Terms implied by law

The distinction between terms implied in fact, and terms implied by law, was well explained by Lord Denning in Shell v Lostock Garage. The case concerned a contract under which a garage owner agreed to buy petrol exclusively from Shell. Subsequently, at a time when there was a petrol «price war», the garage owner discovered that Shell was supplying other petrol stations in the area at a lower price. This was having a disastrous effect on his business. The garage owner was arguing that a term should be implied to the effect that Shell would not discriminate against him in the terms on which it supplied the petrol. The majority of the Court of Appeal (Bridge LJ dissenting) held that no such term could be implied. In coming to this conclusion, Lord Denning emphasised the difference between terms implied in fact, and those implied by law. As regards the first category, as we have seen, this involves deciding what the parties themselves would have put into the contract had they addressed themselves to the issue. Lord Denning thought that the required term could not be implied on this basis, because it was highly unlikely that Shell would have agreed to the inclusion of such a term if this had been requested by the garage owner. Terms implied by law, however, do not depend on determining the intention of the parties. The court in this case will impose the term on them, whether they would have agreed to it or not. Two conditions need to be satisfied before this can be done, however. First, the contract has to be of a sufficiently common type (for example, seller/buyer, owner/hirer, employer/employee, landlord/tenant) that it is possible to identify the typical obligations of such a contract. Secondly, the matter to which the implied term relates must be one which the parties have not in any way addressed in their contract. There must be a clear gap to be filled. In Shell v Lostock Garage, the garage owner failed on the first test. Lord Denning was not prepared to hold that exclusive dealing contracts of this kind were sufficiently common that typical terms could be identified.

In Scally v Southern Health and Social Services Board, Lord Bridge similarly referred to the distinction:

... between the search for an implied term necessary to give business efficacy to a particular contract and the search, based on wider considerations, for a term which the law will imply as a necessary incident of a definable category of contractual relationship.

4.5.7 Liverpool City Council v Irwin

This type of implication of terms derives from the House of Lords’ decision in Liverpool City Council v Irwin. The contract in this case was a tenancy agreement in relation to a block of flats. The agreement said nothing about who was to be responsible for the maintenance of the common parts of the block, and in particular the lifts and rubbish chutes. The tenants argued that a term should be implied that the City Council was responsible. It would clearly not have been possible to imply such a term using the Moorcock or the «officious bystander» test. It would have been quite possible to have a workable tenancy agreement in which, for example, the responsibility for the common parts was shared among all the tenants of the block. An officious bystander suggesting that a term should be included imposing liability on the landlord alone would have been unlikely to have been considered to be stating the obvious, at least as far as the City Council were concerned. The House of Lords nevertheless decided that it was possible to imply a term to the effect that the landlord should take reasonable steps to keep the common parts in repair. What the House was in effect doing was to say that:

• the agreement was incomplete, in that it was mainly concerned with the tenant’s obligations, and contained very little about those of the landlord;

• it was an agreement of a type that was sufficiently common that the court could decide that certain terms would normally be expected to be found in it;

• the term implied was one which the House thought was reasonable in relation to the normal expectations of the obligations as between landlord and tenant.

Despite the fact that Lord Wilberforce insisted on referring the test as one of «necessity rather than «reasonableness», it is clear that in practice it is the latter word which indicates the approach being taken, once the pre-conditions for any implication in law have been met. In other words, if it is established that the agreement is one of «common occurrence, and that it is «incomplete», the courts will themselves decide what term should be implied in order to make the contract work «reasonably» - meaning here «as would commonly be expected in relation to a contract of this type».

An example of a term implied by law into an employment contract is to be found in Malik v BCCI. The employee had worked for the Bank of Credit and Commerce International which collapsed in 1991, amidst allegations that the bank had operated in a corrupt and dishonest manner. The employee claimed that having worked for BCCI had adversely affected his future employment prospects. On a trial of a preliminary issue as to whether the employee had any cause of action, it was confirmed by the House of Lords that there should be implied into contracts of employment a mutual obligation of «trust and confidence». This obligation can be excluded or modified by the parties, but otherwise will operate as a «default» clause in all contracts of employment. In this case, the implied term had not been amended by the parties, and was held to include the obligation that the employer should not:

Without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

Thus, the employee did have the basis for a cause of action against his former employer for the damage caused by the way it was alleged the business had been run.

The possibility of implying a term in law was also raised in Ashmore v Corp of Lloyd’s (No 2), as an alternative to implication in fact. The plaintiff argued that there were many contracts in identical terms between «names» and Lloyd’s, and that therefore this was an appropriate situation in which to use the Liverpool City Council v Irwin approach. Gatehouse J disagreed. What was important was not the number of contracts; rather, there needed to be a broad category or type of relationship, even though within that type the detailed terms might vary on particular points. The fact that in this case each contract was in identical terms did not create a category, or genus, of contracts, for which typical terms could be found. The plaintiff’s attempt to imply a term by this means failed once again.

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