Implied terms

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Implied terms are terms that are not stated expressly in the contract, but were probably within both parties' intention. Terms may be implied in the following scenarios:

  • In law - terms that the law automatically implies in a certain type of contract regardless of the intention of the parties. Will be implied if:[1]
    1. Applicable to a defined category of contracts.
    2. Suitable in a way which allow it to be implied in all contracts in that category.
    • The test of necessity is often used - a term can only be implied if its omission would entail that the rights of the parties under the contract were significantly diminished.
  • In fact - terms that the parties intended to include but didn't expressly state. Will be implied if:"[2]
      1. the implication must be reasonable and equitable;
      2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
      3. it must be so obvious that 'it goes without saying';
      4. it must be capable of clear expression;
      5. it must not contradict any express term of the contract.
    • Informal contracts:[3]
      1. It must be necessary to give business efficacy to the contract. More lenient test. Will be implied if:
  • By custom - terms that are customarily implied in a particular industry. Will be implied if:[4]
    1. There must be such a custom (question of fact).
    2. There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract.
    3. The implied term cannot contradict an existing express term.
    • It is also established person may be bound by a custom notwithstanding the fact that he had no knowledge of it.
  • By statute - terms can be implied because a statute requires so. For example, guarantees under Chapter 3, Part 2, Division 1 of the Australian Consumer Law.

An term which has been implied is regarded just like any other term. Terms may be implied even if an entire agreement clause exists.

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 409-17 [15.05-15.55].

Australian Consumer Law: ss 51-64A (available on Blackboard)

Introduction

[6] Contracts often fail to sufficiently provide for all possible circumstances. The courts will sometimes imply a term in these circumstances. Terms may be implied:

  • In law.
  • In fact.
  • By custom.
  • By statute.

Of course, terms will not be implied where:

  • The parties expressly excluded them.
  • The implied term will be inconsistent with the express terms.

Notice that an entire agreement clause does not mean that terms will not be implied by the courts.

Terms implied in law

[7] Terms implied in law are terms which are implied automatically in all contracts of a particular class, and are a result of legal principles rather than the intention of the parties. A common example is the implied condition is a warranty that the goods/item one is selling is not defective.

The implication of terms in law was discussed in Byrne v Australian Airlines; Frew v Australian Airlines:

  • For a term to be implied in law, it must be:
    1. Applicable to a defined category of contracts.
    2. Suitable in a way which allow it to be implied in all contracts in that category.
  • The test of necessity is often used - a term can only be implied if its omission would entail that the rights of the parties under the contract were significantly diminished.

Terms implied in fact

[8]Sometimes, the certain factual circumstances of a contract mean that a term is implied. These are called terms implied in fact, and are based on the presumed intention of the parties. This means that the court asks whether the parties intended to include a certain term in this particular scenario. It is usually relevant if the contract is formally written or not.

Formal contracts

[9] In order to a term to be implied in a formal contract, the following 5 requirements (set in BP Refinery (Westernport) Pty Lyd v Shire of Hastings) must be satisfied:

  1. "[the implication] must be reasonable and equitable;
  2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
  3. it must be so obvious that 'it goes without saying';
  4. it must be capable of clear expression;
  5. it must not contradict any express term of the contract."[10]

These are obviously pretty though requirements, and this is because the courts are reluctant to add terms to a formalised contract (if the parties intended to include the term, why didn't they include it then).

Informal contracts

[11] The courts are more likely to imply a term in an informal contract, since in these scenarios the parties have not attempted to spell out all the details of their agreement and obviously more was implied. A more lenient and flexible approach is adopted in comparison to the one above. This one was set in Hawkins v Clayton:

  • "in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, the court should imply a term by reference to the imputed intention of the parties, if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case".[12]

Terms implied in custom

[13] Terms may also be implied by custom, which means where is is customary to include the term in similar contracts. The requirements were outlined in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd:[14]

  1. There must be such a custom (question of fact).
  2. "There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract."[15]
  3. The implied term cannot contradict an existing express term.
  • It is also established person may be bound by a custom notwithstanding the fact that he had no knowledge of it.

Terms implied in statute

Chapter 3, Part 2, Division 1 Australian Consumer Law implies certain terms into all consumer contracts. Among others, it implies 'guarantees' (basically, warranties) as to acceptable quality, fitness for any disclosed purposes, reasonable time, correspondence with description and others.

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Byrne v Australian Airlines; Frew v Australian Airlines (1995) 185 CLR 411
  2. BP Refinery (Westernport) Pty Lyd v Shire of Hastings (1977) 180 CLR 266, 283
  3. Hawkins v Clayton (1988) 164 CLR 539, 573
  4. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226
  5. ACL, s64
  6. Casebook, p. 409 [15.05]
  7. Casebook, p. 409 [15.10]
  8. Casebook, p. 414 [1530]
  9. Casebook, p. 414 [15.35]
  10. (1977) 180 CLR 266, 283
  11. Casebook, p. 415 [15.40]
  12. (1988) 164 CLR 539, 573
  13. Casebook, p. 415 [15.45]
  14. (1986) 160 CLR 226
  15. (1986) 160 CLR 226, 238
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