Many contract disputes relate to one party (A) believing the other (B) had agreed to X and B either not understanding or being unaware that X was part of the contract. This type of scenario keeps Commercial Court Judges and Barristers employed. What frequently causes such confusion is the mysterious concept of an ‘implied term’. Understanding what these are will ensure that you can mitigate the risk of a dispute developing that will drain your energy, creativity, productivity, and bank balance.

What is an express term in a contract?

Express terms are terms that have been explicitly included in an agreement, either in writing or verbally.

Confusion can occur during the negotiation stage when representations are made, and A perceives these to be express contractual terms. In contrast, B only made such statements to entice A to agree to the actual contractual terms.

When it comes to deciding whether something is an express term or merely a representation, the Court will consider:

• The time between the making of the statement and the signing of the contract.
• The importance of the statement.
• The relative ability of the parties to determine the truth of the statement.
• Whether a verbal statement is repeated in the written agreement.

What is an implied term?

Implied terms are terms that have not been agreed expressly by A and B but are implied into the contract by the Court on the basis of:

• Usage or custom.
• A and B’s previous business dealings.
• A and B’s intentions.
• The implied term is a necessary part of a particular type of contract (for example, an employment contract).
• Legislation

Let’s examine these in detail.

Usage or custom

The Court can imply a term that is customary to a particular trade or market sector, providing it is notorious, specific, reasonable, legal, and more than a mere trade practice.

Previous dealings

If A and B have entered into agreements in the past, the Court may imply a term that has been common to all previous contracts into the one that is subject to a dispute. There needs to be a regular pattern of dealings, for example, three to four transactions per year and consistent procedures must have been followed.

Intentions

The Court can imply a term into a contract to fill in any gaps but not to make it fairer. Judges will consider what a reasonable person would have understood A and B’s intentions to be, given the background knowledge reasonably available to them when they entered into the contract. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13, the Privy Council put forward that if a term was to be implied, it must meet the following conditions:

1. It must be reasonable and equitable.
2. It must be necessary to give business efficacy to the contract. No term will be implied if the contract is effective without it.
3. It must be so obvious that “it goes without saying”.
4. It must be capable of clear expression.
5. It must not contradict any express term of the contract.

The Supreme Court clarified the above in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, by stating that:

• Test 1 may be disregarded; if a term satisfies the other requirements, it will also be reasonable and equitable.
• Tests 2 and 3 are alternatives: only one need be satisfied.

Necessary characteristics of a contract

Although much is now codified into statute, there are still common law terms that the Court will imply into a contract. An example is that it is implied that if parties agree to arbitration, the proceedings will be private.

Implied by statute

Examples include:

• In B2B sale of goods, the Sale of Goods Act 1979 implies that no third party has any rights over the goods that have not been disclosed to the buyer, and that the buyer will have quiet possession of the goods. It is also implied by the Act that the goods match their description and are fit for purpose.
• The Consumer Rights Act 2015 implies terms in B2C sales that the consumer has certain rights in relation to goods and services that cannot be excluded by another contract.
• The Digital Markets, Competition and Consumers Act (DMCCA) 2024 provides that pre-contract information and reminder notices will be implied terms in every online subscription contract.

Wrapping up

Express and implied terms, along with contract interpretation (to be covered in another article), often come down to common sense. However, in complex agreements, resolving disputes around implied and express terms can result in lengthy court proceedings. This is why it is crucial to have all your commercial contracts checked by a Virtual In-House Legal Counsel. When it comes to express and implied terms, the cost of clarification and, if necessary, redrafting, is minuscule compared with dealing with an avoidable dispute.

To learn more about how our team can assist you, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only.  It is not, and should not be taken as, legal advice.  If you require any further information in relation to this article, please contact 43Legal.

“Melissa Danks is the founder of 43Legal. She has over 20 years’ experience as a solicitor working within the legal sector dealing with issues relating to risk management, dispute resolution, and advising in-house counsel in SMEs and large companies. Melissa has extensive expertise in providing practical, valuable, modern legal advice on large commercial projects, joint ventures, data protection and GDPR compliance, franchises, and commercial contracts. She has worked with stakeholders in multiple market sectors, including IT, legal, manufacturing, retail, hospitality, logistics and construction. When not providing legal advice and growing her law firm, Melissa spends her time running, walking in the countryside, reading and enjoying downtime with close friends and family.”