Hong Kong – The Modern Approach To Implying A Term Into A Contract.

11 March, 2016

 

In the recent English Supreme Court decision, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72 (the M&S Judgment), the Supreme Court clarified the law in relation to  when a term may be implied into a contract. Although, not strictly binding in Hong Kong, it will be highly persuasive and has in fact already been applied in a Hong Kong Lands Tribunal case.

 

The facts

 

Marks and Spencer (“M&S”) had rented premises and the lease required them to pay rent to the landlords on a quarterly basis, in advance. The lease contained a break clause, providing that the tenant could terminate the lease as long as there were no rent arrears on the break date. M&S exercised its right under the break clause to terminate the lease and paid the full quarter's rent due immediately before the break date. The issue in dispute was whether M&S was entitled to recover from the landlords the portion of prepaid rent for the period after the break date up until the next quarter date. There was no express term to that effect in the lease and the question was, therefore, whether such term should be implied. The High Court held that it should and found in favour of M&S. The Court of Appeal held that it should not and overturned the High Court’s decision. The Supreme Court agreed with the Court of Appeal, ruling unanimously in favour of the landlords. 

 

The established law on implied terms

 

In the M&S Judgment, Lord Neuberger referred to the numerous judicial observations made in 19th and 20th century cases about the nature of the requirements which must be satisfied before a term can be implied into a contract, namely :

 

• the parties’ intention must be taken into account when implying a term into the contract;
• a term can only be implied if it is necessary to give business efficacy to the contract;
• a term will only be implied if it is so obvious that it goes without saying.

 

Lord Neuberger cited the case of BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20, in which the Privy Council provided a summary of the key elements to be considered when deciding whether to imply a term into a contract:

 

• it must be reasonable and equitable;
• it must be necessary to give business efficacy to the contract;
• it must be so obvious that “it goes without saying”;
• it must be capable of clear expression;
• it must not contradict any express term of the contract.

 

Lord Neuberger also referred to the more recent case of Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, in which the court expressed reservations about implying a term when there is a lengthy and carefully drafted contract.

 

Six additional comments

 

While affirming the above general principles established by previous case law, Lord Neuberger made six additional comments about implied terms, which paint a clearer picture of the legal principles in this area:

 

1. The implication of a term was not critically dependent on proof of an actual intention of the parties when negotiating the contract.
2. A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them.
3. A requirement that a term is reasonable and equitable will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.
4. Business necessity and obviousness are alternative requirements and only one of them need be satisfied.
5. If one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed by him with the utmost care.
6. A term can only be implied if without the term, the contract would lack commercial or practical coherence.

 

Is implying a term part of the construction exercise?

 

Lord Neuberger also expressed his views on the Privy Council’s judgment in Attorney General & Ors v Belize Telecom Ltd & Anor [2009] UKPC 10 (which has been applied by the Hong Kong Courts in a number of recent judgments) where Lord Hoffmann stated that the process of implying a term into a contract was part of the exercise of the construction or interpretation of the contract.

 

Lord Neuberger took the view that construing the words used in a contract and implying terms into a contract are two different processes, governed by different rules and that Lord Hoffmann’s analysis in Belize Telecom could have obscured that fact. He stated that the exercise of implying terms into a contract and that of interpretation are two different processes, which should be carried out at different times. In particular, it is only after the process of construing the express words in a contract that the issue of an implied term falls to be determined.

 

Lord Carnwath took a different view from Lord Neuberger, namely that Lord Hoffmann’s comments remained authoritative. Lord Carnwath cited case law supporting the view in Belize Telecom that “the implication of a term is an exercise in the construction of the contract as a whole.” He stated that although Lord Neuberger preferred a sequential approach: first interpretation, then implication, it did not change the fact that both processes of interpretation and implication are part of the exercise of “determining the scope and meaning of the contract.”

 

Conclusion

 

Although the Court found that the provision that the defendant landlords reimburse the tenant the apportioned sum would seem to be reasonable and equitable, the lease was a very carefully considered contract, which included express obligations of the same nature as the proposed implied term, namely financial liabilities in connection with the tenant’s right to break, and that term would lie somewhat uneasily with some of those provisions. Further, the Court said that it would be wrong (except in a very clear case) to attribute to a landlord and tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established in judicial decisions.

 

Implications of judgment

 

The M&S Judgment makes it clear that merely being reasonable and equitable does not justify the implication of a term into the contract. Sometimes it may seem unfair to refuse implying a term into the contract, as in this case. However, if taking into account all circumstances, the Court is of the view that it was not the parties’ intention to imply such a term and implication of a term is not necessary to give business efficacy, it will not interfere with the wording of a professionally drafted contract.

 

As to whether the process of interpretation and implication are an integrated exercise or two separate procedures, Lord Neuberger has given guidance on how to approach the matter, namely: construe the meaning of the contract before considering implying a term. Although the M&S Judgment is not strictly binding on the Hong Kong Courts, their position on implied terms generally follows that of the English Courts. In fact, the M&S Judgment has already been applied by Hong Kong’s Lands Tribunal in the recent judgment of Eltron Development Ltd v Director of Lands[2016] HKEC 224. The M&S Judgment is therefore highly persuasive and we anticipate that it will be followed by the Hong Kong Courts in decisions regarding implied terms, in particular those concerning repayment of rent under a lease.

 

 

Paul Kwan, Partner, Deacons