Terms and conditions are stated in a contract, right? So what about all those implied terms that don’t make it into writing? The Privy Council has a view on this …

It goes without saying that certainty is key to the success of every construction project. While such certainty has generally been achieved through detailed contracts and specifications, the courts appear to be increasingly willing to find that even lengthy, comprehensively-drafted commercial contracts contain implied terms over and above their express terms.
There are various categories of implied terms. Some implied terms are clear (those implied by the Construction Act and other legislation) and others are relatively well settled (an employer’s implied obligation not to hinder a contractor).

However, the courts’ approach to terms implied “in fact” - that is, terms implied in a contract to deal with something not covered by the express terms - has recently been redefined.
Previously, English courts had held that such terms should only be implied in a contract in certain circumstances, namely where it was necessary to give “business efficacy” to the contract - in other words, to make it work.

To give a practical example, a programme forming part of a building contract may be based on an assumption that access will be granted by a particular date, while the contract itself may not provide for an extension of time if access is not granted by that date. If access is delayed, a court could apply the business efficacy test, but would be unlikely to find that the contract contained an implied term allowing access by the assumed date - as such a term would not be necessary to make the contract work.

The business efficacy test had the advantage of creating a degree of certainty for employers and contractors, as it was generally difficult to argue that an implied term was necessary
to make a building contract work.

However, there is now considerable uncertainty as to the courts’ approach to implied terms following the Privy Council’s decision in Attorney-General of Belize vs Belize Telecom (2009). In this case, the Privy Council stated that the business efficacy test, while helpful, was not determinative.

Instead, it held that, where a contract does not expressly provide for what should happen when some event occurs, the court should seek to “discover what the instrument means”
– in particular, what it would mean to someone with “all the background knowledge reasonably available to the audience to whom the instrument is addressed”. This judgment has been applied in several subsequent decisions of the High Court, including the Technology and Construction Court and the Court of Appeal.

While it may appear sensible at first glance, the Privy Council’s approach to implied terms is unlikely to be helpful in practice. It is broader than the previous business efficacy test, more subject to the interpretation of the judge and, hence, less predictable. Returning to the example given above, one can readily imagine a court concluding that the “meaning” of the parties’ contract was that access would be granted by the date assumed in the programme, even in the absence of an express provision to that effect. However, this would only give rise to further questions for the court to decide, such as what the consequences of the access delay should be (such as an extension of time for the contractor).

If this broader approach continues to be applied by English courts, there is a real possibility that some construction cases will be decided, not simply on the basis of the express provisions of the parties’ contracts, but what the courts decide to be the meaning of the contracts. Both employers and contractors will then lose the certainty they had sought to obtain by carefully negotiating and agreeing detailed construction contracts.

Ann Levin and Mark Grasso are lawyers at Herbert Smith

This article was originally published under the title: “What are you implying?”