Disputes frequently arise where one party to an agreement seeks to rely upon implied terms to assist them in trying to enforce the agreement.
In Hobhouse v Macarthur-Onslow [2022] NSWCA 158, a party to a deed of settlement containing an option to purchase, sought to validate a purported exercise of option by implying the following italicised words into cl 12.2(d) of the agreement such that it read:
“(d) Any such option … is to be exercised by service of written notice of exercise of option … signed by the Grantee, and if the price has been determined in accordance with this Deed, together with two copies of the Contract for the purchase of such property duly executed by the Grantee and cheque for the deposit payable …”
The effect of this implied term was that a cheque for the deposit would not be required in circumstances where the midpoint of two valuations had not been determined prior to the expiration date.
In considering whether a term should have been implied the Court cited Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 346; [1982] HCA 24 where he said:
“For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.
Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heimann v. The Commonwealth [(1938) 38 SR (NSW) 691 at 695] Jordan CJ, citing Bell v. Lever Brothers Ltd. [[1932] AC 161 at 226], stressed that in order to justify the importation of an implied term it is ‘not sufficient that it would be reasonable to imply the term. … It must be clearly necessary’.
Five principles for implying a term
The following well-known conditions for implication of a term, stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-283; 52 ALJR 20, must be satisfied:
- The term must be reasonable and equitable;
- The term must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
- The term must be so obvious that “it goes without saying”;
- The term must be capable of clear expression;
- The term must not contradict any express term of the contract.
In Hobhouse, it was found that the trial judge had erred in implying a term,
In examining the Deed, the Court said that it:
- Was a “detailed and comprehensive” contract and
- “contained detailed provisions about a variety of matters, including the grant and exercise of options to purchase multiple different properties, and
- there is no warrant for departing from the language used to attempt to establish an equivalence or compatibility between them when differences are clearly identified.
Accordingly, the Appeal Court set aside the trial judge’ decision and declared the exercise of option invalid.
As a consequence, a property worth some $4.25–$4.5million was lost to the Grantee.
Lessons
This decision reminds us that the terms of commercial agreements should be carefully thought out to cover practical and operative steps for parties to follow and drafted with clarity and precision to avoid any unintended uncertainty and unintended consequences. Any failure to do so which then requires implication of terms can result in loss of rights and loss and damage to the disappointed party.
Contact us if you have need for advice in regard to the drafting, exercising or enforcement of any commercial agreements, including grants of options.
