When you’re asked to sign a contract on behalf of your business, you’d think it would be reasonable to assume that the contract contains all the commercial terms. However, commercial solicitors will tell you that contracts can contain both express and implied terms. If an implied term is in a contract it will potentially be binding on your business without you necessarily being aware of the term. Implied terms are a minefield for contracting parties.
Here, we discuss the differences between express terms and implied terms, consider types of these terms and whether implied terms can be excluded and set out a few practical tips.
- What is an express term in a commercial contract?
- What is an implied term in a commercial contract?
- Is a representation an express term in a commercial contract?
- When will implied terms be included in a commercial contract?
- Examples of terms implied by legislation
- Examples of implied terms under common law
- Implied terms by custom or usage
- Implied terms and previous dealings
- What are in fact or parties’ intentions implied terms?
- What happens when there is a conflict between an express and an implied term in a contract?
- Can you exclude implied terms from inclusion in a commercial contract?
- Can an entire agreement clause exclude the inclusion of implied terms?
- Top tips on implied and express terms in commercial contracts
What is an express term in a commercial contract?
An express term in a commercial contract is a term that is expressly agreed between the contracting parties. Many business owners assume that for something to be an express term of the contract it has to be a written term but that isn’t the case. Ideally, express terms will be written down in a contract between the parties but where the contract is agreed verbally, they will be the terms discussed and agreed between the parties.
The types of express terms contained in a contract depend on the type of commercial contract but common express terms include price, time scales, warranties and indemnities.
What is an implied term in a commercial contract?
Implied terms are terms implied into commercial contracts by the courts because the term hasn’t been expressly included by the parties. This may be because the parties did not consider it, did not think that the issue would arise or simply omitted to include the term.
Whilst you may not think that any difficulties you experience with the contracting party will end up in commercial contract dispute litigation, it is important to understand implied terms. That’s because the advice you receive from your commercial solicitor will be based on both the express and implied terms in the contract.
Implied terms are not expressly set out in the contract but are taken to be as effective as if they were and as if they had been included from day one of the contract. The express terms and any implied terms together create the legally binding obligations on the parties. The courts are reluctant to imply terms into a contract and will only do so in particular situations. That’s why it is important to discuss what terms should go into the written contract to reduce the risk of commercial contract litigation over the meaning of the contract and implied terms.
Is a representation an express term in a commercial contract?
Express terms and representations are not the same. Express terms are those terms the parties intend to have contractual force. Representations are not intended to be contractually binding but are made to encourage the other party to enter into the contract.
A breach of an express term in a contract may result in a claim by the non-breaching party for contractual damages and possibly the repudiation of the contract. A false representation cannot give rise to a contractual claim as it is not a term of the contract. Instead, liability in misrepresentation will arise.
Whether the statement is considered a contractual term or a representation will depend on the party’s intentions. To determine these, the courts will consider:
- The importance of the statement and
- The period of time between the making of the statement and entry into the contract and
- Whether the statement is contained in the contract and
- The ability of each of the contracting parties to determine whether the statement is true or not.
When will implied terms be included in a commercial contract?
An implied term is a term which the courts imply into a contract because it has not been expressly included by the parties. The court will only imply terms in the following circumstances:
- Terms implied by legislation or
- Terms implied under common law or
- Terms implied by custom or usage or
- Terms implied because of previous dealings between the parties or
- Terms implied in fact or to reflect the intention of the parties.
Examples of terms implied by legislation
Some pieces of legislation imply terms into a contract. For example:
- In a contract for the sale of assets, the Law of Property (Miscellaneous Provisions) Act 1994 implies covenants for title into the sale contract if the seller is selling assets with full title guarantee or limited title guarantee.
- The Sale of Goods Act 1979 in business-to-business sale contracts implies terms that the goods will be reasonably fit for their purpose, conform to their description, the seller has the right to sell them and that a third party doesn’t have undisclosed rights over the goods. Importantly, if the contract doesn’t cover aspects of the sale and there is no evidence of the party’s intentions, the Act will imply terms. The implied terms can include where no price for the goods is agreed that the price will be a reasonable one and where no time for payment is stated, the buyer must pay cash on delivery and where no place for delivery is agreed, it takes place at the seller’s place of business.
- The Supply of Goods and Services Act 1982 in business-to-business supply contracts implies terms that that work carried out under a contract will be carried out with reasonable care and skill and in a reasonable time.
While it is important to understand what terms can be implied into a commercial contract by legislation it is equally important to appreciate that contracting parties have the right to exclude some legislative implied terms. For example, the Unfair Contract Terms Act 1977 gives contracting parties the ability to exclude some legislative implied terms.
Examples of implied terms under common law
The courts will imply terms into certain types of contract under common law. For example:
- In construction contracts the court may imply, under common law, an obligation not to hinder the contractor from performing their obligations under the contract.
- In arbitration agreements the court will imply a term that the arbitration is confidential.
Implied terms by custom or usage
Implied terms by custom or usage are those which are standard and generally known about in a specific trade or place. However, it is important to be aware that case law has said that a party can be bound by an implied term, even if they do not know about the particular custom.
The courts have stated that for a term to be implied in a contract the usage has to be:
- Notorious, certain and reasonable
- Not contrary to law
- More than a mere trade practice.
It is difficult to second-guess whether the courts will determine that a custom or usage satisfies these tests. To avoid the risk of being caught out by custom and usage implied terms, we recommend business owners take specialist advice before entering into a commercial contract.
Implied terms and previous dealings
If the parties to a commercial contract have consistently done business on the same terms, then these terms may be implied into the contract in the event that:
- They are not set out expressly in the latest contract and
- They are not expressly contradicted in the contract.
A party should not rely on this argument in order to incorporate implied terms into the contract as the tests used by the courts are uncertain, and it is by no means clear-cut whether a term would be implied into the contract using this argument or not. To be successful in claiming that a term should be implied based on a shared business history, the party must show regular and consistent trading with the other contracting party. What is deemed to be ‘regular’ or ‘consistent’ will depend on individual circumstances.
To minimise the chances of uncertainty in this area, ensure that the terms on which you deal with any long-term business venture are reflected in an up-to-date contract.
What are in fact or parties’ intentions implied terms?
The court can imply terms into a contract to fill a gap where the parties intended a term to apply but did not include it expressly in the contract. The courts are reluctant to do this and will not imply a term solely because it seems reasonable to do so or to change the meaning of the contract itself. Similarly, terms will not be implied into a contract if the court determines that there was no binding contract between the parties in the first place.
In deciding whether a term should be implied into the contract, the court will ask itself what a reasonable person (not the parties themselves) would have understood the parties’ intentions to be, given the background knowledge reasonably available to the parties at the time they entered into the contract. Our commercial contract solicitors say that based on contract litigation and current caselaw the court may conclude that a term will be implied into the contract if the term meets a twofold test:
- The business efficacy test – if the implied term is necessary to make the contract work then the court may imply the term but if the contract would work without the term, it will not be implied
- The officious bystander test – if it ‘goes without saying’ that the term should be implied.
In addition, the implied term must:
- Be able to be clearly expressed and
- Not go against any other term expressly set out in the contract. This is a ‘cardinal rule’.
Examples of implied terms ‘in fact’ are:
- Cooperation between the parties – where it is needed for the contract to be performed.
- Non-prevention – a party to the contract (X Limited) cannot force the other party (Y Limited) to perform the contract if X Limited has done or not done something which prevents the performance of the contract from occurring. For example, if Y Limited is obliged under the contract to obtain bank finance for the development of a property with X Limited, then X Limited cannot prevent that bank finance from being obtained.
- Termination rights – if a contract does not give a right to termination then a term might be implied that the agreement can be terminated on ‘reasonable notice’.
- The need to make any unusual or onerous terms known to the other party so particularly onerous terms cannot be added to the contract ‘through the back door’.
- Discretion must be exercised in good faith.
What happens when there is a conflict between an express and an implied term in a contract?
Generally speaking, in the event of a conflict between an express term and an implied term, the express term will prevail.
It is highly unlikely that a court will imply a term (arising through custom or usage, ‘in fact’ or the parties’ intention, previous dealings or common law) if the implied term would go against the express terms of the contract. However, it is not unheard of to imply a term contrary to the express contractual terms. For example:
- If there is a discretion to be exercised under the express terms of the contract, a term restricting the exercise of that discretion may be implied or
- If a consistent practice by the parties is contradictory to the express terms, they may be deemed to have waived those express terms.
In the case of terms implied by statute, the legislation itself will usually state whether the express terms of the contract or the statute has priority.
Can you exclude implied terms from inclusion in a commercial contract?
To resolve the uncertainty of whether the court would imply terms in a contract, commercial solicitors are often asked if the inclusion of implied terms can be excluded from a business contract by express terms in the contract. The answer depends on the circumstances and the type of implied term to be excluded.
|Type of implied term||Can an implied term be expressly excluded in the contract?|
|Statute||Determined by the statute itself|
|Custom and usage||Yes|
|‘In fact’ and parties’ intention||Yes, probably|
The decision whether to exclude an implied term is a tricky one to discuss with your commercial solicitor. That’s because neither party will know, at the time of negotiation, whether they will want to argue for or against the implied term at a later date. The best option is to make the terms of the commercial contract as clear and comprehensive as possible to reduce the risk of a party arguing that there are implied terms, or the court imposing implied terms.
Can an entire agreement clause exclude the inclusion of implied terms?
An entire agreement clause provides that only those terms set out in the agreement form part of the contract. The clause ensures that any statements, representations and notes made before the contract was signed do not have contractual force, unless they are specifically referred to in the contract as doing so. For additional information, read our article Contracts: Entire Agreement Clauses.
In order to exclude implied terms by an entire agreement clause the exclusion wording needs to be clear and expressly stated. An entire agreement clause will not, without specific wording, exclude an implied term.
Even if the exclusion of implied terms is drafted clearly, the effectiveness of the exclusion clause will depend on the type of implied term. For example:
- An implied term that is intrinsic to the actual agreement cannot be excluded.
- A non-intrinsic implied term can be excluded by an entire agreement clause provided it is clearly written but the definition of a ‘non-intrinsic’ term can be disputed by the parties and lead to litigation.
We advise that if an implied term is to be excluded, it should be done so expressly and clearly in a separate clause of the contract and not included within an entire agreement clause.
Top tips on implied and express terms in commercial contracts
When entering into contracts and negotiating terms, certainty is key. However, neither the parties to a contract or their commercial solicitors are able to see into the future to foresee if an implied term may be advantageous or not in the event of a dispute. These tips on contractual terms may reduce the risk of commercial disputes and the need to argue for or against an implied term:
- Terms will not be implied into a contract if there is no binding agreement between the parties. That’s because if there is no contract then terms cannot be added to it. It is a basic but key point to check and get advice on whether there is a binding verbal or written contract in place.
- Ensure that the contract is detailed and clearly drafted. Comprehensive documents are less likely to be deemed to include implied terms as they are more likely to cover the issue. In addition, courts are more inclined to assume that a ‘missing’ clause was intended by the parties to be missing and therefore, should not be implied by the court. Although a short contract may seem the obvious choice at the negotiation stage due to time constraints, a detailed contract may save time and money by reducing the risk of protracted litigation at a later date.
- Even if your business has an excellent working relationship with the other contracting party or your business has been consistently dealing with them for a number of years, do not under-estimate the importance of having a clear written contract in place with them. Ensure that if the way that you work together changes, the terms of the contract are reviewed and updated by your commercial solicitor.
- The courts may imply terms to fill a gap in the contract, but the court won’t change the terms or meaning of the contract itself. It is therefore crucial that all the important issues are expressly dealt with in the contract.
- As custom and usage terms apply to specific trade, industry or areas make sure your business takes specialist legal advice from a commercial contract solicitor.
- The exclusion of any implied terms should be expressly set out in a separate clause in the commercial contract to minimise the risk of commercial litigation over the contractual terms.
For more information on commercial contracts read our article on understanding commercial contracts.