English contract law case profile - February 2016
The case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and anr [2015] UKSC 72 emphasises the need to make provision for all practical possibilities when drafting a contract, regardless of how obvious a course of action, form of relief or implication may seem to any of the parties at the drafting stage.
Marks and Spencer (M&S), the tenant, had entered into a sub-underlease (lease) with the defendant landlord. M&S was to pay the basic rent (rent) each year in four equal quarterly instalments, in advance of each quarter.
The lease provided M&S with a break clause on the condition that there was no rent or VAT on the rent outstanding on the break date. M&S served the landlord with a notice to determine the lease on 24 January 2012 (the break date), and, in anticipation of this and pursuant to the aforementioned term in the lease, paid the landlord the rent for the period of 25 December 2011 to (and including) 24 March 2012. M&S then sought a refund for the sum paid in respect of the post-break date period of 24 January 2012 to 24 March 2012.
The lease had no provision dealing with such a situation and, when the landlord refused to refund the amount sought, M&S brought proceedings to recover this sum, arguing that an appropriate term should be implied into the contract.
Lord Neuberger, delivering the lead judgment of the Supreme Court, considered the question of when a term should be implied into a contract and found against M&S. He cited with approval cases that applied the traditional tests of “business necessity” and “obviousness”, and noted that at least one of those tests needed to be satisfied before a court could imply a term into a contract. Business necessity would only exist if, without the term, the contract lacked “commercial and practical coherence”, and a term would only satisfy the obviousness test if it was “so obvious that ‘it goes without saying’”. This reiterates the high threshold that must be met before a court can imply a term into a contract.
In giving his speech, Lord Neuberger dispelled the uncertainty created by Lord Hoffmann’s judgment in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, which had in effect reduced the implied terms test to one of “reasonableness”.
The Supreme Court’s decision in Marks and Spencer means that the courts will be reluctant to imply terms into a contract henceforth, necessitating that contracting parties make provision for all practical possibilities in the contract, regardless of how obvious a potential course of action, form of relief or implication may seem to them (or one of them) at the drafting stage. Contracting parties should also be careful to set out and define precisely in the contract any required performance standard and what is required pursuant to that standard, because in the absence of express wording the courts are unlikely to "fill in the gaps" should proceedings be commenced. For instance, a contractual obligation to obtain regulatory approval, to undertake marketing/sales activity or to perform ongoing research and development work in relation to a product should specify and detail the precise steps that are required, the procedure to be followed by the relevant party in taking those steps (including in relation to timing) and the consequences flowing from any breach.
(For further analysis of the judgment in Marks and Spencer, see our previous article.)
