Implied Duty to Give Information during Performance of ContractsAuthor(s): Hugh CollinsSource: The Modern Law Review, Vol. 55, No. 4 (Jul., 1992), pp. 556-562Published by: Wiley on behalf of the Modern Law ReviewStable URL: http://www.jstor.org/stable/1096655 .

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CASES Implied Duty to Give Information During

Performance of Contracts Hugh Collinst

During the performance of contracts, information may be acquired by one party in which the other has a vital interest. The information may concern facts which affect performance or events which trigger alterations in the terms of the contract. To what extent and in what circumstances must such information be disclosed?

Questions about a duty of disclosure are usually raised in connection with the formation of contracts. Here, the common law tends to deny the existence of any general duty of disclosure of facts outside fiduciary relationships, relations of confidence within the doctrine of undue influence, and contracts uberrimae fidei. The law takes a more paternalist approach to disclosure of the terms of the contract; the common law requires reasonable efforts to bring the content of the terms to the attention of the other contracting party,l and statutes impose detailed require- ments as to the manner and type of information about the terms to be communicated to consumers.' The economic justiElcation for the rejection of a duty of disclosure of facts is that information is generally expensive to acquire and, in order to reap the reward of investment in discovering information, the information may be withheld so that any bargaining advantage obtained from this knowledge is preserved.-3 These considerations do not apply to disclosure of the terms of contracts butn on the contrary, obscure or hidden terms are likely to impede the competitiveness of markets, so the economic arguments point the other way in favour of a duty to provide full disclosure. But do these economic considerations similarly rule out an implied duty to disclose information during the performance of contracts?

Consider a case of a contract of carriage of goods by road, where the owner of the goods hears on the radio that the main road is blocked due to an accident. Should the owner give this information to the carrier so that the delivery is not delayed? Or can the owner simply leave the carrier to fend for itself, with the result that the carrier breaks the contract by delivering the goods late? Here, the economic analysis points towards a duty to disclose the information. The failure to disclose the information would simply increase the costs of performance to the carrier to the extent of the damages payable for delay and the opportunity costs caused by having a lorry stuck in a traffic jam, with no benefit to the owner of the goods. Since these costs could be avoided at the price of a telephone call, the criterion of wealth maximisation suggests that an implied duty of disclosure of this information should be imposed.

A similar conclusion emerges from an alternative analysis of this example in terms of the value of co-operation.4 If we assume that the common law recognises a

Professor of English Law, London School of Economics.

I Interf(vto Picture Librarx Ltd v Stilletto Visual Pr(vgrammez Ltd 119891 QB 433. 2 eg Consumer Credit Act 1974? ss 60, 63. 3 Kronman, Mistake, Disclosure, Information and the Law of Contracts' (1978) 7 Journ(ll of Legc

Studie.s 1; Nicholas, 'The Obligation to Disclose Information' in D. Harris and D. Tallon (eds). Cosltraet Lclvt T(Jdax (Oxford 1989) p 184.

4 H. Collins, T/te kllt (Jf Cosltra(t (London, 1986) ch 10.

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July 1992J Implied Daty to Give Information Daring Performance of Contracts

basic value that the legal rules should be structured to promote the proper performance of contracts by requiring, where necessary, an implied duty of co-operation, then again we should expect the law to impose an implied duty to disclose information in these circumstances. The duty to disclose information would assist the successful completion of contracts by requiring a minimal and inexpensive mutual duty to safeguard the other contracting party's interests.

It seems likely that, in practice, businesses do recognise this degree of mutual interest and co-ordination, and conduct their affairs accordingly, regardless of the existence or absence of legal duties. The need to preserve good business relations with regular contractors, the self-interest in having contracts performed according to plan, and the avoidance of situations which will cause conflict will be among the many factors which will induce the owner of the goods in such cases to warn the carrier of the risk of delay. But the question arises, to what extent does the law also acknowledge this duty to give information?

In the United States, this question is gradually being subsumed under the implied term of a duty of good faith and fair dealing in the performance of contracts. This originated as s 1-203 of the Uniform Commercial Code,s but has rapidly developed into a general principle of uncertain scope for all contracts.6 The Restatement of Contracts, Second, s 205, endorses the general principle and gives the following pertinent illustration:

A suffers a loss of property covered by an insurance policy issued by B, and submits to B notice and proof of loss. The notice and proof fail to comply with requirements of the policy as to form and detail. B does not point out the defects, but remains silent and evasive, telling A broadly to perfect his claim. The defects do not bar recovery on the policy.7

Similar techniques can be used in civil law systems, where the Civil Codes establish the general principle of a requirement of good faith in performance.8 The closest doctrine in English law which might prove helpful to the insuredis claim is some species of estoppel, such as estoppel by convention,9 or perhaps promissory estoppel as a form of modiElcation of the contract,'° but this avenue might be obstructed by the absence of any express statement by the insurer.

Compared to the plenitude of material in foreign jurisdictions, the English common law hardly makes any reference to the question of disclosure of information during the performance of contracts. It seems likely, if the parties to the contract expressly provide for the disclosure of information, that this term will be enforceable. For example, insurance contracts regularly contain the condition that the insured should notify the insurer of any changes in circumstances affecting the risk. It is also possible that within recognised fiduciary relationships, such as a partnership, the courts might imply as an aspect of the fiduciary duties a duty to disclose information. Sutprisingly, there is little authority on the point. For example, in the law of agency one might expect the principal to be under a duty to keep the agent informed so that the agent

5 Farnsworth, 'Good Faith in Performance and Commercial Reasonableness under the Uniform Commercial Code' (1963) 30 U Chicago L Rev 666; Burton, 'Good Faith Performance of a Contract Utithin Article 2 of the Uniform Commercial Code7 (1981) 67 Iowa L Rev 1.

6 Fortune v National Cash Register Co (1977) 373 Mass 96, 364 NE 2d 1251. 7 American Law Institute, Restatement of the Law, Second, Contracts 2d (St Paul, Minn, 1981) s 205,

Illustration 7, based on Johnson v Scottish Union Ins Co (1929) 160 Tenn 1527 22 SW 2d 362. 8 France: Code Civil, Arts 1134, 1150, 1153; J. Ghestin, Traite de Droit Civil: Le Contrat (Paris,

1980) s 184; Germany: BGB, s 242; for the Roman Law origins, see F.H. Lawson, A Common LawYer Looks at the Civil LSaw (1955) pp 59, 124.

9 Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd [19821 QB 84. 10 Central London Property TrustLtd v High Trees HouseLtd [19471 KB 130.

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The Modern Law Review tVol. 55

can perform his undertaking efElciently, but there is a stark absence of any authority with respect to duties imposed on the principal. At the same time, the agent is, of course, under a strict duty to avoid conflicts of interest, but it has been held that the agent is not under any duty to disclose his own breach of contract or dereliction of duty." In the absence of express terms and the development of fiduciary duties, the English courts must fall back on implied terms of the contract.

Implied terms are usually treated by the English courts as default rules, that is, rules to govern the contractual relation in the absence of express agreement. The courts try to impute these default rules to the presumed intent of the parties. This fits into the economic analysis of default rules which suggests that, to minimise transaction costs, the rules should be those which the parties would have negotiated, were the costs of negotiation low or absent.'2 A general default rule prescribing the disclosure of information during the performance of contracts, based upon the unexpressed intentions of the parties, may be difficult to establish. The courts are far more likely to acknowledge the existence of a duty with a much narrower scope. For example, the particular instance of a duty to disclose information of the implied term to give reasonable notice of termination of contract is well established, and can be effective in the teeth of apparently contrary provisions in the contract. '3 But to develop the implied term beyond such narrow instances renders it vulnerable to two kinds of objections.

First, the disclosure of the information might prevent the owner of the information from taking commercial advantage of it in another context with different contracting parties. In which case, it would be hard to impute an intention to disclose this information from the outset. 14 This point might be met by a requirement of confi- dentiality, though such an elaboration of the implied term incorporating the difficult idea of confidential information would certainly deter the court from regarding the implied term as being easily justified by reference to the intentions of the parties. The more complex the intention is alleged to have been, the less likely the court will accept that it can justify the implication of a term.

Second, the court may be reluctant to imply a duty to disclose the information where the information can only be obtained at some considerable cost. This proved to be one of the decisive considerations leading to the rejection of an implied duty to provide information by the Court of Appeal in Reid v Rush and Tompkins Group Plc. 15 The plaintiff was injured in a road accident whilst working for the defendant employers abroad. Being unable to claim compensation from the other driver because of the absence of compulsory third party liability insurance in Ethiopia, the plaintiff argued that his employers were in breach of an implied term which imposed a duty to advise employees of the risks which might arise from working abroad and advise them to obtain the appropriate insurance cover. One of the reasons given for rejecting the existence of the alleged implied term was that such a term would impose upon employers too great an obligation to acquire information about foreign legal and social systems. 16 Again, this objection to the implied term could be met by quali-

1 1 Healey v Societe Anonyme Franfaise Rubastic 11917] 1 KB 946. 12 R. Posner, Economic Analysis of Law (Boston, 3rd ed, 1986) p 81; Goetz and Scott, 'The Limits

of Expanded Choice: An Analysis of the Interactions Between Express and Implied Terms' (1985) 73 CalifLRev261; Ayres and Gertner, 'Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules' (1989) 99 Yale LJ 87.

13 Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] 3 All ER 769. 14 For similar points based upon game theory, see Johnston, 'Strategic Bargaining and the Economic

Theory of Contract Default Rules' (1990) 100 Yale LJ 615. 15 [1990] 1 WLR 212; [1989] IRLR 265. 16 [19891 IRLR 273.

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July 1992] lmpliebl Dutx to Give lnformation During Performance of Contracts

fying its content, so that it only applied to information already possessed or which could be acquired by trivial steps, but the courts seem unwilling to develop implied terms of this degree of complexity.

It is for these reasons, perhaps, that English courts have been unwilling to recognise a duty to disclose information during the performance of contracts as a general default rule. But, as well as default rules, it must be recognised that implied terms can also serve as a technique by which courts impose obligations on parties in particular standard types of contractual relations for the purpose of establishing a just and fair balance of obligations. These implied terms, often said to be implied by law, suggest a model for the contractual relation which will be presumed to govern the relation in the absence of express contrary provision. The implied terms are not those which were perhaps intended, but rather those which are reasonable or reasonably necessary.l7 The origin of these terms may lie in an appreciation of how a fair allocation of risks between the parties may be achieved, or they may be based on the goal of promoting the successful performance of contracts. Many oi these model contracts have been consolidated in statutes such as the Sale of Goods Act 1979. The question arises whether, in the process of drafting such model contracts on the basis of a fair allocation of risks or the need to ensure co-operation, the courts have incorporated an implied term to disclose information during the performance ol the contract.

In one of these standard types of contract, the contract of employment, the case law may have been moving gradually towards the recognition of an implied duty to give information during the performance of contracts. This is particularly fertile territory for the duty, because it fits into the traditional pattern of master and servant law which required loyalty and co-operation from the servant. These duties can be extended easily to include disclosure of information acquired by the servant in the course of employment. In recent years, the courts have imposed equivalent implied duties upon the employer, such as the duty to be careful and considerate,lS and to take reasonable care to avoid injury to the employee's health.l9 Although the courts have not so far expressly adopted a presumptive default rule of disclosure of informa- tion during performance of contracts, such a rule may be developing out of a number of strands in the cases on employment law, culminating in the recent House of Lords decision in Scally v Southern Health and Social Services Board.20 Although at present isolated from each other, once combined, these strands in employment law drawn from the fields of safety, discipline and incorporated terms, point strongly towards an emerging duty of disclosure during the performance of contracts of elnployment.

In the context of health and safety at work, the duty of disclosure of information derives from the employer's acknowledged duty to devise a reasonably safe system ola work. It would clearly frustrate the purpose of this duty to avoid industrial accidents if the employer were not under a simultaneous duty to explain to employees how the safe system should be operated. For example, in General Cleaning Contractors Ltd v Christmas,'l a window cleaner was injured by a fall after a sash window suddenly closed. In his claim for compensation? the employer denied liability on the ground that it provided safety-belts, though in fact these were not used because

17 Lil!erpool Citx Coun(il V Iru!in [1977] AC 239. 18 Woods v WM Cclr Serviees [1982] ICR 693. 1') Johnstone v Bloomsburx Hecllth Authoritx [1991] IRLR I 18. 90 11991] 4 All ER 563; 11991] IRLR 522. 21 119531 AC 180.

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The Modern Law Review

no suitable hooks on the building were available. The House of Lords held the[vol. ss employer liable on the ground that the employer neither gave instructions to the employees to test the windows nor provided wedges to prevent them from closing. Lord Oaksey declared that 'it is the duty of an employer to give such general safety instructions as a reasonably careful employer who has considered the problem presented by the work would give the workmen.'22 More generally, Lord Reid observed that 'it is the duty of an employer to consider the situation, to devise a suitable system, to instruct his men what they must do and to supply any implements that may be required.'93

The example of safety concerns technically claims in tort, so that the duty to give information affects the standard of care required, but clearly it could make no difference were the action to be framed in contract, for the implied terms of the contract also impose the same duty to provide a safe system of work. The tortious origins of the implied term affects, however, the scope of the duty to provide information. In Reid v Rush and Tompkins Group P/C,24 discussed above, one of the other reasons why the plaintifFs claim was rejected was because it was conceived as equivalent to a claim for economic loss in negligence. The Court of Appeal was unwilling to achieve through an implied term of the contract what it could not achieve in the ordinary law of tort, namely damages for financial loss without a voluntary assumption of responsibility. This decision contains a profoundly unsatisfactory development in the law. In effect, the Court of Appeal is arguing that, in this context of disclosure of information, only an express term can ground liability, for an implied term would generate greater liability than is possible in the law of tort. This turns the reasoning of Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd2-5 on its head. The prohibition against tort duties being permitted to circumvent contractual arrangements is turned around, so that the limitations on recovery between strangers in the law of tort is used to confine the possibility of recovery between parties to a contract.

The cases on discipline of employees alert us to the possibility of another limitation of the implied duty of disclosure. From Bell v Lever Bros Ltd,26 it appears to be well established that an employee is not under an implied duty to disclose his own breach of contract.97 This reflects perhaps the more general principle that a person should not be placed under a duty to incriminate himself.28 Nevertheless, the courts have forged an important exception to this principle. They now recognise that a duty to disclose information will apply to breaches of contract by other, perhaps subordinate, employees.29 This development may fit into the view that senior managers of a comparly owe duties of loyalty which can be almost equivalent to the fiduciary duties owed by directors.3°

The third field of employment law to be highlighted as an instance where duties of disclosure arise during performance of the contract concerns the terms of the contract of employment governing fringe benefits and deferred remuneration. Although an employee can be expected to keep himself or herself informed of the

22 119531 AC 180, 189. 23 11953] AC 180, 194. 24 11990] I WLR 212; [1989] IRLR 265. 25 11986] AC 80. 26 [1932] AC 161. 97 Alor(c:l Ltd v Gc:tic:nd [1984] IRLR 288. 28 Freedland, 'High Trust, Pensions and the Contract of Employment' (1984) 13 ILJ 25, at p 34. 29 S\'t!tlin V We.s't (Butehers) Ltd 11936] 3 All ER 261; Sxbron Corp v Roehem Ltd [ 19841 Ch 1 12. 30 C(lnc:dic:n Aero Serliees Ltd v O Mc:llex (1973) 40 DLR (3d) 371.

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July 1992] Implied Duty to Give Information During Performance of Contracts

main terms of the contract of employment, especially the central ingredients of the wage-work bargain such as hours, many of the terms of the contract will only be discoverable through a reading of other documents, such as a collective agreement, works rules, and a trust deed establishing an occupational pension scheme. This practice of incorporation of terms by reference to other documents gives rise to an implied duty imposed upon the employer to inform the employee of those terms.

The recent decision of the House of Lords in Scally v Southern Health and Social Services Board3' illustrates this application of the duty. The plaintiff doctors sued their employer for the employer's failure to bring to their notice the right to purchase added years of pension entitlement at advantageous rates before that right lapsed. The pension rules were set by Regulations issued by the Department of Health, which were incorporated by reference into the contract of employment. When the Regulations were altered, the employer failed to alert the plaintiffs to the valuable opportunity, so the plaintiffs failed to take the necessary action until the Regulations had once again been altered. The House of Lords decided that the employer had broken an implied term to draw this valuable right to the plaintiffs' attention. The term was not merely a reasonable one, but a necessary one, in the circumstances that the pension right was not a term of the contract directly negotiated by the plaintiffs, but rather depended upon rules determined by a third party, in this case the Department of Health, and that the employee could not reasonably be expected to be aware of the right unless it were drawn to his attention.

These three strands of development in the cases concerning the contract of employ- ment may point to the emergence of an implied duty to disclose information during the performance of a contract. But it has to be acknowledged that the House of Lords in Scally v Southern Health and Social Services Board confined their discussion to the narrowest possible view of the facts and declined to regard the case as founded on any general principle applicable to all contracts of employment, let alone contracts in general. In addition, since the case concerned disclosure of information about the terms of the contract, and since the economic arguments lie in favour of disclosure of terms as opposed to more general facts and circumstances surrounding the transaction, then we may suspect that the courts would look far less favourably on the implication of a term to disclose other kinds of information, a reluctance amply illustrated in Reid v Rush and Tompkins Group Plc.

Outside the contract of employment, older cases have stifled the development of a duty to disclose information during the performance of the contract.32 The courts have viewed such an implied term as in conflict with a more basic right of every individual to go about his business as he chooses, even where the exercise of that right obstructs successful performance of existing contracts.33 At most, the courts have been prepared to imply a duty to disclose information where that information is exclusively in the possession of one party and, without it, the other party cannot perform a central obligation under the contract. For example, if a seller F of goods has to acquire an export licence, it will be an implied term that the buyer must co-operate by telling him the destination of the goods and other information which is required to obtain the licence.34

This reluctance to develop an implied term to disclose information during the

31 [19911 4 All ER 563; [1991] IRLR 522. 32 Mona Oil Equipment Co v Rhodesian Railwclys Ltd [1949] 2 All ER 1014; see Burrows, 'Contractual

Co-operation and the Implied Term' (1968) 31 MLR 390. 33 eg Luror (Eastbourne) Ltd v Cooper [ 1941] AC 108. 34 Pound & Co Ltd v fIcirds & Co Ltd [ 1956] AC 588 per Viscount Simmonds, at p 608.

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Whe Modern Lavs: Reliew [Vol. 55

performance of the contract stems from the courts' understanding of implied terms as default rules. As long as implied terms are restricted in their ambit by the supposition that they must qualify as terms which would have been agreed in the absence of transaction costs, then the rugged individualist image of parties being reluctant to concede any additional obligations will prevent the development of implied duties of co-operation. But there are many contrary instances of the courts defining a broader scope for implied terms based upon such concerns as a fair allocation of risk or the promotion of successfil performance of contracts. As the cases involving the contract of employment illustrate, these concerns can generate an implied duty to disclose information during the performance of contracts. Perhaps these cases indicate the potential for the development of a more general principle requiring disclosure of information throughout the law of contracts.

Judicial Understanding of the Contract of Employment Lesley Dolding and Cathenne Fawlke

The extent to which judges are prepared to exercise their powers to regulate the employment relationship may be of particular importance at a time of high unemploy- ment in a deregulatory environment. The preliminary decision of the Court of Appeal in Johnstone v Bloomsbury Area Health Authorityl raises a number of issues relating to this question in the context of the working hours of junior hospital doctors. The detrimental effects of the long hours worked by some employees7 both to themselves and to third parties, is now well recognised2 and the problems facing inexperienced and overworked doctors in particular had also received limited judicial recognition prior to Johnstone.3 In Johnstone, however, in response to the plain- tiff's direct challenge to the well-established working practices of junior doctors, a majority of the Court of Appeal refused to strike out the plaintiff's claim that the working hours required of him by the Authority were such as to put the latter in breach of its duty to take reasonable care for his health and safety. The importance of the case lies not only in the impetus which it gave to the junior doctors' campaign,4 but more generally in the judicial approaches taken towards the relationship between managerial prerogative and employee protection.

eLecturers in Law University of Exeter. I 11991] IRLR 118; [19911 2 WLR 1362. 2 See HL Select Committee on the European Communities, 4th Report 1990-91 ̂ Woskislg Tis7lb (London:

HMSO, I 990). 3 See for example Wil.sll^r v E.s.sc*.r Ar>u H(9(lltll Altllorit! 119861 3 All ER 801, where a ma jority of

the Court of Appeal held that in determining the standard of care owed by a junior hospital doctor to his patients no account could be taken of such factors as inexperience or overwork; the test was objective. See, however, the dissenting judgment of Sir Nicholas Browne-Wilkinson VC (as he then was) who stated, at p 834. ithe law should not be distorted by making findings of personal fault against individual doctors who are, in truth, not at fault.' This point was not considered when the case went to the House of Lords, [19881 AC 1074.

4 In June 1991. the Secretary of State for Health announced new arrdngements for junior doctor.S. including the introduction by 31 December 1994 of a maximum working week of 72 hour.s for those in hard- pressed specialities. The remaining 60 per cent of junior doctors working in less physically demanding areas will have to wait until January 1997 for the reduction to apply. British Rail has also recently introduced guidelines on maxilllum working hours, following the report by Mr Ju.stice Hidden into

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