When are terms implied in a contract?

Courts and implied terms in contracts

Courts are generally reluctant to imply terms in a contract, on the basis that the parties should have ensured that the terms of their agreement were clear (Shell UK v Lostock Garage Ltd (1976)). In certain circumstances, however, the courts will imply terms which are not actually set out in a contract.

Terms implied in fact

The courts often state that they are not there to re-write the bargain the parties originally undertook when creating the contract; they are merely there to establish whether it must have been the intention of the parties at the time the contract was entered into that a clause be included. The courts have developed two tests to establish this.

The business efficacy test

This involves the court deciding whether the relevant term was necessary to give the contract the originally desired effect. The term must be required to make the contract work (The Moorcock (1889)).

The officious bystander test

This involves the courts considering a hypothetical scenario of an officious bystander being present at the time the contract was made. If said bystander would have suggested that such a term should be included, it must be apparent that both parties would have agreed to it (Shirlaw v Southern Foundries (1939)).

Terms implied in law

There are contracts which are used on a daily basis that have developed a standard set of terms that can be implied in any contract of the same sort, eg, contracts establishing the lease of a furnished house or contracts of employment. They generally aim to give rights to the weaker party to the contract (Liverpool City Council v Irwin (1977)).

When will a term be implied in law?

For a term to be implied in law, the contract in question should be of a defined type and the term must be reasonable (Wilson v Best Travel (1993)). The implication of the term should also be sufficiently clear (Shell UK v Lostock Garage Ltd (1976)).

Terms implied by custom

There may be certain terms that are customary to a particular trade profession or locality. If the contract falls within one of these categories and certain customary terms have not been expressly stated then they may be implied (Hutton v Warren (1836)).

Conditions, warranties and innominate terms

There are three types of terms: conditions, warranties and innominate terms. The remedies available on breach will depend on how the terms are classified.

A condition

A condition is a major term of the contract which goes to the heart of the agreement. When a condition is breached the party that has suffered the damage has the right to sue the wrongdoer for damages and also to terminate the contract (Poussard v Spiers (1876)).

A warranty

A warranty is a minor term which does not go to the root of a contract. Where a warranty has been breached the claimant only has the right to sue the defendant for damages; they cannot terminate the contract (Bettini v Gye (1876).

An innominate term

Where an innominate term has been breached, the legal consequences such as the right to sue for damages or rescind the contract will depend on the facts of the case and the consequences of the breach (Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (1962)).

If the breach of an innominate term is so serious that it basically deprives the injured party of all the benefit that they intended to gain from the contract, they have the right to terminate the contract in addition to suing for damages.

The classification of the term

On what basis a term will be classed will depend on the intention of the parties.

There is a general consensus that most people will try and have their terms labelled an innominate term due to the flexible nature it holds in comparison to a straightforward condition.

On the other hand, a person may wish to have their term classified as a condition because of the certainty it holds. This enables both parties to the contract to know exactly where they stand with each other and also allows a breach of such duty to be easily identified.