Implied Terms of a Contract – Australian Contract Law

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Author: Jasmine Burrows, Progressive Legal

Contracts serve as the cornerstone of modern business and legal interactions, facilitating the smooth exchange of goods, services, and obligations between parties. While the explicit terms of a contract lay out the specifics of the agreement, there exists a realm of unspoken commitments known as “implied terms.”

These unexpressed obligations, though not explicitly outlined in the written agreement, hold significant weight in shaping the parties’ rights and responsibilities. In this article, we delve into what implied terms of a contract are, the various types of implied terms, their legal implications, and relevant case law.

What are Implied Terms of a Contract?

Implied terms are provisions that are not explicitly stated in a contract but are nevertheless considered as integral components of the agreement. These terms are understood to be present due to common practices, statutory requirements, industry standards, or the presumed intentions of the parties involved.

Implied terms bridge gaps that may exist in the written contract, ensuring fairness, reasonableness, and efficacy of the arrangement.

What are the different types of Implied Terms of a Contract?

Common Law Implied Terms

These are terms that the courts consider as essential to the contract based on established legal principles and societal norms. Here are some examples of common law implied terms:

Implied Term of Good Faith: This means that parties are expected to act honestly, fairly, and without intention to undermine the other party’s rights or benefits.

Implied Duty of Care and Skill: In certain contracts, such as contracts for professional services, there is an implied duty that the service provider will perform their obligations with a reasonable level of care, skill, and expertise.

Implied Term of Mutual Trust and Confidence: This term is often relevant in employment contracts. It implies that both employers and employees will not take actions that destroy the mutual trust and confidence necessary for a productive working relationship.

Implied Duty to Cooperate: In contracts that require ongoing cooperation between parties, such as joint ventures or partnerships, there’s often an implied duty to cooperate reasonably and in good faith to achieve the contract’s objectives.

Implied Terms by Custom and Trade Practice

In certain industries, there are well-established customs and practices that are implicitly integrated into contracts. Here are some examples of implied terms by custom and trade practice.

Construction Industry: In the construction industry, it’s customary for contractors to adhere to specific safety standards and practices. Therefore, an implied term might be that a contractor will take necessary safety precautions while performing their work.

Shipping and Logistics Industry: In the shipping and logistics industry, it’s customary to use certain documentation and procedures for handling goods. Therefore, certain expectations regarding documentation and procedures might be implied in contracts between parties in this industry.

Fashion Industry: In the fashion industry, certain quality standards might be implied based on the usual expectations of consumers and industry practices. For instance, a custom might exist that clothing items must meet a certain level of quality.

Statutory Implied Terms

Statutory implied terms are contractual terms that are automatically included in certain types of contracts by virtue of relevant statutes or laws. These terms are established by legislative bodies and are intended to provide a standard set of rights and obligations for parties involved in specific types of transactions. Here are some examples of statutory implied terms:

Consumer Protection Laws: There are laws that imply certain terms into contracts between consumers and businesses. These terms often relate to the quality, fitness for purpose, and description of goods sold to consumers.

Employment Laws: Employment contracts are often subject to statutory implied terms that establish minimum employment rights, such as minimum wage, working hours, and notice periods.

Sales of Goods Laws: Contracts for the sale of goods may be subject to statutory implied terms regarding title, quality, and fitness for a particular purpose of the goods being sold.

Tenancy Laws: Rental agreements might be subject to statutory implied terms concerning the landlord’s duty to maintain the property and the tenant’s rights regarding eviction.

Implied Terms by Previous Dealings

Implied terms by previous dealings refer to contractual provisions that are not explicitly stated in an agreement but are assumed to be part of the contract based on the parties’ past interactions and consistent behaviour. These terms arise from a pattern of conduct and communication established between the parties in previous dealings, which creates a reasonable expectation of how future interactions should unfold. Here are some examples of implied terms by previous dealings:

Payment Terms: If a buyer and a seller have consistently followed a certain payment schedule in previous transactions, it might be implied that the same schedule applies in future deals.

Delivery and Shipping: If a supplier has consistently delivered goods within a specific timeframe, it could be implied that future deliveries will also adhere to this timeframe.

Quality Standards: If a manufacturer has consistently provided products of a certain quality level, it could be implied that this quality standard continues to apply to subsequent orders.

Implied Terms to Give Business Efficacy

Implied terms to give business efficacy refer to contractual provisions that are not explicitly stated in an agreement but are inferred by the courts to make the contract workable, effective, and capable of achieving its intended purpose.

These terms are implied into contracts based on the principle that parties would reasonably intend to include such terms to ensure the contract’s practicality and functionality.

Implied terms for business efficacy are particularly relevant when the literal interpretation of the contract would lead to an absurd or unworkable result.

Here are some examples of implied terms for business efficacy:

Necessary Cooperation: In contracts that require collaboration between parties, it might be implied that both parties have a duty to cooperate reasonably to achieve the contract’s objectives.

Implied Timing: If a contract doesn’t specify the timeframe for certain actions, it might be implied that actions should be taken within a reasonable time.

Dispute Resolution: In the absence of explicit dispute resolution provisions, it might be implied that parties will engage in good faith negotiations or use a common dispute resolution method.

Legal Implications and Challenges

Implied terms can sometimes lead to disputes, as parties may have differing interpretations of what terms should be implied. This can result in legal battles over the true intentions of the parties and the proper interpretation of the contract.

To mitigate such challenges, it’s essential to draft contracts with precision and clarity. Explicitly addressing potential areas of ambiguity and incorporating necessary terms can help prevent disputes related to implied terms. Moreover, parties should be aware of relevant statutory provisions and industry practices that might influence the implied terms in their contracts.

Make an enquiry below to get in touch with our experienced contract lawyers who draft tailored, precise and clear contracts.

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Case Law Examples:

The Moorcock (1889) 14 PD 64

The parties agreed that a ship, the Moorcock, would be moored next to a jetty for loading.

The ship was damaged at low tide when it settled and hit a ridge beneath the mud.

The ship owners sued the jetty owners for the damage the Moorcock, arguing that the other party had responsibility for the safety of the vessel while moored.

The jetty owners argued in response that there was no express term in the contract dealing with liability concerning such damage that occurred.

The court found in favour of the ship owners, and held that there was an implied warranty the jetty owners would take reasonable care to check whether the docking spot was safe, or would warn they had failed to do so.

Liverpool City Council v Irwin `{`1977`}` AC 239

The case revolved around a housing estate managed by the Liverpool City Council. The estate included multiple blocks of flats.

The tenants of the flats were subject to tenancy agreements with the Council. These agreements were not formal leases but were referred to as “conditions of tenancy.”

The tenants were responsible for paying rent, and the conditions of tenancy outlined their obligations as tenants.

Over time, various issues arose in the estate, including disrepair of common areas, broken windows, and malfunctioning lifts. These issues remained unattended for a considerable period.

The tenants, frustrated by the lack of action taken by the Council to address the disrepair, decided to withhold a portion of their rent payments.

The Council initiated legal proceedings against the tenants for the non-payment of rent.

The central legal question was whether there was an implied term in the conditions of tenancy that the Council was obligated to keep the common areas in reasonable repair.

The tenants argued that the Council’s failure to maintain the common areas relieved them of their obligation to pay rent. They contended that the Council’s breach of its duty to repair the premises justified their withholding of rent.

The House of Lords held that there was an implied term that the Council had a duty to maintain the common areas in reasonable repair. This obligation arose due to the nature of the housing estate and the relationship between the parties.

Burger King Corp v Hungry Jacks Pty Ltd `{`2001`}` NSWCA 187

In 1990, Burger King allowed Hungry Jack’s to open and run Burger King restaurants in Australia.

There was a special agreement that required Hungry Jacks to open at least four new restaurants per year. As per the agreement however, Hungry Jacks also required Burger King’s approval to do so.

In 1994, Burger King entered into an agreement with Shell to open outlets at its service stations.

After this, Burger King withheld its approval for any new Hungry Jacks restaurants, and then terminated the agreement with Hungry Jacks because it had not opened the four new restaurants per year that was required.

Hungry Jacks sued alleging breach of an implied term of good faith that required Burger King to cooperate and act reasonably in the exercise of its contractual rights.

The court agreed and found that Burger King’s conduct was designed to frustrate the contract, not to further its own legitimate rights.

The court thought it was necessary to include this rule about good faith because Burger King had a lot of control and authority in the agreement. They could cancel the important rights of Hungry Jack’s for even small mistakes and reasons that weren’t part of the agreement.

Key Takeaways

Implied terms play a crucial role in contracts by filling in gaps and ensuring fairness and practicality. They are the embodiment of unwritten commitments that parties are assumed to have made based on the context of their agreement. Understanding the various sources and types of implied terms is vital for both drafting effective contracts and navigating disputes.

By recognising the significance of these unspoken obligations, businesses and individuals can enter into agreements with a clearer understanding of the implicit commitments that underlie their written contracts.

If you need help drafting a contract for your business or resolving a contractual dispute – feel free to contact our team at Progressive Legal. We have the necessary expertise to help you out. Simply give us a call on 1800 820 083 or make an enquiry below.

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