When will a term be implied in a contract?

Legal and business relationships should be governed by a written contract that sets out the terms and conditions agreed between the parties and their respective rights and responsibilities. Sometimes, certain terms will be implied in an agreement even though they have not been written into the contract.

Generally, a term may be implied in a contract in any of the following scenarios:

• by law – to contracts of a certain type;
• in fact – as necessary to make the contract workable;
• through custom – common knowledge shared within industries;
• through past dealings.

In the first instance, certain terms are deemed to apply to specific contracts through legislation, irrespective of whether or not they are included in the contract. In other cases, the need for a term to be implied may arise when the parties have failed to include certain provisions in their agreement, either purposely on the assumption that a particular event is unlikely to occur, or simply because they have been overlooked during negotiations. The implied term or terms are necessary to make the contract workable.

The information in this article is for general purposes only, and you should obtain professional advice relevant to your individual circumstances.

Terms implied by law

A term may be implied by law to contracts of a particular type through legislation.

For example, the Australian Consumer Law provides that in contracts for the sale of goods, it is implied (amongst other things) that the goods will be reasonably fit for their stated purpose and of merchantable quality.

Similarly, legislation across various jurisdictions sets out certain provisions that apply to domestic building projects, irrespective of whether or not they are expressly included in the contract. These are aimed at consumer protection and may include provisions such as those preventing builders from requesting large deposits, restrictions on how claims for progress payments are made and specific requirements regarding the form and content of a building contract.

There are also a number of statutory warranties implied in domestic building contracts, for example, that work will be carried out in a proper and workmanlike manner, in accordance with the plans and specifications and that unless specified, materials will be new and suitable for their intended purpose.

Terms implied by fact

Terms implied by fact generally concern provisions that have been omitted but are so obvious that they ‘go without saying’.

In such cases, the term is needed to give effect to the contract and the parties would, in the circumstances, have agreed to the term had they turned their minds to it at the time of entering the agreement.

A term implied by fact is unique to the contract in question and will be implied only in such circumstances to give effect to the presumed intentions of the parties and to give business efficacy to the arrangement. Such provisions must be reasonable, equitable and capable of clear expression and not contradict any express terms in the contract.

Generally, for a court to imply a term in such circumstances it must arise through necessity – in other words, the contract must be seriously undermined if the missing term is not included. The term must be fundamental to the nature of the relationship created by the agreement.

Terms implied by custom

A term may be implied by custom where there is general, uniform, and well-known custom within a particular trade or industry, and on the basis that the parties would reasonably presume to have included such a term.

The implied term must be considered standard practice or tradition within the relevant industry. For example, when electricians subcontract to builders, it would be implied that they would provide their own tools and any additional labour (where relevant) to carry out the work provided under the contract.

Terms implied by past dealings

Where an ongoing relationship exists between parties, a term may be implied by past dealings, based on their previous conduct, particularly in circumstances where the governing contract is informal and provides only a summary of key provisions.

In such cases the parties must have been engaged in regular transactions that were consistent and uniform over a period of time.

Conclusion

When drafting or entering a contract, it is important to understand both the express terms and those that may be implied by law specific to certain contracts and industries. These terms cannot be avoided despite contrary provisions or purposeful omission in the contract. Principles of contract law may also imply certain omitted terms deemed necessary to make an otherwise valid contract workable.

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