Introduction
Contracts are generally drafted with the intention of being “airtight” and covering absolutely all bases, however in practice, this is often not the outcome and implications must be drawn to fill in any gaps. These gap-fillers are known as implied terms. Understanding the existence of implied terms is key to ensuring your business runs smoothly as they can have significant impact on your contractual relationship, particularly when something goes wrong.
How does a term get implied?
Implied terms are often imported into a contract for four main reasons:
- By fact;
- By law;
- As a result of past dealings; and
- By custom.
- Terms implied by fact
Implying terms for the purpose of business efficacy simply means to do so in order to achieve the intended business results of the contract the parties intended based upon the facts of the situation. For a term to be implied for the purpose of ensuring business efficacy, it must:[1]
- be reasonable and equitable;
- be absolutely necessary to give business efficacy (i.e., the contract will not be effective without it);
- be so obvious that “it goes without saying”;
- be capable of clear expression; and
- not contradict any of the express terms of the contract
This situation usually arises where the contract was not well thought out and may be a verbal arrangement, handshake deal or a contract created by the conduct of the parties. For example, after you buy a meal at a restaurant, it is implied that the food will not be contaminated. Courts are very reluctant to imply terms into a contract, particularly if the contract is formal and detailed.
- Terms implied by law
Every contract will fall under either a federal or state legislation scheme. This means that parties to those contracts can rely on the protections offered by the relevant legislation, unless it is excludable by the contract, and is expressly done so.
The Australian Consumer Law contains some of the most common examples of terms being implied by law that cannot be contracted out of. For example, where a person supplies you with a service, the Australian Consumer Law provides that they will do so “with due care and skill”[2] Similarly, where a person supplies you with goods, and knows the purpose you intend to use them for, the goods will be fit for that particular purpose.[3]
Alternatively, previous Australian cases can create a precedent that acts as an implied term. For example, following the decision in Koehler v Cerebos (Australia) Ltd[4] it is not necessary for an employer to mention in a contract that they will take reasonable care to avoid subjecting their employees to unnecessary risks of harm. This term is implied in all employment contracts.
- As a result of past dealings
Past dealings refers to circumstances where the actions of the parties have been sufficiently consistent and repeated, as to establish an expected pattern or procedure. This usually occurs in circumstances where the parties have a lengthy history of dealing with one another.
For example, you are consistently providing a service to a person, and it is stated in your contract that they are to pay you within 24 hours of you completing the work. However, you have consistently given a grace period of up to one week, your conduct may be taken to have implied this grace period into the contract.
- A term implied by custom
If all parties to the contract are in the same industry and have similar levels of experience in the field, they may be taken to be aware of common practices within the industry.
For example, if a builder were to hire a plumber to conduct work on a site, the plumber ought to know that he is obliged to supply his own materials unless otherwise stated in the contract. Therefore, the plumber would be liable for any delay caused as a result of materials not being at the site when work was intended to start.
For the builder to be successful in any claim against the plumber however, they must show that it is so common within the industry for plumbers to supply their own materials that the plumber ought to have known that this term was implied in their contract.
Conclusion
Understanding implied terms is essential for anyone who is involved in, or intends to be involved in, any contractual relationship. To prevent being surprised by a term being implied into your contractual arrangements, you should ensure your contract is well drafted and you have good advice on the contract. By being aware of the various sources of implied terms, businesses and individuals can better navigate their contractual relationships and bare in mind the possibility of implied terms via established conduct of their own, or of others.
It is crucial to consider the potential implications both during the formation of a contract and during the course of the contractual relationship and to seek legal advice when necessary. If you need further advice regarding your contractual arrangements, please contact Lynn and Brown Lawyers.
About the Authors: This article has been co-authored by Sam Richardson and Steven Brown. Sam undertook his studies at Murdoch University fresh out of high school in 2020 at 17 years old, keen to pursue and interesting and challenging career. Since November of 2022, he has been with Lynn and Brown as a clerk but following the conclusion of his studies, he will be staying with our Wills and Estates team as a Law Graduate. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.
[1] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266;
[2] Australian Consumer Law s60.
[3] Australian Consumer Law s61.
[4] [2005] HCA 15.
