Implied Terms Making or Curing the contract ?

Stephen Pritchett, Barrister and Accredited Commercial  Mediator

Wells v Devani [2016] EWCA 1106

The Courts have been exercised in recent years by the true test for the implication of terms into a contract. This case however considers the point at which the Court should consider the question of implication.

Can implied terms cure an otherwise unconcluded agreement and operate to make binding that which, without the implication, would not be so?

The answer, according to a split decision in the Court of Appeal is NO.

The case concerned estate agent’s commission but the first question for the appeal was whether there was a binding contract for commission at all. The issue which had not been expressly agreed was the precise trigger event for the payment of the commission. The Judge implied a term based upon business efficacy to the effect that the trigger event was to be the introduction of a buyer who went on to complete to avoid the conclusion that there was no binding contract for want of certainty. Lewison LJ with whom McCombe LJ agreed (Arden LJ dissenting on this issue) said that the Judge had erred in his approach. The Judge, they said, had based his decision on the implication of a term rather than the interpretation of what the parties had actually agreed.

As Lord Roskill put it in the Privy Council case of Scancarriers A/S v Aotearoa International Ltd [1985] 2 Lloyd’s Rep 419:

“… the first question must always be whether any legally binding contract has been made, for until that issue is decided a court cannot properly decide what extra terms, if any, must be implied into what is ex hypothesi a legally binding bargain, as being both necessary and reasonable to make that bargain work. It is not correct in principle, in order to determine whether there is a legally binding bargain, to add to those terms which alone the parties have expressed further implied terms upon which they have not expressly agreed and then by adding the express terms and the implied terms together thereby create what would not otherwise be a legally binding bargain.”

In Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] UKSC 72, [2016] AC 742 at [26] Lord Neuberger said:

“I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann’s analysis in the Belize Telecom case could obscure the fact that construing the words used and implying additional words are different processes governed by different rules.”

At [28] Lord Neuberger continued:

“In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term.”

Arden LJ in her dissent said this:

“Lewison LJ holds, and I agree, that the passage which he cites at paragraph 19 of his judgment from the speech of Lord Roskill in Scancarriers is authority for the proposition that “it is not legitimate, under the guise of implying terms, to make a contract for the parties.” He further holds, and I respectfully disagree, that, because the parties did not agree the trigger event, there was never an agreement which was binding in law, and that this follows from Scancarriers.”

Arden LJ’s approach, based as it is upon what the parties expressly agreed as well as the common sense context has much to commend it. If a seller agrees with an estate agent that the agent will market and receive a commission, is it not obvious that the trigger event for the payment of the commission is the introduction of a buyer who goes on to complete? Arden LJ viewed that as construing the expressly agreed terms in context. The other two LJJs approached it on the basis that this was an exercise in implying a term as to payment which, absent its implication, would be void for uncertainty.

As Arden LJ commented, the answer to the dilemma created by the Scancarriers decision is in the fact that the answer lies in the sequence of events i.e. the context. Interpretation of a contract, she said, is a matter of not simply looking at what the parties said but deducing what they agreed. The whole basis of the arrangement, she said, was that the arrangement was entered into to facilitate the sale of Mr Wells’ house. The level of commission was agreed and the subject matter of the retainer was known and agreed. The context, therefore, led to the conclusion that, without the implication of a term as such, the contract must be interpreted as one under which commission was payable when the agent did that which he was clearly intended to do – find a purchaser to buy.

It may be that the difference between the members of the Court relates to their interpretation of and inferences from the facts and that in any given case the decision will be fact sensitive.

However, the law appears to be that the Court must first of all inquire as to whether there is a contract at all (without implying any terms) and that this is a process of evaluating the evidence and construing the agreed terms. Only if there is found to be a binding contract, can deficiencies in detail be cured by the implication of terms based upon business efficacy or reasonableness.

Lord Clarke put it this way in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH
[2010] UKSC 14, [2010] 1 WLR 753 at [45]:

“The general principles are not in doubt. Whether there was a binding contract between the parties and if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

Stephen J Pritchett
Commercial and Property Counsel
23 Essex Street Chambers

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