Contract Law

Implied Terms & Construction of Terms Theory

FHS 2012

Implied Terms Justification for implied terms -e.g. necessity; wider considerations of policy; to give effect to partiesunexpressed intent (i) Terms implied by statute
? Precise reason depends on particular statute: a. give effect to presumed intentions of parties b. reduce uncertainty by enacting a default rule out which parties can contract out of c. protect weaker party in the transaction
? E.g. s12 - 15 SGA 1979, supply of goods, hire purchase contracts etc. ? protects the buyer by providing minimum floor of rights + placing considerable limits on the seller's right to contract out of those terms (can't exclude as again consumer; can against business if reasonable)
? Lord Bingham in Phillips Electronique Grand PubliqueSA v British Sky Broadcasting - courts won't ordinarily hesitate to imply into a contract of unseen goods that they should be of satisfactory quality b/c hard to imagine a trade conducted on some other terms.
? Hard but not impossible!A landlord doesn't give implied undertaking that premises leased will be fit for occupation, no implied term that house is fit for habitation or any particular purpose, caveat emptor rule (now longer operative) in 19th cent.
? On that basis, unlikely to be based on presumed intentions but rather to protect what are perceived to be legitimate expectations of buyers in sale of goods contracts? esp. b/c can't contract out off them!
(ii) Terms implied by custom
? Unwritten customs & usages of merchants is the reason why commercial lawyers must be responsive to changes & continue questioning whether particular doc, despite having been previously ruled non contractual, may now be contractual b/c of different circs b/w parties & generally [Debate to be viewed in context of int. commercial arbitration]
? B/c of different interpretations which people put on meaning/content of custom, businesses operating in areas of business/finance normally tend to have public a code of rules;e.g. ICC (internationally on banking, insurance, int. trade& transport). In English law operation of customs depends on express or implied incorporation into contracts (v. often will be the latter - e.g. banks ? too important to be left to courts). (iii) Terms implied by courts
? In fact - to give effect to unexpressed intentions of the parties
? Traditional test - necessity
? In law - all particular contracts of that type b/c of nature of the contract rather than intentions
? Test is less stringent - unclear but b/w reasonableness & necessity (1) Gives effect to presumed intentions of parties (2) Court's view of reasonable expectations of the parties (i) Collins -economic analysis: courts should provide a set of default rules to govern transactions in absence of express terms allowing parties to save transaction costs by not having to negotiate every detail i. But any party w/sufficient resources draftsa set of terms to suit his purposes. ii. On this basis, courts would imply terms which parties would have agreed on but for transaction costs - doesn't accord w/ case law? e.g. Liverpool CC v Irwin iii. Model reasoning for courts' selection of implied terms rests on incorporation of fair & practical allocation of risks. E.g. introduction of implied terms to employment contracts reflect the views about fair treatment of employees &
risk of losing the job. Conclusion?economic analysis = misleading description. Through implication of terms courts achieve fair & practical allocation of risks ? ultimately rests on court's view of parties' reasonable expectations (ii) Lord Steyn- no gen. duty of good faith in English law, so need to supplement written contracts. Justification = give effect to reasonable expectations of parties. i. implied by usage of trade/commerce - assumption is that they're usually taken for granted & not spelled out in writing ii. implied in fact - ad hoc gap fillers b/c expectation of party would often be defeated otherwise. Legal test - necessity ? courts shouldn't supplement unless it's necessary to give effect to parties' reasonable expectations. Though it's a myth to say that it's inferred from their intentions.

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