Sources of Implied Terms in English Contract Law

Terms may be implied from a variety of sources which include legislation of general application in commerce such as consumer protection legislation and Sale of Goods Act; specific legislation applicable to a particular type of transaction such as those found between subcontractors in construction law; international conventions and common law principles created by court decisions.

1. Terms Implied by Statute

Implied terms are cumulative. So, the terms implied by the Sale of Goods Act 1979 apply concurrently with the terms implied by any other Act which implies terms into contracts. Some of the most commonly implied terms from the application of the arise by virtue of the Supply of Goods and Services Act 1982 and the Sale of Goods Act 1979.

Contracts for the Sale and Supply of Goods

In a contract of sale of goods, terms of implied that the seller has the right to sell the goods; that the purchaser will enjoy quiet possession of the goods, allowing them to use the goods without interference from a third party or the supplier; and that the goods are free and will remain so when the property is to pass from any charge or encumbrance, not disclosed to the buyer before the contract is made.

Although these may not appear of particular interest, an instance of their importance may be drawn from an application of trade mark law. In the event that a proprietor purchases a registered trade mark with a business, it is an implied term of that contract that the purchaser will not be subject to claims of ownership by predecessors in title to the vendor of the trade mark.

Contracts for the Supply of Services

In a contract for supply of services, where the supplier is acting in the course of business terms are implied that the supplier will exercise reasonable skill and care in delivering the services, the services will be carried out within a reasonable time, unless a specific time-frame has been agreed. A 'reasonable time’ in this context is to be determined by what the parties had in mind at the time of the formation of the contract. Where no fee has been agreed, a reasonable charge will by implied for the provision of the services. Furthermore the services must be of a satisfactory quality and fit for the purpose for which they were intended.

2. Terms Implied Into Specific Contracts

Certain terms may be incorporated into particular types of contract. Specific regulations apply to conveyances of interests in land: Law of Property (Miscellaneous Provisions) Act 1994; contracts for marine insurance: Marine Insurance Act 1906 s 39; and Contractual licenses to enter property: Occupiers’ Liability Act 1957.

Where statute law has in a particular field codified terms implied at common law, the courts may import those statutory terms into similar transactions by way of analogy. For example, the repair of a motor car or erection of scaffolding.

3. Terms of General Application

Should a contract be made subject to a condition precedent - that is, where an event takes place prior to the contract coming into existence - the contract will generally be construed as imposing an obligation on the parties to do nothing to prevent the fulfillment of that condition.

A contractual responsibility may be implied upon a promise on the part of each party to a contract to do all that is necessary to secure the performance of the contract, except where such an implication would fetter the future legislative discretion of one party.

The cases reveal a broad range of events in which implied terms and duties are imposed upon the parties. They include:

• Where the consideration is controlled by a third party, neither contractual party would attempt to obtain an unfair advantage over the other.
• A contracting party in breach may be under a duty to inform the other party of his breach.
• a contract of service may be terminated after reasonable notice where there is no express provision in the contract for termination
• a right granted under a contract be exercised within a reasonable time of the events giving rise to the entitlement to exercise the right
• a right under a contract be exercised with reasonable care and skill
• an implied term that there is no satisfaction of a condition precedent to an agreement until such satisfaction had been communicated.
• where engineering designs are supplied under a contract, there is an implied obligation to carry out the design work with reasonable skill and care and this imports a duty to use reasonable care not to include material knowingly copied from a third party.

Courts have declined to imply duties and obligations where:

• it was alleged that the price quoted for building work was exclusive of value added tax, despite the existence in the building trade of a custom to that effect.
• a contract is in existence between a bank and its customer and the customer insisted that the bank was under an obligation to inform the customer about a new type of banking facility
• a power vesting the majority of the lenders under a syndicated loan facility agreement that entitled the majority of the lenders to alter the agreement, would only be exercised for the benefit of the lenders as a whole.
• a contract conferred absolute discretion.

Specific Contracts

Terms may be implied due simply to the nature of the contract, and are presumed to exist in the contract for this reason. In a contract of employment for instance, an employee has duty of good faith towards their employer; in licensing a product, products made pursuant to a licence agreement may be exploited after the terms of licence may be exploited by the licensee.

Express terms in intellectual property contracts may displace the extent and scope of terms that may be implied. Suppose technical drawings were required to be prepared in order to repair a patented product – there is authority to state that a subcontractor tasked with the repair of the patented product is entitled to prepare drawings to complete the task.

Patent Licences

An example of implied rights may be a case where a purchaser of a patented product has a licence to extend the life of a product by replacing parts of the product by repairing it. To do otherwise, it is said, would derogate from the grant of the licence. The right does not extend to replacing the entire product. A licence to repair may extend to subcontractors who reverse engineer equipment in order to repair them.

Copyright Licences

Where material is produced for a specific purpose, a licence is implied to use the material for that purpose, but not to resell the material for their own commercial profit by sale or rental.

Licensing generally is a complicated area, or rather complex and thorough licensing arrangements may be reached due to the divisibility of the rights granted under intellectual property legislation and the flexibility of contract.

5. Terms Implied by Custom

In commercial transactions, custom and usage is admissible as evidence to imply terms. There is a presumption that in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but meant to contract with reference to those usages. Much turns on the size and detail in the contract, as the greater the detail the more likely it is that the parties catered for the particular event and was an exhaustive statement of the rights between the parties.

In the absence of evidence of a contrary intention, a court may be inclined to order that a local custom or usage forms part of the contract where the terms is:

1. Notorious
2. Certain
3. Legal
4. Reasonable, and
5. If it can be shown that the custom or usage is commonplace for the particular type of contract, it will be regarded as part of that contract in precisely the same manner as if the parties had expressly agreed to it.

The custom or usage will only be imported into a contract where there is nothing in its express or necessarily implied terms to prevent its inclusion and is not inconsistent with the tenor of the contract. However, it is well established that a custom or usage may be imported whether or not the parties knew of it. Furthermore, it may be possible to import the term on the basis of the previous course of dealings between the parties, for instance: an implied promise to pay compound interest on a debt; the incorporation of terms printed on the back of ‘sold notes’; the obligations of the parties to a commission agency.

Application of Implied terms

On the face of a contract, a party may have a right that they seek to exercise in the terms that it is stated. After a consideration of the terms of the contract and the law that applies to the subject contract, it may well be that the party seeking to exercise the right seeks to do so unreasonably, which may not be entitled to do. Again, contractual rights must be exercised within a reasonable frame, and where financial penalty clauses apply, they must be exercised in terms of quantum as well. Contract law conceptually simple - it is simply an agreement between at least two parties - however contract law has developed over hundreds of years both as a result of court disputes and legislative reform.

Terms implied into contracts are one mechanism to manage what might otherwise appear to be a dire state of affairs arising from a lop-sided contract. Such terms contribute to the avoidance of disputes and proper contract management during the term of the contract.

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