Posts Tagged ‘implied terms’

Contractual obligation to produce an architect’s certificate before completion: an implied term that it will be produced within a reasonable time before completion

February 24, 2016

In Guo Jianjun v Dragon Fame Investment Ltd ([2015] HKEC 1986, CA) S entered into an agreement to sell to P four office units (all on the same floor of the building). The agreement contemplated that there would be a re-partitioning of the office units owned by S. The units to be sold were the units as they would be after the re-partitioning. The contract contained a clause obliging S to obtain the certificate of an ‘Authorized Person’ to confirm the legality of the re-partitioning works. The agreement went on to provide that P would not raise any requisitions, queries or objections concerning the re-partitioning works. The re-partitioning works were carried out soon after the agreement was entered into. S produced an architect’s certificate of compliance. This satisfied S’s contractual obligations but it was produced at 6.07 pm on the completion date. It was common ground that the midnight rule applied. P argued that S was in breach of an implied obligation to produce the certificate at a reasonable time. It rescinded and sought the return of the deposit and damages. S argued that there was no implied term and that it was enough for it to have produced the certificate before midnight on the completion date.

The Court of Appeal (Lam V-P giving the judgment) looked at the English and Hong Kong authorities setting out the modern approach to contractual interpretation. This required the court to look at the rest of the contract and the whole of the relevant context / factual matrix. It also looked at what was said in Belize Telecom concerning the implication of terms (and linking this process to the broader process of contractual interpretation).

The obligation had to be construed in the context of the related clause which barred the raising of requisitions concerning the partitioning. It was also necessary to take account of the obvious commercial purpose served by the obligation: if S did not produce an adequate certificate there could be a doubt as to the legality of the works which could prevent P from giving good title on any future sale. Thus, there was to be implied a term ‘that the certificate would be a proper certificate prepared by an authorized person in good faith’ ([34]).

Given that the architect was commissioned by, and would report to, S P had to be given a reasonable time to assess whether or not the certificate satisfied the contractual obligation. They had to be given a reasonable time in which to do so. A term to this effect was to be implied ([41]).

What was a reasonable time? Had the implied obligation been observed in this case? The court referred to its earlier decision in Summit Link v Sunlink Group:

‘What should be considered as a reasonable time must be considered in the light of the prevailing circumstances, including the parties’ knowledge at the time if it can be proved and what the parties would each be reasonably contemplating at the time.’ (at 735 – 6 per Woo JA).

The court also referred to the headnote to the report of Kensland Realty Ltd v Whale View Investment Ltd ((2001) 4 HKCFAR 381):

‘The time which a vendor must allow, was the time reasonably required by the purchaser to perform its obligations, in relation to completion, in the ordinary course of business. This would include the purchaser’s dealing with bankers and solicitors.’

Lam V-P explained what this meant in the present case:

‘I am therefore of the view that the certificate should have been provided to the plaintiffs’ solicitors within a reasonable time before the end of the office hours [on the completion date]. The reasonable time should be long enough to afford the plaintiff’s solicitors a reasonable opportunity to conduct the checks which are reasonably necessary and to do so in the normal course of business. The time should not be so short that the solicitors would have to stretch all their available resources to the extreme so as to accomplish the tasks.’ ([46]).

Further, ‘one should proceed on the general assumption that purchasers will rely on mortgage financing in a conveyancing transaction’ ([50]).

Production of the certificate after the close of business on the date of completion did not satisfy the reasonable time requirement.

Michael Lower





Break clause: implied term that rent paid in advance in respect of a period after termination should be repaid?

January 6, 2016

In Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd ([2015] UKSC 72) BNP granted a lease to M & S. The lease contained a break clause. The lease required M & S to pay rent quarterly in advance. The break right could only be validly exercised if there were no rent arrears at the time when the lease would end assuming the valid exercise of the break right (the ‘break date’). M & S had also to make a further payment to BNP if it exercised the break right. M & S served a clause to trigger the break right, paid the quarterly rent due immediately before the break date and made the further required payment. It now sought to recover the proportion of the rent attributable to the period from the break date up to what would have been the next quarter date under the lease. It argued that a term requiring BNP to make such a repayment should be implied into the lease. The Supreme Court upheld the Court of Appeal’s decision that there was no such implied term.

Lord Neuberger gave the main judgment. The decisive factor was ‘the established legal background against which the Lease was entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance.’ ([42]) Rent is not apportionable in time in common law ([43]). Section 2 of the Apportionment Act 1870 varied this with regard to rent payable in arrear but not rent payable in advance ([45]). Thus:

‘Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.’ ([50])

There was a broader discussion of Lord Hoffmann’s statement in Belize Telecom that the process of implying terms into a contract was part of the general process of contractual interpretation. Lord Neuberger was critical of this view. He saw construction of the express terms of the contract as being logically prior to the question as to whether or not a term was to be implied ([28]) and as being ‘a rather different exercise’ ([29]). Lords Carnwath and Clarke, on the other hand, expressed support for Lord Hoffmann’s formulation. Lord Carnwath expressed the view that Lord Hoffmann’s formulation did not involve any watering down of the previous authorities to the effect that the implication of terms is based on necessity ([58] – [60]). Thus:

‘While I accept that more stringent rules apply to the process of implication, it can be a useful discipline to remind onseself that the object remains to discover what the parties have agreed or (in Lady Hale’s words) “must have intended” to agree. In that respect it remains, and must be justified as, a process internal to the relationship between the parties, rather than one imposed from outside by statute or the common law’. ([69])

Lord Clarke said:

‘like Lord Neuberger (at para 26) I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’ ([76]).

Michael Lower

Implied terms: the tension between the plain meaning of the words and an evident commercial purpose

August 26, 2015

In Aberdeen City Council v Stewart Milne Group ([2011] UKSC 56) the Council sold some development land to Stewart Milne Group Ltd (‘SMG’). The contract for the sale provided for a further payment (‘Profit Share’) to be paid to the Council in the event of (i) the service of a notice by SMG on the Council to trigger the obligation to pay; or (ii) a sale by SMG; or (iii) the grant of a lease by SMG. There was to be only one such payment and once it had been made there would be no further obligation to make any payment even if one of the relevant events occurred.

SMG sold the property to SMW, another company in the same group, at a price that the Council alleged was well below the open market value. SMG contended that this triggered the once and for all obligation to make a Profit Share payment. The Council refused to accept that this was the case. There was a tension between the wording of the contract and the alleged commercial purpose. The contract did not expressly rule out an intra-group transaction in its definition of event (ii) (a sale triggering the obligation to pay). On the other hand there was evidence from other provisions within the contract pointing to a contractual intention that the Profit Share would be calculated by reference to the property’s open market value.

The Supreme Court decided that there was a clear commercial intention that the Profit Share would be calculated by reference to the open market value.  They preferred to think of this in terms of an implied term rather than as a process of interpretation (though the result is the same whichever route is used ([33] Lord Clarke). A term was to be implied to the effect that where the sale was not at arm’s length, an open market valuation (rather than the actual price paid) would be used in the calculation of the Profit Share ([20] Lord Hope; [32] Lord Clarke).

Michael Lower

Seller entitled to rescind and recover deposit where deposit cheque is accidentally dishonoured and time is of the essence?

October 20, 2014

In Howarth Cheung Natalie Jane YS v Tsang Hong Kwang Ok ([2014] HKEC 1683, CA) S entered into a preliminary agreement for the sale of property to P. The agreement provided for P to pay a deposit of just under 5% of the purchase price. The cheque was not honoured as the bank thought that there was a discrepancy between the signature on the cheque and the specimen signature that they had. S accepted the repudiatory breach and P sought specific performance. S counter-claimed for payment of the deposit.

It was accepted by both parties that time for payment of the deposit is of the essence in Hong Kong even in the absence of an express stipulation to this effect. So the delay in paying the deposit was a repudiatory breach ([4.1] – [4.5] per Cheung JA). P argued, however, that the contract included an implied term to the effect that the stipulation as to time was suspended because the extraordinary event that had happened was beyond P’s control. This failed. The obligation was specified in clear terms ([5.9]); S should not be affected by disputes between P and her agent ([5.10]); the term was not needed to give business efficacy to the contract ([5.11]); nor was it capable of clear expression ([5.12]).

P argued that she should be granted equitable relief from termination of the agreement. This was rejected. First, the point had already been dealt with by the Privy Council in Union Eagle ([6.1]). The Australian courts took a different approach and granted equitable relief where the delay was occasioned by fraud, mistake, accident or surprise (and the High Court of Australia considered the ambit of these exceptions in Tanwar Enterprises Pty Ltd v Cauchi (2003) 201 ALR 359). Even if the Australian approach were followed, it would not allow for relief in the present case:

‘The parties themselves have stipulated the time for payment which is of the essence of the contract. The purchaser had chosen to pay by cheque which in law is in the nature of payment by cash. This by itself precludes any argument on suspension of this obligation. Further, the possibility of the bank not honouring the cheque is not beyond the reasonable contemplation of the parties as mishaps do happen. Hence payment of the deposit can be subject to an exculpatory provision which has not been sought for by the purchaser in the first place. As presently drafted, the payment term is not subject to the purchaser tendering another payment upon discovering that the cheque has not been made. In any event, HSBC is not a third party in the strict sense of the term but an agent of the purchaser. To decree relief will deprive the vendor of an essential right of the agreement. The whole circumstances just do not come within the ambit of the requirement for relief that, although the accident was not occasioned by the vendors who were innocent, it was sufficient of itself to render it unconscionable or inequitable for the vendors to insist upon its legal rights.’ ([6.20] per Cheung JA).

Finally, S could recover the unpaid deposit from P. Contractual damages aim to put S in the position that he would have been in had the contract been performed (and in that event the deposit would have been paid). Alternatively, the effect of the acceptance of a repudiatory breach is to discharge the parties from all executory obligations but does not affect rights and obligations that have already accrued (Damon Compania Naviera S.A. v. Hapag Lloyd International S.A. [1985] 1 WLR 435). This approach has been taken by the Hong Kong courts (for example, Sun Lee Kyoung Sil v Jia Weili [2010] 2 HKLRD 30).

Michael Lower



Implication of a term is an aspect of contractual interpretation

June 15, 2014

In A-G of Belize v Belize Telecom Ltd ([2009] UKPC 10, PC) the question was whether a term should be implied into the articles of association of a company (‘the company’) that had been formed to carry on the business of the Belize Telecommunications Authority. Belize Telecom (‘BT’) was the majority shareholder in the company. The company’s shares were divided into classes. BT, as holder of  C shares that exceeded 37.5% of the issued share capital, had the right (under the terms of the company’s articles) to appoint two of the members of the board of directors. When BT defaulted on loans made to it by the Government, it had to transfer a substantial number of shares to the Government. The result was that its C shares no longer amounted to 37.5% of the issued share capital.

The question was whether its appointees to the board remained members of the board. There was no express term dealing with this contingency. Was there an implied term to the effect that a director appointed by virtue of a specified shareholding should vacate his office if there is no longer any holder of such a shareholding.

Lord Hoffmann gave the only full judgment. He emphasised that the law on the implication of contract terms was an aspect of the general law concerning contractual interpretation:

‘It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.’ ([21])

The term contended for was implied, ‘to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles’ ([32]).

Michael Lower