IMPLIED TERMS Lecture 22
CONTRACT LECTURE 9 TRANSCRIPT IMPLIED TERMS
C STRICKLAND TOTAL TIME = 47 mins 12 secs
Track/slide 1 02.23
In a previous lecture we have seen how when looking at the ‘contents’ of a contract, there are both express terms and implied terms to consider. We have noted how it can be difficult for the courts to work out just what the express terms of a contract are as there are various complicating and competing factors at work in that regard, such as the status of pre-contractual statements and the parol evidence rule, to name but two.
One might think that the only terms that can be in a contract are ‘express’ ones - to be true to the idea of ‘laissez faire’, that the parties should be the ones to decide what is in their contract although as we have just noted, it is not always that straight forward a task to identify express terms.
However, sometimes terms are ‘implied’ into a contract – which means that the parties may find themselves subject to terms they did not know they were agreeing to. They can be thought of as ‘invisible’ terms that only become visible when a judge in a court of law says that they exist.
The notion of implied terms came about during the 19th century and was a way for judges to ‘fill in’ perceived gaps in the contract between the parties. Appleby in ‘Contract Law’ 2001, published by Sweet and Maxwell, at page 197 states of implied terms:
‘To some this was a fiction, to others an ingenious tool. Either way, it allowed
the courts to get involved in the contents of contracts without infringing the
principle of freedom of contract. Based on the theory that the courts were merely
interpreting the presumed intention of the parties, they could incorporate new
terms where the contract was silent.’
Track/slide 2 02.12
Much discussion and debate in the cases on implied terms centre on whether terms may be implied into contracts ‘in law’ or ‘in fact’. It is perhaps easier to see the ‘justification’ for terms implied in ‘fact’ in the sense that such implied terms tend to apply to just ‘one’ contract on a ‘one off’ basis, being peculiar to the ‘facts’ of that particular case. The idea is that had the parties to the contract thought about the implied term, then they would have incorporated it into the contract. In this way, the implied term mechanism is merely giving effect to the unexpressed ‘intentions’ of the parties. In this light, the term implied in fact does not seem to interfere with the doctrine of laissez faire.
However, it is arguably less easy to justify terms being implied in ‘law’ as these implied terms tend to apply to a whole ‘type’ of contracts across the board. Their justification is often said to be for ‘policy’ reasons or for ‘fairness’. As such, terms implied in ‘law’ are less likely to give effect to the ‘intentions’ of the parties, one of whom may have left out the contents of the implied term deliberately to gain an advantage.
In the discussion that follows, we shall see which terms are implied on the basis of ‘fact’ and of ‘law’.
Track/slide 3 00.30
How terms may be implied into contracts can be considered under 3 headings:
- Terms implied by usage or custom
- Terms implied by the courts
- Terms implied by statute
We shall discuss each of these in turn.
Track/slide 4 02.00
First then, we shall turn our attention to
Terms implied by usage or custom
A key case here is Hutton v Warren 1836
In this case, the plaintiff was the tenant of a farm and the defendant was the landlord. The landlord gave the tenant notice to quit the farm and according to custom, the plaintiff had to work the land to the end of the tenancy. When the tenancy was at an end, the plaintiff then claimed that, in accordance to custom, he was entitled, on quitting the tenancy, to a fair allowance for seeds and labour on the arable land.
The court held that the plaintiff was allowed a fair allowance for seeds and labour according to the prevailing custom.
Parke B stated:
‘We are of opinion that this custom was, by implication, imported into the lease. It has long been settled , that, in commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts, in matters with respect to which they are silent ... this has been done on the principle of presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to known usasges.’
Track/slide 5 01.29
In modern times, to imply terms on the basis of custom or usage, the usage in question must be ‘certain’ and well known in the market place in which it is said to exist. A term cannot be implied on the basis of custom or usage if it would be in conflict with an ‘express’ term of the contract or in conflict with rule of the common law. In London Export Corporation Ltd v Jubilee Coffee Roasting Co 1958, Lord Jenkins stated:
‘An alleged custom can be incorporated into a contract only if there is nothing in
the express or necessarily implied terms of the contract to prevent such inclusion
and, further, that a custom will only be imported into a contract where it can be
so imported consistently with the tenor of the document as a whole.’
Terms implied by custom and usage, since they are only imported where both sides are taken to have known of the custom or usage, can be seen as terms implied in fact.
Track/slide 6 01.02
We can now move on to consider,
Terms implied by the courts, that is, at common law
This is where the debate on implying terms ‘in law’ and ‘in fact’ is centred.
A leading case is Liverpool City Council v Irwin 1977. In this case it is basically recognised that there are 2 categories of implied terms at the disposal of the courts – those implied in law and those implied in fact. We shall discuss this case in detail shortly.
First, we can look at the cases that explore how terms can be implied ‘in fact’ at common law on the basis of:
necessity, business efficacy and the officious bystander tests
Track/slide 7 03.00
First then, we shall consider the case of
The Moorcock 1889.
In this case, the owner of the steamship The Moorcock, moored at a jetty on the river Thames to unload and reload his steamship. Whilst he did not pay to moor at the jetty, nevertheless he did pay the owner of the wharf for the use of the cranes that loaded and unloaded the cargo. It was known that when the tide ebbed, the steamship would end up sitting on the river bed. This is what happened as she was unloading the cargo. Unfortunately, because of hard ground on the river bed, the steamship was damaged and the owners sued the wharf owner for the damage sustained.
The owners of The Moorcock were successful at first instance and when the wharf owner appealed. On appeal, Bowen LJ stated:
‘Now an implied warranty ... as distinguished from an express contract or express
warranty, really is in all cases founded on the presumed intention of the parties and
upon reason... I believe that if one were to take all the cases ... of implied warranties
... it will be found that in all of them the law is raising an implication from the
presumed intention of the parties with the object of giving to the transaction such
efficacy as both parties must have intended that at all events it should have. In
business transactions such as this, what the law desires to effect by the implication
is to give such business efficacy to the transaction as must have been intended at all
events by both parties who are business men..’
Thus, for business efficacy, a term was implied into their contract that when the tide ebbed and the steamship bottomed out, the river bed was such that no damage would be suffered by the steamship.
This is a term implied in fact to the particular facts of this case. It has been widely quoted and invoked in cases since, maybe more than Bowen LJ may have envisaged.
Track/slide 8 02.49
Another interesting case is Reigate v Union Manufacturing Co (Ramsbottom) 1918.
In this case Scrutton LJ stated:
‘The first thing is to see what the parties have expressed in the contract; and then an implied term is not to be added because the court thinks it would have been reasonable to have inserted it in the contract. A term can only be implied if it is necessary in the business sense to give efficacy to the contract: that is, that it is such a term that it can be confidently said to the parties, “What will happen in such a case?” they would both have replied: “Of course, so and so will happen; we did not trouble to say that; it is too clear.” Unless the court comes to some such conclusion as that, it ought not to imply a term which the parties themselves have not expressed.’
And the idea of the ‘officious bystander’ test is evidenced by the words of MacKinnon LJ in the case of Shirlaw v Southern Foundries 1939 when he stated:
‘Prima facie that in a contract that is left to be implied and need not be expressed is
something so obvious that it goes without saying; so that, if while the parties were
making their bargain an officious bystander were to suggest some express provision
for it in their agreement, they would testily suppress him with a common, “ Oh, of
course”.’
In other words, the courts should be reluctant to imply a term into a business contract in fact, unless they are sure that it is necessary for business efficacy and the parties would have included such a term were it not for the fact that it is obvious that such a term is regarded as part of the contract without the need to actually put it in the contract. In this way, the courts are only giving effect to the presumed intentions of the parties and so are not overly interfering with the concept of freedom of contract.
Track/slide 9 01.55
The foregoing cases reflect instances when the courts will imply a term in ‘fact’ into contracts on the basis of the particular facts of the case. The courts may also imply terms into contracts not based on the particular facts of the case, but, because they believe the contract to fall into a certain ‘type’ of contract that for policy reasons or fairness, a certain term should be implied into it. These terms are thus said to be implied ‘in law’. Such types of contract are contracts of employment or contracts of hire or contracts involving landlord and tenant.
Since terms implied in law apply to a whole range of situations, not just the particular contract before the court, the justification for interfering does not have to be set at such a high standard as is set for implying terms in fact for business efficacy. The idea is that the terms are being implied ‘in law’ to protect a section of weaker parties from abuse by stronger parties. Thus, the justification for interference is that the courts interfere where it is ‘reasonable’ to do so on ‘policy’ grounds.
Track/slide 10 01.50
A key case to discuss with regards to terms implied in law by the courts is
Liverpool City Council v Irwin 1977.
First we can note a few points before looking at the facts of the case and what happened.
The problem with the Liverpool case is that in the House of Lords there seems to be a blurring of these two types of implied terms, terms implied in fact and terms implied in law. This is because the terms implied were implied as being ‘necessary’ (implied in fact) so that the tenants could make use of the lifts and rubbish chutes, yet the landlords only had to take ‘reasonable’ steps (implied in law) to look after the lifts and rubbish chutes.
In the Court of Appeal, Lord Denning had suggested, tentatively, that there be just the one broad category of implied terms based on what was ‘just and reasonable’ in the circumstances. However, in the House of Lords this approach was rejected. That Lord Denning’s approach might have been a good one was seen in Shell UK Ltd v Lostock Garage Ltd 1976 when Denning felt that a term could not be implied either in fact or in law.
Track/slide 11 04.25
So, what happened in the Liverpool case?
In this case, Liverpool City Council had built a block of 70 flats in the Everton district that were let for rent. In the contract between the tenants and the council there were lots of conditions imposed upon the tenants (for instance, to keep the corridors free, not to let kids under 10 use the lifts and so on) but no conditions were imposed upon the council as such.
The case concerned the ‘communal’ areas of the block of flats – the lifts and rubbish chutes – which deteriorated due to vandalism and so forth. The tenants withheld rent because of the condition of the lifts and chutes, and so the council sued for possession of the flats. The tenants counter-claimed that there was an implied term in the contract to keep the block in a proper state of repair.
The Court of Appeal Lord Justices of Appeal found for the council, but by different routes.
Lord Justices Roskill and Ormrod said that no term could be implied because it was not ‘necessary’ to do so and so the council won.
Lord Denning MR said that a term could be implied if it was ‘reasonable’ to do so. He felt that it was reasonable to say that the council would take reasonable care of the lifts and rubbish chutes. However, the tenants could not win as the council ‘had’ kept them in reasonable condition.
In the House of Lords the council also won.
Lord Cross said that a term could be implied if it was ‘reasonable’ to do so.
However, Lord Wilberforce said that a term could only be implied where it was ‘necessary’ to do so. In the case of a tower block of flats since it was ‘necessary’ for the tenants to use the lifts, stairs and rubbish chutes, then the court could imply a contractual obligation on the council with regards to those areas. However, he then said that just what was ‘necessary’ had to be decided in the particular circumstances of each case and in this case it would be ‘unreasonable’ to imply a term that the council had to keep the flats in 100% repair. Rather, the term implied should be that the council should take ‘reasonable care to keep the communal areas of the flats in reasonable repair’ and they had done this.
You can see that there is some overlap between the ideas of ‘necessity’ and ‘reasonableness’. However, the test of ‘necessity’ narrows down the instances when terms can be implied – a purely ‘reasonableness’ test could be seen as too wide and impinging on the parties rights to contract.
Thus the necessity test is the main one for both terms to be implied in fact and in law, though for the latter, the test is applied less stringently.
Track/slide 12 01.55
We can now move on to consider terms implied into contracts by operation of statute.
In the Liverpool case, the ‘court’ implied terms into the contract ‘in law’ on the basis of what was ‘necessary’. In addition, in that case, the House of Lords allowed a term to be implied into the contract between the council and tenants by virtue of a statute – under section 32 (1)(b)(i) of the Housing Act 1961 – ‘to keep ...in proper working order the installations... for the supply of water..for...sanitary conveniences’. The tenants succeeded on this part of the appeal because the lavatory cisterns were badly designed and so the toilets kept on flooding. In other words, though not actually written into a formal document between the council and tenants, this section of the Act could be ‘implied’ into their contract.
Terms are often implied into contracts by operation of statute to protect a weaker party from exploitation by a stronger party. In this way they seem to interfere substantially with the idea of freedom of contract.
Whilst there are many Acts of Parliament that imply terms into contracts these days, we shall focus on the sale of goods.
Track/slide 13 02.07
In ‘Law of contract’ by Cheshire, Fifoot and Furmston, 14th edition, at pages 148 to 149, the point is made that originally at common law, judges were loathe to interfere in contracts made between the parties because of the notion of caveat emptor, let the buyer beware. Thus, so long as there was no fraud or no chance to inspect goods, contracts for goods were not interfered with.
However, as the market developed, various implied aspects of contracts of sale became common, and these became recognised in the courts of common law. The terms implied into contracts of sale included tacit understanding that the bulk of an order would match the sample seen, that goods sold on the basis of a description would actually match the description and so on. This recognition of these implied terms by the courts, then became put on the statute book by the Sale of Goods Act 1893.