IFI Update, June 2009 - Part 1
Contents
Introduction to this Update
In this issue, we examine the following topics:
The implication of terms in contracts and other
instruments
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
insolvency
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
instruments
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
instance.
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
background.
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
meant.
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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