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Implying terms into commercial contracts impacted by COVID-19

31 March 2020

We live and work in unprecedented times. The health of the population is rightly the priority, but it is abundantly clear that steps taken to prevent the spread of COVID-19 are having a very significant impact on the ability of businesses to fulfil obligations in commercial contracts.

We have produced guidance for businesses on how force majeure and frustration may be relevant to contractual performance which may be difficult or impossible as a result of Government Regulations and guidance.  

However, in these fast-moving times we are becoming increasingly aware that businesses want to understand whether terms might be implied into commercial contracts to reflect the drastic alteration to the world in which parties are now required to perform the obligations they agreed in the pre-COVID-19 world.

While the courts are reluctant to deny giving legal effect to what are clearly intended to be enforceable commercial arrangements, they are also reluctant to interfere in arrangements that parties negotiated and agreed.  

In ordinary circumstances, terms might be implied based on the custom and practice of the trade which is the subject of the contract, on a previous course of dealing between the parties or by a statute relating to the particular contract, its subject matter or the nature of the contracting parties.  However, in the unique circumstances in which we find ourselves today, when looking at the impact any steps to combat the spread of COVID-19 have on ordinary commercial arrangements, it is most likely that contracting parties will need to consider whether it is necessary to imply terms to reflect the contracting parties’ intentions.

The starting point is to appreciate that the rationale for the court implying terms into commercial contracts is to reflect, on an objective basis, the parties’ intentions when they entered into the contract.  That doesn’t require proof of the actual intention of the parties at the date of the contract, but rather consideration of what reasonable people in the position of the parties would have intended at the date of the contract.  This requires the court to consider the circumstances which were known to both parties at the time they concluded the contract, including legal principles which would have been available to a reasonable observer, case law existing prior to the date of the contract and any “market practice” relevant to the parties and the subject matter of their contract.

Having identified the surrounding circumstances at the date the contract was entered into, the tests to be applied by the court when determining whether a term should be implied into a contract are:

  • is the term to be implied “necessary” to give business efficacy to the contract (that is, to produce the intended result).  The test does not require the court to be satisfied that the implied term is absolutely necessary, but rather that, if without the term being implied, the contract would lack commercial or practical coherence; or
  • the term to be implied must be so obvious that if any reasonable and objective third party had suggested to the contracting parties at the time of the contract that they should include such a term, the parties would have said ‘yes – it goes without saying’; and
  • the term to be implied must be capable of being clearly expressed; and
  • the term to be implied must not be in conflict with or contradict any term clearly expressed in the contract.

In the post-COVID-19 world, what is critically important to appreciate is that the court will have regard to the circumstances which existed at the date the contract was entered into and apply the tests to those circumstances.  The court will not, contrary to what might be hoped or expected by many, imply terms having regard to the post-COVID-19 circumstances in order to meet difficulties faced by parties when such difficulties did not exist when they entered into the contract.

Seeking to address current contractual performance difficulties by asking the court to imply terms will never be straightforward, but in these difficult times, everyone is encouraged to review their written contracts and consider all possible options, no matter how difficult, to alleviate what are potentially unique impediments to performance.

 

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