1. In What Circumstances Can Courts Imply Terms into a Contract?
2. What Should the Court Consider?
3. Example of Necessity Test
4. Can a Term Also Be Implied in the Previous Course of Dealings?

Knowing what are implied terms in a contract is important when you're one of the parties in the contract. A contract has certain terms that the parties have agreed upon, either orally or in writing. These are combined with any extra terms that haven't been agreed on by the parties but that the court finds to be a portion of the contract, known as implied terms. In order to have certainty and avoid possible disputes, the parties should make sure their obligations and rights are very clearly stated in the contract.

In What Circumstances Can Courts Imply Terms into a Contract?

Courts only have so much power to imply terms into contracts. There are different circumstances in which the courts can do this, including the following:

  • When giving effect to the intentions of the parties.
  • Due to a prior situation between the parties.
  • Due to practice and custom.
  • When it's required by statute (an example being the Sale of Goods Act 1979).
  • Following the common law for special types of contracts (such as tenant and landlord contracts or employment contracts).

This often happens if there's a gap when the contract is being drafted and it doesn't reflect the intentions of the parties during the time it was entered into. This tends to be the most common area for having a disagreement over implied terms.

What Should the Court Consider?

The court will objectively analyze each position to see what it thinks a rational person might have understood about the intentions of the party, based on the knowledge that he or she had at the time of entering the contract. There have been many cases in which the court has had to consider which test to apply. The cases ended up with the test being formulated in a variety of ways.

In the "business efficacy test," a term can be implied in a contract if it is needed so that the contract has business efficacy.

In the "officious bystander test" a term can be implied if it is so obvious that any bystander would understand the term if they heard it.

The "necessity test" is a term that's assumed in a contract when it's the only way to make a contract work. The court won't imply a word into a contract just because it thinks it is reasonable for the parties to do so.

Example of Necessity Test

An example of the necessity test is a case about a lease that was ended early by the tenant due to a break clause. The tenant said it should have been implied in the lease that the landlord would return the portion of the advance payments made for car parking, rent, and insurance that were related to the time after the break date of the lease.

The court did not agree with the tenant, saying that a term only should be implied when it's necessary, so that objective intentions are achieved. It said that based on the facts of the case, it wouldn't be reasonably understood that the lease would require such a term, so the test wasn't satisfied. However, the tenant was allowed to appeal, so the position could be re-evaluated at some point.

Can a Term Also Be Implied in the Previous Course of Dealings?

A term can be implied in a contract if the parties have regularly done business on particular terms in their past dealings. The party that wants to rely on the term that's implied in the contract needs to show there isn't any express term that would contradict it and that the reasonable expectation of the parties is that the term would be applicable to the transaction. Just showing that the parties have traded with each other in the past isn't enough. The court needs to be satisfied that past trading happened regularly and consistently on identical terms.

An example is if a contract for the supply of services or goods doesn't specifically express when payment is due. If payment was due on delivery in the past, the court may say this term should be implied in the existing contract.

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