AUG 12 2019
All Insights

Implied Terms

Implying terms in commercial agreements

A recent decision of the High Court illustrates the role of “implied terms” and when they will be read into commercial agreements. 

The dispute in Air New Zealand Limited v BP Oil New Zealand Limited & ors followed the well-publicised rupture to a pipeline supplying aviation fuel from Marsden Point to Wiri in September 2017.  At the heart of this dispute was the obligation to supply aviation fuel by Z Energy Limited (ZEL) to Air New Zealand Limited (Air NZ) at Auckland Airport – because of the rupture, ZEL was only able to supply 30% of the volume of jet fuel required by Air NZ.  As a result, Air NZ was forced to cancel services and incurred additional costs in maintaining other services.  Air NZ pursued ZEL and other fuel suppliers to seek compensation for the losses it sustained, arguing that they were obliged to supply the fuel required and should accordingly be responsible for the losses caused by a failure to do so.

The contract between Air NZ and ZEL was established by the exchange of emails between the two parties, who agreed on the price for jet fuel, where it was to be supplied (Auckland Airport) and the term for which it was supplied.  However, no express term was agreed between the parties about ZEL’s obligation to supply jet fuel to Air NZ.  Air NZ argued that it was an implied term of the agreement with ZEL that it would supply the full volume of fuel required by Air NZ each day, on a continuous basis.  ZEL argued that there was no such implied term on the basis that the parties’ relationship worked fine without it. However, if a supply term was to be implied, it was only for ZEL to make reasonable endeavours to supply.

The Court, citing earlier authority, set out the following guidelines to assess whether a term should be implied:

(a)          Is it reasonable and equitable?

(b)          Is it necessary to give business efficacy to the contract (in other words, can the contract be effective without the implied term)?

(c)          Is it so obvious, it “goes without saying”?

(d)          Is it capable of clear expression?

(e)          Does it contradict express terms of the contract?

The Court found that it was an implied term of the contract that ZEL would use reasonable endeavours to supply fuel.  In so finding the Court looked to the circumstances of the agreement and determined that Air NZ’s suggestion of an implied term of a continuous supply of fuel was not reasonable, as ZEL would not have reasonably intended to assume all risk in that way for any interruption to supply.  Nor was Air NZ’s suggested implied term required to give business efficacy, whereas a reasonable endeavour to supply was obvious and capable of clear expression.

The case highlights the importance of formalising agreements and capturing what parties understand they are signing up for in a contract in writing.  Otherwise, the potential for disputes as to key terms of an agreement may require costly recourse to the Courts.  In any event, the High Court’s decision illustrates the approach to be taken when considering whether a term that is not expressly recorded is to be implied.

Article written by Edward Fox
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