Implying a term in a contract: does ‘business efficacy’ call for it?
Often when seeking to imply a term in a contract, a party will claim that the term should be implied because it is ‘necessary to give business efficacy’ to the contract. What might this mean, in practical terms?
In Feeney v Southstar Homes Pty Ltd,[1] the Court of Appeal ruled on whether a particular settlement deed between parties featured an implied term. Southstar Homes, the respondent on appeal and plaintiff at trial, had pleaded in its claim that a term was to be implied in the settlement deed ‘in order to give business efficacy’ to it.
The trial judge found in Southstar Homes’ favour. The applicants, a husband and wife who operated the company which had entered into the settlement deed with Southstar Homes, sought to appeal the judge’s decision.
The decision on appeal
Justices of Appeal McLeish and Niall, and Osborne AJA, in reasons given jointly, allowed the appeal.
Their Honours began with an analysis of the law regarding the implication of terms in a contract in fact, that is, terms unique to the contract at hand as opposed to terms implied in contracts of that particular kind or because of some custom. The Court’s analysis included the dictum of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings;[2] their Honours recounted:
[F]or a term to be implied in a specific contract, the following conditions must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract.[3]
So far as the element of ‘business efficacy’ was concerned, the Court’s reasons are telling in two ways.
‘Business efficacy’ does not equate to ‘business fairness’
First, the Court observed that ‘necessity is not to be judged by reference to what might be reasonable or fair and just’.[4] In that vein, the Court did acknowledge that, in the absence of the sought-after implied term, a particular mechanism under the settlement deed might have been ‘less desirable’.[5] But the Court also noted earlier in its reasons that ‘[t]he process of identifying an implied term is not the occasion for a court to improve on the contract, nor to insert a clause that a reasonable observer would consider reasonable, fair or prudent’.[6]
The focus here arguably is not on the ‘business’ side of things so much as it is the necessity of a term. Whether or not a term is necessary for the parties’ bargain, as opposed to whether it is commercially desirable or fair, etc, is a more stringent test. It also arguably is a test closer aligned with the objective approach to construing contracts; whether a term is commercially sensible is open to a much broader world of interpretation.
Focus on workability
Second, the Court in its enquiry focused on whether the implied term was ‘necessary in order to make the [contract] workable’.[7] This notion of workability recurred in the Court’s reasons. So much perhaps is consistent with the proposition that, for a term to be implied in fact, among other things ‘it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it’. That second clause of that tenet, it seems, was key to the Court of Appeal’s decision to reject the implication of the term in question.
[1]: [2024] VSCA 153.
[2]: (1977) 180 CLR 266.
[3]: Feeney v Southstar Homes Pty Ltd [2024] VSCA 153, [104].
[4]: Ibid [136].
[5]: Ibid [139].
[6]: Ibid [106].
[7]: Ibid [136].