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30 November 2017

Sparks v Biden – the courts imply terms to ensure payment of overage

Sometimes a contract may not express the full intentions of the contracting parties.  The recent case of Sparks v Biden  has provided a useful reminder of the situations in which a Court will imply a term into a contract.

The most usual inference drawn by the Courts is that if a contract does not expressly provide for what is to happen when some event occurs or in some situation then nothing is to happen – if the parties had intended otherwise they would have stated so in the contract.  For the Court to imply a term into the contract the term must:

  1. be reasonable and equitable;
  2. be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it but will be if, without the term, the contract would lack practical or commercial coherence;
  3. be so obvious that “it goes without saying”;
  4. be capable of clear expression; and
  5. not contradict any express terms of the contract.

In assessing whether to imply a term and, if so, what it should be, the Court carries out an objective assessment not of the actual intention of the parties but what reasonable people in the position of the parties at the time would have agreed.

Sparks v Biden concerned an option agreement.  This required the buyer to pay the seller overage (also called "clawback") when any new house constructed as part of a development was sold.  However, the option agreement contained no express term requiring the buyer to actually sell the new houses so triggering the obligation to pay overage.  Instead of selling the new houses, the buyer let them under assured shorthold tenancies and occupied one himself.

The Court decided that a term should be implied into the option agreement obliging the buyer to market and sell each house constructed within a reasonable time of obtaining planning permission and exercising the option.  It considered that such term was necessary as a matter of business efficacy, that without it the option agreement lacked practical or commercial coherence and the term was so obvious that it went without saying.

The case highlights the importance of ensuring that contracts correctly reflect what has been agreed and, in the case of complex arrangements such as overage, the need for the parties and their advisers to consider all reasonably foreseeable circumstances to ensure that the contract provisions remain effective for the whole of the life of the contact and are not reliant upon a Court implying terms in (which may not be exactly what the parties would have agreed had they considered them at the time.)

This article was written by Clare Fleming, for more information please contact Clare on +44 (0)20 7203 5043 or