In Short
- Implied terms in contracts are obligations that are not written down but are legally binding. They may be necessary to make the contract work or reflect standard business practices.
- There are three main types: terms implied by fact (specific to the contract), by law (common to certain contracts), and by custom.
- Understanding implied terms can help business owners avoid disputes and ensure contracts reflect all parties’ intentions.
Tips for Businesses
To avoid misunderstandings and protect your interests, review contracts with a focus on both expressed and implied terms. Engage a legal expert to clarify how implied terms may apply to your agreements, particularly in contracts essential to your business, to ensure they cover all expected rights and obligations.
An implied term signifies a promise or assumption not expressly part of a contract. Nevertheless, these terms are still enforceable. For example, you may be able to imply that a promise you have not explicitly stated in the contract forms a part of the agreement anyway. Therefore, it will be an implied term that is in turn enforceable. This article outlines the different types of implied terms and how they may affect the contracts you enter into.
What is an Implied Term?
Simply put, implied terms are promises that parties have not expressly included in a written contract. However, they still form part of the agreement between parties. There are different types of implied terms that you may incorporate into your contracts, which include terms implied:
- in fact;
- by law;
- by custom; and
- as a result of past dealings.
Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.
Terms Implied in Fact
A court may include these terms in a contract to ensure the document reflects the parties’ intentions. They may also promote business efficacy. Often, these terms do not appear expressly in the contract because they ‘go without saying’.
Terms implied in fact must:
- be reasonable and equitable. They cannot benefit one party and burden the other;
- be necessary to increase business efficiency in the contract. For example, the contract will not work effectively without the term;
- be so obvious that it ‘goes without saying’. An objective bystander in the position of the parties should be able to assume that the term is part of the contract;
- be capable of clear expression; and
- not contradict any other express terms of the contract.
Courts hesitate to imply terms unless necessary in situations involving formal and detailed contracts. Therefore, the threshold for the above requirements is high in a commercial contract situation.
Continue reading this article below the formTerms Implied by Law
Parties can automatically assume that terms implied by law form part of specific categories of contracts because of legislation or previous court decisions. If your contract falls into a given category, it might have particular default terms.
These categories of contracts include:
- Service Contracts: the provider is expected to execute the service with due care and skill.
- Employment Contracts: the employer is expected to provide a safe system of work.
- Lease Contracts: the landlord is expected to ensure the tenant has quiet enjoyment of the premises.
This list is not exhaustive, so other established categories may apply. You should consider what category of contract your agreement falls under and whether the implied term is necessary for all contracts of that category.
The Australian Consumer Law (ACL) will also apply to certain contracts to sell goods. The ACL guarantees that goods sold to consumers must be of acceptable quality and fit for purpose. It is important that you do not include terms that contradict or seek to contradict, the ACL guarantees.
Terms Implied by Custom
Parties can imply a term into a contract if they can reasonably presume that other contracts in the same market, trade, or context have that term. Therefore, businesses generally consider terms implied by custom as standard practice or tradition.
To imply a term into a contract by way of custom, you must be able to show the custom or usage exists. You then need to prove that the term is so notorious that everyone in the trade reasonably assumes it will be part of an agreement. It also cannot contradict any express terms between the parties. When a contract includes a customary term, it becomes a contractual obligation, even if neither party knows of the custom.
Terms Implied as a Result of Previous Dealings
Where parties have a recurring contractual relationship, courts may imply terms into a contract based on the parties’ previous dealings. This is especially relevant where a contract is an informal agreement that only outlines the key terms.
When implying terms as a result of past dealings, a court needs to consider whether the:
- contact between the parties was regular;
- past dealings were consistent and uniform; and
- implied terms contradict express terms.
Practical Steps You Can Take
Here are some practical steps you can take:
- Conduct regular contract reviews: periodically review your contracts with legal counsel to identify potential implied terms. This proactive approach can help you address gaps or ambiguities that might lead to the implication of terms you did not intend.
- Be explicit in your contracts: aim to make your contracts as comprehensive as possible. The more explicit you are about the terms of your agreement, the less room exists for implying additional terms. However, remember that certain implied terms, such as those set by statute (discussed above), cannot be excluded.
- Use clear language: draft your contracts in clear, unambiguous language. This reduces the likelihood of courts needing to imply terms to give the contract business efficacy or to reflect the parties’ intentions.
- Consider industry standards: be aware of common practices and standards in your industry. Courts may imply terms based on custom or trade usage, so understanding these can help you anticipate implied terms.
- Address foreseeable scenarios: anticipate potential issues or scenarios during the contract’s lifecycle and address them explicitly in the agreement. This can reduce the need for terms to be implied later.
- Be cautious with exclusion clauses: if you are trying to exclude certain implied terms, ensure your exclusion clauses are clear and prominently displayed. Be aware that some implied terms, particularly those imposed by statute, cannot be excluded.
- Consider dispute resolution clauses: include well-drafted dispute resolution clauses in your contracts. These can provide a framework for resolving disagreements about implied terms without resorting to litigation.
- Seek legal advice: when in doubt, consult with a legal professional. The law surrounding implied terms can be complex, and expert advice can help you navigate these complexities effectively.
Key Takeaways
Understanding the importance of implied terms is crucial for businesses to minimise legal risks and maintain strong contractual relationships. Usually, parties draft simple and informal contracts outlining the key terms of an arrangement. However, a court may impose terms on a contract even after you have entered into it. Therefore, if you think a promise, which you have not included in the formal contract, should form part of the agreement, you should consider whether it is an implied term. There are different types of implied terms, so you should be aware of all of them.
By implementing these strategies, you can better manage the risks associated with implied terms and create more robust, enforceable contracts. To prevent misunderstandings, be proactive and thorough in drafting and managing contracts. This approach can significantly reduce potential issues.
If you need assistance drafting or reviewing your contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Often, parties will not consider every element that could arise in a contractual situation. Therefore, the parties sometimes imply terms to guarantee the function of the contract and fulfil what both parties intended when entering into the contract.
In fact, people imply terms in a contract when they are so obvious they ‘go without saying’. For example, an objective bystander must be able to determine that the parties imply the term because it is so obvious. It must also be capable of clear expression and not contradict another express provision in the contract.
We appreciate your feedback – your submission has been successfully received.
