03/06/24

Business Efficacy | Implied Contractual Terms

Business Efficacy | Implied Contractual Terms
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Business efficacy is the power to produce the intended result.

Contracts are an essential part of the conduct of everyday life, formed at many different levels, either informally, such as when purchasing groceries from the corner shop, or formally, when recorded in writing, as when purchasing a motor vehicle.

A formal contract will consist of express terms and conditions regulating the manner in which it is to be fulfilled to achieve the intent of the contracting parties. Additionally, implied terms may be read into the contract to give it efficacy and enable it to be completed where the content is unclear or fails to address an important issue.

Implied terms may arise from:

  • Custom or usage,
  • Case or Statute Law,
  • Fact.

Commercial contractual disputes brought before the Civil Courts for determination frequently centre around the absence of express terms to clarify the parties’ intent. These cases require the Courts to decide the extent to which one or more implied terms may be incorporated into the contract to give business efficacy to the intended arrangements.

As a simple example, there may be a dispute regarding the quality of goods to be delivered or the delivery period for such items.

Stuart Southall of KANGS comments upon implied terms in contracts.

Case Law | Determining Whether a Term Should be Implied

When determining whether a term should be implied into a contract there are two recognised tests, the business efficacy test and officious bystander test.
The following Case Law is of particular relevance:

The Moorcock (1889):

When pronouncing Judgment it was stated:

‘… The business efficacy test, therefore, should be applied only in cases where the term that is sought to be read as implied is such which could have been clearly intended by the parties at the time of making of the agreement…’

Shirlaw v Southern Foundries (1926)

Known as the ‘officious bystander’ test. Effectively, the proposed term must be so obvious that it goes without saying.

Attorney General of Belize v Belize Telecom (2009)

In which Lord Hoffman stated, “There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977)

The Privy Council provided guidance when considering whether such a term should be implied into a contract stating it must be:

  • reasonable and equitable,
  • necessary to give business efficacy to the contract,
  • so obvious that 'it goes without saying',
  • capable of clear expression
  • of a nature not contradictory to any express term of the contract.

Written Contracts | The Preference

Contracts may be orally concluded or in writing, whatever their nature or size, save for specific exceptions, such as transactions effecting the sale of land which must be recorded in writing.

Invariably, commercial contracts should be, and usually are, set out in a written document. However, exceptions arise where circumstances force the parties to perform the terms of an agreed, but unrecorded agreement and essential terms have been overlooked.

Implied terms may be incorporated into both written and oral contacts, but it is self-evident that those confirmed in writing are less likely to be disputed.

Properly formulated written contracts are important to protect the individual interests of each party. Whilst it may sometimes seem difficult to justify the expense of preparation, the consequences of failing to do so may result in uncertainty, potentially leading to expensive litigation, the cost of which will far outweigh the prudent incurrence of the cost of having a contract prepared.

A carefully considered written agreement is far more likely to have anticipated all possible consequences of the transaction. Resulting in a reduced need for the Court having to determine whether one or more implied terms should be incorporated for the sake of due diligence.

How Can We Assist?

KANGS brings extensive experience gained from years of representing clients in all types of civil disputes, including those related to contested contract terms and conditions.

If we can be of assistance the Team at KANGS will be delighted to hear from you.

Our Team will support you throughout the entirety of any Civil Dispute and Litigation, seeking to achieve the most satisfactory outcome available as quickly and economically as possible.

If we can be of assistance, please do not hesitate to contact our team using the details below:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

Hamraj Kang

Hamraj Kang
Senior Partner

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Nazaqat Maqsoom

Naz Maqsoom
Associate

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