Contract Terms: General (AQA A-Level Law): Revision Notes
Implied terms
What are implied terms?
When parties form a contract, not every term may be explicitly stated or written down in the agreement. Sometimes circumstances arise that the express terms do not address. In these situations, implied terms can be incorporated into the contract to fill these gaps and ensure the contract functions properly.
Case Example: Grant v Australian Knitting Mills Ltd (1936)
A claimant purchased woollen underpants that contained harmful chemical traces, causing a painful skin disease. Although there was no express term about the product being safe to wear, the courts implied a term that the underpants should be fit for their intended purpose and could be worn without causing discomfort or pain.
Implied terms serve an important function in contract law by ensuring fairness and practicality, even when the parties have not expressly agreed to every eventuality. They prevent contracts from failing due to unforeseen circumstances and protect parties from unreasonable outcomes.
Three ways terms can be implied
The law recognises three distinct methods through which terms can be implied into a contract:
- Implied through custom – based on established industry practices
- Implied by fact – determined by courts during disputes to reflect the unexpressed intentions of the parties
- Implied by statute – imposed by legislation, regardless of what the parties intended
Each of these methods serves a different purpose and applies in different circumstances.
Terms implied by custom
Certain industries and professions develop common practices over extended periods. When these practices become well-established, they can create actual and enforceable implied terms within contracts in that field.
The leading case is Hutton v Warren (1836), which established that long-standing customs within a particular trade or locality can give rise to implied contractual terms. These customary terms reflect what parties in that industry would typically expect, even if they have not explicitly discussed or agreed to them.
Requirements for Customary Implied Terms
For a term to be implied by custom, the practice must be:
- Well-established over a considerable period
- Generally recognised within the relevant industry or trade
- Reasonable and consistent with the express terms of the contract
Terms implied by fact
When disputes arise, courts may need to determine what the parties actually intended but failed to express clearly in their contract. Courts use the common law to imply terms that reflect the presumed intention of the parties. There are several ways this can occur:
Common trade practices
Terms may be implied based on practices specific to a particular type of industry and how that sector commonly operates. This is similar to custom but focuses on professional standards and expectations within a trade.
The officious bystander test
This imaginative test asks: if an officious bystander (an interfering observer) had been present when the parties were making their contract and suggested including a particular term, would both parties have immediately agreed to it?
The Shirlaw Principle
The leading case is Shirlaw v Southern Foundries Ltd (1939), which established this principle. The test requires that the suggested term would be so obvious that both parties would have agreed without hesitation. If there would have been any debate or disagreement, the term cannot be implied under this test.
Business efficacy
Contracts must be commercially workable. Where a contract would fail to operate effectively without a particular term, courts can imply that term to preserve business efficacy.
Case Example: The Moorcock (1889)
The defendant owned a wharf and allowed the claimant to dock their ship at a jetty. Both parties knew the ship would be damaged at low tide if it remained at the jetty. When the ship was badly damaged at low tide, the court held that since both parties were aware of the tidal situation, the claimant was taking advantage of the situation. To award damages would not promote business efficacy, so no term could be implied to protect the claimant.
Legal Significance: This demonstrates that terms will only be implied where they are necessary to make the contract work as both parties must have intended.
Important limitation
Courts will not imply a term simply because it would be reasonable to do so. In Liverpool City Council v Irwin (1977), Lord Cross in the House of Lords emphasised that the insertion of such a term had to be 'necessary', not merely reasonable or desirable.
The threshold for implying terms by fact is high – it must be necessary, not just reasonable or desirable. This reflects the courts' respect for contractual freedom and their reluctance to rewrite contracts for the parties.
The modern test: Marks and Spencer v BNP Paribas (2015)
The Supreme Court established the leading authority on common law implied terms in this case. The Court laid down four key principles that courts must apply when considering whether to imply a term:
The Four Principles of Marks and Spencer
1. Strict necessity for business efficacy A term will only be implied into a contract where it is strictly necessary for business efficacy. This is a high threshold and demonstrates the courts' reluctance to rewrite contracts for the parties.
2. Insufficient that parties would have agreed It is not enough to show that the parties would have agreed to the term if someone had suggested it to them. This goes further than the officious bystander test, requiring actual necessity rather than mere agreement.
3. Commercial or practical coherence The test is not one of absolute necessity, but whether, without the term, the contract would lack commercial or practical coherence. This focuses on whether the contract can function properly as a commercial arrangement without the implied term.
4. Consistency with express terms A term will not be implied where it 'lies uneasily' with the express terms of a contract. Implied terms must complement, not contradict, what the parties have expressly agreed.
These principles show that the courts take a cautious approach to implying terms, respecting the parties' freedom to make their own bargains whilst ensuring contracts can function effectively.
Terms implied by statute
The rise of consumer society has revealed significant unequal bargaining power between consumers and businesses. To address this imbalance, successive governments have introduced statutory terms that are automatically implied into certain types of contracts. These terms aim to protect consumers and ensure fair treatment.
Non-Excludable Protection
Crucially, when terms are implied by statute, neither party can ignore or exclude them. This provides essential protection that cannot be contracted away, ensuring consumers receive baseline protections regardless of what the contract says.
Consumer Rights Act 2015
The main statute governing implied terms in consumer contracts is the Consumer Rights Act 2015. This Act implies specific terms depending on whether the contract involves goods or services:
Statutory Implied Terms for Goods and Services
For the supply of goods:
- Section 9: Goods must be of satisfactory quality
- Section 10: Goods must be fit for particular purpose
- Section 11: Goods must match their description
For the supply of services:
- Section 49: Services must be performed with reasonable care and skill
- Section 52: Services must be performed within a reasonable time
These statutory implied terms provide baseline protection for consumers that applies automatically to relevant contracts. Businesses cannot exclude or limit these rights through contract terms.
Key cases on implied terms
Grant v Australian Knitting Mills Ltd (1936)
Facts: The claimant bought woollen underpants containing traces of chemicals that caused a painful skin disease.
Legal principle: The courts implied a term as to quality and fitness for purpose – that the underpants should be fit for the purpose for which they were bought and could be worn without discomfort or pain.
Significance: This case demonstrates how courts will imply terms to ensure products meet basic standards of safety and usability, even where these are not expressly stated.
The Moorcock (1889)
Facts: The defendant owned a wharf and allowed the claimant to dock their ship at a jetty. Both parties knew the ship would be damaged at low tide if it remained there. The ship was badly damaged at low tide.
Legal principle: To preserve business efficacy, terms may be implied. However, the court held that since both parties were aware of the tidal situation, the claimant was taking advantage and damages would not promote business efficacy.
Significance: This case established the business efficacy test but also shows its limits – terms will only be implied where genuinely necessary for the contract to work.
Hutton v Warren (1836)
Legal principle: Established that long-standing customs within a particular trade or locality can give rise to implied contractual terms.
Significance: This case recognises that industry practices can become legally binding terms, reflecting commercial reality and expectations.
Shirlaw v Southern Foundries Ltd (1939)
Legal principle: Established the officious bystander test – a term can be implied if an interfering observer present at the contract's formation would have received immediate agreement from both parties when suggesting it.
Significance: This provides a practical test for determining when terms are so obvious that they must have been intended by both parties.
Liverpool City Council v Irwin (1977)
Legal principle: Lord Cross in the House of Lords stated that the insertion of an implied term had to be 'necessary', not merely reasonable.
Significance: This case raised the threshold for implying terms, emphasising that courts will not simply add reasonable terms but only those that are necessary.
Marks and Spencer v BNP Paribas (2015)
Legal principle: The Supreme Court established the modern test for implying terms by fact, requiring:
- Strict necessity for business efficacy
- More than just hypothetical agreement
- Assessment of commercial/practical coherence
- Consistency with express terms
Significance: This is the leading modern authority on implied terms and provides the framework courts must apply when considering whether to imply a term into a contract.
Exam guidance
When answering questions on implied terms:
In problem questions:
- Do not focus solely on express terms mentioned in the scenario
- Consider what terms might be implied through custom, fact, or statute
- Apply the Marks and Spencer test systematically when considering terms implied by fact
- Remember statutory implied terms from the Consumer Rights Act 2015, particularly in consumer scenarios
- Always support your analysis with relevant and accurate case citations
In essay questions:
- Evaluate the different bases for implying terms and their respective tests
- Consider whether the current law strikes the right balance between respecting party autonomy and ensuring fairness
- Discuss the significance of Marks and Spencer v BNP Paribas in clarifying the law
- Analyse the role of statutory implied terms in protecting consumers
Common mistakes to avoid:
- Ignoring implied terms and focusing only on express terms
- Forgetting statutory implied terms in consumer scenarios
- Failing to apply the necessity test properly
- Not considering whether an implied term would conflict with express terms
Remember!
Key Points to Remember:
- Implied terms fill gaps in contracts where express terms do not cover all eventualities
- Three types of implied terms: custom (based on industry practice), fact (based on presumed intention), and statute (imposed by legislation)
- Terms implied by fact use tests including the officious bystander test and business efficacy principle
- Marks and Spencer v BNP Paribas (2015) is the leading modern case – terms must be strictly necessary, not just reasonable
- Consumer Rights Act 2015 implies statutory terms into consumer contracts that cannot be excluded, particularly ss 9-11 (goods) and ss 49, 52 (services)
- Key principle: Courts will not imply a term simply because it is reasonable – it must be necessary for the contract to work properly