Case law: Court gives guidance when terms will be implied into a commercial agreement
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, a recent ruling makes clear.
This update was published in Legal Alert - October 2019
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A share sale agreement (SPA) for a private company’s shares provided that the seller could require the buyer to ask the auditors to produce a report, at the seller’s cost, saying whether the company’s pre-sale accounts had overprovided for tax. If the auditors decided overprovision had been made for tax the seller could, in certain circumstances, become entitled to a further payment for the shares.
The SPA went on to say that both the buyer and the seller had the right to ask the auditor to review its decision to take any new circumstances into account.
The seller exercised its right to request an auditor’s report, and the buyer duly obtained one. The buyer showed the seller the ‘background’ and ‘executive summary’ sections but refused to disclose the full report on the basis that there was nothing in the SPA requiring it to. The seller argued that a term requiring disclosure of the whole report should be implied into the SPA because, without the full report, it could not know if it was entitled to exercise its right to ask the auditor to review its decision.
The courts will only imply a term into an agreement if the term satisfies the strict test that either:
- 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
- it is so obvious it goes without saying.
Further, a term should only be implied into an agreement if it is reasonable and equitable, if it is capable of clear expression, and if it does not contradict any express term of the agreement.
While the business efficacy and ‘so obvious it goes without saying’ tests are alternatives – only one needs to be satisfied for a term to be implied, though the court noted it would be a rare case where one was present without the other. In this case, it ruled that both tests were satisfied and the term argued for by the seller should be implied.
First, the court found that the SPA clearly envisaged a review in which a party informed the auditor of the circumstances which it claimed warranted amendment of its decision. However, ‘to engage effectively in that process the party needs to know the basis of the original determination so as to be able to assess what circumstances were taken into account and so as to point to further relevant circumstances’. They could not know this without seeing the whole report. This part of the SPA could only work properly if that was the case, so the term was necessary to give business efficacy to it.
Second, it said the two parties had opposing interests so it would be unusual if one was to have access to the report, but not the other – especially given that the party being denied access had paid for it. The more unusual an arrangement if a particular term was not implied, the more likely the ‘so obvious’ test would be satisfied. In this case, it found this test was also satisfied.
- 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: Zedra Trust Company (Jersey) Ltd & Anor v The Hut Group Ltd  EWHC 2191
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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