Contracts and the officious bystander - implied terms must be obvious

8 January 2020

On 6 August 2017, John Young Farming Limited entered a contract to sell 1,000 Friesen rising one-year-old bulls to Ngai Tahu Farming Limited. The contract provided for John Young to deliver cattle which were in good health and free from injury or disease. Ngai Tahu had the right to reject cattle which did not meet this description.

Less than a fortnight before the contract had been made the Ministry for Primary Industries announced that Micoplasma bovis had been found for the first time in New Zealand. In response Ngai Tahu developed protocols to safeguard it from the spread of the disease. Those protocols required it to establish beyond reasonable doubt that any cattle introduced to its farms were free of Micoplasma bovis.

Despite John Young Farming providing a declaration that to the best of its knowledge and belief the cattle had not been exposed to Mycoplasma bovis, and after making further enquiries, Ngai Tahu was not satisfied the cattle would meet the protocols it had put in place. Ngai Tahu advised John Young it was not prepared to take delivery of the cattle because John Young could not prove the animals were healthy and free of disease. John Young had no option but to sell the cattle to other buyers.

John Young's claim

John Young brought proceedings claiming summary judgment for $211,000. This amount was the difference between the price which would have been paid by Ngai Tahu and the price John Young actually received for the cattle as well as labour, feed, pasture and transport costs because the cattle had to be held for longer than expected. The grounds for John Young's claim were Ngai Tahu's repudiation of the contract - or wrongful refusal to perform the contract. ?In response to John Young's claim, Ngai Tahu argued that, although not written in the contract, there was a term implied into it that John Young would, if necessary, provide proof that the animals were in good health and free from injury or disease.

Implied terms and the officious bystander test

The judge referred to various tests laid down in case where the court would imply a term into the contract. The judge concluded the test commonly called the "officious bystander" test was the most apt in this case. The officious bystander test will imply a term into a contract when it is something so obvious that it goes without saying; so 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!?".

The judge concluded that it was probable reasonable people would have different responses;  some would say it was obvious the contract should contain an implied term that John Young would, if necessary, provide proof that the animals were in good health and free from disease, and some would not. The judge entered judgment in favour of John Young for the $211,000 it sought.

With the benefit of hindsight, Ngai Tahu could have avoided this result if it had thought carefully about what needed to be included in the contract before it was signed. Arguing terms should be implied into contracts after they have been made is rightfully beset with difficulty. Parties to contracts need certainty about what has been agreed.

Barbara McDermott is part of our Private Client team at Norris Ward McKinnon.