By Mudit Kaushik & Vasundhara Shankar

November 11, 2021

Contracts contain three basic requisites to be valid: a promise, a consideration, and an acceptance. The promise, or rather term, which is laid down in writing or spoken in words, and agreed upon by both the parties, is an express one. However, all the terms of a contract cannot be discussed or noted down in words. Therefore, some terms are taken to be omnipresent in a contract, even if none of the parties expressly state them in words. These terms are ‘implied terms.

The terms in a contract can be ‘implied in law’ or ‘implied in fact’. In ‘implication in law’, the courts imply terms on a policy basis, whereas, in ‘implication in fact’, the courts actually look into the facts and ascertain the intention of parties while forming the contract. However, the fact that courts have to look at the intention of parties can make judgements rather subjective.

Historical Context and Development

There was a non-coherence in judgements related to reading terms in a contract, early in the development of the ‘implied terms’ principle in English Law. The famous MoorcockCase first tackled this difficulty of non-coherence in cases related to implied terms.

The case was by a shipowner against a wharfinger, on whose wharf the plaintiff’s ship was docked. Low tide had caused the ship’s hull to hit a ridge and the plaintiff sued, claiming that it was the responsibility of the wharfinger to ensure that the ship wasn’t damaged, even though there was no explicit term related to this in the contract. The Bench ruled in favour of the plaintiff, laying down the ‘Business Efficacy Test’.

This test established that a term can be implied in a contract to ensure business efficacy and prevent the non-inclusion of any consideration which the parties intended. However, the terms implied should be the bare minimum required for the fulfilment of the transaction, such that the burden is not imposed on one of the contracting parties.

Followed by this, was the “Officious Bystanders’ Test”, laid down in Southern Foundries Ltd. v Shirlaw.Mr. Shirlaw was removed from his post as the director of Southern Foundries Ltd. in 6 years from his date of appointment, even though his contract was of 10 years. In the judgement, delivered in Shirlaw’s favour, MacKinnon LJ developed the officious bystander’s test. The idea was that in case while the agreement was being signed, an officious bystander had asked the parties if there should be any clause preventing creation of any right to remove Mr. Shirlaw from his post, both the parties would have agreed vehemently. Therefore, terms implied in a contract should pass the test of officious bystander, where both the parties would have answered in affirmative, had any nosy bystander asked them about including the said term in the agreement. However, the main drawback of this test is its subjective nature, accompanied by the fact that the parties would often lie, and there was nothing that could be done about it.

Current Applications and Analysis

Looking at the entire contract holistically and understanding the context of the contract as a whole is important in matters where an impasse is reached on a clause implied in the contract. The Indian Judicature has also been proactively reading into contracts where an impasse has been reached and laid down some principles through landmark judgements in recent times.

One of these landmark judgements is that of Nabha Power Limited vs. PSPCL & Another.The terms in relation to the formula for calculating the cost of coal supplied was the point of contention in this case, with the respondent claiming that ‘washing’ wasn’t mentioned in the contract, and so the cost of washing of coal should not be included in the invoice. The Supreme Court cited the principles established in the Moorcock Case and the Officious Bystander test established in Southern Foundries Ltd. v Shirlawalong with a couple of other English cases. The Court adopted the five principles laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings, to be established while checking implied terms. It was stated that the terms should:

  • be equitable and reasonable,
  • be necessary to give business efficacy,
  • be so obvious that “it goes without saying”,
  • be capable of clear expression, and
  • not contradict any express term of the contract.

A more recent case also had the Court diving into the intent of the parties in the contract, rather than the express written terms only. In the case of Adani Power (Mundra) Ltd v. Gujarat Electricity Reg. Commission, the Court had to infer whether Adani was right in cancelling the contract on non-delivery of power by Adani to GERC, because of an absence of Fuel Supply Agreement with Gujarat Mineral Development Corporation.

Gaurav Pachnanda, in his piece, talks about interpreting the terms of a contract. He writes that to read terms into a contract, courts take the help of the five-point test (which is an amalgamation of Moorcock, officious bystander and Belize test), the principle of contra proferentem, and also apply a ‘common sense’ approach. After going through the aforementioned cases, what has been found is that in most of the cases related to implied terms in a contract, the five-point test and, as mentioned that as a last resort, contra proferentem, have helped the courts to reach a decision. Almost every case of implied terms sees an application of these cases and principles, which suit the need of the hour.

The author, therefore, feels that there is a strong case in favour of looking at the contract’s discussions between the parties and their intentions, to get a better picture of what the parties did or did not want from the agreement. The legal framework developed on the topic has been of great use to the Courts to clear the roadblocks that parties have faced in the application of their agreements.

Conclusion

We find that reading the contract in its entirety, accompanied by the discussions that precede the contract signing and intent of the parties, has been a helpful tool for a long time now, both in Indian and English legal systems. The legal principles devised by English Courts have been readily adopted by the Indian Judiciary in reaching their decisions that pertained to implied terms in a contract. For these reasons, the author advocates reading holistically into the contract and not just the express text of it. However, in the words of Justice Sanjay Kaul, commercial courts should refrain from reading terms into a contract, as contract making nowadays, is done by highly experienced people of this field. Maybe a day will come when ambiguities are completely removed from contracts, and reading implied terms into a contract will no longer be needed.

Vasundhara Shankar is  Managing Partner, Verum Legal. She is a startup lawyer and focuses on data privacy, IP, tech laws, white-collar crime, dispute resolution & legal tech innovations.
Mudit Kaushik is Counsel, ZeusIP Advocates LLP. He is an IP and Tech law lawyer skilled in pre-filing strategies, prosecution, opposition, brand enforcement, data protection laws and domain name disputes.





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