LIKE the interpretation of the express words in a contract, the implication of terms in fact is traditionally explained as a way of the court giving effect to what the parties intended, judged objectively. So the two processes have something in common at a high level of generality. Much more controversial is the suggestion, made by Lord Hoffmann giving the opinion of the Privy Council in Attorney General of Belize v Belize Telecom Ltd. [2009] 1 W.L.R. 1988, that the process of implying terms is merely an aspect of interpretation: “There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?” This analysis, which generated intense academic debate, had not been considered by the Supreme Court until the recent decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd. [2015] UKSC 72.

The defendants were the landlords and the claimant was the tenant of office premises in central London, pursuant to a complex commercial lease that ran to some 70 pages. Basic annual rent of over £1.23 m plus VAT was payable in three-monthly instalments, in advance, on the usual quarter days in March, June, September, and December. The leasehold term was expressed to last until February 2018, but the lease contained a “break clause” giving the tenant the option to terminate the lease early, on 24 January 2012. This break clause contained specific requirements: to exercise the break, the tenant had to give the landlord six months' prior written notice, which would only have effect if on the break date there were no arrears of basic rent or VAT; the tenant also had to pay a premium of £919,800 plus VAT. In July 2011, the tenant served a break notice to terminate the lease; as required, it paid its quarterly advance rent on 25 December 2011 and, just before the break date, also paid the premium, so the lease duly expired on 24 January 2012. The tenant subsequently sought a refund of an apportioned part of its advance rent payment, in respect of the period 24 January to 25 March. As there was no express provision in the lease obliging the landlords to pay this apportioned sum, the tenant sought to persuade the court to imply such a term (an individualised term implied “in fact”). The tenant succeeded at first instance, but the landlords' appeal was allowed by the Court of Appeal ([2014] EWCA Civ 603). The tenant appealed to the Supreme Court, which unanimously dismissed the appeal.

The tenant's position was certainly a reasonable one. It argued powerfully that the essence of rent is that is referable to a tenant's use and enjoyment of the land on a day-by-day basis, such that, for Lord Neuberger (with whom Lords Sumption and Hodge agreed), there was “real force in the contention that, if the defendants can retain the apportioned sum, it would be unfairly prejudicial to the claimant and a pure windfall for the defendants”. Likewise, the lease provided that the basic rent was “paid yearly and proportionately for any part of a year by equal quarterly instalments”, the word “proportionately” indicating (as the landlords conceded) that, if the lease had run its full course to February 2018, the tenant would only have had to pay an apportioned part of the basic rent on the final quarter day in December 2017. But “reasonableness” is categorically not the test for implying a term in fact into a contract. The traditional formulation is that a term will only be implied where it is “necessary to give business efficacy” to the contract (Reigate v Union Manufacturing Co. (Ramsbottom) Ltd. [1918] 1 K.B. 592), a very strict test meaning that a term will not be implied unless, without the suggested term, the contract would be “futile, inefficacious and absurd” (per Lord Salmond in Liverpool City Council v Irwin [1977] A.C. 239, 264) or, as Lord Neuberger put it, would lack “commercial or practical coherence”.

This lease was not remotely unworkable or absurd without the suggested implied term. Indeed, its absence made sense when viewed alongside the express requirement for the tenant to pay a premium to exercise the break clause, since it would be “somewhat peculiar to imply into the Lease a term requiring the landlords to pay the tenant around £200,000 plus VAT on 25 January 2012, when the Lease has an express term requiring the tenant to pay the landlords around £900,000 plus VAT by 24 January 2012”. Such an implied term would “lie uneasily” with the express term – and it is axiomatic that a term will not be implied if it is inconsistent with the contract's express terms. Moreover, the legal background against which the lease was negotiated also pointed away from implying the term, since the statutory regime for apportionment of rent (the Apportionment Act 1870) applies only to rent payable in arrear, but not in advance. Overall, there was no basis on which to add the proposed term, other than the temptation to tinker with and perhaps improve the parties' bargain. But this temptation must be resolutely resisted, as Sir Thomas Bingham M.R. cautioned in Philips Electronique Grand Public S.A. v British Sky Broadcasting Ltd. [1995] EMLR 472: “… the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong.”

The real significance of Marks & Spencer lies not in its unanimous and entirely orthodox refusal to add a term to a professionally negotiated and comprehensively documented commercial lease, but in the majority's disapproval of Lord Hoffmann's view in Belize Telecom (defended strongly only by Lord Carnwath) that the process of implying terms is an aspect of contractual interpretation. Although the court acknowledged (as the Court of Appeal had done in Mediterranean Salvage & Towage Ltd. v Seamar Trading & Commerce Inc. [2009] EWCA Civ 531) that, understood properly, Lord Hoffmann was not advocating making it easier to imply a term, or relaxing the strict test of “necessity” to one of “reasonableness”, nonetheless his approach (with its emphasis on the objective, reasonable interpretation of the contract) risked precisely that misunderstanding.

Moreover, Lord Neuberger identified real conceptual difficulties with Lord Hoffmann's analysis, which “could obscure the fact that construing the words used and implying additional words are different processes governed by different rules”. The difference is crucial, because “the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context”. This circularity reveals another problem with Lord Hoffmann's approach: that it does not sufficiently respect the paramountcy of the express terms when deciding whether a term should be implied:

Given these difficulties, the majority's polite conclusion was that Lord Hoffmann's “observations should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

This clarification is very welcome. There is a real problem with assuming that silence admits of one reasonable, objective meaning, when silence is inherently ambiguous. The other traditional doctrinal test for implying a term in fact recognises this – the term must be so obvious that, when questioned by the hypothetical officious bystander, both parties reply that of course it forms part of their bargain. Such unanimity is extraordinarily unlikely to be satisfied in a commercial transaction. Let's imagine the suggested “apportionment” implied term had been proposed in the negotiations: it would have been the subject of horse-trading and have had knock-on effects on the other terms on the table, such that many possible reasonable outcomes could have been reached. How then can its absence give rise to just one reasonable interpretation?

This in turn raises another difficulty with the assimilation of implication of terms and interpretation. Evidence of the parties' pre-contractual negotiations is inadmissible in disputes about contractual interpretation, but must surely be admitted when considering implied terms. What if the tenant actually proposed the disputed “apportionment” term at an early stage of negotiations, but the landlords adamantly resisted it, regarding the point as a “deal-breaker”? It would be perverse to suggest that a hypothetical reasonable observer should be free to “interpret” the absence of the term objectively, by reference to the rest of the commercial background but not that crucial fact. Overall, the Supreme Court's recognition that implication of terms and interpretation are different, albeit related (along with its re-emphasis of the need for commercial certainty, the primacy of the express terms and the stringency of the traditional doctrinal tests for implying terms) is of both practical and theoretical importance.