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The difficulties of implied terms

When entering into any kind of contract it is essential to expressly include clauses on all matters that are crucial to the parties and the arrangement at hand. Unfortunately this does not always happen.

Where a contract is silent on an issue, the courts may imply a term in order to bridge the gap. An implied term will only be inserted if it reflects the parties’ intentions at the time when they made contract.

The starting point when determining whether there is an implied term will always be to look at the terms that are expressed in the contract. An implied term will never be inferred where it would contradict a term that has been expressly stated. The strongest indication of a party’s intention is that they specifically included it in a contract.

A recent case, Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017], has highlighted the restricted way the courts will determine what the parties’ intentions were.

In this case a facilities agreement expressly allowed the Bank to assign any of its rights to another bank, and to disclose information about Camden and the agreement to the new bank. The Bank entered into liquidation and subsequently advertised the agreement as part of a package which included distressed debt. Camden was concerned that this would give the impression that its loan was distressed, leading to potential purchasers obtaining rights at less than market value.

Camden tried to argue that the agreement contained an implied term that the Bank could not do anything that would jeopardise Camden achieving the best possible price for the sale of the loan under the facilities agreement.

The Court of Appeal held that Camden’s argument had no real chance of success. Although this case specifically refers to banking practices, the principles that the court called attention to shall apply to any commercial contract.

The test that the courts will consider is not what the parties’ intentions actually were (this would be near impossible to determine if a dispute arose), but instead they will reflect on what a reasonable person would have understood the intentions of the parties to be, based on the background knowledge that was reasonably available to the parties when they entered into the contract. In other words, what a reasonable person, putting themselves in the shoes of the parties, would think the parties were trying to achieve.

A term will not be implied into a contract for the following reasons:

  • the term would have been reasonable for the parties to include it;
  • if the parties would have agreed to the term; or
  • if the term is deemed to be fair.

A term will only be implied if a reasonable person would think it was what the parties intended at the time.

The complexities and pitfalls of trying to rely on implied terms serves to highlight the importance of getting a contract right from the beginning. If a term is expressly stated in the contract, there is no need to go through the headache of determining the parties’ intentions.

If you wish to discuss any of the issues raised in this article please contact Chris Wills, Director and Head of Corporate, on 01872 226992 or at chris@murrellassociates.co.uk, or Stephanie Taylor, the author of the article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 09 March 2017. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, March 2017.