IMPLIED TERMSLAW OF CONTRACT II

DR. NURAISYAH CHUA ABDULLAH

Outline

A. Terms implied by custom or trade usageB. Terms implied by lawC. Terms implied by the courts

Introduction

Besides express terms agreed by parties, a contract may also have rights and liabilities arising from terms which are implied to give effect to the parties’ presumed intentions.

The Contract Act does not provide for implied terms and Malaysian courts have applied common law on this subject. The courts are, however, cautious and will be slow in implying terms to the parties’ contracts. Thus, an implication cannot be found in a contract merely because it would make the contract more just and reasonable.

Lord Atkin in Bell v. Lever Brothers Ltd stated:

“Nothing is more dangerous than to allow oneself liberty to construct for the parties contract which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just”.

Case: Sababumi (Sandakan) Sdn. Bhd. v. Datuk Yap Pak Leong

Peh Swee Chin stated:

“Implied terms are of there types. The first and most important type is an implied term which the court infers from evidence that the parties to a contract must have intended to include it in the contract though it has not been expressly set out in the contract …The second type of implied term is one by operation of law, and not based on the inference just explained. By operation of law, I mean that a large number of specific implied terms have been held in to arise from previous decided cases on certain specific facts. Such ratio decidendi in respect of such decided implied terms are normally adopted by courts in subsequent cases on similar facts as a matter of course without to draw the inference as explained above … Many if such decided and specific implied terms have been incorporated into statutes such as the Sale of Goods Act 1957 and others …

“The third kind of an implied term is one that is implied by custom or usage of any market or trade which is reasonable, and again it is not dependent on a court’s inference explained above but by virtue of such a custom or usage from the market or trade”

A. Terms Implied by Custom or trade UsageIn certain circumstances and dealings, if a custom or trade usage exists, these can be implied into the contract between the parties provided it satisfies certain criteria. These are there basic requirements, that is the custom or trade usage:

• Must also not be inconsistent to the express terms of the contract.

• Notorious;• Certain;• Reasonable;

An issues which arise is whether the parties need to know or be aware of the said custom or trade usage.

(a). Not inconsistent with express termCustom or trade usage is implied on the rationale that it is well known, identifiable and reasonable, thus, the parties have not deemed it necessary to express it in their contract and are willing to be bound by it. Bearing this in mind, the implication of the custom must in the first place not be inconsistent with the express terms of the contract itself.

Case: Les Affreteurs Reunis SA v. Leopold Walford (London) LtdLord Atkinson stated:

“I cannot conceive that there should be in any line of business a custom which would provide that no matter what written agreement was to be entered into, the custom is not be excluded, but is to prevail over the terms of the written document”.

Case: Sababumi (Sandakan) Sdn. Bhd. v. Datuk Yap Pak Leong

Peh Swee Chin stated:

“The third kind of an implied term is one that is implied by custom or usage of any market or trade which is reasonable, and again it is not dependent on a court’s inference explained above but by virtue of such a custom or usage from the market or trade. Interestingly, s92(e) of the Evidence Act 1950 seems to be custom-made to provide logistical support for this particular type of implied term. It will be remembered that s92(e) aforesaid is on of the exceptions to the rule against evidence to contradict or vary any terms of a written contract.”

Case: Cheng Keng Hong v. Government of the Federation of Malaya

The applicant submitted his tender to the Ministry of Education for the building of a school. A contract was entered into which included the drawings and specifications of the work to be carried out. A dispute arose regarding the payment for electrical works done as there was a variance regarding this in the specification and in layout drawings.

The applicant contended that it was accepted practice for contractors working for the Ministry of Education, to put in their tenders based on the minimum conveyed in the specifications and not on the drawings as they had to work their tenders on a vary competitive basis, and whatever work they put in following the drawings would be paid as ‘extras’.

Raja Azlan Shah J held:

“This so-called practice, more correctly in law called trade usage or custom, may possibly form part of a contract although not expressly incorporated in the written agreement. The incorporation of a trade usage is, however, subject to well defined principles of law and that is it must be reasonable and not so as to contradict the tenor of the contract as a whole…

In the instant case the contract documents as defined in clause 3 … mean all documents forming the tender and acceptance together with the documents referred to therein, that is the drawing mentioned and annexed to the form of tender, the conditions of contract, the specification, schedule of rates and drawings all these documents taken together shall be deemed to form the contract and shall be complimentary to one another … If I accede to the applicant’s argument that the specification and the drawing must each be read separately and distinctly the answer would be inconsistent with the general tenor of the documents …

“to read the electrical layout drawings in the sense contended for by the applicant give them viability which amounts to violation of clause 3 of the contract … In my judgment the alleged custom was not only a blind confidence of the most unreasonable description but also a repugnant to the terms and tenor of the contract and as such was not a trade custom but merely a long established irregularity.

(b). Must be reasonable Before a practice can be implied as a custom or trade usage, it must be established that it is reasonable practice. Case: Preston Corporation Sdn. Bhd. v. Edward Leong

& OrsThe appellant were a publishing company and the respondents were a firm of printers. A dispute arose about the film positives used in the printing of the books. The respondents contended that the films were theirs and would only give up ownership if the appellants paid for them. The respondents claimed that there was a trade usage entitling them to ownership of the film positives.

The Federal Courts held that the trade usage was not proved. The Court stated that the characteristics of usage are “notoriety, certainty and reasonableness”.

Salleh Abas FJ stated:

“To establish their claim based on the alleged trade usage, the respondents must show that as a matter of law the alleged usage is reasonable; because no particular line of conduct could be held to be a trade usage nor could it exist as a trade usage unless it is reasonable.

In this case, the alleged trade usage was claimed to be for the protection of printers’ interest fearing that the release of these film positives to their customers would prejudice the printer’s business as other printers could be engaged to do the printing work without making new film positives but by using the ones made by previous printers … In our view the basis of the alleged usage seems unreasonable because it conflicts with the ordinary sense of justice commonly understood by reasonable men in that a person who pays for an article or for making it should be entitled to it and not be deprived of its ownership for which he has paid or is required to pay.

“Furthermore this alleged usage is completely unilateral as it does not take into consideration the mutual interest of printers’ customers; be they publishers or others. By this usage a printer obtains ownership without any consideration at all on his part and it certainly extends beyond the need to protect his business interest.

Knowledge of custom or trade usageThe principle of reasonableness of the custom or trade usage

is related to the question whether a party needs to know of the existence of such custom or trade usage.

Case: Cunlife-Owen v. Teather & GreenwoodUngoed-Thomas J considered the factors required to constitute and prove usage:

“ ‘Usage’ as a practice which the court will recognise is a mixed question of fact and law. For the practice to amount to such a recognised usage, it must be certain, in the sense that it is so well known in the market in which it is alleaged to exist that those who conduct business in that market contract with the usage as an implied term, and it must be reasonable … A party to a contract is bound by usages applicable to it as certain, notorius and reasonable, although not known to him, If the practice, though certain and notorius, is unreasonable it follows that it cannot constitute a usage which the court will enforce as a usage. Nevertheless if a party knows of such a practice and agrees to it, then though unreasonable, he is bound by it …”.

Thus, in relation to knowledge of a custom, if the practice is reasonable as well as certain and notorious, then a party will be bound even if he is not aware of it. However, if the practice is unreasonable (though certain and notorious), it cannot constitute a usage but if a party knows of it and agrees to it, it will bind them.

Case: Preston Corporation Sdn. Bhd. v. Edward Leong & Ors

Salleh Abas FJ:

“The issue of reasonableness has a bearing upon the question of existence or otherwise of an alleged trade usage, because no one who is ignorant of an alleged usage can be bound by it if it appears to be unreasonable and because a person can only be assumed to have acquiesced in a reasonable usage.”

The plaintiff was formerly a chief clerk of three rubber estates and was paid by all three estates proportionately. When one of these estates was sold, the plaintiff's appointment was terminated with three month's pay in lieu of notice. Subsequently, he was appointed as a conductor of one of the two remaining rubber estates, both owned by the defendant. Later he received a letter from the defendant that his service was no longer required effective one month from the date of the letter. The issue arose whether the plaintiff was entitled to three months’ notice of termination.

Gill J held that the plaintiff was entitled to three months’ notice and stated:

“Where the parties have not declared their intention as to notice, then the notice will be such as custom or usage prescribed, provided of course the custom or usage was known to the parties at the time when the contract was made. The custom must be

Case: De Cruz v. Seafield Amalgamated Rubber Co Ltd

general and uniform, certain and reasonable in its terms, of reasonable antiquity and so notorious that persons would contract on the basis of its existence … In the absence of any declared intention of the parties or custom, a contract of service can only be terminated by a reasonable notice.”

At the hearing, a representative of the defendant’s managing agents who was at all times in charge of on of the estates and the vice-president of the Malayan Planting Industries Employers’ Association (MPIEA) gave evidence that one month was the normal period of notice for terminating the services of an estate conductor: this was stated in the MPIEA regulations (which were binding upon employers only). However, the judge was unable to accept that this was a custom universally accepted by employees or regularly followed by the employers themselves. The court also took note of the fact that there was no evidence to show that the plaintiff had been aware of this custom at the time of his first employment.

Judicial notice of custom or trade usage

Case: Pembangunan Maha Murni Sdn. Bhd. v. Jururus Ladang Sdn. Bhd

Syed Agil Barakbah SCJ stated:

“With regards to custom and usage, they are required to be proved in any one of these four ways, i.e, by direct evidence of witnesses which must be positive and not amount to a mere opinion or by a series of particular instances in which it has been acted upon or by proof of similar customs in the same or analogous trades in other localities or when ancient by e.g. the declaration of deceased persons of competent knowledge or other forms of reputation.

In Pembangunan Maha Murni Sdn. Bhd. v. Jururus Ladang Sdn. Bhd., the Supreme Court considered the proof of custom and usage and when the courts will take judicial notice of it.

Judicial notice, however, will be given to any custom or usage which has repeatedly been recognised by the courts and it passes into the law of the land; in other words, if it has been frequently or at all events more than once, proved in the superior court as shown by reported cases. The court may hold the custom or usage to be introduced into the law without the necessity of proof in each individual case ...

The opposite party against whom such evidence is tendered may show that the custom or usage does not exist or has not been acted on in particular instances or was a mere practice or has been supersede by a later usage, etc.”

In this case, the Supreme Court held that there was no custom or usage as to entitle it to be judicially noticed that in Malaysia real estate agents was entitled to a commission of 2% of the purchase price.

The burden of proof is on the party alleging the custom or trade usage. In Lee Eng Joo v. Kok Boon Keng & Ors, the High Court held that the Deputy Commissioner had not had sufficient evidence before him to hold that a custom existed between employers and employees in the fish catching business regarding deduction from wages.

B. Terms Implied by law

Terms may be implied by law through the common law and through statutes. The common law has implied terms into some types of contract which commonly occur and where there are precedents of obligations arising form the specific contractual relationships. In cases of implication by law, the courts have applied the test of necessity rather than reasonableness.

Case: Lister v. Romford Ice & Cold Storage Co Ltd The House of Lords held that it was an implied term that an employee will serve diligently, loyally and with reasonable competence. Conversely, it is also an implied term that an employer will provide a safe place of employment and will not require his employee to act unlawfully. Case: Malik v. Bank of Credit & Commerce

International SAThe House of Lords held that both the employer and employee owe to each other an obligation not to act so as to destroy the relationship of trust and confidence between them.

Terms may also be implied by law through statutes. Thus, in the Sales of Goods Act 1957, s14 provides:

In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is - a) an implied condition on the part of the seller, that, in

the case of a sale, he has a right to sell the goods, and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass;

b) an implied warranty that the buyer shall have and enjoy quiet possession of the goods;

c) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.

Section 15 of the Sales of Goods Act 1957 further provides that the goods shall correspond with the description while section 16(1) provides for the implied condition as to quality or fitness.

C. Terms Implied by the Courts

• Terms in fact may be implied by the courts to allow for the unexpressed intentions of the parties to take effects. This may be needed as parties may, for whatever reasons, have omitted to include a term which they would have done so if they had thought about it.

• To do so, the courts would look at the terms of the contract and the surrounding circumstances. There are three test for implying terms in fact: a) The business efficacy test;b) The officious bystander test;c) A combined test.

• These three tests were referred to by the Federal Court in Sababumi (Sandakan) Sdn. Bhd. v. Datuk Yap Pak Leong.

(a). Business efficacy test

The classic authority for the business efficacy test is The Moorcock. In this case, the defendant wharfingers agreed to allow the plaintiff shipowner to discharge his vessel a the defendant’s jetty. While the vessel was moored, the tide ebbed and the vessel sustained damage due to settling on a ridge of hard ground below the mud.

The Court of Appeal implied into the contract a term that the defendant should take reasonable care to ascertain the safety of the vessel’s berth. Bowen LJ stated:

“In business transaction such as this, 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 who are business men; not to impose on one side the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events , as it must have been in the contemplation of

both parties that he should be responsible for in respect of those perils or chances.”

This test will be satisfied if it can be shown that the term sought to be implied is necessary to give business efficacy to the transactions, that is, to enable the transaction to be efficient or produce the effect that was intended.

(b). Officious bystander test

This test is used to imply a term into a contract where the term which is sought to be implied “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!’”. This test was formulated by MacKinnon LJ in Shirlaw v. Southern Foundries (1926) Ltd.

Case: Shirlaw v. Southern Foundries (1926) Ltd.Southern Foundries appointed Shirlaw, who was then a director, to be the managing director for a term of 10 years. The relevant article of association of Southern Foundries provided that a managing director should “subject to the provisions of any contract between him and the company be subject to the same provisions as to .. removal as the other directors of the company”. Subsequently, the shares of Southern Foundries were acquired by another company, Federated Foundries.

The existing articles of association of Southern Foundries were abrogated and new articles were adopted, which, empowered the Federated Foundries to remove any director and a secretary. Such an instrument was delivered to Southern Foundries removing Shirlaw from office. Shirlaw contended that there was an implied term that Southern Foundries would not, by any alteration of its articles, create a right to remove him (Shirlaw) from his position as director.

The Court of Appeal held that there was such an implied term. MacKinnon LJ applied the officious bystander test a follows:

“Applying that in this case, I ask myself what would have happened if, when this contract had been drafted and was awaiting signature, a third party reading the draft had said: ‘Would it not be well to put in a provision that the company hall not exercise or create any right to remove Mr. Shirlaw form his directorship, and he have no right to resign his directorship?” I am satisfied that they would both have assented to this as implied already, and agreed to its expression for greater certainty.

Mr. Shirlaw would certainly said: “Of course that is implied. If I am to be bound by this agreement, including the barring of any activities under clauses 11 and 12 when I cease to be managing director, obviously the company must not have, or create, the power to remove me at my moment from the Board and so disqualify me from the post”; and the company which must be presumed to have been then desirous of binding him to serve them as managing director for ten years, would, I think, with equal alacrity have said: “Of course that is implied. If you were tempted by some offer elsewhere, it would be monstrous for you to be able to resign your directorship and, by so disqualifying yourself from being managing director, put an end to this agreement”.

(c). Combined test

As the law on implied terms developed, courts have combined and used both tests.

Case: BP Refinery (Westernport) Pty Ltd v. Shire of Hastings.The Privy Council referred to both test and

supplemented them with other factors. Lord Simon of Glaisdale stated:

“In [their Lordships’] view, for a term to be implied, the following conditions (which may overlap) must be satisfied” (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.

In Malaysia, in the case of Sababumi (Sandakan) Sdn. Bhd. v. Datuk Yap Pak Leong, the Federal Court referred to the business efficacy test and the officious bystander test and held that both test must be satisfied before a term can be implied.

In this case, Sandakan Turf Club (the Club) was granted a license to operate 3D and 4D lotteries. On November 26, 1987, the club entered into a written agreement with the appellant. The material terms of the agreement were as follows:

(a) The appellant was to buy 100 acres of land and to construct a race course on the land at its own expense;

(b)The club in turn agreed to sublease the land and the race course to the appellant for a period of 20 years;

(c) The appellant was given the exclusive rights to conduct and manage all bettings on the races at the race course and to conduct and manage all 3D and 4D lottery operators throughout the state of Sabah;

(d)The appellant was to pay 20% of all its gross sales takings to the club on a joint venture basis.

In Sabah, gaming generally was prohibited under the Sabah Gaming Ordinance but the club was exempted from this prohibition under the same. Subsequently, the Sabah Gaming Ordinance was repealed by the Modification of Laws (Common Gaming Houses, Lotteries, Betting & Sweepstake Duties and Racing (Tantalisation Board) (Extension to the States of Sabah and Sarawak) Order 1991 which contained a provisio that the exemption and license granted earlier to the club remained in force.

A new license was thereafter issued to the club in January 1985. The appellant continued to carry on off-course betting activities after the 1995 license was issued. However, the appellant’s activities were stopped by police. The appellant the filed an originating summons in the High Court, seeking declaration that the 1995 licence was within the scope of the agreement between the club and the appellant, and that the appellant had the exclusive right to conduct and manage all 3D and 4D lottery operations in and throughout the state of Sabah. One of the issue before the Federal Court was whether the 1995 licence was within the scope of the agreement by way of an implied term.

Having regards to the three types of implied terms: implied terms by operation of facts, by law and by custom or usage; Peh Swee Chin FCJ applied the officious bystander and the business efficacy test to the facts of this case and held that the 1995 licence could in fact be implied into the agreement, as the essence of the intention of both parties was for the club to grant an exclusive right to the appellant to conduct betting or gaming activates on a long-term basis.

Zakaria Yatim FCJ also agreed that both tests were necessary. The judge held that the two test were satisfied and that when the parties were negotiating the agreement, they intended to give the joint venture agreement business efficacy for a period of 20 years. And if the officious bystander had asked about the possible change of law, the parties who had the benefit of the advice of their lawyers would have answered “Of course we know that. We have made some provisions in c11 with regard to the cancellation of the licence in different situations. We anticipate changes in the law and there is no need to make any express provisions in the agreement”.

Necessary to implyAn important issue in implied terms is whether terms are implied based on necessity or reasonableness.

Case: Liverpool City Council v. IrwinLord Denning held that it was reasonable to imply a term that the landlord, the local council, had an obligation to maintain the common parts of the building. When the case went to House of Lord, Lord Edmund-Davies pointed out that “the touchstone is always necessity to imply and not merely reasonableness”.

Lord Wilberforce stated:

“In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less; a test in other words of necessity. The relationship accepted by the corporation is that of landlord and tenant; the tenant accepts obligations accordingly, in relation to the stairs, the lifts and the chutes. All these are not just facilities, or conveniences provided at discretion; they are essentials of the tenancy without

(c). Combined testWhich life in the dwellings, as a tenant, is not possible. To leave the landlord free f contractual obligation as regards these matters, and subject only to administrative or political pressure, is, in my opinion, totally inconsistent with the nature of this relationship.”

The House of Lord in Irwin had in effect adopted the view of Roskill LJ at the Court of Appeal who had said that he could not agree “that it is open to us in the court at the present day to imply a term because subjectively or objectively we as individual judges think it would be reasonable to do so. It must be necessary in order to make the contract work as well as reasonable to do so”.

(c). Combined testThere are a number of decisions that have preferred the basis of necessity fro implying terms.

Case: Trollope & Colls Ltd v. North West Metropolitan Regional Hospital Board

The House of Lord was quick to point out that its function was not to make or improve the parties contract but to interpret and apply the contract which the parties have made. Lord Pearson stated:

“… the court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court’s function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free form ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable”.

(c). Combined testIn relation to implied terms, Lord Pearson stated:

“An unexpected term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went into saying, a term necessary to give business efficacy to the contract, a term which, although tacit, formed part of the contract which the parties made for themselves”.

(c). Combined testCase: Gentali (M) Sdn. Bhd. v. Kawasaki Sunrock Sdn. Bhd. (No.3)

The High Court allowed a term as it was a necessary term to a sole distributorship agreement. Kamalanathan Ratnam JC stated:

“The implication of a term into a contract depends on the presumed intention of the parties. In some cases, that intention is collected from the express words of the contract and the surrounding circumstances. In others it is collected form the nature of the legal relationship into which the parties have entered …

The condition that the plaintiff could not have been an agent or distributor for Seadoo whilst it was still a sole distributor for the defendant can be readily implied as it has to be a necessary term if the plaintiff was to enjoy being a sole distributor and also to allow the distribution of the products ‘smoothly and effectively’ … It is my judgment that where a contract imposes an obligation on one party to the contract, but is silent as to the obligations of the other party, the court may in appropriate circumstances imply a correlative obligation on the other party.

(c). Combined testHence in the present case, if there is an obligation on the defendant not to appoint another distributor, then likewise, if the plaintiffs to be regarded as ‘sole’ distributor, then it should only distribute Kawasaki branded CBU motorcycles and watercraft and not a rival brand. It is a question of loyalty and commercial morality”.

Thank you for your attention