This article is about the implication of terms into contracts based upon the presumed intention of the parties. It is particularly concerned with the decision of the Judicial Committee of the Privy Council in Attorney General of Belize v. Belize Telecom Limited,Footnote 1 a number of recent Court of Appeal decisions thereafter, and whether there has been any change in the law. Before getting to Belize, it is necessary to consider, as briefly as possible, what went before.
BUSINESS EFFICACY AND THE OFFICIOUS BYSTANDER
Prior to the decision in Belize it had long been established that, for a term to be implied into a contract based upon the presumed intention of the parties, it must be necessary to give business efficacy to the contract.
This requirement is derived from the well-known case of The Moorcock Footnote 2, a case involving a vessel which was damaged when docking at the defendant's jetty in the River Thames. In holding that the defendant was liable for breach of an implied undertaking to take care to ensure that the river bed was reasonably fit for purpose, Bowen L.J. said that a term was to be implied to give such “business efficacy” to the transaction as must have been intended by both parties as businessmen.
The business efficacy test, as thus enunciated, was later supplemented by what has become known as the officious bystander test. The origin of this test is to be found in the judgment of Scrutton L.J. in Reigate v. Union Manufacturing Company Footnote 3 (although the learned judge did not use the words “officious bystander”). The same test was restated, and the phrase “officious bystander” coined, by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Limited,Footnote 4 where the learned judge said that for a term to be implied it had to be so obvious as to go without saying, such that if an officious bystander had suggested it to the parties while they were making their contract, they would both unhesitatingly have approved the term.
It is to be noted that the officious bystander is not the arbiter of whether or not a term should be implied. He asks the relevant question; he does not answer it. Nor is he required, given his limited role, to be reasonable. He simply asks the question. It is then for the parties to answer it. And it is only if both parties would have given the same answer, approving the implication of the term, that it is to be implied.
This is a stiff test, because parties in a contractual negotiation will often have competing interests. Thus, if asked whether some term, not expressed in the proposed contract between them, is to be implied one party may well say “of course”; but the other party, having a different interest, may well say “of course not”.Footnote 5
For generations thereafter the business efficacy test and the officious bystander test have gone hand-in-glove, and have been repeatedly adhered to in numerous reported cases. Two, in particular, need to be highlighted here.
The first is Liverpool City Council v. Irwin Footnote 6 in which the House of Lords had to consider whether there should be implied into tenancy agreements between a local authority and tenants of council flats an obligation on the local authority, as landlord, to use reasonable care to keep the common parts in good repair. The decision of the House of Lords, holding that the term was to be implied, turns upon the implication of a term as a matter of law into a common type of contract – as a legal incident of that type of contract – rather than upon the implication of a term based upon the presumed intention of the parties.
The dissent of Lord Denning M.R. in the Court of Appeal is of interest. The learned judge held that the test for implying a term, based upon the presumed intention of the parties, was “whether or not it was reasonable in all the circumstances to do so”Footnote 7 (emphasis added). He quoted Lord Wright, speaking extra-judicially in 1935, saying that His Lordship had “pulled the blinkers off our eyes”. Lord Wright said:
The truth is that the court...decides this question in accordance with what seems to be just or reasonable in its eyes. The judge finds in himself the criterion of what is reasonable. The court is in this sense making a contract for the parties – though it is almost blasphemy to say so.Footnote 8
Thus Lord Denning M.R. sought to abandon the officious bystander test, and replace it with a test based upon what was reasonable. The House of Lords rejected this, affirmed the officious bystander test, but found another basis for implying the term.
The second case to highlight is the decision of the Court of Appeal in Philips Electronique Grand Public S.A. v. British Sky Broadcasting Ltd. Footnote 9 – a case described by Rix L.J. as a useful and authoritative modern restatement of the relevant principles by Sir Thomas Bingham M.R., who gave the judgment of the Court of Appeal.Footnote 10
The Philips Electronique case involved contracts between a manufacturer of electronic equipment (Philips) and a company formerly known as British Satellite Broadcasting Limited (BSB). Pursuant to these contracts Philips undertook to manufacture electronic equipment capable of receiving signals from BSB's satellite. BSB then merged its business with that of its rival, Sky (to form BSkyB), adopted Sky's technology, and thereby largely destroyed the market for the equipment to be manufactured under the contract.
Philips alleged a variety of implied terms, the broad thrust of which was that BSB agreed to do nothing of its own motion that would destroy or impede the market for the equipment which Philips had agreed to manufacture. The Court of Appeal held that none of the terms alleged was to be implied. The following points are particularly to be noted.
First, Sir Thomas Bingham M.R. drew a distinction between the approach of the courts in construing the express terms of a contract, and in seeking to imply terms into it. The two exercises were not the same. He described the exercise of implying terms as an altogether more ambitious undertaking than the task of the court in construing the written words of the contract, and one that was so potentially intrusive that the law imposed strict constraints on the exercise of this extraordinary power.
Secondly, Sir Thomas Bingham M.R. recognised that the court comes to the task of implication with the benefit of hindsight, and that it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. He said that this was tempting, but wrong. In making this observation, he relied upon, and gave an unqualified endorsement to, the officious bystander test.
The judgment of Sir Thomas Bingham M.R. in Philips Electronique exemplifies the classic approach to whether or not a term should be implied. As explained below, neither the decision of the Court of Appeal in Philips Electronique nor the decision of the House of Lords in Liverpool City Council v. Irwin seems to be consistent with the approach taken in the Belize case.
CONSTRUCTION OF WRITTEN CONTRACTS
The Philips Electronique case was decided in 1994. Since then there has been a number of decisions of the House of Lords relating to the approach to be taken in construing written contracts, that is in interpreting the express terms of such contracts. Of particular relevance are the decisions in Investors Compensation Scheme Limited v. West Bromwich Building Society Footnote 11, and Chartbrook Limited v. Persimmon Homes Limited Footnote 12 and the seminal speeches of Lord Hoffmann therein.
The principles to be derived from these cases are well known. They stress the importance of the background against which the parties entered into their contract; and they recognise that, once the background is known, the meaning of the words used might be different from the meaning that would be derived from the application of rules of conventional syntax, and from the dictionary meaning of words. In a nutshell, and as Lord Hoffmann put it in the Chartbrook case (para.14):
the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.
Consequently, contracts might, in some circumstances, properly be construed as meaning something different from what they say. When this occurs, the object of the court construing the contract will be to give it a meaning which more readily accords with commercial good sense, and with the commercial purpose underlying the provisions which it is construing, than that which would be derived from applying conventional rules of syntax or dictionary meanings.
The notion that commercial contracts must be construed in a way that makes business commonsense is not entirely new. Notably, Lord Diplock said in The Antaios Footnote 13 that, if a detailed semantic and syntactical analysis led to a conclusion that flouted business commonsense, it must yield to business commonsense. However, the decisions of the House of Lords in Investors Compensation Scheme Limited v. West Bromwich, and those which followed it, have built upon the idea that contracts might sometimes be taken to mean something different from what they say in a way that has changed attitudes. They have brought about a cultural revolution in commercial law.
IMPLIED TERMS: A NEW REVOLUTION?
As indicated above, in the Philips Electronique case Sir Thomas Bingham M.R. explained that the process of interpreting the written language of a contract was different from that of seeking to imply a term into a written contract. The latter was an “altogether more ambitious undertaking”, which was “so potentially intrusive” that the law imposed strict constraints on “this extraordinary power”.
Consistent with this approach, the change in the way the courts approach the interpretation of written contracts, following the decision of the House of Lords in Investment Compensation Scheme v. West Bromwich, has not, until recently, been considered as applicable in the context of seeking to imply a term into a written contract. That has now changed following the decision of the Privy Council in the Belize Telecom case.
Before considering Belize it is necessary to mention the decision of the House of Lords in Equitable Life Assurance Society v. Hyman,Footnote 14 in which the seeds of a new approach were sown.
The Equitable Life case concerned the effect of certain with-profits retirement policies entered into between Equitable Life and approximately 90,000 policyholders. Under the terms of the policies the policyholder was entitled, upon maturity, to an annuity at a guaranteed rate, increased by related bonuses, if any; alternatively, the policyholder could take an annuity at the society's current rate (whatever it might be) or from another provider. Under Article 65 of Equitable Life's Articles of Association, the amount of any bonus was within the absolute discretion of the directors, and their decision was to be final and conclusive.
From 1994, when the current annuity rate started to fall below the guaranteed annuity rate, Equitable Life adopted a policy of declaring a lower final bonus to policyholders who chose to take an annuity at the guaranteed rate than it did to those who elected to take one of the alternative options. The question which arose for decision was whether, under the terms of the policies, Equitable Life was entitled to do this.
It was held in the House of Lords that Equitable Life was not so entitled. The principal ground of the decision was that the policies contained an implied term restricting the use of the directors' discretion in the declaration of bonuses so as to preclude them from differentiating between those policyholders who opted for the guaranteed annuity rate and those who opted for one of the alternatives.
In reaching this conclusion Lord Steyn, with whom all of the other learned judges (including Lord Hoffmann) agreed, relied upon: the commercial rationale which lay behind the relevant provisions of the policy; and the reasonable expectations of the parties.
Lord Steyn, having referred to the commercial object of the inclusion of guaranteed rates in the policy, held that “[t]he implication is essential to give effect to the reasonable expectations of the parties.”Footnote 15
And he stressed that:
The legal test for the implication of [a term based on the presumed intention of the parties] is a standard of strict necessity.
However, to say that the test is one of strict necessity is to set an incomplete test, because the question is left open – strictly necessary for what? The answer to that question, to be derived from the speech of Lord Steyn, is that the term should be strictly necessary to give effect to the reasonable expectations of the parties, having regard to the commercial purpose of the bargain.
Lord Steyn did not say that, in implying a term on this basis, he was making new law, or departing from existing law. However, in substance, this seems to me to be a different test from that which had previously been established. In particular, the implication of a term in order to give effect to the reasonable expectations of the parties, having regard to the commercial purpose of the bargain, is different from the implication of a term on the basis that it is one which, had it been proposed by an officious bystander prior to the making of the contract, both parties would undoubtedly have agreed to.
It seems that the term that was implied by the House of Lords in the Equitable Life case would not have been implied on the basis of the officious bystander test: if it had been suggested, prior to the making of the contract, by an officious bystander, the proposed policyholder may well have said, “yes, of course” to it; but Equitable Life may well have said, “of course not”. It could not be established that both parties would unhesitatingly have said, “yes”. Equitable Life was therefore a turning point in relation to the law on implied terms. The direction which it set was followed in Belize.
I turn now to Attorney General of Belize v. Belize Telecom Limited.Footnote 16 As a decision of the Judicial Committee of the Privy Council it is not, strictly, binding.
The case concerned the proper construction of the Articles of Association of a company, Belize Telecommunications Limited, and whether they contained an implied term. Under the express terms of the Articles, a special shareholder, provided it also held a particular class of ordinary shares (“C” shares) amounting to 37.5% or more of the issued share capital of the company, was entitled to appoint or remove two directors.
Following the appointment of these directors, the special shareholder then defaulted on certain obligations and, by a process of seizure resulting from the default, lost a significant proportion of the ordinary shares which it previously held. As a consequence, the special shareholder no longer held ordinary C shares amounting to 37.5% of the issued share capital of the company.
A question then arose as to what was to happen to the two directors of the company who had been appointed by the special shareholder. The only person who had the power to remove them was a special shareholder holding C shares amounting to 37.5% of the issued share capital. But the result of the default and seizure was that no such person existed.
It was held by the Judicial Committee that the Articles of Association contained an implied term that a director appointed by virtue of a specified shareholding vacates his office if there is no longer any holder of such a shareholding.
In delivering the Opinion of the Judicial Committee Lord Hoffmann made a number of general observations about the process of implication. The following seem to me to be the main points.
First, Lord Hoffmann stressed that the court has no power to improve upon the instrument which it is called upon to construe. As he put it, “It cannot introduce terms to make it fairer or more reasonable”Footnote 17.
Secondly, the most usual inference to be drawn, in cases where an implied term is alleged, is that no term is to be implied.
Thirdly, the process of implication is concerned only to discover what the instrument means, that is to say the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed. In making this observation, Lord Hoffmann relied upon the decision of the House of Lords in Investors Compensation Scheme v. West Bromwich Building Society.
It is this third point which is of the greatest interest, creating, as it does, an assimilation between the approach to be taken in interpreting the express terms of a contract (as to which see above) and that to be taken in deciding whether or not a term is to be implied.
This is directly contrary to the approach taken by Sir Thomas Bingham M.R. in the Philips Electronique case, which treated the implication of a term as a different exercise from the construction of express terms.
In the context of this assimilation, Lord Hoffmann made a number of observations relating to the business efficacy test, and the officious bystander test, saying that they were not to be treated as different or additional tests – there was only one question, namely what is the contract, read as a whole, reasonably to be understood to mean.
Moreover, the officious bystander test came in for some criticism. Lord Hoffmann observed that it carried the danger of barren argument over how the actual parties would have reacted to the proposed term. As Lord Hoffmann put it,Footnote 18 “that, in the Board's opinion, is irrelevant”.
Lord Hoffmann also said that it was not necessary, before a term could be implied, that it be obvious, in the sense of being immediately apparent. Rather, the test that the implied term must “go without saying”:
is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean. (Emphasis added)
As appears below, that seems to me, with respect, to be a significant reformulation of, and departure from, the officious bystander test.
DISCUSSION
It follows from the decision of the Judicial Committee in Belize that, in considering whether or not a term is to be implied based upon the presumed intention of the parties, there is ultimately only one relevant question: what would the contract, read as a whole, be taken to mean by a “reasonable addressee” having the background knowledge available to the parties?
In formulating the test in this way, Lord Hoffmann has altered the characteristics and the role of the independent third party observer. In the test, as laid down by Scrutton L.J. in Reigate, and by MacKinnon L.J. in Shirlaw, the third party observer was officious, and he asked the relevant question for the parties to answer. He was not an arbiter. In Lord Hoffmann's formulation, the third party observer becomes the person to whom the relevant question is addressed; he has become reasonable; and it is for him to answer, not to ask, the relevant question.
In short, the approach to be derived from Belize seems to entail, in the context of contractual implied terms, the replacement of the officious bystander by another character from legal folklore, formerly referred to as the man on the Clapham omnibus.
This phrase is said to have been coined by Charles Bowen, as he then was, acting as junior counsel in the famous and extraordinary case of The Tichborne Claimant (1871), in which an imposter from Wagga Wagga, New South Wales, originally from Wapping, unsuccessfully claimed to be, and to be entitled to the fortune of, Sir Roger Tichborne, who had been lost at sea some years before.
The first judicial reference to the man on the Clapham omnibus appears to be in the judgment of Sir Richard Henn Collins M.R. in McQuire v. Western Morning News Company Limited,Footnote 19 a case concerning an alleged libel in which the learned judge referred to:
the ordinary reasonable man “the man on the Clapham omnibus,” as Lord Bowen phrased it...
The same character remained alive and well in 1933 when the Court of Appeal decided Hall v. Brooklands Autoracing Club Footnote 20, a case in which a spectator at the Brooklands race track was injured when a car accidentally collided with another and left the track. It was held that the owner of the racetrack was not liable. Greer L.J. based his decision upon an implied term in the contract between the spectator and the racetrack owner that the spectator agreed to take the risk of the kind of accident that happened. In deciding whether or not such a term should be implied Greer L.J. relied upon a test very similar to that established by the Judicial Committee in Belize. He said that whether the relevant term should be implied
must be judged by what any reasonable member of the public must have intended should be the term of the contract. The person concerned is sometimes described as “the man in the street,” or “the man in the Clapham omnibus,” or, as I recently read in an American author, “the man who takes the magazines at home, and in the evening pushes the lawnmower in his shirt sleeves.”
In the test for the implication of terms into a contract, as explained by Lord Hoffmann in Belize, the reasonable observer who is asked what the contract means is imbued with the background knowledge available to the parties when they made their contract. But he is, essentially, the same character as the one described by Greer L.J. in the Brooklands case.
Of course, such a person will not be in court to answer the question of whether an alleged term should be implied. He is a fiction – a fictional embodiment of the good sense of the judge trying the case. As Lord Radcliffe put it in Davis Contractors Limited v. Fareham Urban District Council:Footnote 21
the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. (Emphasis added)
Thus it is the judge, who tries any given case, who stands in the shoes of the “reasonable addressee” and who is called upon to answer the question – what does the contract mean?
But how is the judge to answer that question, when the contract says nothing?
Based upon the decision in Belize, it seems that the task of the judge is to consider the background to the contract; consider its express terms; discern its commercial aim and the parties' reasonable expectations; and decide whether it is necessary to imply a term. Ultimately, it is a matter of judgment and good sense – the judgment and good sense of the judge who tries the case.
This does not seem to me to be different from the approach taken by Lord Steyn in the Equitable Life case – which is perhaps not surprising, given that Lord Hoffmann was a member of the court which decided the Equitable Life case, and he agreed with Lord Steyn. Nor does it seem to me to be different from the business efficacy test, as originally enunciated by Bowen L.J. in The Moorcock.
But that test subsequently had the officious bystander test grafted onto it. In a sense, the officious bystander test put the business efficacy test in a strait-jacket. And judicial decisions of high authority, over many years, have adopted the officious bystander test. The decision of the House of Lords in Liverpool City Council v. Irwin, and the decision of the Court of Appeal in Philips Electronique are examples.
The judgment of Lord Hoffmann in Belize seems to me to be at odds with these cases, principally because it ditches the officious bystander test. It gets rid of the strait-jacket. The business efficacy test is then subsumed into the question of what the contract means to a reasonable addressee – to be decided, ultimately, by the good sense of the judge trying the case.
Though not expressed in the same way, this does not seem to me to be very different, in substance, from the approach advocated extra-judicially by Lord Wright in 1935 and adopted by Lord Denning M.R. in the Court of Appeal in Liverpool City Council v. Irwin, but disapproved by the House of Lords in that case – as to which, see above.
Lord Hoffmann's analysis does not signal the opening of the floodgates for the implication of terms into written contracts. The usual inference is that no term should be implied. But it does, in my view, signal some relaxation of the previously very strict rules; some additional latitude given to the judge trying a given case.
The facts of Liverpool City Council v. Irwin are a good example of how it could make a difference. The implied term in that case – that the landlord was obliged to use reasonable care to maintain the common parts – is one that it was clearly right to imply. Yet it could not be implied on the basis of the officious bystander test – as is apparent from the decision in the House of Lords, and from the fact that the majority in the Court of Appeal (Roskill and Ormrod L.JJ.) held that no term was to be implied. The basis upon which the term was eventually implied – namely that it was to be implied as a legal incident of the type of contract in question – emerged late and unheralded in argument in the House of Lords.Footnote 22
If the approach taken by Lord Hoffmann in Belize were to be followed on the facts of Liverpool City Council v. Irwin, there would be no problem in implying the term.
Another situation in which Lord Hoffmann's approach could make a difference is where it is clear that some term is missing from the express terms of the contract, but it cannot be said for sure what the parties would have agreed, if they had thought about it before making the contract.
This point came up in Trollope & Colls Ltd. v. North West Metropolitan Regional Health Board [1973] 1 W.L.R 601, a decision of the House of Lords. It involved a building contract under which the work was to be carried out in three phases. Work under phase I was delayed, through no fault of the contractor, and the time for completing phase I was extended to take account of this delay pursuant to an architect's certificate given under an express term of the contract. As a result of the delay in completing phase I, the time between the commencement of phase III and the date set in the contract for completion of phase III was significantly reduced.
The issue which the House of Lords had to consider was whether there was an implied term of the contract which had the effect of extending the time for completion of phase III to take account of the delay in completing phase I. It was held, reversing a majority decision of the Court of Appeal (Lord Denning M.R. and Phillimore L.J.), that no such term was to be implied.
One of the reasons for the House of Lords' decision was that, even if the parties had overlooked the possible effect of an overrun of phase I on the time for completing phase III, there were at least four or five different ways in which they might have agreed to deal with the situation. That being so, there was no obvious term to which both parties would have agreed.Footnote 23
Relying upon this in the Philips Electronique case, Sir Thomas Bingham M.R. observed:
And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred …(Emphasis added).
This conclusion follows logically from an application of the officious bystander test: if it must be established, before a term can be implied, that it is one which both parties would unhesitatingly have assented to, the fact that there were several possible solutions, any one of which might have been adopted, will lead to the conclusion that no term is to be implied.
But it is, in my view, questionable whether this is the just answer. If it is clear that the express terms of the contract contain a lacuna and that, had the parties thought about the matter, they would surely have made some express provision for it, it seems odd that the court should be compelled to find that no term is to be implied because it is not obvious which solution would have been adopted.
Although this remains to be seen, I would expect Lord Hoffmann's approach to lead to the implication of a term in such circumstances – being the least intrusive term necessary to allow the contract to operate in a manner consistent with business commonsense.
There is clearly room for debate as to whether Lord Hoffmann's approach is desirable. There is much to be said for the view that the traditional approach, exemplified by Sir Thomas Bingham M.R. in the Philips Electronique case, is to be preferred, since it provides greater certainty, has broadly worked well for generations, and is intellectually more rigorous.
But that is not the only tenable view. Another view is that the officious bystander test is too strict and is apt, occasionally, to produce the wrong result. By way of contrast, the approach to be derived from Lord Hoffmann's judgment in Belize has the advantage of providing greater scope for reaching a result, on the facts of any given case, which accords with “business commonsense” – the phrase used by Lord Diplock in The Antaios.
There is a tension between these two views which, ultimately, is not reconcilable; and it is a tension which seems to me to have surfaced in decisions of the Court of Appeal since Belize, and is yet to be resolved.
SUBSEQUENT AUTHORITIES
There has been a significant number of cases in which the decision of the Judicial Committee in Belize has been considered. It is not possible to mention all of them here. But four decisions of the Court of Appeal are significant.
In Mediterranean Salvage & Towage Limited v. Seamar Trading & Commerce Inc. Footnote 24 (“The Reborn”), the Court of Appeal had to consider whether a voyage charterparty containing a named specific load port was subject to an implied term that the charterers must nominate a safe berth at that load port. It was held that no such term was to be implied.
Sir Anthony Clarke M.R. considered Lord Hoffmann's judgment in Belize in some detail, predicting that it would be much referred to. His Lordship stressed (para.15) that Lord Hoffmann was,
not in any way resiling from the often stated proposition that it must be necessary to imply the proposed term.
Sir Anthony Clarke M.R. then referred to the speech of Lord Wilberforce in Liverpool City Council v. Irwin in which Lord Wilberforce stressed that the test was one of necessity. He then went on to consider, with some enthusiasm, the decision of the Court of Appeal in Philips Electronique, and concluded (para.18):
The significance of both Liverpool City Council v. Irwin and the Philips Electronique case is that they both stress the importance of the test of necessity. Is the proposed implied term necessary to make the contract work?
In the same case, namely The Reborn, Rix L.J. adopted in full the judgment of Sir Anthony Clarke M.R. The third judgment in the Court of Appeal in The Reborn was given by Carnwath L.J., who held that it had not been shown that the implication of the alleged term was necessary, nor was the owners' case strengthened by substituting any of the other formulations of the test discussed in the cases.
One interpretation of the decision of the Court of Appeal in The Reborn is that it treated Lord Hoffmann's judgment in Belize as being no different in substance from the judgment of Sir Thomas Bingham M.R. in Philips Electronique; and that, accordingly, Belize did not alter the law as it stood previously.
That seems to me, with respect, not to be right; but it is what the Court of Appeal, in Groveholt Ltd v. Alan Hughes,Footnote 25 took the position to be. In Groveholt Arden L.J., with whom Wilson L.J. and Henderson J agreed, held that, before a term could be implied on the basis of the imputed intention of the parties, it had to be such that both parties would unhesitatingly have accepted it – that is it had to pass the officious bystander test. In support of this, Arden L.J. relied upon the speech of Lord Cross of Chelsea in Liverpool City Council v. Irwin. Referring to the judgment of Lord Hoffmann in Belize, Her Ladyship said (para. 45) that, in the light of the decision of the Court of Appeal in The Reborn, nothing in Lord Hoffmann's approach affected the conditions that had to be satisfied before a term could be implied and that, therefore, “there is no need to go further into [Belize]”.
Pausing there, the combined effect of The Reborn and Groveholt would appear to be that Lord Hoffmann's judgment in Belize is to be regarded as an exercise in reformulation, which did not make any alteration of substance. However, if that is right, it is difficult to see what the point was of Lord Hoffmann's analysis. It cannot have been to give added clarity: the law, prior to Belize, did not lack clarity; on the contrary, it was unusually clear. It seems to me to be more likely that Lord Hoffmann's analysis does make a difference of substance; and, for reasons that are suggested above, it does.
The judgment of Lord Hoffmann in Belize received a more enthusiastic treatment in the judgment of Aikens L.J. in Thomas Crema v. Cenkos Securities plc (16 December 2010).Footnote 26 The case involved a claim by a sub-broker for a substantial commission said to be due upon the raising of funds for a venture capital company. The question was whether the contract between the principal broker and the sub-broker contained an implied term that the sub-broker would not be paid his commission unless the principal broker had been paid its commission by the client for whom the finance was raised. It was held that no such term should be implied.
In deciding the case, Aikens L.J. took the law to be as stated by Lord Hoffmann in Belize, which the learned judge regarded as having been adopted by the Court of Appeal in The Reborn. Aikens L.J. summarised the principles to be derived from Lord Hoffmann's judgment in six propositions (set out in paragraph 38 of his judgment). Paraphrasing them, they are that: (1) the court cannot improve the contract to make it fairer or more reasonable; (2) the court is concerned to discern the meaning the contract would convey to a reasonable addressee having the background knowledge of the parties; (3) the question of implication only arises where the contract does not provide for what is to happen when some (often unforeseen) event occurs; (4) the default position is that no term is to be implied; (5) but if the reasonable addressee would understand the contract to mean something more, then the court will imply a term; (6) in so doing, the court is not adding to the contract; it is merely spelling out what it means.
It is to be noted that none of these propositions involves a requirement that, for a term to be implied, it must be such that, if suggested to the parties prior to the contract, they would both unhesitatingly have approved it – that is, none of these propositions involves the officious bystander test. Indeed, Aikens L.J. goes on to indicate that Lord Hoffmann made the point that phrases which courts have used such as whether the term was necessary to give business efficacy to the contract, or whether it was one that was obvious “can detract from the task that the court has to undertake”.Footnote 27
The judgment of Aikens L.J. in Crema is an unqualified endorsement of the analysis of Lord Hoffmann in Belize.
The other two members of the Court of Appeal in the Crema case were Hughes L.J. and the Chancellor of the High Court, Sir Andrew Morritt. Hughes L.J. held that the suggested implied term could not be implied on any of the possible tests that might be put forward. The Chancellor of the High Court agreed in the result, but decided the appeal as a matter of the true interpretation of a handful of documents. He expressly said that he did not find it necessary to consider the wider questions to which Aikens L.J. referred in paragraphs 36 to 41 of his judgment – that is to say, the Chancellor did not adopt the propositions of law in relation to the implication of terms into contracts set out by Aikens L.J. on the basis of Lord Hoffmann's judgment in Belize.
The decision of the Court of Appeal in Groveholt does not appear to have been cited in the Crema case.
Most recently (at the time of writing), the decision in Belize was considered by the Court of Appeal in Stena Line v. Merchant Navy Ratings Pension Fund Trustees Limited (12 May 2011),Footnote 28 a case concerned with whether a term should be implied into the rules of an occupational pension scheme. Arden L.J., with whom Toulson L.J. and Rimer L.J. agreed, described Belize as “an important and recent development in the principles of interpretation, which the courts are probably still absorbing and ingesting”.Footnote 29 That seems to me to be entirely right.
WHAT NEXT?
The present state of the law in relation to implied terms seems to me to be unclearFootnote 30 – something which it was not previously.
It is possible that, in the future, the judgment of Lord Hoffmann in Belize will be regarded as adding nothing of substance, so that little further consideration is given to it.
However, I would not bet on that. In The Reborn Sir Anthony Clarke M.R. predicted that Lord Hoffmann's judgment in Belize would be frequently referred to. I think that it will, unless it is subsequently disapproved by a decision of the Supreme Court.
In the cases that have been decided thus far, it does not seem to me to have mattered to the outcome whether the court applied the traditional approach, as exemplified by the judgment of Sir Thomas Bingham M.R. in Philips Electronique, or the new approach set out in the judgment of Lord Hoffmann in Belize, and illuminated by Aikens L.J. in Crema. Indeed, in most cases, perhaps the overwhelming majority, it is unlikely to make a difference which approach is adopted.
But in some cases – hard cases – it will matter. I believe that the facts of Liverpool City Council v. Irwin and of Equitable Life are examples of such cases. There are likely to be others. And, one day, it may be necessary for a court to decide whether the reasoning of the Judicial Committee in Belize is consistent with the previous decisions of the House of Lords in Liverpool City Council v. Irwin and in Trollope & Colls Ltd v. North West Metropolitan Regional Health Board (which, in my view, it is not) and, assuming that it is not, which is to be preferred, – the officious bystander, or the man on the Clapham omnibus. It is anyone's guess; I would go for the latter.
