Implied terms
Overview
Implied terms are those terms which the law implies into a contract notwithstanding the fact that they have not been discussed by the parties or referred to in a contract. They may be implied at common law or by statute
Common law
At common law terms are generally implied where it is necessary to give full effect to the intention of the parties. For example, the common law may imply a term requiring parties to do what is necessary to enable the contract to be performed.
Courts may imply terms where:
the parties would have expressly agreed to the term if they had considered the issue when entering into their contract (ad hoc implied terms)
there is a custom or usage that justifies the implication of a term (custom or usage)
the terms are a 'normal incident' of the type of contract entered into (standard implied terms).
Ad hoc implied terms
The common law may imply terms based on the actual or presumed intention of the parties. Such terms may be necessary to give business efficacy to a contract, may result from a course of dealings, or may arise as a result of custom or trade usage. In ➤ Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337(AustLII), Justice Mason set out [at para 9] the conditions necessary for implying a term (as previously set out by the majority in ➤ BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40 (AustLII))
'(1) it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(3) it must be so obvious that 'it goes without saying';
(4) it must be capable of clear expression;
(5) it must not contradict any express term of the contract.'
His Honour discussed the basis for the implication of a term as follows (my emphasis):
[para 5] The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention.
[para 6] For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.
[para 7] Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. ...
[para 8] The basis on which the courts act in implying a term was expressed by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) 2 KB 206, at p 227 in terms that have been universally accepted: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. . . " (at p347)
Implied terms resulting from custom or trade usage
In ➤ Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Australia) Ltd (1986) 160 CLR 226 the Court, in joint judgment, set out the criteria for implying terms by custom derived from earlier authority [at paras 8-9; my emphasis]:
(1) The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact...
(2) There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract ... [citing ➤ Thornley v Tilley]:
"(The custom) must be so notorious that everybody in the trade enters into a contract with that usage as an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself."
...
(3) A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement ... One explanation of this principle is that, in so far as it relates to written contracts, it is simply an application of the parol evidence rule, by which extrinsic evidence is generally inadmissible to add to, vary or contradict the express terms of a contract which has been reduced to writing ... A more fundamental explanation is that the presumed intention of the parties, on which the importation of the custom rests ... must yield to their actual intention as embodied in the express terms of the contract, regardless of whether the contract is written or oral. ...
(4) A person may be bound by a custom notwithstanding the fact that he had no knowledge of it. Historically the courts approached this question in a rather different way. It was said that, as a general rule, a person who was ignorant of the existence of a custom or usage was not bound by it. To this rule there was a qualification that a person would be presumed to know of the usage if it was of such notoriety that all persons dealing in that sphere could easily ascertain the nature and content of the custom. It would then be reasonable to impute that knowledge to a person, notwithstanding his ignorance of it ... In this way, the issue of notoriety discussed in (2) above came to be co-extensive with the question of imputed knowledge. The achievement of sufficient notoriety was both a necessary and sufficient condition for knowledge of a custom to be attributed to a person who was in fact unaware of it. The result is that in modern times nothing turns on the presence or absence of actual knowledge of the custom; that matter will stand or fall with the resolution of the issue of the degree of notoriety which the custom has achieved. ...
Standard implied terms
In relation to certain categories of contract the common law implies standard terms because they are considered a normal incident of that type of contract. The common law considers certain terms to be a normal incident of implies terms into certain categories of contracts. For example:
in contracts for the sale of goods, an implied term that goods are fit for their intended purpose
in contracts for professional services, an implied term that they will be rendered with reasonable car
The implication of these terms is always subject to the proviso that they will not be implied where the contract evidences a clear intention to the contrary. Thus, for example, if a contract provides that there is no promise given, either expressly or by implication, that the goods will will be fit for any particular purpose, then courts will not imply a term that goods should be fit for purpose.
Statute
Until the Australian Consumer Law came into operation on 1 January 2011, overlapping national and state legislation implied terms into consumer contracts. The national Australian Consumer Law removed this 'implied terms' regime, replacing it with a set of 'statutory guarantees' for which there are independent statutory remedies (rather than contractual remedies). However, these remedies remain relevant to contract, as they may enable a party to escape a contract or provide another avenue for parties to enforce contractual promises (for example, it may be both a term of the contract and a 'statutory guarantee' that goods will be able to perform a certain function; where that is the case the aggrieved party may make a contractual claim for breach or a claim under the statutory guarantee regime).
See the ➤ consumer guarantees page.
State and territory legislation will still imply terms in some cases; for example. Unlike statutory guarantees under the Australian Consumer Law, these guarantees can normally be excluded by the parties.
Example: Victoria
In Victoria, the ➤ Goods Act 1958 implies terms into contracts. These apply to all contracts for the sale of goods (not just consumer contracts) but they may be excluded by the parties. The key provisions are:
Section 17 Implied undertakings
Implied terms that the seller has the right to sell, that the buyer shall enjoy quiet possession of the goods and that the goods shall be free from encumbrances not declared or known to the buyerSection 18 Sale by description
Implied term that goods will conform to descriptionSection 19(a) Implied term as to fitness for purpose
Implied term that goods will be fit for purpose made knownSection 19(b) Implied term as to quality
Implied terms that goods bought by description will be of merchantable qualitySection 20 Sale by sample
Where goods are sold by sample, an implied term that the bulk correspond to the sample.Section 61 Exclusion of implied terms
'Where any right duty or liability would arise under a contract of sale by implication of law it may be negatived or varied by express agreement or by the course of dealing between the parties or by usage if the usage be such as to bind both parties to the contract.
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Last updated: 18 October 2019