The Difference Between Implied Terms and Your Favourite Ice Cream

Contract interpretation should not be as subjective as your favourite ice-cream flavour. They contain specific clauses that will clearly explain to everyone their rights and obligations. There should not be much room for opinion to differ if the terms are clear.

Ambiguity Causes Disputes

Disputes arise where parties have different interpretations of the terms. They are particularly common where parties:

• do not have a written contract
• have a poorly written contract
• conduct their business other than in accordance with their written contract

Parties often try to imply terms into a contract or conduct themselves in a way that is contrary to the written contract, usually because it does not quite do what they intended it to. This can cause disputes as implied terms or variations are ambiguous and parties can easily have different expectations of what is expected.

What Does the Law Say?

The court will only interpret contracts, it will not re-write them. It is strict about when terms can be implied and this is usually only where the implied term is:

• needed to enable the contract to work
• so obvious as to go without saying

A Recent Example

A Supreme Court case a couple of years ago demonstrates just how reluctant the court is to imply terms or amend contracts. In that case:

• Holiday homes were sold in the mid-1970s on a 99-year lease.
  
  
• The service charge was initially £90 per year. The provision provided for this to increase at a rate of 10% per year.
  
  
• Under this clause, the service charge would increase to an annual payment of around £1,025,000 by the final year. The total service charge payable over the 99-year period would be £11,274,146.
  
  
• The dispute was about whether this service charge was due in full or whether a term should be implied, limiting the manner in which the service charge accrued.
  
  
• The Supreme Court held that it was a clear term of the lease that the service charge was due in full each year and it was irrelevant that it increased so significantly each year. The 10% increase also had to be considered in the context of the high inflation of the 1970's when the contract was negotiated and drafted.

As this demonstrates, the court is reluctant to interfere with freely negotiated and agreed terms. Even in this situation, which concerned business to consumer contracts, the Court would not amend or imply terms to alter the calculation of what is clearly a totally unmanageable service charge.

What Does This Mean for Your Business?

Terms that are not clearly agreed and set out in writing are always more likely to be the subject of disputes. This case highlights the importance of making sure the written terms actually do and say what they are supposed to.

A well drafted contract will give you certainty and leave the terms in no doubt, with only limited scope for interpretations to differ. Differences in opinion are best left to ice-cream preferences. My colleague has just told me she "is not really a fan of mint choc chip", which she is entitled to think even if I think that is crazy.

Do you need advice regarding a contractual interpretation dispute? Please contact someone from our Commercial Litigation team, if you would like to discuss your dispute.