IMPLIED TERMS

Question 1

Definition of implied term

Answer 1

A term which does not derive from something that has been expressly stated in words by one or more of the parties (parties have not negotiated the term)
Term which ‘fills a gap’ in the contract in relation to a matter that is not covered by the express terms

Question 2

Why gaps exist in contracts

Answer 2

Parties may not have considered a particular contingency
Parties may have chosen for some reason not to expressly provide for a particular contingency in the contract
Parties believe that certain contingencies they otherwise would have provided for are taken care of by the law
Finalized orally without needing to say anything
Parties may have not have thought about everything that could happen
Parties may expect terms that ordinarily apply to apply

Question 3

What happens if there is a gap

Answer 3

Where there is a contingency that is not covered in the contract the courts can
Do nothing- any losses suffered will lie where they fall
Imply a term to “fill the gap” in a contract

Question 4

Ways of implying a term

Answer 4

Terms implied by custom (well known and notorious in a particular industry)
Terms implied in fact (through particular contract)
Terms implied by law (apply to all classes of contracts)
May be a fourth implied duty of good faith
Statutes can also imply terms into particular types of contracts

Question 5

Effect of parole evidence rule

Answer 5

Claims of an implied term are not impeded by the parol evidence rule

Question 6

Effect of entire agreement clause

Answer 6

Implied terms will not necessarily be defeated by an entire agreement clause but a provision that “implied terms are excluded” might prevent implication of terms at common law

Question 7

Most important rule of implied terms

Answer 7

Cannot contradict express term

Question 8

TERMS IMPLIED IN FACT:

• what is it?
• what is it based on?

Answer 8

Tailored to the particular contract in question, unique to that particular contract
Based on the presumed intentions of the parties- had the parties considered it, they would have filled the gap with an express term

Question 9

How is a term implied into a formal contract (by fact) ?

Answer 9

strict application of the BP 5 point test - Codelfa; Re Ronim

Question 10

What are the requirements of the BP refinery 5 point test

Answer 10

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

Question 11

How is a term implied into an informal contract (by fact)?

Answer 11

○ the “BP Refinery 5-point test” is less rigidly applied
○ it must be necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case - Hawkins v Clayton
○ “obviousness” also relevant– Byrne v Aus Airlines

Question 12

The Moorcock

Issue

Answer 12

• was there an implied term that the Defendants had to take reasonable care to ascertain that the bottom of the river was in such a condition as not to cause injury to the vessel

Question 13

The Moorcock - decision

Answer 13

○ There was a term implied in fact:
○ Required for business efficacy: honest business could not be carried on between the parties in this case unless the Defendants had impliedly undertaken to take reasonable care to ascertain that the bottom of the river adjoining the jetty was in such a condition as not to cause injury to the vessel (i.e. that the wharf was fit for its purpose)
- doesn’t apply the 5 point test because it was before the test was developed

Question 14

Re Ronim

Issue-

Answer 14

Was there an implied term that an extension of time for completion would be granted in such circumstances

Question 15

Re Ronim - decision

Answer 15

Implied term applies- unusual, unforeseen circumstance
Implied term is reasonable and equitable, so obvious it goes without saying, is capable of clear expression and does not contradict any express provision of the contract
Necessary for business efficacy- if they had thought of the circumstances, then it is probably they would had inserted an express term to the effect of the term the court held to be implied

Question 16

Codelfa Constructions v State Rail - issue

Answer 16

Issue- was there an implied term in the contract that if Codelfa was restrained by injunction from carrying out the work by the shifts it had planned, the Authority would grant an extension and indemnify it against additional costs incurred

Question 17

Codelfa Constructions v State Rail - decision

Answer 17

Courts reluctant to imply a term into a detailed formal contract- will only do so if it is necessary to give business efficacy to the contract
No implied term in this contract
Difficulties in implying a term because it did not go without saying and was not obvious
Proposed implied term would also be inconsistent with the main contract governing the time for completion and payment for the work performed
Issue of formality goes against implying a term

• not necessary
• not obvious (the parties had contemplated issues of noise etc.)
• contradictory to express terms (governing completion time)

Question 18

Hawkins v Clayton

Issue

Answer 18

• Was there an implied term that the law firm had to inform Mr. Hawkins about his role as executor and beneficiary upon Ms Brasier’s death

Question 19

Hawkins v Clayton - decision

Answer 19

Contract to keep the will in the custody of the firm was informal no details about the terms of conditions and due to this the terms had to be inferred or implied
For interpretation and identification of terms in an informal contract there are two stages
Inference of the actual intention- what terms can be inferred from the circumstances as having been included in the contract as a matter of actual intention of the parties
Terms we impute, implied in the contract due to a presumed or imputed intention
Implied term- obligation of safe custody continued after her death after such time as the will was handed over to someone else
Implied that the firm was authorize to communicate the contents of the will to anyone with a legitimate interest in them, but no such obligation to notify the executor
BP Refinery Test not applied strictly

Question 20

TERMS APPLIED IN LAW - what is it?

Answer 20

Terms implied in all contracts of a particular class or description
Conceived of as a legal incident of a particular class of contracts- based on the presumed intentions of the parties
The category of the terms is not closed, it develops over time, and open to be argued to new categories

Question 21

Requirements for a term implied in law

Answer 21

○ the term must be applicable to a definable class of contractual relationship; and
○ it must be recognised as a term suitable to be implied in all contracts of that class (by reason of “necessity”)
○ Byrne v Australian Airlines: the requirement of necessity - “it reflects the concern that unless such a term be implied, the enjoyment of rights conferred by the contract would or could be rendered nugatory, worthless or perhaps seriously undermined” (similar to business efficacy test)

Question 22

Examples of terms implied in law

Answer 22

Contract type Term implied in law
Sale of goods Goods are of merchantable quality and fit for purpose (ie a stapler works)

Boat charter Boat is seaworthy

Lease of house House is fit for habitation

Employment contract Employee will not disclose the employer’s confidential information

Employer owns intellectual property in work done by employee in the course of employment

Architect consultancy services Client has right to use drawings and plans developed for their intended purpose

Vehicle hire Vehicle is roadworthy

Question 23

Which case was it successfully argued that there was a term implied in law?

Answer 23

Liverpool CC v Irwin

Question 24

Liverpool CC v Irwin

issue

Answer 24

Issue- Was there an implied term for the Landlord to keep the common parts of the building in repair and properly lighted

Question 25

Liverpool CC v Irwin - decision

Answer 25

of the building in repair and properly lighted
Found implied term in law to take reasonable care of common areas
Necessity for the terms to be implied in law in order for the tenants to live there
In contracts of lease there must be the following implied terms
right of exclusive possession of the premises by the tenants
a covenant for quiet enjoyment
rights for tenants and visitors to freely access and use the stairwell and lifts
right to use rubbish chutes
Landlord must of necessity have a contractual obligation as to the maintenance of the common parts

Question 26

UWA v Gray

Issue-

Answer 26

Was there an implied term in Gray’s employment contract of a duty to invent

Question 27

UWA v Gray - decision

Answer 27

not implied - general policy considerations relating to the nature and public purposes of universities and the distinctiveness of academic employment in universities, including the academic employee’s freedoms to choose the subject and manner of their research are relevant and are inconsistent with and negate the existence of a “duty to invent”

Question 28

Breen v Williams - decision

Answer 28

Mrs Breen ran was that there was an implied term in law in a contract between doctor and patient that the patient is entitled to inspect or obtain his or her medical records

Question 29

Breen v Williams - decision

Answer 29

No such implied term in law or in fact
Not implied in fact- not necessary for the reasonable or effective operation of the contract, access to records not necessary for any therapeutic reason
Not implied in law- if term implied the enjoyment of the rights conferred upon the patient by the contract with the medical practitioner would, or could be rendered nugatory, worthless or be undermined
Contract for therapeutic purposes, not necessary for her purpose

Question 30

TERMS IMPLIED BY CUSTOM

Answer 30

A term may be implied on the basis of entrenched norms relating to custom or usage in a particular market or context

Question 31

General rules of terms implied by custom

Answer 31

• General principles laid down by High Court (Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ) in Con-Stan Industries (Aust) v Norwich Winterthur Insurance (1985):
  ○ Question of fact: “The existence of custom or usage that will justify the implication of a term into a contract is a question of fact”
  ○ Must be notorious: While it need not be “universally” accepted, “there must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract”
  ○ Must be consistent: “A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement”

No actual knowledge required: “A person may be bound by a custom notwithstanding the fact that he had no knowledge of it”

Question 32

Con Stan Industries v Norwich

Issue-

Answer 32

Was there an implied term in custom in the industry that the broker alone is liable to insurer for payment of premium or that the payment of premium by assured to broker discharges assured’s liability to insurer

Question 33

Con Stan Industries v Norwich (term implied in cumstom)

Answer 33

Application to the facts: no term implied by custom
• In order to establish a custom to the effect that a broker is alone liable to an insurer for payment of a premium on a policy of insurance, it is not sufficient to show that in the ordinary course of events:
○ the premium is paid to the insurer by the broker, or
○ that where a broker has failed to pay a premium the insurer makes its first demand for payment from the broker
• Both circumstances are consistent with the continued liability of the assured
• “It is necessary to establish a clear course of conduct under which insurers do not look to the assured for payment of the premium. This may be established by proving either an absence of claims by insurers against assured, or the existence of claims directed exclusively to brokers as a practice rarely if ever departed from. Having examined the evidence of custom that was led in the present case, we do not think this requirement is satisfied”

Question 34

Con Stan Industries v Norwich (implied in fact)

Answer 34

• For this argument to succeed, the term sought to be implied must be necessary to make the contract work and must be so obvious that it goes without saying
  
  • Neither term is so obvious that both the insurer and the assured would clearly have agreed to its inclusion in the contract of insurance had they directed their minds to it at the time they concluded their bargain
  • This will commonly be the situation where the term sought to be implied is adverse to the interests of one of the parties, as they are adverse to the interests of the insurer here. An implication which may be regarded as obvious to one party may not be so regarded by the party detrimentally affected
  • Unless it can be said that both parties would have consented to its inclusion, a term cannot be implied
  • Nor is implication of the suggested terms necessary to give business efficacy to the contract. The contract is capable of sensible operation in the absence of the implied terms

Question 35

Are the ways of implying a term mutually exclusive

Answer 35

No - more than one can be applied at the same time (Byrne v Australian Airlines)

Question 36

Byrne v Australian Airlines - issue

Answer 36

Issue- was there an implied term that the termination of the employment contract not be harsh, unjust or unreasonable and that there was an implied obligation to provide procedural fairness. Could these terms be implied by custom in fact or in law

Question 37

Byrne v Australian Airlines

Answer 37

No implied term found in customs- term must be notorious but need not be universally accepted. In this case lack of evidence notoriety, the fact that the award was common knowledge does not mean that the parties intended to give it contractual force
Found to be n informal contract, therefore no strict application of the BP Refinery test was necessary to imply the term in fact
No term implied in fact- term not so obvious as to go without saying, not necessary for the reasonable or effective operation of the contract
Terms implied in law- unless a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless or perhaps be seriously undermined
No implied term in law- employment contract a well recognized class of contract, but no necessity to imply in the contract the regime established by the award

Question 38

Good faith as an implied term - does it exist?

Answer 38

Emerging principle of the common law
Lower courts have favored and applied the principle- oblige parties to refrain from uncooperative or unfair conduct in the performance and enforcement of contractual rights and responsibilities
High Court has not affirmed or rules on it

Question 39

When is a duty of good faith relevant

Answer 39

Where a party has a discretion to exercise rights under a contract (right to terminate, right to keep a security bond, right to approve or disapprove an action)

Question 40

Examples of the application of good faith:

Answer 40

○ Duty of co-operation – requires doing all that is necessary to enable the other party to have the benefit of the contract – Secured Income v St Martins
○ Act reasonably and honestly and follow fair procedural processes when exercising right to terminate – eg Renard Constructions
○ Not exercise contractual powers (eg right to terminate or right to withhold approvals) for extraneous purposes – Burger King
○ Not exercise contractual powers “capricously” (as compared to protection of “legitimate interests”) – Garry Rogers v Subaru

Question 41

Renard Constructions v Minister for Public Works

Issue-

Answer 41

Was the principal obliged to act fairly, reasonably or in good faith in exercising the contractual power under cl 44 of the contract and was a good reason needed to terminate the contract

Question 42

Renard Constructions v Minister for Public Works

Answer 42

Implied term in law of an obligation to act reasonable in this type of contract (fixed price construction contract)
Duty of good faith applies and had been breached
Must act reasonably and honestly and follow fair procedural processes when exercising the right to terminate
Obiter support for a universal term to apply

Question 43

Hughes Aircraft Systems International v Airservices Australia
Issue-

Answer 43

Could a term of good faith be implied into the tender process contract?

Question 44

Hughes Aircraft Systems International v Airservices Australia

Answer 44

Found an implied duty of good faith for government tender contracts
Implication ad hoc- implied term in fact that the government would conduct its evaluation fairly and in a manner that would ensure equal opportunity
Obiter statements of support for universal standard of good faith

Question 45

Esso Australia v Southern Pacific

Answer 45

Reservations about implying a duty of good faith in all contracts, if good faith can not be defined then the certainty of the contract is undermined
Duty of good faith needs to be assessed ad hoc, cannot be applied to every class of contract
Didn’t find duty of good faith, contract was not unreasonable, capricious, or in pursuit for an ulterior purpose, did not prevent the performance of the contract or deny Esso its benefits

Question 46

Duty of co-operation?

Answer 46

Implied duty to co-operate in performing a contract is well-established
Duty to co-operate may be seen as an aspect of a more general duty of good faith in contract performance
Duty to co-operate is the scope of an duty of good faith in Australia
Duty to co-operate means neither party may do anything to impede performance of the agreement or to injure the right of the other party to receive the proposed benefit

Question 47

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd
Issue-

Answer 47

Did the purchaser breach an implied duty to cooperate by not approving the vendor as a tenant (was there an implied duty to actively cooperate in supplying tenants)

Question 48

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd - decision

Answer 48

Found there was a duty to cooperate- common that each party to a contract agreed to do all such things as are necessary on their part to enable the other party to have the benefit of the contract
However duty was not breached because there was a genuine reason for refusal- duty to cooperate does not require a party t do anymore than to cooperate reasonably in the circumstances
Implied duty to cooperate in performing a contract s well established

Question 49

Garry Rogers Motors v Subaru

Issue- Had Subuaru breaches an implied duty of good faith in exercising its termination right

Answer 49

Party must not act capriciously, but that does not mean that they are restricted from protecting their legitimate interests/concerns
No breach found, there was a legitimate reason to terminate
Party must not act indiscriminately and capriciously but are entitled to protect their legitimate interests

Question 50

Burger King Corporation v Hungry Jack’s Pty Ltd

Issue-

Answer 50

was there implied terms of cooperation, reasonableness, and good faith in the contract between Hungry Jacks and Burger King

Question 51

Burger King Corporation v Hungry Jack’s Pty Ltd - decision

Answer 51

Implied duty of cooperation found and accepted
Implied duty of good faith found to be breached
Good faith and reasonableness are the same
Implied term fo good faith does not restrict the parties acting to promote their own legitimate interests
Where the contract confers a subjective discretion on one party to end the other party’s valuable contractual rights, even for the slightest breach the implied term of good faith will prevent the party exercising that discretion for a purpose extraneous to the contract
Burger King used its discretion for a purpose to which it was foreign under the contract