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Implied Terms In Corporate Agreements

1. Concept of Implied Terms

Implied terms are provisions that are not expressly written in a contract but are introduced by courts or statutes to:

• Give effect to the parties’ intentions,
• Make the contract workable, or
• Ensure fairness and reasonableness in corporate relationships.

Implied terms cannot contradict express terms, and they arise from three main sources:

1. Statutory implication – imposed by law.
2. Custom or usage – implied due to trade or industry practices.
3. Common law (business efficacy or necessity) – to make the contract work or to reflect presumed intentions.

2. Categories of Implied Terms in Corporate Agreements

A. Terms Implied by Fact

• Necessary for the contract to operate effectively.
• Example: obligation for a managing director to act in good faith to achieve corporate objectives.

B. Terms Implied by Law

• Imposed automatically in certain relationships, e.g.:
  • Directors’ duties under the Companies Act 2006
  • Shareholder agreements (minority protection provisions)

C. Terms Implied by Custom or Practice

• Based on recognized trade or industry norms.

D. Terms Implied to Ensure Fair Dealing

• Courts may imply terms of good faith, loyalty, or mutual cooperation in joint ventures and shareholder agreements.

3. Tests for Implied Terms (UK Common Law)

Courts often use the following tests:

1. Business Efficacy Test (The Moorcock [1889])
   • Term is implied if necessary to make the contract workable.
2. Officious Bystander Test (Shirlaw v Southern Foundries [1939])
   • Term is so obvious that “if an officious bystander suggested it, both parties would agree.”
3. Reasonableness / Fairness Test
   • Common in shareholder agreements where one party cannot act oppressively.

4. Case Law Examples

Case 1: The Moorcock [1889] 14 PD 64

• Established the business efficacy test.
• Implied a term that a wharf owner would take reasonable care that the riverbed was safe for a ship docking.
• Principle applied widely to corporate contracts to imply necessary operational terms.

Case 2: Shirlaw v Southern Foundries [1939] 2 KB 206

• Introduced the officious bystander test.
• Court implied that a director should not be prevented from performing duties if obvious and necessary for the contract.

Case 3: Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72

• Confirms that terms can only be implied if necessary to make the contract work, not merely reasonable or fair.

Case 4: Re BCCI (No. 8) [1998] AC 214

• Courts implied fiduciary obligations in corporate contracts where one party held trust-like powers.
• Protects shareholders or partners from abuse of authority.

Case 5: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

• In close companies, courts implied terms of fairness and mutual confidence to protect minority shareholders.

Case 6: Liverpool City Council v Irwin [1977] AC 239

• Landlord-tenant context, but principle applied to corporate agreements: obligations implied to ensure contractual purposes can be fulfilled.

5. Practical Applications in Corporate Agreements

1. Shareholders’ Agreements
   • Implied obligations of good faith, non-compete, non-dilution, and cooperation.
2. Joint Ventures
   • Implied duty to act in the best interests of the venture, including fair allocation of profits and responsibilities.
3. Service Contracts / Employment Contracts for Executives
   • Implied duties: loyalty, confidentiality, and avoiding conflicts of interest.
4. Supply or Licensing Agreements
   • Implied terms: reasonable care, adherence to statutory standards, cooperation for performance.

6. Summary Table: Implied Terms in Corporate Agreements

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