Implication of Terms – Two Recent Judgments
- Date: 18/05/2021
Two recent Commercial Court judgments have considered the implication of contractual terms, with notably differing outcomes. The question of whether or not a term can be implied into a contract often gives rise to dispute, so we welcome this opportunity to consider the principles relating to implied terms in the context of these two recent examples.
The two cases considered in this article arose in the context of a guarantee and a time charter respectively. In each case, the question was whether a term should be implied. The answer in the guarantee case was “no”. In the time charter case, it was “yes”.
Firstly, by way of brief background, implied terms are ones which are not expressly agreed in a contract but are assumed to be included.
It is well established under English law that for a term to be implied, it must be necessary either to give business efficacy to the contract or because otherwise the contract would lack commercial or practical coherence. As has been stated in one case, for a term to be implied, it must be so obvious that it “goes without saying”.
While these two recent cases break no major new ground on the relevant principles governing the implication of terms, they usefully illustrate two general points:
On the law as it currently stands, the test for the implication of a term is rather demanding. It is not enough that a proposed implied term seems fair – it has to be necessary. There can be no implication of a term if the contract works without it.
However, the courts are nevertheless prepared to imply a term in an appropriate case. This is particularly so where a contract has left a gap that needs to be filled. If so, an implied term, often founded on the concept of reasonableness, may provide the solution. The overarching intention is that the contract should continue rather than fail.
The guarantee case: CVLC v AMPT
In CVLC Three Carrier Corp & Anor (CVLC) v Arab Maritime Petroleum Transport Company  EWHC 551 (Comm), the owner, CVLC, had concluded two bareboat charters with a charterer whose performance had been guaranteed by AMPT pursuant to two letters of guarantee. The owner asserted breaches by the charterer and made claims against the guarantor in respect of which it sought security by way of arrest.
The question was whether the owner was entitled to seek such security. The guarantor contended that it was an implied term of the guarantees that the owner should not do so. Its core argument was essentially that the original transactions were on the basis that the guarantees themselves were adequate security.
Concept of necessity not to be watered down
The sole arbitrator accepted the guarantor’s case. However, the Commercial Court unhesitatingly rejected it. The proposed implied term simply failed to pass the demanding tests applicable under English law. The judge commented that “the concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition.”
In short, the guarantees worked perfectly well without any implied term. There was no good or sufficient reason to treat them as implicitly excluding the owner’s ability to seek security for their claims.
Points of note in relation to appeal procedure
As a side issue, quite apart from the implication of terms, the case provides some useful guidance on procedural matters relating to appealing from an arbitration award. An appeal such as this on the question of law, pursuant to section 69 of the Arbitration Act 1996, requires the court’s permission. This case raises a few points of interest which are worth noting here.
Firstly, this was an unusual case in the sense that the judge who gave permission to appeal also heard the appeal itself. This is normally avoided.
It was also notable that the judge had reformulated the question of law at the permission stage. It is a statutory requirement under section 69 that the question of law must be one which the Tribunal was asked to determine. However, the judge noted that this does not mean the question must have been asked in exactly the form in which it is posed on appeal.
Finally, and perhaps most significantly, the judge rejected an attempt to re-argue the matters that had arisen at the permission stage. The grant of permission is intended to be “a qualifying hurdle which is not revisited”. Although the granting of permission to appeal does not bind the judge hearing the appeal in relation to the question of law that is being appealed, the respondent should not argue that the appeal should not have been granted in the first place.
The time charter case: The New Hydra
In Regal Seas Maritime SA v Oldendorff Carriers Gmbh & Co Kg (The New Hydra)  EWHC 566 (Comm), the time charter in question contained a hire formula which made the hire dependent on capesize time charter route rates published by the Baltic Exchange. It provided that hire should be the average of four such route rates plus a specified size adjustment (+4%).
The size adjustment was evidently intended to reflect the difference between the chartered ship and the Baltic’s benchmark ship at the time, which was 172,000 tonnes.
A problem then arose during the course of the charter when the Baltic increased the size of its capesize benchmark ship, to 180,000 tonnes, almost exactly the same size as the New Hydra. The Baltic no longer published individual rates for the old benchmark 172,000 tonne ship, but it did continue to publish a single derived rate for such a ship.
The parties disagreed on the consequences of this adjustment on the hire calculation and the issue ended up before the Commercial Court.
The owner maintained that the base rate should remain the same, namely the current rate for the benchmarked ship, and that there was an implied term that the size adjustment should reflect a change to the benchmarked ship. The charterer, on the other hand, argued that the parties intended the base rate to be that for the original benchmark ship.
On appeal, the court supported the imposition of an implied term, as argued by the owner. There was a gap which needed to be filled. The Baltic Exchange was still publishing four time charter route rates, of which the average could be taken. However, the parties had not agreed any specific percentage adjustment referable to the new benchmark ship, as opposed to the old one. Such a term could be implied.
The court considered an implied term in this case to be founded on the concept of reasonableness in accordance with previous authorities, such as Mamidoil v Okta  EWCA Civ 406. Far from subverting the hire provision and the parties' bargain, the implied term ensured that the charterparty continued to operate for the period intended by the parties.
Although these two cases do not develop the law on this well-established issue, they do provide guidance as to when the courts will or will not be prepared to imply a term.
The position remains clear that a term will not be implied into a contract simply because it is fair. Ultimately, the test is one of necessity.
Members are invited to contact the Managers for guidance in relation to any of the issues discussed in this article.