The UK courts, like others around the world, have for many years grappled with the question of how best to approach contractual interpretation and implied terms.
The two competing forces at play are those of respecting the commercial deal as formulated by the parties, on the one hand, and injecting ‘business common sense’ where a court considers it to be lacking, on the other. And the two tools at the court's disposal for doing so are contractual interpretation of the deal (respecting the written terms) and the imposition of implied terms (adding to the written terms, while not obviously contradicting express provisions.)
At the end of 2015, in Marks & Spencer v BNP Paribas, the Supreme Court approved the formulation from an earlier case for balancing those competing forces:
“The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.”
The upshot of that formulation would seem to be this: when the wording of a contract is clear, one need look no further; when there is ambiguity, terms may be applied but only when necessary to fill in gaps in a deal.
As a philosophy for construing English law agreements, this approach has much to commend it. It brings clarity and certainty to commercial arrangements and allows parties to know that, absent extreme circumstances, the words on the page will be the words that count.
Six months after the Supreme Court's ruling, the UK public voted to “Brexit”. As is becoming more and more apparent, Brexit is a slow and uncertain process, but when (and assuming) the UK does eventually leave the EU, this philosophy will face its greatest challenge.
Consider the following (imaginary) licence entered into in April 2015 (before the Conservative party won an unexpected majority and subsequently announced an “in-out” Brexit referendum):
“Licensor grants a 15 years exclusive licence to Licensee to exploit its IP rights in the EU. Licensee shall pay to Licensor royalties on sales of items under the IP subject to a minimum yearly guaranteed royalty of £5 million.”
In circumstances in which the UK was the key sales territory under the IP, the Licensee would undoubtedly balk at having to pay £5 million per annum if its rights in the UK were to be ripped away after Brexit. On the wording of the clause above, a UK court would certainly have leeway to interpret the words “in the EU” to mean either “in the EU as constituted at the date of this Agreement” or “in the EU as constituted from time to time”. Problem solved by adopting the former interpretation: the commercial deal and business common sense brought into line.
But consider a scenario in which the EU was explicitly defined thus:
“EU means the EU as constituted from time to time”.
When written in that form (as many licences were) it was almost certainly intended to deal with ongoing and prospective additions to the EU, particularly from Eastern Europe and did not envisage the UK leaving the EU: that, until recently, seemed to many people (and certainly many business people) unthinkable.
The effect of this wording on the licence scope however seems clear: when the UK leaves the EU, the licence would cease to cover the UK … and the £5 million minimum yearly payment would remain in force. This would be a disastrous outcome for the licensee.
Earlier in 2015 (in Arnold v Britton), the Supreme Court had been clear that “it is by no means unknown for people to enter into arrangements which are ill-advised…and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice.”
So on the face of it the licensee would be stuck with its disastrous outcome and would have more reason that most to regret Brexit.
Alternatively, is the Brexit earthquake so violent, and so widely impactful on business, that UK courts will be asked again to consider the balance between contractual interpretation and implied terms?
The most well-known test for the implication of terms under English law, is a test described in a 1926 case (Southern Foundries v Shirlaw). One needs to imagine a nosey officious bystander watching the parties agreeing their deal. “If (s)he were to suggest some express provision [that should be included], they would testily suppress him with a common “Oh, of course!”.
Might the imaginary officious bystander be encouraged to be yet more vexing in this sort of post-Brexit dispute, encouraging contracting parties to consider Brexit more seriously and make specific provision for it? “Do you really mean to define EU like that? Have you thought about what should happen if the UK leaves?”
If so, then he or she will likely be a frequent visitor to UK courts over the next few years.
Issue Section:
 Editorial
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