Name

Tutor
No. of Words

: Daniel Boon Peng

: Dr Anca Chirita
: 2002 words

Contract Law Formative 2 Question 2

Based on the orthodox account of freedom of contract, courts should not be allowed
to interfere with a contract, regardless of how unfair the contract might be. A courts duty is
to police and ensure that obligations of the parties under the contract are carried out: nothing
more, nothing less. However, following the introduction of implied terms, it has been argued
that the court has exceeded its authority. Even though general rules have been formulated to
limit the scope of implying terms into contracts, such as that courts are not allowed to imply
terms which are inconsistent with the tenor of the express term of the agreement, it is
unconvincing if courts merely rely on this rule alone to explain this radical act. This is
particularly so when it has been argued that the act of implying terms into contracts results in
the court making the contract, rather than the parties themselves. Bearing this in mind, this
essay will examine the possible justifications for courts to imply terms into contracts.

Carrying out Parliaments Will

Owing to the principle of parliamentary sovereignty, a possible justification for courts
implying terms into contracts is that they have been required to do so by Acts of Parliament.
Based on this concept of parliamentary sovereignty, Parliament is the supreme source of law,
and courts are required to obey any Act of Parliament once it has been enacted. 1 In keeping
with its duty to protect the rights of the citizens, 2 specific Acts, particularly those relating to
consumer contracts, have been enacted by Parliament to protect consumers against possible
exploitation by sellers. For example, the Sale of Goods Act 1979 has directed the courts to
imply various terms into consumer contracts. The requirement that the seller has the right to
1 A V Dicey, The Introduction to the Study of the Law of the Constitution
(10th edn, Macmillan 1985).
2 Colin Munro, Studies in Constitutional Law (2nd edn, Butterworths
1999).

sell the goods;3 that goods sold by description shall correspond to the description; 4 and that
goods sold by sample will correspond to the sample5 are all examples of the terms which will
be implied by courts into a consumer contract following the enactment of the 1979 Act.
Hence, this implication of terms by courts is justified by the fact that courts are
merely carrying out the instructions of Parliament and are not doing so because they feel this
would make the contract more fair or reasonable. This idea that courts are merely carrying
out their duty imposed by Parliament to imply terms is indirectly shown in Reid v Rush &
Tompkins Group, where Ralph Gibson LJ, supported by Neil and May LJJ, stated that while
arguments of social policy requiring employers to insure their employees were obvious, there
was no way that the court could embody this policy in the law without the assistance of
legislature.6 From this, it can be seen that courts are only comfortable with implying terms
into contracts when this implication is provided for by legislation, regardless of how
important the term to be implied might be.7 Following this, it is proposed that courts are not
the party responsible for the modification of the contract; the fault lies in Parliament.

Improving Efficiency of Trade

Courts could also justify implying terms into contract to facilitate the conclusion of an
agreement. Many tests, such as the business efficacy test and the officious bystander test
have been developed by the court to increase the efficiency of a contract. Even though it is
tempting to wholly accept this justification as it is, Colin highlights an important fact:
although these tests have been hallowed by constant judicial use over a century, we must
doubt whether they always provide a convincing justification for the insertion of additional
3 Sale of Goods Act 1979 (SOGA 1979) s 12(1).
4 SOGA 1979, s 13(1).
5 SOGA 1979, s 15.
6 [1990] 1 WLR 212, 220 (Ralph Gibson LJ) (emphasis added).
7 E Peden, Policy Concerns Behind Implication of Terms in Law (2001)
117 LQR 459.
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obligations.8 Thus, further discussion is required to ascertain whether the aim to improve
efficiency of trade is a sufficient justification for implying terms into contracts, particularly
where the terms have been implied against the parties will.
Before any discussion can take place, it is important to ascertain the definition of
efficiency that the courts are trying to achieve. When law and economics scholars advocate
efficiency, they are advocating rules which are Kaldor-Hicks efficient, meaning rules which
will maximise the aggregate welfare of the contracting parties, notwithstanding that one of
the parties may end up worse off as a result. 9 According to Craswell, such rules aim to
maximise the size of the pie even if someone ends up with a smaller size. 10 Consequently, it
is logical to require terms implied in fact and custom to maximise aggregate welfare of the
contracting parties to amount to a sufficient justification for implying terms.
With regards to terms implied in fact, the courts have taken a liking to the business
efficacy test established in The Moorcock,11 which provides that the law desires to give such
business efficacy effect by implication to the transaction as must have been intended at all
events by both parties who are business men. This test assumes that both parties must have
known that unless the term had been implied, all consideration would fail. 12 From this, it can
be gathered from Bowen LJs comments that the contract must be rendered unworkable
without the term for it to be implied, indicating a test of necessity. However, it is unclear
how this test would contribute to maximising the aggregate welfare of the contracting parties.
It could be argued on a superficial level that this test does not promote aggregate welfare
between parties, merely incorporating a term on which the contract cannot operate without.

8 H Collins, The Law of Contract (4th edn, CUP 2003).

9 C A Riley, Designing Default Rules in Contract Law: Consent,
Consideration and Efficiency (2000) 20 OJLS 367.
10 R Craswell, Efficiency and Rational Bargaining in Contractual Settings
(1992) 15 Harvard Journal of Law and Public Policy 805.
11 [1889] 14 PD 64.
12 ibid [69] (Bowen LJ).
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However, it is possible that by incorporating this term, at least one of the parties has
improved his welfare since he would have received a benefit that will boost his welfare care.
In the case of The Moorcock, the welfare of the shipowner was improved through the
implication of the term, as he was able to receive compensation for the damage caused to his
ship, which was damaged by the uneven condition of the bed of the river adjoining the jetty.
In addition, terms implied in custom has also been established to improve efficiency
of the contract, as parties need not waste time, effort and money to expressly include terms
which both parties presumed to have existed. When courts imply terms by custom, they are
effectively emphasising the social context within which individual acts of contracting take
place.13 The social context has enormous explanatory power, as it helps to explain the
agreements parties actually reach, and the behaviour they exhibit during the course of their
contractual relationships. This gives an impression that the custom of the market or trade is
such an integrated part of contracts concluded in those circumstances that it has become part
of the welfare of the parties. Hence, when courts are implying terms in customs, they are
effectively implying welfare into the contract, thereby increasing the welfare level of the
parties involved. It should be noted that both situations above depict the parties making the
contract, as courts are merely introducing terms that both parties have implicitly agreed upon
but have not expressly provided for in contracts.

Giving Effect to Parties Intentions and Reasonable Expectations

Finally, courts have been well known to justify their implication of terms by referring
to giving effect to parties intention and their reasonable expectations. This has received
positive feedback from academics, as demonstrated by McKendrick who agreed that the
function of implied terms is to provide some protection for the expectations of the parties. 14
13 T Scanlon, Promises and Practices (1990) 19 Philosophy & Public
Affairs 199.
14 E McKendrick, Contract Law (9th edn, Palgrave Macmillan 2011).
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Stone and Cunnington observes that courts are increasingly concerned with satisfying the
reasonable expectations of the parties.15 Clearly, the need to fulfil reasonable expectations of
parties is a convincing justification for implying terms, since expectations of parties will
often be defeated if not for implied terms.16 This leads us to the operation of the classic
liberal theory in contract law, where parties have been known to leave gaps in their
agreement, in the sense that contingencies that are often reasonably foreseeable occur but are
not covered by express contractual terms. Therefore, courts justify their implication of terms
by purporting to imply into the contract terms that both parties would have intended to
include had they foreseen these gaps.17 However, one wonders how satisfactory this
justification is, given that courts claim to derive this knowledge by analysing the nature and
content of the contract, as well as the subjective intention of parties when entering into the
contract. Bearing this in mind, this justification is clearly undermined by the strong
impression that courts are the ones making the contract in such a situation.
However, academics largely agree on the suitability of giving effect to the parties
intention as a justification for implying terms into contracts. According to Ridley, there may
be any matters which parties share the same intention on, but that intention is merely tacit. 18
Tacit here refers to what the parties think but failed to articulate, and many were not even
consciously addressing the intentions at the moment of their agreement. Thus, courts are
merely giving form to these intentions, and not including any of their own opinion.
Nevertheless, it is still highly plausible that the process by which courts arrive at such a
conclusion might include insertion of the courts opinion. Furthermore, there is also a
possibility that such shared tacit intentions do not necessarily form part of the agreement
15 R Stone and R Cunnington, Text, Cases and Materials on Contract Law
(Routledge-Cavendish 2007).
16 Lord Steyn, Contract law: Fulfilling the Reasonable Expectations of
Honest Men (1997) 113 LQR 433, 442.
17 Riley (n 9).
18 ibid.
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since it has not been expressly provided for in the contract. Prentice, however, disagrees; he
argues that such shared tacit intentions can be properly regarded as part of what parties have
agreed to, and courts could seek to discover and enforce them, highlighting the common
occurrence of such a practice in company law and drawing a parallel to that of contract law. 19
Rakoff supports Prentices argument, suggesting that all that is involved (in implying terms)
is an inference as to what the parties had in mind but failed to say. To this extent, there is
hardly a problem.20 Even though this is convincingly argued, it does not answer the issue that
arises where the default rule was first promulgated by the court in resolving a dispute. At this
instance, the parties litigating that dispute can hardly be said to have consented to this new
implication of term, thereby strongly suggesting that courts are the ones making the contract.

Ultimately, the justifications that courts are implying terms into contracts based on
legislative obedience, efficiency promotion and crystallising parties intentions seem to hold
more weight than initially presumed. It can also be seen that in most circumstances, except
when courts are implying terms based on the intention of the parties, parties do not sustain
much damage to their freedom to contract. As such, one can conclude that the courts
principle of implied terms is more credible than expected, and this principle has in fact
brought more benefits than disadvantages to contract law.
Bibliography
1. Reid v Rush & Tompkins Group [1990] 1 WLR 212
2. The Moorcock [1889] 14 PD 64
3. Sale of Goods Act 1979 (SOGA 1979) ss 12(1), 13(1), 15
19 D Prentice, Theory of the Firm: Minority Shareholder Oppression
(1988) 8 OJLS 55.
20 T D Rakoff, The Implied Terms of Contracts: Of Default Rules and
Situation-Sense in J. Beatson and D.Friedmann (eds), Good Faith and
Fault in Contract Law (OUP 1995).
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4. Collins H., The Law of Contract (CUP 2003)

5. Dicey A. V., The Introduction to the Study of the Law of the Constitution (Macmillan
1985)
6. McKendrick E., Contract Law (Palgrave Macmillan 2011)
7. Munro C., Studies in Constitutional Law (Butterworths 1999)
8. Stone R. and Cunnington R., Text, Cases and Materials on Contract Law (RoutledgeCavendish 2007)
9. Rakoff T. D., The Implied Terms of Contracts: Of Default Rules and SituationSense in Beatson J. and Friedmann D. (eds), Good Faith and Fault in Contract Law (
Oxford University Press1995)
10. Craswell R., Efficiency and Rational Bargaining in Contractual Settings (1992) 15
Harvard Journal of Law and Public Policy 805
11. Peden E., Policy Concerns Behind Implication of Terms in Law (2001) 117 Law
Quarterly Review 459
12. Prentice D., Theory of the Firm: Minority Shareholder Oppression (1988) 8 Oxford
Journal of Legal Studies 55
13. Riley C. A., Designing Default Rules in Contract Law: Consent, Consideration and
Efficiency (2000) 20 Oxford Journal of Legal Studies 367
14. Scanlon T., Promises and Practices (1990) 19 Philosophy & Public Affairs 199
15. Steyn, Contract law: Fulfilling the Reasonable Expectations of Honest Men (1997)
113 Law Quarterly Review 433