Tag Archives: Implied Terms

Principle of – Business Efficacy

A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation on its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy as observed in Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC 131, as follows:
“The principle of business efficacy is normally invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results. The classic test of business efficacy was proposed by Bowen, L.J. in Moorcock, (1889) LR 14 PD 64 (CA). This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied—the bare minimum to achieve this goal. If the contract makes business sense without the term, the courts will not imply the same. In Moorcock, (1889) LR 14 PD 64 (CA), it was held as under:
“In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both the parties who are businessmen; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances. Transmission Corporation of Andhra Pradesh Ltd. v. GMR Vemagiri Power Generation Ltd., (2018) 3 SCC 716.

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Implied Terms of Contract

Evidently before any contract will be enforced, it is essential that the terms of the contract must be clear, definite, certain and complete and the contract must be free from doubt, vagueness and ambiguity so as to leave nothing to conjecture or to be supplied by the court. See Nair Service Society v. R.M. Palai, AIR 1966 Ker 311.
Lord Hoffman in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, (1998) 1 WLR 896, has summarized five principles of interpretation of contracts. These are:
1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge.
2. The background means “matrix of fact.”
3. The law excludes from the admissible background, the previous negotiations of the parties and their declarations of subjective intent.
4. The meaning which a document (or any utterance) would convey to a reasonable man is not the same thing as the meaning of its words.
5. The rule that words should be given their “natural and ordinary meaning reflects the common sense proposition that is not easily acceptable that people have made linguistic mistakes particularly to formal documents.”
In B.P. Refinery (Westernport) Pty. Ltd. v. Shire of Hastings, (1978) 52 PLJR 20 (PC), the Privy Council has laid down five conditions which are to be satisfied for an implied terms of contract. These are: (1) It must be reasonable and equitable; (2) It must be necessary to give business efficacy to the contract; (3) It must be so obvious that it “goes without saying”; (4) It must be capable of clear expression; (5) It must not contradict any express term of the contract. So basically, every contract involves four elements, v.iz.,
1. Competency of the Parties
2. Consensus
3. Consideration and object
4. Certainty
Thus, contracts may be classified according to:
(i) Their sunject matter;
(ii) Their parties;
(iii) Their form (whether contained in deed or in writing, whether express or implied);
(iv) Their effect (whether bilateral or unilateral, whether valid, void or unenforceable). Syed M.M. Rizvi v. Subhash Singh, 2014 (6) AWC 5751.

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Filed under Contract Law, Implied Terms of Contract