As I please

Contract 2 iStock 000003466551XSmall 146x219A recent High Court judgment on contractual discretions has shown again that judges do not like implied terms, writes John Bryant.

A common type of contractual clause whose wording appears to be nebulous (and certainly can give rise to some nebulous thinking) is that conferring on one of the parties a discretion to do something or not to do it.

So, for instance, X is not to act without the consent of Y or Y is not obliged to act unless Y himself considers it appropriate to do so. Is there a limit to Y’s discretion in such cases or can he do as he pleases? Often it is asked: does he have to act reasonably?

A recent decision of Warren J reminds us how the judges construe (or are supposed to construe) such clauses. It also reminds us how in general the law approaches the implication of terms in documents.

Unique Pub Properties Ltd v. (1) Broad Green Tavern Ltd (2) Dempsey [2012] EWHC 2154 (Ch) was a case about the lease of a pub, which incorporated a beer-tie. The landlord, Unique, wished to install within the premises a device known as the “i-draught” system, so that it could monitor the amount of beer dispensed and thus see whether or not the tenant was observing the tie. The tenant objected and Unique sought injunctions, ordering the defendants to allow it to have access on reasonable notice in order to install the i-draught system. This was an application for summary judgment for that relief.

The provisions of the lease under which Unique claimed the right to install the i-draught system (referred to by the judge as “the Reservation”) included the right:

“To enter the Property

(1) to inspect and/or take inventories

……..

(6) to install operate repair replace renew inspect and maintain such beer and cider (or other drinks) dispensing equipment including (without limitation) lines pumps cooling apparatus flow regulating or monitoring systems and such other ancillary equipment as Unique may from time to time consider appropriate or desirable [my emphasis]

……..

such entry…to be at reasonable times on reasonable notice.”

The tenant objected to the installation of the i-draught system because it considered it inaccurate and constituted measuring equipment that was “false or unjust” within the meaning of section 17 of the Weights and Measures Act 1985. To install it therefore would render the defendants guilty of a criminal offence.

First the tenant took a number of points of construction, some on the express wording of the Reservation and a couple by way of implication of terms. We need not dwell on those save to note that Warren J rejected each and every one of them and that in relation to the argument about implication of terms he reminded himself of Lord Hoffmann’s words in A-G of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [21]: “It follows that in every case where it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean……. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

As Lord Hoffman put it at para.18 in the same case, “…the implication of the term is not an addition to the instrument. It only spells out what the instrument means.” So whether or not to imply a term is merely part and parcel of construing the document.

In the Unique Pub case the tenant went on to submit that the landlord’s right of entry did not extend to: “entry for the purpose of installing any equipment which is unlawful and/or is not shown to be accurate for the purpose of monitoring the flow of beers and ciders through the dispensing equipment, an appropriate objective standard of accuracy being a margin of error of +/- 0.5%”.

The judge considered the relevant provisions of the Weights and Measures Act and concluded that the installation of the i-draught system would not be unlawful. So there was no need for him to decide whether or not a term should be implied into the lease that the right of entry could not be exercised to install equipment which would result in a breach of the Act. He went on to say (obviously, obiter): “However, the court would surely strive to reach the result that Unique should not be entitled to install equipment the use of which would be unlawful and I accordingly incline strongly to the view that such a term ought to be implied.”

The tenant made a further submission, namely, that terms were to be implied which would prevent Unique from exercising its right of entry in order to install equipment (i) which was not shown to be accurate or (ii) which would interfere substantially with the operation of the tenant’s business.

As for (ii) the judge saw little or no evidence of interference with the tenant’s business and in any event, since there was a covenant for quiet enjoyment, considered there was no need to imply such a term.

The judge concluded that the Reservation, properly construed, was to be read “as granting a right of entry to Unique to install such flow monitoring equipment as it should from time to time consider appropriate or desirable.” That led him to consider whether or not there was any legal constraint on Unique’s consideration of what was appropriate or desirable and here we come to the most relevant part of the judgment.

Warren J considered a number of authorities dealing with the implication of terms where a contractual provision “puts one party at the mercy of another’s exercise of a discretion.” He set them out briefly together with the legal principle each established. They were:

  1. Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Reports IR 221 per Brooke LJ at [35]: the circumstances in which the court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited. The courts will not intervene where the discretion is exercised honestly and in good faith for the purpose for which it was conferred and provided that it was true exercise of the discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse.
  2. Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047 per Mance LJ at [62]: implication all depends on the circumstances, and the authorities do not establish any automatic implication of a term as to reasonableness whenever a contractual provision exists putting one party at the mercy of another’s exercise of a discretion.
  3. Abu Dhabi National Tanker Co v Product Star Shipping Ltd [1993] 1 Lloyd’s Reports 397 per Legatt LJ at p 404: where a contractual discretion falls to be exercised, it must be exercised honestly and in good faith and must not be exercised arbitrarily, capriciously or unreasonably.
  4. Paragon Finance plc v Nash [2002] 1 WLR 685 per Dyson LJ at [41] and to the same effect Gan Insurance per Mance LJ at [64]: unreasonableness in the context connotes conduct or a decision to which no reasonable person having the relevant discretion could have subscribed.

Summarising, the judge said this (at para.53): “What I conclude from those authorities is this principle, namely that a contractual discretion must be exercised honestly and in good faith and must not be exercised arbitrarily, capriciously or unreasonably, unreasonableness being assessed in the sense that no reasonable person would exercise the discretion in the manner proposed. Sometimes the courts appear to approach these restrictions by way of implication. In others, they appear to approach the matter of one of construction. It does not matter which approach is more accurate, especially as the implication is, in any case, a facet of construction as explained by Lord Hoffmann.”

Applying that principle he decided that the term as to the accuracy of the equipment for which the tenant contended should not be implied. There was nothing to suggest that Unique was acting other than honestly and in good faith. Nor was it acting arbitrarily, capriciously or unreasonably in the sense he had described. He gave summary judgment.

The lesson? On the whole the judges do not like implied terms.

John Bryant is a barrister at 1 Chancery Lane. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..