Monday, 1 July 2013

[Contract] Terms Implied in Fact and BP Refinery Case

1.0 Requirements for implication

If the contract is expressed in a document which is complete on its face, the requirements are those stated by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings

They are:
  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
This test has been approved by Codelfa v State Rail Authority NSW.

1.1 Reasonable and Equitable

It is not sufficient to justify an implication that it be reasonable to imply a term (Hospital Products v United States Surgical Corp) but it is nevertheless required that a term which sought to be implied must operate reasonably and equitably between the parties. 

For example, an alleged implied term which sought to allow manufacturers to fix 'reasonable' prices was held to be unreasonable and unfair to the retailer to oblige him to pay any price considered reasonable by the manufacturers (Peters American v Champion)

1.2 Necessary to give business efficacy

Term should only be implied if it is necessary (Hospital Products v United States Surgical Corp). Therefore it follows that a court will not imply a term if a contract is effective without it (Bell v Lever Bros; Heimann v The Commonwealth; CGU Workers Compensation v Garcia). 

But if the contract is ineffective without implying a term, then the court will imply it (Hospital Products Ltd v United States Surgical Corp). 

1.3 Obviousness

The case Shirlaw v Southern Foundaries is an important case which illustrates that a term which is obvious does not need to be implied. It sets out the officious bystander test. Mackinnon LJ said:

'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!'

See cases Luxor (Eastbourne) v Cooper and Alpha Trading v Dunnshaw- Patten

1.4 Clarity of expression

Another factor to consider is whether a term to be implied is capable of clear expression and reasonably certain in its operation. There is clearly a link between this element and obviousness as a term which is unclear would be not obvious to both parties.

For example in Codelfa v State Rail Authority the High Court refused to imply a term into a construction contract because it was impossible to say, with any degree of certainty, what the term would have said. 

1.5 Consistency

This requirement has two aspects where both must be considered:

  1. the term sought to be implied must not contradict the express terms of the contract, (Sanders v Snell) and
  2. the term must not deal with a matter already sufficiently dealt with by the contract (John Alexander's Club v White City Tennis Club
In Hart v MacDonald a written contract for the erection of a dairy plant and butter factory provided: 'it is to be understood that there is not agreement or understanding between the parties not embodied' in the document. This did not prevent an implication of term and High Court held that such implied term was necessary and that it did not contradict the express terms. 

1.6 Informal contracts

Different rules have been adopted for informal contracts in Australia.

In relation to informal contracts which are not complete on their face, the High Court in Byrne v Australian Airlines Ltd approved the following statement by Deane J in Hawkins v Clayton

'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. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties.' 

The statement effectively means that the factors in BP Refinery case still needs to be considered. However, they are to be considered as factors which are not to be strictly determined. Nevertheless, a term cannot be implied if it is unnecessary to do so and the term must also be consistent with express terms. 

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