Interpretation and Implied Terms Flashcards
Oscar Chess v Williams [1957]
FACTS: W purchased a second hand Morris car on the basis that it was a 1948 model. The registration document stated it was first registered in 1948. The following year her son used the car as a trade in for a brand new Hillman Minx which he was purchasing from O. The son stated the car was a 1948 model and on that basis the Oscar Chess offered £290 off the purchase price of the Hillman. Without this discount Williams would not have been able to go through with the purchase. 8 months later O found out that the car was in fact a 1939 model and worth much less than thought. They brought an action for breach of contract arguing that the date of the vehicle was a fundamental term of the contract thus giving grounds to repudiate the contract and claim damages.
JUDGEMENT: Claim not allowed.
PRINCIPLE: The statement relating to the age of the car was not a term but a representation. W was only relying on the registration document and had no specialist knowledge of cars and so was not expected to know that it was in fact a 1939 model instead of a 1948 model.
Dick Bentley v Harold Smith Motors [1965]
FACTS: DB knew HSM, who was a car trader specialising in the prestige market, for some time. He had asked him to look out for a well vetted Bentley car. HSM obtained a Bentley and recommended it to DB. He told him that the car had been owned by a German Baron and had been fitted with a replacement engine and gearbox and had only done 20,000 miles since the replacement. DB purchased the car but it developed faults. HSM had done some work under the warranty but then more faults developed. It transpired that the car had done nearer 100,000 miles since the refit. The question for the court was whether the statement amounted to a term in which case damages would payable for breach of contract, or whether the statement was a representation, in which case no damages would be payable since it was an innocent misrepresentation and the claimant has also lost his right to rescind due to lapse of time.
JUDGEMENT: Held that the statement was a term.
PRINCIPLE: HSM, being a car dealer, had greater expertise and DB relied upon that expertise.
Esso Petroleum v Mardon [1976]
misrep. case
FACTS: M entered into a tenancy agreement with the defendant, E, in respect of a petrol station owned by the latter. During the course of the negotiation of the agreement, ‘expert’ advisers employed by the defendant had provided an estimate of the sales which the petrol station could expect which was based on inaccurate information and consequently was significantly inflated. The value of the rent on the agreement had been calculated based on this inflated figure. As a result, it was impossible for the plaintiff to operate the petrol station profitably.
JUDGEMENT: CA held that there was no action for misrepresentation as the statement was an estimate rather than a statement of fact. However, as D had taken it upon themselves to employ experts for the purpose of providing an estimate of sales, C was entitled to damages based on either negligent misstatement at common law or breach of warranty of a collateral contract.
Couchman v Hill [1947]
FACTS: Buyer asked for assurance that the heifer he was contemplating purchasing at an auction was unserved, as he required it for servicing his own bull. He also stated that without this assurance, he would not bid. Both seller and auctioneer gave him their assurance. The heifer turned out to have been served.
JUDGEMENT: CA held that assurance was a term of the contract. (alternatively, a collateral contract)
Investors Compensation Scheme v West Bromwich Building Society [1998]
(Useful as a starting point when construing a contract/principle of modern contract interpretation)
Lord Hoffmann’s 5 principles on interpreting contracts:
- The intention of the parties is objective
- The “matrix of facts”
- Exclusions from the “matrix of facts”
- The words used in a contract do not have to be taken literally
- Something must have gone wrong with the language
Prenn v Simmonds [1971]
Lord Wilberforce on ascertaining the parties’ intention and its “factual matrix”:
“In order for the agreement… to be understood, it must be placed in its context. The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations”
Rainy Sky v Kookmin Bank [2011]
FACTS: The case concerned the interpretation of refund guarantees issued by K to protect advance payments made by buyers to a shipbuilder under shipbuilding contracts. A long and poorly-drafted clause required the bank to pay “such sums”. The question was which sums these words referred back to. 2 interpretations were possible, as follows:
- The buyer’s case. These sums were “Instalments” mentioned earlier in the same sentence (sums due under the shipbuilding contract, including the refund of advance payments on the shipbuilder’s insolvency); or
- The bank’s case. These sums were those mentioned in the previous sub-clause (payable on various guarantee trigger events but not insolvency).
The shipbuilder suffered financial difficulties and the buyer claimed under the guarantees. The bank argued that, properly interpreted, its guarantee obligations were not triggered by the shipbuilder’s insolvency. Insolvency was not specifically mentioned in the guarantee bond but other events such as rejection or total loss of the vessel were. Under the shipbuilding contract, however, the shipbuilder was required to refund advance payments if it became insolvent.
JUDGEMENT: The Supreme Court therefore, agreeing with the judge and Sir Simon Tuckey in the Court of Appeal, preferred the buyer’s interpretation, because it was consistent with the commercial purpose of the guarantees in a way that the bank’s was not.
PRINCIPLE: The appropriate construction of the ambiguous wording should be the one most consistent with ‘business common sense’.
Wood v Capita Insurance Services Ltd [2017]
Textualism v contextualism
FACTS: SC had to consider competing interpretations of an indemnity provision in a share purchase agreement. When looking at the indemnity provision in isolation, commercial common sense favoured a more liberal interpretation (favouring C as the indemnitee). However, the natural meaning of the language used and the overall contractual context of the agreement tipped the balance in favour of a more restrictive interpretation. The indemnity provision as drafted formed part of an overall risk allocation regime within the SPA and therefore had to be read in conjunction with the extensive warranties in the document. As such, a narrowly construed indemnity was not contrary to commercial common sense when considered in light of those warranties.
JUDGEMENT: CA determined that the indemnity did not apply in the absence of claims or complaints registered with the FSA.
PRINCIPLE: While commercial common sense remains relevant to contractual interpretation, the court will consider what makes commercial sense in the context of the agreement as a whole – not merely by reference to the provision in dispute. In contracts drafted by sophisticated parties, the court is less likely to be willing to depart from a literal reading of a provision unless to do so would place the parties’ overall allocation of risk at odds with commercial common sense.
Chartbrook Homes Ltd v Persimmon Homes Ltd [2009]
A victory for common sense?
FACTS: In October 2001, C and P entered into an agreement for P to develop a site acquired by C. For a while everything went smoothly: planning permission was granted and the development was carried out. However, a dispute arose as to the amount due from P under the contract and C commenced proceedings. The disputed element of the pricing formula was described as the Additional Residential Payment (“ARP”). On C’s construction, the ARP amounted to approximately £4.5 million. P’s view was that, properly construed, the ARP was just under £900,000.
JUDGEMENT: HoL held that Persimmon’s construction of the ARP provision was the correct one
PRINCIPLE: The key question was what a reasonable person would have understood the parties to be using the language in the contract to mean, having all the background knowledge which would have been available to the parties (other than pre-contractual negotiations and declarations of subjective intent)
- The exclusionary rule was upheld by the House. Therefore, when construing the
meaning of a term of a contract, a party cannot rely on evidence of the pre-contractual
negotiations.
- Nevertheless, applying an objective test, the House was prepared to construe the
provision in question liberally as the literal interpretation flouted commercial common
sense. It mattered not that this involved a fair amount of “red ink”.
- In any event, rectification would have been possible - the pre-contractual negotiations
revealed, objectively, that a prior consensus had been reached, and there was no
evidence of any subsequent discussions to suggest an intention to depart from that
consensus.
The Moorcock (1884)
FACTS: C moored his ship at D’s wharf on the river Thames. The river Thames is a tidal river and at times when the tide went out the ship would come into contact with the river bed. The ship became damaged due to uneven surfaces and rocks on the river bed. C sought to claim damages from D and D argued that there was no provision in the contract warranting the condition of the river bed.
JUDGEMENT: The court implied a term in fact, that the river bed would be safe for mooring.
PRINCIPLE: The court introduced the business efficacy test i.e. the term must be necessary to give the contract business effect. If the contract makes business sense without the term, the courts will not imply a term.
Shirlaw v Southern Foundries [1939]
FACTS: C had been employed as a managing director of SF the office of employment was to last for 10 years. Federated Foundries then purchased a controlling share in the company and altered the company’s Articles of Association giving them the power to remove directors. They then dismissed C as a director who brought an action for wrongful dismissal. There was no breach of contract for his dismissal based on the employment contract as they had not dismissed him from being a managing director but only as a director. However, if he was not a director he was not able to be a managing director. C asked the court to imply a term that D would not act in a way making it incapable for him to perform his contract.
JUDGEMENT: The CA applied the officious bystander test and did imply the term.
PRINCIPLE (the officious bystander test):
If a third party was with the parties at the time the contract was made and had they suggested the term should be implied it would be obvious that both parties would reply with a hearty ‘oh of course’.
It must be obvious that both parties would agree to the term at the time the contract was made.
Paragon Finance v Nash [2002]
FACTS: Mr and Mrs N obtained a mortgage from P for their matrimonial home. The mortgage agreement allowed P to vary the rate of interest ‘at their discretion’. After the Bank of England base rate of interest dropped, P failed to match the drop in interest and continued charging a significant amount above this rate. After Mr and Mrs N could no longer continue to afford these payments, P applied for an order for possession as a precursor for a sale of their property.
JUDGEMENT: There was an implied term that the power to vary the interest rate had to be exercised in a reasonable manner. Under the provisions of the Consumer Credit Act 1974 this meant that rates could not be capricious, dishonest, improper or unreasonable. This required the court to assess the position at the time the bargain was made. In this case, the rate was not applied in an unreasonable or unfair manner and so the clause allowing this discretion was not void.
PRINCIPLE: the ‘reasonable expectations of the parties’ test; whilst the lenders had not reduced their interest rates in line with other lenders, they had a commercially legitimate objective in doing so, and so the implied term that the rate be ‘reasonable’ was satisfied.
Shell UK v Lostock Garage [1977]
FACTS: L entered a solus agreement with S by which they would only buy and sell petrol from S for 20 years. For agreeing to being tied in to S they received a discount. However, after entering this agreement, S began supplying petrol to L’s neighbouring garages at an even lower price. L were unable to compete with these prices and began obtaining petrol from a third party. S brought an action for breach of contract and L asked the court to imply a term that S would not abnormally discriminate against them in supplying other garages in the locality.
JUDGEMENT: The court refused to imply a term in fact as it was not a necessary term to imply as the contract made business sense without it, nor was it obvious that Shell would have agreed to it. They also refused to imply a term in law. Whilst the term may be a reasonable one to include it lacked sufficient certainty.
Liverpool City Council v Irwin [1977]
FACTS: L owned a block of flats in which the D was a tenant. The common parts of the flats, the lifts, stair cases, rubbish chutes etc, had fallen into disrepair. A rent strike was implemented by many of the tenants including D. The council sought to evict the defendant for non payment of rent and she counter claimed for breach of an obligation to repair. However, the tenancy agreement did not mention any obligation to repair. In fact the tenancy agreement only imposed obligations on the tenant with no mention of the obligations of the landlord. The defendant asked the court to imply a term that the council had an obligation to repair the common parts of the block of flats.
JUDGEMENT: The courts did imply a term.
PRINCIPLE: The implied term arose as a legal incident in contracts of a defined type between landlord and tenant that the landlord was to take reasonable care to maintain the common parts. However, there was no breach of this duty.
Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015]
(largely reversed Belize which attempted to link implication of terms as part of the process of contract interpretation)
Lord Neuberger affirmed that “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 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.”
