Silence Isn't Always Golden – The Limitations On Implied Contract Terms

It comes as no surprise that commercial contracts lawyers repeatedly recommend that contractual arrangements are written into formal agreements. The realities of business though, sometimes mean that not all contracts can or will be fully or properly documented. In certain circumstances, implied terms can be a helpful tool for contracting parties, allowing unwritten provisions to be incorporated into a contract. Some are implied by specific legislation – for example, to grant consumers protection in a sale of goods. Other terms can be implied by a court if they meet the requirements set by case law.

Implied terms typically are used when a contract is silent on a subject. However, courts are also asked to imply a term where contract states something that has created unintended consequences for a party. In these cases, a contract might inadvertently paint a party into a corner and an implied term could solve their problem.

In two recent cases¹, the English courts were asked to consider contracts which contained specific triggers for a payment of a success fee – respectively, on the sale of a property at or above a given price, and on the completion of the sale of a company. In each case, the specific trigger had not been achieved, but the affected party still sought payment, arguing that they had still done significant work and so deserved to be paid. The courts were asked to consider if the payment obligation should be honoured, even though the specific trigger in the contract was not met. This would be done by inserting an implied term that payment is due even without the trigger.

The courts consistently refused to insert the implied term that payment should be honoured. These decisions by the courts reiterate the long-standing principles regarding insertion of implied terms:

1. implied terms will not be inserted simply to make the contract reasonable or fair and must only be permitted if either:
   1. the implied term is needed to give business efficacy to the contract; or
   2. no implied term should be inserted that contradicts an express term already present in the contract
2. the implied term is so obvious that it goes without saying that it should be included; and

In both cases, the contracts stated specific triggers for payment, so the courts refused to insert an implied term contradicting those provisions and allowing payment without the trigger.

Underpinning the courts' decisions are two fundamental assumptions that dominate how contracts between commercial parties with comparable bargaining power will always be interpreted:

1. everything of importance to the parties was captured by them in the contract; and
2. commercial parties have complete freedom of contract and may strike whatever bargain they choose, and it is not the court's place to unwind a bad bargain.

The court's reminder of these fundamental principles highlights that commercial agreements are undeniably best served by being documented clearly in a formal contract. However, businesses should also take care to ensure that what is written in a contract works for them commercially. These cases demonstrate starkly that, while the law can help imply terms, the courts will have little sympathy for a party seeking to go against the written wording of a contract in order to improve its commercial position.

Blaser Mills' Commercial team are on hand to guide you through the whole journey of your commercial arrangements, from negotiation to reviewing and drafting documentation and licensing of your business' intellectual property.

Footnote

1. Barton v Morris in place of Gwyn Jones (deceased) [2023] UKSC 3, Contra Holdings Ltd v Bamford [2023] EWCA Civ 374

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