that ‘The function of the law of contract is to provide an effective and fair framework for contractual dealings. This function requires an adjudication based on the reasonable expectations of parties.’ [2] In the case of William v Roffey Bros. & Nicholls the defendants promised to pay the claimants an extra sum of money to complete a task quicker so that the defendants did not have to pay extra because of the ‘delay clause’ in their own contract. The claimants were already contractually bound to do to this task. If this was decided conservatively, the facts would reveal that there was no consideration and the claimants would not have been able to enforce performance for lack of consideration. However the court held that that the defendants were bound by their promise since there was consideration in form of the practical benefit to the the defendants. This demonstrates how important it is that the reasonable expectations of the parties prevail ‘over technical and conceptualistic reasoning’ [3] .

A contractual document, when it is drafted, will contain the terms which the parties wish to be bound by and perform upon. Terms are either expressed or implied. The job of the courts is to ensure that these terms are enforced. It would be unreasonable to say that with all the complexities that go behind drafting a contract, or in some cases, time constraints and expenses, that the parties will remember to include all the terms that they want to without forgetting any [4] . One of the many reasons for which the English legal system recognises the doctrine of implied terms. Developed towards the end of the 19th century, this principle allowed the courts, for the first time, to get involved in a contract without infringing the principle of freedom of contract. Historically notaries were paid by the word and therefore contracts were very long documents. In this day and age that is not the case. Majority of the terms are expressed in the contract however it is impossible to conclude all the true intentions of the parties in a piece of paper.

English law recognises the ideology of freedom of contract. In short, this is the belief that any party can contract on any terms that they wish and that it is not for the courts to interfere or re-write terms. Courts should not intervene with the formation of contracts as their role is not to write the contract but merely enforce it. Despite that courts still imply terms into contracts.

Terms are implied using one of three sources, which can further be broken down. They are either implied by statute, by custom or implied at common law [5] .

Implied by custom is when terms are implemented by considering what is the common practice for the particular trade, locality or business in question (Hutton v Warren [6] ). However if the custom is contrary to the express terms of the contract it will not be implied as shown by Palgrave, Brown & Son Ltd v SS Turid [7] . This decision complies with the principle of freedom of contract. A custom will only be implied if that particular custom is one that is typically accepted within that trade and if someone was to make an enquiry they would not be oblivious to that custom. Upon satisfying this criteria, a custom will be binding on both parties. This is important because common practices are usually overlooked and in some cases not included. For example e.g. in the sale of a door lock you would assume that the key is provided otherwise without the key the lock would be pointless. If such terms were not be implied that would hinder the reasonable expectations of the parties. [8]

The second source which terms are implied using is statute. Parliamentary Acts are used to imply terms to a contract. This method obviously does not have the intention of the contracting parties in mind but seems to rather focus on public policy. An example of this is the Sales of Goods Act 1979. There is an implied condition in s.13 (1) that all goods sold by description shall correspond to that description. Such terms as mentioned, do not realistically give effect to the intention of the parties but are there to provide the purchaser of the goods with protection. Mainly focusing on providing protection for weaker party, the consumer. These terms are implemented in every day contracts of sale. However if we look at this from another perspective, it could be said that such a term does seek to fulfill the reasonable expectations of the consumer. It would be unjust and totally unfair if the consumer had no remedy against being sold something by description and then that product not matching the description he bought it using. Such an absurdity would bring the law of contract into disrepute and would allow stronger parties to abuse the fundamental rights of consumers. On the other hand, it is Parliament who are deciding statutes and so the implied conditions are set by them, and therefore such an approach cannot always seek to promote the reasonable expectations of parties and to a large extent focuses on public policy.

Parol evidence rule states that extrinsic evidence cannot be used to infer the meaning of the words of the contract as the document ‘is the sole repository’ [9] . This was decided in Jacobs v Batavia & General Plantations Trust Ltd [10] . Ambiguity about the meaning of the words can cause disputes. In light of this principle the court cannot look at pre-contractual negotiations even if the meaning of the words are defined there. The reason behind this rule is that it promotes certainty [11] . If, when implying terms, judges are not allowed to look at any past information in the the pre-negotiations of the contract despite that they may contain definitions of the words in the contract. Then how can implied terms in that respect, be seen to fulfill the reasonable expectations of the parties. The court seems to favour promoting certainty rather than promoting the reasonable expectations of the parties.

Another area of vagueness in the law of implied terms is when terms are implied in law by statute. Here, statute defines a term,its meaning and then it is embedded into the relevant contract to which it was intended to apply. Its seems a rather obscure idea that Parliament can truly define in a single statute, what every possible parties intention and reasonable expectations may be. It seems that rather than the parties actual intentions, Parliament seeks to satisfy the social norm. They fulfill the expectations of what society would expect to be a satisfactory outcome in the relevant scenario. Therefore this method of the implication of terms does not entirely seek to fulfill the function of promoting the reasonable expectation of parties.

Thirdly, terms are implied at common law. These terms can be further broken down to two distinct categories: implied in fact and implied in law [12] . These distinct categories were acknowledged by Lord Bridge in Scally v Southern Health and Social Services Board [13] . Terms implied in fact are those which are applied in order to give effect to the unexpressed intentions of the parties. Unlike terms implied in law, terms implied in fact are specific to a particular transaction rather than a category. The test which is frequently used by the courts is the ‘officious bystander’ test. This test has its roots in the statement made by MacKinnon LJ in Shirlaw v Southern Foundries Ltd [14] that when contracting parties were negotiating and if “an officious bystander were to suggest some express provision…they would testily suppress him with a common, “Oh, of course’’. In other words, the implication of the term must be ‘necessary to give the transaction as such, business efficacy as the parties must have intended’ [15] . The purpose of this is to to try to arrive at the parties “actual intention on the matters which they omitted to express in the contract or to find the “presumed” or hypothetical intention of the parties over matters about which they may not have thought at the time of contracting. In Liverpool County Council v Irwin an action was brought by the council to eject non paying tenants who then counter-claimed. They were claiming against the landlord, the council, for failing upkeep of the common parts of the building such as stairs and lifts. It was held that there was an implied term that it was the landlords duty to keep and maintain common amenities such as stair cases and lifts of a high rise building, in good working order. Even though the council had already invested more than it received in rents, the decision was found on policy reasons that it was unreasonable for the tenants to arrange and afford the repairs and that the council were in a more suitable position to bear the loss for doing so.

Terms ‘implied in law’ are those which are regularly found in contracts of certain types [16] . For example in Lister v Romford Ice & Cold Storage Co Ltd [17] it was held that despite there being no express term within the contract, it was implied that an employee is to serve his employer faithfully and with reasonable competence. The test which governs terms ‘implied in law’ is the test of strict necessity. This is that terms will only be implied if they are ‘necessary’ [18] for the performance of the contract. It is important that such terms are implied to uphold the reasonable expectations of parties because if this was not so, in terms of employment contracts, it would mean that employees could do anything that they wished without having regard to the effect on the employer. They could commit acts which could possibly cause financial harm to the employer and damage his business. This, at least up to some extent, appears to justify the statement that ‘implication of terms fulfills an important function in promoting the reasonable expectations of parties’.

Lord Mansfield once stated that good faith is “the governing principle…. of all contracts and dealings’. One definition of good faith can be found in the writings of Burton which is to act in way “to protect justifiable expectations arising from their agreement” [19] . The good faith principle seeks to protect the reasonable expectations of parties. However the English legal system does not recognise a single doctrine of good faith as such, but it would be inaccurate to say that it is not an unspoken underlying principle which predominately flows through our contract law.

In systems where good faith is a recognised doctrine, parties are expected to perform the contract and hence the reasonable expectations are held. For example, in the United States the UCC (Uniform Commercial Code) implements the notion of good faith. In § 1-203 it states that ‘Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement’. The UCC governs the law of sales and commercial contracts. Good faith in the United States is underpinned in the American Law Institute’s Restatement (2d) of Contract, and the United Nations Convention on Contracts for the International Sale of Goods. Because parties are expected to act in good faith and therefore are required to keep each others expectations and perform, the need to use implied terms in contracts is lessened.

However the doctrine of good faith is not given much regard in the English system. In Walford v Miles it was held that even where there was an express term stating parties must negotiate in good faith, it would be unenforceable [20] . This strong disinclination towards good faith shows that the English legal system does not wish to recognise such a doctrine. Maybe this is because the law of contract in our system is densely based around objective understanding and good faith would introduce a very subjective abstract. On the other hand good faith does have an objective part as well which is ‘the observance of reasonable commercial standards of fair dealings’ [21] . However it would be incorrect to say that our system completely disregards good faith because in instances where parties act in bad faith, for example, where a weaker contracting party is pressured or has been lied to induce a contract, the law holds such transactions as voidable. Vitiating factors like misrepresentation, duress and undue influence all provide remedies for such cases. Thus it could be said that the notion of good faith prevails through our system discreetly, linked in with many other principles rather than a single recognised doctrine.As Steyn LJ stated, there isn’t very much difference between the objective requirements of good faith and reasonable expectations of parties [22] .

Based upon the discussion above, I would agree with the statement that it is a reasonable justification to imply terms to uphold the reasonable expectations of parties although that is not the only justification which I think is important. It is quintessential in the law of contract that reasonable expectations are kept as that is one of the fundamental elements which performance of contract fall upon. However not all ways which terms are implied have the intention of the parties in mind therefore cannot possibly aim to keep the reasonable the expectations of the parties. Although reasonable expectation is the main rationale, I think that the other grounds for which implied terms are justified should be given merit as well.