What implied terms imply

When a term is implied into a contract it is because a party to the contract wants it to say something that it doesn’t. Often the other party will say that the contract is complete without the term and they shouldn’t be saddled with some additional, unexpressed, duty. Such disagreements contribute to disputes if they don’t in fact cause them. Recent cases blow hot and cold when it comes to implying terms into contracts.

Just over a year ago, the Technology and Construction Court said that terms requiring work to be progressed regularly and diligently would very reluctantly be implied into construction contracts. This matters for contracts like NEC3 and JCT’s subcontract form which contain no such clause, unlike the JCT 2011 tier 1 contracts. The term matters where for a subcontract, say, the contractor suffers not just from delayed completion of the subcontract works but from delayed progress which delays other subcontractors. When the term is absent, the contractor’s case may not be saved by the often implied duty on parties to contracts to cooperate with one another.

While NEC3 expressly requires the parties to act in a spirit of mutual trust and co-operation, it may be that a similar term is implicit in JCT forms

That often implied duty may be growing into a wider duty of good faith. The wider duty entails reasonable standards of fair dealing, loyalty to the common aim (for example, the project) and respecting the other party’s justified expectations. Traditionally English law has rejected a general duty on parties to act in good faith, preferring to limit it to certain contracts, like partnership deeds. Last month the High Court said (in Yam Seng vs International Trade Corporation) this “hostility” was “misplaced” and suggested that duties of good faith should be implied more often. One of the bases for this was that “a general norm which underlies almost all contractual relationships is an expectation of honesty”. Some may query how normal that is in the construction industry. However, while NEC3 expressly requires the parties to act in a spirit of mutual trust and co-operation, it may be that a similar term is implicit in JCT forms.

But how might such a term matter in practice? Compass (2012) was concerned with a long-term contract to provide catering facilities for an NHS trust. The contract required the parties to cooperate in good faith. The trust breached that duty by making large deductions from payments for service failures; for example £84,540 for a one-day out-of-date chocolate mousse. While the trust had a power to make such deductions, it had to do so in good faith.

It breached that duty, thereby justifying the catering firm’s termination of the contract. One can see how a similar duty might limit, say, an employer’s right to levy liquidated damages that are otherwise due.

However, last fortnight the Court of Appeal reversed the Compass judgment. It rejected the wider duties found at first instance and in Yam Seng, saying: “There is no general doctrine of ‘good faith’” and: “If the parties wish to impose such a duty they must do so expressly.” Hostilities thereby resume, with NEC3 vs JCT.”

Often construction contracts make express provision for the quality of the materials used and the works overall. Where they do not, usually a term is implied requiring, for instance, that the materials used should be fit for purpose. However, last August the Court of Appeal refused to imply into a contract for the design, installation and commissioning of a fire fighting system a term that the system should be fit for purpose. Instead it was simply held that a term was implied requiring the system to be designed with reasonable skill and care. This is, of course, a lesser duty from the point of view of the employer whose factory burnt down.

The court’s decision was based on characterising what the employer had bought as a service, rather than as goods. Thus, no one suggests when an architect supplies drawings that he is supplying goods for which he is strictly liable if they are not fit for purpose. However, one difficulty with the Court of Appeal’s approach is the hair splitting it seems to produce in contracts for the design and build of bespoke systems. For instance, part of what was installed was a sensor which, due to the system’s design, was installed in the wrong place. One might equally say that given where the sensor was located it was not fit for its purpose. Furthermore, if the sensor had been supplied and installed under a separate contract, the supply contract would presumably be characterised as a contract for goods and services and include an implied term requiring the sensor to be fit for its purpose.

Needless to say, this is all a disputes lawyer’s paradise: there is not just uncertainty as to when terms are implied but what they mean when they are.

Rupert Choat is head of construction disputes at CMS Cameron McKenna