Skip to main content

News story

January 22, 2016

Implied terms

The Supreme Court has recently clarified the law on implied terms in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd.

The traditional understanding

The courts may imply a term into a contract to fill a gap in its drafting. The rationale for implying a term is to attempt to reflect the parties’ original intentions.

A long line of case law has developed the test for implying terms in a contract.

When determining whether a term should be implied or not, traditionally, the following two tests are applied:

If it is necessary to give business efficacy to the contract, the proposed term will be implied.

If it is necessary to give business efficacy to the contract, the proposed term will be implied.

The “Officious Bystander” test

The proposed term will be implied if it is so obvious that it goes without saying. For example, if a bystander suggested to the parties that they include the term in the contract, “they would testily suppress him with a… “Oh, of course”.

In the case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings, Lord Simon proposed the following summary be regarded as cumulative when implying a term:

  • be reasonable and equitable;
  • be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
  • be so obvious that “it goes without saying”;
  • be capable of clear expression; and
  • not contradict any express term of the contract.

The Belize case

In the Privy Council decision in AG of Belize v Belize Telecom, Lord Hoffman formulated the test for implied terms as follows:

“In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. The courts have formulated this question in various ways (the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on), but these formulations should not be treated as different or additional tests.”

Lord Hoffmann gave two examples of the dangers of treating alternative formulations of the question as if they had a life of their own:

Business efficacy test

“There are dangers… in detaching the phrase “necessary to give business efficacy” from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but [without the implied term] the consequences would contradict what a reasonable person would understand the contract to mean.”

“Officious Bystander” test

“The requirement that the implied term must “go without saying” is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean. Any attempt to make more of this requirement runs the risk of diverting attention from the objectivity which informs the whole process of construction into speculation about what the actual parties to the contract or authors (or supposed authors) of the instrument would have thought about the proposed implication.”

Lord Hoffmann suggested that the criteria set out in BP Refinery were best regarded as a collection of different ways in which judges have tried to express the central idea that an implied term(s) must spell out what the contract actually means. , or that they have explained why they did not think they did so, not as a series of independent tests.

Marks & Spencer v BNP Paribas

On 2 December 2015, the Supreme Court handed down its judgment in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd.

The case concerned a tenant’s break clause in a lease. It was common ground that the express terms of the lease did not compel the landlord to pay the tenant a sum of money upon the exercise of the break clause. The tenant contended that the lease in question should have contained a term to that effect.

Lord Neuberger referred to the ‘traditional’ authorities, describing them as “a clear, consistent and principled approach” to the implication of terms and simply added six ‘comments’ by way of explanatory gloss to Lord Simon’s summary in BP Refinery:

Reasonable people, not actual parties

What matters is not the hypothetical answer of the actual parties but that of notional reasonable people in the position of the parties at the original time.

The Fairness of a term of the fact that the parties would agree to it is insufficient

A term should not be implied in a commercial contract merely because it appears fair or because one considers that the parties would have agreed with it if it had been suggested. Those are necessary but not sufficient grounds for including a term.

The requirement from BP Refinery V Hastings that implied terms must be reasonable and equitable adds nothing

If a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.

Business efficacy and the “Officious Bystander” tests are not cumulative

Only one of these requirements must be satisfied (although if one is, the other will likely be). Lord Neuberger agreed with Lord Hoffmann in Belize on this, although all other requirements in BP Refinery are cumulative.

It is important to formulate the question asked by the “Officious Bystander correctly”

Lord Neuberger cited Lewison in Interpretation of Contracts, 5th edition (2011) para 6.09 on this point. The book criticises questions which suggest only one answer and comments that a question may produce a different answer if put in a more neutral or easy-to-understand way.

The necessity for business efficacy involves a value judgment

The test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. A more helpful way of putting the business efficacy requirement may be that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

As such, Lord Neuberger stated that Lord Hoffmann’s comments in Belize should “henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

Conclusion

The Supreme Court confirmed that, for a term to be implied, it must be necessary for business efficacy or be so obvious it goes without saying.

This is an important judgment that provides welcome guidance on the questions generated by Belize, which have been misinterpreted as diluting these requirements. Going forward, the courts should consider Lord Neuberger’s explanatory comments on the traditional tests when deciding whether to imply a term into a contract or not.

For more information on this article’s content, speak to Alex Deal.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Stay in touch

Subscribe to our newsletter

Stay in touch

By completing your details and submitting this form you confirm you are happy for us to send you marketing communications and that you agree to our Website Privacy Policy and Legal Notice and to us using Mailchimp to process your data.


Sending

News/Insight

  • The Employment Rights Act is a call to action for employers 
    A new year, a new employment framework: what employers need to know about the Employment Rights Act passed by parliament in December 2025.


    Read more
  • Dilapidations explained: What commercial tenants and landlords need to know
    Dilapidations are a common source of dispute at the end of a commercial lease. They can involve significant sums of money and often come as an unwelcome surprise to tenants who believed they had left a property in reasonable condition. Understanding


    Read more
  • The role of due diligence in corporate transactions
    In corporate transactions, due diligence is a key stage that usually follows agreement of Heads of Terms, allowing the Buyer to investigate the target company or its assets before committing to the deal.


    Read more
  • Love in later life and the inheritance tax trap
    Increasingly, lawyers are seeing couples who have chosen to live together rather than marry, sometimes for many years, without fully appreciating how differently the law treats them, particularly when it comes to inheritance tax and financial protect


    Read more
  • Understanding Heads of Terms in corporate transactions
    Heads of terms are a crucial first step in corporate transactions. Learn what they include, why they matter, and how they shape successful deals.


    Read more

What they say...

  • Amish Bristol, January 2026
    Absolutely brilliant, fast, professional, clear and delivered a robust service “Recent mortgage oversight from Ben Marks and Anne was superbly dealt with, and I intend on moving all my business to them. For a big firm, they really do pay attent

  • Client, January 2026
    Excellent experience “The process of my work was quick and effective.”

  • Vicky, January 2026
    Clear, friendly, helpful “Very efficient and helpful with arrangements for my will.”

  • R Cook, December 2025
    Settlement Sorted “Grayson Stuckey was great. Efficient and friendly with all aspects of the support provided. We worked well together and achieved a positive outcome. Recommended.”

  • Ivan Naisbitt, December 2025
    More than just a service “Michael Davies has been representing me for about 35 years, and I cannot recommend him or RIAA Barker Gillette (UK) highly enough. Aside from the normal conveyancing, he is always on hand to advise and guide you throug

Read more
Send this to a friend