IFI Update, June 2009 - Part 1


Introduction to this Update

In this issue, we examine the following topics:

The implication of terms in contracts and other


International supply contracts and exclusion clauses

Vicarious liability for the tortious acts of employees and

other agents

Appropriation of security over financial collateral

CREST payments: provisions precluding legal set-off

Avoidance of cross-border transactions within an EU


Jurisdiction in tortious claims under the EC Regulation on

jurisdiction and judgments and the right of an agent to enforce a

contract for its own benefit under the Contracts (Rights of Third

Parties) Act 1999

Jurisdiction in a claim against a foreign non-EU defendant: a

contract governed by English law

The implication of terms in contracts and other


The Privy Council has discussed the basis on which a term will

be implied into a contract or other instrument. The particular case

concerned the articles of association of a company, but it was made

clear that the same approach should apply to the interpretation of

contracts and statutory enactments. Lord Hoffmann delivered the

advice of the Privy Council, on behalf of himself and Lord Roger,

Lady Hale, Lord Carswell and Lord Brown. The case came before the

Privy Council on appeal from the Court of Appeal of Belize.

In brief outline, the facts concerned provisions in a

company's articles of association which gave the holders of

certain classes of shares the right to appoint directors and gave

further rights in favour of a particular shareholder to make

appointments and exercise other controls whilst it retained

specified levels of its shareholdings. The articles failed to deal

with the situation where that shareholder ceased to keep its shares

or reduced its holdings. It was argued that terms should be implied

to the effect that the directors whom the shareholder had appointed

would cease to hold office if such a situation occurred. The Privy

Council agreed with that approach, overruling the decision of the

Court of Appeal and restoring the decision of the judge at first


Lord Hoffmann emphasised that the process of implying a term is

an exercise in the construction of the instrument as a whole so as

to ascertain its meaning. The implication of a term does not add to

the instrument but simply says what it means. The meaning has to be

ascertained objectively by reference to what the instrument would

mean to a reasonable person having all the background knowledge

reasonably available at the time the instrument was made, but

without reference to the subjective intentions of the parties or

how the actual parties would have reacted to the proposed implied

term (see Lord Hoffmann in Investors Compensation Scheme v.

West Bromwich Building Society [1998] 1

WLR 896, at 912- 913). The exercise is not simply an exercise in

gap filling, just because the instrument is silent on a point, as

"the most usual inference" to be drawn is that the

parties did not intend to provide at all for what has occurred and,

accordingly, that the loss which has been suffered should lie where

it falls.

In each case, the question is whether the term which it is

sought to be implied spells out in express words what the

instrument, read as a whole, would reasonably be understood to mean

when taken against the relevant background (see Lord Pearson in

Trollope & Colls Ltd v. North West Metropolitan

Regional Hospital Board [1973] 1 WLR 601, at 609) . The

practical consequences of deciding what the contract means should

be taken into account, including whether a construction one way or

the other would frustrate the business purposes of the parties as

objectively understood (see Lord Steyn in Equitable Life

Assurance Society v. Hyman [2002] 1 AC 408, at 459). That

is context for the "business efficacy" test that is

sometimes used (see Bowen LJ in The Moorcock

(1889) 14PD 64, at 68).

Similarly, the test that the proposed implied term "goes

without saying" (see Shirlaw v. Southern Foundries

(1926) Ltd [1939] 2 KB 206, at 227) is simply another way

of emphasising the objective nature of the inquiry that should be

undertaken. It shows that the proposed implication should spell out

what the contract would reasonably be understood to mean. Given the

objective nature of the exercise, it is irrelevant to consider how

the actual parties would have reacted to the proposed implied term.

It is also unnecessary that the need for the implied term should be

obvious from the outset, as the need often becomes apparent only at

a later stage, especially in a complicated instrument where the

draftsman may have overlooked some of the possible contingencies

that might arise, even though it might become obvious after a

careful consideration of the express terms and the relevant


Lord Simon of Glaisdale, giving the advice of the Privy

Council in BP Refinery (Westernport) Pty Ltd v. Shire of

Hastings (1977) 180 CLR 266, at 282-283, had said that the

following conditions, which he said might overlap, had to be

satisfied if a term was to be implied in a contract, "

(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 term of the contract."

Lord Hoffmann said that Lord Simon's list was,

Best regarded, not as a series of independent tests which

must each be surmounted, but rather as a collection of different

ways in which judges have tried to express the central idea that

the proposed implied term must spell out what the contract actually

means, or in which they had explained why they did not think that

it did so. [Lord Hoffmann had] already discussed the significance

of 'necessary to give business efficacy' and 'goes

without saying'. As for the other formulations, the fact that

the proposed implied term would be inequitable or unreasonable, or

contradict what the parties have expressly said, or is incapable of

clear expression, are all good reasons for saying that a reasonable

man would not have understood that to be what the instrument


By way of comment, the problem with the approach taken by Lord

Hoffmann is that it does not really help in providing a practical

guide to assist in determining when a term will be implied in a

contract or other instrument and how to go about it. It is not

really satisfactory to say that it is just a matter of construing

the contract to see what it means from an objective standpoint. By

dint of the situation, one or other of the parties is saying that

the contract has failed to deal explicitly with the situation that

has arisen, which the parties may well have failed to envisage at

all when they contracted. Indeed, Lord Hoffmann acknowledges that

in most cases it is not appropriate to imply a term to cover the

situation. It seems to beg the question to say that it is just a

matter of construing the contract to discern what it says impliedly

about a situation that the parties to it had failed expressly to

address, to determine if they should be taken to have addressed it

by implication.

Lord Hoffman also said that it might be possible to imply a term

where the express terms of a complicated instrument were silent on

the particular point in issue, because the draftsman may have

overlooked the contingency giving rise to the point in issue. In

reply, one might say that if the draftsman had overlooked the

relevant contingency then it is difficult to understand how it

might be said that the document should be construed as having

addressed the point by implication.

There is also a difficulty in saying that the whole thing should

be approached from an entirely objective standpoint, without

reference to the subjective intentions of the parties and how they

might individually have reacted to the proposed implied term. Such

an approach gives no scope to a party to say that it had actually

thought about the situation and decided, for its own purposes, not

to raise the matter because it did not wish it to be covered. In

other words, that it had wished any loss that might arise to lie

where it happened to fall (probably with the other party).

In contrast to what Lord Hoffmann said, it is instructive to

bear in mind what Sir Thomas Bingham MR said (on behalf of himself

and Stuart-Smith and Leggatt LJJ) in Philips Electronique

Grand Public SA v. British Sky Broadcasting Ltd [1995]

EMLR 472, at 480 to 482 (which was quoted with approval by Rix LJ

in Socimer International Bank SA v. Standard Bank London

Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd's Rep 558, at

[105]). The Master of the Rolls said that the courts, when they

implied terms, were going further than just engaging in an exercise

of interpretation of the contract, as:

The implication of contract terms involves a different and

altogether more ambitious undertaking: the interpolation of terms

to deal with matters for which, ex hypothesi, the parties

themselves have made no provision. It is because the implication of

terms is potentially so intrusive that the law imposes strict

constraints on the exercise of this extraordinary power.

The Master of the Rolls went on to say, however, that in some

cases the courts routinely implied terms, particularly where the

contracts were oral or in short form. He gave as examples the

implication of an obligation to exercise reasonable care and skill

in a contract to perform professional services and the implication

of obligations as to quality and description in a contract for the

sale of goods (although, in the case of a sale of goods, his

Lordship appeared to overlook the point that the implication arises

by virtue of statute). He then said that,

"It is much more difficult to infer with confidence what

the parties must have intended when they have entered into a

lengthy and...

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