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The contract, the whole contract and nothing but.....?

2 May 2013
Construction News
A written construction contract is, you might say, rather like a millpond. All may look fine on the surface, but what lies beneath it can upset the contractual calm. The words written down may not tell the whole story. One party may have exerted illegitimate pressure, or said something incorrect, or made a promise that cut across what the written contract said, in order to get the other party to sign up. Duress, misrepresentation or a collateral contract, for example, can all make waves but, of all the unseen contractual ingredients, possibly the most challenging are implied terms.

In theory, although not written down, their detection should not be a problem. There is, according to Lord Hoffmann, just one question: what the contract, read as a whole against the relevant background, would reasonably be understood to mean. It is a forensic exercise, looking at the contract through the eyes, not of the parties, but of an objective third party armed with the parties’ background knowledge (perhaps these days a commuter on a Boris bike, rather than the pensioned-off (or privatised) Clapham omnibus).

Implied terms might be seen as the "of course" clauses, found beneath the surface of contracts governed by English contract law. Take the law on damages and remoteness, for instance. If the parties have not written a term in their contract to deal with the types of losses for which a contract breaker accepts potential liability, then, according to the Court of Appeal in Grimes v Gubbins, the law in effect implies a term to determine the answer. Normally, applying the well-worn case law starting with Hadley v Baxendale, this implied term is an acceptance of responsibility for the types of losses reasonably foreseeable at the contract date as not unlikely to result from a breach. Unless, however, there is evidence that the implied assumption of responsibility is inappropriate for a particular type of loss.

Or take the tricky issue of a duty of good faith. Lord Justice Jackson has recently confirmed, in the Court of Appeal in Compass Group UK v Mid Essex Hospital Services NHS Trust (which involved the hospital's contractual right to levy performance-related deductions under a facilities management contract), that English contract law has no general doctrine of "good faith" (unlike, for instance, Sharia law, the U.S., France or Australia). Such a duty needs to be expressly agreed, although a duty of good faith is implied by law in certain categories of contract, for instance, employment and partnership.

But in Yam Seng v International Trade Corporation, Mr Justice Leggatt could see no difficulty, following the established English law approach to implying terms in fact, in implying a good faith duty in any ordinary commercial contract, based on the parties’ presumed intention.

Applying Lord Hoffmann’s simple test for implied terms may not, however, be as straightforward as it sounds. The law reports remind us that different judges and different courts may come to different views as to what our contract law avatar might reasonably understand a contract to mean. In the Compass case, Mr Justice Cranston had originally concluded that there was an implied term. The Court of Appeal, overruling him, said there was not.

So what does this mean for construction contracts? If implied terms are detected they should, in theory, come as no surprise because the court is only drawing out what the contract, objectively, would reasonably be understood to mean, taking into account the parties’ background knowledge. This underlines the need for the good old-fashioned virtue of recording agreements clearly and comprehensively so that a court does not have to look beneath the surface. Still waters, they say, run deep and, as a venerable great-aunt used to add, there’s often mud at the bottom.

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