The courts have no power to imply a term so as to ‘improve’ a contract, or to make it fairer or more reasonable. The task of the courts is simply to discover what the contract means, not to alter the agreement to the parties. The classic approach adopted by the court is the ‘business efficacy’ test (ie that the proposed term is necessary to give business efficacy to the contract). There is also the ‘officious bystander’ test (ie that the proposed term must be so obvious that it goes without saying).

But, to what extent do the old tests still survive? The answer is that the courts take a more holistic view these days. This was confirmed in a recent PC case where Lord Hoffmann said that the various tests for implying a term into a contract could be reduced to a single objective question: would the implied term spell out in express words what the contract, read against the relevant background, could reasonably be understood to mean? That test would reveal the parties’ intentions. The key point here, of course, is that it is an objective approach; the danger of using the ‘business efficacy’ test is that it might tempt the court to look at the subjective intentions of the parties, rather than what a reasonable person would understand the contract to mean at the time it was executed. As Lord Hoffmann made clear, the meaning of a contract is not necessarily or always what the contracting parties would have intended, but what it would convey to a reasonable person with all the background knowledge that would be available to the audience to whom the contract is addressed. That is the meaning that will represent the mutual intention of the parties.

This more holistic approach is being described as the ‘consolidated’ test. Lord Hoffmann’s judgment earlier this year, being a PC case, is not technically binding on the English courts. Since the decision was reported, there is one High Court case that has followed the ‘consolidated’ test and another that has stuck with the ‘officious bystander’ test. The likelihood is, however, that Lord Hoffmann’s approach will prevail. See excellent commentary on AG of Belize v Belize Telecom [2009] UKPC 11 in [2009] IHL 14.