Implied terms in contracts are hiding in plain sight

Even though they may not be documented on a piece of paper, implied terms can massively alter the nature of your relationships with suppliers

Implied terms in contracts are hiding in plain sight

You may have spent some time drafting and chatting over them with your lawyers but do you really know what the terms of your contracts with suppliers are? Even if you have a carefully written contract in place that’s signed by everyone involved, you may be surprised to learn that additional provisions could be implied into your agreements. It’s important to be aware of implied terms because they can apply to your contracts even if they have not been expressly agreed by you. But how can terms be implied into contracts?

Previous course of dealings

The first – and one of the most common – ways terms can be implied into contracts is where the parties have consistently done business together on certain terms. In that case, the terms that applied in the past may be implied into future contracts.
This is the rule that is commonly used to incorporate standard terms and conditions where the terms are printed on the back of an invoice. The normal rule is that terms printed on the back of an invoice are produced too late to form part of the contract because the contract has already been made before the invoice was delivered. However, if the customer has regularly bought items from the supplier and received a copy of the terms on each of the previous invoices, then this may be sufficient to imply that those terms will also apply to future purchases. While this is not conclusive and not an approach I recommend, it can be a useful argument if all else fails.

Another common example of this is in relation to payment terms. A supplier’s standard terms may state payment should be made in 30 days but if the supplier regularly allows a customer to pay in 60 without enforcing the 30-day term, then there is an argument that this sets a precedent that extends the agreed payment term to 60 days.

Terms implied by statute

But it’s not just about past behaviour: there is a raft of legislation that implies terms into certain types of contract. The most common of these are terms implied by the Sale of Goods Act and Supply of Goods and Services Act. These both imply basic minimum terms into contracts between businesses; for example, there is an implied term that the supplier is the owner of the goods and has the right to sell them. Other implied terms relate to the quality of the goods, such as that goods will conform to their description, be of satisfactory quality and suitable for their purpose.

In most cases, the buyer and seller will have agreed fundamental terms such as price and delivery. However, if there are any gaps in the agreement, implied terms may help to fill them. For example, if the parties have not agreed a place for delivery, there is an implied term that delivery will be at the seller’s place of business; if payment terms have not been agreed, the implied term is cash on delivery.

Other legislation implies terms in other specific situations. The Consumer Rights Act implies certain minimum terms into contracts between businesses and consumers, the Commercial Agents (Council Directive) Regulations imply terms into agency agreements and the Working Time Regulations imply terms into employment contracts.

Terms implied by other methods

Other ways that terms can be implied into contracts without the express agreement of the parties include terms that are implied by common law. In this case, terms can be implied by the courts where they see those provisions as a necessary characteristic of the particular type of contract. This has become less frequently used since many of these rules are now codified in legislation.

In some cases, the courts will use the facts of the individual case to imply a term into the contract, usually to fill a gap in the agreement – for example because a particular scenario wasn’t envisaged by the parties at the time of drafting. This can be fertile ground for litigation because each case depends on its own facts and circumstances, which means predicting what a specific court will decide in relation to a specific case can be very difficult.

Can implied terms be excluded?

Implied terms can be very useful to assist in situations where, for example, the parties did not agree a written contract or the contract doesn’t deal with the particular situation. However, by definition, they are clauses that have not been expressly agreed. This means that the implied terms may not reflect the actual agreement that the parties have reached. For example, the implied payment term in business contracts is cash on delivery but often the parties will want to agree something different – perhaps payment of a deposit in advance or payment at the end of the month following delivery.

The good news is that all terms that would otherwise be implied by custom or practice, a regular course of dealing or by common law can be excluded with an appropriately worded clause. The general view is that terms implied by fact are also capable of being excluded in this way. Where terms are implied by statute, the relevant law will usually state whether or not the term can be excluded. In business contracts, the parties can exclude most of the terms implied by the Supply of Goods Act but in consumer contracts the Consumer Rights Act does not allow the parties to exclude liability for breach of the implied terms.

It is always better to expressly agree the terms of a contract in writing and ensure it is signed by both parties but if that’s not possible then the implied terms can be helpful. Having said this, it is important to have a basic awareness of what the implied terms are so that they can be excluded if they don’t reflect your intentions.

Kate Legg
Kate Legg