Essay: Do judges have too much input into the terms of legally binding contracts in English Law?

This essay critically examines whether there is any weight to the claims that judges have too much input into the terms of legally binding contracts in English Law and whether it contravenes the principle of freedom of contract. It has been argued that the law of implied terms contradicts the principle of freedom of contract and the belief that courts should interfere as little as possible with the affairs of individuals . It will ultimately be argued that the law of implied terms contravenes slightly the principle of freedom of contract, however, the facts that terms are only implied when necessary, either to make the contract work or as a matter of reasonableness to protect the ‘little man’, means that the courts did not become too interventionist.
Implied terms are defined as a provision of a contract not agreed to by the parties in words. Terms implied by the courts are divided into two categories, namely terms implied in law and terms implied in fact. In most of the contracts the main primary obligation can be found in the express terms. The unexpressed intention of the parties will give rise to many disputes in the civil courts because sometimes the express terms of a contract do not answer the particular answer raised by the circumstances. Therefore, the courts will be forced to imply terms into a contract.
Terms implied in law are those terms that are implied in all contracts of the same type because of its nature and not because of the intention of the parties. As Lord Denning described, this occurs in all common contractual relationships. In Liverpool City Council v Irwin the Court of Appeal decided to imply a term which stated that the landlord must take reasonable care towards the conditions of the building. In his judgement, Lord Denning MR made reference to a statement made by Lord Wright to the Holdsworth Club. Lord Wright claimed that the court is making a contract to the parties when deciding what is just or reasonable in its eyes, nevertheless, he described the role of a judge as being a criterion of what is reasonable. It can be argued that the implication of terms in law is potentially intrusive because the finding of a term may be binding in terms of precedent in subsequent cases.
Nevertheless, it is important to note that in the case of Liverpool City Council v Irwin before the Supreme Court, Lord Cross stated that the court should not imply terms into a contract to make it more fair and reasonable. One may say that this shows that the courts are aware of the risk of becoming too interventionist and that they respect the principle of freedom of contract. Moreover, it can be argued that the courts are only protecting the interests of the party with less bargaining power and that are not being too interventionist. This is done so in order to guarantee that adequate protection is given to both parties. Lord Denning argued in the case of George Mitchell (Chesterhall) Ltd. v Finney Lock Seeds Ltd that in the name of the principle of freedom of contract the little man was often neglected. Additionally, the Sale and Supply of Goods Act 1994 offer further weight to the argument that the principle of freedom of contract is only undermined so that both parties can enjoy equal and adequate protection from the law. One may conclude that the protection of the parties’ rights justifies the undermining of the principle of freedom of contract and that the courts have not become too interventionist in regard to terms implied in law.
Terms implied in fact are those terms that are implied on a basis of an unexpressed intention of the parties. In The Moorcock case Bowen LJ explained that the source of the implied term is the presumed intention of the parties . Bowen LJ also developed a test based on the need to give ‘business efficacy’ to the transaction. Without this term the contract would have not worked. It has been argued that this is a test based on necessity rather than reasonableness. Later, in the Shirlaw v Foundries (1926) Ltd [1939] MacKinnon LJ established the ‘officious bystander’ test. This test established that a term should only be implied if it is something so obvious that it would be implied without saying. It can be argued that this amounts to a violation of the principle of freedom of contract because the court is filling the gaps in the contract. One may say that if the parties wanted a specific term in the contract, then it is likely they would have put it in the contract themselves.
However, it can be argued that the reason why courts imply terms into a contract is compatible with the principle of freedom of contract. The courts will only imply terms into a contract if the term is necessary for the contract to work or if the term would have been agreed by both parties. This seems to be a good reason to imply terms into a contract because the aim of the law of contract is to make business. One may say that the parties would have intended that their contract worked. Nevertheless, there is some limitation on the ability of the courts to imply terms, which protects the principle of freedom of contact. In Hillas & Co. (1932) Lord Wright stated that there is a line that should not be crossed whilst implying terms, the courts should not write the parties’ contract for them. In addition, Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) summarized five conditions necessary to imply a term into a contract. This shows that there are several limitations to the ability of the courts to imply terms into a contract. Even when doing so, only with the purpose of giving effect to the parties’ intentions, either to make the contract work or to imply a term which would have been assented by the parties if it has been proposed. The later requirement imposes a very strict standard for the imposition of terms. For these reasons stated above it seems that the principle of freedom of contract is not lost.
After Attorney-General of Belize Telecom ltd the claims that judges have become too interventionist in implying terms into contracts have become more vocal. Until Belize, it was thought that the implication of a term was a process of addition. However Lord Hoffmann argued that ’the implication of a term is an exercise in the construction of the instrument as a whole’. It was also decided that when applying a term in fact the only question the court must ask is ‘is that what the instrument, read as whole against the relevant background, would reasonably be understood to mean?’. This was controversial because it seems that the implication of terms in fact is no longer a separate process with its own rules and restrictions, such as, the “business efficacy” and “officious bystander” tests. There seems to be a concern shared by many authors that Belize took the law into a direction where the power to decide whether a term is to be implied has been removed from the contracting parties themselves and given to the reasonable observer, in other words, the court.
Some authors, such as Paul Davis described Lord Hoffmann’s approach in Belize as dangerous because it “suggests that the subjective intention of the parties is now irrelevant, and that the only matter of importance is what the reasonable observer would understand the contract to mean”. Additionally, John McCaugran suggested that the focus was on the reasonable person (the man on the Clapham omnibus) and not on the parties themselves. Davis also argued that this approach would leave the court with greater room to alter the bargain made in an attempt to improve and agreed contract. Furthermore, he argued that the traditional tests should be preferred over Lord Hoffmann’s approach. This was the position adopted by the Court of Appeal of Singapore in Foo Jong Peng v Phua Kiah. Lord Hoffmann’s approach was described by the court as an abstract test of the reasonable person which does not provide the courts with concrete guidance necessary to avoid uncertainty. The “business efficacy” and “officious bystander” tests were preferred and were described as specific, concrete and “an integral as well as indispensable part of the law relating to implied terms in Singapore”.
There is a fear that if reasonableness and not intention becomes the driver for the implication of terms in facts there is a danger that the court would end up making the contract for the parties. One may say, that Belize amounts a regression of the law because there is no respect for the principle of freedom of contract and the judge finds in himself the criterion of what is reasonable and as Lord Wright stated: “the court is in this sense making a contract for the parties”. This amounts to a regression of the law because the House of Lords rejected the suggestion of Lord Denning in the Court of Appeal that a term could be implied if it was reasonable. Nevertheless, in Marks and Spencer v BNP Paribas, the Supreme Court rejected the approach taken by Lord Hoffmann in Belize. Marks and Spencer v BNP Paribas is now the leading authority on implied terms. Lord Neuberger argued that prior to Belize, the courts took a ‘clear, consistent and principled approach’. His Lordship went further to argue that the legal test for the implication of a term is necessity, not reasonableness. Reference was made to the position adopted by the Court of Appeal of Singapore in Foo Jong Peng v Phua Kiah.