Contract terms should only be implied

In your opinion, were the House of Lords right in Liverpool City Council v Irwin [1977] AC 239 to hold that contract terms should only be implied where it is necessary to do so, rather than where it is merely reasonable? Give reasons for your answer.

Introduction

In Liverpool City Council Respondents v Irwin and Another Appellants [1977] A.C. 239, 11 the court was faced with the question whether a term could be implied into the contract on basis of a necessity or reasonableness and whether it should be implied by fact or by law.

“The nature of the contract required a term to be implied that there was an obligation to take reasonable care to maintain the common parts in reasonable repair and use”.

The House of Lords rejected Lord Denning's dissenting view in the Court of Appeal that the term was implied on a test of reasonableness, but contended that the correct approach here would be a test of necessity.

This is a controversial issue in contract law and it is still not determined what approach is to be used in future. An analysis of two differing judgments are crucial here in this case: Lord Denning's claim for reasonableness in the Court of Appeal Liverpool City Council v Irwin [1976] QB 319 and Lord Wilberforce's judgment where he concludes “in a rather restrained fashion” that necessity has to be present in order to imply a term.

The question is here whether it was really “necessary to imply such a term into the tenancy agreement?” and why the House of Lords disagreed with the reasonableness test that is usually used in cases such as this one where terms are implied in law (“into all contracts of a particular type” in particular to protect a weaker party). After consulting various sources, it is at this point to be added that there seems to be confusion in the case in question whether the term was implied by fact or law and it is a crucial aspect of the case, nevertheless this essay will put more weight on the first issue namely the test applied on grounds of necessity or reasonableness.

The idea behind this essay is to elaborate why the conclusion of the House of Lords was right in regards to the necessity test and why nevertheless the case seems a bit ambiguous as it seems to reflect a strong stand for a reasonableness test which points towards a trend in subsequent case law.

INTRO TO 1ST PARA

The courts will be very careful to depart from the common law principle of freedom of contract and therefore show reluctance when it comes to implying terms into a contract, especially in cases where an implication of a term by law would set a general implication of a term into all contracts of a particular nature. It could here be argued that the courts try to avoid this because of the long debated criticism of judge-made law in the judiciary and that a better way to regulate such inconsistencies in contract law(and other fields of law for that matter) would be to leave Parliament with the task of clarifying the issue.

Necessity

In the case in question it is to be believed that this was one of the reasons why the judges preferred to go the route of the ‘necessity' test, as the broader approach whether a term should be implied because it is merely ‘reasonable' to do so, would probably open floodgates as reasonableness can be very easily interpreted into any conflict area in contract law whereas a necessity narrows the scope and keeps the issue of implying terms under control. The necessity test is a doctrine that was developed in the 19th century. One of the leading cases is The Moorcock (1889) 14 PD 64, Court of Appeal. The court asked itself what the “presumed intention of the parties” is and that an implication of a term is only possible if it does give “business efficacy” to the contract. In other words, without implying the term, the contract will not work. MacKinnon LJ in Shirlaw v Southern Foundries (1926), Limited [1939] 2 K.B. 206, 227 says that such a term is “(…)so obvious, it goes without saying”, meaning it is not even necessary to include it as an express term- it's simply logical that it is there.

Shirlaw set the ‘officious bystander test' which developed out of the ‘business efficacy test' and stretches the importance of the narrow necessity test to imply a term.

In Irwin we have to ask ourselves whether business efficacy can only be reached if the term is necessarily implied or what the officious bystander would say if asked whether the term is necessarily to be implied? Would he say: “oh, of course!” as per McKinnon LJ in Shirlaw?

“The term was clearly not implied in fact: the "officious bystander" test was not satisfied; nor was the implication necessary to give business efficacy to the contract. The implication arose because the nature of the relationship made it desirable to place some obligation on the landlord as to the maintenance of the common parts of the premises. It amounted to the imposition of a legal duty, in spite of the fact that no term could be implied in fact. However, on the facts there had been no breach of the obligation“.

The first and foremost basic discommodity in Irwin was that the contract between the Landlord and the tenants was not per se a contract of bilateral nature as the contract included the do's and dont's for the tenants but no contractual obligations were included for the Landlord. The question was therefore whether a Landlord in general is obliged to look after common areas if not expressly stated. Lord Wilberforce states in his judgment that “they [the common areas] are essentials of the tenancy without which life in the dwellings, as a tenant, is not possible” and that “the subject matter of the lease […] demand[s] some contractual obligation on the landlord”. Lord Wilberforce proposes quite rightly: “(…) it is necessary to define what test is to be applied, and I do not find this difficult. In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity.” At the end of the judgment he concludes that an absolute obligation would go too far but that “[a]n obligation to take reasonable care to keep in reasonable repair and usability is what fits the requirements of the case”. He actually reaches the same conclusion as Denning but states that it would go too far to say that the court has the power to imply terms that are merely reasonable. “A just result can be reached, if I am right, by a less dangerous route”. Here the ‘dangerous route' most probably relates to the potential danger of judges crossing the line when it comes to making law and that it is for the Parliament to decide whether reasonableness is enough for a term to be implied or “is this anything more than judicial reluctance to abandon the pretence that judges will not make a contract for the parties?”.

Lord Denning in contrast who showed continuously in various cases that he was against the stand still and backwards-looking nature of the common law, expresses his contrary belief to the idea to leave the Parliament with the task of changing the law but for the judges to adopt a more proactive role:

“The judges must no longer play a constructive role. They must be automatons applying the existing rules. Just think what this means. The law must stand still until the Law Commission have reported and Parliament passed a statute on it: and, meanwhile, every litigant must have his case decided by the dead hand of the past. I decline to reduce the judges to such a sterile role. They should develop the law, case by case, as they have done in the past: so that the litigants before them can have their differences decided by the law as it should be and is, and not by the law of the past.”

Reasonableness- Lord Denning

This said, it leaves no surprise that Lord Denning gave a dissenting judgment in Irwin. Even though his test of reasonableness was rejected he nevertheless “Denning broke new ground by holding that landlords bore an implicit duty to repair their tenants' decaying houses” and “the House of Lords upheld his view that the City Council, in its capacity as landlord, was under an implied obligation at least to keep the stairways safe”. Lord Wilberforce expresses his decision to uphold the necessity test in his judgment as the “less dangerous route” but nevertheless, such terms are now implied by law into these particular types of Landlord-tenant contracts which was definitely in Lord Denning's interest- even though a compromise had to be reached here.

Lord Denning disagrees with the narrow necessity test and believes that the court do in fact use another approach if looked at it carefully. “(…)Is it necessary to give business efficacy to the transaction? If asked, the answer would have been: "It is reasonable, but it is not necessary." The judgments in all those cases show that the courts implied a term according to whether or not it was reasonable in all the circumstances to do so.” and further “That cannot be solved by inquiring what they both intended, or into what was necessary. But only into what was reasonable.”. (It is to be noted that Lord Denning has departed from many a opinions of judges in other cases and that he likes to oppose himself to the traditional common law view that judges should not represent a law making body but an instance that should interpret the law as it is.)

Peden is concerned that the courts tend to “hide behind the vagueness of the test” of necessity instead of “openly discussing policy considerations”.

Why did Denning express doubt towards the approach of necessity as a test?

Although Denning's position was rejected by his colleagues in the Court of Appeal, the House of Lords upheld his view that the City Council, in its capacity as landlord, was under an implied obligation at 187 least to keep the stairways safe. Liverpool City Council v. Irwin, [1977] A.C. 239 (1976).

Brainstorm: How to answer the question: mention a lot of Wilberforce and Denning

  • Start with a short review on what exactly has been held by the HoL-> necessity and reasonableness.

  • (Analyze the different judgments and come to the conclusion of what has really been decided (article 1990 by Phang) + other articles) doesn't answer the question-> keep this for a future essay of your own!

  • Explain the difficulties of openly suggesting that “reasonableness” and therefore a subjective test is a better way as FLOODGATE, judge made law etc. Argument that the parliament should rather have a look at it than the judges

  • Therefore the careful approach in Liverpool was probably right as to not ascertain reasonability when it comes to implied terms (Judges will be reluctant to get away from common law principle of freedom of contract)

  • Compare with other cases and decide where the trend goes (stay brief)

  • Conclude by saying that necessity is a key point of implying a term but whether clarification ought to follow in this area of law as it leads to a lot of insecurities. The question is whether a radical change in the common law that would get rid of implied terms altogether and a written contract is all that there is without taking any other aspects into considerations might be a bit harsh but would probably lead to fewer insecurities and theorizing about an area that should be fairly clear such for instance in the…..jursidiction.

Or as CLEO: use in conclusion

  1. Discuss what the question is- maybe even question the question: Was it really necessity- is that line that clear? Why is it then a revolutionary case in the first place?

1st para: CLAIM: I claim that the outcome was in fact not entirely in regard to necessity but a strong element of reasonableness was incorporated but to avoid floodgates opening the claim for necessity was probably wiser than to get away from the freedom of contract idea in common law- I agree with Lord Dennings argument but believe that Lord Wilberforce counter balanced the plea in a clever way and reached a balance even if it does seem confusing when reading his judgment- there was a paradox but he juggled it well.

Be careful here: I must get a better idea of the case and make sure that it was really not 100% sure on necessity…..do they really want you to question the question? In a way yes…but here they just want you to answer yes or no in the end. Remember Seminar tutor and Moore both agree with WB.

  1. Thrre or 4 or 5 paragraphs explaining my claim: 1) Why do I think the question in itself poses difficulty to answer the question as I don't fully believe that necessity was the outcome but that L WB reached a paradoxical equilibrium between the 2 tests and came to the conclusion that reasonable necessity is the key here- journals and books to substantiate. 2) Contrast between Denning and WB's arguments and the other judges opinions and conclusion- 3) Why necessity and not clear cut reasonableness? Explain

  2. Conclusion answering the question: At first sight it seems as if necessity was utilized as the test- but the confusion lies behind implied by law or by fact and what test is to be used in which instance- in this case the 2 principles seem to have merged and even though the case sets the landmark for implication by law it has not come away from the Moorcock narrow approach for the test of implied terms in fact and therefore a strong claim for necessity is present but with an open possibility to leave the future door open for implied in law/ reasonableness cases. Right in the sense that the court refused to create law to set a precedent for all cases of this nature and didn't want to depart from common law freedom of contract and the objectivity test. Therefore believe its right when L WB says that… END QUOTE.

Bibliography

Books

E McKendrick ‘Contract Law, Text, Cases& Materials', (3rd ed OUP, Oxford 2008)

R Duxbury ‘Nutshells Contract Law', (8th edn Sweet & Maxwell, London 2009)

S Fafinski & E Finch ‘Contract Law', (2nd ed, PEL, 2010)

Cases Mentioned And Cited:

In re Selectmove Ltd. [1995] 1 W.L.R. 474

In Vanbergen v. St. Edmunds Properties Ltd. [1933] 2 K.B. 223

Musumeci v. Winadell Pty Ltd [1995] A.L.M.D. 1670

Pao On v Lau Yiu Long [1980] A.C. 614

Pinnel's case 77 E.R. 237

Stilk v. Myrick 170 E.R. 1168

Ward v. Byham [1956] 1 W.L.R. 496

Williams v Williams [1957] 1 W.L.R. 148

Williams v Roffey Bros. & Nicholls (Contractors) Ltd.[1990] 2 W.L.R. 1153

Journal Articles:

J Skelly Wright ‘Law and the Logic of Experience: Reflections on Denning, Devlin, and Judicial Innovation in the British Context', (SLR, Vol. 33, No. 1 1980), 187

Lectures Mentioned And Cited:

N Moore ‘Lecture Recap 6: Consideration', (Blackboard: LLB Course Material, Law of Obligations 1: Contract Law, 2009)