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The Officious Bystander Test: Implied Terms Included When Interpreting a Contract
Question: What does it mean when a contract lacks clarity on essential terms?
Answer: When a contract lacks clarity, courts may infer implied terms to reflect the parties' intentions, ensuring the agreement has necessary "business efficacy." This interpretation helps clarify obligations without altering the established terms, providing greater predictability in contractual relationships.
How Does a Court Interpret a Contract When Terms Were Left Out of the Agreement?
When a Contract Lacks Certain Details a Court May Be Called Upon to Insert Implied Terms Within the Agreement As a Means to Determine the Intentions of the Parties. Inserting Implied Terms Differs From Adding Absent Terms.
Understanding the Officious Bystander Test As Relating to the Interpretation of Implied Terms to a Contract
The contract that is written perfectly is highly unlikely to exist, whereas the drafters of the contract, whether lawyers or laypersons, are imperfect and subject to human frailties including the inability to think of, and perfectly state in words, every possible concern that may subsequently arise. Additionally, such a perfect contract would likely be thousands of pages in length and impractical in the real world of dealings between people. Accordingly, disputes regarding what a contract intended often occurs and courts are frequently required to make decisions about what a contract intended based upon what is legally known as implied terms.
The Law
An implied term is an unstated term that is intellectually interpreted as existing within the contractual intention rather than an express term which is a stated, written or verbal, term to a contract. An explanation of what constitutes an implied term was well stated within Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514 where it was said:
[30] As observed by the application judge, a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the ‘officious bystander test.’” (M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619).
[31] The officious bystander test was most famously articulated in Shirlaw v. Southern Foundries (1926) Ltd., [1939] 2 K.B. 206 at 227, [1939] 2 All E.R. 113 at 124 (C.A.):
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. Thus, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common: “Oh, of course.”
[32] The business efficacy test in its modern form originated in The Moorcock (1889) 14 P.D. 64, [1886-90] All E.R. Rep. 530 (C.A.) at 68:
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 parties…
[33] The Moorcock concerned a contract between a wharf operator and a ship owner; the court implied a warranty that the ship could be safely moored at the wharf with “the object of giving to the transaction such efficacy as both parties must have intended” (p. 68, 70).
[34] The business efficacy test was reviewed more recently by the Privy Council in Attorney General of Belize v. Belize Telecom Ltd., [2009] UKPC 10, [2009] 2 All E.R. 1127, at para. 22:
Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. …
[35] Implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds (Belize Telecom, para. 31).
[36] On the other hand, a court will not imply a term that contradicts the express language of the contract, or is unreasonable: G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd. (1984), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.).
As above in Energy Fundamentals, an implied term relates to what an "officious bystander" would view as a term necessary to provide a contract with "business efficacy", that is a sensible purpose.
Interestingly, and at first seeming paradoxical, the interpretation and insertion of an implied term occurs without suggesting the addition of an absent term. Again, this may seem paradoxical; however, understanding implied terms principles requires a fundamental appreciation for the difference between an implied term which was intended, consciously or unconsciously, and an additional term, which would be supplemental and beyond the conscious or unconscious intentions of the contracting parties. To help appreciate the subtlety between inserting an implied term versus inserting an additional term, consider that a loan contract may state that "twelve (12) payments are due and payable on the 1st". Accordingly, a court will deem that payments are indeed due. Subsequently, the court may interpret the "1st" as meaning the first day of each month, rather than meaning the first day of every week or due the first day of each year. In this circumstance, the court is merely interpreting as an implied term when a payment is due rather than inserting a contract term that a payment is due.
Conclusion
An implied term is a term that was left unstated in the creation of a contract; and yet, the presence of the term is necessary to give "business efficacy" to the contract. There is a significant distinction between what would be inserting an implied term and what would be inserting an additional term. Appreciating this difference is necessary to the interpretation of contracts.