Briefing Note - Contracts & Disputes: The Importance of Implied Terms

The majority of disputes over the interpretation of contracts tend to arise for a small number of reasons. Properly drafted contracts are not immune to disputes. The law of contract in the UK is sufficiently developed to allow parties to contracts avoid or otherwise manage disputes based on misconcieved interpretations of the agreement altogether.

The Nature of Implied Terms

Commercial agreements are usually expressed in writing. Terms of the contract may also be determined by statements made by the parties during negotiations. Other terms of contract, that are not expressly stated may also form part of the agreement. Such terms may be implied by law as the parties rarely have the opportunity to agree all possible contingencies and events that may arise under a contract, particularly when a disputes arises.

The overarching principle is that a term may be implied in certain cases to prevent an unjust operation of the contract, however a court is not in a position to to create a new contract in order to mitigate some injustice to a party. Proir to implying a term into a contract, a court will consider the objective intentions of the parties in the context of the express terms of the contract.

General Application to Contracts

The rule is of general application and terms may be implied into contracts of virtually any nature, involving arbitration, agency, building, technology licences, sales of goods, supply of services and real property. The implication of terms remains a matter of law for a court to decide with the guidance of established legal principle.

When Terms are Implied into a Contract

Terms may be implied by the facts of a particular case, which are considered to reflect the parties’ intentions. The general principles are that an implied term must:

1. not contradict any express term of the contract
2. be reasonable and equitable
3. be necessary to give business efficacy to the contract, such that the contract cannot be effective without it
4. so obvious that it goes without saying, and
5. be capable of being clearly expressed.

The factual background at the time of formation of the contract is the relevant time to consider whether the the parties probably had the term in mind but did not express it, but probably would have expressed it, had it arisen in the court’s view of fairness or policy.

Application to Contractual Disputes

Suppose a company engages a software house to develop and implement and support software to perform a particular task. The parties agree the contract work by preparing a functional specification; agreeing performance specifications, acceptance testing scope and standards and functional testing, project management and control mechanisms, and resources to be allocated. Through all of this, the focus is the project ahead, and intellectual property ownership is is neglected. Because intellectual property has not been dealt with in the contract, the baseline position is that the software developer owns the code. But this may be the case with any copyright work, the principle is applicable to all manner of contracts for production of copyright work, be it new brands intended to be used in business and registered as trade marks, production of multimedia content or mobile content, or for the production of an article that qualifies as a new and inventive patentable invention. Suppose now that the contract work was for the production of a technology that creates such a competitive edge, that the company contracting for the production of the work would entirely lose its competitive advantage if the party creating - and paid for - the technology were permitted to licence the work to competitors. This is the province of implied terms. At the same time, terms implied into contracts alleviate excessive consequences of harsh contracts. It may be that due to these surrounding circumstances and factual background that a court may be prepared to imply a term that the paying contracting party owns the copyright or other intellectual property and displace the baseline position due to the dire consequences to the paying contracting party should that not be the case.

The express terms of the contract set the boundaries and scope for implied terms, should the need arise, and these terms are the saving grace to unfair contracts and terms in contracts that may otherwise be applied unfairly against a contracting party in circumstances that are either not contemplated or not provided for in the contract. Not all contingencies can be catered for in all contracts.

Some terms are more frequently implied than others. Parties are at liberty to contract out of implied terms where the applicable regulations do not prohibit the practise, however such a suggestion would suggest a serious imbalance in bargaining power and may provoke a reconsideration of the merits of transaction.

A common practise involves an assessment of the implied terms that may be excluded and minimising the effect of those implied terms which may not be excluded. Be that as it may, terms implied by the applicable regulatory regime are there as a safety net of general application, so that contracting are not forced to draft contracts disproportionate to the transaction at hand.

Sources of Implied Terms >>