The law may imply terms into a contract where the verbal and written communications do not contain the full agreement. In many cases, the verbal terms of the agreement which can be ascertained are relatively minimal. The remaining terms must be ascertained by implication. There are a number of sources for implied terms.
There are two broad categories of implied terms. One category involves unspoken terms which the parties would never have seriously disputed, which they would have intended to be incorporated if they had considered the matter. The other category comprises those implied by custom, common law or statute, irrespective of the parties express or implied intention. This latter category are not based on the implied or presumed intention of the parties.
In certain types of contract, terms are implied by statute or common-law. Statute may imply detailed terms and conditions. Most apply in the absence of a contractual term to the contrary. In some cases, the statutorily implied terms cannot be varied. This is in particular where they are provided with the objective of protecting a “weaker” party, such as a consumer.
Outside of statutory implication, terms may generally be implied, only where necessary. The implication of terms may be necessary to give commercial effect to the terms of the contract because it is incomplete. However, the court must be willing in the first instance, to decide that the contract is sufficiently complete so as to constitute a contract in the first place. If it is not so, then it may hold that there is no agreement at all.
Implied by or Common Law
Common law has long implied terms into certain types of contracts. This may be additional to, but may not be inconsistent with terms implied by legislation. In effect, the implied terms are “incidents” of the contracts. Examples include landlord and tenant, employment, hire purchase, partnerships and the sale of goods. In some cases statute has supplanted or supplemented the common law.
Implied terms apply to employment contracts at common law, which supplement the many statutorily implied terms. At common law, employment contracts imply a duty of faithful service on the part of the employee and a duty not to undermine relations of trust and confidence on the part of the employer.
In many cases where services are to be provided, it is an implied term at common law that they will be provided with due care and skill. For example, in contracts for building and construction, it is implied that the works shall be completed in a good and workmanlike matter with fit and proper materials. In the case of professional advisory services, it is implied that the services will be provided with due skill and care.
In business to consumer contracts, certain key terms are implied in favour of consumers by statute law. These implied terms cannot generally be overridden by the terms of the contract. These are dealt with separately in the articles on consumer protection.
Employment law implies many terms and conditions, most of which are incapable of variation. The Consumer Credit Act implies mandatory terms and conditions in consumer credit, leasing, and hiring contracts, which may not be varied.
Outside of the financial services, employment and consumer protection context, where the terms are usually mandatory, the implied terms usually apply in the absence of an agreement to the contrary.
Sales of Goods
The Sale of Goods Act implies numerous “default” provisions into a contract for the sale and purchase of goods. The Act implies a range of obligations and terms. Similar, but less extensive provisions apply to the supply of services. They are in less absolute implied terms.
The legislation deals with both consumer and non-consumer contracts. In the former case, certain key implied terms cannot be varied by agreement. In the latter case, a variation is usually allowed, provided that it is fair and reasonable. See the sections on the Sale of Goods.
The provision of financial services is highly regulated by Codes of Conduct. There are extensive requirements in relation to distance sales and sales made away from the business premises to a consumer. There are also pre-contract information requirements that apply to all consumers sales. They may be implied into the sale contract.
In business to consumer contracts, an obligation of good faith and fair dealing, is implied by the Unfair Contract Terms Regulations. Numerous other statutes express or imply terms that may apply in particular settings.
In business contracts, the law implies terms necessary to give business efficacy to the contract. Where the parties have failed to express necessary terms by oversight or carelessness, the Courts may be willing to imply the required terms. The Court may not substitute its own contract terms.
Many courts take the view that where the parties clearly intend to enter a contract and believe that they have done so, that the court ought to imply in terms, necessarily required to give business efficacy to the agreement. The terms implied must be capable of clear expression. They must not contradict the express terms of the contract. They must be reasonable and equitable.
The terms must be necessary to give business efficacy to the contract. The courts imply in terms which necessarily follow from the presumed common intention of the parties as found from the words used and the circumstances.
Business Efficacy Test
Terms may be implied which are necessary in order to give business “efficacy” to the contract. If the contract is incomplete, it is more likely that the terms will be implied. The requirements of business efficacy may be used to imply terms, where the parties have failed to express them.
A document or agreement may have a clear purpose, but certain obvious and necessary terms may be omitted. In these cases, the courts will usually imply terms that are necessary to give effect to the contract in its commercial / business setting.
The court seeks to ascertain the presumed intention of the parties, which they deduce from the parties’ words and the surrounding circumstances. The law presumes that the parties intended that the transaction should be effective and the court may imply in terms in order to give effect to this presumption.
Some terms and conditions may not be specified because it is so obvious that they apply, that it is not necessary to mention or set them out. A further test used in implying contract terms is the so-called “officious bystander” test.
The implication of terms under this principle must be reasonable and necessary. They must be so obvious as to go without saying. They must be capable of clear expression and must not contradict the express terms of the contract.
This test of implication is made by reference to a hypothetical so-called officious bystander. The term to be implied is something so obvious that it goes without saying. It is often said, that if an officious bystander were to suggest the term, both parties would readily (and “testily”) respond “of course”.
The term must be so obvious that it goes without saying. The terms may be implied only where they are necessarily inevitable and obviously, part of what is agreed. Hence, the testy reply to the officious bystander on the part of both parties.
Relationship of Business Efficacy and Officious Bystander
Some courts have equated the business efficacy and officious bystander tests under the umbrella of business efficacy. Other courts have taken the approach that the tests are separate. This is probably the better approach.
If the parties were not aware of the matter to be implied, then necessarily, it does not satisfy the officious bystander test. The courts may be willing to imply such terms as a matter of business efficacy.
A business contract is generally entered in a particular setting or context. The background of custom and usage in a particular business or another context may supplement the agreement and inform it.
There may be a context of past dealings and practices between the parties. It may be that there are customs and practices in the particular business sector.
A custom may apply to explain and flesh out the contract, but it may not vary the contract. Custom was more important in earlier times than it is today. Where there is a uniform trade practice and custom, it may be implied and incorporated into the contract. The custom must be certain and reasonable.
Custom is based on the principle that it represents the presumed wishes and intentions of the parties. It must not be inconsistent with the contract. If what is said or done contradicts the custom, then it cannot apply.
Application of Custom
Custom may not vary the terms of a written or oral agreement. However, terms deriving from custom may be incorporated. The custom is presumed to reflect the intentions of the parties. Accordingly, if the contract is inconsistent with it or excludes it, then the custom may not be incorporated.
The custom must be so notorious that it must be taken to have been known by the parties and be intended to form part of the contract.In order for a custom to apply, it must have acquired such notoriety that the parties must be taken to have known it and intended it to form part of the contract.
Clear proof must be given of the custom. It must be proved by clear evidence and must not be inconsistent with the terms of the contract. If a custom is unreasonable, it is harder to prove its existence and application. In some cases, the courts will take judicial notice of very well-established customs.
Limits to Implication
Terms will not be implied, where they are contrary to or inconsistent with the express terms of the contract. The implied term must be capable of being clearly expressed and articulated. It must be sufficiently certain. It must not be at variance with or contradict the express or implied terms of the contract.
Where a proposed term is raised in the course of negotiations and rejected, it cannot be implied. That is because it is clearly inconsistent with the intention of the parties. Similarly, where a term is the intention of one party, but there is little or no evidence that it is the intention of the other party, it cannot be implied.
Implied Duty of Good Faith
It is a principle of many Continental systems of law, that the parties should deal in good faith. Such a general principle has never applied at common law. However, in certain scenarios and relationships, obligations to deal in good faith apply.
Where a person enters a contract conditional upon some state of affairs or a result to be achieved, it is implied that he will use reasonable efforts to achieve that result. Accordingly, where a person enters a purchase contract, subject to obtaining loan approval, he must make reasonable efforts to obtain loan approval.
Where a party has a power or right under a contract, it may be implied that they must be exercised in good faith in accordance with the terms of the contract. They may not be exercised for an extraneous purpose, unrelated to the evident reason for the provision concerned.
Public Sector Good Faith
In a small number of cases, the courts have been willing to imply obligations of good faith and fair procedure into dealings with the public-sector entities on the basis of constitutional rights and constitutional justice. See generally the sections on administrative law.
Contracts between public bodies and office holders have been deemed subject to requirements of fair procedures for termination. This principle has been applied to contracts between directors and companies on the basis that the former are office holders.
Right to Terminate
Where a contract does not make provision for termination, the courts will often imply a right to terminate on giving reasonable notice. This is implied into contracts for employment.
It is also implied into many other standing and ongoing arrangements, such as contracts for the appointment of commercial agents, supply and distribution contracts.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 6
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch 7
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.