Implied terms in contract law – substantive inconsistency
When a court considers a contract which is in dispute, it will seek to give effect to the parties’ intention as expressed in the terms of the contract. Where the parties have left gaps in the contract drafting, the court has the power to imply terms into the contract in order to fill such gaps. The idea is that by implying a term into the contract, it might better reflect what the parties’ intentions were when they entered into the contact. The court will look at what a reasonable person would have understood the parties’ intentions to be. This hypothetical reasonable person would be deemed to have the same background knowledge as was reasonably available to the parties at the time when they entered the contract.
In the recent case of Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp, the bank had advanced facilities to Camden Market Holdings Corp (“Camden”) for the purpose of acquiring and developing properties. The loans expressly permitted the bank, with Camden’s consent, to assign or transfer its rights to another bank and to disclose information about Camden and the finance documents to any potential transferee or assignee, subject to the recipient signing a confidentiality undertaking.
The bank then went into liquidation, and the liquidator marketed the loans as part of a package which contained distressed debt. Camden was concerned that this would create an impression that its loans too were distressed, and that any potential investors would be more interested in acquiring the loans than the properties, with a view to subsequently acquire the properties for below market value.
Camden issued proceedings and claimed that a term should be implied into the contract, to provide that the bank must not market the loans or do anything to hinder Camden’s marketing of the premises so as to achieve the best price.
The matter reached the Court of Appeal, where the court rejected Camden’s argument that terms should be implied into the contract. As part of their reasoning, the Court of Appeal cited an earlier court decision whereby it was a ‘cardinal rule’ of contract law that an implied term must not contradict any express term in the contract. In the current case, the contract gave the bank an unrestricted power to disclose information to potential purchasers of the loans, and therefore to restrict such power would be ‘substantively inconsistent’ with the express terms of the contract.
The Court of Appeal took the view that although the proposed implied term may not be linguistically inconsistent with the express terms of the contract, nevertheless it would be substantively inconsistent with the express terms and therefore the requested qualification or term should not be implied into the contract.