Implied Terms in Contract Law: The Case of M&S vs BNP Paribas, Exercises of Business

Download Implied Terms in Contract Law: The Case of M&S vs BNP Paribas and more Exercises Business in PDF only on Docsity! 1 Marks & Spencer plc v BNP Paribas Securities Services [2015] UKSC 72, [2016] AC 742 Summary Marks & Spencer (‘M&S’) rented four premises from BNP Paribas. Under the terms of the leases – which had been negotiated and drafted by specialist solicitors – (1) M&S had to pay rent in advance for each quarter, (2) M&S had the option of terminating the lease on 24 January 2012, (3) but in order to do that, it had to give BNP Paribas six months’ notice, have no arrears in terms of the rent due under the agreement, and pay BNP Paribas a ‘break premium’ of one year’s worth of rent. In early July 2011, M&S gave BNP Paribas notice that it would be exercising its power to terminate the lease on 24 January 2012. On 25 December 2011, M&S was due to pay £1.2m rent in advance for the following quarter and as the lease was still in force at the time, M&S paid that money to BNP Paribas. Shortly afterwards, M&S paid BNP Paribas the ‘break premium’ of a year’s worth of rent, and the tenancies duly terminated on 24 January 2012. M&S then sued BNP Paribas to recover the proportion of the advance rent that they had paid for 25 December 2011-24 March 2012 that corresponded to the proportion of time (from 24 January 2012 onwards) that they were no longer in occupation of BNP Paribas’ premises. As the terms agreed between M&S and BNP Paribas said nothing about when advance payments of rent would be repayable, M&S argued that there was an implied term (an implied term ‘in fact’) in the M&S-BNP Paribas lease that if the lease were terminated on 24 January 2012 any payments in advance rent for the use of the premises after that time would be refundable. M&S won at first instance, lost in the Court of Appeal, and lost in the UKSC. Lord Neuberger gave the leading judgment (with the agreement of Lords Sumption and Hodge). In addressing the issue of when the courts would imply a term in fact into a contract, he endorsed (at [18]) the statement of Lord Simon in the Privy Council case of BP Refinery v Shire of Hastings (1977) 180 CLR 266, 283 that ‘for a term to be implied... (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract.’ To this Lord Neuberger added six observations (at [21]): (i) in implying terms in fact into the contract, the courts are not strictly concerned with what the parties actually intended, but with what ‘notional reasonable people in the position of the parties at the time at which they were contracting’ would have agreed to; (ii) a term should not implied in fact just because it seems fair or that one thinks that the parties would have agreed to had they been asked – these ‘are necessary but not sufficient grounds for including a term’; (iii) Lord Simon’s condition (1) for implying a term in fact into a contract is redundant – it is hard to imagine a term that satisfies Lord Simon’s other conditions being unreasonable or inequitable; (iv) conditions (2) and (3) are ‘alternatives in the sense that only one of them needs to be satisfied, although I suspect it would be a rare case where only one of those two requirements would be satisfied’; (v) in determining whether condition (3) is satisfied, it is necessary to phrase the question that an officious bystander would have asked the parties about whether a particular term is part of the contract ‘with the utmost care’; (vi) in determining whether condition (2) is satisfied, the test is ‘not one of “absolute necessity”’ but rather requires the courts to make a ‘value judgment’, asking themselves whether ‘without the term, the contract would lack commercial or practical coherence.’ Lord Neuberger then turned to Lord Hoffmann’s suggestion in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, at [21] that there was no real distinction 2 between interpreting a contract and implying a term into a contract, and that there is in both cases ‘only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?’ Lord Neuberger made two points about this: (a) Lord Hoffmann’s words should not be read as supplanting the traditional tests for implying a term in fact into a contract – in particular, they should not be read as suggesting that ‘reasonableness is a sufficient ground for implying a term’ ([23]). (b) The process of implying a term is not part of the exercise of interpreting a contract – ‘construing the words used [in a contract] and implying additional words are different processes governed by different rules’ ([26]). This is because ‘When one is implying a term or phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed’ ([27]). Given these two points Lord Neuberger thought that the safest way of regarding Lord Hoffmann’s suggestions in the Belize case was to treat them ‘as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms’ ([31]). Lord Carnwath agreed with Lord Neuberger’s point (a), holding that Lord Hoffmann’s judgment in Belize ‘is not to be read as involving any relaxation of the traditional, highly restrictive approach to implication of terms’ ([66]). With that point made, he saw no reason why the UKSC should not regard Lord Hoffmann’s judgment as authoritative: ‘a valuable and illuminating synthesis of the factors which should guide the court’ ([74]). In particular, he thought criticisms of Lord Hoffmann for eliding the distinction between interpretation and implication amounted to ‘an interesting debating point, but to my mind of little practical significance’ ([68]). Lord Clarke gave a short supporting judgment, pointing out that the disagreement between Lords Neuberger and Carnwath may rest on different views of what ‘construing a contract’ involves. Lord Neuberger was right to point out that ‘when one is implying a word or phrase, one is not construing words in the contract because the words to be implied are ex hypothesi not there to be construed’. However, Lord Hoffmann (and by extension, Lord Carnwath) were pointing out that ‘both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract’ ([76]). Lord Clarke agreed with both Lords Neuberger and Carnwath that Lord Hoffmann’s observations in the Belize case were ‘not watering down the traditional test of necessity’, which Lord Clarke phrased as asking ‘whether it is necessary to [imply the term in question] in order to make the contract work’ ([77]). Comments (1) The test(s) for implying terms in fact. If, as all of the UKSC Justices agreed, whatever Lord Hoffmann said in Belize did not, and was not intended to, affect the traditional tests for determining whether a term can be implied in fact into a contract, then it is hard to see why we should pay any attention to what Lord Hoffmann said in Belize when determining whether a given term should be implied in fact into a contract. We should simply get on with applying the ‘officious bystander’ and ‘business efficacy’ tests. With regard to those tests, there is some help (though not much) in Lord Neuberger’s judgment in particular as to how those tests should be applied – see especially points (i) and (v) on the ‘officious bystander’ test, point (vi) on the ‘business efficacy’ test, and point (iv) on how these two tests relate to each other. But Marks & Spencer plc to dispel the uneasy impression that the courts do not really understand what they are doing in applying these two tests. The fact that there are two tests prompts the questions – Why two? Why not one, if both of these tests are concerned with the same issue? But we should be very careful about succumbing (as Lord Hoffmann did in the