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Court of Appeal considers test for implied terms

Practical Law UK Legal Update Case Report w-005-5043 (Approx. 5 pages)

Court of Appeal considers test for implied terms

by Practical Law Commercial
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The Court of Appeal has reiterated that the starting point for the court when considering the existence of an implied term to give effect to the parties' intention is the express terms of the contract and the pleaded implied term must not contradict any express term. (Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017] EWCA Civ 7)
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The Court of Appeal has held that a bank's express power to market a loan was not subject to any implied qualification that such marketing should not interfere with the borrower's attempts to get the best price for property purchased with the loan. The bank was marketing the loan as part of a package which included distressed debt and the borrower was concerned that this might negatively impact the price it could get for property bought and developed with the loan.
In so ruling, the Court of Appeal reaffirmed that the starting point for a court when considering the existence of an implied term to reflect the parties' intentions is the express terms of the contract and that the pleaded implied term must not contradict any express term. The case is of interest because it discusses how an implied term may be linguistically consistent with the express terms of a contract but, fatally, substantively inconsistent with them. (Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017] EWCA Civ 7)

Background

A court may imply a term into a contract to fill a gap in the contract's drafting. The rationale for implying a term in this way is to reflect the parties' intentions when the contract was entered into. However, the test is an objective one, the court will consider what a reasonable person would have understood the parties' intentions to be, given the background knowledge reasonably available to the parties at the time they entered the contract.
The correct test for implying terms into a contract, to reflect the parties' intentions, has been developed in a long line of case law. Following Lord Hoffmann's judgment in Attorney General of Belize and others v Belize Telecom Ltd [2009] UKPC 10 there were suggestions that the rules on implying terms had been relaxed. However, in 2015 the Supreme Court held that Belize should no longer be treated as authoritative guidance, see Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72 . In Marks & Spencer the Supreme Court stated that the approach established in the pre-Belize cases still applies. (See Practice note, Contracts: express and implied terms: Terms implied in fact.)

Facts

Irish Bank Resolution Corp Ltd (in special liquidation) (the Bank) had advanced facilities to Camden Market Holdings Corp (Camden) for the purpose of acquiring and developing properties.
The facilities agreement expressly permitted the Bank to assign or transfer any of its rights to another bank (with Camden's consent) and to disclose information about Camden and the finance documents to any such potential assignee or transferee, subject to the recipient signing a confidentiality undertaking.
After the Bank entered special liquidation, the liquidator began marketing the facilities agreement as part of a package which contained distressed debt. Camden was concerned that this would create the impression that its loan was distressed and that potential purchasers would be more interested in acquiring the loan than the properties, with a view to then enforcing the security and obtaining the properties at less than market value.
Camden brought an action claiming, amongst other things, that there was an implied term of the contract that the Bank would not do anything to hinder Camden's marketing of the premises to achieve the best price by marketing the sale of the loan under the facilities agreement in competition with Camden.
The Bank applied for summary judgment or the striking out of the claim.
At first instance, the judge refused the Bank's application, finding that it was arguable that the implied term did exist and was consistent with the express terms of the facilities agreement; the matter should go to a full trial.
The Bank appealed, again seeking summary judgment or the striking out of the claim.

Decision

The Court of Appeal allowed the Bank's appeal, entering summary judgment against Camden. The court held that the argument for the implied term was bad in law and Camden had no real prospect of success.

First interpret the express terms

Beatson LJ, giving the leading judgment, took as his starting point Lord Neuberger's comments in Marks & Spencer that in most, possibly all, disputes about whether a term should be implied, it was necessary first to interpret the express terms.
The fact that the agreements did not contain express wording excluding or delimiting implied terms should not detract from this focus on interpretation as the first step.

Lord Neuberger's "cardinal rule"

Beatson LJ also cited Lord Neuberger's statement in Marks & Spencer that it was a "cardinal rule" that an implied term must not contradict any express term.

Linguistic inconsistency and substantive inconsistency

Beatson LJ differentiated between two ways in which an implied term may be inconsistent with an express term:
  • Direct linguistic inconsistency. In this case, there was no linguistic inconsistency between the express term (the Bank was free to market the loan by disclosing information to potential purchasers) and the implied term argued for (no marketing of the loan by the Bank in competition with Camden's marketing of the property). This was because there could be situations in which the marketing of the loan by the Bank was not in competition with the marketing of the properties by Camden and where disclosure of the information could be made in a manner that did not hinder Camden from achieving the best price.
  • Substantive inconsistency. However, the pleaded implied term was substantively inconsistent with the express wording:
    • the implied term would amount to a significant restriction on the Bank's power to deal with the loan and to its entitlement to disclose information to prospective assignees and transferees, and would do so in a way that was redolent of uncertainty; and
    • the judge had failed to reflect the principle in Reda v Flag Ltd [2002] UKPC that an express and unrestricted power, in this case the power to market the loan by disclosing information to potential purchasers, cannot in the ordinary way be circumscribed by an implied qualification.
Beatson LJ accepted that where there is substantive inconsistency it might be argued that the express terms dealing with a particular issue should be supplemented with an implied term which further clarifies them. However, he cited Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 to the effect that where a contract is lengthy and carefully drafted but is silent on a particular issue it is difficult to infer with confidence what the parties intended. Although not determinative of the issue, the fact that the agreement worked without the implied term was a significant impediment to implying a term that dealt with subject matter expressly addressed in the agreement.

Comment

The judgment shows that while the pleaded implied term may not necessarily be linguistically inconsistent with an express term, it may nonetheless be substantively inconsistent with it. Where an express term confers an express and unrestricted power on a party, such a power should not be restricted by an implied qualification.

Case

Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017] EWCA Civ 7, 19 January 2017, Longmore, Beatson and Sales LJJ (Bailii).
Published on 23-Jan-2017
Resource Type Legal update: case report
Jurisdictions
  • England
  • Wales
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