Sometimes, what's not in a contract is more important than what is.
You read a contract. Reading only the express terms, you might not get the full story.
There may be implied terms.
Terms implied into contracts can change what you're reading. They can re-balance one-sided business agreements. They can address behaviour that frustrates performance of the contract.
The legal rules to imply a term are universal to all contracts, whether they are between a business and a consumer, business to business contracts or between two individuals. There's no difference.
In fact, implied terms can put you - or your contracting partner - in serious breach of contract.
Express and Implied Terms: What are Implied Terms?
Legally binding contracts in law are made up of two types of contractual terms: express and implied terms. Here are the differences between them:
- Express Terms of a Contract: These are the terms that are specifically agreed (think “expressly stated”) by the parties.
In a written contract, the express terms of a contract will be the written terms.
In a verbal contract, they'll be the words spoken by one party to the other to form the contract.
- Implied Terms of a Contract: these are terms that the parties have not expressly stated.
The law imposes implied terms and conditions only when certain legal tests are met.
They apply in addition to the express terms.
As a result:
- Together, the express terms and implied terms combine to form all of the legally binding contract obligations
- The implied terms compliment the express terms of the contract, and
- If no term is implied into the contract, the contract is interpreted using its express terms only.
The difference between express terms and implied terms is that the implied terms aren’t expressly agreed (ie stated) when the contract is made.
And implied terms aren't "implied contracts" or "implied agreements". In law, they're different things altogether.
What happens when a party is in breach of an implied term?
Breach of an Implied Term
When terms are implied into contracts, they have "equal status" with the express terms.
They'll either be:
That means that they'll be treated just like any other term of the contract, because that's just what they are.
Just as with express terms, if the breach of the implied term is a repudiatory breach of the contract, the innocent party is entitled to terminate the contract and claim damages. If the breach is not a serious breach or breach of a warranty, the innocent party may only claim damages.
See the sort of terms are more readily implied into contracts than others are further down.
Why imply a term into a contract?
Whether a term should be implied (and if so what) almost invariably arises after a contract crisis has arisen.
It comes about due to some deficiency in the language of the contract.
It could be because the contracting parties:
- had the term in mind, and just didn’t express it
- didn’t turn their minds to the question arising out of the omission of the term (to be implied), or
- didn’t foresee the difficulty, but if they had, they would've included the term.
In short: the contract terms haven't been spelled out in detail in the contract, or stated in verbally agreed terms.
The contract doesn’t make explicit provision for the state of affairs that ended up taking place.
When are Terms Implied?
Consideration of an implied term will only come into play only after the meaning and effect of the express terms of the contract is complete.
The question is: Would the implied term spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean?
After all, the term would be implied to bring about the presumed intention of the parties, giving effect to the contract the parties intended to make.
There are two types of implied terms.
- Category of the Contract: a rule of law applies which says that the term should be implied, and
- Specific Circumstances of the Case: on the facts of the case, the implied term is required. These implied terms are custom-made. Although in business contracts, some are commonly implied, for reasons of "business efficacy".
They're completely different situations.
Let's see what both of them are about.
1. Implying a Term: Category of the Contract
There have been 1,000s of legal cases dealing with recognised categories of contracts.
As a result, conventions have been established to imply terms into particular types of contract.
Examples of these categories of contract include:
- Employment contracts
Typical examples of terms implied into employment contracts are:
- an implied term of mutual trust and confidence, which would not be betrayed without reasonable and proper cause
- that an employee will not to act contrary to their employer's interest, and will remain loyal to the employer
- that an employer will reasonably and promptly afford employees an opportunity to obtain redress of grievances.
- Contracts for the Sale of Goods
Terms implied in contracts for the sale of goods include:
- the seller has the right to sell the goods. This is also a condition of the contract
- the goods are free from undisclosed security interests
- the goods supplied under the contract will be reasonably fit for any purpose which the buyer made known to the seller
- sales of unseen goods will be of merchantable quality, and match their description and conform with a sample.
They seem obvious don't they? That's because they are.
The parties are taken to have agreed terms like these, unless they are:
- expressly excluded
- altered by the express terms, or
- inconsistent with the express terms.
A positive rule of law can also apply. A statute may say that a term applies to the contract. For instance, a statute may apply to a class of contracts, such as business to business contracts. That's what the Late Payment of Commercial Debts (Interest) Act does. It implies a term into commercial contracts that interest may be charged for late payment, even if the express terms of the contract says nothing about interest.
In business contracts though, the more frequent situation is to imply terms of contract on the facts of the case.
There's quite a bit to it. Let’s make a start.
2. Implying a Term: The Circumstances of the Case
When the facts of the case require it, tailor-made implied terms may be added to a contract.
It's done on a case-by-case basis.
When a term is implied, it's deemed to have been included from the very beginning of the contract. That is, when the contract was formed.
A term will only be implied to give "business efficacy to the contract". Basically, the contract is unworkable without it.
How to Imply a Term
Implication of terms by courts potentially interferes with the agreement reached by the parties. Done carelessly, it could change the agreement altogether.
For that reason, courts severely restrict the occasions when they will imply terms into a contract.
Over time, the courts developed two tests to make sure that it is the right thing to do.
Both tests focus on the same thing: the necessity of the implied term.
Two Central Tests
There are two core tests with importance above all others that are required to be satisfied to imply a term.
If you don't pass either of these tests, there's no point trying:
- The "Officious Bystander Test"
The tests says:
if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it, the parties to the contract would respond:
‘Oh, of course!’
Put another way, the term to be implied must be so obvious that it "goes without saying".
When more than one alternative could be implied, the less likely any of them is obvious. More on that in a minute.
- The "Business Efficacy Test":
The term implied must be necessary in order to give business effect to the contract
It must be so obvious that it was taken for granted, or (again) "it goes without saying".
Different tests. In reality, there's very little between the 2 tests. In most cases where a term is to be implied, it will satisfy both tests.
Both tests require the implied term to be necessary on the facts of the case.
Implied Term Example
A business property is owned jointly by two landlords. One of the landlords is also the tenant. The landlords must act together as landlords under a lease.
Obviously, the landlord who is also a tenant doesn't want the rent to go up.
A rent review clause requires "the landlord" to issue a notice to the tenant for the rent review to take place. The landlords do not agree that a notice should be issued.
The rent review can't take place. We have a deadlocked rent review process.
A term is implied that the landlord will cooperate and act reasonably in respect of the rent review.
The dual landlord/tenant can't stonewall progress of the rent review as landlord.
When is it "necessary" to Imply a Term?
“Necessity” means different things to different people.
But it's a legal test. A particular standard applies.
It’s usually a tough test to satisfy:
- It must be “strictly necessary” to imply the term.
- The "necessity" is assessed within a commercial setting.
It's the necessity of the business purpose for the business efficacy of the contract that counts, not some wider commercial objective.
So the implication must be required to make the contract work. Without the term, the contract would lack commercial or practical coherence.
And that "necessity" is considered from the perspective of both parties, not just one of them.
The term to be implied must be capable of clear expression. If it isn't, it can’t be clear what the term is.
It must be reasonably certain what the implied term would be. This sounds the same as "clearly expressed". It's not.
One implied term must be clearly preferred over all others. It may be one within a range of options. But there must only be one contractual solution.
Again, the more possibilities of what the term might be, the less likely that it's reasonably certain.
When it’s Harder to Imply a Term
The background to the contract and what the contract contains are taken into account before a term is implied.
Higher degrees of difficulty are encountered to imply a term, in these situations:
1. Long Agreements
The longer the agreement, the less likely a term will be implied. There is less likelihood of a gap in the terms of the contract.
Let me explain.
Long contracts are increasingly common. What's a long contract? It depends on the industry and the types of contract. Take a simple example. I've seen 1-page non-disclosure agreements, and I've seen 8- page NDAs. Once you have more than 10 pages or so for most types of contracts in most industries, you’re in the territory of a "long contract".
With length comes detail and careful drafting. It’s easy to conclude that in a long contract, the parties must have included everything they intended to include.
It’s then harder to say that something was not included on purpose.
For that reason, it's presumed that the parties deliberately excluded a term from the contract. It follows that the court should not then imply that term as it didn’t form part of their agreement.
2. Implied Term Covers the same Subject Matter
An express term in a contract is more than likely to exclude implication of any term dealing with the same subject-matter as the express term.
Let's say you engage me to make a delivery. It's a 3-day drive by car. We agree that you will pay me a fixed amount per day, hotel bills for the first 2 nights, petrol, breakfast and dinner.
We've just agreed the express terms. The "subject matter" of meals has been covered in those express terms.
What if I then try to try to imply a term to claim payment for morning tea, lunch and afternoon tea?
Well, meals were covered in the express terms and conditions of our agreement. It's unlikely that I'd be successful having a term implied, because we've agreed that meals include breakfast and dinner. We've covered that subject matter.
3. Only Reasonable or Fair, but not necessary
It's not enough to show that the term is reasonable or fair for it to be implied into the contract, or that it would improve the contract. That is not the relevant test. It must be necessary.
Continuing the example above...
It most certainly is reasonable and fair that you'd pay my expenses for morning tea, lunch and afternoon tea.
However is it necessary for the contract to work? It isn't, so no term would be implied.
So I pay for my own lunch. Entertainment expenses are out of the question.
4. Effect of Entire Agreement Clauses
An entire agreement clause does not necessarily preclude the implication of a term.
It depends on the precise wording of the entire agreement clause.
For instance, suppose an entire agreement clause reads:
This agreement is the entire agreement of the parties with respect to the subject matter hereof and there is no other promise, representation, warranty, usage or course of dealing affecting it.
The clause only prevents implied terms arising from "usage" or "course of dealing" (see below). There are many other types of implied terms. The clause doesn't prevent implication of all possible types of implied terms.
Below are 7 examples of the types of implied terms which aren't excluded by that entire agreement clause. As well as the types that are.
When won’t a Term be Implied?
There are a whole host of reasons why a term won’t be implied. The most common stumbling block is the necessity test. Here are some others:
- Inconsistency with Express Terms: Any term implied into a contract must be consistent with the express terms.
It must sit with the tenor of the whole document. Implied terms may sometimes supplement the express terms, but cannot contradict them.
The implied term wouldn't be consistent with what the parties actually agreed in the express terms.
Courts won’t go against what the parties have actually agreed.
- Changing the Contract: Courts have no power to alter what contracts mean.
If the implied term changes the fundamental nature of the agreement, it would change what has been agreed. That won't happen. No term will be implied.
- Illegality: The implied term must not be illegal, contrary to public policy or outside the power of the company (aka "ultra vires"). It won't be implied.
Example: Conflict of Duty - Confidential Information
Stockbrokers represent a number of clients.
They can’t be required contractually to disclose to their private clients' inside information, which was disclosed to the stockbrokers confidentially by another of their clients.
No term will be implied for them to do so.
Common Law Contractual Implied Terms
There are a number of situations that come up again and again in legal cases, which deal with implied terms at common law: ie, the general law.
What legal effect do implied terms have, when they are implied?
They prevent behaviour inconsistent with being bound to a legally binding agreement.
1. Implied Term to enable Performance
Sometimes, the express terms impose obligations mostly on one party. It can get pretty one-sided.
In legally binding contracts, a party will have express obligations to perform the contract. However, in order to perform them, they are reliant on the other party doing their thing first.
If the contract says nothing about what the other party must do, it's open to imply a term requiring them to do what they need to do to put you in a position where you can perform your bit.
It's a corresponding implied obligation on the other party to do the things necessary for the completion of the contract. Implication of the term facilitates the completion and performance of the contract that the parties signed up to.
2. Implied Term to not prevent Performance
It's one thing for a party to need the help of the other party to comply with obligations under a contract. It's another for the other party to get in their way and block performance of their contracting partner.
There are at least 4 types of cases where parties might get in the way to prevent the contract being performed. These are where:
- a party takes deliberate steps to prevent performance of an obligation required by the other
- a party does something that prevents a future obligation becoming impossible. It could be a contingent obligation, which only needs to be done depending on another prior event
- a party’s duty to perform is subject to a condition. The party will not do anything to prevent achievement of the precondition
- a condition must be satisfied before the contract comes into being. A term may be implied that a party will not do anything which would prevent that condition becoming satisfied.
If a party deliberately renders the performance of a contract impossible, their liability for breach remains. If the event was the consequence of the involuntary act of the other party (for instance, bankruptcy), that is a different matter.
Prevention of Performance
A planning application for a building improvement needed to be lodged by a particular date. The customer delayed giving the information required to an architect to submit the application until it was too late. The reason given by the customer, was that it was for reasons beyond their control.
A term was implied that the time for the completion of the planning application could be extended beyond the due date under the contract.
3. Implied Term: Not to Interfere with a continuing State of Affairs
A specific state of affairs or circumstances may be in mind when the contract is signed.
The parties expect that state of affairs to continue after the contract is signed.
A term may be implied that each party will not do anything to voluntarily change that state of affairs.
Put another way, a party is not expected to take active steps to impede the contract completing.
Consequently, a party can't take positive steps to change the circumstances in which the contract was entered into.
Negative Implied Terms
A negative obligation may more readily be found to be implied than one requiring positive steps. That is, an obligation not to procure non-performance.
Each party shall not to take active steps to prevent [an event] taking place
The parties should do nothing of their own volition to put an end to [circumstances].
Each party will not do anything which will prevent performance of the terms of the contract.
Expected continuing circumstances to permit performance
A person purchased a professional services business.
The purchaser was to pay the seller one-quarter of the gross earnings at the end of each year, for 3 years.
The sale of the business would frustrate the business efficacy of the contract.
It makes sense that a term is implied requiring the purchaser to carry on the business for the period that the revenue share provisions remain in force.
4. Implied Term to Cooperate
When a term is implied that the parties must cooperate and work together, lack of co-operation leads to breakdown of the contractual relationship.
An implied duty to cooperate takes its shape from the express terms. . Whether a duty to co-operate to fulfil a contract is implied only stems from what the express terms say.
Even then, the law can only imply and enforce a duty of co-operation to the extent that it is necessary to make the contract workable.
What happens when a duty to cooperate is implied?
Suppose a contracting party has to complete a task by a certain date. The other contracting party has a duty to co-operate to take reasonable steps to ensure that such date can be met. If they don't cooperate, and the term is implied, they will be in breach of contract.
A minimalist approach is taken when a duty of cooperation is implied. It's implied only to make the contract workable, and no more. Whether the contract is workable or not is decided - again - by reference to the terms of the contract in question.
Supply of Computer Systems: Implied Terms
A standard computer system was to be supplied. After delivery, the computer system was said to be defective.
Terms were implied into the contract with the affect that:
- the customer must accept reasonable solutions to problems that have arisen, where possible
- the purchaser must communicate any special needs to the supplier clearly
- the purchaser and supplier work together to resolve the problems which will almost certainly occur. This requires active co-operation from both parties. If such co-operation is not present it's likely that the purchaser will not achieve the desired results from the system.
You can expect serious consideration by courts of similar terms to be implied in contracts which require cooperation between parties.
5. Terms Implied by a Course of Dealing
A "course of dealing" between parties is one where a number of transactions were entered into over a period of time. Knowledge of the terms is gained through previous experience of similar transactions.
A problem arises where a party's terms aren't properly agreed in a later contract, but there has been a previous course of transactions.
Are those terms implied into a later transaction?
In some cases, yes. Where a course of dealing arises, the parties are bound by the terms which apply to those previous transactions, provided that they’re similar to those which have gone before.
However the later transaction may be carried out in different circumstances. Because of that difference, a party may rightly believe that the conditions attached to the earlier transactions are not intended to apply.
As you can see, these sorts of cases are fact sensitive. A small change in the facts can change the outcome.
What amounts to a course of dealing, to imply a term?
- The course of dealing by the party contending that its terms and conditions are incorporated has to be consistent and unequivocal
- It usually easier when an entire trade uses standard terms for the type of transaction - which isn't often
- Reasonable notice of the terms needs to be given
- It may be sufficient if they are clearly contained in or referred to in invoices sent subsequently
This is a common occurrence:
- The goods or services to be delivered under a contract are delivered. An invoice follows. It refers to the terms and conditions of sale
- Receiving the terms and conditions that late (ie after the contract was made) will probably be too late for the terms and conditions to be enforceable, because they don't form part of the contract.
Here are 2 examples:
11 contracts for supply of goods had been entered into in the previous six months. Orders were made by telephone. The invoice for shipping was sent at a later date.
The invoice stated all business was done under specified terms. Copies were available on request, but were never requested by the purchaser. The purchaser had never seen them.
A director of the purchaser knew that transport companies used standard terms. He also knew terms and conditions of contract dealt with risk of loss. He said that he had never noticed the reference to the terms of contract in invoices.
The conditions were incorporated into the contract.
The director was an experienced businessman. He knew what sort of terms and conditions would be in the document. He was taken to have known what the terms and conditions where that covered risk of loss.
What about 4 contracts in 1 year?
There was a course of dealing that consisted of 4 contracts in 1 year. There was a gap of 5 months between the second, and the last two.
The first 4 were agreed orally.
In the next contract, the buyer received a contract note from the seller with goods. The order confirmation stated that "standard terms applied". The course of dealing was inadequate to justify inclusion of the terms. There were too few transactions.
What's the message?
If you know that there are practices in the industry and have a rough idea of what they are likely to be, it's more likely that a course of dealing will be implied with a smaller number of transactions.
6. Terms Implied by Custom or Usage
Different industries establish their own trade practices or usage of contract terms. What has become an established custom in one industry may be unheard of in other industries.
In each industry, terms and usages of those terms take on their own meaning. Those usages may be followed throughout the market, or they may not.
When it goes without saying that the parties would have unhesitatingly agreed to include the term, that term is a candidate to be implied by custom or usage.
A term implied by custom or usage requires:
- Widespread knowledge and understanding of the trade custom. It’s a usage which is "notorious, certain, reasonable" and not contrary to law. It’s something more than just a trade practice
- The usage of the practice must be certain: there is an established universal practice, which has become acknowledged practice in the market.
- It must be so well known in the market every business in that market operates with the usage.
These types of implied terms can't be implied without solid evidence of the industry-wide practice.
Example: Over 400 transactions
In an 8-year period, a company had over 400 transactions for the purchase of polymers. Invoices contained the words "… subject to normal terms and to current conditions of sale".
A director initialled invoices after they arrived. He realised that there were terms on the back of the invoices. He didn’t read them.
In about the second year, the written terms of sale weren’t included in the contract.
A term was not implied because there were no customary terms in the polymer trade which were so certain, notorious and reasonable that anyone purchasing must be taken to have contracted on those terms.
7. Implied Terms as to Time for Performance
When a contract doesn't set an agreed period of time to perform an obligation, a term may be implied to perform the obligation within a reasonable time.
What's a reasonable time?
Calculation of a reasonable time is not a purely theoretical or unascertainable measure. It isn’t decided in the abstract. It depends on the circumstances which actually existed at the time.
It's highly fact dependant: it must be related to the surrounding events at the relevant time. A small change in the facts may significantly change the calculation.
Figuring out what is a reasonable time will take into account all sorts of different factors. Factors which come into play include:
- expectations within ordinary circumstances of performance
- any estimate given by the performing party of how long it would take to perform the obligation
- whether that estimate has been exceeded and, if so, in what circumstances
- whether the party for whose benefit the relevant obligation was to be performed needed to participate and collaborate in what was needed to be done
- whether it was necessary for third parties to collaborate with the performing party in order to enable it to perform its obligation
- what exactly was the cause or were the causes of the delay to performance
Type of events to estimate a reasonable time
Any relevant circumstance of the case is likely to be taken into account, such as:
- the time within which goods must be shipped
- the time for delivery
- the time of payments should be made
- time for delivery of services
- response times
- time to rectify errors
8. Implied terms to fix the Price Payable
Believe it or not, your business can perform work, and have no legal right to be paid for it.
The contract should specifically state that the supplier will be paid, and then set out the formula or calculation to be used to work out the amount.
What if the price isn't set in the Contract?
A contract provided for petrol to be supplied at a price to be agreed in writing in the future. The price was not agreed at the time of the contact.
Terms were implied into the agreement that:
- the petrol supplied should be of a reasonable quality and sold at a reasonable price, and
- any dispute into those matters was to be determined by the alternative dispute resolution clause in the agreement.
The dispute resolution clause provided the method to determine the price to be paid.
In another case, the contract fixed the price to "such other figures as may be agreed between the parties".
It was held that had effect, because the figures had to be reasonable. If agreement could not be reached, the price was agreed using the alternative dispute resolution procedure in the agreement.
In another case example, a rent review clause in a lease referred to such rent "as shall have been agreed between the lessor and the lessee". That was read to mean a fair rent as between the lessor and the lessee.
Guidelines to Imply a Term
Before a term can be implied, a series of conditions need to be satisfied.
- The starting point is that nothing will be implied into a contract.
- The more detailed the contract, the harder it will be.
- The express terms of the contract are read first. After that, the possibility of implied terms is considered.
- Implied terms need to:
- retain consistency with the express terms of the contract
- not deal with the same subject matter as the express terms. If the failure to include an express provision may have been deliberate, no term is likely to be implied
- be reasonable and fair
- necessarily give business efficacy to the contract or be so obvious that it goes without saying
- enhance the commercial or practical coherence of the contract.
Courts won’t make your contract more commercially reasonable for you. Courts can fill gaps where the contract is unworkable, where it's necessary for reasons of business efficacy. The need for the term must be so obvious, that it goes without saying.
But courts can't make a new contract for you. That's out of bounds.
Default Position: No term implied
If you're left in a position where you can’t imply a term to fix a problem, the loss will fall where it lies. That’s not good for your business if the loss falls your way.
It may be that you are stuck with a breach of contract and damages claim, or worse still termination of the contract, finding yourself in court.
Make the Contract work for you
It’s a mistake to leave matters out of contracts when you know better. The contract won’t do the job you need it to do.
It’s worth thinking through your contract before you sign it. Think about:
- What the contract needs to work for your business
- Anything that you need to rely on to make the contract work. It must be in the contract - the express terms.
The contract should not get in your way to do business successfully.
Being wise with contracts means knowing the likely legal effect of the contracts you sign.
Even then, when a contracting party doesn't behave in the manner that the legal expects them to, implied terms may render them accountable for a repudiatory breach of contract.
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