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Neuberger v M&S: was the BNP case really necessary?

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One has to ask: why did the UK Supreme Court even bother to hear, at vast public expense, the case of Marks & Spencer v BNP Paribas – in which M&S threw good money after bad in the hope of getting a few hundred thousands back from the landlords of their former London HQ in St Pancras Bay.

The money at stake isn’t the point. Was there a real issue of public interest such that the Supreme Court should have heard the whole matter again in order to come to the same view as the Court of Appeal a year earlier?

But the fact is that Lord Neuberger, President of the Supreme Court, is a man on a mission – to impose his literal interpretation of the world on the world of law. And this case was an ideal opportunity for him to drive the point home.

The legal point was simple enough: There was no term in the lease under which M&S would receive back prepaid rent after exercising a break clause and vacating the premises. So could such an apparently just and fair clause be implied into the lease “in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made”? 

The Court of Appeal had said no on the basis of well established law. It may seem reasonable, obvious and fair that M&S shouldn’t have to pay up for not being in its former HQ – but if a rebate isn’t allowed for in the lease, then a very high bar would be set before one could be implied into it. 

The Supreme Court could have refused to hear the case on the grounds that no new or contentious point of law was at stake. Neuberger added the powerful weight of his imprimatur – a warning to judges and contracting parties that the courts must favour literal readings of contracts over individual judges’ notions of fairness. But did he do more?

 It is as if Neuberger saw this as an opportunity to grapple with demons of his own making – a notion that judges can toss aside literal readings of contracts, leases and, indeed, legislation to impose their own discretionary answers to the problems before them. Here was a chance to lay that demon to rest.

The case
M&S had served notice that it would vacate the headquarters on 25 January 2011. But it had paid three months in advance to March 2012, as required by the terms of the lease, meaning it had paid for two extra months when it did not occupy the building. It was this money that it claimed back. There was no provision in the lease for the money to be returned. The crucial legal principle was set out in A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 by Lord Hoffmann. A court may imply a clause into a contract but not simply because it would seem fair to do so to one party:

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.” (Hoffmann quoting from Pearson L in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 at 609) 

By business efficacy is meant that the contract can work from a business point of view – again, not simply that it is fair to one or both contracting parties. A term that “went without saying” means that:

“if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!'” (Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227, MacKinnon LJ)

All this is referred to in Neuberger’s Marks & Spencer judgment along with judges’ comments in a line of similar cases. Indeed, he says “It could be dangerous to reformulate the principles.” He has something to add, perhaps this:

“Necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of ‘absolute necessity’, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting [it] … is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.” (Para 21)

One might explain this by saying that the fact M&S could not get its money back does not undermine the “practical coherence” of the contract – not least because it could have been a perfectly reasonable (though perhaps unfair) express term of the contract – that no rebate was due on rent paid in advance. M&S could not, in those circumstances have come to court to have such a term struck out – so there is no reason it could ask a court to add in a protection that wasn’t there.

Neuberger also is insistent that “the notion that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied is quite acceptable, provided that … the reasonable reader is treated as reading the contract at the time it was made” i.e. not with the benefit of hindsight in the light of some contingency that has occurred since to make the contract look ill-conceived (from the point of view of one of the parties).

Neuberger’s message
Underlying all this is the main message Neuberger has for us: that a term cannot be implied simply because it would be fair and reasonable to do so. And this, in a sense, is the purpose behind this particular hearing. Neuberger does wish to slay a demon, one set loose by Hoffmann’s judgment in Belize Telecom. Judges must hold firmly to the view that “the [implied] term [is] to be so obvious as to go without saying or to be necessary for business efficacy”.

Hoffmann had said “[t]here is only one question: is that [the contract with the implied term added] what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?” Neuberger said these words might unfortunately be taken “as suggesting that reasonableness is a sufficient ground for implying a term”.

Neuberger’s M&S judgment, therefore, is an exercise to put this notion to bed. He declares Hoffmann wrong on this, or at least his words misleading. Henceforth we must discount paragraphs 17-27 of the Belize judgment. That Hoffmann said an implied term must be reasonable and equitable is not to be seen as suggesting a reasonable and equitable term can be implied into a contract.

So a clarification of the law has been made by Neuberger in line with his campaign for literalism. Marks & Spencer may feel proud to have assisted in clearing up this point – or slightly aggrieved that it has been put to some cost in doing so.

A comment on business efficacy
A look at Neuberger’s recent judgment on another lease case, Arnold v Britton (critiqued here: Neuberger abolishes common sense) suggests his campaign for literal readings of contracts actually fails to give sufficient weight to commercial common sense or business efficacy. This was a case in which an inflation busting annual 10% uprating of service charges (which started at £90 a year in 1976) for holiday chalets on 99 year leases would have resulted in unsustainable multimillion pound annual windfalls for the landlords within a few decades.

Neuberger refused to cap the charges – in effect consigning the leases to zombie status since the leaseholders’ default would be inevitable. The notion of business efficacy or common sense would surely require an intervention in a contract that makes no business sense to either party, one that says it is a 99-year lease but is actually doomed to fail. In other words the lease as Neuberger insists it be literally read might to other eyes “lack commercial or practical coherence” – his own words in M&S v BNP. This lack of commercial coherence in Arnold v Britton was not such that he felt able to intervene on behalf of the chalet-dwellers being squeezed for increasingly absurd amounts of money for grass cutting, footpath maintenance and so on.

Unfortunately one can only say that Neuberger’s radical judgments have rather perverse outcomes – and are not even consistent with regard to his literalist process. Notoriously in another service charges case, Daejan v Benson (critiqued here: Supreme Court flies in face of legislation; and see also: Leasehold Knowledge Partnership) he actually changed parliamentary legislation by refusing to read Section 20 of the Landlord and Tenant Act 1985 literally since it would have given leaseholders windfall gains. The only consistency seems to be that landlords are favoured over tenants.

Neuberger might argue that literalism can benefit either side of a contract, but the message seems rather that the age of fairness and judicial discretion is over. Those with the best lawyers drafting their contracts will be the winners.

Twitter: alrich0660

Note on Supreme Court permission hearings
These are held by a panel of three Justices usually on the papers as submitted by the appellant and respondent. The Practice Direction says this:

“3.3.3 Permission to appeal is granted for applications that, in the opinion of the Appeal Panel, raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal. An application which in the opinion of the Appeal Panel does not raise such a point of law is refused on that ground. The Appeal Panel gives brief reasons for refusing permission to appeal. The reasons given for refusing permission to appeal should not be regarded as having any value as a precedent

A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.
Lord Hoffmann on the basic approach of a court asked to imply a term into a contract as follows (at [16] – [18):

“16 Before discussing in greater detail the reasoning of the Court of Appeal, the Board will make some general observations about the process of implication. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.

17 The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

18 In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.”

The M&S v BNP litigation
High Court 2013
Court of Appeal 2014
Supreme Court 2015

About alrich

Journalist and blogger on legal and financial/economics issues

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