Terms implied in fact

The approach here is based on the attempt to determine the true intention of the parties. The courts will imply a term if they consider that it represents the true intention of the parties on a particular issue. In other words, the term is implied not as a matter of law, but on the basis that as a matter of fact, this is what the parties had agreed, though the agreement was implicit rather than explicit. The courts will not easily, however, be convinced that such implication should take place. It is certainly not sufficient that a particular clause would appear to be «reasonable». Nor will a term be implied to deal with an eventuality which the parties had not anticipated. If they had not expected a particular circumstance to happen, they cannot be said to have intended that a particular term would apply to the situation. This was the view of the Court of Appeal in Crest Homes (South West) Ltd v Gloucestershire County Council, where in a construction contract the local planning authority unexpectedly imposed conditions which entailed additional expense and a loss of profit for the builder. The court was not prepared to imply a term that the defendant (which had performed its side of the bargain in accordance with the original contract) should bear any liability for these costs. This shows the court being unwilling to use the concept of the implied term to deal with «relational» aspect of contracts – which may require the modification of obligations to deal with changed circumstances.

4.5.4 The Moorcock test

The starting point for the law in this area is the case of The Moorcock. This concerned a contract which involved the plaintiff’s ship mooring at the defendant’s wharf in the Thames. The Thames being a tidal river, at low tide the ship, as both parties knew would be the case, settled on the river bed. Unfortunately, the ship was damaged because of a ridge of hard ground beneath the mud of the river bed. There was no express term in the contract as to the suitability of the river bed for mooring a ship there. Nevertheless, it was held by the Court of Appeal that such a term could, and should, be implied. The reason for this was that without such a provision, the contract would have effectively been unworkable. It was implicit in the contract for the mooring of the ship that it would have to rest on the bottom of the river. Both parties must have contracted on the basis that it was safe to do so. On this basis, the court felt that it must have been the parties’ intention that the owners of the wharf should warrant that the river bed was suitable for the purpose of the contract. Bowen LJ explained this reasoning as follows:

Both parties knew that the jetty was let for the purpose of profit, and knew that it could only be used by the ship taking the ground and lying on the ground. They must have known, both of them, that unless the ground was safe the ship would be simply buying an opportunity of danger and buying no convenience at all, and that all consideration would fail unless the ground was safe. In fact, the business of the jetty could not be carried on unless, I do not say the ground was safe, it was supposed to be safe.

Note that the test being applied here is a stringent one. It is not based on the reasonable expectation of the owner of the ship, but rather on what is necessary in order to make the contract work at all. The fact that a contract might work better with a particular term implied would not be sufficient. The Moorcock can thus be characterised as having established a test of «necessity» in relation to the implication of terms.

4.5.5 The «officious bystander» test

The reason why necessity is a good test for the implication of terms is that it must be regarded as a sure guide as to what the parties intended. If a contract will not work without the inclusion of a particular term, it is a reasonable assumption that the parties intended that term to be included. The courts have been prepared, however, to consider other tests of intention. One of the most commonly used is the test of the «officious bystander». This derives from the case of Shirlaw v Southern Foundries MacKinnon LJ suggested that a term may be implied where it is 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 test is again a strict one, in that there will be relatively few provisions of such obviousness that they will satisfy the «officious bystander» test. Moreover, it is not a particularly easy one to apply, as is perhaps shown by the fact that in Shirlaw’s case itself there was considerable disagreement between members of the Court of Appeal and House of Lords as to what terms, if any, should be implied into a contract appointing the managing director of a company. Nor is it well suited to complex commercial transactions, in relation to which it may be difficult to formulate an appropriate question for the officious bystander to ask. A final difficulty is that in relation to terms other than those which are «necessary» in the Moorcock sense, it may be difficult for a court, after the event to establish what the parties, at the time of the contract, would have agreed. If the matter is before the court, they are by definition in dispute, and identifying an obligation (which will inevitably favour one side of the agreement) to which they would clearly have said «yes, of course that is included» may be very difficult. Overall, the Moorcock test is probably the more satisfactory of the two.

The operation of both the Moorcock and the «officious bystander» tests were considered by Gatehouse J in Ashmore v Corp of Lloyd’s (No 2). The case arose out the problems of Lloyd’s «names» who had made substantial losses out of insurance contracts. The plaintiffs were arguing that Lloyd’s had a duty to alert names about matters of which Lloyd’s became aware which might seriously affect their interests. One basis for the action was that the duty should be based on an implied term in the names’ contracts with Lloyd’s. Gatehouse J, however, was unable to find that either of the tests outlined above helped the plaintiffs. Looking first at the Moorcock test of business efficacy, many thousands of people had been or were names with Lloyd’s under the same contractual arrangements as the plaintiffs. It could not be said that these contracts would not work without the suggested implied term.

As to the officious bystander, Gatehouse J found the suggested question too complicated to be answered by a simple «yes». The question was set out in this way by the plaintiffs:

If, at the Rota meeting to admit a new Member, an officious bystander interrupted the proceedings and said, «You Lloyd’s are asking this applicant to engage in a high risk business and, in effect, entrust his entire personal fortune to an underwriting agent approved by you with whom he is not to interfere, and whom you know he relies upon and is by the system you impose forced to rely on: [Question] what if something professionally discreditable is or becomes known to Lloyd’s about the underwriting agent which might prejudice the member’s underwriting interests, other than matters which in Lloyds reasonable opinion are not capable of being seriously prejudicial to the member’s underwriting interests, would you Lloyd’s be obliged to take reasonable steps to alert the applicant, if thought necessary, in confidence, and tell the underwriting agent within a reasonable time thereafter what you have done?» Surely, the answer would be «of course». On the contrary, the response of Lloyd’s to such a complex question, thought Gatehouse J, would have been to refer the question to their lawyers, following which the most likely answer would have been an uncompromising «no».

Similarly, in Wilson v Best Travel Ltd, the court refused to imply a term into a contract between a tour operator and holidaymaker that a hotel would be reasonably safe. Applying the officious bystander test, the judge did not think the tour operator would have said «of course» to an inquiry as to whether such a term was included, given that the hotel was not under the operator’s control.

These cases illustrate the reluctance of the courts to imply a term, and that the tests to be satisfied are applied quite strictly. A recent example of the courts being prepared to imply a term on this basis is, however, to be found in Equitable Life Assurance Society v Hyman. The issue was whether the life assurance society could decide to reduce the level of bonuses which certain of its policyholders would receive, in contravention of past practice, and the expectations of the policyholders. The articles of association of the society, which governed the society’s powers in relation to bonuses, gave the directors a very broad discretion which seemed to allow them to make the reductions. The House of Lords, however, held that a term should be implied into the articles to the effect that the society could not exercise its discretion under the articles so as to defeat the reasonable expectations of the parties, which included an expectation that the directors would not exercise their discretion in a way that prejudiced the rights of a particular group of policyholders. Lord Steyn confirmed that this term could be implied on the basis of the «necessity»: «In my judgment an implication precluding the use of directors’ discretion in this way is strictly necessary». Despite these protestations, the case seems to be an example of a rather more relaxed approach to the implication of a term «in fact» than has been the case previously. Whether this is an indication of a general trend towards the more frequent implication of terms on this basis remains to be seen.

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