A recent decision from the Outer House of the Court of Session provides useful insight into the implied terms of contracts.
The pursuer in this case, William Burnside, is a property investor and developer who owns 26 properties in the Borders region of Scotland. Clydesdale Bank PLC (CB) loaned the pursuer, the funds to buy and develop the properties, which were subsequently let. In 2012, the loan fell due, with an outstanding sum of just over £2.5 million.
As a result, CB and the pursuer entered into a settlement agreement (agreement), under which the bank was obligated to arrange for the properties to be sold. The proceeds of sale were to be retained by CB to extinguish the debt owed. Until the properties were sold, the pursuer was obliged to manage the properties and remit the rental income to CB. However, he was permitted to deduct maintenance costs from the rental income.
In June 2015, CB assigned its rights under the agreement and most (if not all) of the standard securities granted in favour of CB over the properties to the defender, Promontoria (Chestnut) Limited (Chestnut). The properties were not sold and in March 2016 Chestnut purported to terminate the agreement on the basis that the rental income had not been paid to it in terms of the agreement.
Arguments advanced in court
The pursuer raised an action in the Outer House of the Court of Session seeking specific implement of the defender's obligation to sell the properties. He claimed that CB, and subsequently Chestnut, had failed to comply with an implied term in the agreement that the properties would be sold ‘within a reasonable time’.
Failure to comply with this implied term, he argued, constituted a material breach of the agreement, entitling him to withhold performance of his own obligations in reliance upon the principal of retention. He also sought declarator to the effect that the agreement had not been validly terminated and thus he was entitled to withdraw performance of his obligation to remit rental income to Chestnut.
In response, Chestnut argued that since the agreement contained an entire agreement clause stating "this agreement forms the entire agreement between the parties", it was not possible to imply a term that the properties were required to be sold within a reasonable period of time. Chestnut also cited earlier case law in its argument that a clause of this nature prevents the implementation of an implied term. On the basis that the implied term did not form part of the agreement, Chestnut therefore believed it had been validly terminated and sought recovery of the outstanding debt.
The central issue for the court was to determine whether the implied term founded on by the pursuer formed part of the agreement.
Decision of the court
Following consideration of the development of case law in this area, the court held that there was implied into the agreement a requirement that the defender sell the properties within a reasonable time. Lord Clark cited consideration of business common sense, the context and background as known by the parties, and the fact that the agreement did not provide that the obligations were intended to be perpetual as factors in his decision. He confirmed there was also nothing to indicate that the parties had agreed the timing for sale of the properties would be at the sole discretion of the defender. Turning to the entire agreement clause, the judge found that, since the implied term formed part of the agreement, it did not exclude the requirement for the properties to be sold within a reasonable time.
Comment
This is a decision of a court of first instance, and Lord Clark has allowed a proof before answer on the remaining disputed points between the parties. Whilst judgment on the merits of the wider case is awaited, the decision gives useful insight as to when terms will be implied into all commercial contracts, and highlights the risk in relying on entire agreement clauses as a fall-back to prevent implied terms from being found. Best practice is always to explicitly include any required timescales, or indeed confirm that an obligation is to be perpetual.
William John Burnside v Promontoria (Chestnut) Limited [2017] CSOH 157
Article contributor: Lucy Mulreany, solicitor