Hong Kong – Why Timeless Obligation Doesn’t Necessarily Mean Timeless.

29 June, 2018

 

The Scottish case of William John Burnside v Promontoria (Chestnut) Limited 2017 CSOH 157 discussed the existence and the scope of implied terms of a contract setting a time limit on a timeless obligation. It provides practical insight into such implied terms.

 

Background

 

A loan was provided by Clydesdale Bank plc (the Bank) to William John Burnside (Burnside), a property developer, to fund the purchase of 26 properties. Both the Bank and Burnside entered into a separate repayment agreement (the Agreement) which stated that the Bank would arrange and facilitate the sale of the properties and retain the sale proceeds which would extinguish the debt. Until the properties were sold, Burnside was required to manage the properties and pay the rental income to the Bank.

 

A few years later, the Bank assigned its rights under the Agreement to Promontoria (Chestnut) Ltd (Promontoria). The 26 properties had not been sold and Promontoria purported to terminate the Agreement and demanded repayment of the loan, arguing that Burnside had failed to account for the rent he had received.

 

Was there an implied term?

 

Burnside argued that Promontoria had failed to comply with an implied term of the Agreement that the properties would be sold within “a reasonable time”, which constituted a material breach of the Agreement. Promontoria, on the other hand, argued that as the Agreement contained an entire agreement clause stating “this agreement forms the entire agreement between the parties”, it was impossible to imply such a term into the contract.

 

The key issue for the Scottish court to decide was whether there was an implied term that the properties would be marketed and sold within a reasonable time.

 

Court’s decision

 

The Court held that a requirement that Promontoria sell the properties within a reasonable time was implied into the Agreement. Following England’s House of Lords decision in Hick v Raymond & Reid [1893] AC 22, the Court held that where the language of the contract does not expressly, or by necessary implication, fix any time for the performance of a contractual obligation, the law implies that it shall be performed within a reasonable time. It is then a matter of construction as to what is the duration of the reasonable time. Whether a reasonable time has been exceeded, the Court said, is a matter for broad consideration, to be viewed with the benefit of hindsight when the issue of alleged breach arises for determination, in all of the relevant circumstances of the case.  

 

The first issue to consider, the Court said, was whether the language of the Agreement did not expressly, or by implication, fix any time for the performance of the obligation in question. This involved construction of the Agreement terms, on well-established principles, including consideration of the natural and ordinary meaning of the language, having regard to the context and background as known to both parties and, where appropriate, considerations of business common sense. The Agreement did not, the Court said, contain any terms which indicated that it was perpetual or indefinite. Equally, there was nothing in the Agreement or in the context or background or based upon business common sense, which could indicate that the parties had left it entirely in the discretion of Promontoria as to when it wished to arrange to sell the properties. There was nothing to indicate that the parties intended to allow that Promontoria could take a period of time that was in all the circumstances unreasonable to sell the properties. 

 

Accordingly, subject to the entire agreement clause, there was an implied term that the obligation to sell the properties be performed within a reasonable time

 

What was the effect of the entire agreement clause?

 

As regards, the entire agreement clause, the Court said that the precise language of it had to be considered. The Court held that the clause in the Agreement did not affect the implied term, the whole point of the implication of the term contended for being that it would already form part of the Agreement. The implied term was intrinsic and formed part of the Agreement and accordingly, the entire agreement clause did not preclude it from applying.

 

Conclusion

 

The judgment provides useful guidance in relation to when the courts will imply terms into contracts as to the timeframe for performance of obligations, where no such timeframe is specified. Best practice is of course to expressly and clearly state any required timeframes for performance of obligations in a contract, rather than having to rely on an implied term for such.