IMPLIED TERMS IN COMMERCIAL CONTRACTS: NEVER ASSUME THE OBVIOUS

1. IMPLIED TERMS IN COMMERCIAL CONTRACTS: NEVER ASSUME THE OBVIOUS The courts are reluctant to add or imply terms to commercial contracts. Even more so when the agreement is a commercial one, properly drafted and reached at arms’ length between two independent parties. The recent High Court case of Sparks v Biden (2017) EWHC 1994 (Ch) is an exception. But the case should not be seen as giving a green light to parties to rely on the courts to amend contracts. Nor as the start of a trend of adding terms that were overlooked at the negotiation and drafting stage. Instead, even the most obvious terms should be included expressly. This ensures clarity. And it minimises the event of dispute and litigation. SPARKS V BIDEN: WHAT HAPPENED? The dispute between Mr Sparks and Mr Biden centred on an option to purchase agreement relating to land in Wimbledon, South West London. The option required Mr Biden (the purchaser) to use all reasonable endeavours

2. to obtain planning permission for eight houses and to construct the houses as soon as practicable after obtaining permission. The agreement also contained overage provisions which would see Mr Sparks benefit by at least £700,000 when any of the houses were sold. Overage (also known as claw-back) is common in contracts for the sale of land. It allows for a premium to be paid to the seller above the original sale price if certain conditions are met. For example, as here, if houses are sold. Mr Biden got his planning permission and built the houses. But instead of selling them he rented them out. Because the option agreement had not expressly required him to sell, Mr Biden argued that the overage clauses did not kick in. Mr Sparks, depending on the overage payments for his retirement fund, asked the court to oblige Mr Biden to sell and pay what was due under the overage provisions. IT MIGHT BE OBVIOUS – BUT SPELL IT OUT Mr Sparks’ case was that, without the implied term he sought, the whole option agreement was meaningless. What was the point of requiring Mr Biden to seek planning permission and construct houses if not to sell them? This line of reasoning seems to have been the principle driver behind the judge’s ultimate decision to find in favour of Mr Sparks. Judge Davis- White QC decided to imply into the option agreement a clause to the effect the buyer was under an obligation to market and sell each house constructed within a reasonable time of the option having been exercised and the planning permission having been obtained. He stated that, ?Such A Clause Is One That Is Necessary As A Matter Of Business Efficacy And Without It The Option Agreement Lacks Practical Or Commercial Coherence.? And for the avoidance of doubt he added that he believed the clause was ?so obvious? that ?it goes without saying?. This was a good result for Mr Sparks. And a judgment like this showing a degree of judicial flexibility is to be welcomed. But Mr Sparks’ main arguments do beg the question: If selling the newly constructed houses was

3. so fundamental to what he believed he was agreeing to, why didn’t he – or his advisers – not include an express reference to selling the dwellings in the initial agreement? While the case may strengthen the case of those seeking to imply terms into existing construction agreements and options we do not think it would be sensible to use it as a way of persuading courts to imply terms in future. Instead the case demonstrates the importance of thinking long and hard at the time of contract negotiation about every possibility. And setting these out in detail. At Nath Solicitors we are specialist Commercial Law Firm in London. For advice please call us on +44 (0)203 670 5540 . Reach us @ https://www.nathsolicitors.co.uk/