How Do Implied Terms Work in a Contract?

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Table of Contents

• What Are Implied Terms?
• 1. Implied by Conduct
• 2. Implied by Law
• 3. Implied by Custom
• Why Should You Be Aware of Implied Terms?
• Key Takeaways

Every contractual dispute revolves around the meaning of the terms and their legal effect. As a first step, a court will look at terms that are expressed in writing or verbally. However, a court may imply terms into contracts that were not discussed by you or the other party. This article explains the meaning of implied terms and how they can arise in a contractual dispute. 

What Are Implied Terms?

Implied terms are promises that have not been expressly included in the contract, whether through written words or a verbal agreement. The terms are assumed by either party to be part of your contract and are binding on the parties. 

Courts tend to recognise implied terms in the contract if the term is:

• reasonable and equitable, where no party receives a benefit or burden because of the term;
• necessary for the contract to work properly;
• so obvious it goes without saying;
• clearly expressed; and
• consistent with the express terms of the contract.

A court can apply a ‘bystander test’ when deciding if an implied term exists. For example, if a bystander suggests that the parties should include a term and both parties agree that “it goes without saying”, the term could be implied into the contract.

Implied terms can be formed in three ways:

1. through conduct;
2. by law; or
3. by custom.

1. Implied by Conduct

Express terms usually cover how the contract will treat the behaviour of parties to a contract. However, you can have an implied term if two parties behave or act in a way that is not covered by the contract but they intend to bind themselves to those actions. Here is an example of how that could work in practice.

In this situation, a court may consider whether:

• both parties have regular contact with each other;
• past dealings have been consistent; and
• the implied terms contradict the express terms in the contract.

The homeowner has consistently paid for the hedge-trimming without complaint for several months. The consistent payment points to an implied term in the contract to pay for hedge-trimming every month. Therefore, the homeowner will have to pay the gardener for time spent trimming.

2. Implied by Law

In some circumstances, terms can be implied “by law” in the interests of justice. Usually, a court will imply terms into a contract that prevent one party from taking unfair advantage of the other party. For example, employment agreements can contain implied terms that set basic standards and expectations. 

Other examples of terms implied in law include the implied:

• term that you should perform your contractual obligations within a reasonable time when no deadline is stated;
• duty of a landlord to give the tenant quiet enjoyment of the premises; or
• terms of reasonable fitness for purpose and quality in contracts that sell goods. 

3. Implied by Custom

A term can be implied by custom if the term covers a common industry standard that everyone is expected to follow. For example, if you hire an arborist to trim your trees, there might be an implied term that they would bring their tools to carry out their work. 

To imply a term by custom, you must show that:

• the custom exists;
• everyone reasonably assumes that the custom would be part of an agreement; and
• it does not contradict any express agreement between the parties.

Why Should You Be Aware of Implied Terms?

Courts will generally try to honour the parties’ true intentions in a contract, even if the intention had not been captured originally through writing or a verbal agreement. While a court can imply terms into a contract in your favour, you can save time and legal fees by ensuring you have a well-drafted contract in the first place.

The more express terms that you and the other party include in the contract, the less likely you will have any misunderstandings about your agreement. Therefore, you can avoid unnecessary contractual disputes by including express terms and being aware of your obligations under the contract.

Key Takeaways

Courts can imply terms into your contract to reflect the true intention of your agreement, even if you did not agree to them in writing or verbal agreement. Terms can be implied:

1. through conduct;
2. by law; or
3. by custom.

If you need help with 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.