In Attorney General of Belize v. Belize Telecom [2009] UKPC 10 the Privy Council spelled out the law on terms implied in fact. The importance of the decision in early 2009 can be seen from the fact that it was cited in eight other cases before the end of the year.

The test now to be applied to determine whether a term should be implied as a fact (as opposed to law) into a contract can be summarised as: "Is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"

Most recently, in Infection Control Enterprises Limited v. Virrage Industries Limited [2009] EWHC 2602 (QB), the Judge said that deciding whether it was to be inferred that the parties to a software agreement had intended the intellectual property ownership in the software to be transferred was "an exercise in construction, not creation".

In that case, an earlier agreement for the provision of the same software between the claimant and a different entity (which was sub-contracting the work to Virrage) had included a term that the claimant would acquire all IP on payment. However, that relationship ran into difficulties and so the claimant entered into a new agreement with Virrage, which was silent as to any transfer of IP. The claimant said it was so obviously the understanding between the parties that no mention needed to be made of it. The Judge summarised the factual matrix regarding the commercial operation of the contract and also the language of the relevant clauses of the agreement. He found no reason why the agreement should include an assignment of copyright, when a right to sub-licence would suffice for the claimant's business.

The effect of the Privy Council's approach in Belize Telecom, has been to elide the law on the implication of terms into a contract, with the law on contractual construction. In giving the Privy Council's opinion, Lord Hoffman effectively put the "officious bystander" (who in the past was said to be the arbiter of what the parties had intended) firmly on the sidelines. He said that both this, and the other well-known maxim of "business efficacy", were not different or additional ways of testing for an implied term, but simply different ways of expressing the same central proposition. The officious bystander is another way of saying, although the agreement does not deal with the point expressly, that is what a reasonable person would understand it to mean. Business efficacy means that the process of construing the document should take into account relevant background, such as the practical consequences of implying a term.

But if there was to be any suggestion that this might make it easier to find terms implied into a document, this was rebuffed by the Court of Appeal in Mediterranean Salvage & Towage Ltd v. Seamar Trading & Commerce Inc (The Reborn) [2009] 1 CLC 909. Where a contract does not deal with a point expressly, the usual conclusion should be that this is because nothing was intended to happen if the point arose and any loss that is suffered should lie where it falls. In this way, whilst following the new unified test from Belize Telecom, the Court was clearly of the view that the process of construction of the contract did not lower the threshold for implying a term: it is not sufficient that to do so might be reasonable - it must still be necessary.

The law on implying terms into contract is now a clear single test, but construing any particular contract in light of its relevant background is a much less clear exercise. If the words of a contract do not say what a party later wants them to say, there is still considerable room for commercial uncertainty.

Jo Sanders-Key