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Elements in a Contract X - Terms implied by fact

Updated on July 12, 2017

In addition to the express terms that have been agreed to by the parties there may also be additional terms that are read into the contract by the courts. These terms are known as implied terms. There are in essence and substance four types of implied terms. They are as follows:-

i) Terms implied by fact

ii) Terms implied by law

iii) Terms implied by custom

iv) Terms implied by trade usage

Terms implied by fact are terms that despite not being included in the contract, are included or read into the contract because the court assumes that the parties must have intended the terms to be part of the contract.

In Shirlaw v Southern Foundries (1926), it was held that implied terms are terms which in any contract are left to be implied and need not be expressed i.e. they are tacit terms.

These terms are so obvious that they go without saying and if, while the parties were making their bargain, an officious bystander were to suggest some express provision to be included in the agreement, the parties would testily suppress him with a common “Oh, of course!”. This test is also known as the officious bystander test.

In Banco de Portugal v Waterlow & Sons Ltd (1932), the plaintiffs a bank had contracted with the defendant company to print bank notes. The defendants delivered the notes to a third party and the notes were then circulated. The plaintiffs subsequently retracted the notes and sued for damages.

The defendants argued that the term was not part of the contract. The court held that the term was implied and that any person would know that the notes should not make their way into the hands of an unauthorized person or persons.

The test that is applied is the subjective test because it is applied from the perspective of the parties in the contract in that it would have been obvious to them that the term should be a part of the contract.

In Liverpool City Council v Irwin (1977) the tenants in a block of flats rented out by the City Council refused to pay the rent because the flats were in a state of disrepair and some of the basic amenities were either not available or were unusable. The council sued for the outstanding rent and in their claim they argued that the duty to keep the flats in good repair was not a term of the contract.

The House of Lords held that the landlord (the council) should take reasonable care to ensure that the facilities were kept in a good state of repair and that the terms to do so were implied into the contract. The plaintiffs were unsuccessful in their claim.

Terms are also incorporated or read into a contract in order to give the contract business efficacy. In the Moorcock (1889) the defendants owned a wharf and the plaintiffs contracted with them to unload their boat (the Moorcock).

Because the water levels were low at the time, the docking of the boat was dependant on the river bed. If the river bed was soft, it was possible to unload the boat but if the river bed was hard then it would not be possible to unload the boat without the boat sustaining some form or type of damage. The plaintiffs boat docked and did in fact incur some type of damage. The plaintiff sued.

The Court of Appeal held that the contract was based on the proposition that the plaintiffs could unload their boat without causing any damage to the boat. The plaintiffs were successful. The term that the boat should not be damaged was read into the contract because otherwise it was like saying unload at your own risk which would not have been the intention of the parties to start with.

The use of implied terms to facilitate business efficacy was however restricted by the court in Reigate v Union Manufacturing Co (1918). The court decided that it is important to first determine what the parties had expressed in the contract and if the court feels or deems it necessary then an implied term can be imported into the contract.

A term can only be implied if it is necessary in the business sense to give efficacy to the contract, that is to say that if at the time the parties were entering into the contract, someone had stood up and said what would happen in such a case?

The position of the courts was clarified in Trollope and Colls Ltd v North West Regional Hospital Board (1973). An express term can only be implied if the courts are satisfied that the parties would have incorporated the term into the contract and it does not suffice that a reasonable man would have stood up and suggested it to them. It must be a term that that goes without saying i.e. implied or understood to be part of the contract and a term necessary to give business efficacy to the contract.

In Alpha Trading Ltd v Dunnshaw Patten Ltd (1981) an agent was to receive a commission from a sale. The agent introduced a third party to the principle who subsequently entered into a contract with the third party but pulled out before the sale was completed. Since there was no sale the agent despite having made the introduction as per the agency agreement stood to lose his commission. The principle settled with the third party but did not pay the agent his commission. The agent sued.

The Court of Appeal held that business efficacy required that the principle would not withdraw from the sale and leave the agent without his commission. The court ruled that the agent was entitled to his commission.

Both the officious bystander test and the business efficacy test are subjective in that the court will look into the intention of the parties at the time that they entered into the contract to determine if a term can be implied into the contract or otherwise.

© 2017 Kathiresan Ramachanderam and Dyarne Jessica Ward

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