A contract is a written agreement which encompasses the oral and written negotiations and agreements of the parties. Provided that the necessary factors, such as offer and acceptance, consideration and intention to be contractually bound, are all present, a contract will be formed. Whilst the words, whether written or spoken, which the parties use in formulating the agreement are the express terms of the contract, it is important to bear in mind that these may not constitute the whole agreement. The parties to a contract cannot possibly contemplate every contingency and eventuality that may arise over the course of a contractual relationship. The result is that gaps are inevitably left in the express contractual terms. For this reason, the Courts are prepared to imply terms into a contract, either as a matter of custom, by statute or by common law.
The express terms of a contract are those terms that have been specifically mentioned and agreed by both parties at the time the contract is made. They can either be oral or recorded in writing.
Inevitably the express terms of an agreement will set out the primary obligations of the parties. However, rarely will the express terms deal with all eventualities. It may be that a specific event did not occur to the parties at the time of drafting, or that the parties thought the matter was obvious and therefore they did not think it necessary to mention it.
Whatever the reason for the omission, additional terms may be implied into the contract to fill the gap where it is equitable and reasonable to do so. However, a term will not be implied if it would be inconsistent with the express wording of a contract. This article explores the principal factors which may determine whether a term will be implied into a contract.
Intention of the Parties
The basic principle is that a term will be implied into a contract where it is necessary in order to reflect the intention of the parties. In other words, a Court will imply a term into a contract if, in the Court's opinion, it is apparent from the facts that the parties must have intended that term to form part of that contract.
The intention of the parties is ascertained from an objective viewpoint. In construing the parties' intentions, the Court will consider what a reasonable person would have under - stood the parties' intentions to be, given the background knowledge reasonably available to the parties at the time they entered the contract.
A useful test for determining the intention of the parties is the 'officious bystander' test. This holds that if, while the parties were making their bargain, an 'officious bystander' were to suggest some express provision for it in their agreement, they would testily suppress him with a common 'oh, of course!'
Implying a term into a carefully drawn up contract to fill a gap for which the parties had inadvertently not provided is justified only in cases of necessity and only if certain other requirements are satisfied. The implied term, for example, should not be unreasonable or inequitable, should not be incapable of clear expression and should not be contrary to the express terms. For the Courts to imply a term, it is not enough that the term should have been reasonable; it must be both obvious and necessary.
Usage or Custom
In the event where a provision could be deemed to be 'notorious, certain and reasonable and not contrary to law', an implied term can arise. In other words, frequent usage between the parties or because of widespread custom may result in a term being implied; however this will only occur when it is considered necessary to do so. Such a term would not be implied if there was express wording to the contrary, for example an entire agreement clause.
Terms Implied by Statute
Sale of Goods Act 1979
The Sale of Goods Act 1979 (SGA) defines a contract for the sale of goods as "a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price" (s.2(1)). The SGA imposes the following implied terms in contracts for the sale of goods:
- good title: it is implied that the seller has the right to sell the goods (s.12(1) SGA);
- no encumbrances and quiet possession: it is implied that the goods are free from charges or encumbrances and that the buyer will enjoy quiet possession of the goods (s.12 (2) and (3) SGA);
- correspondence with description: it is implied that, when goods are sold by description, they correspond with that description (s.13 SGA);
- and perhaps the most significant implied term:
- satisfactory quality: it is implied that the goods are of a satisfactory quality (s. 14(2) SGA). The goods' quality will be ascertained by reflection on the following (s.14 (2B) SGA):
- fitness for purpose;
- appearance and finish;
- freedom from minor defects;
- safety; and
- Fitness for purpose: in the event that goods are sold in the course of a business and the buyer, whether expressly or by implication, makes it known to the seller the purpose for which the goods are being purchased, it will be an implied term that the goods will be reasonably fit for that purpose.
Supply of Goods and Services Act 1982
This Act (SGSA) governs contracts which relate to the supply of services as opposed to the sale of goods, although the terms implied under this Act are somewhat similar to those terms implied by the SGA. Under the SGSA the following terms will be implied into a contract for the supply of services:
- reasonable care and skill: it is an implied term that the service will be carried out with reasonable care and skill (s.13 SGSA);
- reasonable time: it is an implied term that the service will be conducted within a reasonable time frame (s.14 SGSA). What is deemed to be reasonable will hinge on the facts of each individual case; and
- reasonable charge: where consideration is not stipulated by the contract, it will be an implied term that the services will be priced 'at a reasonable charge' (s.15 SGSA).
Excluding Implied Terms
Whether or not it is possible to exclude implied terms will depend on whether the contract is between businesses or a business and a consumer.
The Unfair Contract Terms Act 1977 (UCTA) prohibits exclusion of the implied term as to right to title under the SGA irrespective of whether or not the seller is dealing with a business or a consumer.
Where the seller is dealing with a consumer, it will be prohibited from excluding any of the implied terms listed above. A 'consumer' is defined under s.12 UCTA as follows:
- the consumer does not make the contract in the course of a business;
- the other party making the contract does so in the course of a business; and
- the goods being supplied are of a type ordinarily supplied for private use of consumption.
In the event that the buyer is not a consumer, but dealing in the course of a business, any attempts to exclude an implied term will be subject to the reasonableness test, which is examined in detail in the limitation of liabilty article.
In conclusion, when dealing in the course of a business with another business, it is infinitely preferable to rely on explicit express drafting in a contract as opposed to being in a position where terms can be implied by the Courts arising either from statute or from trade usage. Whilst implied terms will not be implied that do not reflect the intentions of the parties, it is clearly preferable to have express wording which reflects the parties' positions as opposed to the Court's interpretation of this. That said, it is extremely difficult to provide for each eventuality during the course of a contract and thus, at the very least, awareness of the potential burden of implied terms should be considered.
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.