Implied Contracts: Identification, Rules, and Necessity, Study notes of Law

Download Implied Contracts: Identification, Rules, and Necessity and more Study notes Law in PDF only on Docsity! Implied contract: a convenient fiction in claiming damages Rupert Reed QC 1 Introduction 1.1 Like nature, English law abhors a vacuum. Where it can find no express agreement between commercial parties, it has often sought to find an implied contract in order to regulate the relations between those parties. 1.2 Such implied contracts often have a remedial function where a commercial party, unchecked by the constraints of an express agreement, seeks to act unconscionably in taking advantage of its counterparty’s failure to conclude such an agreement. The Courts would seek to imply a contract in the arrangements in which the parties had acquiesced either in anticipation of a contract or upon its failure or expiry. 1.3 The principles on which the Courts relied were those applied in identifying implied terms within an express agreement even where those principles were not a good fit. 1.4 As the rules for implying contractual terms have become tighter, those for implying entire agreements have also become tighter, with the Courts requiring the necessity of the implied contract to give effect to the agreed common purpose of the parties. The analysis involved has seemed increasingly artificial or ‘fictitious’. 1.5 The Courts have therefore looked to unjust enrichment, historically founded on the related notion of a quasi-contract, to fulfill the same remedial function served by an implied contract. Free acceptance has emerged as a distinct ground for restitution where services are accepted knowing that they were to be paid for. 1.6 Free acceptance is a controversial ground because its focus is less on the absence or failure of an intention on the Claimant’s part to benefit the Defendant and more on the Defendant’s conduct in acquiescing in the supply of services. The Courts have restricted the application of the doctrine by insisting that the acceptance be free. 1.7 Claimants relying on free acceptance, usually in the alternative, need: (i) to consider how they will quantify and evidence their claim; and (ii) to use the restitutionary gateway if they require permission to serve their claim out of the jurisdiction. 2 Remedial Function 2.1 The Courts have commonly found implied agreements in order to prevent conduct by commercial parties that would be plainly unconscionable. They have particular value in that they may avoid the effect of entire agreement clauses that would be effective to preclude the imposition of an implied term.1 2.2 Implied agreements arise most often in practice from the arrangements entered by parties in anticipation of entering an express agreement: (1) There is often an implied collateral contract between invitor and tenderer by which the invitor is required to adhere to the tender process and which allows the Courts to regulate the good faith and fairness of the tender procedure.2 (2) Where parties seek to settle a dispute, there may be an implied agreement that their discussions are without prejudice, in terms either of privilege or of wider confidentiality so as ‘to immunise acts from legal consequences’.3 (3) Where professionals provide services in advance of being retained, there may be an implied agreement as to the basis on which they provide those services. 2.3 Similarly, implied agreements arise where it was never envisaged that there would be an express contract or where such a contract has failed for some reason: (1) An implied agreement may be found where the express agreement between parties is found to have been a ‘sham’, as in the case of a sham ‘licence’ to use property or a sham ‘service contract’ entered by an employee. (2) A partnership agreement may be implied in the case of a family member who has given years of service to a family business. A specific agreement may also be implied as to the ownership of partnership property. (3) Similarly a service agreement may be implied in the case of a long-standing family retainer who has never formally entered a written agreement. (4) There may be an implied agreement to pay a reasonable fee for services that a broker provided in procuring the sale of an asset.4 1 Energy Venture Partners Ltd v. Malibu Oil & Gas Ltd [2013] EWHC 2118 [265]-[277]. 2 Blackpool and Fylde Aero Club v. Blackpool BC [1990]1 WLR 1195 at 1202-1204; Pratt Contractors Ltd v. Transit New Zealand [2003] UKPC 83; [2004] BLR 143 at [47]. 3 Unilever plc v. Procter & Gamble Co [2001] 1 WLR 2436 per Lewison LJ. 4 Energy Venture Partners Ltd v. Malibu Oil & Gas Ltd [2013] EWHC 2118 [265]-[277]. (1) in AG Belize v. Belize Telecom14 that a Court would enquire what the contract read as a whole could reasonably be understood to mean; and (2) in Equitable Life v. Hyman15 that a term could be implied if it was essential to give effect to the reasonable expectations of the parties. 16 5.2 The Supreme Court affirmed the observation of Bingham MR in Philips Electronique that it would be ‘tempting but wrong’ for the Court to fashion terms to reflect the merits of a particular case.17 The Court should not be considering what the parties would have done had they addressed their minds to the situation in hand. 5.3 What has therefore emerged is a hierarchy in terms of what the Court will require: (1) In the case of construing a contract, where there is ambiguity, the Court can consider the commercial reasonableness of the rival terms; (2) In the case of implying a term, the Court will supply a term on the basis of the necessity of the term to make the contract workable in commercial terms; but (3) In the case of implying a contract, where the parties have made none, and the implication is even more ‘intrusive’, the test is one of very strict necessity. 6 Examples of tightening 6.1 There have been a number of recent cases that make clear that the tightening of the test of necessity applies to implied contracts just as it does to implied terms: (1) In Ham v. Bell,18 the Court found that the mere fact that an asset was used by a partnership did not make it a partnership asset, as it was entirely possible that the partner was making his own asset available to the partnership. (2) In Khan v. Khan,19 it was found that the mere fact that a family member worked for a partnership, even as de facto CEO, did not mean that he was necessarily a partner. The payment of salary or wages as such was likely to be fatal to any claim to a partnership by implied agreement. Even where other monies were taken out of the business, this was 14 [2009] 1 WLR 1988. 15 [2002] 1 AC 408. 16 M&S v. Parisbas [21]-[23]; [26]; [29]-[31]. 17 Philips Electronique Grand Public SA v. BSkyB Ltd [1995] EMLR 472 481-482, quoted with approval by Lord Neuberger in M&S plc v. BNP [2015] UKSC 72; [2016] AC 742 [19]. 18 [2016] EWHC 1791 (Ch). 19 [2015] EWHC 2625 (Ch) [65]-[89]. not ‘consistent only’ with the existence of an implied partnership agreement, as those monies could be a gift in the context of a family relationship. (3) In Flat Roof Co v. Bowden,20 where the Claimant argued there was an implied agreement after the termination of a franchise agreement, the Court rejected an analogy with a tenant’s holding over on the expiry of a lease. There was no necessary continuance of the restrictive terms of a covenant against competition, which was held to have lapsed with the express agreement. (4) In Noemalife SpA v. Infinitt UK Ltd,21 it was not found necessary, after the expiry of a licence, to find as a term of an implied licence a right to claim a reasonable fee. Where the licensor had been aware of the continued use of the software and done nothing, there was no intention to create legal relations, and any implied contract did not include any provision for a fee.22 While it was accepted that there could not be an impliedly agreed gratuitous licence, the licensor’s claim would be for infringement or in restitution. 7 Fiction of implied contracts 7.1 There has for some time been a degree of judicial skepticism as to implied contracts described by Harman J as being ‘fictitious’ and having been invented.23 7.2 It has sometimes been suggested, in the same vein, that the Courts will only find an implied contract where that is necessary to achieve a desired result. In many of the older cases, it was necessary to find an implied agreement in the rules of trade associations and professional bodies, where they were closed shops, in order to regulate the actions of those bodies which could in effect exclude their members from employment and the ability to earn their living. Without the implication of an agreement, it was difficult for the Court to make an award of damages, and the Court would be left trying to find a restraint of trade in order to defend the right to work of the member by way of a less effective declaration or injunction. 7.3 In a more recent case, the Court found an implied agreement between (i) a group company employing certain staff and (ii) another group company to which they were seconded and which paid their costs, which had the effect of protecting staff pension benefits on an administration.24 The suggestion of a result-driven approach may be supported by the outcome of many cases. However, the Courts have in fact taken a much more objective approach in considering the relevant necessity. 7.4 Such skepticism surrounding the implication of contracts may explain in part the recent tightening of the test of necessity applied by the Court. 20 [2009] EWHC 2894 (Ch) [16]-[17]. 21 Noemalife SpA v. Infinitt UK Ltd [2013] EWHC 2376 (TCC). 22 [34]; [41]. 23 Abbot v. Sullivan [1952] 1 KB 189. 24 Re MF Global UK Ltd (In Special Administration) [2015] Pens LR [56]-[58]. 7.5 This move is related to a strengthening in the judicial insistence that the Courts should not be seeking to contractualise what is in the mere contemplation of the parties by way of their subjective intention. For example, where a farm is used by an agricultural partnership, the parties may well anticipate that the farm would be brought into the partnership, but that is a long way from their agreeing, or indeed even understanding, that the farm was a partnership asset. 8 Restitution as an alternative 8.1 Where a genuine contract cannot be implied, an alternative remedy lies in unjust enrichment. Historically, the basis of such a claim was quasi-contract, with it being recognised in the use of that term that the relevant contract was in fact fictitious. 8.2 Actions in quantum meruit are now commonly pursued in respect of services where the Claimant might previously have sued on the basis of an implied contract. 8.3 The Claimant will need to show not just unjust enrichment but one of the ‘grounds’ of restitution or ‘unjust factors’. In recent years, the Courts have recognised ‘free acceptance’ as such a distinct ground existing in its own right.25 It arises where the relevant services were accepted by the Defendant knowing that they were to be paid for. The example given in many of the texts is that of the window cleaner who starts work without request but whom the window’s owner refrains from telling that he will not pay for the work.26 It is the owner’s failure to reject the benefit that estops him from arguing that the cleaner proceeded at his own risk. 8.4 In practice, restitution has been awarded in respect of plans made in anticipating a development contract where the relevant work was done on the property at the request of the prospective tenants before negotiations for a lease broke down.27 8.5 The burden is on the Claimant to establish the requisite unjust factor or failure of basis. As a factor, free acceptance has been considered as controversial because its primary focus is on the fault of the Defendant and not the vitiation of the will or intention of the Claimant.28 However, the Courts have stated that they should not strain to find a contract where there is a restitutionary remedy available.29 25 Goff & Jones on Restitution, 9th edn, 2016, ch 17. The alternative view is that the restitutionary claim arises on the basis of an ‘absence of basis’ analysis in the absence of legal benefit for the relevant benefit. 26 Goff & Jones on Restitution, 9th edn, 2016, 17-05. 27 William Lacey (Hounslow) Ltd v. Davis [1957] 1 WLR 932. 28 Wee Chiaw Sek Anna v. Ng Li-Ann Genevieve [2013] SGCA 36; Chitty on Contracts, 32nd edn, 2015 20-020. 29 Whittle Movers v. Holywood Express Ltd [2009] EWCA Civ 1189 [15] per Waller LJ. value. In those circumstances it would be unjust to award more than the benefit conferred. To that extent, the Court may need to assess the Defendant’s genuine subjective value of the services. 12.3 The enrichment may include the ‘use-value’ of money, being the benefit of holding the enrichment over time. In Sempra Metals v. IRC,37 the House of Lords confirmed that compound interest was available for unjust enrichment claims at common law. 13 Jurisdictional gateway 13.1 If the Claimant requires the Court’s permission to serve out of the jurisdiction, it will need to obtain permission for a restitutionary claim by reference to 6 BPD 3.1(16). 13.2 In some cases, it may be harder to obtain permission for a restitutionary claim than for a contractual claim, not least where the relevant services were provided abroad. In Sharab v. Prince Al-Waleed,38 the Claimant sought compensation for his work in Libya over two years in negotiating the sale of a plane by the Defendant, a Saudi prince, to a Libyan company. As for his alternative claims, the Court: (1) granted permission in respect of his contractual claim based upon an alleged oral contract made in a London restaurant; but (2) refused permission in respect of his quantum meruit claim on the ground that there was no arguable case that the relevant acts were committed in England. 13.3 In an earlier case,39 Hamblen J had given permission to serve out a quantum meruit claim made in respect of services requested and provided in anticipating a contract on three grounds, namely (i) as a ‘claim in respect of a contract’ under 6 BPD 3.1(6) (ii) a claim in quasi-contract also under 6 BPD 3.1(6) and (iii) a claim for restitution under 6 BPD 3.1(16). In Sharab, Sir William Blackburne doubted whether the first two of these grounds properly applied to a quantum meruit claim. 13.4 The Court in Sharab further confirmed that in considering for the purposes of 6 BPD 3.1(16) whether the alleged restitutionary liability ‘arises out of acts committed in the jurisdiction’, the test, by analogy with the tort gateway, is whether ‘substantial and efficacious acts’ occurred in the jurisdiction (even if not all of them did). 37 [2007] UKHL 34; [2008] 1 AC 561. 38 [2012] EWHC 1798 (Ch); [2012] 2 CLC 612. 39 Cecil v. Bayat [2010] EWHC 641 (Comm). 14 Conclusions 14.1 The Courts have historically been keen to find implied contracts in order to prevent the exploitation of commercial arrangements that are not expressly contractual. 14.2 However, the artificiality of that approach has long been accepted and has become obvious as free acceptance has emerged as a free-standing ground of restitution. The approach to implying contracts has always been strict but it has become stricter as the test for implying contractual terms has returned to one of necessity. 14.3 Claims in free acceptance provide a useful alternative cause of action where the relevant services have been requested or acquiesced in. The primary constraint on such claims is the need to show that the acceptance was free in that the acceptor had a genuine opportunity to reject the particular services.