2.2 Terms implied to make the contract effective

While ordinarily reluctant to do so, courts may imply context-specific terms into a formal contract even where the contract is not of a kind discussed above (2.1). The term “formal” is here, and in Rule 2, used in its ordinary English language meaning, and not in its strict legal sense.

If it is necessary to imply a particular term in order to give “business efficacy” to the contract, the court may choose to do so, but “the term sought to be implied must be necessary to make the contract work and must be so obvious that it goes without saying”.^[1] In The Moorcock,^[2] Bowen LJ stated that:

I believe if one were to take all the cases, and they are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have. In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men.

Furthermore, in Reigate v Union Manufacturing Co,^[3] Scrutton LJ expressed the view that:

“A term can only be implied if it is necessary in the business sense to give efficacy to the contract i.e., if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, ‘What will happen in such a case?’, they would both have replied: “Of course, so and so will happen; we did not trouble to say that; it is too clear.”

Finally, in Shirlaw v Southern Foundries,^[4] MacKinnon LJ commented that:

“Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common, ‘Oh, of course.’”

The case giving the clearest guidance as to when terms may be implied to give “business efficacy” to the contract is BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.^[5] Article 1 of Rule 2 is primarily based upon the Court’s reasoning in that case.  In that case, the appellant company had entered into an agreement with the respondent. The agreement had the effect of giving preferential rating to an oil refinery operated by the appellant. The majority judgment stated 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.^[6]

The dissenting judgment delivered by Lord Wilberforce and Lord Morris of Borth-y-Gest does not dispute that terms ought to be implied in the manner outlined above. However, it clearly illustrates how even a relatively detailed rule, as the one envisaged in the majority judgment, can lead to different and contradictory conclusions. The majority judgment implied a rather far-reaching term, while the dissenting judges read the agreement to imply a much more limited term. In doing so, the dissenting judges took the better approach, as any term implied by the court ought to be as limited as possible, provided that it still gives business efficacy to the contract. In other words, if the court can imply different terms, all of which will ensure that the contract gets business efficacy.  The court should choose to imply the term with the most limited implications possible, provided that the end result is still reasonable and equitable.

As is clear from Article 2 of Rule 2, the law takes a less strict approach to implying terms into informal contracts, such as the contracts associated with every-day activities like restaurant visits, the purchasing of a bus ticket etc.

In Byrne v Australian Airlines Ltd,^[7] the High Court outlined the proper procedure for implied terms in cases involving such informal contracts: “the actual terms of the contract must first be inferred before any question of implication arises.  That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention”^[8].

Further, the Court stated that the test outlined by Deane J in Hawkins v Clayton^[9] was the test to be used for actually implying terms into informal contracts:

The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.^[10]