Implied Terms In Contracts: What Business Owners Need To Know

Contracts sit at the heart of almost every business relationship. They govern supply arrangements, leases, service provision, joint ventures and long-term commercial partnerships. In theory, a written contract sets out everything the parties have agreed. In reality, even carefully negotiated agreements rarely anticipate every issue that may arise over time.

For business owners, they most often come into focus when a relationship begins to break down and one party argues that obligations exist which were never documented. At that point, questions of risk, responsibility and cost can turn on whether the court is willing to read something into the agreement.

Understanding how and when terms may be implied into a contract is crucial. It goes directly to commercial certainty, risk allocation and the ability to enforce rights when a contract is under pressure.

What are implied terms?

Implied terms are obligations that the law may treat as part of a contract, even though they do not appear in the written agreement. In practice, they arise where one party argues that the contract does not work as intended unless a particular obligation is read into it. This most commonly occurs once a commercial relationship has soured, or when a dispute develops over performance, responsibility or financial exposure.

Courts will not imply terms simply because a particular outcome feels fair or because one party assumed something would be covered. The starting point is always the express wording of the contract. A term will only be implied where the law considers it necessary to make the agreement operate in a coherent and workable way.

English law recognises two distinct ways in which terms may be implied. Some terms are implied by law and apply automatically to certain types of contract. Others are implied by fact and depend on the wording, structure and commercial purpose of the specific agreement. This distinction matters for businesses because it affects both the likelihood of a term being implied and the extent to which it can be controlled or excluded.

Terms implied by law

Terms implied by law arise because the legal system recognises that certain types of contract require minimum standards to operate properly. These terms apply automatically to particular categories of agreement, regardless of whether the parties discussed them during negotiations.

From a business perspective, these implied terms operate as baseline obligations. For example, employment contracts carry implied duties relating to trust, confidence and safety. Consumer contracts are subject to statutory implied terms requiring goods and services to meet minimum quality standards. In property arrangements, landlords and tenants may be subject to implied obligations that protect the basic use and enjoyment of premises.

In some commercial contracts, these obligations can be adjusted or limited through careful drafting. In others, particularly where consumer protection legislation applies, they are mandatory and cannot be excluded. For businesses, the key point is that obligations may exist even where they are not written down, and failing to account for them can result in unexpected liability.

Terms implied by fact

Terms implied by fact are more narrowly focused on the individual contract. They arise where, having regard to the express terms and the surrounding circumstances, the court concludes that the parties must have intended a particular term to apply, even though they did not expressly include it.

The Supreme Court's decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (UK) Ltd illustrates how cautious the courts are in this area. The case concerned a commercial lease which allowed the tenant to break the lease early if certain conditions were met, including payment of rent up to the break date. The lease was silent on whether rent paid in advance, but relating to a period after the break date, should be repaid.

Marks and Spencer argued that a term should be implied requiring the landlord to refund the overpaid rent. Without such a term, it said, the commercial deal made little sense. The Supreme Court rejected that argument. It held that the lease operated perfectly well without the implied term, even though the outcome was financially unfavourable to Marks and Spencer. The fact that the parties might have agreed to a refund had they turned their minds to it was not enough.

For businesses, this is a valuable lesson to learn. Courts will not correct an omission simply because it produces an unattractive result. A term will only be implied if it is essential to make the contract function at all, not because it would improve the bargain or align with one party's expectations.

Obviousness and commercial expectations

When courts are asked to imply a term into a contract, they apply a strict legal test. One element of that test considers whether the proposed term was so obvious at the time the contract was agreed that it did not need to be written down.

This is sometimes explained by reference to the idea of an "officious bystander". If an outsider had suggested the inclusion of a particular term during negotiations, and both parties would immediately have accepted it as self-evident, the court may be willing to imply it.

This is a demanding standard. A term is not implied simply because it reflects standard market practice or because one party assumed it would apply. Courts are careful not to rewrite contracts with the benefit of hindsight. For business owners, this reinforces the importance of being explicit. If a particular protection or obligation is commercially significant, it should be stated clearly in the contract rather than left to argument later.

Why implied terms become an issue in commercial disputes

Disputes about implied terms most often arise in long-term or relational contracts, where performance depends on cooperation over time and circumstances evolve in ways that were not fully anticipated at the outset. As commercial pressure increases, gaps in drafting can become points of contention.

In these situations, one party may argue that certain obligations must have been intended, even though they were never recorded. The other may rely on the express wording of the agreement and the risks it allocates. Courts approach these disputes with caution. Context is relevant, but it does not lower the legal threshold for implication.

The starting point remains the contract itself, and silence will not easily be filled.

Drafting, risk and commercial certainty

From a commercial perspective, implied terms highlight the importance of careful drafting. Express terms take priority, and where an issue has been addressed in writing, the courts will rarely intervene. Where a contract is silent, the risk may sit uncomfortably with one party, but that does not mean it will be reallocated by the court.

For business owners and decision-makers, understanding implied terms is part of understanding contractual exposure. Implied terms can sometimes provide a safety net, but they are an uncertain and often contested one.

Arguments about implication are common in litigation and can be costly to pursue. However , the fact remains that the devil is always in the detail, and the creation of clear, well-considered contracts remains the most effective way to maintain certainty, control risk and avoid costly disputes when commercial relationships come under strain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.