Lord Clark heard proceedings in the Commercial Court in the Outer House of the Court of Session on an implied term importing a reasonable time restriction for the performance of obligations in a commercial contract. His decision supports the view that the omission of express timescales in connection with the performance of obligations in such contracts will not provide a basis for a party under such an obligation to delay unreasonably in its performance.
On 28 December 2017, Lord Clark issued a judgment in the case of William Burnside (“the pursuer”) v Promontoria (Chestnut) Ltd (“the defender”) in favour of the pursuer.
Background
The case concerned an agreement between a property investor and developer (the pursuer) and a bank with regard to the sale of 26 properties located in the Borders area of Scotland. The properties were purchased by the pursuer with funding from the bank. The agreement was entered into when the loan became due for repayment.
The terms of the agreement were such that the bank was under an obligation to sell the properties in order to realise capital to repay the loan. The pursuer’s obligations included managing the properties and remitting rental income to the bank in the interim.
In June 2015, the bank assigned its rights under the agreement to the defender. The defender thereafter sought to terminate the contract on account of the pursuer failing to pay over the rental income.
The Court Action
The pursuer raised proceedings seeking orders, including, a declarator that the contract had not been terminated and remained in force; and specific implement (specific performance in England) compelling the defender to perform its obligation to sell the properties.
The pursuer argued that the purported termination of the contract by the defender was invalid on account of the pursuer being entitled to withhold the rental income due to the defender having failed to perform its obligation to sell the properties within a “reasonable time”. The contract was silent on any timescale in connection with the defender’s obligation but nevertheless the pursuer argued that such a term was implied. The defender contested the pursuer’s position and the point came before Lord Clark at debate.
The court was to determine whether the implied term founded on by the pursuer formed part of the agreement, subject to the effect on an entire agreement clause in the contract.
Discussion
In determining the point the court identified two types of contractual implied terms:
- Terms which are implied into a contract for reasons of business efficacy where, in the circumstances, the parties must have intended to include them; and
- Terms which, unless expressly excluded, are implied by the law generally (whether by statute or the common law) in certain instances.
In relation to the second category, within which the implied term in question; that a contractual obligation ought to be performed within a reasonable time – fell, the court applied the authority, Hick v Raymond & Reid [1893] A.C. 22. Hick provides that as a general rule of law, where the language of a contract does not expressly, or by necessary implication, fix a time period for the performance of a contractual obligation, it shall be implied that the said obligation shall be performed within a reasonable time.
The Decision
The court held that there was no basis under the contract or implied by circumstances to exclude the implied term and thus the obligation on the defender to sell the properties was to be performed “within a reasonable time”.
The above was subject to an entire agreement clause which the court held, whilst in principle capable of excluding an implied term of this nature, did not have that effect in this instance.
Separately, the court held that the absence of written averments in the court pleadings with regard to the duration of the reasonable time period did not affect the competency of the pursuer’s position, the pursuer having offered to prove that a reasonable time had elapsed.
Finding in favour of the pursuer the court allowed a proof before answer (a full hearing on the facts and the legal issues). The action is on-going (at July 2018).
What we can learn from the decision
The opinion of Lord Clark is a useful illustration of the court’s approach to implied terms in commercial or property contracts. It provides support for the view that the omission of express timescales in connection with the performance of obligations in such contracts will not provide a basis for a party under such an obligation to delay unreasonably in its performance.
This is potentially useful in the context of commercial agreements in relation to, for example, the payment of settlement monies or proceeds in connection with the sale of property or other commercial dealings, where parties have omitted to state an express deadline for monies to be remitted from one to the other.
Notwithstanding the above, it would be prudent to take advice prior to entering into any such agreements.
The court’s approach in this case ought not to be viewed as a “get out of jail free” card where parties have inadvertently contracted on less than favourable terms than they may have intended, in particular, in light of the Supreme Court’s approach to contractual interpretation (see Arnold v Britton and the more recent decision of the Inner House of the Court of Session in Hoe International Ltd v Andersen).
If you would like to discuss any issues raised above, our Dispute Resolution and Litigation experts would be happy to help.
