Implication in fact as an instance of contractual
interpretation
(Published in (2004) 63 Cambridge Law Journal
384-411)
Adam Kramer
This
article proposes an account of the legal doctrine of implication
of terms in fact. The first proposition presented herein
is that implication in fact is an example of the more general
process of interpretation of contractual documents. This
proposition has been accepted by some
and discussed by a few. I am happy to add my voice
to these. To further the debate, this article seeks to dissect
the particular part of the interpretative technique of which
the implication of terms is an example: the part of interpretation
dealing with supplementation. This dissection proceeds upon
the assumption that interpretation is a pragmatic process
of inference, a view supported by a large body of work in
the field of linguistics.
The second proposition made in this article is more
specific. It is argued that the information implied into
agreements varies in how ‘primary’—independent of the expressed
information—it is. The more primary the information is,
the less likely it will be intended to go without saying,
and so the stricter a test of supplementation should be.
Since full contractual terms are more primary than details
implied into existing terms, one can see why the tests of
implication in fact (the officious bystander and business
efficacy tests) are stricter than the test for supplementing
with details through ordinary interpretation (the objective
test and the common sense principles outlined in the Investors
Compensation Scheme case).
Nevertheless, the second proposition does not justify
the existence of a separate category for the implication
of new terms, since primariness is a continuous and not
binary variable: information is not merely primary or secondary,
it is primary to a certain degree. As the primariness
of information sits on a spectrum, the strictness of the
test for supplementation should be a question of degree.
Thus the separate category of implied in fact terms should
be abolished, and all supplementation should take place
through the basic test of interpretation that asks what
it was reasonable to understand as going without saying.
This test should take account of the primariness of the
information to be implied, maybe using the officious bystander
and business efficacy tests as rules of thumb when the supplementation
is by way of very primary information (i.e. new terms).
In answer to the common criticism that any reference
to intention or the will of the parties in discussions of
implication in fact is merely fictional, two things must be said. The first is
that this is no more true of implication in fact than it
is true of interpretation, since the former is an instance
of the latter, as this paper seeks to show. The second is
that reference to intention is not fictional in either case,
since (as philosophers and practitioners of linguistics
have long since realised) communication is based upon a
process of pragmatic inference. Under this process, one
can intend what goes without saying and what does not cross
one’s mind. A communicator intends the background of social
norms and his goals and principles within which he (non-consciously)
formulated his utterance. These norms and goals and principles
are thus intended to be used to determine issues that are
undetermined by the express utterance. This is not a fiction,
or a diluted form of intention, it is the way communication
and the mind works. This is discussed elsewhere.
The
Common Sense Principles of Interpretation
This article follows on
from an earlier investigation of the welcome trend in the
law of interpretation of contractual documents away from
specialist rules of interpretation and towards the common
sense principles by which communications are interpreted
in everyday life. The common sense principles of interpretation
are, in brief, as follows:
1)
A communicator is held responsible for what she reasonably
appears (subjectively) to intend to mean. This is the objective
principle of interpretation.
2)
The first place a communicatee must look in finding the
apparently intended meaning is to the linguistic meaning
of the utterance in question—the meaning that has been codified
using the shared rules of language.
3)
The linguistic meaning, however, is only one element in
the apparently intended meaning. The process of interpretation
is, above all, governed by a process of pragmatic inference.
Under this process, a communicatee infers (guesses) the
communicator’s purpose and hence what the communicator intended
to mean. The communicatee’s principal tools in this task
are the information that appears to be mutually known (the
‘mutual context’ or ‘matrix of fact’), and an assumption
that the communicator intends what, and behaves as, a normal
person would (the ‘assumption of normality’). One important
element of the mutual context is the mutually known norms
of the society, also known as the ‘reasonable expectations’.
Another is the personal mutual context that makes up the
parties’ previous discussions, negotiations and dealings
(although there are legal rules restricting the admissibility
of evidence of such mutual context).
4)
The linguistic meaning is only prima facie the apparently
intended meaning, as in some situations the communicatee
must pragmatically infer that the communicator intended
the communicatee to replace the linguistic meaning in some
respects. The most common cases in which such replacement
appears to be intended are when there is a dialectual meaning,
such as a technical or customary meaning, that is more likely
to have been intended than the linguistic meaning, or when
the communicator appears to have made a mistake in formulating
the utterance.
5)
In addition, the
linguistic meaning will often appear to be an incomplete
communication of the communicator’s intended meaning. Often
it will reasonably appear (using the process of pragmatic
inference) that the communicator’s intended meaning goes
beyond the linguistic meaning in some particular respects—most
clearly where the linguistic meaning is ambiguous or vague
in a way that it appears the communicator did not intend
the communication to be, but also in many other cases in
which it would be normal to leave things to inference. In
such cases there is an apparently intended ‘licence to supplement
by inference’. In such cases the communicatee must pragmatically
infer what was intended but was unsaid (by ‘unsaid’ I mean
not codified in the linguistic meaning of the utterance).
6)
The interpretation will fail to resolve an issue where (a)
the communication does not appear to be intended to extend
to the issue in question (in other words, there is no licence
to infer with regard to that particular issue and the linguistic
meaning does not cover it) and so the utterance is incomplete,
or (b) the communication does appear to be intended to extend
to the issue in question, yet the utterance is uncertain
such that it is not possible to pragmatically infer what
was intended on that issue.
Supplementation
of the linguistic meaning
One part of this process
of pragmatic inference deserves elaboration beyond that
given above and elsewhere, and that is the process of supplementation
of the linguistic meaning. This is the part of pragmatic
inference that can, it is submitted, account for the process
of implication in fact.
To convey all the intended meaning by encoding it,
i.e. by including it all in the linguistic meaning
of the words used, is unnecessarily (and probably impossibly)
time consuming. The process of pragmatic inference allows
information to be conveyed impliedly without encoding within
the linguistic meaning of an utterance. By assuming normality
on the part of the communicator, and assuming optimal design
(that the communicator designed the utterance correctly
in the light of the surrounding circumstances, the apparent
purpose of the communicator, and the usual process of pragmatic
inference), the communicaters can convey information without
needing to encode it all.
Whilst the advantage of communicating through the
process of pragmatic inference is a saving in time (and,
more generally, drafting costs), the disadvantage is unreliability.
Encoding meaning in language is a more reliable means of
communicating than leaving meaning to pragmatic inference,
since mutual knowledge of language (a large body of linguistic
norms) can be easily inferred and its norms are fairly clear
to apply. The process of pragmatic inference, however, involves
both parties in modelling the norms of the surrounding society
(‘reasonable expectations’, the normal practices of communication,
and normal goals and means of arriving at them) and then
estimating which of these norms, and which facts about the
context, are mutually known. In such a process, the
chances of error are much greater; parties are much less
likely to have different opinions about the normal linguistic
meaning of a sentence than they are to have different opinions
about what is normally intended to go without saying.
Deciding whether to leave a part of her meaning to
inference, then, involves a communicator in a rough cost-benefit
analysis. Such an analysis requires the weighing of the
probability that the information will be successfully inferred
by the communicatee against the importance to the communicator
that the particular piece of information is successfully
communicated, and thus the calculation of whether it is
worth making something explicit just to be surer
of getting it across.
To understand this better, we need to see how a communicatee
successfully infers that something goes without saying.
The process can be loosely divided into two stages: identification
of a gap in the linguistic meaning that is not present in
the intended meaning, and filling the gap by pragmatic inference.
The first stage of the process
of supplementation by pragmatic inference involves identifying
a gap in the linguistically encoded meaning, and finding
a licence to supplement that meaning by way of pragmatic
inference so as to fill the gap.
Where the linguistically encoded meaning is silent
as to a particular issue, the communicatee must ask (a)
whether it would be normal to intend a determination of
that particular issue and (b) whether the silence can be
taken to show that no determination of that issue was intended.
(a) Would it be normal
(in the circumstances) to intend a determination of the
particular issue or type of issue that has not been determined
within the linguistically encoded meaning?
Using the apparent purposes
of the communicator, and other mutual context such as norms
of behaviour, the communicatee must ask whether it would
be normal for the communicator to intend to cover the particular
issue. If I agree to buy goods travelling on The Peerless,
it is apparent that I intend to refer to a particular ship
and so the specific identity of the ship, which is not part
of the linguistically encoded meaning (given that there
are at least two ships called The Peerless), is part of
my intended meaning. Similarly, if I agree a charterparty
with an option to redeliver ‘after 12 months’ trading’,
it is apparent that I am not ambivalent as to whether the
option is exercisable at any time after 12 months’ trading
or only at the specific point of time marked by passage
of 12 months’ trading. These two phenomena, deictic reference
and ambiguity, are easy examples of an apparent licence
to supplement by inference since they provide linguistic
markers as to an issue that was almost certainly determined
by the intended meaning even though it is not determined
in the linguistically encoded meaning. However even with
such clear linguistic markers of the need to supplement,
there may exceptionally be no apparent intention for supplementation
(i.e. intention that a reference be saturated or
that a linguistic ambiguity be disambiguated). For example,
in some cases of ambiguity so little will turn on the choice
between possible linguistic meanings that it will not be
apparent that the communicator’s intended meaning was any
less ambiguous than the linguistically encoded meaning.
If I say ‘they gave us much valued advice’, is it likely
that I care whether I am saying that they gave much advice
that was valued rather than that they gave an unquantified
amount of advice that was much valued?
Occasionally there will be a clear substantive
marker as to an issue that is intended to be determined
but is not explicitly determined, for example if there is
an agreement to sell goods with no agreement as to price.
Usually, however, there is no linguistic or explicit substantive
marker; most cases concern linguistic vagueness or mere
silence on a particular issue. Vagueness is a feature of
most, if not all, words (i.e. of the semantic rules
tied to words), but imprecision is a feature also of intention.
The degree of precision with which issues are intended to
be determined depends upon the apparent purpose of the utterance.
The intended meaning of the author of a sign stating ‘no
dogs allowed’ almost certainly determines some issues of
vagueness that the linguistic meaning does not determine,
otherwise the sign would not be able to fulfil its purpose
(i.e. the author probably does care whether wolves,
or toy dogs, are included in the prohibition). Beyond even
vagueness, there may simply be silence on an issue in the
linguistic meaning with no indication as to an absence.
Still, the communicatee must investigate whether the communicator
is likely to have intended something upon a particular issue.
If I book a hotel room I have said nothing about wanting
a bed to be in it, and yet the hotel clerk can infer from
my apparent purpose that my intended reservation includes
more detail than my linguistically encoded reservation.
(b) If yes to the above
question, would it be normal (in the circumstances) to intend
the determination of such an issue or type of issue to go
without saying, rather than to actually include it within
the linguistically encoded meaning?
In other words, even though
it would be normal to intend a determination of the issue,
does the fact that it has not been determined within the
linguistically encoded meaning indicate that the issue was
not intended to be determined in this instance? Before the
communicatee can set about using the assumption of normality,
the reasonable expectations, and all the other tools of
pragmatic inference, the communicatee must ask himself why
the communicator did not linguistically encode her determination
of the particular issue if she had intended to communicate
such a determination. The fact that the communicator did
not linguistically encode such a determination, and hence
did not put its inclusion beyond doubt and beyond the risk
of miscommunication, provides some evidence against an intention
to communicate such a determination. Quite how much, depends
upon the nature of the issue and the circumstances of the
communication (something that we will return to later).
The communicatee must ask himself whether it would be normal
to leave communication of determination of a particular
issue to pragmatic inference. Answering this question requires
application of the cost-benefit analysis described above
in order to assess the options that were available to the
communicator (the cost being the time and effort of linguistic
encoding, the benefit being the avoidance of the risk of
failure to successfully communicate).
Concerning this analysis, a few things should be
said about the benefit. The benefit of linguistic encoding
is the multiplicatory product of the importance of successful
communication on the one hand, and the probability of unsuccessful
communication without linguistic encoding on the other.
With regard to the former, the communicatee must look at
whether (and to what extent) communication of the issue
is important for the satisfaction of the communicator’s
goals, and this will relate to its place in the achievement
of those goals, as well as the likelihood that circumstances
will arise to make the issue a live one. In booking a hotel
room I do not expect the fire safety of the hotel to be
tested as fires are rare, so I am unlikely to make explicit
my intended requirement that the hotel meets certain standards
of fire safety in terms of materials and procedures. This
is true even though I run the risk of failing to communicate
the requirement as to fire safety, or particular aspects
of it.
The latter feature, the probability of unsuccessful
communication without linguistic encoding, depends upon
a variety of factors related to pragmatic inference, such
as the amount of contextual information (as to circumstances,
purposes, reasonable expectations, norms of individual practice)
that is shared by the parties, since this is what is used
by the communicatee to pragmatically infer. One crucial
factor is the type of issue the determination of which is
to be communicated, and we might call this the degree to
which an issue is ‘primary’, or independent.
A fully primary issue is one that is completely independent
of other issues—an entirely new thread in an utterance.
Such primary issues are the skeleton of the utterance, the
bones of the communicator’s preference, which fundamentally
define the utterance or transaction. It is difficult to
infer the determination of such issues because of their
independence—they do not qualify or depend upon other issues
for which a determination may be known, and so are more
personal to the communicator. Consequently, norms of behaviour
are of more use in predicting an intended determination
of issues secondary to other issues for which the determination
is known, than in predicting an intended determination of
primary issues. This is the difference between inferring
from a communicator’s purpose what they want, and inferring
the communicator’s purpose itself. It is easier to infer
the delivery arrangements for a sale agreement than to infer
the identity of the goods or even that the transaction agreed
upon is a sale rather than a loan or a gift (or a fight
or a greeting). Even in cases in which norms exist as to
the determination of primary issues, the assumption of normality
is less reliable in the case of primary issues because primary
issues are preferential, determinative of choices: thus
norms are likely to be less clear, since the distribution
of purposes is less likely to be normal than that of means
used to achieve a given purpose. The greater the primariness
of an issue, the greater the probability of unsuccessful
communication of a determination of the issue and the greater
the importance of the issue, and so the greater the benefit
of linguistic encoding of such a determination and the lesser
the likelihood that such a determination was intended to
go without saying.
A note on silence
Where an issue is specifically
determined by the linguistically encoded meaning, in other
words it is explicitly mentioned, it would not be normal
to think that the communicator intended the issue to be
determined by pragmatic inference, since the more secure
and costly method of communication has been chosen. Consequently,
as has been mentioned, the communicatee should only look
to supplement by pragmatic inference when the linguistically
encoded material is silent as to a particular issue. It should be made clear, however, that
the silence required for a licence to infer the determination
of an issue means only that the linguistically encoded material
does not specifically cover the issue. When a specific
issue falls within a more general issue, and the general
issue determined in the linguistically encoded meaning,
this does not mean that it is unlikely that the communicatee
was intended infer a determination for the specific issue:
indeed, as has been mentioned above, it is usual to specify
a primary issue and leave secondary ones to implication.
Determination of a specific issue as part of a more general
issue, then, can also count as silence as to the specific
issue for our purposes.
The secondary issues that are left to implication
may be additive (‘We haven’t only agreed that I hire a hotel
room, but also that it comes with a bed and a telephone
etc.’) or they may be qualificatory (‘Of course, the agreement
to let you a room is off if we find that you are using the
room to conduct illegal activities’). In cases of inference of qualificatory
issues, other examples of which are the granting of a discretion
without specifying any restrictions upon its exercise, or
any agreement that does not specify its common assumptions
as to facts or supervening events, commentators and judges
seem to be particularly strongly inclined to think that
the contract does cover the particular issue. Morris confuses the issue by saying of
excuse cases (cases of common mistake or frustration), ‘[t]he
problem is not that the contract does not provide a complete
answer, but that the answer that the contract provides seems
in some sense wrong.’ In fact, a contract only provides a complete
answer if we allow that silence on a secondary issue is
an answer (that nothing beyond the linguistic meaning is
intended as to the secondary issue). If this were to be
accepted then the lack of a specified limit on the granting
of a discretion would mean that the discretion is exercisable
without limit, and the lack of a specified limit on the
promise of action would mean that the action is to be performed
whatever happens (so when an intervening event occurs the
loss must fall where it lies). Of course, in some cases
this will be the intended answer, but that does not mean
that the answer comes from a full treatment of the specific
issue (the additive or qualificatory detail) in the encoded
meaning. Such undetermined specific issues are potential
areas by which the linguistically encoded meaning may fall
short of the intended meaning, and they need investigating.
(c) If the answer to
question (a) or (b) is negative then there is no licence
to supplement. In other words, if it would not be normal
to intend a determination of a particular issue or type
of issue that has not been linguistically encoded, or it
would not be normal to intend the determination of the undetermined
issue to go without saying, then there is no licence to
supplement.
In this case it does not
reasonably appear that the communicator intended the communicatee
to supplement by inference the linguistically encoded meaning
with regard to the particular undetermined issue. In such
a situation there can be said to be a ‘true contractual
gap’, meaning that the contractual agreement,
as apparently intended, does not extend to the issue in
question (in other words, the contractual agreement is incomplete).
What a court can and does do when faced with a true contractual
gap is touched upon below.
Stage Two: Filling the gap in linguistic
meaning: What determination of the particular issue would
it be normal to intend to go without saying?
When the particular issue,
of which there is no determination in the linguistically
encoded material, is shown not to be a true contractual
gap but rather to be an issue the determination of which
was intended to be inferred (in other words (a) and (b)
are both answered in the affirmative), the task remaining
is to infer this determination. This means that the common
sense principles must be applied to discover what it would
be normal to intend on the particular issue, given the mutually
known contextual circumstances. The answer to this inquiry
can be said to have been ‘reasonably expected’ or ‘what
would have been intended if the parties had put their mind
to it’, although note that this does not mean that such
a determination was intended. These principles have been discussed
elsewhere. Sometimes the norms (the community standards
or past practice or reasonable expectations) will not determine
an issue, and there can be said to be no single determination
that appears to have been reasonably intended. In such cases
the agreement does appear to cover a topic, but the utterance
was not optimally designed and so is too uncertain for the
identification of a single jointly salient meaning—the communicator’s
meaning has failed to get through. Such design gaps, resulting
from uncertain utterances, are rare, except as to precise
points of detail upon which there will be insufficient practical
experience to develop a reliable norm. What the court can
and does do when faced with a design gap will also be mentioned
below.
Supplementation
in contract law
Discussion so far has been
of supplementation as one aspect of interpretation, the
pragmatic process of inference by which a communicatee understands
what meaning a communicator intends. The following are examples
of some contract cases in which the apparently intended
meaning goes further than the linguistically encoded meaning,
and so pragmatic inference has been used to supplement the
linguistically encoded meaning:
i)
In The Karen Oltmann a charterparty states, ambiguously,
that the charterers have an option to redeliver the vessel
‘after 12 months’ trading’. The court found, after looking at the
pre-contractual negotiations and the norms of communication,
that the option was intended to be exercisable at the specific
point of time defined by the passage of 12 months’ trading,
rather than at any time after 12 months’ trading had been
completed.
ii)
In B.C.C.I. v. Ali an employee’s release of
‘any or all claims’ against his employer was intended to
be qualified such that it did not apply to those claims
that were unforeseeable at the time of contracting (claims
for stigma damages).
iii)
In Equitable Life Assurance Society v. Hyman a pension company’s general discretion
was held to be intended to include an implied restriction
preventing its exercise so as to deprive the guarantees
of annual rate of any value. In Paragon Finance v.
Nash, a mortgage lender’s variable interest
clause was held to include an implied restriction preventing
its exercise dishonestly, for an improper purpose, capriciously,
arbitrarily or in a Wednesbury
unreasonable
manner.
iv)
In The Moorcock an agreement to unload a vessel at a
wharf was intended to include an implied warranty that the
wharfingers had taken reasonable care to see that the river
bottom was not in a dangerous condition.
v)
In Malik v. B.C.C.I. an employment contract was held to be
intended to include a promise by the employer not to engage
in conduct likely to undermine the trust and confidence
required if the employment relationship is to continue in
the manner the employment contract implicitly envisages.
Consequently, an employer is held to intend to promise to
take reasonable care when writing an employee’s reference
(Spring v. Guardian Assurance).
vi)
In Hutton v. Warren a lease was held to include a landlord’s
duty to compensate the tenant for seed and labour since
the tenant had sown the land before quitting (upon notice
to quit served by the landlord), such a duty being customary.
vii)
In Liverpool CC v. Irwin a lease was held to include an implied
obligation on the landlord to take reasonable care to keep
in reasonable repair and usability the staircase, lifts
and rubbish chutes, as well as implied rights in the tenants
to use such facilities.
All of the above are cases of supplementation of
the linguistic meaning by a process of pragmatic inference.
In such cases there is an apparently intended licence to
supplement because it would be normal to intend more than
the linguistic meaning. However the interesting thing about
law’s treatment of these cases, all cases of the same linguistic
process, is that they are divided by our principles of contract
law into two categories. The cases outlined in headings
(i) and (ii) are characterised by courts as cases of interpretation,
and hence governed by the rules set down by Lord Hoffmann
in the Investors Compensation Scheme v. West Bromwich
Building Society case. The cases under headings (iii) to (vii)
are characterised by the courts as cases of implication
of terms, and hence governed by the officious bystander
test of Shirlaw v. Southern Foundries (1926) Ltd. and/or the business efficacy test of
The Moorcock, and/or the test for implying from custom,
and/or the principles of implication in law.
It is, at least at first sight, puzzling that we
should have two sets of rules to govern what is as a single
task, that of supplementation by inference. Lord Steyn has
said, extra-judicially, ‘The implication of terms is also
part of the process of interpretation of written contracts.’ Lord Hoffmann has said that ‘As
in the case of any implied term, the process is one of construction
of the agreement as a while in its commercial setting’, and extra-judicially, ‘the implication
of terms into a contract is in essence a question of construction
like any other’. Kim Lewison has observed that
the implication of terms is ‘part of the province of the
interpretation of contracts’, but rightly observes that
‘if the implication of terms is part of a continuous spectrum
beginning with the construction of express terms, it would
seem to follow that at some point in the spectrum there
is a radical change in approach. The location of that point
is uncertain.’ Certainly, it is difficult to
explain why the situation in (ii) is on a different side
of the point of radical change to the situations in (iii),
why this point of radical change exists and how it can be
identified.
An attempt will be made in the following section
to answer these questions by using the analysis of supplementation
by pragmatic inference given above. Ultimately it will be
shown to what degree the rules of implied terms are merely
a special instance of interpretation of express terms, and
whether a ‘bright line’ separating the two tests and two
categories can be justified.
A further source of confusion is the relationship
between the implication of terms at law and the implication
of terms in fact. Does the implication of terms in law fit
onto the continuum that begins with the interpretation of
express terms, or is it something else altogether? This
is a question that will remain unanswered by this article
since the implication of terms in law does not seem to be
an instance of interpretation, at least in principle.
Using
the analysis of supplementation by pragmatic inference to
explain the law of implied in fact terms
The implication of terms under the officious
bystander and business efficacy tests
As is well known, there
are two common tests (or two formulations of one test) for
the implication of terms in fact. The first is the ‘business
efficacy test’ of Bowen L.J. in The Moorcock, whereby
a term will be implied if it is necessary to give ‘such
business efficacy to the transaction as must have been intended
at all events by both parties who are business men’. The second is the officious bystander
test of MacKinnon L.J. in Shirlaw v. Southern Foundries
(1926) Ltd., whereby a term will be implied if it is…
…so obvious that it goes
without saying; so that, if, while the parties were making
their bargain, an officious bystander [or imaginative friend] were to suggest some express
provision for it in their agreement, they would testily
suppress him with a common “Oh, of course!”
The relationship between
these two tests is not entirely clear. MacKinnon L.J. thought
that his test ‘may be at least as useful’ as Bowen L.J.’s
test in The Moorcock, suggesting that both tests
were formulations of the same principle. It has been convincingly
shown that MacKinnon L.J.’s test actually derives
from Scrutton L.J.’s judgment in Reigate v. Union Manufacturing
Co (Ramsbottom) Ltd:
A term can only be implied
if it is necessary in the business sense to give efficacy
to the contract; that is, 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 of 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.’
It is clear that Scrutton
L.J. also believed that the business efficacy test and the
officious bystander test were formulations of the same principle.
Phang has argued that the latter test is practical application
of the former, which is the basic theoretical guideline
and is based upon fairness. The generally held view is probably the
opposite: although Steyn L.J. emphasised that both tests
were based upon ‘strict necessity’, he explained that the
officious bystander test was wider than the business efficacy
test and to that extent should be preferred. In other words,
he sees the business efficacy test as a rule of thumb that
will often but not always satisfy the true, officious bystander,
test. Treitel seems to agree, although the Privy Council in BP Refinery
(Westernport) Pty Ltd v. Shire of Hastings seemed
to view the tests as cumulative requirements to implication, and Phang’s modern view is that the tests
are complementary.
It is not necessary to take sides in this debate
as it seems fairly clear that the test is at least based
upon presumed intention of some sort. If this is so, then
we must ask (after Glanville Williams) whether this is this
an intention that was presumed to be actually held, or a
hypothetical intention that the parties would have held
if they had foreseen and considered the matter? Even if the implication of terms
is not founded upon principles of interpretation, it is
sufficiently similar a project that it must be governed
by the objective principle to avoid confusion and incoherence
in the law. If this is so, then Williams’ distinction should
be reformulated as that between, on the one hand, implying
terms that reasonably appear to have been in fact intended,
and, on the other hand, implying terms that reasonably appear
to be what the parties would have intended if they had put
their mind to the matter. This nice distinction fades away
when we realise that one can intend something without it
crossing one’s mind—applying intended principles to interpolate
or extrapolate from what is expressed is to find
out what was intended even if it was not consciously considered.
If this is correct, then at their hearts the tests
of implication in fact require that the term to be implied
be one that reasonably appears to have been intended—the
same test as that for interpretation of express terms by
supplementation. This is consistent with the raft of rules
surrounding the implication of terms, for example that a
term cannot be implied where it is inconsistent with the
express terms (in other words, where it is inconsistent
with linguistically encoded material and that which is implied
in interpreting such material). This stands to reason—it
cannot reasonably appear to have been intended if the linguistically
encoded material, which clearly was intended, is inconsistent
with it. The business efficacy test, as a neither necessary
nor sufficient guide to what terms can be implied, fits
with the basic common sense principles of interpretation:
all students of contractual interpretation know that the
court should be slow to construe a commercial agreement
in a way that produces an uncommercial or absurd result
because it is very unlikely to have been intended. To say that any term that is necessary
for business efficacy is likely to have been intended is
merely an application of this principle.
Yet the officious bystander test appears to be stricter
than the basic objective principle of interpretation (‘does
it reasonably appear that the term was intended by both
parties’) rather than merely a colourful recounting of it,
and it is usually understood in that way. Should implied
terms have a stricter test than the implication of supplementary
material through interpretation, and if so why? This is
perhaps the real mystery of implied terms, and the main
obstacle to seeing implication in fact as part of the rules
interpretation.
Explaining why the test for implication
of terms is stricter than the basic objective test
First, it is a mistake to
think that the basic test for supplementation through the
ordinary process of interpretation is not strict. When,
as is often the case, we are dealing with commercial written
contractual documents, a special type of utterance, the
interpreter can reasonably assume less licence to supplement
by inference than in other cases. Such utterances are likely
to have left less to inference than an ordinary utterance
because certainty and successful communication are particularly
important to those making commercial agreements, and inference
is less reliable than linguistic encoding. In addition,
being written, commercial and legal, they will be carefully
drafted, so not much that is important is likely to have
been missed by the drafters, and so that which is not expressed
is probably not intended. Finally, certainty is doubly important
in the case of contracts (rather than other utterances)
because there is no opportunity for subsequent clarification,
as contracts are binding as to their meaning at the time
of contracting. For these reasons, in practice the basic
objective principle itself justifies a strict test for inferential
supplementation. Indeed, the test should be stricter the
more complete the linguistically encoded (usually written)
record of the contract appears to be, and there is some
evidence that judges see things this way too. Nevertheless, this does not explain
the difference between the test for implication of terms
in fact and the test of interpretation, since the strictness
justified here should apply equally to both tests for supplementation.
Crucially for an understanding of why the implication
of terms tests are stricter than the basic interpretation
tests, there is a principled difference between the implication
of terms and the interpretation of express terms, although
the distinction cannot be drawn with a bright line. Earlier,
when discussing when it is reasonable to infer that the
determination of an undetermined issue was intended to go
without saying, the difference between primary and secondary
information was identified. We may remember that primary
information is that which is more independent, which forms
the skeleton of the preferences or goals of the communicator,
and which identifies new issues rather than relating to
other issues in an utterance. Such information is important
and the inference of such information is more unreliable
than the inference of secondary information. For these reasons,
the benefits of expressing such information are by far outweighed
by the costs of doing so, and so primary information is
less likely to be intended to go without saying than secondary
information.
With this in mind, the stricter (implication of terms
in fact) test of supplementation can be justified by reconceptualising
it as an instance of the application of the basic interpretation
principles (the objective test etc.) to the special situation
of primary information. The test is strict because the information
inferred is primary and so less likely to be intended to
go without saying: information characterised as a new term
to be implied is more primary than information characterised
as detail to be inferred in interpretation of an existing
linguistically encoded term. As new terms are more primary than details
supplementing existing terms, the licence to supplement
by inference is much harder to infer in the case of the
implication of terms than in the case of the interpretation
of terms.
The narrow formulation of the implication in fact
tests seeks to point to the narrow range of situations in
which it is credible to believe that such primary information
went without saying—to wit, those situations in which a
term is easy to identify (i.e. ‘so obvious that it
goes without saying’) and those situations in which it appears
that the communicaters may have forgotten to express the
term (hence their testy suppression of the officious bystander’s
reminder).
It is thus submitted that this difference between
primary and secondary information explains the existence
of a separate and strict test for the implication of terms
in fact. The test for the implication of terms
is thus a special instance of contractual interpretation;
a special application of the common sense principles (particularly
the objective principle). Terms that are implied in fact
are really terms that are tacitly intended, the process
of implication being the same as the process by which information
is imported through interpretation, but the type of information
implied being different. This explanation, however, does not completely
fit with the orthodox understanding of the law. Under the
proposed explanation there should be no bright line between
the implication of terms and the interpretation of contracts,
since primary and secondary information sit on opposite
ends of a continuum of importance and independence of issue,
rather than in two mutually exclusive categories. As a result, the law should view the
officious bystander test as, at most, a special version
of the basic objective test of agreement that governs interpretation,
to be applied in varying degrees. The more primary a piece
of (proposed) implied information is, the more scepticism
should be used in applying the basic test, up to the very
sceptical officious bystander test when the implied information
is very primary indeed. A lot of information will be between
the two extremes of primary and secondary, and in such cases
judges will probably concentrate more on the general interpretation
by supplementation approach and pay little heed to the special
officious bystander version of the test.
To determine whether a continuum-approach is in fact
that taken by the courts, despite their outward adherence
to the binary categorisation, is a large task that will
not be undertaken here. Existing surveys of cases do show
that judges are inconsistent as to whether they classify
what they are doing as interpretation (governed by a basic
test) or implication (governed by a strict test), whether
they apply the strict test of implication more or less strictly,
and whether they classify their implication as implication
in fact or implication in law. However, a very brief investigation of
our own should suffice to show that only a continuum approach
makes any sense of the law. The list of examples of supplementation
given above has been loosely arranged in an order
proceeding from most secondary to most primary (although
information supplemented can also be more secondary than
the first example or more primary than the last). It makes
more sense of these cases to see them as a continuum of
secondary to primary information such as this, whereby this
feature of primariness, all other things being equal, increases
the skepticism of the supplementing interpreter accordingly.
The alternative is to understand these examples as cases
falling into two categories, the demarcation for which must
be identified and justified (a task which, to me, seems impossible).
Recommendations for changes to the law
of implication in fact
Four categorisation options
spring to mind:
1)
Abolish the implication of terms in fact and re-characterise
all implication in fact cases within the unchanged rules
of either interpretation or the implication of terms in
law, ignoring the particularly primary nature of what we
call ‘terms’. This solution seems to be favoured by Peden
and Vorster, who agree with the writer that the maintenance
of a separate implication in fact category is incoherent
and unjustifiable.
2)
Abolish the implication of terms in fact and re-characterise
all implication in fact cases within the rules of either
interpretation or the implication of terms in law, incorporating
into the idea of interpretation the notion that the more
primary a piece of information is, the harder it will be
to convince oneself and a court that the information was
intended even though it went unsaid (i.e even though
it was not encoded in the express words through their linguistic
meaning).
3)
Retain the categories of interpretation, implication of
terms in fact, and implication of terms in law, but reconceptualise
them as being on a continuum, in particular viewing interpretation
and implication in fact as two extreme applications of the
same inquiry (an inquiry which asks what reasonably appears
to have been intended). This solution is substantially similar
to the previous one, but with a slight difference of emphasis.
4)
Maintain the system as it is (or appears to be), with a
bright line between interpretation and the implication of
terms in fact.
I would submit that the
fourth option is unacceptable as the law is at present incoherent
and unjustifiable: the distinction between implication in
fact and interpretation is impossible to draw clearly because
there is no justifiable principle upon which such a sharp
distinction can be based. Therefore, it is dishonest (since
it entails that the varying degrees of strictness in interpreting
and implying are not made openly) and renders the law unpredictable
(what test will be applied?) The first option is better
because it removes the problem of two apparently distinct
categories that are actually doing the same thing, but it
ignores the problem that the separate category of implied
in fact terms seems to be trying to answer. Of the second
and third options, I would favour the third because it seems
less drastic and so is likely to be more palatable to lawyers,
the judiciary and jurists, as it permits the reconceptualisation
of a body of rules rather than their excision. In truth,
though, the second solution is probably the most honest
and the easiest to understand, although both solutions make
the important steps of recognising that implication in fact
and interpretation are doing the same job, and recognising
that the strictness of the test—the scepticism of the interpreter
to possible supplementations—must vary with the degree to
which the information to be implied is primary.
As Lord Hoffmann has written, extra-judicially, ‘the
officious bystander test… diverts attention from the fact
that the implication of terms into a contract is in essence
a question of construction like any other.’ One consequence of accepting that implication
in fact is an instance of interpretation is to recharacterise
the business efficacy and officious bystander tests as useful
pointers or rules of thumb. When they are treated as more than that,
one is liable to become confused and to ask things like
‘would the parties really agree if they were asked by an
officious bystander?’ In truth the answer may well be no,
but the correct question to ask is ‘given that the parties
were not asked and did not express a view on the matter,
is it reasonable for each party to think that the agreement
included the proposed term?’ The answer will often be in
the negative if the term is strongly contrary to the interests
of one of the parties, but all terms are against one party’s
interests and that is not conclusive. If a term is not strictly
necessary for business efficacy - and, after all, how necessary
is necessary? - then one has to look for another reason
why it is reasonable to think that it went without saying.
These tests are not carefully-drafted legislation, they
are individual judges’ ideas of how to apply the general
test in a particular instance. The general test is the test
of whether it is reasonable, all things considered, to understand
the intended agreement as including the proposed term even
though it was unexpressed. It is not possible to achieve
a greater level of certainty than this without sacrificing
fairness and justifiability.
An illustration of this type of approach is provided
by the rules by which the grant of an easement may be implied into a deed of conveyance
of a piece of land when the vendor also owns land neighbouring
that being sold. It is easiest to imply such a grant where
it is a grant of a right of way (over the land retained
by the vendor) and the conveyance (into which the grant
is to be implied) is of some land that there would otherwise
be no way of legally accessing. This type of implication
is called an implication out of necessity. Another type of implication is possible
where there is evidence of a common intention that the easement
be (impliedly) granted. In addition, easements will be implied
to permit any type of land-use that was enjoyed by the vendor
before the sale ‘continuous[ly] and apparent[ly]’ for the
benefit of the land an estate in which is now being sold,
or any easement that is ‘necessary for reasonable enjoyment’
of the property in which an estate is now being sold. Finally, if before the sale the buyer
has been in occupation of the property in which the buyer
is now buying an estate, and has been permitted by the vendor
to use the neighbouring land (also owned by the vendor and
now retained by him), an easement giving a proprietary right
to such use over the neighbouring land will be implied into
the conveyance. Like the officious bystander and business
efficacy tests for implied terms, these tests are all based
upon presumed intention and as such are subject to expressed
contrary intention. To varying degrees they rely upon basic
underlying norms such as that one would not intend an absurd
result (land with no method of legal access), that a grantor
must not derogate from his grant, that a buyer would expect
the property to include the incidents with which it is usually
enjoyed. Nobody assumes that one test excludes
all others, or that one norm is all important, or that the
words of the tests are sacrosanct, or that all the tests
will even all make sense in every situation. They are merely
useful pointers towards what might reasonably have been
expected to have been intended, couched in imprecise enough
terms to enable them to be used to find whatever the intention
reasonably appears to have been in a particular case.
A note on how terms are implied in fact:
the use of normal principles
By the account proposed,
terms are implied in fact through the general method of
supplementation through pragmatic inference, discussed above.
Part of this process is the use of norms governing society,
particular communities, and particular relationships. It
is difficult to generalise about the application of the
process of inference beyond what has already been said,
but it may be instructive to identify a few examples of
norms or types of norm that seem to play an important part
in supplementation, in other words norms that are often
intended to be applied to specific (often unconsidered or
even unforeseen) situations. The key point to remember here
is that these norms are important only when and to the extent
that they reasonably appear by both parties to have been
intended (which in practice means that one party would assume
that the norm would apply and the other would not have disabused
them of this assumption). They are what the parties would
have reasonably expected to apply.
One example of a norm relevant to interpretation
is the basic idea that people are generally out to serve
themselves. Thus, in general, one cannot reasonably
expect another contracting party to serve one’s interests
beyond what they have promised to do—this leads to the principles
of caveat emptor and that the loss lies where it
falls. However not all contractual situations are so hostile.
Usually at least some cooperation will be reasonably expected,
and in such cases one applicable norm will be that a conferral
of a benefit comes with a promise not to do something that
substantially detracts from the conferral, which J.F. Burrows
identifies as the source of the common principle that one
must not derogate from one’s grant (e.g. in contracts
granting interests in land). Similarly, the parties will often
reasonably expect the agreement to include the norm by which
a party has a duty not to obstruct the other party’s performance
of his obligations or even to cooperate in it.
In many situations the climate of negotiation is
less hard-nosed still, and the parties may reasonably expect
their consumer dealings (for example) to be governed less
by the norm ‘what you see is what you get’ and more by the
norm ‘this product will do what you want it to do except
where I say otherwise’, which leads to implied warranties
of fitness for purpose and the like, and the norm ‘this
product will come with the accessories and incidents that
one would normally expect or that it normally has’, which
leads to the inclusion of all fittings in sales of real
property. Further, it may often be the case that a task
or cost that remains unallocated is intended to be performed
by the party best placed, in terms of control or cost or
ability to insure,
to perform it.
When parties are engaged in a more cooperative venture
such as a long-term employment contract or a partnership,
their relationship may be positively friendly, or at least
far less hostile. In such situations it will be easier to
imply duties of cooperation since cooperation is a basic
norm that applies to such relationships.
These types of norms, applicable where it is reasonable
to think that they are intended to apply, are how the parties
and courts determine what would have been intended in a
particular situation. They exist in society, are part of
the common background to the contracting, and are sufficiently
precise to be useful. The general duty of good faith is,
unless the law takes an interventionist stance for policy
reasons and abandons the intention of the parties in this
matter, merely a general norm of society that is intended
to apply sometimes to some specific situations in some way,
all depending upon what it is reasonable to expect. Where
application of this general norm is intended, it will indicate
the intended determination of many specific issues. However countervailing norms that one
must watch one’s own back and do only what one has promised
will usually, particularly in commercial situations, indicate
that little of a concept of good faith is intended to apply.
Failure for incompleteness or uncertainty
There are two types of situation
in which the interpreter will be unable to discover an intended
meaning on a particular issue. The first is where the intended
meaning is incomplete because it is not reasonable to think
that the communicator intended anything on the particular
issue—the case of true contractual gaps. Because of the
norms that would be reasonably expected to apply, this type
of incompleteness will be rare except with regard to small
details (the incompleteness of which results from the incompleteness
and uncertainty of the norms themselves). The second type
of uncertainty is the design gap and occurs when the utterance
has run out even though the intention may not have—in other
words, the utterance was inadequately designed such that
it is impossible to identify one salient meaning that reasonably
appears to have been intended.
Providing that enough of the contract’s skeleton
exists, the contract will be held to subsist. In such a case, the courts must go outside
the contract (the parties’ intentions) to fill the gap,
although the ways in which they do this are beyond the scope
of this work.
The implication of terms in law
The implication of terms
in law, i.e. on the basis of considerations other
than the parties’ intentions, is not an instance of interpretation,
since the supplementation is not based (or not solely based)
upon the inferred intention of the communicators. Implication
in law, then, is largely omitted from the discussion in
this article, although this is done in the knowledge that
the distinction between implication in law and implication
in fact is a ‘thin and slippery one’ and is ‘notoriously
unclear’, running as it does from default rules
and rebuttable presumptions as to intention to judicial
legislation on the basis of policy. However, two things will be said.
First, when the process of supplementation is understood
as the application of norms that might be reasonably expected
to govern, rather than the discovery of precise details
that would have been intended if they had been considered,
not only does the criticism that the whole approach is a
fiction disappear, but many of the cases that are currently
characterised as implied in law can be seen to be implied
in fact. Not only is it a ‘necessary incident’ of the relationship
of landlord and tenant that the landlord repair the common
areas and keep them in good usable order (ignoring the uncertainty of the term
‘necessary incident’ for a moment), it is what would be
reasonably expected because the common areas are in the
control of the landlord, are bound to be used, etc. Also,
many of the terms implied as normal incidents to a relationship
are assumed to be part of the agreement because they are
normal in such a relationship, in other words they are implied
in fact through a trade or other custom.
Second, there may be a category of hitherto unidentified
cases in which the term is imposed by law but is imposed
to fill a gap that is implied in fact. In other words, applying
the test of pragmatic inference above, the court discovers
that it is reasonable to assume that the parties intended
something on a particular issue but, due to inadequate drafting
or for another reason, it is impossi
