Beware your friends

A whopping discount from your regular supplier may look like an opportunity that’s too good to miss – even if you do have to commit yourself exclusively to that supplier to get it. However, the smile on your face might fade if you were to learn that that your ever-so-friendly supplier was also trying to grab your customers for itself. The recent Court of Appeal decision in Ultraframe (UK) Ltd vs Tailored Roofing Systems Ltd provides a valuable reminder of the commercial facts of life – and the extent to which courts will or won’t imply terms into contracts where no express provision has been made.

TRS fabricated conservatory roofs and sold them on to installers. Ultraframe supplied the roof components. After a few years of doing business together, the parties entered into an exclusivity agreement, under which TRS agreed to purchase its components only from Ultraframe in return for a substantial discount. Neither party was obliged to buy or sell any particular amount, and the agreement could be terminated on 12 months' notice.

Things went well for the first few months. However, Ultraframe then mounted a campaign to persuade TRS' customers to buy the components direct from itself, rather than through TRS, and offered price inducements for this. TRS was outraged. Although it could point to no express term preventing this sort of action, it argued that one must surely be implied. TRS said that it simply could not have been contemplated that, while it was bound to buy Ultraframe’s products, Ultraframe could at the same time be free to conduct a campaign to take away the customers for whom those products were being bought in the first place. In addition, said TRS, what about an implied term of good faith?

It seems that even Ultraframe's managing director was a little sheepish about this issue. He admitted in evidence that it was contrary to the spirit of the relationship between the parties for Ultraframe to raid TRS' market in this way.

The court began by reviewing the well-known circumstances in which a term will be implied into a contract. One example is where the term is necessary to make the contract work as a business transaction. Another is what is known as the “officious bystander” test. This says that if a bystander had asked the parties, just as they were about to sign the contract, whether a term was part of their agreement, they would have replied with an impatient “of course it is”.

The court decided that there was no room for the implied terms Tailored Roofing Systems wanted

Applying these tests the court decided that there was no room for the implied term TRS wanted. On the contrary, it was open to Ultraframe to approach TRS' customers, and offer them lower prices. This was so, even if what Ultraframe was doing amounted to a deliberate campaign to undermine TRS' customer base.

TRS' attempt to persuade the court to imply a term of good faith also failed – although in this case, it is doubtful whether Ultraframe's actions would have amounted to a breach of any such term. Good faith obligations are notoriously difficult to sue on, and often amount to no more than a statement of the parties' amicable intentions at the outset. TRS was plainly upset by Ultraframe's actions, but the court’s findings show that its actions were no more than aggressive marketing in a commercial world.

The case is thus a reminder that courts do not step in to imply terms into a contract merely because they seem reasonable. Parties should therefore make express provision to cover possible outcomes.

One other aspect of the case deserves mention. The trial judge had taken eight months from trial to deliver even a draft decision to the parties. The Court of Appeal described the delay as “totally unacceptable”. If the contract had been governed by the Construction Act, and therefore subject to adjudication, at least TRS would not have had to wait so long before getting the bad news. Adjudicators can therefore read this decision with a certain degree of smugness.