Implied terms are one of the most challenging aspects of contract law and even the simple objective test is not as simple as it sounds.
- The law on damages and remoteness
- A duty of good faith?
- The difficulty of identifying implied terms
- So what does this mean for construction contracts?
A written construction contract is, you might say, rather like a millpond. All may look fine on the surface, but what lies beneath it can upset the contractual calm. The words written down may not tell the whole story.
One party may have exerted illegitimate pressure, said something incorrect or made a promise that cut across what the written contract said in order to get the other party to sign up.
“The words written down in a contract may not tell the whole story”
Duress, misrepresentation or a collateral contract, for example, can all make waves. But of all the unseen contractual ingredients, possibly the most challenging are implied terms.
In theory, although not written down, their detection should not be a problem. There is, according to Lord Hoffmann, just one test: what the contract, read as a whole against the relevant background, would reasonably be understood to mean.
It is a forensic exercise that involves looking at the contract through the eyes of an objective third party armed with the interested parties’ background knowledge.
The law on damages and remoteness
Implied terms might be seen as the ‘of course’ clauses, found beneath the surface of contracts governed by English contract law.
Take the law on damages and remoteness, for instance. If the parties have not written a term in their contract to deal with the types of losses for which a contract breaker accepts potential liability, then, according to the Court of Appeal in Grimes v Gubbins, the law in effect implies a term to determine the answer.
Normally, applying the well-worn case law starting with Hadley v Baxendale, this implied term is an acceptance of responsibility for the types of losses reasonably foreseeable at the contract date as not unlikely to result from a breach. Unless, however, there is evidence that the implied assumption of responsibility is inappropriate for a particular type of loss.
A duty of good faith?
Or take the tricky issue of a duty of good faith. Lord Justice Jackson has recently confirmed, in the Compass case in the Court of Appeal, that English contract law has no general doctrine of ‘good faith’ (unlike, for instance, the US, France or Australia).
“Unlike in other countries, English contract law has no general doctine of good faith”
Such a duty needs to be expressly agreed, although a duty of good faith is implied by law in certain categories of contract, for instance employment and partnership.
But in Yam Seng v International Trade Corporation, Mr Justice Leggatt could see no difficulty, following the established English law approach to implying terms in fact, in implying a good faith duty in any ordinary commercial contract, based on the parties’ presumed intention.
The difficulty of identifying implied terms
Applying Lord Hoffmann’s simple test for implied terms may not, however, be as straightforward as it sounds.
“Applying the test for implied terms may not be as straightforward as it sounds”
The law reports remind us that different judges and different courts may come to different views as to what our objective third party might reasonably understand a contract to mean.
In the Compass case, Mr Justice Cranston had originally concluded that there was an implied term; the Court of Appeal, overruling him, said there was not.
So what does this mean for construction contracts?
If implied terms are detected they should, in theory, come as no surprise because the court is only drawing out what the contract, objectively, would reasonably be understood to mean, taking into account the parties’ background knowledge.
This underlines the need for the good old-fashioned virtue of recording agreements clearly and comprehensively so that a court does not have to look beneath the surface.
Still waters, they say, run deep and, as a venerable great-aunt used to add, there’s often mud at the bottom.
Amber Chew is a senior associate and Richard Craven is a professional support lawyer in the construction & engineering group of Mayer Brown International