Implied terms in English law

Implied terms in law refers to the practice of setting down default rules for contracts, when terms that contracting parties expressly choose run out, or setting down mandatory rules which operate to override terms that the parties may have themselves chosen. The purpose of implied terms is often to supplement a contractual agreement in the interest of making the deal effective for the purpose of business, to achieve fairness between the parties or to relieve hardship.

Terms may be implied into contract through statutes, custom or by the courts. When implied by statute, Parliament may well make certain terms compulsory. The examples are numerous. For instance, the National Minimum Wage Act 1998, provides that in any contract for work, the worker must be paid according to a minimum wage set by Parliament (£6.19 per hour for workers aged 21 or over as of October 2012).

Another example is that under the Unfair Contract Terms Act 1977, liability can only be excluded when reasonable[1] in contracts among businesses. When terms are implied by courts, the general rule is that they can be excluded by express provision in any agreement. The courts have developed an apparent distinction between terms implied "in fact" and those implied "in law". Terms implied "in fact" are said to arise when they are "strictly necessary" to give effect to the "reasonable expectations of the parties". Terms implied "in law" are confined to particular categories of contract, particularly employment contracts or contracts between landlords and tenants, as necessary incidents of the relationship. For instance, in every employment contract, there is an implied term of mutual trust and confidence, supporting the notion that workplace relations depend on partnership.

There is also an ongoing debate whether the rules of remoteness and frustration or common mistake are best characterised as implied terms. Remoteness places a limit on the compensatory award given for breach of contract, so if unlikely losses result or losses are not something that one would generally expect compensation for, compensation is not payable. Recent judicial support for its status as an "internal" rule and as an implied term derives from the judgment of Lord Hoffmann in The Achilleas. Frustration is a rule which brings contracts to an end in the event of some unforeseen event subsequent to the agreement which would make performance of obligations radically different from that envisaged, for instance because a car for sale is destroyed before it is delivered. Common mistake, as a doctrine, following The Great Peace, analogous to frustration, can similarly be said to imply a term that a contract will be extinguished if entered into on the false pretence that performance would be possible.

Implication by statute
  • The Sale of Goods Act 1979, section 12 states the following general rules:
    • In a contract of sale, the seller has the right to sell the goods
    • In an agreement to sell at a later date, the seller will have such a right at the time when the property is to pass
    • After the sale, the buyer will have and enjoy quiet possession of the goods
    • After the sale, the goods will be free from any charge or encumbrance in favour of any third party unless this has been made known to the buyer beforehand.[2]
  • Sale of Goods Act 1979, ss 12-15 and s 55 "may (subject to the Unfair Contract Terms Act 1977) be negatived or varied by express agreement or by the course of dealing between the parties, or by such usage as binds both parties to the contract."
  • Unfair Contract Terms Act 1977 s 6 makes s 12 non-excludable and ss 13-15 non-excludable in consumer sales.
  • The Supply of Goods and Services Act 1982, sections 13 to 15 state the following general rules:
    • Where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill (section 13)
    • Where ... the time for the service to be carried out is not fixed by the contract, left to be fixed in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the supplier will carry out the service within a reasonable time (section 14)
    • Where ... the consideration for the service is not determined by the contract, left to be determined in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the party contracting with the supplier will pay a reasonable charge (section 15).[3]

Implication by custom

Terms can be implied into contracts according to the custom of the market in which the contracting parties are operating. The general rule, according to Ungoed Thomas J in Cunliffe-Owen v Teather & Greenwood,[4] is that the custom must be:

certain, notorious, reasonable, recognised as legally binding and consistent with the express terms

One of the older cases illustrating this is Hutton v Warren.[5] Mr Warren, a landlord, leased his farm to Mr Hutton. The tenant complained that it was the countryside's custom that landlords would keep the land arable and give a reasonable allowance for seeds and labour in return for leaving manure to be purchased. Parke B held there was such a custom and that

in commercial transactions, extrinsic evidence of custome and usage is admissible to annex incidents to written contracts matters with respect to which they are silent.

Like all terms implied by courts, customs can be excluded by express terms or if they are inconsistent with a contract's nature.[6] Lord Devlin in Kum v Wah Tat Bank Ltd. [7] summed up the policy of the law:

Universality, as a requirement of custom, raises not a question of law but a question of fact. There must be proof in the first place that the custom is generally accepted by those who habitually do business in the trade or market concerned. Moreover, the custom must be so generally known that an outsider who makes reasonable enquiries could not fail to be made aware of it. The size of the market or the extent of the trade affected is neither here nor there.

Implication in fact

Implication in law

Remoteness
Main article: Remoteness in English law

Frustration
Main article: Frustration in English law

Historically, the test for frustration was deemed to be one of implied terms. Judge Blackburn in Taylor v Caldwell[8] deemed a contract for the hire of a music hall frustrated – where it had been destroyed – on the grounds that there was an implied term it would continue to exist.

Such an idea has been rejected in later cases, with the ideas of Krell v Henry[9] and Davis Contractors v Fareham UDC[10] being preferred. This is that a contract should be found frustrated where the principal purpose for contracting becomes radically different from the original purpose, as explained by Lord Reid:

The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.[11]

Common mistake
Main article: Mistake in English contract law

See also

Notes
  1. See s 11 and Sch 2 UCTA 1977
  2. Sale of Goods Act 1979, section 12
  3. Supply of Goods and Services Act 1982, Part II
  4. Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421
  5. (1836) 1 M&W 460
  6. e.g. Palgrave, Brown & Son Ltd v SS Turid (Owners) [1922] 1 AC 397, A charterparty provided that cargo at Yarmouth should be delivered ‘always afloat … taken from alongside the steamer at charterer’s risk and expense as customary.’ But when the vessel arrived with his timber he could not come closer than thirteen feet to the quay and was told the custom was for him to pay for stevedores to do the unloading. Viscount Birkenhead LC held the shipowners succeeded.
  7. [1971] 1 Lloyd’s Rep 439
  8. Taylor v Caldwell (1863) 3 B & S 826
  9. Krell v Henry [1903] 2 KB 740
  10. Davis Contractors v Fareham UDC [1956] AC 696
  11. [1956] AC 696, p. 721

References
  • E Peden (2001) 117 LQR 459
  • I MacNeil, 'Contract, Discretion and the With-Profits Mechanism (The appellate decisions in Equitable Life v Hyman)' [2000] 3 Company Financial and Insolvency Law Review 354
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