Update on Implied Terms and Obligations

Published: 11/11/2016

In the case of Marks & Spencer plc v BNP Paribas (Enyo Blog, 9 December 2015), the Supreme Court re-iterated the limited circumstances in which a term will be implied into a commercial agreement and resisted the suggestion which academic discussion argued could be derived from the case of Attorney General of Belize, that reasonableness itself was a ground for implying a term.

The Supreme Court in Marks & Spencer plc v BNP Paribas also confirmed that a duty of good faith would only be implied where the contract would lack commercial or practical coherence without it.

In the recent case of Monde Petroleum SA v Westernzagros Limited [2016] EWHC 1472, the High Court has adopted a similar approach to the question of implying terms into contracts by rejecting an argument that a contractual right to terminate (in that case, a consultancy agreement) must be exercised in good faith.

It was argued by the Claimant that the consultancy agreement contained an implied term that the Defendant would not exercise any right to terminate otherwise than in good faith, and that the Defendant had breached that term by terminating with an intention to deprive the Claimant of what was due to it under the agreement.

The judge found that there was no implied term of good faith, and even if there had been, there had been no breach.  He found that:

  1. it was not necessary to imply a term (such as the duty to act in good faith) which would limit the Defendant’s ability to exercise its contractual rights of termination (recognising that the common law values certainty in respect of the right to terminate a contract).  Although other long term contracts which involve expectations of loyalty have previously been found to contain implied terms when express terms have not been included in the contract itself, the judge noted that the mere fact that a contract is long-term (or a “relational” contract) is not sufficient to justify such an implication.  In fact, in this case and citing the test set out in Marks & Spencer, he found that the contract did not, in any event, contain the sorts of mutual obligations and commitments which would be expected in those types of relational contracts, and consequently that the contract did not lack commercial or practical coherence in the absence of an implied duty of good faith.
  2. he was, in any event, able to distinguish between the exercise of a contractual discretion as to the performance of a contract (where there are a range of options from which a party can choose in the course of its performance of the contract) and the binary choice available in respect of termination.  In respect of the latter, provided that the party has the right to terminate under the contract, it did not have to justify its actions in doing so.

The decision is of importance in demonstrating the general approach currently adopted by the English courts to the implication of terms into commercial agreements governed by English law.  The decision, following recent Supreme Court authority appears to support the hardening of the approach of the courts following Attorney General of Belize, which may herald a period of greater predictability in the interpretation of commercial contracts in the English courts, more accurately reflect commercial reality and reinforcing contractual stability.

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