Implied Terms in Contracts: Types, Tests, and Examples

Key Takeaways

• Implied terms are unwritten provisions inferred into a contract to reflect the parties’ intent or legal obligations.
• These terms can arise from common law, statute, custom, or conduct.
• There are multiple legal tests to determine whether a term should be implied, including business efficacy and officious bystander tests.
• Implied terms are especially important in employment and commercial contracts where not all conditions are expressly detailed.
• Courts are cautious when implying terms and will generally do so only when necessary to give effect to the contract.

Implied Term Overview

What is an implied term? Well, it is a term that is not expressly stated, but is assumed to be in a contract nonetheless. A good contract will be worded so as to eliminate as many implied terms as possible, but it is not possible to cover every possible scenario that could affect the outcome of a contract, and in such cases a lawyer will argue that the language of a contract implied what was not covered so as to give the contract force of intent. Essentially, without implied terms, contracts would have to expressly cover every possible scenario, which would be an unreasonable expectation of a contract.

Sources of Implied Terms

Implied terms can originate from several different sources, each playing a distinct role in filling contractual gaps:

• Common Law: Courts imply terms based on precedent to ensure fairness or uphold the functionality of a contract. For instance, the duty of good faith in employment may arise through judicial reasoning rather than statute.
• Statute: Some terms are implied because legislation mandates them. For example, employment laws often imply minimum wage or notice period provisions.
• Custom or Usage: If a term is commonly understood within a particular industry or locality, courts may infer its inclusion. This is especially relevant in niche sectors with established practices.
• Course of Dealing: Courts may look at how the parties have conducted themselves in past dealings to determine implied expectations.
• Conduct of the Parties: Repeated or consistent behavior may imply an understanding even where no express term exists.

Important Implied Terms

Some of the most common and important implied terms for contract law are as follows:

• The duty of mutual confidence and trust. This refers to the notion that both parties should act in a manner that will not erode trust in one another. This means they should not partake in deceptive practices, abusive behavior, or impose unfair conditions.
• The duty of fidelity. This is a term common in employment contracts that assumes that an employee will not act against the interests of their employer. Examples could include working with an employer’s competitor or misusing company assets. Post-employment restrictions are not covered by the duty of fidelity.
• The duty of pay. This is an implied term that may also be an expressed term. That a worker will be paid does not need to be expressly stated since legislation demands it, but most contracts will state the amount that a worker is to be paid, making it expressed.
• The duty of reasonable care. This assumes that an employer will provide safe working conditions for their workers during employment.
• The duty of reasonable care for references. Employers do not have to give references, but it is assumed that if they do, it will be done with care and in such a manner as to be beneficial to the employee.

Legal Tests for Implied Terms

Because implied terms, by their very nature, are not written or expressed in any way, other methods, or tests, must be applied to a contract to discover if implied terms were present. These tests include:

• The Business Efficacy Test. This is a term that is necessary for the contract itself to function, such as the implied trust between the two parties entering into the contract.
• The Officious Bystander Test. This is a term that is so obvious that it is deemed unreasonable for it to need to be stated. For instance, that an employee should not steal from their own company would be an implied term by officious bystander standards.
• The Custom and Practice Test. Certain terms can be implied if the customs or practices of the industry or workplace would make such a term standard and assumable. For some industries, such a term might be that a business would not operate on a major holiday.
• The Terms Implied by Statute Test. Some terms are dictated by law, so there is no need to cover them in a contract. Equal pay clauses and a statutory minimum notice period would both be examples of this.

Limitations on Implied Terms

Although implied terms help ensure fairness, courts are reluctant to imply terms unnecessarily. Limitations include:

• No Contradiction of Express Terms: An implied term cannot override or contradict an express term in the contract.
• Reasonableness is Not Enough: Courts do not imply a term merely because it seems reasonable—it must also be necessary to the contract’s operation.
• No Subjective Intent: Implied terms must reflect what a reasonable person would understand, not the subjective belief of one party.

Courts aim to preserve party autonomy by implying terms only when failure to do so would undermine the purpose or coherence of the agreement.

Implied Contracts

While implied terms are usually part of an expressed contract, they may make up an entire contract, as well, in which case an implied contract will exist. Implied contracts can take on two forms: implied-in-fact contracts and implied-in-law contracts.

Implied-in-fact contracts are those that are made by mutual understanding through the actions of two parties, rather than through expressed terms. For example, if you bring your pet to a vet, there is an implied contract that he or she will work to secure the pet’s health to the best of their abilities.

Implied-in-law contracts, on the other hand, are those that exist because laws already cover the issues at hand. For example, if a vet saved a pet’s life outside of their office, without be asked to, the vet could choose to send the pet owner a bill for their services and the owner would be obliged to pay it, and this is because receiving unjust benefits at the expense of another party is not permitted by law.

Examples of Implied Terms in Practice

Understanding how implied terms operate in real-world scenarios can clarify their importance:

• Commercial Sale: A contract for the sale of goods may not mention the product's fitness for purpose, but consumer protection laws often imply such a term.
• Employment Relationship: An employer who regularly provides bonuses without explicitly stating so may create an implied expectation through custom or conduct.
• Service Contracts: A service provider may not expressly state a timeline for delivery, but a term for "reasonable time" can be implied based on context and industry norms.
• Landlord-Tenant Agreements: Even if a lease doesn't mention it, courts often imply a duty for the landlord to maintain habitable conditions.

These examples highlight how implied terms ensure functionality and fairness in situations where express language is lacking.

Implied Terms vs. Express Terms

Understanding the distinction between implied and express terms helps clarify the structure of a contract:

Courts give primacy to express terms and only rely on implied terms when absolutely necessary to support the contract's operation.

Frequently Asked Questions

1. What are implied terms in contract law?
   Implied terms are provisions not expressly written in a contract but are inferred by courts to reflect the intentions of the parties or legal requirements.
2. When will a court imply a term in a contract?
   A court will imply a term when it is necessary to give the contract business efficacy, when it’s obvious to both parties, or when law or custom mandates it.
3. Can implied terms override express terms in a contract?
   No, implied terms cannot override or contradict express terms. Express terms always take precedence.
4. Are implied terms legally enforceable?
   Yes, once a court determines that an implied term should be included, it is legally binding and enforceable as part of the contract.
5. What’s the difference between implied-in-fact and implied-in-law contracts?
   Implied-in-fact contracts are formed through conduct suggesting agreement, while implied-in-law contracts (quasi-contracts) arise to prevent unjust enrichment, even without mutual consent.

If you need further help understanding what an implied term is, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.