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Case law: Court clarifies when terms will be implied into a commercial agreement

Parties negotiating an agreement should ensure it is comprehensive and clearly and unambiguously expressed, to avoid disputes about what it means and whether additional terms should be implied into it, as a recent case clarifies.

February 2019

This update was published in Legal Alert - February 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Under an agreement to set up a new business, Z paid a deposit of $1m to D, which was refundable if their proposed collaboration did not go ahead. There was a clause in the agreement saying that if D failed to repay the deposit and Z incurred any legal expenses as a result, D would indemnify him in respect of all those expenses.

When Z decided not to go ahead, D refused to return his deposit. After legal action, Z tried to recover his legal expenses under the indemnity, claiming they were nearly $723k. However, D argued that a term should be implied into the indemnity that it was limited to Z’s reasonable expenses only - and that $723k was not a reasonable sum.

The courts will only imply a term into an agreement if it is necessary to give business efficacy to the contract (so, if the agreement works without that term in it, the term will not be implied) or is so obvious that it goes without saying.

The rules also say that a term should only be implied into an agreement if it is reasonable and equitable, if it is capable of clear expression and does not contradict any express term of the agreement.

In this case, the Court ruled that words should be implied into the indemnity limiting it to Z’s reasonable expenses. It found that a reasonable person reading the indemnity would decide its intended meaning was that it should only apply to reasonable expenses. Implying such words was therefore necessary in order to give the agreement business efficacy, and was so obvious it went without saying.

Operative date

  • Now

Recommendation

  • Parties to a contract should ensure it is comprehensive and clearly and unambiguously expressed, to avoid disputes about what it means or whether additional terms should be implied into it.

Case ref: Zahid v Duthus Group Investments Ltd [2018] CSOH 59

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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