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    02:19 PM Nicholas Poon (Assistant Registrar, Supreme Court of Singapore)

    UK Supreme Court Confirms the Traditional Approach to the Implication of Terms: Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72

        

    In 2009, Lord Hoffmann delivered the Privy Council’s decision in Attorney General of Belize & Ors v Belize Telecom Ltd & Anor (Belize) [2009] UKPC 10. His judgment has attracted much scrutiny and generated division amongst judges and academics ever since. One passage, in particular, stood out (Belize at [21]):

    It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. … this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on – but these are not in the Board's opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?

    Distilled, the debate revolved around whether the Privy Council had altered the traditional common law approach to the implication of terms in fact by, firstly, amending the standard for implication from necessity to reasonableness, and secondly, jettisoning the “business efficacy” and “officious bystander” tests in favour of a general interpretative approach that focuses on “what the instrument, read as a whole against the relevant background would reasonably be understood to mean”.  

    When the controversy reached the shores of Singapore, the apex court, on two separate occasions, decided that Belize amounted to a departure from the clear, traditional approach, and for that reason declined to follow it. In the first decision, Foo Jong Peng and others v Phua Kiah Mai and another [2012] 4 SLR 1267, the Court of Appeal held that it would “respectfully reject [the Belize approach] in so far as it suggests that the traditional “business efficacy” and “officious bystander” tests are not central to the implication of terms”. The Court of Appeal reiterated subsequently in Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal [2013] 4 SLR 193 that Belize should not be followed in so far as it stands for the proposition that a standard of reasonableness suffices for the implication of terms, as opposed to the standard of necessity. Quite plainly, the Court of Appeal in both cases did not consider Belize as having merely restated the traditional approach.

    This brings us nicely to the UK Supreme Court’s decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72, where the Court, unanimous in the result but divided over the reasoning, articulated its views on the correct interpretation of Belize and its effect on the implication of terms in English law.   

    Very brief facts of Marks & Spencer

    As introduced pithily in the opening of Lord Neuberger’s judgment, the appeal concerned a tenant’s break clause in a commercial lease. The lease had been granted for a term expiring on 2 February 2018. The tenant exercised its right under the break clause to determine the lease on 24 January 2012, after it had paid the usual rent for the quarter (until 24 March 2012) due on 25 December 2011.

    The issue, therefore, was whether it could recover from the landlords the apportioned rent in respect of the period from 24 January to 24 March 2012. The tenant claimed that there should be implied into the lease a term that if the tenant exercised its contractual right to break and hence determine the lease, the landlords ought to pay back a proportion of the rent paid for the quarter that covered the period after the lease was determined.

    The High Court held that the tenant was entitled to a refund of the paid but unused rent. This was overturned by the Court of Appeal whose decision was upheld by the Supreme Court, on amongst other grounds, the fact that the lease was negotiated against the background of a clear, general and correct legal understanding that rent payable in advance by tenants are not apportionable in time (at [46]). Consequently, there was no basis to imply into the lease the term sought by the tenant.   

    Gist of Supreme Court’s decision

    Lord Neuberger’s judgment (with whom Lord Sumption and Lord Hodge agreed)

    Subject to six caveats, the law on the implication of terms was, in Lord Neuberger’s judgment, adequately summarised by Lord Simon in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20 at 26:

    [F]or 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.

    The six caveats are (at [21]):

    1. The rationale of implication of terms is to determine what the parties would have agreed. For that reason, the court is not concerned with the hypothetical answer of the actual parties (presumably in the context of the question posed in the “officious bystander” test), but with that of notional reasonable people in the position of the parties at the time at which they were contracting.
    2. A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed to it if it had been suggested to them.
    3. It is questionable whether the first requirement of Lord Simon’s formulation in BP Refinery, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.
    4. Business necessity and obviousness, the second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although in practice it would be a rare case where only one of those two requirements would be satisfied.
    5. If one approaches the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by the official bystander with the utmost care”.
    6. Necessity for business efficacy involves a value judgment. It may be more helpful to state that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

    Lord Neuberger then went on to discuss the implications of Belize. He made two observations. First, he reaffirmed the traditional approach, citing with agreement Foo Jong Peng and Sembcorp Marine (at [24]) that “business efficacy” and “officious bystander” tests remained central to the law governing the implication of terms. Second, Lord Neuberger preferred to regard construction of words (as opposed to the entire instrument) and implication of terms as distinct processes, rather than elide the distinction as Lord Hoffmann did in Belize (see for eg [26]). Lord Neuberger then concluded his discussion on Belize (at [31]), rather unusually, by clarifying that Lord Hoffmann’s observations in Belize on the implication of terms should be treated as a “characteristically inspired discussion rather than authoritative guidance”.  

    Lord Carnwath

    Lord Carnwath disagreed with Lord Neuberger (and by extension, Lord Sumption and Lord Hodge) on the issue of the authority of Belize. He was of the view (at [59]) that Belize, properly interpreted, did not represent the loosening of the traditional approach with its focus on necessity. In the same vein, Lord Carnwath regarded the Singapore courts’ rejection of Belize as good authority unconvincing if not incorrect.

    Suggesting that business efficacy and obviousness are not the only criteria that govern whether a term should be implied, Lord Carnwath aligned himself with Lord Hoffmann’s pronouncement in Belize (at [27]) that whether the proposed implied term is necessary for business efficacy, obvious, is reasonable and equitable, capable of clear express, or does not contradict any express term of the contract, is but “a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means”.

    Lord Clarke

    On the issue of whether Belize had watered down the traditional test of necessity, Lord Clarke said (at [77]) that his reading of Belize was that it did not. In relation to the interaction between the approach to construction and the approach to implication of terms.  Lord Clarke opined (at [76]) that if “construction of the contract” is understood in a broad sense of determining the scope and meaning of the contract, then the process of construing the words which the parties have used, and the process of implying terms into the contract, are both part of the process of “construction of the contract”.

    Commentary

    The rich jurisprudence in Marks and Spencer can be grouped into three major areas for discussion: (i) what is the correct interpretation of Belize; (ii) what is the relationship between construction of a contract, interpretation or construction of words, and the process of implication of terms; and (iii) what is the role of the “business efficacy” and “officious bystander” tests, and how are they to be applied, under the approach endorsed in Marks and Spencer.

    What is the correct interpretation of Belize

    Lord Carnwath and Lord Clarke were unambiguous in their assessment that Belize did not water down the traditional approach (see [60] and [77] respectively). That much is clear. What is less clear, is what Lord Neuberger thought Belize meant. While Lord Carnwath and Lord Clarke seemed to think that Lord Neuberger was on the same page as them (at [66] and [77] respectively) – and there are certainly indications in favour of this reading – the language deployed by Lord Neuberger in his judgment, paints a far less certain picture. There are two principal contrary indications:

    First, after setting out his view of the general and present law governing implication of terms, Lord Neuberger clarified that Lord Hoffmann’s statements on the law in Belize are “observations” that are “open to more than one interpretation … and that some of those interpretations are wrong in law”, which led to his conclusion that those observations should henceforth be treated as “characteristically inspired discussion rather than authoritative guidance”. If Belize did not alter the traditional approach, Lord Neuberger’s clarification would be meaningless.

    Second, at [24] of his judgment, Lord Neuberger refers to Foo Jong Peng and Sembcorp Marine, both of which as mentioned above, categorically reject Belize to the extent that it purports to dispense with the traditional “business efficacy” and “officious bystander” tests and reduce the standard of necessity to that of reasonableness.

    It is true that Lord Neuberger did not go so far as to say that the Singapore Court of Appeal’s interpretation or characterisation of Belize was correct. It is also correct that Lord Neuberger, by saying the Singapore Court of Appeal was “right to hold that the law governing the circumstances in which a term will be implied into a contract remains unchanged following Belize”, can be taken to have suggested that Belize, properly construed, did not change the traditional approach. It is also right that there is no internal consistency for Lord Neuberger to agree with the result in Foo Jong Peng and Sembcorp Marine and at the same time construe Belize as not having altered the traditional approach. Proponents of this conclusion would finally point to the opening sentence of [24] where Lord Neuberger states that “it is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied [after the case of Belize].”

    There is, however, a small fly in the ointment. If all Lord Neuberger had wanted to say was that Belize did not change the law, he would have, and could have, done so in a far less circuitous, and indeed, in a more obvious way. Fully cognisant of the “inspired discussion” that Lord Hoffmann’s choice of words in Belize had stimulated, Lord Neuberger would no doubt have been extra careful to ensure that his own words would not be the source of similar controversy, lest history repeated itself. He certainly did not have to, and ought not to have cited Foo Jong Peng and Sembcorp Marine with approval, if nothing for the reason that those decisions have been widely interpreted as construing Belize as having changed the law, as was correctly noted by Lord Carnwath (at [66]).

    Thus, if Lord Neuberger must be taken to mean what he says, that he went to great lengths to qualify Belize (which he undoubtedly did) instead of flowing along the stream of least resistance paved for him by Lord Carnwath and Lord Clarke must stand for something, namely, that Belize had gone beyond merely restating the traditional approach, into territory that at the very least threatened if not actually undermined the supremacy of the traditional approach.

    Construction, interpretation, implication

    Are Lord Hoffmann’s observations in Belize therefore dead in the water? Probably, in so far as they may be interpreted as lowering the standard for the implication of terms from necessity to reasonableness. Not necessarily so, however, in relation to the broader question of the interaction between the process of construction and implication.

    Unfortunately, it seems that none of the judgments in Marks and Spencer appreciated Lord Hoffmann’s delicate selection of words in Belize. As was noted in Sembcorp Marine (at [79]–[81]), Lord Hoffmann scrupulously avoided using the word “interpretation” (or interpret), preferring instead the word “construction” (or construe) which was used 14 times, all but once clearly referring to the construction of an instrument – in that case, the articles of association as a composite document – and not the words in the instrument.

    Having authored the leading and seminal judgment in Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 on the process of “interpretation” where he established that “interpretation is the ascertainment of the meaning which the document would convey to a reasonable person”, there would have been very little if any justification for Lord Hoffmann to refrain, almost deliberately it seems, from using the word “interpretation” to describe the process of determining the meaning to be given to the articles of association in Belize. Unless of course, he had, in the intervening 10 years since Investor Compensation Scheme, refined his philosophy and now considered construction to be an overarching process under which interpretation and implication – both of which apply specifically to terms (as opposed to the instrument) – were subsumed.

    This reading of Lord Hoffmann’s intentions in Belize has been considered, and rejected, by least one pair of commentators, who argue that Lord Hoffmann had never expressed such fine taxonomical distinctions in his other judgments, and the two terms are generally understood and used interchangeably (JW Carter and Wayne Courtney, “Belize Telecom: A Reply to Professor McLauchlan” (2015) 2 LMCLQ 245 at pp 250–251). They are right on both counts.

    As can be seen even from the judgments in Marks and Spencer, particularly in Lord Neuberger and Lord Carnwath’s judgments, there is an inherent assumption that “interpretation” and “construction” are interchangeable. On that assumption, it is little wonder that Lord Neuberger was reluctant to adopt Lord Hoffmann’s characterisation of implication as part of the process of construction. But that assumption merely begs the question whether Lord Hoffmann had intended them to be different. In that regard, Lord Hoffmann’s judgments predating Belize – which are silent on a distinction between “interpretation” and “construction” – can only confirm what his philosophy was before, but not after, Belize. He is, after all, entitled to develop his philosophy, and arrive at a landing that is not so different from Lord Wilberforce who in Liverpool City Council v Irwin [1977] AC 239 at 253 also considered it conceptually sound to view implication as part of the process of construction. Regretfully, it would appear that Belize might have been Lord Hoffmann’s final judgment before he retired from the Bench just one month later. The dearth of any extra-judicial writings since precludes confirmation of the thesis but does not undermine it either.

    Role and application of the “business efficacy” and “officious bystander” tests

    There is a more practical effect of Marks and Spencer, as far as Singapore law is concerned. In signifying that the “business efficacy” and “officious bystander” tests are alternatives, Marks and Spencer entrenches the divergence between English law and Singapore law, for the latter adopts the “complementarity” characterisation of the business efficacy and officious bystander tests first embraced in Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] 1 SLR(R) 927 at [34]–[39] and subsequently affirmed in Foo Jong Peng and Sembcorp Marine. Under the complementarity system, the business efficacy test serves a normative function while the officious bystander test serves an instrumental, practical function. Hence, the two tests must be applied and satisfied cumulatively (at [91]–[101]). It is worth mentioning, nonetheless, that Lord Neuberger appeared sympathetic to the internal logic of the cumulative approach, saying (at [21]) that “it would be a rare case where only of those two [tests] would be satisfied”.  

    Finally, another divergence may be observed in the understanding and application of the “officious bystander” test. Both Lord Neuberger and Lord Carnwath explained (at [21] and [72] respectively) that the court when deciding whether to imply a term is not concerned with “the hypothetical answer of the actual parties” to the question of what the parties would have agreed, but what the “notional reasonable people in the position of the parties at the time at which they were contracting” would have answered. This may be interpreted as being directed at or at least having an effect on the “officious bystander” test because that is the test which utilises the hypothetical answer of the parties. If that interpretation is correct, it would follow that the “officious bystander” test ought to be reviewed. 

    However, the distinction drawn by Lord Neuberger and Lord Carnwath is a slightly curious one, because it presupposes that the hypothetical answer of the actual parties is a real, not notional, event, with the corollary that the approach which seeks the hypothetical answer is somehow less desirable. But the pursuit of the hypothetical answer as exemplified in the “officious bystander” test is not any less (or more) notional than seeking out the views of the notional reasonable persons in the shoes of the parties. In both instances, the court is attempting to reconstruct what the actual parties, now only capable of being represented by notional persons (or who some would call the omnibus reasonable men) imbued with the traits of the parties, would have agreed to at the time of contracting, so that the court can then say, objectively, that having regard to what the parties contemplated and would have agreed, the term in dispute ought or ought not to be implied into the contract.

    Conclusion

    It should be apparent from the above that while Marks and Spencer does put to bed some longstanding doubts over Belize, new questions emerge. The ghost of Belize survives. 

    * This blog entry may be cited as Nicholas Poon, “UK Supreme Court Confirms the Traditional Approach to the Implication of Terms”, Singapore Law Blog (22 December 2015) (http://www.singaporelawblog.sg/blog/article/147)

    ** A PDF version of this blog entry may be downloaded here

    *** This entry does not represent the views of the author’s employer

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