What Are Implied Terms?
Implied terms are conditions or provisions that are not explicitly written or stated in a contract but are nonetheless considered part of the agreement due to law, custom, or the presumed intention of the parties involved. These terms are integral to contract law, ensuring that agreements are fair, reasonable, and effective, even when certain details are left unsaid. The concept of implied terms helps provide enforceability and completeness to legal agreements, filling gaps that the parties may not have anticipated or thought necessary to codify.
History and Origin
The concept of implied terms has deep roots in the development of common law, where judges inferred terms into contracts based on established customs, trade practices, or what they believed the parties would have reasonably intended. This judicial intervention aimed to ensure commercial efficacy and prevent injustice. Over time, many implied terms became codified into statutory law. A prominent example in the United States is the Uniform Commercial Code (UCC), which implies certain warranties in the sale of goods, such as an implied warranty of merchantability, which guarantees that goods are fit for their ordinary purpose. The UCC, a comprehensive body of statutory law, has been adopted across nearly every U.S. state, providing a uniform framework for commercial transactions and demonstrating the evolution of implied terms from judicial interpretation to codified law.9, 10, 11
Key Takeaways
- Implied terms are unstated conditions that form part of a contract.
- They arise from law, custom, or the presumed intent of the parties.
- Implied terms ensure fairness and practical workability of agreements.
- They can prevent one party from undermining the spirit of the contract, even if explicit terms are silent on the matter.
- Failure to adhere to implied terms can lead to a breach of contract, despite no written violation.
Interpreting Implied Terms
Interpreting implied terms often requires courts or arbitrators to discern the unexpressed intentions of the parties or to apply established legal principles. A key aspect of this interpretation is the concept of good faith and fair dealing, which is implied in nearly every contract in the United States. This implied covenant mandates that parties conduct themselves honestly and reasonably, refraining from actions that would undermine the other party's ability to receive the benefits of the agreement. For instance, in commercial transactions, if a contract is silent on a specific operational detail, an implied term might dictate how parties should cooperate to achieve the contract's purpose, reflecting what reasonable individuals would expect. Courts typically do not use implied terms to rewrite a contract or create obligations that contradict explicitly stated terms; instead, they serve to fill genuine gaps where the contract is silent.6, 7, 8
Hypothetical Example
Consider a scenario where a software development company, "InnovateTech," enters into a contract with a client, "Global Ventures," to build a custom financial analytics platform. The written contract details the features, deadlines, and payment schedule. However, it does not explicitly state that Global Ventures must provide InnovateTech with necessary data access and feedback in a timely manner.
In this situation, an implied term of cooperation would exist. While not written, it's presumed that Global Ventures would provide what is necessary for InnovateTech to fulfill its obligations. If Global Ventures delays providing data or feedback, hindering InnovateTech's ability to meet deadlines, they could be in violation of an implied term. This implied term ensures that both parties cooperate effectively to facilitate the successful completion of the project, just as the acceptance of an offer relies on the clear communication of both parties involved.5
Practical Applications
Implied terms are prevalent across various aspects of finance and business, ensuring standards and protecting parties even in the absence of explicit contractual language. In consumer protection, for example, the Federal Trade Commission (FTC) highlights the importance of implied warranties, which automatically arise under state law with nearly every purchase. The most common type is the "implied warranty of merchantability," meaning a product will function as expected (e.g., a car will run, a calculator will calculate)3, 4. Another is the "implied warranty of fitness for a particular purpose," applicable when a buyer relies on a seller's advice for a specific use. These implied warranties are crucial for consumer risk management. Additionally, in areas like corporate governance, a fiduciary duty may be implied, requiring directors to act in the best interest of shareholders, even if not explicitly detailed in every company bylaw. Understanding these implied obligations is essential for navigating the legality and integrity of financial and business dealings.
Limitations and Criticisms
While implied terms serve to bridge gaps in contracts and promote fairness, they are not without limitations and criticisms. A primary challenge lies in their inherent ambiguity; discerning what terms truly were "implied" can be subjective and lead to disputes. Courts must carefully balance filling contractual gaps with avoiding the imposition of terms the parties never intended, which could amount to rewriting the agreement. The implied covenant of good faith and fair dealing, while vital, is "infamously hard to pin down" due to its context-dependent nature, often resulting in complex litigation.2 Critics argue that excessive judicial implication of terms can undermine contractual certainty and the principle of freedom of contract, where parties should be free to negotiate and be bound only by what they explicitly agree upon. This can lead to unforeseen liabilities or the need for costly litigation to determine if a breach of contract occurred based on unstated conditions. Furthermore, the concept of consideration—the value exchanged in a contract—can sometimes blur with implied terms, as courts might imply a term to ensure adequate consideration was present, even if not perfectly articulated.
Implied Terms vs. Express Terms
The distinction between implied terms and express terms is fundamental in contract law. Express terms are those explicitly stated and agreed upon by the parties, whether orally or in writing. They are clear, direct, and form the foundational promises of the agreement. For instance, in a loan agreement, the interest rate, repayment schedule, and principal amount are express terms.
In contrast, implied terms are unwritten but legally binding conditions inferred from various sources, such as trade customs, prior dealings between the parties, or legal statutes. While express terms leave no room for ambiguity regarding their existence, implied terms require interpretation to determine their presence and scope. Disputes often arise when parties disagree on whether a particular term was genuinely implied or if its absence simply means it was not part of the bargain.
FAQs
What is the primary purpose of implied terms in a contract?
The primary purpose of implied terms is to ensure the practical workability and fairness of a contract by filling in unstated gaps. They reflect what reasonable parties would have intended or what is required by law or custom to make the agreement complete and effective.
##1# Can implied terms contradict express terms?
No, implied terms generally cannot contradict or override express terms in a contract. They are intended to supplement, not supplant, the explicit agreement between parties. If an express term covers a specific matter, it will typically take precedence over any conflicting implied term.
Are implied terms common in financial contracts?
Yes, implied terms are common in financial contracts, although they may not always be obvious. For instance, the implied covenant of good faith and fair dealing is a pervasive implied term in many financial legal agreements. Additionally, industry customs and regulatory expectations often lead to implied obligations within financial dealings to ensure ethical conduct and enforceability.