IMPLYING TERMS INTO A CONTRACT

IMPLIED TERMS

Simply put, implied terms are nothing but the words or provisions every court assumes were
intended to be included in a contract. This means that the terms aren’t expressly stated in the
contract. In a business contract, it’s usually not possible to cover every minute detail. A court
will assume that some contract terms are often implied.

Contracts of some businesses are often lengthy. Usually during those situations a contract
drafter will try to cover all the terms and provisions of agreement together. Generally, the
drafter of the contract try to avoid usage of implied terms. Most parties try not to have to rely
on a court’s interpretation of how the terms of a contract are implied. However, it is not possible
in every situation to cover all the details of an argument, and in those cases the court will state
that some terms are to implied in the contract and make a judgment on the nature of those
terms. This helps the court to enforce the contract and have a follow through with parties intent.
By a deliberate examination of the implied terms it is possible for the court to protect parties
from fraud by misrepresentation.

USE OF IMPLIED TERMS

The use of implied terms is fairly common. There are many different ways a court can use
implied terms based on previous judgements and public policy. There are some situations
where a court will have to imply a term if it decides that it is necessary to enable the intentions
of the contracting parties. Terms can also be implied by the law when there is a direct address
of an issue. There have been over a 1000 legal cases dealing with recognised categories of
contract and as a result conventions have been established to imply terms into different types
of contracts. They are employment contracts and contracts for sale of goods. Some of the
examples of terms implied in employment contracts and sales and goods are:

• Without any reasonable or proper cause an implied term on mutual trust and confidence
cannot be betrayed. An employee will remain loyal by not acting contrary to their
employer’s interests.
• The goods supplied to the buyer under the contract will be reasonably fit, for any
purpose which the buyer made known to the seller. It is clear that 2 parties are into a
contract of sale which was defined in section 2(1) SGA, that a contract is bound between
the seller and the buyer for a consideration of money called price. Even in this situation
there must be a term established to provide necessary rights to the parties of contract.
The goods that are sold unseen will be considered as merchantable quality. They have to match
exactly to their description and before processing there has to be a sample test for confirmation.
The parties will decide on an agreement like these unless they are expressly excluded during
the agreement process, altered by the express terms, or inconsistent with the terms that express
terms in the contract. In business contracts, it is frequently the situation is to simply imply the
terms of contract on the facts of the case. This point will become relevant as we see the facts
and judgement of the case we have considered. Additionally, considering an example of

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Harrow LBC v Engie Regeneration Ltd, the UK court did emphasize that there should be an
implied term on the contract otherwise the contract would be practically incoherent.

To illustrate the applications of the concept of implying terms into a contract, let’s go over the
Supreme Court case of Nabha Power Limited (“NPL”) vs Punjab State Power Corporation
Limited (“PSPCL”) & another, 2017.

FACTS OF THE CASE

Punjab State Power Corporation Ltd (PSPCL) in 2009 floated an international competitive
bidding for the procurement of power on long term basis, for a power station which is to be
setup in Rajpura, Panjab. The guidelines for the bidding were according to the guidelines issued
by GOI as per Section 63 of the Electricity Act, 2003.

There are provisions in the Electricity Act, 2003 which provide regulations related to the tariff
that is to be determined by the appropriate commission according to guiding principles set out
in Electricity Act, 2003.

For implementation, Nabha Power Limited (NPL) is incorporated by Punjab State Electricity
Board (PSEB) as a Special Purpose Vehicle and an agreement was made for the Power
Purchase Agreement for 25 years. As a matter of fact, it should be known that PSPCL is the
successor company of PSEB. On November 19, 2011, M/S L&T Power Development Ltd was
declared a successful bidder and subsequently purchased the 100 percent equity in Nabha
Power Limited.

Issues arose between the NPL (appellant) and PSPCL (first respondent) regarding –

a. Component of cost regarding washing of coal and the loss of quantity of coal after
washing.
b. Midpoint consideration of GCV of ROM coal on equilibrated GCV basis to calculate
energy charges.
c. Denial of the cost of road transportation
d. Denial of transit and handling losses, liaising charges, coal testing by third parties, etc.
e. Non-payment of the capacity charges on non-linkage coal.

This led the appellant to file a petition before the State Commission, seeking relief in the
deduction of the amount by the first respondent. The state commission dismissed the petition.
Then the appellant filed an appeal before the Appellant Tribunal which again got dismissed.
Lastly appellant filed a case before the Hon’ble Supreme Court of India. In the following
sections we will examine the case presented before the Hon’ble Supreme Court of India, and
understand how the Justices made use of the notion of implied terms while delivering their
verdict.

The Changes Formula Clause in the agreement provided certain definitions of FCOAL4 and
PCV5 to determine the amount that need to be paid to NPL. NPL was of the view that the cost
of coal included additional amounts incurred in washing and transport which PSCPL wasn’t
aligned with. PSPCL only paid for the purchase price without considering additional expenses

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incurred by NPL. While the primary dispute in the case was around the ‘cost of coal’, the
secondary dispute was around the measurement of the ‘Gross Calorific Value’ of the coal.

ARGUMENTS AND COUNTER-ARGUMENTS

Argument of NPL:
• NPL claimed that under the agreement it can include the cost of washing, transporting,
storage and handling, crushing and sizing of coal.
• NPL also claimed reimbursement for the cost that they paid to the third party for quality
checkup of the coal.
• The appellant also invoked the principle of ‘business efficacy’ and the maxim
‘Reddendo Singula Singulis’ for interpreting the terms of the PPA and the Energy
Charges Formula, as set out at Article 1.2.3 of Schedule 7 of the PPA.
• The formula, it is pleaded, of FCOALn is stated to refer to the actual cost of transporting
the coal to the project and the actual cost of unloading at the project. The mere transfer
of title of unwashed coal, which cannot be used in generation of electricity charges is,
thus, pleaded not to imply delivery of coal to the project.
• Non-payment of Capacity charges (electricity, utilities, etc.) that are required for
operation are claimed for the period from 20.02.2014 to 03.03.2014.

Counter Arguments of PSEB:

• PSEB already provided clarifications related to the queries raised by the prospective
bidders regarding the bidding document in accordance with the schedule VII of PPA.
• As clarified for the queries raised by the bidders regarding coal washing, coal supplies
need not to be washed and agreement was not made for coal washing.
• On a specific query raised by a prospective bidder it was clearly specified that the
washing of coal should be arranged by the successful bidder.
• PSEB argued that they are going to pay for the processes that are explicitly mentioned
in the energy charges formula.
• Only the cost of the coal purchased should be included, not the usable coal cost
including all the operations costs carried out to make it usable.

JUDGEMENT

The Hon’ble Supreme Court bench comprising Justices Rohintan F. Nariman and Sanjay
Kishan Kaul, analysed both domestic and international cases and held that the pre-bid
clarification made it clear that NPL had to “arrange for washing of the coal.” But this doesn’t
mean that entire cost is on NPL to bear in its entirety. The Court used subjective and objective
theories to interpret vague contractual terms.

The Court held that “A contract should be read as it reads, as per its express terms, the concept
of implied terms must come into play only when there is a strict necessity for it, and

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Commercial Courts ought to be mindful of the contemporary technical expertise of legal
drafting and must not endeavor to imply terms into a contract.”

The Court further said that any implication should have been in the mind of both the parties
and the absence of it cannot imply a term. The Court concluded that the following conditions
must be satisfied to imply terms into contract:

(1) implying terms must be reasonable and equitable;

(2) no term should be implied for a contract to be effective without it and business
efficacies of contract must be provided;
(3) it should be written in such a way that it becomes so obvious that "it goes without
saying";
(4) it must be capable of clear expression;
(5) No express term of the contract should be contradicted.’
The Court in detail analysed two landmark judgments to arrive at a decision:

1. The Moorcock [1889] 14 PD 64

2. Shirlaw v Southern Foundries (1926) Ltd [1939]
In addition to the above two judgements, the Court also analysed the following judgements:

1. Liverpool City Council vs. Irwin

2. Attorney General of Belize & ors. vs. Belize Telecom Ltd. & Anr
3. The Union of India vs. M/s. D.N. Revri & Co. and Ors.
4. Satya Jain (Dead) Through LRs. And Ors. vs. Anis Ahmed Rushdie (Dead) Through
LRs. And Ors
Analyses of the above mentioned case was to understand how the principles of “business
efficacy to transaction”, “officious bystander test”, “unexpressed term cannot be implied”, and
“implication only when reasonable and necessary” were applied in different cases to deliver a
reasonable judgement.

During the performance of a contract, if the parties face situations that weren’t explicitly
mentioned in the contract, the principle of business efficacy is invoked to read an implied term
so as to achieve the objective intended by both the parties. Under the officious bystander test,
if a bystander asks both parties ‘whether they’d like to include a clause x’ in their contract
when it’s being drawn and if both of them say yes to it; then such a clause can be considered
as an implied term. The Court held that implication must be reasonable and equitable and
should pass the test of necessity. If the consequences of an implication contradict what the
contract reads, such implications should be avoided. The Court observed that ‘coal’ in the
Charges Formula Clause refers to the washed coal transported to the site.

In reference of the above, the Hon’ble Court observed that coal reference in the Charges
Formula Clause as provided in the Agreement would include all charges up to transportation
to the site including washing. The Court also creatively applied the concept of distributive
interpretation with respect to prepositions in the case and held that ‘to’ and ‘at’ in the Charges
Formula Clause refers to ‘transporting to’ and ‘unloading at’. With regards to the Gross

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Calorific Value of the coal, the Court directed that the GCV was “to be measured at the project
site where the title of the required quality of coal used for generating electricity passed to NPL.”

The Court held that NPL is entitled to the cost of washing the coal and that PSPCL is to pay
the outstanding amount claimed within three months; the failure of which would carry a 12%
annual interest on the due. The Court also directed PSCPL to compensate NPL for the
transportation cost till the Project site.

The Court through this case has set a precedent that would encourage contracting parties to
clarify obligations and intentions expressly. The court clearly stated that modern day contracts
involve careful legal drafting done by technical experts and there is sufficient opportunity to
clear all doubts of both parties before finalising the agreement. This will eliminate the scope
of implying terms into a contract unless the conditions of necessity, obviousness, reason and
equity is met. The Court gave importance to objective interpretation while also considering
subjective theory of presumed intention of parties. The judgement ensures that “a parties’
contractual rights are always based on equity.”

REFERENCES

1. Guest, & Guest. (2018, April 03). Subjectivity or Objectivity? Supreme Court
on Implied Terms in Commercial Contracts. Retrieved from
https://indiacorplaw.in/2018/04/subjectivity-objectivity-supreme-court-
implied-terms-commercial-contracts.html
2. Nabha Power Limited Vs. Punjab State Power Corporation Ltd. and Ors.
(n.d.). Retrieved from https://www.legitquest.com/case/nabha-power-limited-
v-punjab-state-power-corporation-ltd-and-ors/17B0F0
3. Principles of Business Efficacy and Contra Proferentem and their application
in interpretation of co. (n.d.). Retrieved from
http://www.legalserviceindia.com/legal/article-990-principles-of-business-
efficacy-and-contra-proferentem-and-their-application-in-interpretation-of-
commercial-contracts.html
4. Ratho, S. (2017, November 13). Implying Terms Into A Contract? Supreme
Court Sets Contours - Corporate/Commercial Law - India. Retrieved from
https://www.mondaq.com/india/contracts-and-commercial-
law/645868/implying-terms-into-a-contract-supreme-court-sets-contours
5. The contours of principle of 'business efficacy' in interpreting commercial
contracts. (2018, August 09). Retrieved from
https://www.lawyersclubindia.com/articles/the-contours-of-principle-of-
business-efficacy-in-interpreting-commercial-contracts-9270.asp
6. Caution to the Courts – Read contract as it Reads! Retrieved from
http://www.psalegal.com/wp-content/uploads/2017/01/Commercial-Law-
Bulletin-Issue-XI.pdf

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