Tuesday, June 8, 2010

Contracts - Implied Terms - Common Law and Equity

How do implied terms fit in?

  • Once it has been established that a contract has been formed it needs to be known what tyhey have agreed to
  • What do they owe each other
    • Express terms
      • Written contract
      • Written Notes
      • Oral terms (including a collateral contract)
  • The law has developed means for testing these oral/written terms

Implied terms

  • Implied terms are terms that will read into the contract even though there is no record of the parties expressly agreeing to them.
  • Why might implied terms be necessary?
    • It is not always easy to expressly indicate all the terms you wish to include, so a listener often has to make an inference – to fill a gap.
  • How do courts justify implying a term?
    • Because things get left out or parties often don’t turn their mind to every possible eventuality – to give effect to the unintended but unexpressed meaning of the parties
    • Often the court implies a term because the court thinks that it would be a ‘good thing’ for parties to take on such obligations.
    • This dichotomy gives rise to a distinction between terms implied in fact and terms implied in law.
  • Categories of implied terms
    • Terms implied in fact
    • Terms implied in law I (‘generic terms’)
    • Terms implied in law II (‘universal terms’)

Justifications for ‘filling gaps’

  • Policies are about planning and locking people into promises, but in terms of planning for the future, its often very hard to predict all contingencies that may arise.
  • Also, the parties may have turned there mind to something and deliberately left it vague, so it makes sense to insert a term.
  • SO, two broad reasons for inserting terms
    • Inserting a term accords with the (‘presumed’ or ‘imputed’) intention of both parties
    • There is a good policy reason for inserting such a term

Types of implied terms I

  • terms that are obvious and/or necessary for a particular contract (terms implied ‘in fact’);
  • terms that are obvious and/or necessary for certain types of contract (terms implied ‘in law’)
  • terms that are obvious and/or necessary for all contracts (terms implied ‘in law’)?
  • Also note:
    • terms implied by statute
      • TPA and FTA etc
    • terms implied by custom and usage
      • Where parties are bound by a term that they haven’t expressly agreed to but because parties in a particular trade or profession have always contracted on the basis of these terms
      • Often in areas of trade and sales and negotiable instruments are regulated by statute.

Terms implied in fact I

  • A particular term in a particular contract is necessary to make it work so the parties must have intended to include it and they would have included it had they thought about it but for whatever reason that term remained unexpressed
  • Are going to apply to particular parties in particular situations as one-offs
  • Also called ‘ad hoc’ terms
  • Apply to individual contracts and are unique to that particular contract.

Terms implied in fact II

  • Courts will rely on external indicators to discern the intentions of the parties
    • Because they are implying on the basis of what the parties must have intended, these cases usually turn on their individual facts.
  • Test for formal contracts (Shire of Hastings v BP Refinery, Privy Council):
    • Hastings Shire Council wanted BP to set up an oil refinery
    • So they agreed to let a company pay discount rates for 40 years
    • But a subsidiary company of BP signed the lease
    • That new company wanted the discount rates but Hastings Council wanted to charge them the normal rates
    • Privy Council responded by implying a term into the contract that the offer applied to other members of the other group.
      • It would be unreasonable if BP had to hinge corporate restructuring on its contractual obligations.
  • Specific term will only be implied if:
    • Reasonable and equitable
    • Necessary to give business efficacy to the contract
      • Looks to the objectives of the parties and the courts will imply terms that give effect/don’t frustrate those aims and objectives
      • What would the parties have agreed to if they had turned their minds to it?
    • So obvious it ‘goes without saying’
      • This is aided or supplemented by the officious bystander test
      • = that the parties are negotiating their contract and the officious bystander butts in and says what about this and the parties respond ‘of course’
      • If BOTH parties were to respond like that, then the term will be implied.
    • Capable of clear expression.
    • Does not contradict any express term of the contract
      • So obviousness and business efficacy.
  • Adopted in Codelfa Construction v State Rail Authority NSW, 1977
    • High Court of Australia Adopted the BP test but didn’t apply it.
    • Codelfa was contracted to build the Eastern suburbs railway in Sydney
    • Intended to do so on a three-shift day
    • The local residents got an injunction to stop them working through the night
    • The contract was silent on this point (the injunction)
    • So Codelfa argued that there should be an implied term that they could do it this way or they should get paid more for the job because it would take them longer to complete
    • Alternatively they argued that the contract had been frustrated.
    • High Court of Australia rejected Codelfa’s argument.
      • Ran into trouble with obviousness and capability of clear expression
      • You couldn’t settle on one possible implied term.
    • Codelfa essentially shows the difficulty of meeting the BP criteria.
  • One key problem is applying the officious bystander test, because the parties are in dispute, it usually isn’t so obvious that it goes without saying.
  • The BP refinery test is applied where the contract is fully written

Terms implied in fact III

  • Test for informal contracts – oral or not fully expressed in writing. (Byrne v Australian Airlines):
    • The test in this case can be a little looser
  • Term must be necessary for reasonable or effective operation of a contract in the circumstances of the case.
    • Leaves off the notion of obviousness
  • Byrne v Australian Airlines
  • In Australia employment relations are legally regulated by contract law and various statutes – Workplace Relations Act
  • WRA covers
    • Awards: Which are intended to cover entire industries
    • Enterprise Agreements: Which cover firms
    • AWAs: Which cover individuals (No longer applicable)
  • So most employment law is covered by law of contract and one or other of these two statutory instruments
  • Byrne and Frew were baggage handlers, who alleged they had been unfairly dismissed, contrary to their Award. They tried to claim damages for breach of contract
    • They had allegedly been caught thieving
  • They wanted to argue that there was an implied term in the contract of employment that their employer could not dismiss an employee in a manner that was harsh, unjust or unreasonable
  • The clause to that effect was already in their award (which trumps the contract)
  • They argued this way so the remedy of damages would then be available to them
  • Under the award, if the employer breached, they had to pay a financial penalty, but the remedy under contract is damages so they wanted to show the employer had breached the award.
    • McHugh & Gummow JJ say that a different test applies to informal contracts i.e.
  • Term must be necessary for reasonable or effective operation of a contract in the circumstances of the case.
  • In the case of the employees it was not reasonable because even if the parties had got around to discussing it, they wouldn’t have agreed.
  • Its also not necessary for the effective opera operation of the contract because the common law already governs the reasons for why an employer can terminate employment
  • The point here seems to be efficacy, not reasonableness.
  • Also, the objective background is admissible in order to ascertain whether it is necessary to give business efficacy to a contract.

Terms implied in law (‘generic terms’) I

  • Where a contract falls into a particular type (see below) then each type is presumed to attract its own set of obligations that are enforceable as implied terms.
    • So its about implying a term on policy grounds that it’s a good idea
  • These terms make it easier to contract because it saves the parties form having to consciously turn their mind to every term.
  • Examples: (List p. 286)
  • Building contracts:
    • Implied term that completed house will be reasonably fit for habitation
  • Provision of professional services
    • Implied term that reasonable care will be taken by the professional providing the service
  • Employment contracts
    • Implied term that employee will obey all reasonable and lawful orders of their employer
  • Bailment
    • Implied term that the goods will be looked after.
  • Legislation is now the most important source of these terms.
  • Many of these contracts are now governed by their own law of implied terms.

Terms implied in law (‘generic terms’) II

  • On what basis are terms implied in a particular class of contract?
  • Liverpool City Council v Irwin
  • Dispute over who has to fix the lights or elevators in the stairwell of a block of flats
  • Flats had a bad reputation for vandalism
  • Irwin and some other tenants went on a rent strike
  • Council sued to recover rent, tenants counter-sued saying that the council was failing in its duty to maintain a habitable space.
  • Council said they couldn’t keep pace with the vandalism
  • Where did the duty to repair come from? The contract of tenancy contained little obligations for the council.
    • Was there an implied term in the contract that the council provide a habitable space?
    • House of Lords HELD that they were able to imply a term – that the landlord was under a duty to keep the high rise at a reasonable state of repair and that term was to be implied in all contracts of occupancy between tenants of towers and blocks of flats and their landlords.
  • ‘necessity’ versus ‘reasonableness’
    • This rested on a test of necessity, it was necessary to apply this term in these kinds of leases
  • This differs from implying a term in fact because the rationale is not based on the parties having accidentally omitted a term but rather on the fact of their relationship which gives rise to this implied term
  • Reasonableness is not the basis for implying the term but is the description of the term itself.
  • So test is one of necessity, not reasonableness
    • This can’t be taken too far, is it necessary for the landlord to be the one responsible?
    • No, but is certainly most convenient
    • So it is reasonably necessary having regard to the context of the relationship.
    • This is explained in Renard Constructions

Terms implied in law (‘generic terms’) III

  • Implication of terms an ongoing process – longstanding implied duties.
    • E.g., employment contracts:
      • Worker must
        • Obey all lawful and reasonable orders
        • Refrain from misconduct
        • Stay loyal to business interests of employer
        • Be sufficiently skilled
      • Employer must
        • Pay wages
        • Exercise care
        • Be a good and considerate employer(?)
    • So using Priestley JA’s analysis, over time the community interests have affected employment contracts and have introduced that last term
    • So now both parties have a mutual duty to be maintain trust and confidence.
      • This = that it is open to courts to find new terms, which over time builds up a model contract.

Terms implied in law (‘generic terms’) III

  • When do we imply terms in law?
    • When enjoyment of rights conferred by contract would otherwise be worthless or undermined (narrow view: see Byrne)
    • When it is appropriate or reasonable in the light of contemporary thinking to insert such a term (wider view: see Priestley JA in Renard).
      • People generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing… This is in these days the expected standard, and anything less is contrary to prevailing community expectations”. Per Priestley JA
    • BUT High Court of Australia took a different view: they applied a strict test of necessity. (See Above)
    • ALSO, the fact that the parliament has created these statutory regulations is a sign that the common law should go no further.

Terms implied in law (‘universal terms’?) I

  • All contracts contain certain implied terms, such as good faith
    • The duties for all parties to a contract to act in good faith.
  • Are there terms which can be implied as a matter of law into all contracts?
  • Is good faith one of these?
    • This is still controversial in Australia and what it means is unclear. The High Court of Australia has yet to pronounce it.
  • What would we mean by a duty to act in good faith?

Terms implied in law (‘universal terms’?) II

  • Duty to co-operate
  • The law enforces co-operation through the adherence to the strict terms of the contract
  • So each party agrees to do all lawful things necessary on their part to enable the other party to have the benefit of the contract
    • Secured Income Real Estate
  • Evolution of duty of good faith
    • Renard Constructions
    • Garry Rogers
    • Burger King

Terms implied in law (‘universal terms’?) III

  • Secured Income Real Estate v St Martins Investments
    • The sellers sold a large office building and the purchase price was to be reduced by a certain formula if after 5 months, rentals from the premises had not reached a certain amount
    • The clauses to that effect were
      • Cl 1(a): Purchaser shall pay balance of purchase price within 14 days of Vendor producing evidence of leases aggregating rental income of at least $227,900 per annum…
      • Cl 1(c): In the event that by 26 May the Vendor cannot show aggregate rental income amounting to $227,900, then the balance of the purchase price shall be reduced…
    • After 5 months they haven’t tenanted the building to produce the required rent
    • So seller decided to rent some space in the building
    • Buyer refused with the result that they didn’t reduce the purchase price.
    • Essentially they were using their power to refuse rental in the building to drive down the purchase price – they should have been trying to make the contract work
    • There was an implied term to make the contract work by accepting the tenant
    • Court accepted that there was an implied term to do all things necessary to allow tenants to lease the space.
      • BUT in this case, the buyers refusal to refuse the seller as a tenant was made for perfectly good business reasons as they didn’t like the buyer’s business position
    • So it came down to a consideration of the purposes of the buyer’s refusal. You can’t make a term that you have to accept every tenant so the implied term was that you can’t refuse a tenant without reasonable cause.
    • SO you can imply terms for co-operation but not to give up self interest
  • It is easy to imply a duty to co-operate in doing acts which are necessary to performance by one of the parties of fundamental obligations.
  • Not so easy when the acts in question are necessary to entitle the one party to a benefit but are not essential to the other party’s performance of obligations. Can a party decide for themselves whether to perform even if this disentitles the other party to a benefit?

  • Terms implied in law (‘universal terms’?) V
  • Renard Constructions v Minister for Public Works
    • There was a contract for construction of power lines
    • The Minister for Public Works had termination power under a construction contract:
      • If Contractor (R) misses deadlines, then Principal (MfPW) can demand Contractor ‘show cause’ (‘please explain’) as to why contract should not be terminated.
      • Is there an implied duty regarding how Principal can exercise its termination power?
    • Renard had missed deadlines, largely because other parties had missed their own deadlines including the minister himself
    • Renard tried to meet performance but had not communicated this with the MfPW, so the MfPW terminated the contract
    • Renard thus argued for an implied term that the minister’s power to terminate must be exercised reasonably
    • Courts HELD: yes, there is a duty to act reasonably
      • Marr J: I support Renard’s claim but no need to imply a term, there’s no reason why the minister should have to exercise his powers having regard to any other interests but his own but in this case, the minister did not have absolute power to terminate. The clause specified a process so the contract expressly required good faith.
      • Handley J: Happy to imply a term that the minister exercise his power reasonably
      • Priestley JA: This is an implied term in law and fact
        • Term could be implied in fact
        • Good faith requirement could also be implied in all construction contracts on the basis that it is reasonable and necessary
    • But also makes a number of other observations
      • The time has come for an implied duty ion all contracts of a duty of good faith and fair dealing.
  • A very large number of everyday contract law is now governed by statutory unconscionability provisions… People generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing… This is in these days the expected standard, and anything less is contrary to prevailing community expectations”. Per Priestley JA

  • Terms implied in law (‘universal terms’?) VII
  • Burger King v Hungry Jack’s (2001)
    • Hungry Jack’s agreed to open four new outlets a year in Australia as a condition (development agreement) of it being granted a sole distributor licence
    • They could do this by opening them themselves or getting franchisees to do it
    • BUT, Burger King retained the right to refuse any new development
    • ‘Development Agreement’
      • 2.1 Hungry Jack’s shall develop and open for business in Australia in accord with franchise and site approval procedures a minimum of 4 new Burger King restaurants per annum
      • 4.1 Hungry Jack’s must apply for and obtain franchise and site approval from Burger King for each restaurant to be established pursuant to this Agreement
    • So Burger King could use cl. 4.1 to make Hungry Jack’s be in breach of cl. 2.1
    • That’s what happened. Burger King had decided it had had enough of Hungry Jacks and wanted to set up its own stores so they refused to approve any new stores then told Hungry Jacks that they had failed to meet the target.
    • NSW CA held that Burger King had acted in bad faith and couldn’t rely on HJ’s breaches as a grounds for termination
    • So there is a term of good faith and reasonableness that could limit BK’s power to terminate.

Terms implied in law (‘universal terms’?) VIII

  • Gary Rogers Motors v Subaru
    • This was referred to in the Burger King case
    • Gary Rogers owned a Subaru dealership
    • Cl 11: “Either party may terminate this arrangement by giving to the other notice in writing…effective 32 days after posting”.
      • 1991 — first dealership contract. GRM updates premises for $110 000; further $40,000 for staff training and advertising
      • 1994 — further 3 year dealership
      • 1996 — Subaru introduces sales targets; GRM meets them all
      • 1997 — no new dealership, but GRM continues to act as dealer.
      • 1997 — ‘Six Star Revitalisation Program’: changes to showrooms and service departments: uniform interior and exteriors, signage etc.
      • 1998 — Feb: GRM warned they were not complying; May: further meeting, GRM says not willing to totally comply (thought required changes were pedantic or unappealing); June: written notice of termination; Sep: GRM says willing to adopt 6 Star Program, but Subaru not willing to withdraw termination
    • Cl. 11: nothing in it about good faith but the court was happy to apply a term of good faith over how Subaru should exercise its power under cl. 11, but then said that Subaru had not breached that term.

‘Good faith’

  • What does the implied term mean? What is the content of the obligation?
  • When should you imply it?
  • Can an express term override the implied term?

What does ‘good faith and reasonableness’ mean?

  • In Burger King, the court draws on three concepts that they actually borrow from Mason CJ
    • An obligation of the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);
    • Compliance with honest standards of conduct; and
    • Compliance with standards of conduct which are reasonable having regard to the interests of the parties.
      • So its designed to stop a party from relying on a cynical application of the black letter of a term.
      • Not designed to stop a party exercising their power, but to stop them from exercising it fro improper purposes.
    • SO Identify (TEST),
      • Why was that power granted under the contract?
      • What were the purposes behind that power? and
      • Then judge whether that power was properly used.
        • Sound business reasons or something else…

When might it apply?

  • Try to specify the type of contract first, because once a term is implied into a particular type of contract, it will have universal application within that niche
    • So if it doesn’t fit within a particular type of contract then perhaps you ave to imply a term in fact (much more difficult)
  • So does term of good faith apply to:-
    • All commercial contracts? (Burger King)
    • Only ‘relational’ contracts?
      • Franchising and dealership contracts
      • Because they go on for a long time, they probably can’t put all the terms in, or want to retain flexibility
      • But over time there will be expectations of loyalty and trust that develop over time and the courts may be happier to imply a term of good faith in these circumstances

Can implied term of good faith override express terms?

  • Most terms implied by common law are not usually mandatory.
  • So terms cannot be implied that conflict with express terms because they are not filling a gap.
  • What about good faith?
    • Usually applies to a situation where a discretion is available.
    • Court often deals with construing express terms narrowly, and limiting express powers in other ways. (Johnson v Bloomsbury Health)
      • Term permitting the hospital to demand that a doctor work 88 hours/week.
      • Court held that there was no term directing how this discretion should be used so it was subject to health and safety rules etc.

Terms implied in law (‘universal terms’?) X

  • Emerging concept of ‘good faith’ and ‘fair dealing’ grounded in two concepts:
    • Implied duty to co-operate
    • Where one party has apparently unfettered discretion under the express terms of a contract, the exercise of that discretion may be limited by an implied requirement that it be exercised ‘rationally’ for proper purpose, rather than ‘capriciously’. (By references to the purposes for which it was intended.
      • Especially in relation to termination
  • BUT…
  • no High Court authority
  • unclear whether the duty is to be implied into all contracts, into all ‘commercial’ contracts, or only into certain types of commercial contract.


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