Beyond The Four Corners – Implied Terms In New Zealand

Emma Hunter-Hills

March 2018. . . Ward Equipment Limited v Preston is a 2017 Court of Appeal case dealing with the question of when additional terms should be implied into a commercial contract.

Preston and Ward were parties to a licence agreement for the import, hire and sale of patented construction products and the exclusive right to use certain trademarks in New Zealand. The licence agreement was entered into in 1998; neither party was an original party to the agreement.

The agreement made provision for termination on breach but did not provide a general termination clause.

In 2016 Preston began trading and registered trademarks in New Zealand, in breach of the license agreement. Ward threatened injunctive proceedings. Preston then sought to terminate the agreement for breach of the Ward’s obligations to exploit the products in a diligent and professional manner in New Zealand or alternatively sought to rely on an implied term allowing Preston to give reasonable notice terminating the agreement.

The notion of having terms implied into a contract by a court is at odds with both the concepts of sanctity of contract and freedom of contract; why should terms be implied into a contract when those terms haven’t been agreed between the parties?

Well, what about situations that arise that the parties have not contemplated? Or where the terms contained contradict certain statutes? Or where there is an understanding between the parties (by virtue of the nature of the contract) that certain terms would simply apply, it was so obvious that they didn’t need to write it down?

It is well recognised that in certain cases other terms will be implied into a contract in addition to the terms which have been agreed between the parties; these are referred to as “implied terms”. Often a contract is not an isolated act but is coloured by its context; implied terms are a way in which the context surrounding the agreement is brought into the contract.

There are various types of implied terms that have been recognised by the courts and we can broadly classify these into three categories (although often there will be an overlap as between these categories).

Terms implied by Custom

This is the concept of contractual terms that are known or generally understood in the area in which the contract arises, i.e. the concept of good husbandry on a farm sale. It is important that terms implied by custom reflect the intentions of the parties and has not been expressly excluded and, when imported, will be consistent with the contract as a whole. The custom must be so well-known that the parties must have intended it would form part of the contract and must also be certain and reasonable

Terms implied by Statute

These are terms which regulate the contract, particularly those that protect the everyday consumer from the ruthlessness of the original market position of “buyer beware”. As time progressed this position was modified by the market; once concepts like “goods sold by sample should match the sample” and “those sold by description must match that description and be of merchantable quality” became commonplace they were codified into the Sale of Goods Act 1893. There are other statutes that we recognise today that impose similar implied terms into everyday dealings, these include the Fair Trading Act 1986 and the Consumer Guarantees Act 1993.

Terms implied by the Court

These include terms that are implied as a matter of course into all contracts of a particular type, the common example is that building work will be done in a proper and workmanlike manner, as well as terms deduced by implication or interpretation from the express terms of the contract (also referred to as logically implied terms) and terms implied in order to give business efficacy to the contract.

It is under this last category that Preston sought to rely on an implied term; Preston submitted that because the licence was not of any fixed duration the parties were entitled to terminate on reasonable notice.

The High Court agreed with this interpretation stating it was “simply improbable and commercial nonsense” to suggest that commercial parties intend to contract forever and that “the existence of a termination clause and a whole-of-contract clause in the licence agreement did not prevent the implication of a term that the contract could be terminated on reasonable notice”.

Ward appealed this decision for a number of reasons including that the parties had consciously agreed to delete a general termination clause during pre-contractual negotiations, the term would contradict the express wording and it was not required to give business efficacy. The Court of Appeal agreed stating that “to apply a presumption of this nature would be inconsistent with the freedom of the parties to contract and inconsistent with the role of the court when interpreting the language of a contract or determining whether such a term should be implied”.

Why? Because “the law correctly places a premium on the express words adopted by the parties”; implication of terms is “not to be deployed to improve a contract but simply to ascertain the meaning all parties intended the contract to bear”. With the exception of those terms implied by statute, terms will not just be implied into a contract lightly, particularly commercial contracts.

It is important to realise that sometimes there may be obligations that limit or extend beyond what your contract expressly provides for. If you are contemplating entering into a contract and want to understand the extent of your obligations or ensure that the contract aligns with all your expectations, please do call us to discuss.