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Implication in Fact as an Instance of Contractual Interpretation

Published online by Cambridge University Press:  06 July 2004

Adam Kramer
Adam Kramer*
Affiliation:
University College, Oxford, University of Durham
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Abstract

This article seeks to analyse the part of interpreting contractual documents that deals with supplementing the (linguistically encoded part of the) contract, and it is argued that the implication of terms in fact is an instance of this interpretation by supplementation. A reason for the strictness of the implication in fact test, as contrasted with the basic objective test of interpretation, is proposed: some information (new terms) is more primary than other information (details added to existing terms), and such primary information is less likely to be intended to go without saying by the contractors. As a result, although implication in fact should be seen as an instance of interpretation, interpretation through supplementation should take account of the primariness of the information by which the contract is being supplemented. To put things another way, the strict officious bystander and business efficacy tests of implication should be seen as at the strict extreme of a continuum of tests of interpretation by supplementation.

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Articles
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The Cambridge Law Journal , Volume 63 , Issue 2 , 18 June 2004 , pp. 384 - 411
Copyright
Copyright © The Cambridge Law Journal and Contributors 2004

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Footnotes

Thanks to Anna Gotts for her valuable comments on an earlier draft.

References

1 See for example the quotations of Lords Steyn and Hoffmann, and K. Lewison, at text to notes 36-39, below; Oliver L.J. in Harvela Investments v. Royal Trust Company of Canada [1985] ch. 103 (C.A.), 138; A.L. Corbin, Corbin On Contracts: One Volume Edition (St. Paul, Minn. 1952), at [561 ff.], with a chapter called ‘Interpretation—The Process Called Implication”; S. Smith, Contract Theory (Oxford 2004), ch. 8.

2 See particularly E. Peden, Good Faith in the Performance of Contracts (London 2003), especially 141 ff and E. Peden's PhD thesis, A Rationalisation of Implied Terms in Contract Law, University of Cambridge, 1998, copy supplied by author. See also J.P. Vorster's PhD thesis, Implied Terms in the Law of Contract in England and South Africa, University of Cambridge, 1987.

3 See further A. Kramer, ‘Common Sense Principles of Contract Interpretation—And How We’ve been Using Them All Along’ (2003) 23 O.J.L.S. 173 [hereinafter ‘Common Sense Principles’].

4 Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 W.L.R. 896 at 912.

5 Rakoff, for example, refers to the reference to intention as an ‘ideological justification’ and ‘a ceremonial bow to complete private autonomy’: T.D. Rakoff, ‘The Implied Terms of Contracts: Of ‘Default Rules’ and ‘Situation-Sense’ ‘’ in J. Beatson and D. Friedmann, Good Faith and Fault in Contract Law (Oxford 1995), p. 191.

6 For example, we ‘know’ the conventional, dictionary, meaning of words but that meaning does not cross our mind when we use the word, indeed we can only formulate the meaning of words by testing our intuitive ‘knowledge’. When we use the word ‘bachelor’ we do not think about whether, according to our intended meaning of bachelor, all bachelors must be human or over the age of twelve. This does not mean that we have no intentions as to these issues, it is just that they do not cross our mind when we use the word. Interestingly, one test that linguistics experimenters use to test their intuitive knowledge as to the definition of a word is the ‘That's impossible test’: If you say ‘‘My tadpole is a bachelor’ … you would be likely to get the response: ‘That's impossible … bachelors have to be human’’ (J. Aitchison, Words in the Mind, 2nd ed. (Oxford 1994), 44). Ignoring the limitations of the semantic model presupposed by this test (word meaning is much more complicated than a simple list of necessary definitional propositions), the reader may have noted the similarity between the linguistics experimenter's counterfactual and the officious bystander counterfactual test of implied terms, to which the analogous response is a testy ‘Of course’. It is submitted that the similarity arises because both govern intentions dependant upon intuited norms that did not cross the communicator's mind and were not expressed but were nevertheless intended.

7 See A. Kramer, ‘Common Sense Principles’ and the works cited therein. See also B. Langille and A. Ripstein, ‘Strictly Speaking, It Went Without Saying’ (1996) 2 Legal Theory 62.

8 Kramer, ibid.

9 Mentioned at point 5 in the previous section.

10 See Kramer, ‘Common Sense Principles’, note 7 above

11 A gap in the linguistic meaning merely means that the linguistically encoded meaning does not cover the issue at hand. There are three possible conclusions a communicatee may reach at this point. The first possibility is that nothing was intended on the issue, and so the contract is silent, the contractual agreement is incomplete, and the gap in encoded meaning is also a ‘true contractual gap” (after A.J. Morris, ‘Practical Reasoning and Contract as Promise: Extending Contract-Based Criteria to Decide Excuse Cases” [1997] C.L.J. 147, 162). The second possibility is that the intended meaning does stretch to the issue in question, but the gap in encoded meaning cannot be filled by pragmatic inference because the document or utterance was badly drafted so the interpreter cannot identify a single salient meaning. This we might call a ‘design gap”. The final possibility is that the intended meaning does stretch to the issue in question and the gap in encoded meaning can be filled by pragmatic inference.

12 The facts are taken from Raffles v. Wichelhaus (1864) 2 H. and C. 906. The utterances in this case did not yield a single salient intended meaning so the design gap rendered the contract uncertain.

13 The facts are taken from ‘‘The Karen Oltmann”: Partenreederei M.S. Karen Oltmann v. Wscarsdale Shipping Co. Ltd. [1976] 2 Lloyd's Rep. 708.

14 The example is taken from Sperber, D. and Wilson, D., ‘Reply to Clark’ in Smith, N.V. (ed.), Mutual Knowledge (London 1982), p. 130.Google Scholar

15 Although note that even when there is no silence on an issue, everyday communication does allow the pragmatic inference of connotation of irony and other figurative meanings, and of course the fact that an issue is covered does not prevent the communicatee concluding that an error (typographical or otherwise) was made in drafting the utterance.

16 Additive supplementations include the saturation of deictic references, disambiguation, the reduction of vagueness and implication in the cases of The Moorcock (1889) L.R. 14 P.D. 64 (C.A.) and Malik v. B.C.C.I. [1998] A.C. 20. Qualificatory supplementations include the cases of B.C.C.I. v. Ali [2001] UKHL 8, [2002] 1 A.C. 251 (H.L.), Equitable Life Assurance Society v. Hyman [2002] 1 A.C. 408 (H.L.), British Movietonenews v. London and District Cinemas [1952] A.C. 166 and mistake and frustration cases. Of course, supplementation by primary information will always be additive (since, being independent from other terms, it cannot qualify them) whereas supplementation by secondary information can be additive or qualificatory.

17 But see Lord Denning, The Discipline of Law (London 1979), 41 ff.

18 Morris, note 11 above, at p. 156.

19 Note 11 above.

20 See below ‘Failure for incompleteness or uncertainty’.

21 See the Introduction, above.

22 See Kramer, ‘Common Sense Principles’, note 7 above, passim.

23 See below ‘Failure for incompleteness or uncertainty’.

24 Partenreederei M.S. Karen Oltmann v. Wscarsdale Shipping Co. Ltd. [1976] 2 Lloyd's Rep. 708 (Kerr J.).

25 [2001] UKHL 8, [2002] 1 A.C. 251 (H.L.).

26 [2002] 1 A.C. 408 (H.L.).

27 [2001] EWCACiv 1466, [2002] 1 W.L.R. 685 (C.A.).

28 (1889) L.R. 14 P.D. 64 (C.A.).

29 [1998] A.C. 20.

30 [1995] 2 A.C. 296.

31 (1836) 1 M. & W. 466 (Exchequer).

32 [1977] A.C. 239 (H.L.).

33 [1998] 1 W.L.R. 896, at 912.

34 [1939] 2 K.B. 206, aff’d [1940] A.C. 701.

35 ‘Interpretation: Legal Texts and their Landscape’ in B. Markesinis (ed.) The Coming Together of the Common Law and the Civil Law: The Clifford Chance Millenium Lectures (Oxford 2000), p. 84, and, more recently, J. Steyn, ‘The Intractable Problem of The Interpretation of Legal Texts’ (2003) 25 Sydney L. Rev. 5, 11.

36 South Australia Asset Management Corporation v. York Montague Ltd. [1997] A.C. 191, 212.

37 ‘Anthropomorphic Justice: Reasonable Man and His Friends’ (1995) 29 Law Teacher 127, p. 139 (a paper delivered as the 24th Lord Upjohn Lecture at the Inns of Court School of Law on 12 May 1995).

38 Lewison, The Interpretation of Contracts, 3rd edn. (London 2004) p. 156. The phrase ‘continuous spectrum” is Lord Wilberforce’s, Liverpool City Council v. Irwin [1977] A.C. 239, 254. See also S.C. Smith, ‘Making Sense of Contracts’ (1999) Scots Law Times 307, p. 311.

39 As, inter alia, Lewison and Lord Wilberforce believe.

40 Although see below ‘The implication of terms in law’.

41 (1889) L.R. 14 P.D. 64, 68 (C.A.).

42 Broome v. Pardess Co-operative Society of Orange Growers (est. 1900) Ltd. [1940] 1 All E.R. 603, at 612-613, cited by A. Phang, ‘Implied Terms, Business Efficacy and the Officious Bystander—A Modern History’ [1998] J.B.L. 1 [hereinafter ‘A Modern History’], 17 ff.

43 [1939] 2 K.B. 206, 227.

44 Phang, ‘A Modern History’, note 42 above, at 17 ff.

45 [1918] 1 K.B. 592 (C.A.), at 605.

46 ‘Implied Terms Revisited’ [1990] J.B.L. 394, p. 397.

47 Watts v. Aldington, LEXIS Transcript, December 15 1993, also Society of Lloyd's v. John Stewart Clementson [1995] I.R.L.R. 307, 330, both cited by Phang, ‘A Modern History’, note 42 above, at pp. 26 and 34.

48 The Law of Contract, 10th edn. (London 1999), p. 185.

49 (1977) 180 C.L.R. 266, 283.

50 Phang, ‘A Modern History’, note 42 above.

51 ‘Language and the Law—IV’ (1945) 61 L.Q.R. 384, 401.

52 See Introduction, above.

53 Wickam Machine Tools Sales Ltd. v. Shuler AG [1974] A.C. 235, at 251. Vorster also makes the point that the business efficacy test is an equivalent to the interpretative presumption against absurdity, note 2 above, at p. 87 and footnote 193 and accompanying text.

54 In Australia, at least, the test for the implication of terms is less strict where it is apparent that the parties have not attempted to spell out the full terms of their contract: Byrne v. Australian Airlines Ltd. (1995) 131 A.L.R. 422 approving the qualification made by Deane J. in Hospital Products Ltd. v. United States Surgical Corp. (1984) 156 C.L.R. 41, 121 and Hawkins v. Clayton (1988) 164 C.L.R. 539, 573 to the Privy Council's criteria for the implication of terms, laid down in BP Refinery (Westernport) Pty Ltd. v. Shire of Hastings (1977) 180 C.L.R. 266, 283.

55 Part (b) of ‘Stage One: Please mind the gap’, above.

56 Cf. the European distinction between principal and collateral terms: H. Kotz, European Contract Law Volume 1: Formation, Validity, and Content of Contracts; Contract and Third Parties, T. Weir trans., (Oxford 1997), 120 ff.

57 Note that this use of the terms ‘primary’ and ‘secondary’ is very different to that of Lord Diplock in his famous discussions of primary obligations (to do) and secondary obligations (to compensate if you don’t), e.g. in Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827, 848 ff.

58 On the other hand, terms that are implied in law are implied in a different way to both terms implied in fact and information implied through interpretation. Arguably, terms implied in law should be labelled “imposed”, “constructed” or “constructive” terms.

59 Concomitantly, ‘new term” and ‘detail to an existing term” are also at opposite ends of this continuum.

60 Note the approach taken in Australian courts, mentioned above at note 54, and note Peden's sensible observation that contracts do not easily fall into the categories of ‘formal and complete’ and ‘informal and incomplete’, A Rationalisation of Implied Terms in Contract Law, note 2 above, at p. 127. Of course, this is correct—how formal and complete a contract reasonably appears to be is a matter of degree like many other matters, and should contribute to locating the correct point on the scale of scepticism, the scale ending in the model of the implied term.

61 See e.g. the recent decision of Cel Group v. Nedlloyd Lines UK Ltd. [2003] EWCA Civ 1716.

62 See Peden, A Rationalisation of Implied Terms in Contract Law, note 2 above.

63 Above, ‘Supplementation in contract law’.

64 By way of contrast, note that the Scottish Law Commission excludes the implication of terms from its Report on Interpretation in Private Law (Scot Law Com No. 160 (1999)) by way of a five line explanation that ‘the implication of terms is a different matter from the interpretation of terms” (p. 2).

65 Peden, Good Faith in the Performance of Contracts, note 2 above, at 141 ff, Vorster, note 2 above, at chapters 5-6. Peden views implication in fact as ‘the odd card in the deck”, an accident of history (at p. 142). Vorster's argument for the abolition of implication in fact is that in those cases of implication in fact that are not cases of interpretation or implication in law, the court is merely applying policy reasons to find the justice of an individual case unjustifiably.

66 Peden is wrong to say that ‘[n]othing is lost’ if implication in fact is seen as a part of construction (Good Faith in the Performance of Contracts, ibid, at p. 143), unless the different approach to more primary information is salvaged from the implication in fact tests.

67 Note 37 above, at p. 139.

68 Peden, Good Faith in the Performance of Contracts, note 2 above, at 147 ff.

69 A type of proprietary right, exercisable over the land of a neighbour, enabling the holder to use the neighbour's land in a particular way.

70 For example, Nickerson v. Barraclough [1981] ch. 426 (C.A.).

71 Wong v. Beaumont Property Trust Ltd. [1965] 1 Q.B. 173 (C.A.) is usually cited for this proposition.

72 Wheeldon v. Burrows (1879) 12 ch. D. 31, 49, per Thesiger L.J. Interestingly, a similar discussion has taken place concerning the relationship between the two elements of ‘continuous and apparent’ and ‘necessary for reasonable enjoyment’ in the Wheeldon test as has taken place with regard to the business efficacy and officious bystander tests.

73 International Tea Stores Co. v. Hobbs [1903] 2 ch. 165 (ch.), Wright v. Macadam [1949] 2 K.B. 744 (C.A.) and Sovmots Investments Ltd. v. SSE [1979] A.C. 144, putting s. 62 Law of Property Act 1925 to a rather unexpected use.

74 Birmingham Dudley & District Banking Co. v. Ross (1888) 38 ch. D. 295 (C.A.), s. 62(4) Law of Property Act 1925, Nickerson v. Barradough [1981] ch. 426 (C.A.).

75 For the importance of general norms, see the discussion in the next section.

76 J. Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 L.Q.R. 433, 440, emphasises that customary terms (‘terms taken for granted and therefore not spelled out in writing”) and other terms implied in fact give effect to the reasonable expectations of the parties. Catherine Mitchell usefully identifies ambiguity in the term ‘reasonable expectations” in C. Mitchell, ‘Leading a Life of Its Own? The Roles of Reasonable Expectations in Contract Law” (2003) 23 O.J.L.S. 639. To use her terminology, we are largely concerned with empirical reasonable expectations, and with normative expectations but only if and to the extent that they are empirical.

77 Cf. the sentiments of Lord Ackner in Walford v. Miles [1992] 1 All E.R. 453 (H.L.).

78 ‘Contractual Co-operation and the Implied Term’ (1968) 31 M.L.R. 390. See also J.M. Paterson, ‘Terms Implied in Fact: the Basis for Implication’ (1998) 13 J.C.L. 103, 118 ff, who formulates a ‘duty to cooperate’ as ‘each party agrees … to do all such things as are necessary on his part to enable the other party to have the benefit of the contract’ (after Griffith C.J. in Butt v. McDonald (1896) 7 Q.L.J. 68, 70).

79 See E. Peden, ‘‘Construction’ in English Contract Law—To Construe or Imply?’ (2000) 16 J.C.L. 57, ‘Incorporating Terms of Good Faith in Contract Law in Australia’ [2001] 23 Sydney L. Rev. 222.

80 Paterson, note 78 above, at 111 ff.

81 This is what Lord Cooke calls, in employment situations, the ‘portmanteau duty to take reasonable care to act consistently with the trust and confidence with should exist between employer and employee’ (‘The Right of Spring’ in P. Cane and J. Stapleton, The Law of Obligations: Essays in Celebration of John Fleming (Oxford 1998), 56), as identified in Malik v. B.C.C.I. [1998] A.C. 20, that gives rise to specific duties such as that in Spring v. Guardian Assurance [1995] 2 A.C. 296. See also Paterson, note 52 above, at 119 ff. See, earlier, Hivac Ltd. v. Park Royal Scientific Instruments Ltd. [1946] ch. 169.

82 Peden sees cooperation (the requirement of honesty and due regard to the legitimate interests of the other party) as a principle of contract law or a rule of construction, indeed she views cooperation as underlying all interpretation (see particularly, Peden, Good Faith in the Performance of Contracts, note 2 above, at chapter 6). I prefer Brownsword's view that cooperation (good faith) is relevant when and to the extent that the norms of cooperation formed part of the background (factual matrix) in which the parties negotiated and entered their agreement, ‘‘Good Faith in Contracts’ Revisited’ (1996) 49 C.L.P. 111, particularly at p. 127 and footnote 49. In other words, cooperation is not a principle of contract law, it is a principle of our community, and is relevant when and to the extent that it was intended (reasonably expected) to govern the agreement. The difference between Peden's view and that put forward in this article appears to be only a difference of degree.

83 See the recent discussion by D.W. McLauchlan, ‘Intention, Incompleteness and Uncertainty in the New Zealand Court of Appeal’ (2002) 18 J.C.L. 153, which considers the New Zealand Court of Appeal case of Fletcher Challenge Energy Ltd. v. Electricity Corporation of New Zealand Ltd. [2002] 2 N.Z.L.R. 433.

84 See the next section, and see Kramer, ‘Common Sense Principles’, note 7 above, at 192 ff, and the works cited therein.

85 Law Comm Rep. 242: ‘Privity of Contract: Contracts for the Benefit of Third Parties’, at para. [7.8].

86 But see Peden, A Rationalisation of Implied Terms in Contract Law, note 2 above, at p. 128.

87 Cf. Liverpool CC v. Irwin [1977] A.C. 239.

88 Cf. Peden, Good Faith in the Performance of Contracts, n. 2 above, at 102 ff.

89 Cf. Peden, ibid., at p. 135