Risks of rider clauses

The UK Supreme Court has clarified the English law approach to implying terms into contracts, adopting a restrictive approach. Although not a case relating directly to the shipping industry, the decision has important implications for all commercial contracts, and the key point for all is to try and deal with every contingency within the contract. Failing to do so could otherwise prove costly.

In certain circumstances, the Court will imply terms that were not dealt with explicitly in the wording of the contracts. With this, there are two types of implied term: first, a term that is implied into a particular contract, in light of the express terms, commercial common sense, and the facts known to the parties at the time the contract was made; and second, terms that are implied because the law effectively imposes certain terms into certain classes of relationship.

For either term to be implied at all, it has to do the following:

• Be reasonable and equitable
• Be necessary to give business efficacy to the contract
• Be capable of clear expression
• Be so obvious that it almost goes without saying
• Not contradict any express term of the contract

This stringent test reflects the Court’s traditional reluctance to imply either kind of term into any contract, viewing it as an intrusion into the parties’ commercial autonomy.

Recently, some observers have said English law had changed, and that the English courts were now more willing to look beyond the explicit terms of commercial contracts and imply terms more liberally. The case of Marks and Spencer plc v BNP Paribas Securities Services trust Company Limited and another, however, disputed this and re-affirmed the Court’s traditional view.

Refusal to interfere

This particular case dealt with the first type of implied term, mentioned previously. The dispute arose out of the terms of a lease under which M&S leased premises from BNP. M&S was entitled to break the lease by giving six months’ notice before a specified date. The lease would then terminate on that date so long as all payments due had been paid. Rent was to be paid in quarterly instalments in advance.  

M&S exercised its right to terminate the lease on January 24, 2012. In accordance with its obligations, M&S paid a three-month instalment of rent before December 25, 2011, which covered a period up to March 24, 2012. The lease then terminated on January 24, 2012. 

M&S asked to be refunded pro rata for the rent it had paid from January 24, 2012 to March 24, 2012, however BNP refused. Certainly, there was no provision in the lease that expressly obliged BNP to pay back these sums to M&S, who argued that such a term should be implied into the lease.

While the Supreme Court noted that it was reasonable and equitable that M&S be refunded its money, as the sum represented a pure windfall for BNP, it refused to imply such a term into the lease.

According to the Court, not only was the sum still insufficient, this particular contract was a detailed commercial lease that had been entered into between two experienced parties. It had been negotiated and drafted by lawyers, not forgetting dealt with a large number of contingencies. The lease was, therefore, still workable without the implied term, and so was unnecessary to imply.

A cautionary tale

The term M&S wanted implied was reasonable and fair. Without the implied term, the Court accepted that the lease operated in a capricious way. Nonetheless, the Court refused to imply the term. An implied term must be necessary to give commercial or practical coherence to a contract. Reasonableness was just not enough.

In terms of the shipping market, there are many terms that the Court implies into charterparties. For example, the implied indemnity given by charterers to owners for following charterers’ orders. While the Court’s judgement in this particular case will not affect said terms, it stresses the importance of considering in detail what you are agreeing to when negotiating rider clauses. Only that kind of review will allow you to adequately assess the risks of any deal.

Specifically, you should consider the following:

• The courts have already determined the meaning of most of the older industry standard charterparty clauses. This gives a degree of certainty. If you are replacing these standard clauses with rider clauses, do the rider clauses have the same effect?
• When negotiating additional rider clauses, do they cover everything? Think through all contingencies that could occur and try to deal with these explicitly. This is particularly important on longer term or higher value contracts where your potential liabilities will be greater.
• Keep your contract terms under review – if a situation occurs that is not dealt with, can you insert a clause in your future contracts that deals with this issue?  
• Try to use clear and unambiguous language when drafting.
• Seek professional advice where necessary.  

Taking such precautionary steps at the contracting stage could save you a lot of money later. If you make a bad bargain, the Court will not correct your mistake, so getting your contracts right is crucial.

Max Cross is a partner at Ince & Co., focusing on commercial disputes, insolvency and corporate recovery, international trade and commodities, and shipping. He can be contacted at max.cross@incelaw.com or +852 2877 3221. William Blagbrough is a solicitor at the same firm, and can be contacted at William.blagbrough@incelaw.com or +852 2877 3221.