When interpreting a contract, it’s not just the express terms of the contract that are important. Careful consideration should also be given to implied terms.
It is important to know when terms will be implied, how they will work alongside the express terms in the contract and when they can be excluded. Terms might be implied into a contract for a number of reasons, including to reflect the intentions of the parties at the time the contract was entered into, to achieve fairness between the parties or to fill a gap in a contract so that the contract works in practice.
The court may imply a term into a contract based on:
- Usage or custom
- The parties’ previous course of consistent dealing
- The intention of the parties, known as a term implied "in fact"
- Common law, where the implied term is a necessary part of a particular type of contract
- Statute, for example the Sale of Goods Act 1979 (which implies terms as to the quality of goods supplied and their fitness for purpose)
The recent case of Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest) (2013) highlights the reluctance of the courts to imply terms into a contract where express terms will suffice. In that case, the Court of Appeal found that there was no implied term that the discretion of one party must not be exercised arbitrarily, capriciously or irrationally, where the discretion consisted of a yes/no decision rather than a choice between a range of options in which the interests of both parties were relevant. In addition, there was no justification for implying the term, as the express terms were sufficient. The implied term therefore failed the test of necessity.
The Court of Appeal also rejected the argument that there is a general duty of good faith and found that the extent of the duty (if any) depends on the particular context. If the parties wish to include a duty of good faith, this should be set out expressly in a stand alone clause.
Some practical tips:
- When drafting contracts, ensure that all the terms you wish to be included are expressly set out. Parties will otherwise be reliant on the contractual interpretation of the courts – which can be costly and unpredictable!
- Given that there is no general duty of good faith, beware including clauses such as "the parties will act in good faith when performing their services under this contract." Although clauses of this type seem fairly innocuous, they can have far reaching and unanticipated consequences. For example, a "good faith" clause may limit a party’s ability to terminate a contract: the party will have to consider not only whether it has the contractual right to terminate but also whether it is acting in good faith in exercising that right.
Consider trying to exclude implied terms. Implied terms can be expressly excluded by the following types of provisions:
- Entire agreement clauses: to exclude implied terms effectively, the entire agreement clause should use clear, express words to this effect. A general exclusion in an entire agreement clause will not necessarily exclude terms required for business efficacy, or terms required to make the express terms work, as they are seen to form part of the agreement itself.
- Specific exclusions: if you wish to exclude particular implied terms (assuming any relevant statute allows parties to "contract out" in this way), use clear wording and specific language, such as the following wording often found in warranty or limitation of liability provisions:"Except as set out in this contract, all warranties, conditions, terms and undertakings, express or implied, whether by statute, common law, custom, trade usage, course of dealings or otherwise (including without limitation as to quality, performance or fitness or suitability for purpose) in respect of any products or services to be provided by the Supplier under this contract are excluded to the fullest extent permitted by law."
- When excluding implied terms, always remember the Unfair Contract Terms Act 1977 (UCTA). Under UCTA the exclusion of certain implied terms in consumer contracts will not be enforceable and exclusions in business-to-business contracts will only be enforceable if the exclusion is reasonable. In a business-to-business contract, the exclusion of the implied term that goods will be of satisfactory quality may be enforceable where the contract includes an express warranty that the goods will comply with their specification. However, an exclusion that leaves a purchaser with no effective remedy is far less likely to be found by a court to be reasonable.