Enforcing promises by implying terms in commercial contracts

What can you do if your contract doesn't expressly state a promise that it should? If the promise is sufficiently obvious and necessary, it may be implied into the contract.

Terms can be implied in various ways, for example by law, statute, accepted custom in the relevant trade, a previous course of dealings, or to give the contract business efficacy. This article focuses on two of the most common types of implied term: those implied by law and those implied "in fact" or "for business efficacy".

Practical tips when seeking to imply a term into your contract

Consider the following when seeking to rely on (or oppose) a promise that was not expressly stated in your contract:

• Is the term implied into the contract as a matter of law because of a previous court decision, or by statute, accepted custom of the relevant trade or previous dealings between the parties?
• Could a court be persuaded that the term should be implied by law into contracts of the relevant type, having regard to the nature of the contractual relationship and reasons of policy?
• Can the term be implied in fact, applying the BP Refinery test? Remember that this is a question of whether the parties as reasonable people must have intended the term, having regard to the contract as a whole and the relevant surrounding circumstances known to both parties (the factual matrix).
• Is the term inconsistent with the parties' intentions (as evidenced by the express terms of the contract and the factual matrix)? If so, the term will not be implied unless it is imposed by legislation which prevents parties from "contracting out" of it.
• If the term is not implied, what alternative arguments or remedies might make the promise enforceable (for example, rectification of the contract, estoppel, misrepresentation, collateral contract, section 18 Australian Consumer Law )?

Terms implied "in fact"

Terms implied "in fact" or "for business efficacy" are those necessary for the contract to work in the way that both parties, as reasonable people, must have intended (The Moorcock (1889) 14 PD 64).

For a term to be implied "in fact" into a contract in writing, it must:

• be reasonable and equitable;
• be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
• be so obvious that "it goes without saying";
• be capable of clear expression; and
• not contradict any express term of the contract

(BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266).

If the parties' contract is not wholly in writing, the test is less onerous – a term may be implied where it is necessary for the reasonable or effective operation of the contract in the circumstances: Byrne v Australian Airlines Ltd (1995) 185 CLR 410.

In considering whether a term should be implied, courts will often apply the "officious bystander" test, asking: "What would the parties have said if an 'officious bystander' had suggested including the term in the contract?" If they would have said something like "of course" or "that goes without saying", this suggests the term should be implied.

Whilst the term must be necessary (not merely reasonable), this does not mean the contract must be completely inoperable or ineffective without it. Rather, the term must be necessary for the contract to operate in the way that the parties, as reasonable people, must have intended. This intention is assessed by examining the contract as a whole, in the context of the surrounding circumstances known to both parties (aka the "factual matrix"). As recently confirmed by Justice Einstein in New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503:

"the term must be necessary to make the contract effective and workable according to the presumed intention of the parties, as disclosed by the terms of the contract and the admissible surrounding circumstances".

Satisfying the test for a term implied "in fact" can be difficult and will, of course, depend on the facts of the case. Nonetheless, the seminal cases of BP Refinery and Codelfa give useful illustrations of when a term might be implied:

• BP Refinery: Council agreed to give BP preferential rates for 40 years for an oil refinery site. After a corporate restructure, a different BP company occupied the site. The Privy Council found an implied term that the preferential rates would apply to any Australian BP subsidiary that might occupy the site for the same purpose.
• Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337: Codelfa contracted with the Authority to build a railway. At the time of contracting, both parties assumed work could occur around the clock as legislation would prevent third parties from restraining it. However, the legislation was ineffective and an injunction prevented Codelfa from working nights and Sundays. The High Court declined to find an implied term that, if Codelfa's working hours were restricted, the Authority would indemnify it against additional costs. That term was not sufficiently obvious or necessary, as it was just one of several solutions the parties might have agreed had they considered the possibility of work being restrained.

Terms implied by law

A term is implied "by law" when the courts decide that it should be implied into all contracts of a particular type, having regard to the nature of the legal relationship and reasons of policy. If this has occurred, the term is a "default rule" in all contracts of the relevant type, unless it can be shown that the parties objectively intended to exclude it.

Established terms implied by law include:

• the implied duty of a landlord to give the tenant quiet enjoyment of the premises;
• implied terms of reasonable fitness for purpose and merchantable quality in contracts for sale of goods;
• the implied term that a contractual obligation should be performed within a reasonable time if the contract does not specify a deadline.

An important term implied into all contracts is the duty of co-operation, whereby each party must do all things necessary to enable the other party to have the benefit of the contract. Courts have relied on this broad duty to impose a variety of specific duties. For example:

• In ACT Cross Country Club Inc v Cundy [2010] FCA 782, the parties had entered a settlement agreement which permitted Cundy to organise the Canberra Marathon in 2010. However, the roads authority refused to allow the event unless the parties confirmed in writing that their dispute had been settled. The Federal Court held that the Club had an implied duty to inform the roads authority that the dispute had settled.
• In Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215, a land owner engaged a company to construct and drill a minimum of three water bores. The owner opposed the driller's claim for unpaid fees on various bases, including that the construction and drilling was not authorised by the required legislative permits. Justices McHugh and Gummow of the High Court held that the owner had an implied duty to procure any construction or drilling permits required by the legislation.

The duty of co-operation may extend to a duty of good faith in performing and enforcing commercial contracts, although the law in this area is not settled. In Vodafone Pacific Limited v Mobile Innovations Limited [2004] NSWCA 15, the NSW Court of Appeal indicated that the law had not yet gone as far as to treat all commercial contacts as carrying the implied term of good faith. However, the Court was willing to assume in that case that "unless excluded by express provision or because inconsistent with the terms of the contract, Vodafone was under an implied obligation to act in good faith and reasonably in exercising its powers under the [agreement]".

If a court will not imply a duty of good faith as a matter of law, it might nonetheless imply it as a matter of fact. In Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710, Justice Bergin did not accept that the law had implied a duty of good faith into all commercial contracts, but was prepared to imply certain good faith obligations "in fact", having particular regard to the purpose of the relevant provision and the nature of the parties' relationship.

Similarly, a court that is reluctant to imply the "good faith" duty may be willing to imply a duty of honesty and reasonableness to the same end (see for example Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234).

You might also be interested in...

• Does your choice of law for the contract extend to the international arbitration agreement?
• Rectification: What to do when your "contract" is not your contract
• Rectification: How to prove your "contract" is not your contract