Implied Terms in Contracts

Implied terms may have to be added to a contract so that it represents the agreement reached by the parties and the law which applies to that type of contract.

The Historic Basis of a Binding Contract

The terms of a contract should represent the agreement reached by the parties. This may sound obvious but, in practice, a contract may not include everything that the parties agreed. Historically, it was decided that a binding contract had to represent the consensus - or coming together of wills – of the contracting parties. If a dispute arose, and the matter went to court, the judge would have to establish the intention of the parties and give effect to that intention.

Express Terms and Implied Terms

It may sometimes be difficult to work out from the terms of the contract itself what the parties intended. The terms which parties explicitly include in a contract are known as the express terms. If the intentions of the parties are not clear from the express terms, it may be necessary to imply terms into the contract.

A contract rarely stands alone in absolute isolation. It may:

• arise out of a particular course of dealing between the parties;
• relate to a particular set of circumstances; or,
• be in relation to a type of transaction which always has certain rules attached to it.

In any of these situations the contract might not expressly include all of the terms that relate to it. Therefore, it may be necessary to incorporate implied terms.

There are generally three different ways in which a term may be implied into a contract.

Contract Terms Implied by a Statute

Traditionally legal statutes had little impact on a contract freely entered into. However, increasingly, terms are implied by statute which may take precedence to the express terms of the contract. For example, a landlord and tenant may agree that, by way of a deposit, the tenant will give the landlord a painting. The tenancy agreement may include an express term stating this. However, according to the Housing Act 2004 a deposit in relation to a shorthold residential tenancy must be in monetary form. This law may override the express term in the contract.

A common type of contract which is likely to contain terms implied by statute is a contract for the sale of goods. Under common law the legal principle of caveat emptor – or “let the buyer beware” - applied to most contracts for the sale of goods. This meant that it was up to the buyer to make sure he knew what he was buying. Today various terms are implied into most contracts for the sale of goods. Some of the most important implied terms are:

• The seller has good title to the goods (i.e. he actually owns them);
• The goods correspond to the description given by the seller;
• The goods will be reasonably fit for the purpose for which they are sold and of satisfactory quality;
• Where a large quantity of goods is purchased following production of a sample, all of the goods will be of the same quality as the sample.

Whether or not the parties can include a valid express term excluding the terms which would otherwise be implied by statute may depend on a number of factors. These could include the previous business relationship between the parties, the relative bargaining power of the parties and the particular term which it is sought to exclude.

Contract Terms Implied by Custom

Some contracts may be entered into in the context of widely accepted business practices common to all contracts of that type. Therefore, even if the contract does not include an express term that the practice applies, it may be implied that it does. If the parties decide that the practice or custom will not apply they may have to include an express term excluding it.

If the parties have included an express term excluding the usual practice this should usually take precedence to the general custom which applies to that sort of contract.

Contract Terms Implied by a Court

The courts may imply terms into a contract to give effect to the intentions of the contracting parties. Generally a court will only imply a term into a contract where it is obvious that it represents what all of the parties intended when they entered into the agreement and where the term is necessary to give “business efficacy” to the contract.

The courts may also imply a term into a contract if it is necessary to do so for the contract to comply with the common law. (However, for many modern contracts the necessary term may already have been implied into the agreement because it is contained in a legal statute.)