“Oh, of course”: A review of implied terms in support of Belize Telecom

Ben Bielski - Otago law studentArticle author Benjamin Bielski* is in his final year of an LLB(hons) and a BA majoring in philosophy at the University of Otago. Originally from Invercargill, Ben is employed by the University of Otago as a tutor and researcher. After graduating, Ben intends to begin a career as a management consultant for a major company, to complete further studies and contribute to the realm jurisprudence.


 

1. Introduction

In Attorney-General of Belize v Belize Telecom Ltd [1] Lord Hoffmann held that the implication of terms is to be approached as an exercise in the construction of the instrument as a whole.[2] Lord Hoffmann treated this consideration as a reformulation of existing tests throughout the judgment.[3] The practical focus of this article is to determine if indeed Belize reformulated existing tests, or instead introduced a paradigmatically distinct standard for the implication of terms. The underlying aim however, is to consider, if distinct, whether the process expounded in Belize is to be preferred. To achieve the above aims, the previous tests of implication will first be outlined. Then, Belize will be described. Key points of contrast will next be identified and explained in order to advance the thesis that Belize does more than refine pre-existing tests. Finally, criticisms of Belize will be evaluated and rejected in order to argue that Lord Hoffmann’s approach to the implication of terms is preferable.

2. The effect of Belize

Prior to Belize the courts chiefly utilised two (of several) tests when implying terms in fact.[4] One such test is the “business efficacy” test. Formulated in The Moorcock,[5] this test held that ‘what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties.’[6] Within this test exists the requirement that the proposed implication must be necessary in order for the contract to be made workable.[7]  In this case, the owners of a ship named The Moorcock had contracted for wharf space. While docked, a low tide caused the ship to hit a ridge, damaging the ship. There was nothing in the contract that explicitly stated that the wharf owners were responsible for ensuring the vessel was safe when docked. Utilising the above test, the courts implied such a warranty.[8]

The second test is referred to the “officious bystander” test. It is best encapsulated in Southern Foundries v Shirlaw [9], where Mr Shirlaw was dismissed as director of Southern Foundries after new owners altered the company’s constitution. This was in conflict with Mr Shirlaw’s employment contract that stated he was to remain as director for ten years.[10] In favour of Mr Shirlaw, the courts implied a term, stating that an implied term ‘is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common Oh, “of course!”’[11]

In Belize, the Government of Belize aimed to privatise telecommunications in Belize while still retaining a degree of control. To do this, a share scheme was established that saw two classes of ordinary shares, B and C, and one special share. The special share was issued to the Government. There were to be eight directors: two appointed by the holder of the special share; two appointed by the B shareholders; and four appointed by the C shareholders. However, there was a special provision in the company’s articles of association stating that if the special shareholder owned 37.5% or greater of the C shares, the owner of the special share may appoint two of the four directors allocated to the C shareholders at their discretion. This was done. Later, the defendant sold C shares to the effect that they no longer retained 37.5% of them. There was nothing in the company’s articles of association which determined what happens to the already appointed directors in such a situation. Lord Hoffmann implied a term removing these specially appointed directors.[12]

In doing this, Lord Hoffmann considered that the aforementioned tests were merely different formulations of the ultimate question of: ‘what the instrument, read against the relevant background, would be reasonably understood to mean.’[13] Criticising the “business efficacy” test, Lord Hoffmann considered that a danger is manifest when this test is separated from the basic process of construction.[14] Similarly, Lord Hoffmann considered that the ‘requirement that the implied term “must go without” saying is no more than another way of saying… that is what a reasonable person would understand [the instrument] to mean.’[15] Ultimately, Lord Hoffmann stated that the previous tests are ‘best regarded… as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means’.[16]

It seems then that Lord Hoffmann considered his judgment little more than a reformulation of existing tests into one more cogent. He was not rocking a stable boat [17]. Rather, he believed himself to be stabilising an unsteady one. To demonstrate that Belize introduces a paradigmatic shift from the “officious bystander” and “business efficacy” tests criticisms unique to each test will be identified. These criticisms will reflect fundamentally distinct concerns. It will then follow logically that the tests at the source of these concerns are fundamentally distinct.

3. “Business efficacy” and the “officious bystander”

The “business efficacy” and “officious bystander” tests are often criticised on the basis that there is uncertainty as to their precise relationship. On one hand, the tests may be alternative.[18] This would see a term implied when either one of the two tests are satisfied. This is a difficult approach, as situations may arise where a term is necessary to give effect to business efficacy, even though it may not meet the “officious bystander” test (or vice-versa). This application of the two tests may see the subjective intentions of contracting parties ignored, in order to give effect to business efficacy. The possibility of such an occurrence is a common criticism of academics in response to Belize.[19] Alternatively, the tests may be cumulative [20] and thus subject to the requirement of “necessity”.[21] Arguably, this threshold is too high; ‘for if it can be established that the parties regarded the term as obvious, and would have accepted it, that should be enough’.[22] One case, BP Refinery (Westernport) Pty Ltd v Shire of Hastings [23] (“BP”) suggests a five part test. Again, it is unclear if this composite is to be treated as five independent thresholds, or as overlapping.

Additionally, the “business efficacy” test, in its requirement of necessity, introduces a form of fuzzy logic. “Necessity” here refers to what is required to “render the contract workable” [24] but this itself is a vague concept. There may be dispute between parties as to what constitutes a “workable” contract. And, is the degree of “workability” a minimal one, or should the contract be required to work well? In either case, such a determination will require an objective consideration from the court.

Finally, the “officious bystander” test has been subject to ridicule. Lord Hoffmann has stated it constitutes a “little pantomime” in the make believe exchanges between bystander and parties.[25]

It seems then, that the law prior to Belize was in disarray. Lord Hoffmann was not unwarranted in attempting to rectify this situation in Belize.

4. Criticisms of Belize

Belize itself is not a stranger to criticism. Below, two common criticisms of Belize will be outlined in brief. In contrast to the “officious bystander” and “business efficacy” tests, these critiques are unique to Belize. They will be re-evaluated later in this article.

One criticism of Belize relates to the fact that, against the aforementioned requirement of necessity, Belize adopts a different standard in the implication of terms. There is no restrictive approach [26] as under the old tests. Rather, the requirement is one of reasonableness. Professor McLauchlan in In Defence of Belize Telecom [27] articulates that this does not allow a court to imply a term simply because that term is reasonable; a term may be implied that unilaterally benefits one party.[28] The question is not what would make the contract reasonable. The question is what the contract, against the background context, would be reasonably understood to mean. Nevertheless, the standard is one which attracts much criticism. The Singapore Court of Appeal in SembCorp Marine Ltd v PPL Holdings Pte Ltd [29] rejected Belize primarily on this basis. The Singapore Court of Appeal stated that “[in] so far as Lord Hoffmann proposed a standard of reasonableness for the implication of terms, we had respectfully registered our disagreement in Foo Jong Peng [30] (at [36]) and we reaffirm that disagreement here… Reasonableness is a necessary but insufficient condition for the implication of a term”.[31]

A further criticism unique to Belize, is that it does not prioritise the subjective intentions of the contracting parties.[32] For this, it has been described as ‘dangerous’.[33] Davies writes that Belize ‘suggests that the subjective intentions of a party are now irrelevant, and that the only matter of importance is what a reasonable observer would understand the contract to mean.’[34] In other words, a court does not need to directly consider how the contracting parties would respond to the implied term. Belize is criticised because it arguably has removed the power to decide whether a term is to be implied from the contracting parties, and given this power to the courts.[35]

The above does not exhaust the gamut of criticisms of Belize. However, they are two of the most common and, if accurate, challenging disparagements against Lord Hoffmann’s judgment. More importantly to the thesis of this article, they are unique to Belize. They are fundamentally distinct criticisms to those that the “officious bystander” and “business efficacy” tests attract. It follows as a corollary that Belize provides an independent approach to the implication of terms, paradigmatically distinct to its predecessors.

5. Which approach is to be preferred?

In realising that Belize introduces a fundamentally distinct approach to the implication of terms, the question arises as to which approach is to be preferred. This question is controversial. Belize has polarised opinion amongst academic commentators.[36]

As the foregoing discussion outlines, a common criticism of Belize is that it adopts a standard of reasonableness in the implication of terms. This criticism is, on its face, understandable. The need for caution when implying a term into a contract is important. Too low a standard would undermine the principles of freedom of contract and the contracting parties’ autonomy. Further, it would work against contractual and commercial certainty. The courts previously would only intervene where confident that an implied term is warranted.[37] This was given effect to by the restrictive approach of necessity. However, criticising Belize for not recognising the same threshold is unwarranted. As outlined above by McLauchlan, Belize does not give the courts scope to interpret terms simply because they are reasonable.[38] Belize still enforces a rigorous threshold for the implication of terms. Lord Hoffmann states that in most cases a term will not be implied [39] and that the court has no power to ‘improve upon the instrument which it is called to construe.’[40]  Thus, on closer analysis, the threshold is a rigorous one. Contractual certainty and freedom of contract are still respected by Lord Hoffmann.

Furthermore, this criticism tends to focus directly upon the absence of an explicit test of necessity. To properly reject this criticism, it can be shown that on one (and in the author’s view, correct) reading of Belize necessity remains a requirement for the implication of terms. Lord Hoffmann emphasises that the process of implication is a question of construction, but at no point does he resile from the proposition that it must be necessary to imply the term. Such an interpretation of Belize seems to be favoured in New Zealand. In Satterthwaite v Gough Holdings Ltd [41] the Court of Appeal stated that there was no ‘gap’ such as to trigger the application of Belize.[42] In other words, it was not necessary to imply the term. Above, the requirement of ‘necessity’ was criticised for introducing a form of fuzzy logic. This interpretation of Belize resolves this. Necessity can now be considered broadly.[43] The question of necessity should not be ‘is the implication necessary for the contract to function?’ but rather, ‘is the implication necessary to give effect to what the contracting parties can reasonably be thought to have intended?’[44] This question removes the inherent difficulties with necessity as it was previously applied, and it prioritises the subjective intentions of the parties, as far as they can be reasonably ascertained. On this interpretation of Belize, necessity is arguably still the base requirement preceding the implication of terms, but it is applied in a more effective way.

The criticism that Belize does not give effect to the subjective intentions of parties is also invalid. Under traditional tests, a term could not be implied if a party would not have instantly agreed to it when asked by a bystander.[45] On closer analysis however, it is revealed that Belize will give greater effect to the subjective intentions of the parties than this previous test.

The Belize approach to implication will ultimately give effect to the subjective intentions of contracting parties because implication is based on a process of “pragmatic inference”.[46] When one uses words to communicate, the meaning of these words is ascertained by unconscious reference to background knowledge and experience. The word itself with no such background is devoid of meaning.[47] The shared background is how one can properly interpret what is said by another. For example, ‘when someone asks me to “show the children a game”, the unspoken inference is that they do not intend me to show them how to gamble with dice.’[48] In the same way that meaning, by reference to context, can be inferred from words, meaning, by reference to context, can be inferred from silence.[49] So, where a contract is silent (and a term may be implied) the process of understanding what the contract must mean should be the  same of the process of implication: a process of objectively ascertaining the tacit intention of the parties.[50] Terms are therefore implied in the same way that ordinary language is translated. The risk of implying a term that does not reflect the subjective intentions of the parties is thus no greater than the risk of misinterpreting the contract in the first instance. By approaching implication as a process of construction, Lord Hoffmann appears to recognise this philosophy. A contextual inquiry allows the courts to actively identify the background framework that provides words, or an absence of words, with meaning. This is how, as Lord Hoffmann notes, the implication of terms spells out what the document ‘must mean’.[51] Additionally, if the requirement of necessity is applied and interpreted as above, the subjective intentions of the parties, insofar as they can be reasonably ascertained, will be given effect to.

Admittedly, there may be some rare cases in which the objectively ascertained meaning is not that meaning intended by the contracting parties. Such a case will be rare because the court will have actively sought to identify the background circumstances which determined the subjective meaning of the parties. However, if such a case arises this is not detrimental to the approach in Belize. First, the parties will have redress through rectification. Moreover, the merit of Belize stems from its contrast to the previous tests. “Business efficacy” is similar to commercial common sense. As the New Zealand Supreme Court noted in Firm PI 1 Ltd v Zurich Australia Ltd [52] commercial absurdity (or in this case business efficacy) tends to lie in the eye of the beholder. When this is viewed cumulatively with the other criticisms of the previous tests, Belize appears to be more likely to give effect to the subjective meanings of the parties, despite not explicitly prioritising them.

6. Conclusion

The above criticisms of Belize prioritise the sanctity of the written contract. They argue that terms should not be easily implied and the subjective intentions of the contractors should be emphasised. They prioritise commercial certainty, and stem from a reticence to involve the courts commercially. Both share common footing in that, under Belize, they feel the danger of judicial intervention would be more present.

Belize is clearly a paradigmatic shift from the “business efficacy” and “officious bystander” tests, but this shift was not unwarranted. The above comparative inspection of Belize against its predecessors reveals that Belize does not in fact lower the threshold of judicial intervention to a dangerous extent. Nor is Belize likely to operate in a way that will undermine the subjective intentions of the contracting parties. Rather, Belize provides cogency in a clear test and adds a neatness to the law by reference to the common contractual standard of reasonableness. The previous tests were problematic. Belize introduces a new test as to the implication of terms, and this test is favourable.


*This essay was initially prepared as an optional research assignment.

Footnotes

[1] Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.

[2] Ibid, at [17] – [27].

[3] Ibid. esp. [25] and [27]. Discussed in greater detail below.

[4] Richard Hooley “Implied Terms after Belize Telecom (2014) 73 CLJ 315 at 320; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (“BP”) in fact identifies a five stage test, but the precise number depends on whether the tests are seen as alternative or overlapping.

[5] The Moorcock (1889) 14 P.D. 64 per Bowen LJ

[6] Ibid, at [68].

[7] Paul Davies “Recent Developments in the Law of Implied Terms” (2010) LMCLQ 140

[8] Ibid.

[9] Southern Foundries (1926) Ltd v Shirlaw [1940] A.C. 701 (HL).

[10] Ibid.

[11] Ibid.

[12] Belize, above n 1.

[13] Ibid, at [21].

[14] Ibid, at [23].

[15] Ibid, at [25].

[16] Ibid, at [27].

[17] Hooley R, above n 4, at [323].

[18] See, e.g. Marcan Shipping (London) Ltd v Polish Steamship Co, The Manifest Lipkowy [1989] 2 Lloyd’s Rep 138, 143 per Bingham L.J.

[19] David McLauchlan, “Construction and implication: in defence of Belize Telecom” [2014] LMCLQ 2013.

[20] See, e.g. Stubbs v Trower, Still and Keeling [1987] I.R.L/R 321, 324 (Mustill L.J).

[21] Hooley R, above n 4, at 322.

[22] Ibid.

[23] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.

[24] Hooley R, above n 4, at 321.

[25] Lord Hofmann “Anthropomorphic Justice: The Reasonable Man and his Friends” (1995) 29 Law Teacher 127, 138-140

[26] Davies P, above n 8.

[27] McLauchlan D, above n 20.

[28] Ibid, at 212.

[29] Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43 at [82].

[30] Foo Jong Peng v Phua Kiah Mai [2012] SGCA 55.

[31] Sembcorp, above n 30, at [82].

[32] Ibid, at [213]

[33] Davies P, above n 27, at [144].

[34] Ibid.

[35] John McCaughran Q.C “Implied Terms: The Journey of the Man on the Clapham Omnibus” [2011] C.L.J 607, 614.

[36] Hooley R, above n 4, at 316.

[37] Reigate v Union Manufacturing Co [1918] 1 K.B. 592, 605 (Scrutton LJ) as cited in Davies P, above n 27, at 319.

[38] McLauchlan D, above n 20, at 212.

[39] Belize, above n 1, at [17].

[40] Ibid, at [16].

[41] Satterthwaite v Gough Holdings Ltd [2015] NZCA 130.

[42] Ibid., at [67].

[43] Hooley R, above n 4.

[44] Ibid.

[45] Davies P, above n 27, at 143.

[46] Adam Kramer “Implication in Fact as an instance of Contractual Interpretation” (2004) C.L.J 384.

[47] For further articulation of this idea see the workings of Willard Van Orman Quine. In particular, his indeterminacy thesis, the argument from below, and the argument from above.

[48] Ludwig Wittgenstein “Philosophical Investigations” 3rd ed., trans. G.E.M Ansombe (Oxford 1972) 33.

[49] Hooley R, above n 4, at 327

[50] Ibid.

[51] Belize, above n 1, at [18]

[52] Firm PI 1 Ltd v Zurich Australian Ltd [2015] NZLR 432.

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