BetterLawNotes-5 (2)

CONTRACT LAW

A term implied in fact is one which the parties themselves must have intended to incorporate into their contract.

To begin, note that the court is generally wary of implying a term in fact. “The general presumption is that the parties have expressed every material term which they intended should govern their agreement, whether oral or in writing”. Similarly, Viscount Simonds warned that the process is “one against the abuse of which the courts must keep constant guard”.

On what basis does the court decide that a term should be implied in fact? A good starting point is the test propounded by Lord Wright:

‘it is well recognised that there may be cases where obviously some term must be implied if the intention of the parties is not to be defeated, some term of which it can be predicated that ‘it goes without saying,’ some term not expressed but necessary to give to the transaction such business efficacy as the parties must have intended’.

One Test or Two?

Despite numerous authoritative dicta to the contrary the current view appears to be that it is preferable to break down the single test illustrated above into two separate tests.

The first is the so-called ‘officious bystander’ test. This was famously formulated by Mackinnon LJ in Shirlaw v Southern Foundries [1939] 2 KB 206, 227 as follows:

‘Prima facie that which in any contract 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 the agreement, they would testily suppress him with a common “Oh, of course!”’

The second test is the ‘business efficacy’ test set out by Bowen LJ in The Moorcock as follows:

‘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’.

The Moorcock (1889) 14 PD 64

The defendants owned a wharf abutting on, and a jetty extending into, the River Thames. The defendants agreed with the claimants for the claimants’ vessel to be discharged and loaded at the wharf. To do this, the vessel would be moored alongside the jetty and would take the ground at low water. Ownership of the riverbed was vested in the Thames Conservancy. The defendants did not charge mooring fees but did charge customers for goods landed, shipped or stored. As the Moorcock was lying at the jetty, discharging her cargo, the tide ebbed and the vessel was damaged when it settled on a ridge of hard ground beneath the mud. Butt J. held that there was an implied representation that the defendants had taken reasonable care to ascertain that the river bottom was in such a state as not to endanger the vessel, and that on the facts, the defendants had not used reasonable care and were liable to the claimants for the damage sustained.

‘Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just. The implications to be made are to be no more than are “necessary” for giving business efficacy to the transaction.’ Bell v Lever Bros at 226 (Lord Atkin).

Does it matter?

Probably not, although see Mosvolds v Food Corporation of India [1986] 2 Ll R 68 which suggests the contrary. Steyn J held that a term could be implied into a charterparty on the officious bystander basis but not on the business efficacy test. On Steyn J’s approach, the tests are alternative – it is sufficient for a term to be implied that one or other test is satisfied.

Applying the tests

Given that the test for implication of terms in fact is ultimately one based on intention, two further points should be borne in mind. First, it must be clear that both parties would have understood the term. Second, it must be clear that they would both have agreed to it.

Wells v Devani [2019] UKSC 4, rvsg [2016] EWCA Civ 1106

C, an estate agent, spoke on the phone with D about some flats which D wished to sell. C told D that his standard commission was 2% plus VAT. Subsequently, C introduced someone who agreed to buy the flats from D. When C sought payment of his commission from D, D refused arguing, among other things, that there was no contract between them as they had not agreed at what point the seller’s obligation to pay commission would arise.

The Court Appeal held (Arden LJ dissenting) that C was not entitled to claim commission as there was no concluded contract between the parties. Identification of the trigger event rendering the seller liable to pay commission was an essential element for a contract of this type and the parties had not reached agreement on this point. The Supreme Court allowed C’s appeal. The parties had entered into a legally binding agreement. In the circumstances, the only feasible construction of the parties’ phone conversation was that C would be entitled to commission on completion of the sale from the sale proceeds.

Spring v NASDS [1956] 1 WLR 585

The National Amalgamated Stevedores and Dockers Spciety and the Transport and General Workers’ Union were both members of the Trades Union Congress. In 1939 the TUC agreed certain principles with regard to avoiding disputes between unions. These principles became known as the Bridlington Agreement. The Claimant had been a member of the TGWU for many years. Under TGWU rules any member who was more than 13 weeks in arrears with his contributions was deemed no longer to be a member. In 1955, the claimant, being more than 13 weeks in arrears, applied to become, and was accepted as, a member of NASDS. Subsequently the NASDS appeared before the disputes committee of the TUC because of concerns that its recruitment of former members of the TGWU breached the principles set out in the Bridlington Agreement. The committee ruled that the NASDS should exclude certain recently recruited members, including the claimant. The NASDS then purported to exclude the claimant from membership. The claimant sought a declaration that he remained a member of the NASDS. The NASDS argued that it was an implied term of the claimants contract of membership that the NASDS should have the right to do all things necessary for it to comply with the Bridlington Agreement. In evidence accepted by the judge, Sir Leonard Stone V-C, the claimant said that he had not heard of the Bridlington Agreement until after joining the NASDS. Stone V-C held there was no such implied term and made the declaration sought.

‘If [the officious bystander] test were to be applied to the facts of this case and the bystander had asked the plaintiff, at the time when the plaintiff paid his 5s and signed the acceptance form, “Won’t you put into it some reference to the Bridlington Agreement?” I think (indeed, I have no doubt) that the plaintiff would have answered, “What’s that?” In my judgment, that is sufficient to dispose of this case.’

Reid v Rush & Tomkins [1990] 1 WLR 212

The claimant was offered work by the defendants on a project in Ethiopia. While working out there, the claimant was injured while driving his Land Rover in an accident caused solely by the negligence of the other driver. The identity of the other driver was not known. There was no system of compulsory third party motor insurance in Ethiopia nor was there any scheme comparable to the Motor Insurers’ Bureau scheme in the UK. Accordingly, the claimant received no compensation for the injuries he received. The claimant sued the defendants arguing, inter alia, that they were in breach of an implied term of his contract of employment. That term was expressed in the alternative as being that the defendants would effect adequate insurance cover for the claimant during his stay in Ethiopia or that the defendants would advise the claimant of any special risks of working in Ethiopia and advise him to obtain appropriate insurance cover himself. The claim was struck out as disclosing no reasonable cause of action. The claimant appealed to the Court of Appeal. The appeal was unanimously dismissed. 

As to the first alternative, that the employer would effect appropriate cover, Ralph Gibson L.J. said that the term could neither be implied at law, “under the test of necessity, as applicable to all such contracts of employment” or in fact “as a term which the parties must have agreed”. As to implication of a term in fact, Ralph Gibson LJ said that the written contract contained detailed terms as to the claimant’s “economic welfare”. The claimant was made a member of the defendants’ group retirement benefit scheme and was given the opportunity of joining the defendants’ group BUPA medical expenses scheme. The defendants also undertook responsibility for any medical treatment reasonably necessary for the claimant while in Ethiopia. “[I]t is impossible to suppose that the defendants would have acknowledged as obviously included within the contract additional terms with reference to provision by them of personal accident insurance.”

As to the alternative term, that the employer should give to the employee all necessary advice and advise him to take out appropriate insurance cover:
“If the parties had been asked what the position was with reference to the risk of the plaintiff suffering injury in the course of his employment by the negligence of another driver, for whom the defendants were not responsible, and from whom the plaintiff could recover no damages, it is impossible to be confident, on the facts pleaded, that either side would have answered that the defendants had undertaken a duty to deal specifically with the matter, whether by advice or otherwise.”

 One relevant issue which goes almost unnoticed in the cases and the literature is the distinction between actual and imputed knowledge. Is it necessary that the term to be implied is one which each party actually thought about but neither expressed? Or will it suffice that, while one or neither party thought about the particular term, they would have agreed to it had they both thought about it? Judging from the authorities it seems clear that the latter proposition is correct (see e.g. The Star Texas per Lloyd LJ although cf Re Comptoir Commercial [1920] 1 KB 899, 900 per Scrutton LJ).

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