Implied Terms in Contracts: A Comprehensive Guide to Understanding Their Impact

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When you sign a contract, you typically expect all the promises and obligations to be written down. However, many agreements go beyond what is expressly stated – they also include implied terms. These are promises or assumptions that aren’t explicitly documented, but are nonetheless considered part of the contract due to the way the parties act, legal requirements, or long-standing industry custom. In this guide, we’ll walk you through the different types of implied terms, how courts determine what should be implied into an agreement, and the impact these terms can have on your business dealings.

What Are Implied Terms in Contracts?

In the realm of contracts, implied terms are those that, although not written or spoken, are assumed to be part of the agreement. They fill in the gaps, ensuring that the contract operates fairly and efficiently. Whether a term is implied by the actions of the parties, mandated by law, or based on common practice in a particular industry, these terms can be as binding as any express clause.

For a deeper understanding of the basics of agreements, you might explore what constitutes a contract. This foundation helps you appreciate why courts sometimes resort to implying terms even when they haven’t been explicitly mentioned.

Types of Implied Terms in Contracts

Implied by Conduct

Terms implied by conduct arise from the way the parties act during the performance of the contract. For example, if you are a homeowner who has consistently paid for a neighbour’s hedge‐trimming without ever formalising an agreement, that regular behaviour can imply an ongoing obligation to provide that service. This practical approach helps to avoid disputes by recognising the unspoken rules emerging from repeated actions.

In business, especially if you’re operating as a sole trader or running a small enterprise, your everyday practices can inadvertently create implied terms that bind you. These unwritten understandings often reflect the mutual expectations that develop over time.

Implied by Law

Some implied terms aren’t simply a product of behaviour – they are imposed by law. Such terms ensure that contracts are fair and that neither party is taken advantage of. For instance, there are legal obligations that require duties to be performed within a reasonable timeframe or stipulate that a landlord must provide tenants with the quiet enjoyment of their premises.

Government agencies like the Australian Competition & Consumer Commission and resources available via the Australian Government’s legislation portal can provide additional guidance on the statutory obligations that might be implied into contracts. These legal standards are particularly prevalent in employment contexts and consumer transactions, where fairness is paramount.

Implied by Custom

In many industries, customs and established practices inform what is expected from the parties, even if the contract does not specify these details. For example, if it is customary for an arborist to bring all the necessary tools when hired, that expectation can become an implied term of the contract. For such a term to be upheld, the custom must be widely recognised, generally accepted by everyone in the field, and should not conflict with any express terms already included in the agreement.

Court Tests for Implied Terms

When disputes arise about whether a term should be implied into a contract, courts employ a number of tests. Two of the most important tests are:

Bystander Test: Would a reasonable outsider agree that both parties would have seen the term as obvious during the negotiation? This test considers whether an impartial bystander would recognise the term as something that “goes without saying.”
Business Efficacy Test: Is the term necessary to make the contract work effectively? Courts look at whether the term is essential for ensuring that the contract performs as intended. Without it, the agreement might be rendered ineffective or unworkable.

These tests illuminate the importance of fairness and practicality in contractual relationships. If you’re ever in doubt about whether a term should be part of your contract, it might be time to consider getting a professional contract review to ensure your agreement covers all necessary bases.

Exclusion of Implied Terms

While implied terms help fill gaps in contracts, parties can sometimes agree to exclude them through explicit language. For instance, you might find a clause specifically stating that no additional, unwritten obligations will be imposed on either party. Such exclusion clauses must be carefully drafted to ensure that they are fair and comply with legal standards.

However, there are limits. Certain implied terms—especially those related to protecting personal safety such as provisions for personal injury or death—cannot simply be excluded. These non-excludable obligations are mandated by law in order to prevent one party from unfairly escaping responsibility.

Implied Contracts: Beyond the Express Agreement

Beyond implied terms in express contracts, there is another important concept: implied contracts. These arise not through an explicit agreement, but from the conduct, actions, or circumstances of the parties involved. Despite the lack of written or verbal confirmation, such contracts are legally binding and carry the same weight as express contracts.

Implied in Fact Contracts

An implied in fact contract is formed through the actual conduct of the parties. Even if there’s never been a conversation or a signed document, the behaviour of both parties can demonstrate a mutual understanding. For instance, if a real estate investor frequently negotiates informally with an agent and pays a commission after successful property purchases—even without a formalised agreement—the court might imply a contractual relationship based on that repeated conduct.

For a term to be enforced in such an instance, it must meet several criteria. It should be reasonable, equitable, necessary for the fair functioning of the deal, obvious or “goes without saying”, capable of clear expression, and must not contradict any express terms that are already present.

Implied in Law Contracts (Quasi-Contracts)

Also known as quasi-contracts, these arrangements are imposed by law primarily to prevent unjust enrichment. In other words, when one party is unfairly benefited at the expense of the other, the law may step in to imply a contract that ensures fairness. For example, if a property management company undertakes emergency repairs to mitigate damage without a prior agreement, the courts may imply that the owner should compensate the company for the costs incurred.

Rectification vs. Implication: Clearing the Confusion

It’s important not to confuse rectification with implication in contracts:

Rectification involves correcting a contract by adding a term that the parties intended to include but inadvertently omitted. This process requires robust proof that the omission was a mistake.
Implication is the process by which the courts determine that a term is necessary for fulfilling the overall purpose of the contract. This decision is often rooted in the fundamentals of fairness and commercial efficacy.

Understanding the difference is essential to ensuring your agreement accurately reflects your intentions and stands up in negotiations or legal disputes.

Enforcement of Implied Contracts and Terms

Proving the existence of an implied contract or term can be challenging due to the lack of a written record. However, once established, these agreements are given full legal effect. To successfully enforce an implied term, you should:

Document Evidence: Keep records such as emails or business correspondence that demonstrate a consistent pattern of conduct.
Show Mutual Understanding: Demonstrate that both parties were aware of and operated under the same assumption regarding the term.
Attempt Informal Resolution: Where disputes arise, consider negotiation or mediation before taking more formal legal steps.
Seek Legal Advice: If informal attempts fail, consult a lawyer who can advise on whether the implied term meets the thresholds of fairness and necessity required for enforcement. For guidance, you might review what legally binding contracts entail.

Court decisions in these matters are rooted in established tests (like the bystander and business efficacy tests mentioned earlier) and focus on whether enforcing the term is both reasonable and equitable. The aim is to uphold the integrity of the agreement while ensuring that justice is served.

Practical Considerations for Business Owners

For small business owners and entrepreneurs, understanding the concept of implied terms is crucial. Not only does it impact how you draft your contracts, but it also affects everyday business practices. Here are a few practical tips to consider:

Clarity is Key: While implied terms fill in gaps, it’s always advisable to have your responsibilities and obligations clearly stated in your contracts. Ambiguities can lead to disputes and costly legal action.
Regularly Review Your Agreements: Business practices evolve, and what was once an implied term may need to be explicitly documented as your company grows. Regular contract reviews can help prevent misunderstandings down the track. Consider engaging in a contract review to ensure all pertinent terms are adequately captured.
Know Your Rights and Obligations: Being aware of the legal environment can prevent one party from unfairly taking advantage of the other. The interplay between express and implied terms is an important area of contract law that safeguards fairness in commercial dealings.
Seek Professional Advice: If you’re unsure whether your contract adequately protects your interests, consulting a legal professional can help clarify which terms are genuinely necessary and ensure that any potentially implied obligations are appropriately addressed.

By taking these steps, you can avoid the pitfalls that arise from ambiguities in your commercial contracts and focus on growing your business with confidence.

Key Takeaways

Implied terms are promises that, although not explicitly stated, are assumed to be part of the contract either by conduct, by law, or by custom.
Court tests such as the bystander test and the business efficacy test help determine which terms should be implied.
Parties may exclude implied terms with clear exclusion clauses, although some non-excludable obligations remain protected by law.
Implied contracts can be legally binding, even if they are not formally documented, and are enforced based on principles of fairness and necessity.
Clear, well-drafted contracts that explicitly state all obligations help avoid the ambiguities that can give rise to implied terms.

If you would like a consultation on implied terms in contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Alex Solo

Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.

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