A recent decision by the Supreme Court has restated the rules around implied terms in contract. In Marks and Spencer v BNP Paribas, the United Kingdom’s highest court made clear that when deciding whether to apply a term into a contract, the question should be one of business necessity rather than of what the parties would reasonably have understood the contract to mean.
The contract in issue in this case was a lease of a building in London between BNP Paribas, as the landlord, and Marks and Spencer, as the tenant. Under the lease, rent was payable quarterly in advance so, on 25 December 2011, Marks and Spencer paid the rent up to 24 March 2012. However, on 24 January 2012, Marks and Spencer ended the lease in accordance with its right under a break clause in the lease. Marks and Spencer then sought to recover the rent for the period 24 January to 24 March 2012. BNP Paribas disputed this and the issue eventually ended up before the Supreme Court.
Marks and Spencer argued that a term should be implied into the lease that, if the tenant exercises its right to end the lease on 24 January, the landlords ought to pay back the rent already paid that can be apportioned to the time after that date. The Court decided that it was necessary to review the case law surrounding implied terms.
Lord Neuberger wrote the lead judgement. He went through the tests that have been set out in numerous cases and said that there was a “clear, consistent and principled approach”. In relation to The Attorney General of Belize v Belize Telecom, Lord Neuberger stated that “it is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied, because it is apparent that Belize Telecom has been interpreted by both academic lawyers and judges as having changed the law.”
In Belize Telecom, Lord Hoffman suggested that the process of implying terms into a contract was part of the process of interpretation of contract and therefore the test was what the contract, read as a whole, would reasonably be understood to mean. Lord Neuberger emphasised that this should not be taken to mean that reasonableness is sufficient to justify implying a term. A term can only be implied when it is so obvious as to go without saying or is necessary for business efficiency. Lord Neuberger also stated that the process of deciding whether a term should be implied should normally be carried out after the process of interpreting the express terms rather than as part of it.
In this case, the Supreme Court’s interpretation led them to reject Marks and Spencer’s argument that a clause should be implied into the lease. Whilst accepting that the result could be seen as curious, the Court looked at the fact that the lease was a detailed document that had been carefully considered. Not only this but “the Lease was negotiated against the background of a clear, general (and correct) understanding that rent payable in advance was not apportionable in time”. The refusal to imply a term would not make the contract unworkable nor “commercially or otherwise absurd” therefore a term need not be implied.
The rules around implied terms have been looked at in a number of cases. This means that there are a number of statements and restatements of the rules which have been used to try and expand or reduce its scope according to the interests of parties. This Supreme Court decision is a useful clarification of what test should be used and will hopefully provide increased certainty for parties entering into contracts. It also emphasises that where possible you should set out the full terms of your agreement in the contract rather than rely on the courts to imply in important terms.