Express yourself: the Court of Appeal reaffirms the position that implied terms cannot be inconsistent with express terms

In the recent case of Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017] EWCA Civ 7, the Court of Appeal once again considered the test for terms being implied into a contract. This decision highlights that the starting point of contractual interpretation should always be the express terms and that linguistic consistency will not be enough to render an implied term viable. As this is an English decision, it is not technically binding in Scotland but it is highly persuasive.

Facts

Irish Bank Resolution Corp Ltd (“Irish Bank”) entered into a facilities agreement with Camden Market Holdings Corp (“Camden”) to provide loans for Camden to purchase and develop properties (the “Agreement”). Obtaining planning permission took longer than expected, and so Camden and Irish Bank entered into a supplemental deed extending the Agreement by twelve months (the “Extension”), to allow Camden adequate time to market and sell the properties prior to the Agreement maturing.

The Agreement contained a clause allowing Irish Bank to assign or transfer any of its rights to another bank or financial institution with Camden’s consent, and the right to disclose any information about Camden and the loans to any potential assignee or transferee without Camden’s consent.

Irish Bank entered special liquidation in 2013. Its liquidator began marketing its loans, including those subject to the Agreement and others, some of which were distressed. Camden became concerned the packaging and marketing of the loans would give the misleading impression that its loans were also distressed. Camden’s potential clients had indicated they may acquire the loans, rather than buying the properties, with a view to enforcing the security, thereby obtaining the properties for less than market price.

Camden brought an action claiming that the Agreement contained an implied term that Irish Bank would not do anything to impede the marketing of Camden’s properties to achieve the best sale price under the Agreement. Camden asserted that the purpose of the Extension was to give Camden more time to sell the properties at a higher price, and thus the Extension impliedly affected Irish Bank’s express rights in the Agreement to deal with the loans.

Irish Bank disagreed, arguing that the pleaded implied term was inconsistent with the Agreement, and applied for a summary judgment or for the claim to be struck out.

Decision

In the first instance, the judge found it was arguable the implied term may exist and was consistent with the express terms of the Agreement, ruling that it should go to a full trial.

The Court of Appeal found in favour of Irish Bank. Lord Justice Beatson ruled that the starting point when considering any potential implied term must be to first interpret the express terms of the agreement, following Lord Neuberger ‘cardinal rule’ that any implied term must not contradict any express term (Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72).

Lord Justice Beatson went on to consider the test of consistency of express and implied terms, noting that consistency can be assessed both linguistically and substantively. The alleged implied term that Irish Bank could not deal with the loan in a way which would hinder Camden from achieving the best price did not linguistically contradict the express term providing for Irish Bank’s right to assign and disclose information to potential assignees - there could be situations in which marketing the loan and marketing the properties did not place them in competition with each other, and information about the loans could be disclosed in a way which did not hinder Camden in achieving the best price. However, in practice, the implied term would significantly restrict Irish Bank’s express rights and therefore was substantively inconsistent with the express terms. The Court applied Reda v Flag Ltd [2002] UKPC in noting that an express and unrestricted power “cannot in the ordinary way be circumscribed by an implied qualification”, concluding that this principle should have been reflected in the first instance decision.

The Court noted that, in this instance, the Agreement clearly granted Irish Bank broad powers to deal with the loans and disclose information about them. The Agreement was also lengthy, and carefully drafted – while not definitive, this is indicative that it would be inappropriate to imply a term. Furthermore, the Extension was made by experienced commercial entities, incorporated the Agreement, and did not amend, qualify or discuss Irish Bank’s powers regarding assignment and disclosure.

Comment

The Court of Appeal reinforced that express terms of a contract must be interpreted prior to considering whether to imply a term. It was noted, however, that implied terms may be used to clarify inconsistent express terms, but ultimately express terms should not be limited or contradicted by implied terms.

This case illustrates that while express and implied terms may not necessarily be linguistically inconsistent, they may nonetheless be substantively inconsistent. The Court has continued with the recent trend of strictly interpreting implied terms and respecting the words used by the parties to effect the deal they have made. This once again highlights the importance of ensuring that contracts accurately reflect parties’ intentions, and take into account any current or future commercial considerations. Moreover, should a contract be amended, parties should ensure that any further commercial requirements or consequences have been carefully considered and are included in the amendment.

Co-authored by Tamara Mackay-Temesey, trainee solicitor.