Implication of terms into a contract
MARKS AND SPENCER v BNP PARIBAS (CA) [2014]
The Court of Appeal (CA) ruled that if a party wishes to claim that there is an implied term in a contract, that party must show that: (a) the term is part of the agreement (even though not expressly written); and (b) it is necessary to achieve the parties’ common objective in entering into the agreement. It is not sufficient simply to show that the term could or should be part of the agreement.
Facts:
- Marks and Spencer (M&S) was a tenant under various leases which contained break options, one of which allowed M&S to terminate them on 24 January 2012. Each break option required M&S to meet two pre-conditions:
- there must be no arrears of basic rent; and
- M&S must have paid a break penalty.
- There was no express provision in the leases entitling M&S to a refund from the landlord, BNP Paribas (B), of the rent paid for the period after the break date.
- M&S served notice to terminate the leases on 24 January 2012 and prior to the termination date, B sent out the December quarter’s rent demand. M&S paid the quarter’s rent in full to ensure that there were no arrears to prevent compliance with the first pre-condition.
- M&S tried to get a refund for the rent paid for 25 January to 24 March 2012, being the rest of the quarter after the break date. B refused to issue a refund on the basis that the full quarter’s rent was payable and the leases did not entitle M&S to a refund.
- The High Court (HC) ruled that a term should be implied into the leases to allow M&S to recover the overpayments on the basis that this was necessary to give so-called ‘business efficacy’ to the leases (ie because otherwise the leases would not make sense without it).
- It also said that the break penalty was compensation for B, which meant it was unlikely the parties had intended that it would be entitled to keep the full quarter's rent as well as that compensation.
- The Court therefore found that M&S was entitled to a refund of the overpaid rent.
- B appealed.
Decision:
- The CA overturned the HC decision and concluded that no term should be implied in the leases to require repayment of the rent.
- When looking at whether a term should be implied into a contract, the Court has to consider the document as a whole, together with evidence of the parties' aims in entering into the agreement. The Court said that if any party wishes to claim that there is an implied term, that party must show that the parties effectively agreed that the term would be part of the agreement as being necessary in order to achieve the parties’ common objective in entering into the Agreement. It is not sufficient simply to show that it could be part of the agreement.
- Here, no implied term was necessary as:
- at the time of drafting the leases the parties could have included express wording requiring B to repay any sums relating to the period after the break date; and
- the possibility that M&S would have to pay a full quarter's rent to exercise the break options should have been obvious to the parties when they entered into the leases.
Points to note:
- The decision in this case was almost certainly influenced by the fact that it involved building leases and therefore the traditional expectations of parties in the world of real property. Prior to the HC’s ruling, it was apparently established law that a tenant exercising a break clause in the middle of a rental period was not entitled to a refund for that element for the period after the break unless the lease contained an express provision to the contrary. In that light it is perhaps not so surprising that M&S failed.
- The implication of terms is, in essence, an exercise in interpretation and requires a high degree of loyalty to the parties’ express agreement.
- A party does not show that an implied term is unnecessary simply by showing that the agreement could work without the implied term. A term may be implied, “if it is necessary to achieve the parties’ objective in entering into the agreement” (as distinct from the more traditional test of being necessary to give the agreement ‘business efficacy’).
- The CA judgment follows a number of other recent decisions on the implication of terms which have focussed on trying to ascertain what the agreement actually means based on the supposed ‘common intention of the parties’. However, as this case amply demonstrates, query if in most disputes there is ever a ‘common intention’?
- As always, contracting parties should try to anticipate possible scenarios such as this and deal with them in advance, expressly including all the terms that they wish to be part of their agreement.
- M&S appealed to the Supreme Court in 2015 - see our update on this case).