Marks and Spencer v BNP Paribas: A new landscape for implied terms

January 7, 2016

 

For a number of years, the key decision as to when terms may be implied into a contract has been the Privy Council opinion in Attorney General of Belize and Others v Belize Telecom Ltd and Another1 (“Belize”). The opinion of the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Service Trust Co (Jersey) Ltd and Another2 (“M&S”) has revisited and largely reversed Belize.

 

The Facts of M&S

 

Marks and Spencer were the tenant and BNP Paribas the landlord under four commercial leases. These leases required rent to be paid in advance on the usual quarter days. Each lease also contained a break clause allowing the leases to be terminated on 24 January 2012 – not a quarter day – provided that, inter alia, there were no arrears of rent and that the tenant paid the landlord a break premium, which was the equivalent of one years’ rent.

 

Marks and Spencer validly exercised this break clause, and the lease ended on 24 January 2012 notwithstanding that rent had been paid up to 24 March 2012. They then brought a claim for repayment of a portion of the rent paid in advance in December 2011. At first instance, Morgan J3 found for Marks and Spencer, holding that there was an implied term entitling repayment. BNP Paribas successfully appealed this decision to the Court of Appeal4 , who held that no such term could be implied. The Supreme Court upheld the decision of the Court of Appeal.

 

Implied Terms in Contracts: Belize and M&S

 

Lord Hoffmann, giving the opinion of the Privy Council in Belize, considered that the court has no power to alter the contract to improve it 5 . When implying terms into a contract, Lord Hoffmann initially noted that the previous case law used a variety of expressions such “necessary to give business efficacy to the contract” and “goes without saying”6 . He held, however, that there would be a danger that expressions such as these will gain a life of their own 7 . Instead, the process of implying a term into a contract was considered part of the process of construction8 and that when implying a term into a contract:

 

“[t]here is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”9

 

Lord Neuberger in M&S, with whom Lords Sumption and Hodge agreed, differed from Lord Hoffman in two main ways:

 

(1) First, far greater reliance was placed on the requirement that the implied term must be necessary for business efficacy and that the implied term must be so obvious as to go without saying; and

 

(2) Secondly, that it was necessary to keep the processes of construction of a contract and the implication of a term into a contract separate, as they are10 “different processes governed by different rules.”

 

In M&S Lord Neuberger approved 11 the approach taken by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings:

 

“for a term to be implied, the following conditions (which may overlap) must be satisfied: (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 it12; (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.”

 

Conclusion

 

In delivering his opinion, Lord Neuberger noted that some judges and academic lawyers had interpreted Belize as changing the law. He was keen to emphasise that there has been no dilution of the requirements for the implication of a term into a contract13. The impact of this decision, therefore, is likely to be two-fold. The first stems from this assessment by Lord Neuberger: the pre-Belize case law is likely to gain renewed importance. The second implication may be of greater practical importance. As the question of necessary for business efficacy” involves a value judgment, parties to future disputes will have to give this factor additional focus in pleadings, evidence, and argument.

 

Simon Jones

 

1 [2009] 1 WLR 1988; [2009] UKPC 10

2 [2015] 3 WLR 1843; [2015] UKSC 72

3 [2013] L&TR 494; [2013] EWHC 1279 (Ch)

4 [2014] L&TR 390; [2014] EWCA Civ 603

5 [2009] 1 WLR 1988 at [16]

6 [2009] 1 WLR 1988 at [21]

7 [2009] 1 WLR 1988 at [22]

8 [2009] 1 WLR 1988 at [19]

9 [2009] 1 WLR 1988 at [21]

10 [2015] 3 WLR 1843 at [26]

11 [2015] 3 WLR 1843 at [21]

12 At [2015] 3 WLR 1843 at [21] Lord Neuberger suggested that this may be interpreted to mean that the contract would lack commercial or practical coherence without such a term. This was accepted to involve a value judgment.

13 [2015] 3 WLR 1843 at [24]

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