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What are implied terms in Australia?

An Overview on Implied Terms

An implied term is a term that is not an express term and does not expressly form part of a contract. However, implied terms may be incorporated into a contract by implication and may be enforceable. This may arise in situations when the express terms of a contract do not anticipate events that may consequentially affect a contract. A response may involve the Court accepting there are gaps in the express terms of a contract, and that those gaps may be filled by implied terms.

This article addresses the frequently asked questions regarding implied terms that form part of a contract, including:

What is a contract?

A contract is a legally binding agreement that is made between the parties. Generally, there are six common elements that must be met before a legally contract is formed: Offer and Acceptance, Consideration, Intention to Create Legal Relations, Certainty, Capacity, and Formalities.

Legal ElementsSummary
What is Offer and Acceptance?An offer and acceptance must be communicated between the parties to form an agreement. 
What is Consideration?Consideration is an exchange of something in value for a promise. Generally, when parties enter into a contract, the consideration, representing the agreed price between the parties, must be sufficient but need not be adequate.
What is an Intention to Create Legal Relations?When parties enter into a contract, they should also have an intention to create legal relations. This is an intention to be bound by the contract.
What is Certainty?A contract must be sufficiently certain and complete as to its essential terms to become a legally binding contract.
What is Capacity?The parties to a contract must have legal capacity to enter into a legally binding contract. Generally, a contract made by a person without capacity may be open to be set aside by that person.
What are Formalities?Certain type of contracts must meet formality requirements. The formality requirements may differ from state to state. For example, certain kind of contracts may be required to be in writing and signed by the parties.

Notes and Further Information on formation of contract

In other topics involving the application and general principles of contract law in Australia, we look into the following areas:

Why may a term be implied into a contract?

An implied term of a contract may arise by implication. It is commonly understood that implied terms involve “an exercise in gap filling in the sense that it deals with issues the contracting partes might have resolved by express provisions, but have not” (Robertson, 2016, p. 142). This is intended to give effect to the presumed intentions of the parties in a transaction, when a contract’s express terms have not fully anticipated the occurrence of events.

As part of implied terms, the exercise of gap-filling involves judicial application of set rules and interpretation that imposes rights and obligations on the contracting parties. External standards may also be imported into the judicial exercise of gap-filling. Gap-filling may also arise at the primary and secondary level, such as implying terms to a contract and remedies (Robertson, 2016). However, there are limitations and boundaries to the creation of implied terms as they must not be expressly excluded by or be inconsistent with, the express terms of a contract.

What are situations that may involve a term being implied?

Situations that involve implied terms may arise where there are gaps in a contract, and the parties did not turn their minds to events that created those gaps at the time of contract-making. This is not uncommon. Others describe that “gaps in the express terms of all but the simplest of contracts are inevitable” (Paterson, 2020, p. 355). Moreover, there could be “several causes of contractual incompleteness” that causes gaps to form in contracts (Robertson, 2005, p. 207). Examples of contractual incompleteness are described in the table (Robertson, 2005):

Causes of Contractual IncompletenessSummary of Causation
ForeseeabilityParties to a transaction may not have been able to anticipate all future possibilities at the time of contract-making.
Transaction CostsThe costs involved in participating in a transaction may have required the parties to be selective in the approach towards contract-making.
ProportionalityThe costs incurred in dealing with some possibilities may have been greater than the possibility if those possibilities actually arose.
DisagreementThe actual negotiation of remote possibilities may cause disagreement between the parties and obstruct from the parties to reach an agreement.
Social or Business PracticesThe parties may adopt social or business practices that imply terms into a contract, rather than having those terms expressly written.

Generally, the Court will imply terms to reflect the hypothetical intentions of parties if they had negotiated about the event and gap when the contract was being formed.

The common types of implied terms in Australia are: terms implied by fact, terms implied by law, and terms implied by custom.

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What are terms implied by fact?

Terms may be implied to give business efficacy to a contract. The common elements of terms implied by fact was stated in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (BP Refinery). The conditions, as approved by subsequent decisions in the High Court of Australia, for a term to be implied in fact are:

Legal ElementsSummary of Legal Elements
Reasonable and EquitableThe implied term must be reasonable and equitable.
Business EfficacyThe implied term must be necessary to give business efficacy to the contract.
ObviousnessThe implied term must be so obvious it goes without saying.
Clear ExpressionThe implied term must be capable of clear expression.
ConsistencyThe implied term must not contradict any express term of the contract.

In summary, the five elements are: reasonable and equitable, business efficacy, obviousness, clear expression, and consistency. Particularly, the implied term must be necessary and obvious for a term to be implied by fact.

What are terms implied by law?

Terms that are implied in law are the kind of terms implied to contracts of a particular class, kind or description. The difference between terms implied by law, and terms implied by fact, are that terms implied by fact are intended to fill gaps within a contract and requires a legal assessment as to the contractual relationship between the parties. Whereas terms implied by law are terms that are implied across particular kinds of contracts and operate as default rules.

What are terms implied by custom?

A term may also be implied by custom or usage. This implication may arise if a custom is well known, or that persons making a contract in that situation can be presumed to have imported that term into the contract. The general principles for terms to be implied by custom was described as follows:

  • the existence of a custom or usage justifies the implication of a term into a contract
  • there must be evidence that the custom relied on is well known and acquiesced such that those making the contract can be reasonably presumed to have imported that term
  • the implied term is not contrary to the express terms of the contract
  • a person can be bound by custom even though that person has no knowledge of that custom.

What should you know about implied terms?

While the Court may imply terms into a contract, this kind of situation often arises in commercial disputes where parties are engaged in a lengthy dispute at Court. If an agreement is properly drafted with express terms that anticipates contingencies and possibilities, then this will likely reduce miscommunication, and ensure that the parties are aligned as to their expectations regarding the performance of a contract.

Bibliography

  • Robertson, A. (2005). The limits of voluntariness in contract. Melbourne University Law Review, 29(1), 179-217.
  • Robertson, A. (2016). The Foundations of Implied Terms: Logic, Efficacy and Purpose. In Degeling, S., Edelman, J., & Goudkamp, J (Eds.), Contract in Commercial Law. Law Book Co.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.

Express Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Consideration | Intention To Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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