You have express contracts and implied contracts.
The difference lies in how they are formed.
Ordinarily, parties negotiate and/or receive a copy of a document which is intended to be the contract, agree to the terms, and form the contract when they sign it.
That's an express contract.
Also, you have implied contracts and implied terms.
In law, they’re all different things.
What is an Implied Contract?
Implied agreements create enforceable legal obligations between parties when honest business people would expect the business reality to be legally enforceable, and there is no express agreement.
Implied contracts mitigate against cases where one would-be contracting party acts as if there was a contract in force, and then, when it suits them denies a contract exists because the legal documentation does not satisfy the usual requirements of express contract.
To get a sense of what an implied contract is, it helps to know how express agreements are formed.
Then the differences become apparent.
Express Contracts / Express Agreements
Contracts are usually formed by express agreement.
This means that the contract might be formed:
- verbally or orally: in a telephone conversation, face-to-face, or in social media application such as Skype or Telegram App;
- in writing, by formal contract, click-wrap agreement, shrink-wrap agreement, or exchanges of email, or letters, WhatsApp or other type of communication. Online trading platforms can it electronically. So even contracts entered by electronic means are written contracts; or
- partly orally and partly in writing: parts of the contract are formed in conversation(s) and parts of the contract is in writing.
For instance, following an email exchange, the parties might have a conversation where the contract is formed. The words used in the conversation form part of the express terms, and the content of the emails are also part of the contract.
The email exchanges might set out a proposal and discuss the price to be paid for services, and the conversations discuss the time for delivery and conclude the scope of work.
Express Terms
It results in an “express contract”, which has express terms:
- The terms a written contract are the express terms of the contract
- The words used in a conversation by the parties when it is formed are the express terms
- The law isn’t concerned about the mode or method of communication.
Just that the essential elements of a contract are present.
When parties negotiate and one or both of the parties start performing services or delivering products they may come to a point where they have reached an express agreement on the essentials of a contract with sufficient certainty to be legally enforceable.
Essentials of a Contract
This bit is important. We come back to it later.
The essentials of the contract are the bare minimum requirements to form a contract of the sort the parties had in mind. It does not matter that there might have been other important terms remained to be agreed later in negotiations. (This is one of the reasons why lawyers say should you use written terms, where there is a clear method of acceptance of a clear and known offer, and avoid verbal agreements)
In these cases, an intention to create legal relations is usually assumed, and the contract is formed.
When contracts are formed in this way, it is still an express contract, not an implied contract.
Express Terms vs Implied Terms
The express terms may not be the entire contract though.
Terms might be implied into the contract by the way the law works. These are known as implied terms. They’re completely different to an implied contract. They’re only implied to give what is known as “business efficacy” to the contract, and form part of an existing contract (which might be an implied contract).
Believe it or not, both the express terms and the implied terms constitute the terms of an express contract.
Implied agreements aren’t like that.
Express Contracts v Implied Contracts
Suppose that no conversation and no document or series of events draw out the terms of an express agreement.
You can’t identify an express agreement in the business dealings (see the different types of express contract above: oral / written / partly oral, partly written).
When the chain of events doesn’t reveal an express agreement, if there is a contract, it has to be drawn or implied - from the parties' conduct by:
what they say and do at different times.
Inferences - or implications - are drawn out of their conduct to ascertain the offer and the acceptance, and intention to create legal relations: that is, a contract.
That’s when the parties have an implied contract.
It’s not an easy thing to imply a contract. It’s just as difficult as implying a term into a contract. It’s highly fact specific: a small change in the facts can lead to a completely different outcome.
Implied Contracts
Implied contracts are formed against the conduct of the parties, against the background circumstances of the case. Ordinary rules of formation of contracts - which apply universally for the formation of contracts – are applied.
With an implied contract, must satisfy the usual requirements of formation of contract, that is:
- agreement is reached on the “essentials of agreement”, with sufficient certainty to be enforceable
- the parties show an intention to create legal relations
it needs to be clear that the parties intended to create a legal relationship, and the agreement disclosed by the evidence matches what the party alleging the implied contract (ie the party that sues) says it was.
- it is necessary to imply a contract in the circumstances
- contractual consideration is present. In commercial relationships, this is usually the easy part. But it still needs to be present.
The terms of the contract made is determined by the outward appearance of what the parties said and did.
The burden is on the party asserting the implied contract to establish that it is necessary to imply the contract.
Necessity
To satisfy the test for necessity, something more than behaviour which is consistent with a contractual relationship is required.
The implied contract must be “necessary” in the sense that there is:
- conduct referable to the contract alleged;
- conduct which is inconsistent with there being no contract made between the parties .
- conduct which is more consistent with an intention to form a contract than not.
Indicators:
- It’s more likely an implied agreement exists when the conduct serves the common intention or purpose of the parties shown in the evidence
- One party allows the other party to act without saying anything: but conducting themselves in a way that one would think they were legally bound (that's a legal intention to be bound to a contract)
- Extensive cooperation over an extended period of time
Extent of Implied Contract Terms
The necessity stems from the need to give business reality to commercial relationships, and uphold enforceable obligations where a reasonable bystander would expect them to exist.
To that end, the minimum contractual terms will be implied.
The one which is consistent with the essentials of agreement, and no more and no further.
When Agreement not Implied
Contracts won’t be implied where:
- The background and circumstances show that the subject matter of the contract alleged is already covered by an express contract.
It’s not necessary to do so. “There can be no necessity in law in these cases”: West Bromwich Albion v El-Safty [2006] EWCA Civ, Rix LJ, from Tod v Swim Wales - The alleged implied contract is inconsistent with an express agreement covering the same ground
- The circumstances show that a party has simply “done something more than, or something different from, what they were already bound to do under obligations owed to others”.
The parties must conduct themselves:- consistently with the contract implied, and
- inconsistently with there being no such contract.
Circumstances: What sort of conduct counts?
To find an implied contract, all of the background circumstances are taken into account, including:
- in particular, the conduct of the parties
- verbal communications, including meetings, interviews, negotiations and other discussions between the parties and their representatives
- in writing, letters, proposals, heads of terms
- partly in oral exchanges at the interviews or elsewhere and partly left to evolve by conduct as time went on
- responses and reactions to events
- The formality of correspondence and letters which indicate the importance of the subject-matter and the potential effect of not doing something, especially when the other party expected or nudged the other party to do something against its interests
- The value or sums of money at stake
- What happened after the alleged implied contract was formed.
- How each party conduct themselves in response to each other’s action
Examples:
- A passenger boards a London bus, where payment is not required prior to boarding.
The passenger impliedly promises to pay the fare, and the bus company promises to take the passenger to the place the bus is marked to travel - When a company issues an invitation to tender and respondents are required to adhere to the tender process
- Professional services are supplied in advance of being formally contracted. An implied agreement may arise to set the basis that the preliminary services are provided
- An implied agreement might arise where a person has made arrangements to purchase an asset by a third party.
- A contract ends, but an implied intellectual property licence applies post-termination. A contract might be implied with a term requiring payment for the licence
- Where the licensor had been aware of the continued use of the software and done nothing, there was no intention to create legal relations, and any implied contract did not include any provision for a fee.
- Handing a bill of lading for goods which had been delivered to the carrier, can give rise to an implied contract to ship the goods
- A contract to abandon a dispute resolution process might be implied from the parties’ conduct, or more precisely, the lack of conduct. It can "lead necessarily to the inference of an implied agreement" between them to abandon the contract.
When one party is led down the garden path, and then the other party reneges on the understandings brought about by their conduct, the situation is ripe for an implied agreement.
Breach of Implied Contracts
Once an implied agreement has been made, it will be a legally binding agreement. It can be breached like any other contract. The consequences of the breach depends on the type of term which has been breached.
The term breached will be either:
- a condition
- a warranty, or
- an innominate or "intermediate" term
It can also have terms implied into the contract, like any express contract.
The defaulting party becomes liable for damages for the breach, and potentially an injunction to enforce performance of the contract.
The Purpose of Implied Agreements
When a party holds out on the other and induces behaviour typical of a contractual relationship, the odds heighten that a contract will be implied.
The law of implied contracts fixes those situations. They prevent exploitation of commercial arrangements which are not expressly contractual.
Upholding implied contracts results in greater certainty in business dealings, which have the hallmarks a legally binding contract. They protect reasonable expectations of honest businesses.
The requirement that the contract is necessary to imply makes it harder to rely on an implied contract. It is an “extra” test that applies, that does not exist in formation of express contracts.
The necessity test filters out cases where:
- a business is unexpectedly made a party to a contract: in circumstances where it is unacceptable from a legal perspective.
- a contract that was merely in the contemplation of the parties, by their subjective intentions – that is, still deciding whether to enter a contract or not.
When the circumstances do exist – the party behaved themselves as if there was a contract, implied agreements provide one of the methods of resolution of the dispute.