12/04/2023
Earlier this year, the UK Supreme Court handed down the judgment of Barton and others (Respondents) v Morris and another in place of Gwyn Jones (deceased) [2023] UKSC 3.
This seminal judgment confirms the reluctance of the court to imply terms into a contract in the interests of equity. The case also provides a review of the concept of unjust enrichment and its relationship with commercial contracts.
Facts of the Case
- Mr Barton (‘B’) entered into an oral agreement with Foxpace Limited (‘F’) concerning Nash House, a property owned by F which it intended to sell.
- The rationale of the agreement was that should B introduce a purchaser to F who went on the purchase the property for £6.5 million or more, B would be entitled to a sum of £1.2 million from F.
- B introduced a buyer to F who initially agreed to pay £6.5 million, however the sum was subsequently renegotiated after the buyer uncovered a potential issue with a HS2 rail link and the property was eventually sold for £6 million.
- As B had technically introduced F to a buyer who was willing to pay £6.5 million for the property, B argued that he was entitled to the £1.2 million he was promised. F argued that as the property was in fact sold for under the £6.5 million threshold, F was entitled to nothing.
High Court Decision
The dispute was brought before the High Court[1] and the judge concluded that F was not obliged to pay £1.2 million to B because the contract was silent on a situation where a purchaser originally agreed to pay £6.5 million but the price was subsequently negotiated down.
B based his claim on the principle of unjust enrichment. This principle operates in the law of equity whereby one person benefits financially at the expense of another and this benefit is deemed unfair, or ‘unjust’. The High Court concluded that, whilst F was enriched at B’s expense, this enrichment was not unjust because otherwise this would undermine the terms of the contract.
Court of Appeal Decision
B appealed to the Court of Appeal[2] where the decision of the High Court was unanimously overturned and B’s appeal was allowed. The Court held that B was entitled to £435,000 as reasonable remuneration for introducing the purchaser to F.
The concept of unjust enrichment was revisited and the Court concluded that F’s enrichment was unjust in the circumstances. The Court elaborated by stating that this conclusion did not go against the terms of the contract because there was an implied term that B would be entitled to remuneration irrespective of whether the final purchase price was renegotiated or not.
Supreme Court Decision
F appealed the decision to the Supreme Court[3] and the appeal was allowed by a 3-2 majority. The UKSC ruled that it was inappropriate for the Court to imply a term to accommodate for a situation where a purchase price was agreed at £6.5 million but it was subsequently negotiated below this threshold. No such term was necessary to give business efficacy to the terms of the contract nor was the term so obvious as to go without saying[4].
By a 4-1 majority the UKSC held that unjust enrichment did not apply at all where the parties’ rights and obligations were set out in a contract (“the subsisting contract principle”) and that this applied even on the unusual facts of this case, in which the contract was an oral contract consisting of only one term. Therefore, B was entitled to no remuneration from F for introducing it to a purchaser for Nash House.
The majority judgment in this case adopted a non-interventionist approach, favouring the literal meaning of the words (or lack thereof). Lady Rose gave the leading judgment whereby it was concluded that F was not entitled to any remuneration under the contract: neither through an implied term nor unjust enrichment. Lady Rose quoted Lord Bingham MR in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 in reaching her conclusion:
“…it may well be doubtful whether the omission was the result of the parties’ oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur”.
Drawing upon this reasoning, Lady Rose concluded that the Court was unable to imply a term into the contract to account for the possibility of the sale being for less than £6.5 million. The lack of detail within the contract meant the Court was unable to confidently deduce from the parties’ intentions as to what should happen in this event.
However, both Lord Leggatt and Lord Burrows submitted dissenting judgments. Their Lordships considered the context of the overall agreement between the parties and concluded that a term would be implied into the contract that F would be entitled to reasonable remuneration. However, their Lordships disagreed as to whether unjust enrichment also applied: Lord Burrows concluded that unjust enrichment would step in had the implied term not done so, whereas Lord Leggatt stated that the claim in unjust enrichment would fail on the facts.
Lord Leggatt elaborated on the “consequences of saying nothing” and stated that the law of contract, in his opinion, operates beyond the literal words of the agreement:
“The fact that the contract did not expressly deal with whether a fee was payable in the circumstances which occurred does not mean that the law of contract is inapplicable. But nor does it entail that pursuant to the law of contract nothing was payable in those circumstances. Both approaches fail to recognise that the law of contract provides a set of rules for ascertaining the legal rights and obligations of contracting parties which extend well beyond their expressly stated intentions”.
Practical Points
The decision in the Court of Appeal and the two dissenting judgments in the Supreme Court illustrates the challenges around interpretation on issues where a contract remains silent. The current prevailing view is that the Court will not step in to “fill the gap”.
Parties entering into contracts should consider different outcomes and, where appropriate, seek to include those in the drafting. The Court will only imply terms into a contract if the tests set out in B.P. Refinery[5] are met:
- it is reasonable and equitable to do so;
- it is necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- it is so obvious that ‘it goes without saying’;
- it is capable of clear expression; and
- it does not contradict any express term of the contract.
These tests were reaffirmed in Marks & Spencer v BNP Paribas, and the Supreme Court elaborated that tests 2 and 3 are alternatives: only one needs to be satisfied for the Court to imply a term. Furthermore, test 1 will be satisfied provided that test 2 or 3 applies, and test 5 was described as a “cardinal rule”.
In practical terms, this means that commercial contracts should aim to strike a balance between definitive, extensive express terms, and drafting which allows scope for flexibility.
Parties should not rely on implied terms to save them. Mr Barton found this to his cost –notwithstanding that 5 of the 9 judges who considered his argument throughout the course of the various proceedings concluded that he was in fact, entitled to something. Those arguments could have been avoided had the contract provided for what would happen if the sales price was not achieved.
For more information on this topic, please contact Judith Hopper, Partner or Louise Ducasse, Trainee Solicitor.
This article was co-written by Louise Ducasse, Trainee Solicitor.
[4] Marks and Spencer v BNP Paribas Securities Services [2016] A.C. 742
[5] B.P. Refinery (Westernport) Proprietary Ltd v Shire of Hastings (Victoria) [1977] UKPC 13 (27 July 1977)
